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CPAR Auditing Theory

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  1 CPAR Reviewers Auditing Theory  2 CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING THEORY CPA REVIEW    PREFACE TO PHILIPPINE STANDARDS ON QUALITY CONTROL, AUDITING, REVIEW, OTHER ASSURANCE AND RELATED SERVICES    PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS    OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS (PSA 200 [Amended as a result of PSA 700 (Revised)]) The Authority Attaching to Philippine Standards Issued by the AASC STANDARDS APPLICATION 1.   Philippine Standards on Auditing (PSAs)      Audit of historical financial information  2.   Philippine Standards on Review Engagements (PSREs)      Review of historical financial information  3.   Philippine Standards on Assurance Engagements (PSAEs)      Assurance engagements dealing with subject matters other than historical financial information  4.   Philippine Standards on Related Services (PSRSs)      Compilation engagements      Engagements to apply agreed-upon procedures to information      Other related services engagements as specified by the AASC   1.   PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASC’s Engagement Standards.  2.   Philippine standards on Quality Control (PSQC) are to be applied for all services falling under the AASC’s engagement standards. 3.   Philippine Standards are applicable to engagements in the Public sector. The Authority Attaching to Practice Statements Issued by the AASC 1.   Philippine Practice Statements are issued to:      Provide interpretive guidance and practical assistance o professional accountants in implementing Philippine Standards; and      Promote good practice  2.   Professional accountants should be aware of and consider Practice Statements applicable to the engagement.  3.   A professional accountant who does not consider and apply the guidance included in a relevant Practice Statements should be prepared to explain how the basic principles and essential procedures in the AASC’s Engagement Standard(s) addressed by the Practice Statement have been complied with.  PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS 1.   The Framework does not itself establish standards or provide procedural requirements for the performance of assurance engagements. 2.   In addition to the Framework and PSAs, PSREs and PSAEs, practitioners who perform assurance engagements are governed by:    The Philippine Code of Ethics for Professional Accountants; and    Philippine Standards on Quality Control (PSQCs) ASSURANCE ENGAGEMENTS 1.   “Assurance engagement” means an agreement in which a particular expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.  2.   “Subject matter information” refers to the outcome of the evaluation or measure ment of a subject matter.  3.   In some assurance engagements, the evaluation or measurement of the subject I performed by the responsible party, and the subject matter information is in the form of an assertion by the responsible party that is made available to intended users ( assertion-based engagements). 4.   In other assurance engagements, the practitioner either directly performs the evaluation or measurement of the subject matter, or obtains a representation from the responsible party that  3 has performed the evaluation or measurement that is not available to the intended users in the assurance report ( direct reporting engagements) TWO TYPES OF ASSURANCE ENGAGEMENT 1.   Reasonable assurance engagement  –  the objective is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as the basis for a positive form of    expression of the practitioner’s conclusion.   2.   Limited assurance engagement  –  the objective is a reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement, but where the risk is greater than for a reasonable assurance engagement, as a basis for a negative form of expression of the practitioner’s conclusion.  SCOPE OF THE FRAMEWORK The following are non-assurance engagements and therefore are not covered by the Framework: 1.   Engagements covered by the PSRSs such as agreed-upon procedures engagements and compilations of financial or other information. 2.   The preparation of tax returns where no conclusion conveying assurance is expressed. 3.   Consulting (or advisory) engagements, such as management and tax consulting. ELEMENTS OF AN ASSUARANCE ENGAGEMENT 1.   A three-party relationship involving:    A practitioner;    A responsible party; and    Intended users. 2.   An appropriate subject matter; 3.   Suitable criteria; 4.   Sufficient appropriate evidence; and 5.   A written assurance report in the form appropriate to a reasonable assurance engagement or a limited assurance engagement. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS 1.   The OBJECTIVE of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. 2.   The auditor should comply with relevant ethical requirements relating to audit engagements. 3.   The auditor should conduct the audit in accordance with PSAs. 4.   “Scope of an audit” refers to the audit procedures that, in the auditor’s judgment and based on PSAs, are deemed appropriate in the circumstances to achieve the objective of the audit. 5.   The auditor should plan and perform an audit with an attitude of PROFESSIONAL SKEPTICISM recognizing that circumstances may exist that cause the financial statements to be materially misstated. 6.   In forming the audit opinion, the auditor obtains sufficient appropriate evidence to be able to draw conclusions on which to base that opinion. 7.   The auditor’s opinion enhances the credibility of financial statements by providing a high, but not absolute, level of assurance. 8.   Absolute assurance in auditing is not attainable as a result of such factors as:    The need for judgment;    The use of testing;    The inherent limitations of any accounting and internal control systems; and    The fact that most of the evidence available to the auditor is persuasive, rather than conclusive, in nature. 9.   While the auditor is responsible for forming and expressing an opinion on the financial statements, the responsibility for the preparation and presentation of the financial statements in accordance with the applicable financial reporting framework is that of the entity’s MANAGEMENT, with oversight from those charged with governance.  4 ENGAGEMENTS TO REVIEW FINANCIAL STATEMENTS 1.   The objective of a review of financial statements is to enable a practitioner to state whether, on the basis of procedures which do not provide all the evidence that would be require in an audit, anything has come to the practitioner’s attention that causes the practitioner to believe that the financial statements are not prepared, in all material respects, in accordance with an identified financial reporting framework ( negative assurance)  2.   A review comprises INQUIRY and ANALYTICAL PROCEDURES which are designed to review the reliability of an assertion that is the responsibility of one party for use by another party. 3.   A review does not ordinarily involve an assessment of accounting and internal control systems, tests of records and of responses to inquiries by obtaining corroborating evidence through inspection, observation, confirmation and computation, which are procedures ordinarily performed during an audit. 4.   The level of assurance provided in a review report is less that that given in an audit report. ENGAGEMENTS TO PERFORM AGREED-UPON PROCEDURES REGARDING FINANCIAL INFORMATION 1.   In an engagement to perform agreed-upon procedures, an auditor is engaged to carry out those procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on FACTUAL FINDINGS. 2.   The recipients of the report must form their own conclusion from the report of the auditor. 3.   The report is restricted to those parties that have agreed to the procedures to be performed since others, unaware of the reasons for the procedures, may misinterpret the results. ENGAGEMENTS TO COMPILE FINANCIAL INFORMATION 1.   In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to auditing expertise to collect, classify, and summarized financial information. 2.   It ordinarily entails reducing detailed data to manageable and understandable form without a requirement to test the assertions underlying that information. 3.   The procedures performed are not designed and do not enable the accountant to express any assurance on the financial information. 4.   Users of compiled financial information derived some benefit as a result of the accountant’s involvement because the service has been performed with due professional skill and care. SUMMARY Nature of service Audit Review Agreed-upon Procedures Compilation Level of Assurance Provided High, but not absolute assurance Moderate assurance No assurance No assurance Report provided Positive assurance on assertion(s) (Audit Report) Negative assurance on assertion(s) (Review Report) Factual findings of procedures Identification of information compiled (Compilation Report)
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