AUDITING

Module 1 Overview of Auditing and Pre-Engagement Activities

1.1. Overview of Auditing ................................................................................................. 1

1.2. Preface to the Philippine Standards on Quality Control, Auditing,

Review, Other Assurance and Related Services ............................................. 4

1.3. Philippine Framework for Assurance Engagements .................................... 5

1.4. PSA 120 Framework of Philippine Standards on Auditing ........................ 8

1.5. PSA 200 Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with PSAs ..............................................10

1.6. PSQC 1 Quality Control for Firms that Perform Audits and Reviews
of Financial Statements, and Other Assurance and Related Services
Engagements ...............................................................................................................13

1.7. PSA 220 Quality Control for an Audit of Financial Statements ..............14

1.8. PSA 210 Agreeing the Terms of Audit Engagements .................................15

Summary of the Audit Process

PHASE I Accept client and perform initial planning

Plan and design an audit approach
Understand the client’s business and industry

Assess client business risk

Perform preliminary analytical procedures

Set materiality and assess acceptable audit risk

and inherent risk

Understand internal control and assess control risk

Gather information to assess fraud risks

Develop overall audit plan and audit program

PHASE II Plan to reduce assessed level of control risk? NO

Perform tests of controls and
YES
substantive tests of transactions
Perform tests of controls

Perform substantive tests of transactions

Assess likelihood of misstatements in financial

statements

PHASE III Low Medium High or Unknown

Perform analytical procedures
and tests of details of balances Perform analytical procedures

Perform tests of key items

Perform additional tests of details of balances

PHASE IV Perform additional tests for presentation and

Complete the audit and issue an disclosure
audit report
Accumulate final evidence

Evaluate results

Issue audit report

Communicate with audit committee and

management
AUDMOD1.1 NATURE OF AUDITING

Auditing is the accumulation and evaluation of evidence about information to determine and report on the
degree of correspondence between the information and established criteria. Auditing should be done by a
competent, independent person.
Information and Established Criteria Accumulating and Evaluating Evidence
 To do an audit, there must be information  Evidence is any information used by the auditor to
in a verifiable form and some standards determine whether the information being audited is
(criteria) by which the auditor can evaluate stated in accordance with the established criteria.
the information. Evidence takes many different forms, including:
 Examples of quantifiable information: 1. Electronic and documentary data about transactions
1. companies’ financial statements 2. Written and electronic communication with outsiders
2. individuals’ federal income tax returns. 3. Observations by the auditor
 Examples of subjective information: 4. Oral testimony of the auditee (client)
1. effectiveness of computer systems  To satisfy the purpose of the audit, auditors must obtain
2. efficiency of manufacturing operations. a sufficient quality and volume of evidence. Auditors
 Examples of criteria: must determine the types and amount of evidence
1. IFRS necessary and evaluate whether the information
2. US GAAP corresponds to the established criteria.
3. COSO Internal Control – Integrated  The auditor must be qualified to understand the criteria
Framework used and must be competent to know the types and
4. Internal Revenue Code amount of evidence to accumulate to reach the proper
 For more subjective information, it is more conclusion after examining the evidence. The auditor
difficult to establish criteria. Typically, must also have an independent mental attitude. The
auditors and the entities being audited agree competence of those performing the audit is of little value
on the criteria well before the audit starts. if they are biased in the accumulation and evaluation of
evidence.
Distinction between Auditing and Accounting
 Accounting is the recording, classifying, and summarizing of economic events in a logical manner for the
purpose of providing financial information for decision making. To provide relevant information,
accountants must have a thorough understanding of the principles and rules that provide the basis for
preparing the accounting information. In addition, accountants must develop a system to make sure that
the entity’s economic events are properly recorded on a timely basis and at a reasonable cost.
 When auditing accounting data, auditors focus on determining whether recorded information properly
reflects the economic events that occurred during the accounting period. Because U.S. or international
accounting standards provide the criteria for evaluating whether the accounting information is properly
recorded, auditors must thoroughly understand those accounting standards.
 In addition to understanding accounting, the auditor must possess expertise in the accumulation and
interpretation of audit evidence. It is this expertise that distinguishes auditors from accountants.
Determining the proper audit procedures, deciding the number and types of items to test and evaluating
the results are unique to the auditor.
Economic Demand for Auditing
 As society becomes more complex, decision makers are more likely to receive unreliable information.
Information risk reflects the possibility that the information upon which the business risk decision was
made was inaccurate. The following are the causes of information risk:
1. Remoteness of Information – When information is obtained from others, the likelihood of it being
intentionally or unintentionally misstated increases.
2. Biases and Motives of the Provider – If information is provided by someone whose goals are
inconsistent with those of the decision maker, the information may be biased in favor of the provider.
3. Voluminous Data – As organizations become larger, so does the volume of their exchange transactions.
This increases the likelihood that improperly recorded information is included in the records—perhaps
buried in a large amount of other information.
4. Complex Exchange Transactions - In the past few decades, exchange transactions between
organizations have become increasingly complex and therefore more difficult to record properly.
 The following are the ways to reduce information risk:
1. User verifies information – The user may go to the business premises to examine records and obtain
information about the reliability of the statements. Normally, this is impractical because of cost.
2. User shares information risk with management – There is considerable legal precedent indicating
that management is responsible for providing reliable information to users. A difficulty with sharing
information risk with management is that users may not be able to collect on losses.
3. Audited financial statements are provided – The most common way for users to obtain reliable
information is to have an independent audit. Typically, management of a private company or the audit
committee for a public company engages the auditor to provide assurances to users that the financial
statements are reliable. Decision makers can then use the audited information on the assumption that it
is reasonably complete, accurate, and unbiased. They value the auditor’s assurance because of the
auditor’s independence from the client and knowledge of financial statement reporting matters.

AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES 1

Assurance Services
 An assurance service is an independent professional service that improves the quality of information for
decision makers. Such services are valued because the assurance provider is independent and perceived as
being unbiased with respect to the information examined.
 Individuals who are responsible for making business decisions seek assurance services to help improve the
reliability and relevance of the information used as the basis for their decisions.
 Assurance services can be done by CPAs or by a variety of other professionals. Examples are:
1. Consumers Union – a nonprofit organization that tests a wide variety of products used by consumers
and reports their evaluations of the quality of the products tested in Consumer Reports. The
organization provides the information to help consumers make intelligent decisions about the products
they buy. Many consumers consider the information in Consumer Reports more reliable than
information provided by the product manufacturers because Consumers Union is independent of the
manufacturers.
2. Better Business Bureau (BBB) – provides an online reliability program, the BBB Accredited Business
Seal, that allows Web shoppers to check BBB information about a company and be assured the company
will stand behind its service.
3. Nielsen television and Internet ratings and Arbitron radio ratings
Categories of Assurance Services
1. Attestation services – the CPA firm issues a report about the reliability of an assertion that is made by
another party. Attestation services fall into five categories:
a. Audit of historical financial statements – management asserts that the statements are fairly stated
in accordance with applicable U.S. or international accounting standards.
b. Audit of internal control over financial reporting – management asserts that internal controls
have been developed and implemented following well established criteria.
c. Review of historical financial statements – management asserts that the statements are fairly
stated in accordance with accounting standards, the same as for audits but the CPA provides a lower
level of assurance for reviews of financial statements compared to a high level for audits, therefore
less evidence is needed.
d. Attestation services on information technology – management makes various assertions about
the reliability and security of electronic information. WebTrust and SysTrust are examples of
attestation services developed to address these assurance needs.
e. Other attestation services
2. Other assurance services – Most of the other assurance services that CPAs provide do not meet the
definition of attestation services, but the CPA must still be independent and must provide assurance
about information used by decision makers. These assurance services differ from attestation services in
that the CPA is not required to issue a written report, and the assurance does not have to be about the
reliability of another party’s assertion about compliance with specified criteria. These other assurance
service engagements focus on improving the quality of information for decision makers, just like
attestation services. Examples are:
a. Controls over and risks related to investments, including policies related to derivatives –
Assess the processes in a company’s investment practices to identify risks and to determine the
effectiveness of those processes
b. Mystery shopping – Perform anonymous shopping to assess sales personnel dealings with
customers and procedures they follow
c. Assess risks of accumulation, distribution, and storage of digital information – Assess security
risks and related controls over electronic data, including the adequacy of backup and off-site storage
d. Fraud and illegal acts risk assessment – Develop fraud risk profiles, and assess the adequacy of
company systems and policies in preventing and detecting fraud and illegal acts
e. Compliance with trading policies and procedures – Examine transactions between trading
partners to ensure that transactions comply with agreements; identify risks in the agreements
f. Compliance with entertainment royalty agreements – Assess whether royalties paid to artists,
authors, and others comply with royalty agreements
g. ISO 9000 certifications – Certify a company’s compliance with ISO 9000 quality control standards,
which help ensure company products are of high quality
h. Corporate responsibility and sustainability – Report on whether the information in a company’s
corporate responsibility report is consistent with company information and established reporting
criteria
Non-assurance Services
 CPA firms perform numerous other services that generally fall outside the scope of assurance services.
Three specific examples are:
1. Accounting and bookkeeping services
2. Tax services
3. Management consulting services

