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Auditing Overview An Introduction to Philippine Standards on AuditingATTY. RHENEIR P. MORA, CPAMANAGING PARTNERR. P. MORA & CO.

Last Update: 7 January 2007

Historical backgroundRecords of auditing activity in early Babylonian times (around 3,000 BC). Ancient China, Greece and Rome. The Latin meaning of the word 'auditor' was a 'hearer or listener' because in Rome auditors heard taxpayers. Modern auditing dates to beginning of the modern corporation

Page 2Cuniform is the writing style in the picture, the oldest in the world, Cuniform was the writing style in which the first accounting records were written. Try these websites for cuniform info: Cuniform Numbers http://it.stlawu.edu/~dmelvill/mesomath/Numbers.htmlMake your initials into cuniform tablet:http://home.korax.net/~websiter/cgi-bin/cuneiform.cgi

Scotland in 1853. Growth in technology, communications, transportation, worldwide markets resulted in securities markets and credit. Creditors and shareholders were dependent on the reports of management. Management has control over accounting systems and authority to determine the nature of representations on financial reports. Reports may determine management compensation. Due to importance of reports and outside stakeholders investments, an independent auditor was needed.

By the audit process, the auditor enhances the usefulness and value of the financial statements, and also increases the credibility of other non-audited information released by management.

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The function of auditing is to lend credibility to the financial statements Is the company a going concern?Is it free of fraud?Is it managed properly?Is there integrity in its database?Do directors have proper and adequate information to make decisions?Are there adequate controls?What effect do the company's products and by-products have on the environment?Can an unfortunate mistake bring this company to its knees?

Page 4Investors want more information than just financial statements such as: - is the company a going concern - is it free of fraud - is it managed properly - is there integrity in its database - do directors have adequate information to make decisions - are there adequate controls - what affect does the companys products and byproducts have on the environment - can an unfortunate mistake bring this company to its knees?AICPA has put a new emphasis on fraud detection. Corporate governance related to directors is also of concern.

Philippine Financial Reporting StandardsPhilippine Financial Reporting Standards (PFRS) are the standards that are applied for financial accounting.PFRS were formerly called Philippine Accounting Standards (PAS)The Philippine Accounting Standards Board (PASB) has accounting standard setting responsibilities for PFRS.

Advantages of Philippine Standards of Auditing (PSA)worldwide increases confidence in non-domestic investmentconsistent international investors comprehend financial statements from different countrieshigh qualityNon-national standards encourage better quality, less political influence

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Auditing and Assurance Standards Board (AASB) Issues:Philippine Standards on Auditing (PSAs) as the standards to be applied by auditors in reporting on historical financial information. Philippine Standards on Assurance Engagements (PSAEs) as the standards to be applied by practitioners in assurance engagements dealing with information other than historical financial informationPhilippine Standards on Quality Control (PSQCs) as the standards to be applied for all services falling under the Standards of the AASB, and Philippine Standards on Related Services (PSRSs) as the standards to be applied on related services, as it considers appropriatePhilippine Standards on Review Engagements (PSREs) as the standards to be applied to the review of historical financial information.

P 6 7; see http://ifac.org/Guidance/

PSAs100-999 Philippine Standards on Auditing (PSAs)100-199 Introductory Matters120 Framework of International Standards on Auditing 200-299 General Principles And Responsibilities200 Objective and General Principles Governing an Audit of Financial Statements 210 Terms of Audit Engagements220 Quality Control for Audit Work 230 Documentation (ED)

Illustration 1.1 List of 2004 International Standards on Auditing pages 8-9

240 The Auditors Responsibility to Consider Fraud and Error in an Audit of Financial Statements250 Consideration of Laws and Regulations in an Audit of Financial Statements 260 The Auditors Communication with Those Charged with Governance300-499 Risk Assessment And Response To Assessed Risks300 Planning 310 Knowledge of the Business315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement320 Materiality in the Identification and Evaluation of Misstatements 330 The Auditors Procedures in Response to Assessed Risks PSAs

Illustration 1.1 List of 2004 International Standards on Auditing pages 8-9

400 Risk Assessments and Internal Control 401 Auditing in a Computer Information Systems Environment 402 Audit Considerations Relating to Entities Using Service Organizations500-599 Audit Evidence500 Audit Evidence 500R Audit Evidence 501 Audit EvidenceAdditional Considerations for Specific Items 505 External Confirmations PSAs

Illustration 1.1 List of 2004 International Standards on Auditing pages 8-9

510 Initial EngagementsOpening Balances 520 Analytical Procedures 530 Audit Sampling and Other Selective Testing Procedures540 Auditing Accounting Estimates and Related Disclosures (Other than Those Involving Fair Value Measurements and Disclosures)545 Auditing Fair Value Measurements and Disclosures 550 Related Parties560 Subsequent Events 570 Going Concern 580 Management RepresentationsPSAs

Illustration 1.1 List of 2004 International Standards on Auditing pages 8-9

600-699 Using Work Of Others600 The Audit of Group Financial Statements610 Considering the Work of Internal Auditing 620 Using the Work of an Expert 700-799 Audit Conclusions And Reporting700 The Auditors Report on Financial Statements 701 The Independent Auditors Report on Other Historical Financial Information705 Modifications to the Opinion in the Independent Auditors Report 706 Emphasis of Matter Paragraphs and Other Matters Paragraphs in the Independent Auditors Report710 Comparatives 720 Other Information in Documents Containing Audited Financial Statements 800-899 Specialized Areas800 The Independent Auditors Report on Summary Audited Financial Statements

PSAs

Illustration 1.1 List of 2004 International Standards on Auditing pages 8-9

2000-2699 Philippine Standards on Review Engagements (PSREs)2400 Engagements to Review Financial Statements (Previously PSA 910) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity3000-3699 Philippine Standards on Assurance Engagements (PSAEs)3000 Assurance Engagements (Previously PSAE 100) 3000R Assurance Engagements Other Than Audits or Reviews of Historical Financial Information 3400 The Examination of Prospective Financial Information (Previously PSA 810)4000-4699 Philippine Standards on Related Services (PSRSs)4400 Engagements to Perform Agreed-upon Procedures Regarding Financial Information (Previously PSA 920) 4410 Engagements to Compile Financial Information (Previously PSA 930)

Illustration 1.1 List of 2004 International Standards on Auditing pages 8-9

PSA 200 states 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 identified financial reporting framework.Terms used 'give a true and fair view' or present fairly, in all material respects equivalent terms?

Page 10Exercise 1-23. Objectives of an Audit

Audit Definition An audit is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results to interested users. American Accounting Association

Page 11An audit is objectively conducted: an audit is an independent, objective and expert examination and evaluation of evidence.The auditor obtains and evaluates evidence. The auditor assesses the reliability and sufficiency of the information contained in the underlying accounting records and other source data by: a) evaluation of accounting systems and internal controls; b) carrying out substantive tests.The evidence obtained and evaluated by the auditor regards assertions about economic actions and events. Assertions are representations by management that are embodied in the financial statements. (PERCV- MO Presentation, Existence, Rights & obligations, Completeness, Valuation, Measurement, Occurrence) The basis of evidence gathering objectives, the thing that the evidence must prove are the assertions of management.The auditor ascertains the degree of correspondence between assertions and established criteria. The audit program tests most assertions by examining the physical evidence of documents, confirmation, inquiry and observation. Established criteria is GAAP in the U.S., IAS internationally. The goal, or objective, of the audit is communicating the results to interested users. The audit is conducted with a view of expressing an informed and credible opinion, in a written report stating that the statements give a true and fair view or present fairly, in all material respects the financial position of the company. The communication of the auditor's opinion is called "attestation, or the "attest function".

