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The Auditor's Role in Assessing
Internal Controls and Audit Risk
Overview of Auditing
Postulates of Auditing
Certain fundamental beliefs called 'postulates' underlie auditing theory. The following are the postulates of auditing:
Economic assertions can be verified.
The auditor acts exclusively as an auditor. An audit has a benefit only to the owners.
The postulate that "No long-term conflict exists between the auditor and the management of the enterprise under audit" is not a postulate of auditing.
Audit Reports
In all cases, audit reports must inform readers of the degree of correspondence between the quantifiable information and the established criteria.
The audit report does not: - Need to be signed by the individual who performed the audit procedures. - Certify the accuracy of the quantitative information which was audited. - Communicate the auditor's finding to the general public.
Auditor's Communication
The auditor communicates the results of his or her work through the medium of the audit report.
Assertions
Assertions are the representations of management as to the fairness of the financial statements.
Expertise of Auditors
The expertise that distinguishes auditors from accountants is in the accumulation and interpretation of evidence.
Auditing and Related Services
The framework for auditing and related services as addressed by PSA includes review, compilation, and agreed upon procedures.
Assurance level refers to the level of auditor's satisfaction as to the reliability of an assertion being made by one party for use by another party.
The level of assurance provided by different services are:
Audit: High Review: Moderate Agreed-upon procedures: Limited Compilation: None
Agreed-Upon Procedures
The report based on agreed-upon-procedures is restricted to those parties who have agreed to the procedures to be performed. The CPA provides the recipients of the report limited assurance as to reasonableness of the assertion(s) presented in the financial information.
Review Engagement
The objective of a review engagement is to report whether material modifications should be made to the financial statements to make them conform with generally accepted accounting principles.
Compilation
The procedures employed in doing compilation are not designed to enable the accountant to express any form of assurance.
Attestation Services
Any services in which the CPA firm issues a written communication that express a conclusion with respect to the reliability of a written assertion that is the responsibility of another party is an attestation service.
The three types of attestation services are: audits, reviews, and other attestation services.
The primary categories of attestation reports are: compilation report, review report, and audit report.
The primary goal of the CPA in performing the attest function is to determine whether the client's assertions are fairly stated.
Because an external auditor is paid a fee by a client company, he or she may be sufficiently independent to conduct an audit.
The entity's management is responsible for the entity's financial statements.
The best statement of the responsibility of the auditor with respect to audited financial statements is that the auditor's responsibility is confined to his expression of opinion about the audited financial statements.
The inherent limitations of any accounting and internal control system is the factor that least likely limits the auditor's ability to detect material misstatement.
Because an examination in accordance with generally accepted auditing standards is influenced by the possibility of material errors, the auditor should conduct the examination with an attitude of professional skepticism.
The main reason why an independent auditor reports on financial statements is that competing interests may exist between management and the users of the statements.
An audit can have a significant effect on information risk.
The main way to reduce information risk is to have audited financial statements provided.
Internal Auditing
Internal auditing is an appraisal activity established within an entity as a service to the entity.
The scope and objectives of internal auditing vary widely and depend on the size and structure of the entity and the requirements of its management.
Internal Auditing Activities
Ordinarily, internal auditing activities include one or more of the following:
Review of the Accounting and Internal Control Systems
Examination of financial and operating information
Review of the Economy, Efficiency and Effectiveness of
Operations
Review of Compliance with Laws, Regulations and Other
External Requirements
To operate effectively, an internal auditor must be independent of: - The line functions of the organization - The entity - The employer-employee relationship which exists for other employees in the organization
Internal auditors cannot be independent: - As long as an employer-employee relationship exists
To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to: - Board of Directors
Relationship between Internal Auditing and External
Auditing
Certain aspects of internal auditing may be useful in determining the nature, timing and extent of external audit procedures. The external auditor is responsible for the audit opinion expressed, however that responsibility may be reduced by any use made of internal auditing.
Distinctions between Independent Auditing and Internal
Auditing
Independent auditors represent third party users external to the auditee entity, whereas internal auditors report directly to management. Internal auditors are employees of the auditee, whereas independent auditors are independent contractors. The internal auditor's span of coverage goes beyond financial auditing to encompass operational and performance auditing.
Commission on Audit
The 1986 Constitution provides that the Chairman and Commissioners of the Commission on Audit shall be: - One or two lawyers and one or two CPAs for a total of three
The duties of the Commission on Audit include: - Define the scope of its audit and examination - Keep the general accounts of the government - Promulgate accounting rules and regulations
continuing research on both auditing and financial accounting in order to make them responsive to the needs of the public.