2 AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES

Types of Audits
 CPAs perform three primary types of audits:
Operational audit Compliance audit Financial statement audit
 Evaluates the efficiency and  Conducted to determine  Conducted to determine
effectiveness of any part of an whether the auditee is whether the financial
organization’s operating following specific procedures, statements (the information
procedures and methods. rules, or regulations set by being verified) are stated in
 At the completion of an some higher authority. accordance with specified
operational audit, management Following are examples of criteria.
normally expects compliance audits for a private  Normally, the criteria are U.S. or
recommendations for improving business: international accounting
operations.  Results of compliance audits are standards, although auditors
 It is more difficult to objectively typically reported to may conduct audits of financial
evaluate whether the efficiency management, rather than statements prepared using the
and effectiveness of operations outside users, because cash basis or some other basis of
meets established criteria than management is the primary accounting appropriate for the
it is for compliance and financial group concerned with the extent organization.
statement audits. of compliance with prescribed  In determining whether
 Also, establishing criteria for procedures and regulations. financial statements are fairly
evaluating the information in an  A significant portion of work is stated in accordance with
operational audit is extremely often done by auditors accounting standards, the
subjective. employed by the organizational auditor gathers evidence to
units. determine whether the
statements contain material
errors or other misstatements.
Examples of the three types of audits:
Type of Example Information Established Available Evidence
audit Criteria
Operational Evaluate whether the Number of payroll Company Error reports,
audit computerized payroll records processed standards for payroll records and
processing for a Chinese in a month, costs of efficiency and payroll processing
subsidiary is operating the department and effectiveness in costs
efficiently and number of errors payroll department
effectively made
Compliance Determine whether Company records Loan agreement Financial statements
audit bank requirements for provisions and calculations by
loan continuation have the auditor
been met
Financial Annual audit of Boeing’s Boeing’s financial Generally accepted Documents, records
statement financial statements statements accounting and outside sources
audit principles of evidence
Types of Auditors
The most common types of auditors are the following:
1. Certified public accounting firms – responsible for auditing the published historical financial statements
of all publicly traded companies, most other reasonably large companies, and many smaller companies
and noncommercial organizations. They are often called external auditors or independent auditors to
distinguish them from internal auditors.
2. Government auditors
3. Internal auditors – employed by all types of organizations to audit for management. Internal auditors’
responsibilities vary considerably, depending on the employer. To maintain independence from other
business functions, the internal audit group typically reports directly to the president, another high
executive officer, or the audit committee of the board of directors. However, internal auditors cannot be
entirely independent of the entity as long as an employer–employee relationship exists. Users from
outside the entity are unlikely to want to rely on information verified solely by internal auditors because
of their lack of independence. This lack of independence is the major difference between internal auditors
and CPA firms.

AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES 3

AUDMOD1.2 PREFACE TO THE PHILIPPINE STANDARDS ON QUALITY CONTROL,
AUDITING, REVIEW, OTHER ASSURANCE AND RELATED SERVICES

Introduction
 This Preface to Philippine Standards on Quality Control, Auditing, Other Assurance and Related Services is
issued to facilitate understanding of the objectives and operating procedures of the Auditing Standards and
Practices Council (ASPC) and the scope and authority of the documents issued by the Council.
 The mission of the ASPC is “the promulgation of auditing standards, practices and procedures which shall
be generally accepted by the accounting profession in the Philippines.”
 The pronouncements of the ASPC shall be in the form of:
1. Philippine Standards on Quality Control (PSQCs)
2. Philippine Standards on Auditing (PSAs)
3. Philippine Standards on Review Engagements (PSREs)
4. Philippine Standards on Assurance Engagements (PSAEs)
5. Philippine Standards on Related Services (PSRSs)
6. Philippine Auditing Practice Statements (PAPSs)
7. Philippine Review Engagement Practice Statements (PREPSs)
8. Philippine Assurance Engagement Practice Statements (PAEPSs)
9. Philippine Related Services Practice Statements (PRSPSs)
The Auditing Standards and Practices Council (ASPC)
 The ASPC was established by the Philippine Institute of CPAs (PICPA) and the Association of CPAs in Public
Practice (ACPAPP).
 The Council has 17 regular members coming from the following:
No. of members
Independent auditing firms 7
PICPA 5
ACPAPP 2
Board of Accountancy 1
Securities and Exchange Commission 1
Commission on Audit 1
 Whenever there is a PICPA representative to the International Auditing and Assurance Standards Board
(the then International Auditing Practices Committee), such PICPA representative becomes an ex-officio
member of the Council. 

 The Council members from PICPA represent the following sectors (one representative each): 

 Academe
 Commerce and Industry
 Public Practice – one from Luzon, one from Visayas, one from Mindanao
The Authority Attaching to Philippine Standards Issued by the AASC
 Pronouncements on generally accepted auditing standards, interpretations, and opinions issued by the
AASC apply whenever an independent examination of financial statements of any entity, whether profit-
oriented or not, and irrespective of size or legal form, when such examination is conducted for the purpose
of expressing an opinion thereon. They may also have application, as appropriate, to other related activities
of auditors. 

Standards Application
Philippine Standards on Auditing audit of historical financial information 

Philippine Standards on Review review of historical financial information
Engagements (PSREs) 

Philippine Standards on Assurance assurance engagements dealing with subject matters other
Engagements (PSAEs) than historical financial information 

Philippine Standards on Related Services compilation engagements, engagements to apply agreed-
(PSRSs) upon procedures to information and other related services
engagements as specified by the AASC
 PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the ASPC’s Engagement Standards. 

 Philippine Standards on Quality Control (PSQCs) are to be applied for all services falling under the ASPC’s
Engagement Standards. 

 Philippine Standards are to be applied as written to engagements in public sector, unless so stated that they
do not apply in a public sector environment or they are not appropriate in such an environment.
The Authority Attaching to Practice Statements Issued by the AASC
 Philippine Auditing Practice Statements (PAPSs) are issued to provide interpretive guidance and practical
assistance to professional accountants in implementing PSAs and to promote good practice.
 Philippine Review Engagement Practice Statements (PREPSs), Philippine Assurance Engagement Practice
Statements (PAEPSs), and Philippine Related Services Practice Statements (PRSPSs) are issued to serve the
same purpose for implementation of PSREs, PSAEs and PSRSs, respectively.