General Principles Governing an Audit of Financial Statements An auditor should comply with the Code of Ethics for Professional Accountants issued by IFAC.An auditor should conduct an audit in accordance with International Standards on Auditing.

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Scope of an audit - the audit procedures deemed necessary to achieve the objective of the audit.Certain inherent limitations in an audit affect the auditors ability to detect material misstatements. Test and samplingInternal controlAudit evidenceAudit process permeated by judgmentManagement is responsible for the financial statements, accounting, and internal control.General Principles Governing an Audit of Financial Statements

Page 12Reasonable assurance is a concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that there are no material misstatements in the financial statements taken as a whole. It is the confidence that any material misstatements in the financial information will have been detected.Limitations result from the use of testing, internal control system effectiveness, audit evidence is persuasive rather than conclusive, and audit work is permeated by judgment.

Business Risk and Audit RiskCompanies, depending on the nature of their operations and industry, the regulatory environment in which they operate, and their size and complexity, they face a variety of business risks. The risk that causes the greatest concern by the auditor is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated (known as audit risk). The auditor should plan and perform the audit to reduce audit risk to an acceptably low level that is consistent with the objective of an audit. (ISA 200)

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TYPES OF AUDITAudit of financial statementsExamine financial statements, determine if they give a true and fair view or fairly present the financial statements.Operational AuditA study of a specific unit of an organization for the purpose of measuring its performance.Compliance AuditA review of an organizations procedures and financial records performed to determine whether the organization is following specific procedures, rules, or regulations set out by some higher authority.

Page 14- 16 Internal and External Audit. Operational audit used mainly by internal auditors to measure company operations. The operations of the receiving department of a manufacturing company, for example, may be evaluated in terms of its effectiveness, that is, its success in meeting its shared goals and responsibilities. Compliance audit mainly for governmental audit (comply with government standards). An example would be an audit of taxpayers to see if they comply with national tax law such as the audit of an income tax return by an auditor of the government tax agency such as the Internal Revenue Service (IRS) in the United States.

Types of AuditorsInternal auditors are employed by individual companies to investigate and appraise the effectiveness of company operations for management.Independent auditors are typically certified either by a professional organization or government agency.

Page 16 -19. Auditing Tasks Type of Auditor. Independent auditors should evaluate the competence and objectivity of internal auditors by inquiries: organizational status, professional standards used, audit plan, and access to records.

Planning

Fieldwork

Audit Follow Up

Audit Report

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PlanningAnnouncement LetterInitial MeetingPreliminary SurveyInternal Control ReviewAudit ProgramFieldworkTransaction TestingAdvice & Informal CommunicationsAudit SummaryWorking PapersAudit ReportDiscussion DraftExit ConferenceFormal DraftFinal ReportClient ResponseClient Comments Audit Follow-UpFollow-up ReviewFollow-up ReportAudit Annual Report to the Board

AUDIT PROCESS

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Audit Planning The audit process is similar for most engagements and normally consists of four stages: Planning (sometimes called Survey or Preliminary Review), Fieldwork, Audit Report, and Follow-up Review. Client involvement is critical at each stage of the audit process. As in any special project, an audit results in a certain amount of time being diverted from your department's usual routine. One of the key objectives is to minimize this time and avoid disrupting ongoing activities.

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Planning During the planning portion of the audit, the auditor notifies the client of the audit, discusses the scope and objectives of the examination in a formal meeting with organization management, gathers information on important processes, evaluates existing controls, and plans the remaining audit steps.

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Management Assertions and Audit ObjectivesThe audit starts with the financial statements prepared by the client and the claims or assertions. that the client makes about these numbers. It is the auditor's job to validate management's assertions. In order to do so, the auditor will identify audit objectives, which can be regarded as the auditor's counterpart of management assertions.

Pages 19 -221-28. Management Assertions and Audit Objectives.

Management assertions Management assertions are implied or expressed representations by management about classes of transactions and related accounts in the financial statements. An example of a management assertion is that the companys financial statements are prepared based on international financial reporting standards.

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Question 4-2, Exercise 4-12; AU 319Management assertions are implied or expressed representations by management about the classes of transactions and related accounts in the financial statements. ISA 500 classifies seven categories of assertions:PERCV-MOPresentation and Disclosure Existence Rights and ObligationsCompleteness Valuation Measurement OccurrenceUS GAAS applicable: AU 326 Evidential Matter (SAS 31, 70)

Assertions about classes of transactions and events for the period under auditOccurrence. Transaction and events that have been recorded have occurred and pertain to the entity. Completeness All transactions and events that should have been recorded have been recorded..Accuracy - Amounts and other data relating to recorded transactions and events have been recorded appropriately. Cutoff - Transactions and events have been recorded in the correct accounting period.Classification - Transactions and events have been recorded in the proper accounts.

Pages 20 21; Illustration 1.3 Financial Statement Assertions, Definitions and Procedures of Accounts Receivable.) Assertions about classes of transactions and events for the period under audit: Occurrence. Transaction and events that have been recorded have occurred and pertain to the entity. For example, management asserts that a recorded sales transaction was effective during the year under audit. Completeness all transactions and events that should have been recorded have been recorded. For example, management asserts that all expense transactions are recorded, none were excluded. Accuracy - Amounts and other data relating to recorded transactions and events have been recorded appropriately. For example, management asserts that sales invoices were properly extended and the total amounts that were thus calculated were input into the system exactly. Cutoff - Transactions and events have been recorded in the correct accounting period. For example, management asserts that expenses for the period are recorded in that period and not the next accounting period.

Assertions about account balances at the period end.Existence:- Assets, liabilities and equity interests exist. Rights and obligations:- An entity holds or controls the rights to assets, and liabilities are the obligations of the entity.CompletenessAll assets, liabilities and equity interests that should have been recorded have been recorded Valuation and allocation Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

Assertions about account balances at the period end. Existence:- Assets, liabilities and equity interests exist. For example, management asserts that inventory in the amount given exists, ready for sale, at the balance sheet date. Rights and obligations:- An entity holds or controls the rights to assets, and liabilities are the obligations of the entity. For example, management asserts that the company has the legal rights to ownership of the equipment they use and that they have an obligation to pay the notes that finance the equipment. Completenessall assets, liabilities and equity interests that should have been recorded have been recorded For example, management asserts that all liabilities are recorded and included in the financial statements, that no libilities were 'off the books'. Valuation and allocation assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded. For example, management asserts that their accounts receivable are stated at face value, less an allowance for doubtful accounts.

Assertions about presentation and disclosureOccurrence and rights and obligationsDisclosed events, transactions, and other matters have occurred and pertain to the entity. CompletenessAll disclosures that should have been included in the financial statements have been included..Classification and understandabilityFinancial information is appropriately presented and described, and disclosures are clearly expressed. Accuracy and valuationFinancial and other information are disclosed fairly and at appropriate amounts.