Determining Generally Accepted Auditing Standards
(GAAS)
In the absence of pronouncements issued by the ASPC and the Philippine Institute of Certified Public Accountants (PICPA), published statements and guidelines issued by other authoritative bodies like the American Institute of CPAs (AICPA), International Auditing and Assurance Standards Board (IAASB), and Accounting and Finance Association (AFA) are the bases for determining GAAS. These pronouncements provide persuasive authority in determining GAAS.
Pronouncements of the ASPC
Regarding the pronouncements of the ASPC:
a. The Philippine Standards on Auditing (PSAs) and Interpretations may also have application, as appropriate, to other related activities of auditors. b. PSAs contain basic principles and essential procedures (identified in bold type black lettering) together with related guidance in the form of explanatory and other material. c. PSAs need only be applied to material matters. d. The Interpretations have the same authority as the PSAs.
Applicability of Philippine Standards on Auditing (PSAs)
The Philippine Standards on Auditing issued by the ASPC:
a. Apply to independent examination of financial statements of any entity when such an examination is conducted for the purpose of expressing an opinion thereon. b. Must not apply to other related activities of auditors. c. Need to be applied on all audit related matters. d. Require that in no circumstances would an auditor may judge it necessary to depart from a PSA, even though such a departure may result to more effective achievement of the objective of an audit.
Statements Issued to Assist Auditors in Implementing
PSAs
The statements issued to provide practical assistance to auditors in implementing the PSAs are called Interpretations.
Auditing and Assurance Standards Council
(AASC)
Creation and Composition of the AASC
The Auditing and Assurance Standards Council (AASC) is a body created through the Philippine Accountancy Act of 2004 to replace the ASPC. The
AASC shall be composed of 15 members plus a Chairman. The chairman and members of the AASC shall be appointed by the President of the Philippines upon the recommendation of the PRC. The chairman and members of the AASC shall have a non-renewable term of 3 years. The chairman should have been or presently a senior practitioner in public accountancy.
Representation in the AASC
The following government agencies are represented both in the ASPC and the AASC:
Board of Accountancy (BOA) Securities and Exchange Commission (SEC) Commission on Audit (COA) Bangko Sentral ng Pilipinas (BSP)
The Philippine Institute of Certified Public Accountants (PICPA) has one representative each from the government, public practice, commerce and industry, and academe sectors in the AASC membership.
Issuance of Financial Accounting Standards
Statements on financial accounting standards constituting Generally Accepted Accounting Principles (GAAP) are issued by the Accounting Standards Council.
Audit Engagement Responsibilities
Audit Engagement Roles and Responsibilities
The following audit engagement roles and responsibilities are performed by:
(1) Supervises two or more concurrent audit engagements - Manager (M) (2) Performs detailed audit procedures - Audit Assistant (AS) (3) Overall responsibility for audit - Partner (P) (4) Signs audit report - Partner (P)
Audit Fees
Factors Affecting Audit Fees
The amount of audit fees depend largely on the:
a. Size and capitalization of the company under audit. b. Amount of profit for the year. c. Availability of cash. d. Volume of audit work and degree of competence and responsibilities involved.
Considerations in Determining Audit Fees
In determining audit fees, an auditor may take into account each of the following except the size and amount of capital of the client.
render professional services as a certified public accountant; or offering or rendering, or both, to more than one client on a fee basis or otherwise.
Requirement for CPA Positions in the Private Sector
Any position in any business or company in the private sector which requires supervising the recording of financial transactions, preparation of financial statements, coordinating with the external auditors for the audit of such financial statements and other related functions shall be occupied only by a duly registered CPA, provided that the business or company where the above position exists has a paid-up capital of at least P5,000,000 and/or an annual revenue of at least P10,000,000.
Integrated National Professional Organization of CPAs
The integrated national professional organization of Certified Public Accountants accredited by the BOA and the PRC per PRC accreditation No. 15 dated October 2, 1975 is the Philippine Institute of Certified Public Accountants (PICPA).
Definition of a Firm
As defined in the IRR of RA 9298, a firm is an organization engaged in the practice of public accountancy, consisting of sole proprietor, either alone or with one or more staff members.