4 AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES

AUDMOD1.3 PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS

Introduction
 This Framework defines and describes the elements and objectives of an assurance engagement, and
identifies engagements to which Philippine Standards on Auditing (PSAs), Philippine Standards on Review
Engagements (PSREs) and Philippine Standards on Assurance Engagements (PSAEs) apply.
 It provides a frame of reference for:
a. Professional accountants in public practice (“practitioners”) when performing assurance
engagements. Professional accountants in the public sector refer to the Public Sector Perspective at
the end of the Framework. Professional accountants who are neither in public practice nor in the
public sector are encouraged to consider the Framework when performing assurance
engagements;
b. Others involved with assurance engagements, including the intended users of an assurance
report and the responsible party; and
c. The International Auditing and Assurance Standards Board (IAASB) in its development of
ISAs, ISREs and ISAEs and, consequently, the Auditing and Assurance Standards Council (AASC)
in its adoption of said standards for application in the Philippines.
 This Framework does not itself establish standards or provide procedural requirements for the
performance of assurance engagements.
 In addition to this Framework and PSAs, PSREs and PSAEs, practitioners who perform assurance
engagements are governed by:
a. The Code of Ethics for Professional Accountants in the Philippines (the Philippine Code),
which is adopted from the IFAC Code of Ethics for Professional Accountants, which establishes
fundamental ethical principles for professional accountants; and
b. Philippine Standards on Quality Control (PSQCs), which are adopted from the International
Standards on Quality Control, which establish standards and provide guidance on a firm’s system
of quality control.
 Part A of the Code sets out the fundamental ethical principles that all professional accountants are required
to observe, including:
a. Integrity;
b. Objectivity;
c. Professional competence and due care;
d. Confidentiality; and
e. Professional behavior
 Part B of the Code, which applies only to professional accountants in public practice (“practitioners”),
includes a conceptual approach to independence that takes into account, for each assurance engagement,
threats to independence, accepted safeguards and the public interest. It requires firms and members of
assurance teams to identify and evaluate circumstances and relationships that create threats to
independence and to take appropriate action to eliminate these threats or to reduce them to an acceptable
level by the application of safeguards.
Definition and Objective of an Assurance Engagement
 Assurance engagement means an engagement in which a practitioner 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.
 Subject matter information refers to the outcome of the evaluation or measurement of a subject matter
that results from applying the criteria to the subject matter. For example:
 The recognition, measurement, presentation and disclosure represented in the financial statements
(outcome) result from applying a financial reporting framework for recognition, measurement,
presentation and disclosure, such as Philippine Financial Reporting Standards, (criteria) to an entity’s
financial position, financial performance and cash flows (subject matter).
 An assertion about the effectiveness of internal control (outcome) results from applying a framework
for evaluating the effectiveness of internal control, such as COSO or CoCo (criteria) to internal control, a
process (subject matter).
 Subject matter information can fail to be properly expressed in the context of the subject matter and the
criteria, and can therefore be misstated, potentially to a material extent. 

 Assertion-based engagements – the evaluation or measurement of the subject matter is 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 the intended users. 

 Direct reporting engagements – the practitioner either directly performs the evaluation or measurement
of the subject matter, or obtains a representation from the responsible party that has performed the
evaluation or measurement that is not available to the intended users. The subject matter information is
provided to the intended users in the assurance report.
Two types of assurance engagements
 Reasonable assurance engagement – 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.

AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES 5

 Limited assurance engagement – objective is a reduction in assurance engagement risk to a level that is
acceptable in the circumstances of the engagement, but where that risk is greater than for a reasonable
assurance engagement, as the basis for a negative form of expression of the practitioner’s conclusion.
Scope of the Framework
 Not all engagements performed by practitioners are assurance engagements. Other frequently performed
engagements that do not meet the above definition (and therefore are not covered by this Framework)
include:
1. Engagements covered by PSRSs, such as agreed-upon procedures engagements and compilations
of financial or other information.
2. Preparation of tax returns where no conclusion conveying assurance is expressed.
3. Consulting (or advisory) engagements, such as management and tax consulting.
Reports on Non-assurance Engagements
 A practitioner reporting on an engagement that is not an assurance engagement within the scope of this
Framework, clearly distinguishes that report from an assurance report. So as not to confuse users, a
report that is not an assurance report avoids, for example:
 Implying compliance with this Framework, PSAs, PSREs or PSAEs. 

 Inappropriately using the words “assurance,” “audit” or “review.” 

 Including a statement that could reasonably be mistaken for a conclusion designed to enhance the
degree of confidence of intended users about the outcome of the evaluation or measurement of a
subject matter against criteria. 

 The practitioner and the responsible party may agree to apply the principles of this Framework to an
engagement when there are no intended users other than the responsible party but where all other
requirements of the PSAs, PSREs or PSAEs are met. In such cases, the practitioner’s report includes a
statement restricting the use of the report to the responsible party. 