Assertions about presentation and disclosure. Occurrence and rights and obligationsDisclosed events, transactions, and other matters have occurred and pertain to the entity. For example, management asserts that events that did not occur have not been included in the disclosures. Completenessall disclosures that should have been included in the financial statements have been included. For example, management asserts that all disclosures that are required by IFRS are made. Classification and understandabilityfinancial information is appropriately presented and described, and disclosures are clearly expressed. For example, management asserts that all long-term liabilities listed on the balance sheet mature after one operating cycle or one year and that any special conditions pertaining to the liabilities are clearly disclosed. Accuracy and valuationfinancial and other information are disclosed fairly and at appropriate amounts. For example, management asserts that account balances are not materially misstated.

Phase 1: Planning

9/6/1430Stages in Planning of Audit1. Engagement This could be a request from the authority or a routine audit.Appointment of audit team: The appointed team (by Audit Executive) should do the following:-Conduct team first meetingDocument preparations for auditSet engagement objectives (audit objective)Determine the scope of audit.

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Illustration 1.7 The Organization Hierarchy of a Typical International Auditing Firm, p28

Phase 1: Planning9/6/14322. Conduct in office reviewReview documents (criteria) related to the client (laws, regulations, guideline etc.)Advantages of in-office reviewGain good understanding of the clientHelp to establish audit risk and materiality of issues (relevant criteria).Help to identify criteria and establish compliance requirements Clarify audit objectives (operating objectives).Enable the team to prepare relevant questions to the client during entrance meeting.Help the team to understand well the criteria (what is to be done; by whom and when).

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Phase 1: Planning.9/6/14333. Contact and meeting clientClients needs to be notified on the audit at least 5 (five) working days before entrance meeting.Notification should be formal (eg. Engagement letter)Contents of engagement letterLetter reference Date of letter Source of audit (Annual plan, Management request etc.)General audit objectiveNames of audit team and team leaderOfficial contacts of team leaderTime and location of entrance.

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Phase 1: Planning.9/6/14344. Entrance ConferenceShould be conducted prior to preliminary surveyHead of Internal audit should meet with key personnel of the clientPoints to be discussed in entrance meetingScope and objective of auditEmphasize that the purpose of audit is to add value to the organization.Determine who will be the contract person from the client (it should not be the director or person of too high level).Brief overview of the process from preliminary survey to reporting.Tentative audit event timeline estimated dates of fieldwork, interim meeting, exit meeting, audit report (draft and final) and follow-up audits.

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Entrance Conference9/6/1435How audit findings will be handled (resolution of minor findings; agreement on the action plan to implement the audit recommendations etc.)Collective review of draft report.Method of distribution of final audit report.Identification of areas of special concern by client (Note: Do not get involved in functional or operational activities of the client).Working hours, access to records, available work area, clients work deadline requirements (i.e. Auditor should fit into the clients office routine with minimal disruption to client).Arrange for tour of the facility for familiarization.Arrangement for auditors to meet other personnel who will be working with during audit.Note: Effective Communication at the beginning of audit engagement will significantly influence the atmosphere in which the entire audit is conducted.

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Phase 1: Planning.9/6/14365. Preliminary surveyThis refers to the process for gathering information without detailed verification on the activity being examined (audited)Why Preliminary SurveyTo understand well the activity under review.Identify significant areas that worth special emphasis.Obtain relevant information for use in actual audit.Determine whether further audit is necessary (nature, timing and extent of detailed audit work).Note: i) No fieldwork should be started unless preliminary survey has been conducted.Survey work may be more extensive for activities that are audited for the first time than for areas that were audited previously.

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Preliminary survey9/6/1437Phases of Preliminary SurveyFamiliarization Obtaining significant back ground information and practical working knowledge of applicable laws, regulations policies, and procedures, management and financial controls, organizations statues and staffing; and unusual challenges faced. Documents to be reviewed includes; previous audit reports/programs, working papers, laws, regulations, operating manuals, organization charts, financial statements, flow charts, budget, operating reports etc.

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Phases of Preliminary Survey..9/6/1438ii) Identification of potential areas for improvementIdentifying areas for audit emphasis (risk area). These include:-Areas identified/documented in risk. Register.Area of high possibility of fraud or mis management Where there is large volumes of transactions.Where management has expressed concerns.Where prior audit disclosed major weakness/deficiencies.

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Phases of Preliminary Survey..9/6/1439iii) Confirmation: Getting evidences from third parties where necessary.(iv)Planning the detailed auditPreparation of audit program in areas that worth for further auditAudit program should be recordedIt basically show, what is to be done; by when; by who; for how long and how will it be done.This is a link between preliminary survey and field work.

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Announcement Letter: The client is informed of the audit through an announcement or engagement letter from the Internal Audit Director.

Initial Meeting: the client describes the unit or system to be reviewed, the organization, available resources (personnel, facilities, equipment, funds), and other relevant information.

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Preliminary Survey: In this phase the auditor gathers relevant information about the unit in order to obtain a general overview of operations.

Internal Control Review: The auditor will review the unit's internal control structure, a process which is usually time-consuming.

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Audit Program

Preparation of the audit program concludes the preliminary review phase. This program outlines the fieldwork necessary to achieve the audit objectives.

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Mechanics for preparation of Audit Program

9/6/1443Setting of Audit Objective: Start from operating objectives followed by operating procedures eg.Operating objective: To ensure procurement of right goods/service at right, right price, at right time and right quantity and quality).Operating Procedure: On requisition, the ordering dept should clearly spell out the goods/service to be procured proper specification).Audit Objective: To ascertain whether the procurement of goods/services was done properly to ensure right goods/service, right price, right time and right quality and quantity.Determine the scope of Audit Program (objective of Internal Control System) and key risk from the same.Develop audit objective from operating objective/target; requirement of the law (legislative requirements) terms of reference in special audit assignment [see item (i) above].

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Benefits/Advantages of Audit Program

9/6/1444Set a systematic approach to audit. Gives specific steps to be taken by auditor.Provide precise instruction to obtain precise audit information.Provide for more focused audit hence serve time for audit engagement.As a bases of or duty/assignment to audit assistants. Help the supervisor to monitor the auditProvide summary of work to be done.

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Phase 2: Field work (Evidence Gathering)

9/6/1445Is the systematic process of gathering evidence about entitys operations, evaluating it and found out whether those operations meet the acceptable standards. Here auditor perform the procedures as in the audit program by doing the following:-Concentration on transaction testing and informal communication.Determine and evaluate whether internal controls are operating properly and in manner described by management.

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Evidence

9/6/1446Defn: Refers to all matters that supports a point/position assumed by auditor Qualities of an evidenceEvidence must be:-Suffient ie. Adequate and convincing.Competent ie. Reliable and best attainable.Relevant ie. Supporting the observations and recommendations; consistent with objectives.Useful ie. Help the organization to meets its objective.

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Evidence.

9/6/1447Types of evidencePhysical - direct inspection/observation documented as memoranda, charts, maps, photographs etc. Documentary - created information eg. Accounting records, invoices, letters contracts etc.Testimonial - responses to inquires interview (needs to be confirmed).Analytical - analysis or verification of information computations, comparisons of operations; standards, law/regulations, and evaluation of physical or documentary information.