Composition and Appointment of the Board of Accountancy
(BOA)
Regarding the Board of Accountancy:
a. The Board consists of a Chairman and six members. b. The chairman and members are appointed by the President of the Philippines upon recommendation of PICPA. c. The Professional Regulation Commission may remove from the Board any member whose certificate to practice has been removed or suspended. d. Majority of the board members shall as much as possible be in public practice.
Nomination of BOA Members
The Accredited Professional Organization (APO) shall submit its nominations with complete documentation to the Commission not later than 90 days prior to the expiry of the term of an incumbent chairman or member.
Qualifications of BOA Members
A member of the BOA shall, at the time of his/her appointment, possess the following qualifications, except that the member must not be a director or officer of the APO at the time of his/her appointment.
Term of Office of BOA Members
The incorrect statement regarding the term of office of the chairman and the members of the Board of Accountancy (BOA) is that a member of the BOA may continuously serve office for more than nine years.
Powers, Functions and Responsibilities of the BOA
The Board shall exercise the following specific powers, functions and responsibilities:
a. To supervise the registration, licensure and practice of accountancy b. To issue, suspend, revoke, or reinstate the Certificate of Registration for the practice of the accountancy profession c. To monitor the conditions affecting the practice of accountancy d. To conduct an oversight into the quality of audits of financial statements
Penalties that can be Imposed by the BOA
The penalties that can be imposed by the Board of Accountancy do not include fine or imprisonment.
Purpose of Creating the FRSC and AASC
The creation of the Financial Reporting Standards Council (FRSC) and the Auditing and Assurance Standards Council (AASC) is intended to assist the BOA in carrying out its function to monitor the conditions affecting the practice of accountancy and adopt such measures, rules and regulations and best practices as may be deemed proper for the enhancement and maintenance of high professional, ethical, accounting and auditing standards.
Body Assisting BOA in Upgrading Accountancy Education
The body that is created to assist the BOA in the attainment of the objective of continuously upgrading the accountancy education in the Philippines to make the Filipino CPAs globally competitive is the Education Technical Council (ETC).
Grounds for Suspension or Removal of BOA Members
The grounds for suspension or removal of members of the Board of Accountancy include:
I. Neglect of duty or incompetence. II. Violation or tolerance of any violation of the CPA's Code of Ethics. III. Final judgment of crimes involving moral turpitude. IV. Rigging of the certified public accountant's licensure examination results.
a. 5 days
b. 10 days
c. 15 days
d. 30 days
Professional Identification Card
A Professional Identification Card bearing the registration number, date of issuance, expiry date, duly signed by the chairperson of the Commission, shall be issued to every registrant renewable every:
a. Two years
b. Three years
c. Four years
d. Five years
Identification Numbers on Professional
Documents
The certified public accountant shall be required to indicate the following numbers on the documents he/she signs, uses or issues in connection with the practice of his/her profession:
His/her Certificate of Registration: Yes Professional Identification Card: Yes Professional Tax Receipt: No
Registration of Successful CPA Examination
Candidates
The BOA shall not refuse the registration of any person who successfully passed the CPA examinations, except if:
a. Convicted by a court of competent jurisdiction of a
criminal offense involving moral turpitude
b. Convicted for a political offense
c. Guilty of immoral and dishonorable conduct
d. None of the above
Grounds for Proceedings Against a CPA
Which of the following is not one of the grounds for proceedings against a CPA?
a. Gross negligence or incompetence in the practice of his
profession
b. Engaging in public practice while being employed in a
private enterprise
c. Insanity
d. Immoral or dishonorable conduct
Reinstatement of a Revoked CPA Certificate
A person whose CPA certificate has been revoked:
a. Can no longer be reinstated as a CPA
b. Is automatically reinstated as a CPA after two years if
the has acted in an exemplary manner
c. May be reinstated as a CPA by the Board of Accountancy
after two years if he has acted in an exemplary manner
d. May be reinstated by the PRC after two years if he has
acted in an exemplary manner
Entities Permitted to Practice Accountancy
Who is not permitted by law to practice accountancy?
a. Commerce and industry and shall include significant
involvement in general accounting, budgeting, tax
administration, internal auditing, liaison with external
auditors, representing his/her employer before government
agencies on tax and matters related to accounting or any
other related functions.
b. Academe/education and shall include teaching for at
least three (3) trimesters or two (2) semesters subjects in
either financial accounting, business law and tax, auditing
problems, auditing theory, financial management and
management services.
c. Government and shall include significant involvement in
general accounting, budgeting, tax administration,
internal auditing, liaison with the Commission on Audit or
any other related functions.
d. Public practice and shall include at least two years as
audit assistant and at least one year as auditor in charge of
audit engagement covering full audit functions of
significant clients.