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Field work Audit Checklist

9/6/1448Before going to fieldwork the audit team should ensure to have the following:-Audit program (each team member should have a copy).Responsibility of each team member (segregation of duties).That audit client is aware in advance. Adequate working tools (working papers, folders, stationery, calculator, laptop, camera etc.).Copies of relevant laws, regulation, standards, etc. relating to the audit area.

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Documentation of the fieldwork results

9/6/1449The field results (step of activities) will be recorded in the audit working paper.The reference should be made in the working paper with the audit program to maintain consistency.The working papers are used to arrive to the audit finding.

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AUDIT EVIDENCE & DOCUMENTATION

Evidential MatterEvidential matter supporting financial statements consists of:Underlying accounting dataCorroborating evidence (supporting information)

Evidential MatterAppropriateSufficientReliableAmount of evidenceRelevantProfessional judgment

Sufficient Audit EvidenceInfluenced by:Competence of evidenceRisks involvedMateriality and tolerable errorExperience

Appropriate EvidenceRelevantSatisfies audit objectiveTimely

Reliability is influenced by:Independence of sourceHow the evidence is obtained Condition of internal control

Audit Workflow 55

Audit MethodologyAudit Work FlowUnderstand the business including the IT environmentEvaluation of entity level controls and fraud assessmentPerform risk assessment and evaluation proceduresDetermine audit approach and plan audit strategyDetermine substantive proceduresPerform substantive proceduresConclude on procedures performedPerform completion proceduresPerform overall review of financial statementsObtain management representationForm an audit opinionPlanning and Risk AssessmentEvaluation of ControlsFraud assessment proceduresGoing concern assessmentSubsequent events reviewLaws and regulations, litigations and claimsUnderstand significant processes and perform walkthroughEvaluate design and implementation of controlsTest and conclude on operating effectiveness of controlsPerform Substantive TestGeneral Audit ProceduresConclude the AuditPRELIMINARYFINAL

Anticipation and Resolution of Audit IssuesTeam discussion of accounting and auditing issuesBrain storming session with the Company on the identification and resolution of issues`

Planning and Risk Assessment

Engagement acceptance and continuanceUnderstand the businessUnderstand IT environmentPlanning materialityEntity level control and fraud assessmentIdentification of significant account and processesUnderstanding and evaluation of IT general controlsUnderstanding of significant process and walkthroughAudit planning memorandumCombined risk assessmentAudit planning discussion

Control Evaluation

Test of the design and operating effectiveness of controlNature of test of controlTiming of test of controlExtent of test of controlConclude on operating effectiveness of controlControl deviations discovered during the testingControl deficienciesDocumenting control deficiency

Substantive Procedures

Test of DetailsAnalytical Review ProceduresOther Substantive Procedures

General Audit Procedures

FraudGoing concern assessmentSubsequent eventsLaws and regulationsLitigations and claimsRelated parties

Conclude the Audit

Overall review of financial statementsManagement representationsPerform overall evaluation of:Procedures performed on each significant accountsSignificant findings and issuesReassessment of materialityChanges in audit strategy and planned proceduresAudit differencesEthical and independence issuesForm an audit opinion

Substantive Tests

SUBSTANTIVE PROCEDURES ASSETSCash and Cash EquivalentsObtain bank confirmations for all accounts, including the accounts closed during the yearExamine client's bank reconciliationTest proper cut off of cash receipts and cash disbursementsTest appropriate valuation

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Cash and Cash EquivalentsBank confirmationBank reconciliationBank statementCash bookGeneral ledger

Cash and Cash EquivalentsBank Reconciliation

Balance per Bank xxx

Add:Deposit in Transit x

(Less)Outstanding Checks (x)

Balance per book xx

Bank StatementBank ConfirmationPost Year-End Bank StatementCash BookCash BookPost Year-End Bank StatementGeneral Ledger

SUBSTANTIVE PROCEDURES ASSETSAccounts Receivable - TradeAgree subledger to general ledger control account Verify existence through confirmation or subsequent cash receipts.Perform roll-forward procedures, as necessaryPerform analytical procedures

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SUBSTANTIVE PROCEDURES ASSETSAccounts Receivable Trade (cont)Evaluate adequacy of the allowance for impairment of receivables Evaluate the adequacy of other adjustments to accounts receivablesTest valuation of balances in foreign currenciesInquire about or review list of credit balances and investigate large items.

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SUBSTANTIVE PROCEDURES ASSETSInventoriesObserve the taking of physical inventoriesIf significant, confirm inventories held by others at the physical inventory dateReview the reconciliation of physical inventory compilation with the GL account and recordsPerform roll-forward procedures, as necessaryPerform cut off proceduresPerform valuation and NRV testing

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Physical Inventory ObservationReview industry observation instructions obtained from client.Review the physical inventory work programAttend physical inventory:Plant tourTest countsPhysical Inventory Observation Checklist and memoConclusion

QUANTITYxUNIT COST=TOTAL COSTQxUC=TC

CountsheetLocationDescriptionQtyX1Cheddar Cheese600X2Cream Cheese400X3Cheddar Cheese300(completeness)

Inventory byLocation ReportLocationDescriptionQtyX1Cheddar Cheese600X3Cheddar Cheese 3006000X2Cream Cheese400

Priced OutInventory ListingUnitTotalQtyCostCost_________24,000,000(accuracy)

G/L

Inventory cut-off proceduresIn order to ensure that the books and records are complete, the paperwork associated with the above must all be processed by the same count date.

Inventory Obsolescence ReviewThe identification and valuation of inventory items that are:ExcessSlow movingObsoleteDefectiveExpiredReplaced or reproduced for less than the cost or current carrying amount

SUBSTANTIVE PROCEDURES ASSETSInvestments, including investments in affiliatesVerify the existence through confirmation or examination of evidence of ownershipReview minutes of meetings, agreements and confirmation repliesPerform valuation procedures through inspection of market quotationsPerform impairment testing

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SUBSTANTIVE PROCEDURES ASSETSProperty, Plant and EquipmentObtain a schedule of property, plant and equipment, including capitalized leasesExamine invoices, authorizations, leases and other data for additions and disposalsReview and examine support for rentals under operating leasesTest reasonableness of depreciation, depletion and amortizationAssess possible indications of impairment

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SUBSTANTIVE PROCEDURES ASSETSIntangibles, including GoodwillObtain a schedule of intangibles, including goodwill, and test the bases on which additions, amortization and disposals are recorded.Assess possible indications of impairmentImpairment testing for goodwill (e.g. review of discounted cashflows)

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SUBSTANTIVE PROCEDURES - LIABILITIESAccounts Payable - TradeAgree subledger to general ledger control account Review subledger for unusual itemsTest proper cut-offReview subsequent events and analytic proceduresTest valuation of balances in foreign currencies

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SUBSTANTIVE PROCEDURES - LIABILITIESIncome Taxes, Deferred Taxes and Related Income Statement AccountsTest reconciliation of the current year book/local GAAP/statutory and taxable incomeTest computations of provisions for current and deferred income taxesReview movements of income tax accountsDetermine whether provision should be made for tax positions or other tax contingenciesTest intercompany and other related party transactions

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SUBSTANTIVE PROCEDURES - LIABILITIESProvisions, Accrued Liabilities and Deferred IncomeReview the schedule of provisions, accrued liabilities and deferred income and agree amounts to the general ledger accounts Test if provisions, accrued liabilities and deferred income were recorded at appropriate or reasonable amounts Review lawyers confirmation, minutes and other documents for completeness of recorded liabilitiesSearch for unrecorded reserves/accruals (i.e. review contracts, invoices, payments)

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SUBSTANTIVE PROCEDURES - LIABILITIESNotes Payable, Long-term debt & Leases Obtain confirmations from banks or other debt holdersInspect documents and authorization (i.e. loan documents, minutes, lines of credit)Test compliance with loan covenantsIdentify liens, security interests, and assets pledged as collateral for debt. Ensure proper disclosure

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SUBSTANTIVE PROCEDURES - LIABILITIESNotes Payable, Long-term debt & Leases Review subsequent events (i.e. refinancing transactions)Test reasonableness of interest expenseReview summary of lease and rent contracts and test correct presentation (e.g., operating or finance lease) in the financial statements Test reasonableness of rent expense

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SUBSTANTIVE PROCEDURES INCOME STATEMENT ACCOUNTSRevenuePerform analytical review proceduresInquire of sales and marketing personnel for any unusual transactions, or similar itemsReview of the terms of sales agreements (i.e. returns, sales incentives)Identify unusual items

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SUBSTANTIVE PROCEDURES INCOME STATEMENT ACCOUNTSOther IncomeReview contents of miscellaneous income and identify unusual transactionsTest interest and dividend incomeDetermine that the changes in the value of investments is properly recorded

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SUBSTANTIVE PROCEDURES INCOME STATEMENT ACCOUNTSCost of Sales And ExpensesObtain details of expenses and analyze in comparison of prior period /and or budgetTest reasonableness of major expense accounts i.e. payroll, depreciation, interest Verify through a review of lawyers fees that all lawyers and in-house legal counsels, who handle significant litigation or other claims, have been covered in the lawyers' confirmation workReview significant other taxes, e.g., property taxes, for correctness and proper cutoff.

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AUDIT DOCUMENTATION

Purpose of Audit DocumentationDocumentation occurs throughout the AuditThe Engagement TeamConducts testingObtains sufficient appropriate evidenceProvides opinion

Reasons for DocumentationSupports compliance with PSAProvides the principal support for our audit opinionAids us in the conduct and supervision of the engagementFacilitates communication

We DocumentWhat we didWhat we foundWhere we found itWhat we concluded

GOAL OF DOCUMENTATIONQuality and Efficiency

Volume

EXTENT OF WORKING PAPER DOCUMENTATION PSA 230The auditor should prepare the audit documentation so as to enable an experienced auditor, having no previous connection with the audit, to understand:(a) The nature, timing, and extent of the audit procedures performed tocomply with PSAs and applicable legal and regulatory requirements;(b) The results of the audit procedures and the audit evidence obtained; and(c) Significant matters arising during the audit and the conclusions reachedthereon.

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Audit Files

Continuing Audit Files

Current Workpaper Files

Permanent FileBrings together all the materials which may continue to be of interest to this and future audits.Contents of a Continuing Audit FileGeneral information about the clientMinutes, contracts, and regulationsAccounting policies and proceduresMaterial relating to the formation of the companyHistorical analyses of accountsIncome tax information

Current Workpaper FileBrings together all of the current audit work performed and conclusions reached in the current-year auditContents of Current Workpaper File:Working Trial BalanceLead SchedulesDetailed SchedulesPlanning documentAudit ProgramSchedules prepared by clients

Safeguarding Working PapersAll professionals are responsible for safeguarding audit working papers to prevent their loss or use by an unauthorized person.Secure working papers and computers in a locked area at the clients office.Be careful not to leave confidential data on the screen of the computers for unauthorized persons view.Consider security matters when transporting working papers and computer to the clients location.

Elements of an Effective Work ProgramResponds to risks in the planning processActs as a substitute for practice aids in lower risk areas.May serve as a vehicle to communicate time expectationsIncludes client proceduresIncorporates any general notesDocuments results of work doneReinforces what work to do and how to do it

Contents of the Work ProgramCompany procedures and background informationAudit objectivesAudit proceduresPerformance and results of work (including general explanatory notes)Conclusions

Current Working Paper File

FINANCIAL STATEMENT

LEAD SCHEDULES & SUBSTANTI VE TEST

Working Trial Balance

Lead SchedulesAssetsLiabilities & Shareholders StatementProfit & Loss CashAccounts PayableSales

Detail Schedules & Memoranda

Workpaper Hierarchical StructureFinancial Statements

(Assets)(Liabilities & Equity)(Profit & Loss)A (CASH)B(Accounts Receivable)C(Inventory)D(Prepaid)E(PPE)K(Notes Payable)L(Accounts Payable)M(Accruals)U(Sales)V(Cost of Sales)W(Selling, General & Admin Costs)

L(Accounts Payable Lead Schedule)L1(Reconciliation of Payables Listing to General Ledger)L2(Listings of Trade Payables)L3(Trade Payables Circularization Control)L3.1(Agreed Replies)L3.2(Disagreed Replies)L3.3(Nonreply Work)

Techniques for Documenting WorkIndexingCross ReferencingTick MarksGeneral NotesLettered ExplanationsConclusionsDisclosures

Cross-ReferencingTwo-types of cross-referencing:InternalExternalCross-referencing should be in red pencil

Tick marksSymbols used to refer to an explanation of work completed Explain that work was done in a specific wayEliminate the need to write repetitive explanationsNormally include description of evidence examined, findings and results and unusual items noted and how they were resolved.

Tick marks - agrees with support documentC - confirmed - all formula and calculations have been testedi - immaterial balance, accept as reasonable, NFAPY - agrees to prior period working papersTB - agrees to trial balanceGL - agrees to general ledger - discussed with client

Example of a General NoteExample: General note on review of subsequent payments:Note 1 Reviewed cash payments book and all bank statements until Feb 15, last fieldwork day. One omission noted. A payment on Jan 8 to Tokyo office was not accrued. This is the subject of an Audit Difference. No other above sdcope omissions.

Lettered ExplanationsDocument and explain exceptions and unusual itemsCan be documented in the workprogram or workpaperShould be in red pencil

Types of Conclusions1234Conclusions on the financial statements taken as a wholeExplicit conclusions dealing with fraud and going concernConclusions on passed adjustments and reclassificationsConclusions on resolution of significant audit issues

Audit DifferenceA difference between the amount, classification, or presentation of a financial statement element, account, or other item and the amount, classification, or presentation that we believe would be required under PFRSOmission of a financial statement amount, account, or item required under PFRS.

Essential Documentation FeaturesIndexingCross-referencingTick marksGeneral NotesLettered ExplanationsSigned ConclusionsCompleted Work ProgramSignature and Date on WorkpaperHeadings

OutlinePurposes and Uses of Working PapersWorking Papers IncludesPermanent File IndexCurrent File Index Audit DocumentationMatters Affecting the Form & Content of Working PapersTypes of Audit Evidence

9/6/14109Purposes and Uses ofWorking Papers Serve as basic tools to assist the auditor in the conduct of the audit.Support the auditors opinion on the financial statements.Substantiate the competence of the auditors examination.Serve as guides in subsequent audits.Aid in giving advice on tax and business mattersProvide a basis for evaluation of staff members performance.

9/6/14110WORKING PAPERS ORDINARILY INCLUDE:Information concerning the legal and organizational structure of the entity.Extracts or copies of important legal documents, agreements and minutes.Information concerning the industry, economic environment and legislative environment within which the entity operates.