Ownership of Audit Working Papers
The Accountancy Law provides that all working papers made during an audit shall be the property of the auditor. These working papers shall include the following, except:
a. Schedules and memoranda made by the CPA and his
staff
b. Working papers prepared and submitted by the client
c. Excerpts or copies of documents furnished the auditor
d. Reports submitted by the CPA to the client
Renewal of Registration for CPA Firms
If the application for registration of AB and Co., CPAs was approved on August 30, 2005, it shall file for renewal on or before:
a. September 30, 2007
b. September 30, 2008
c. December 31, 2007
d. August 30, 2008
Continuing Professional Education (CPE)
Requirements
Which statement is correct regarding CPE requirements for renewal of professional license?
a. The total CPE credit units required for CPAs shall be
sixty (60) units for three (3) years, provided that a
minimum of twenty (20) credit units shall be earned in
each year.
b. A registered professional shall be permanently exempted
from CPE requirements upon reaching the age of 60 years
old.
c. A registered professional who is working abroad shall be
temporarily exempted from compliance with CPE
requirement during his/her stay abroad, provided that he/
she is has been out of the country for at least one year
immediately prior to the date of renewal.
d. Those who failed to renew professional licenses for a
period of five (5) continuous years from initial registration,
or from last renewal shall be declared delinquent.
Penalties for Violation of RA 9298
Any person who shall violate any of the provisions of RA 9298 or any of its implementing rules and regulations as promulgated by the Board subject to the approval of the Commission, shall, upon conviction, be punished by:
a. 2 years
b. 3 years
c. 4 years
d. 6 years
Violation of IRR of RA 9298 by CPA Firms
Below are the names of three CPA firms and pertinent facts relative to each firm. Unless otherwise indicated, the individuals named are CPAs and partners, and there are no other partners. Which firm name and related facts indicates a violation of the IRR of RA 9298?
a. Joyce, Ara and Angela, CPAs (Joyce died about 10 years
ago, Ara and Angela are continuing the firm)
b. Lupin and Fujico, CPAs (the name of Goymon a third
active partner is omitted in the firm name)
c. Hugo and Pugo, CPAs (Hugo died 25 months ago, Pugo
is continuing the firm as a sole proprietor)
d. Bubu and Bibi, CPAs (Bibi died 3 years ago, Bobot was
admitted into the partnership 2 months after Bibi's death.)
Assessing Control Risk and Audit Risk
Factors Influencing Audit Risk
The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements. However, the auditor did not consider factors influencing audit risk for account balances that have pervasive effects on the financial statements taken as a whole.
Detecting Fraud
The auditor's ability to detect a fraud depends on factors such as: I. The skillfulness of the perpetrator. II. The frequency and extent of manipulation. III. The degree of collusion involved. IV. The relative size of individual amounts manipulated. V. The seniority of those involved.
Comparing Management Fraud and Employee Fraud
In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is greater for management fraud because of management's ability to override existing internal controls.
Assessing Fraud and Error
Subsequent Discovery of Material Misstatement
The subsequent discovery of a material misstatement of the financial statements resulting from fraud or error, in and of itself, does not indicate a failure to obtain reasonable assurance, inadequate planning, performance or judgment, the absence of professional competence and due care, or a failure to comply with Professional Standards on Auditing (PSAs).
Performing an Audit in Accordance with PSAs
Whether the auditor has performed an audit in accordance with PSAs is determined by the adequacy of the audit procedures performed in the circumstances and the suitability of the auditor's report based on the result of these procedures, not by the absence of material misstatements or material errors.
Purpose of Inquiries of Management
When planning the audit, the least likely purpose of the auditor's inquiries of management is to determine the extent of authentication of documentation.
Fraud Risk Factors
A "fraud risk factor" refers to factors whose presence indicates that the risk of fraud is high and often has been observed in circumstances where frauds have occurred.
Categories of Fraud Risk Factors
The least likely category of fraud risk factors that relate to misstatements resulting from fraudulent financial reporting is susceptibility of assets to misappropriation.
Fraud Risk Factors Relating to Management's
Characteristics and Influence over the Control
Environment
Fraud risk factors relating to management's characteristics and influence over the control environment pertain to management's abilities, pressures, style, and attitude relating to internal control and the financial reporting process.