9/6/14111Evidence of the planning process including audit programs and any changes thereto.Evidence of the auditors understanding of the accounting and internal control systems.Evidence of inherent and control risk assessments and any revisions thereof.Evidence of the auditors consideration of the work of internal auditing and conclusions reached.Analyses of transactions and balances.

9/6/14112Analyses of significant ratios and trends.A record of the nature, timing and extent of audit procedures performed and the results of such procedures.Evidence that the work performed by assistants was supervised and reviewed.An indication as to who performed the audit procedures and when they were performed.Details of procedures applied regarding components of business whose financial statements are audited by another auditor.

9/6/14113Copies of communications with other auditors, experts and other third parties.Letters of representation received from the entity.Conclusions reached by the auditor concerning significant aspects of the audit, including how exceptions and unusual matters, if any, disclosed by the auditors procedures were resolved or treated.Copies of the financial statements and auditors report.

9/6/14114Permanent File IndexInformation About the Clients BusinessInternal Control System DocumentationOrganization and Equity CapitalArticles of IncorporationBy-LawsMinutes or Resolution of Continuing Interest

9/6/14115Permanent File Index(Cont.)Financing and Other Significant Agreements and ContractsBank and Other Financing AgreementBond Indentures, Mortgages and Trust AgreementsOther Information of Continuing RelevanceCertificates of Registration with Govt. or Regulatory BodiesTax Information

9/6/14116Current Index FileAuditors Report, Financial Statements and General MattersPlanning and AdministrationPA Initial Planning Audit ProgramPA1 Initial Planning MemorandumCompliance Test Documentation

9/6/14117Current Index File (Cont.)Substantive TestsWORKING TRIAL BALANCES AND ADJUSTMENTSST Substantive Test Program SummaryWBS Working Balance SheetWPL Working Profit and LossTB Trial BalanceAJE/RJE Summary of Adjusting/Reclassifying Journal EntriesPJE Summary of Passed Journal Entries

9/6/14118Current Index File (Cont.)ASSETS (Single Capital Letters)A CashB Trade ReceivablesC Other ReceivablesDInventoriesEPrepaymentsFInvestmentsGProperty, Plant and EquipmentHDeferred ChargesIIntangible AssetsJOther Assets

9/6/14119Current Index File (Cont.)LIABILITIES (Double Capital Letters)AANotes Payable and Bank LoansBBAccounts PayableCCAcceptances Payable and Related AccountsDDAccrued LiabilitiesEEIncome TaxesFFOther Current LiabilitiesGGLong-Term DebtHHOther Non-Current LiabilitiesIIContingent Liabilities and CommitmentsJJStockholders, Partners or Proprietors EquityKKRetained Earnings

9/6/14120Current Index File (Cont.)INCOME AND EXPENSES (Two-Digit Numbers)10Sales20Cost of Sales30Selling Expenses40Administrative Expenses50(60 or 70) Other Groupings of Expense Accounts80Other Income or Expenses

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PSA 210 ON AUDIT DOCUMENTATIONSection 2.The auditor should document matters which are important in providing evidence to support the audit opinion and evidence that the audit was carried out in accordance with Philippine Standards on Auditing.Section 5.The auditor should prepare working papers which are sufficiently complete and detailed to provide an overall understanding of the audit.

9/6/14122Matters Affecting the Form and Contents of Working PapersNature of the engagement.Form of the auditors report.Nature and complexity of the business.Nature and condition of the entitys accounting and internal control systems.Need in the particular circumstances for direction, supervision and review of work performed by assistants.Specific audit methodology and technology used in the course of the audit.

9/6/14123Types of Audit EvidencePhysical ExaminationThird-Party Statements or ConfirmationClient Statements or RepresentationsAuthoritative DocumentationsObservationClerical AccuracyComparison & Data Relationships

9/6/14124PHYSICAL EXAMINATIONDescription Of General Auditing Procedures

COUNTING OF INVENTORY, CASH, SECURITIES, UNMATURED PROMISSORY NOTES

- To establish existence and, where applicable, ownership and condition of assets

9/6/14125THIRD-PARTY STATEMENTS OR CONFIRMATIONSOBTAINING CONFIRMATION DIRECTLY OR DETAILS OF ACCOUNT BALANCES

To verify validity and accuracy of balances and other information with outside parties.

9/6/14126CLIENT STATEMENTS OR REPRESENTATIONSOBTAINING CLIENTS REPRESENTATION LETTER, EXPLANATIONS TO MANY DIVERSE QUESTIONS RAISED DURING THE AUDIT

To obtain knowledge and understanding about the client and its circumstances.

9/6/14127AUTHORITATIVE DOCUMENTATIONEXAMINING (OR VOUCHING) PAID CHECKS, VENDORS PRUCHASE ORDERS, RECEIVING REPORTS, TITLES, CONTRACTS AND OTHER DOCUMENTARY MATERIALS.

- To verify the validity and propriety of accounting treatment of transactions and account balances and compliance with internal controls.

9/6/14128OBSERVATIONOBSERVING THE TAKING OF PHYSICAL INVENTORIES BY CLIENT PERSONNEL OR THE ACTUAL OPERATION OF INTERNAL CONTROL

- To determine compliance with prescribed procedures.

9/6/14129CLERICAL ACCURACYRECHECKING CLERICAL DETERMINATION BY CLIENT

- To verify the accuracy of computations and transfers of information made by client.

9/6/14130COMPARISON AND DATA RELATIONSHIPSCOMPARING CURRENT PERIOD ACCOUNT BALANCES OR OPERATING DATA WITH SIMILAR INFORMATION FOR PRIOR PERIODS AND INVESTIGATING UNUSUAL DATA RELATIONSHIPS.

-To disclose and determine the reasons for significant changes.

Working PaperOrganization Chart

ContinuingAuditFileCurrentWorkingPaper File

RiskAssessment& Planning

JobAdministration

WorkOfOthers

LeadSchedules&SubstantiveWork

FinancialReporting

TransactionProcessingCyclesTransactionProcessingCycles

Evidential Matter(Test of Controls)AssetsLiabilities&EquityProfit& Loss

FinancialReporting

WorkingTrialBalances

LeadSchedulesandSubstantiveWork

LeadSchedules

DetailSchedulesandMemoranda

Account LevelEvidential Matter(Substantive Testing)

B-10

B-9 2-1

B-9 2

B-9 1

B-9

B-5 2/2

B-5 1/2

B-1

Indexing

BABC CorporationReceivable Lead ScheduleAudit: 12-31-2005

If there are two or more pages comprising a given schedule, the pages are marked to indicate both the particular page and the number of total pages (see B-5 above).Detailed work of an account balance could be supported by several tiers of supporting schedules using fractional indexing (see B-9 above)

2003 2004 _Balance Beginning of Year P130,089 P151,691 Write-offs ( 71,087) ( 62,439) Provision 92,689 83,994_Balance End of Year P151,691 P173,246 ========= =========

Examples

ANAK NG JUETENG, INC.Analysis of Reserved for Doubtful AccountsAudit: 12-31-04B-9PBCDETAIL OF CURRENT WRITE-OFF Date Customer Amount _4-21-04Lion King P 25,0814-29-04Jose Pedal 5,3775-18-04Atty. Ong 17,3415-20-04Sec. Bunye Original 10,093Various amounts under P1,000 4,547_2004 Write-Offs P 62,439 ==========Examined write-off form approved by the controller noting agreement of date, customer and amount all write-offs over P1,000.Accumulated write-offs under P1,000 from detail maintained by the credit manager noting agreement.Traced to Prior Year Audit Working Papers noting agreement.Footed by QCB & Co. and agrees.

1122BB

Examples

ANAK NG JUETENG, INC.List of Outstanding ChecksAudit: 12-31-04A-4PBC Amount _P 991.90 15,000.00 2,001.03 12,576.13 2,790.29 1,745.75 8,941.86 49,810.73 15,439.75 4,989.51 5,533.64P122,410.43==========Examined cancelled checks returned by bank together with the December 2005 bank statement, noted in order.Examined check register and noted that these were not acknowledged received by the payee in December 2004. Footed by QCB & Co. and agrees.

P25,962.90=========Reviewed the list of outstanding checks noting no unusual or significant items except for & as discussed below.NOTE 1>AB

BAPer review of the vendor invoices and receiving reports, this check is for lumber and supplies purchased for the additions to the building site. See extracts from the board of directors meeting minutes at XX for further discussion.BPer discussion with Gen. Garcia, Comptroller, these checks dated 12/30/04 were not released to the vendors until 1/2/05 as all authorized check signers were on vacation. Based on the dates these checks cleared the bank per our review on the January 2005 bank statement, this explanation is reasonable. Thus the following adjustment is proposed to properly state cash and accounts payable at 12/31/04:PAJE CashP25,962.90 Accounts Payable P25,962.90

Exit Meeting

9/6/14135This is the meeting between audit team and the client at the end of fieldwork.The objective of the meeting is to share and discuss the key noted findings.It is the important forum for audit team to get confirmation on the obtained/noted findings; responses from the management and the tentative corrective actions/action plans.The minutes of the meeting should be well documented and signed by both parties and these forms parties of the working papers.

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Filling of 5 Attribute form/sheet

9/6/14136This is the sheet/form where audit findings are recorded.It is a key tool for ensuring effective report writing.Summary of contents of the form include:-Audit objective: The purpose of auditAttributes of the findings: Condition, criteria, cause effect and recommendation.Client personnel with who discussed: Name, title, dept, date of discussion, and name of auditor.Comments by client personnel: Relevant comments made by client personnel with whom the finding was discussed.

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Phase 3: Reporting

9/6/14137This refers to the communication between the Auditor and the Client on the results of the audit engagement (It is the product of audit engagement).It is the most visible output that provides feedback to the client and other stakeholders on the result of engagement.It is an opportunity for audit showing how it can add value to the organization.It provide the management with the opinion on the adequacy of internal controls systems.

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Audit Step : To communicate the results of the audit to managementW/PNo.Est.Hrs.Act.Hrs.A.

B.

C.Prepare a Draft Report:Write report introduction, background & scope.Consolidate conclusion summaries into a report, x-refWrite memo for less significant items.Submit report for review & clear review notes.Set up the Exit Conference and distribute Draft ReportConduct Exit Conference to brief on the audit results and request a date for completion of the corrective action plan. (Note: If any material changes to the audit report are identified, establish the date for revised report to be issued.)

Obtain Corrective Action PlanAnalyze the Corrective Action Plan for adequacy and document.Advise agency management of any apparent inadequacies in the Corrective Action Plan & resolve.

Prepare a Final Report:Add the revised Corrective Action Plan to the Draft Report to prepare the Final Report.Submit report for review & clear review notes.Distribute the final report.

REPORTING: Date Completed April 4, 2010 _____69_____Total Hours:

AUDIT REPORT.

AUDIT PROCESS

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Discussion Draft

At the conclusion of fieldwork, the auditor drafts the report. Audit's goal is to complete the audit and issue a draft audit report within 30 days after the completion of fieldwork. Audit management reviews the audit working papers and the discussion draft before it is presented to the client for comment. This discussion draft is submitted to the client for review before the exit conference.

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Exit Conference

Internal Audit meets with the unit's management team to discuss the findings, recommendations, and text of the discussion draft. At this meeting, the client comments on the draft and the group works to reach an agreement on the audit findings.

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Exit Conference Is an opportunity for the auditor, department management, process owners, and other to review and validate audit outcomes. The Exit Conference should accomplish the following: 1) Present observations and determine if the current operating context might affect past transactions.

2) Confirm facts, observations, and conclusions, e.g., that the findings are accurate.

3) Validate the cause leading to findings and present recommendations.

4) Estimate the effect of the findings on operations or its risk management.

5) Solicit draft management comments on the audit findings and determine if alternative recommendations adequately eliminate the cause of findings.

6) Define the timeline for issuing the final audit report and implementing recommendations.

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Audit Finding Audit Findings Reconciliation Supervisory Review (Urgent) During our sample review of account reconciliations, it was noted that many account reconciliations were not being reviewed by the supervisor in Item Processing and Deposit Operations.

Recommendation We recommend management review all accounts at least monthly.

Action Plan The Supervisor of the Item Processing Department was advised of this requirement and has implemented changes as requested. The Deposit Operations Manager will sign and review all account reconciliations. A secondary signature by the balancing associate and/or supervisor will also be implemented. This procedure is currently in place.

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Exit Conference ChecklistProcedure Set the date, time, and location of the exit meeting. The agenda should include the following: Accomplishment of the audit objectives (theirs and ours). Discussion of potential audit findings and recommendations. Discussion of when managements response will be due. Audit reporting process. Follow up process.Document results of the exit meeting.

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Exit Conference

This section of the report summarizes the pertinent information regarding the Audit Exit Conference. It includes:

The date the conference was held. The persons in attendance and their titles. A statement that a summary of the Findings and Recommendations was discussed.

Exit Conference

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Audit Exit Conference WPAudit Location (Faculty Division)---------------------------------------------------------------------------------------------Audit Date---------------------------------------------------------------------------------------------------------------------------Lead Auditor------------------------------------------------------------------------------------------------------------------------ Audit team Member--------------------------------------------------------------------------------------------------------------The main purpose of this meeting is to immediately present audit observations to the senior management in a timely manner at the end of the audit and in such a manner so as to ensure that they clearly understand the results of the audit.List Observations:The lead auditor should present observations, taking into account their perceived significance and identifying key non-conformance areas.Key Non-conformances:The lead auditor should present the audit teams conclusions .Proposed Audit Score:Audi tee response to observations, non-conformances and audit score proposed by the auditor.

JOSE

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Formal Draft

The auditor then prepares a formal draft, taking into account any revisions resulting from the exit conference and other discussions. This report is issued to the audited requesting a written response to any audit findings and recommendations. When the changes have been reviewed by audit management and the client, the final report is issued.

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AUDIT REPORT Our principal product is the final report in which we present the audit findings and discuss recommendations for improvements. Once the fieldwork is completed, Internal Audit will draft a report to include the result of the audit including recommendations for improvement. After the draft report is completed, it will be forwarded to department management for review and discussion at a scheduled exit conference.

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Quality of the Internal Audit report

9/6/14148Internal Audit Report must be:-Accurate - ie. Free from errors and distortions (purpose clearly communicated).Objective - ie. Fair, impartial and unbiased.Clear - ie. Easy to understood and logical.Concise - ie. Straight to the point without unnecessary details.Constructive - ie. Help the client to improve its performance (practical solution).Complete - ie. Should include all the relevant facts.Timely - ie. Well timed to enable timely decision on proposed recommendations.

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Format of Internal Audit Report

9/6/14149The standard audit report should have the following key sectionsExecutive Summary: showing all aspects of the report but in a nutshell. It should be able to give the snapshot of the whole report, but it should not too much summarized to lose the meaning. Introduction: Show the background information on area under the audit, establishment, objective, function etc. (The mandate of the internal audit in auditing such area).Objectives: Show the audit focus, expected output (what it will achieves (could generals and specific ones).Scope of Audit: description of auditable areas, timing (period covered and when the audit conducted).Compliance statement: describe that the audit activity was conducted In accordance with professional practice of auditing standards (whether local, international or both).

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Format of Internal Audit Report

9/6/14150Approach or Methodology use: describe the criteria followed; standards used; work done in testing; documents used (reviewed) etc.Findings and Recommendations: For each finding, describe the condition; criteria; cause and effect/impact. Recommendations should address the cause to improve operations, and is shown in a separate sub-paragraph.Conclusion/Summary: This show the auditors evaluation of the effect of the findings on the activity audited (The overall implications).Should focus on audit objectives and any qualifications.Can also focus on clients accomplishment in relation to previous findings, compliance and achievements of operations (Here the auditor can show the noted strengths of the client).Compliance plan: Agreement between auditor and client on the implementation of the auditors recommendations as part of management responses. It show area of improvement, responsible person, action to be taken and time frame, name and signature of both parties (client & auditor). [where possible the compliance plan can be signed between Head of Internal Audit and the Head of audited entity].Acknowledgement: General statement to show the appreciation for cooperation/assistance extended by client to the audit team during time of audit (Note: it should not mention specific individuals).

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Format of Internal Audit Report

9/6/14151Signature: Signed after the audit examination completed. Should be signed by the authorized internal auditor and showing his/her name after his/her signature.Appendixes: Any relevant information that clarifies the finding/ observation can be shown as appendix to the report. This must be cross-referenced in the report by number or letters (eg. Appendix 1 or Appendix A)

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Phase 4: Audit follow-up

9/6/14152Sometime referred as Recommendation Audit.It assumes all steps like any other audit engagement.The objective is to review and verify the Implementation of audit recommendation.It is the last phase of audit engagement. However The Audit Engagement is completed/closed when all recommendation has been fully implemented.

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Report Issuance Control SheetSpelling and Grammar Check Performed by: ______PABLO____________________Quality Assurance Review (QAR) Performed by: ______VILMARI__________________Approval of final draft with responses Director of Audits: ___AMANDA_________________ Engagement Manager: ___JOSE ____________________Check all reports (original and all copies). Verify the following: 1. They contain all pages, in the appropriate order __________ 2 All copies are straight and legible; and __________ 3. The signature page has been signed. __________ Report Distribution*:President Client Management Chief Business Officer Director of Internal Audit Chancellor Vice Chancellor for Academic Affairs Executive Vice Chancellor for Health Affairs Executive Vice Chancellor for Business Affairs Institution Compliance Officer Others (list) Reading File (unbound hard copy stamped and placed in Reading File) Unbound hard copy provided to Office Associate* As determined by type of audit and institution where engagement is conducted (Academic, Medical, or System Administration). Compliance Officer should be included in report distribution if engagement involves a compliance issue. Engagement Distribution Timeline:

Last Day of Fieldwork (MM/DD/YYYY) _____________ Report Issuance Date _____________ Days between Last Day of Fieldwork and Report Issuance. _____________

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Final Report

After audited management has been given an opportunity to respond to the Preliminary Draft, the Final Draft Report is presented to the Accountability Oversight Committee for approval. Upon approval of the Final Draft the Final Report is issued. Auditor distributes the final report the Chief Financial Officer, the Chief Accountant, the President, the Board of Directors, and other appropriate members of senior management. Final Reports are considered public information and will be available to anyone.

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Independent Auditors' Report

To the Board of Directors and Shareholders

I have audited the accompanying financial statements of ABC CO., INC., which comprise the statements of financial position as at December 31, 2013 and 2012, and the statements of comprehensive income, statements of changes in equity and statements of cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Managements Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards (PFRS), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors Responsibility

My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion.

Opinion

In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC CO., INC. as of December 31, 2013, and their financial performance and its cash flows for the years then ended in accordance with the PFRS.

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Client Response

The client has the opportunity to respond to the audit findings prior to issuance of the final report which can be included or attached to our final report. In the response, the client should explain how report findings will be resolved and include an implementation timetable. In some cases, managers may choose to respond with a decision not to implement an audit recommendation and to accept the risks associated with an audit finding.

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Client Response ExampleClient Response (1) - Treasury balances are reconciled monthly. Treasury activity is reconciled daily. Differences are isolated to the period of October 1, 2012 and prior, and have been controlled since that date. Adjusting entries are made with proper documentation and review. Moving the function to a private sector financial institution has been discussed and poses two major obstacles. The first obstacle is the negotiability of a private sector check versus a Treasury check. This would obviously cause problems for account holders in remote locations as Treasury checks are readily negotiated at local merchants. A private sector financial institutions checks would not be as negotiable. The second obstacle is the financial resources required to obtain the services of a private sector institution.

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Client Comments

Finally, as part of Internal Audit's self-evaluation program, we ask clients to comment on Internal Audit's performance. This feedback has proven to be very beneficial to us, and we have made changes in our procedures as a result of clients' suggestions.

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Client Comment Example "I would highly recommend Schmidt & Associates to any credit union currently searching for a quality auditing firm. I have been very impressed with the scope of the audits and the level of detail employed by representatives of the firm during their monthly and quarter contacts. Furthermore, I always receive prompt attention whenever I have questions regarding regulatory or compliance issues."

Greg KidwellMembers First Credit UnionColumbus, Ohio11,000 Members, $38 Million in Assets

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Audit Follow upDepending on the nature of the audit or the audit findings, the Follow-Up procedure may formal or informal.

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Audit Approximately one year of the final report, Internal Audit will perform a follow-up review to verify the resolution of the report findings.FOLLOW UP REVIEWFOLLOW UP REPORT AUDIT ANNUAL REPORT TO THE BOARD

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Followed up reviewThe actions taken to resolve the audit report findings may be tested to ensure that the desired results were achieved.

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Followed up ReportTo resolve the original report findings. Unresolved findings will include a brief description of the finding, the original audit recommendation, the client response, the current condition, and the continued exposure to the board of company.

The review will conclude with a follow-up report which lists the actions taken by the client to resolve the original report findings.

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Audit Annual ReportMemorandum to the senior manager that notifies them that audit activities are underway and describes the follow-up process. This memo should include: timeframes for the project, a copy of the outstanding findings relating to areas reporting.a request that they distribute the findings to these areas and ask the managers to provide Internal Audit with the information requested, a statement that these comments were previously distributed as part of an audit report or close-out letternotification that the results will be reported to Board of Trustees. The Announce Memo report Findings Access database provides sample wording for the notification memo. The notification memo should be sent

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Thank You for Your AttentionAny Questions?