Engagement Acceptance
 A practitioner accepts an assurance engagement only where the practitioner’s preliminary knowledge of
the engagement circumstances indicates that:
a. Relevant ethical requirements, such as independence and professional competence will be
satisfied, and 

b. The engagement exhibits all of the following characteristics:
i. The subject matter is appropriate; 

ii. The criteria to be used are suitable and are available to the intended users; 

iii. The practitioner has access to sufficient appropriate evidence to support the practitioner’s
conclusion;
iv. The practitioner’s conclusion, in the form appropriate to either a reasonable assurance
engagement or a limited assurance engagement, is to be contained in a written report; and
v. The practitioner is satisfied that there is a rational purpose for the engagement. If there is a
significant limitation on the scope of the practitioner’s work (see paragraph 55), it may be
unlikely that the engagement has a rational purpose. Also, a practitioner may believe the
engaging party intends to associate the practitioner’s name with the subject matter in an
inappropriate manner (see paragraph 61). Specific PSAs, PSREs or PSAEs may include
additional requirements that need to be satisfied prior to accepting an engagement.
 When a potential engagement cannot be accepted as an assurance engagement because it does not exhibit
all the characteristics in the previous paragraph, the engaging party may be able to identify a different
engagement that will meet the needs of intended users. For example:
a. If the original criteria were not suitable, an assurance engagement may still be performed if:
i. The engaging party can identify an aspect of the original subject matter for which those criteria
are suitable, and the practitioner could perform an assurance engagement with respect to that
aspect as a subject matter in its own right. In such cases, the assurance report makes it clear
that it does not relate to the original subject matter in its entirety; or
ii. Alternative criteria suitable for the original subject matter can be selected or developed.
b. The engaging party may request an engagement that is not an assurance engagement, such as a
consulting or an agreed-upon procedures engagement.
 Having accepted an assurance engagement, a practitioner may not change that engagement to a non-
assurance engagement, or from a reasonable assurance engagement to a limited assurance engagement
without reasonable justification.
 A change in circumstances that affects the intended users’ requirements, or a misunderstanding concerning
the nature of the engagement, ordinarily will justify a request for a change in the engagement. If such a
change is made, the practitioner does not disregard evidence that was obtained prior to the change.
Elements of an Assurance Engagement
a. A three party relationship involving a practitioner, a responsible party, and intended users;
b. An appropriate subject matter;
c. Suitable criteria;
d. Sufficient appropriate evidence; and
e. A written assurance report in the form appropriate to a reasonable assurance engagement or a limited
assurance engagement.

6 AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES

Three-party relationship
 Assurance engagements involve three separate parties: a practitioner, a responsible party and intended
users.
 The responsible party and the intended users may be from different entities or the same entity.
 The term “practitioner” as used in this Framework is broader than the term “auditor” as used in PSAs and
PSREs, which relates only to practitioners performing audit or review engagements with respect to
historical financial information.
Subject matter
 Financial performance or conditions (for example, historical or prospective financial position, financial
performance and cash flows) for which the subject matter information may be the recognition,
measurement, presentation and disclosure represented in financial statements.
 Non-financial performance or conditions (for example, performance of an entity) for which the subject
matter information may be key indicators of efficiency and effectiveness.
 Physical characteristics (for example, capacity of a facility) for which the subject matter information may
be a specifications document.
 Systems and processes (for example, an entity’s internal control or IT system) for which the subject
matter information may be an assertion about effectiveness.
 Behavior (for example, corporate governance, compliance with regulation, human resource practices) for
which the subject matter information maybe a statement of compliance or a statement of effectiveness
 An appropriate subject matter is:
a. Identifiable, and capable of consistent evaluation or measurement against the identified criteria;
b. Such that the information about it can be subjected to procedures for gathering sufficient
appropriate evidence to support a reasonable assurance or limited assurance conclusion, as
appropriate.
Criteria
 Criteria are the benchmarks used to evaluate or measure the subject matter including, where relevant,
benchmarks for presentation and disclosure.
 Suitable criteria are required for reasonably consistent evaluation or measurement of a subject matter
within the context of professional judgment. Without the frame of reference provided by suitable criteria,
any conclusion is open to individual interpretation and misunderstanding. Suitable criteria exhibit the
following characteristics:
a. Relevance – contribute to conclusions that assist decision-making by the intended users.
b. Completeness – relevant factors that could affect the conclusions in the context of the engagement
circumstances are not omitted.
c. Reliability – allow reasonably consistent evaluation or measurement of the subject matter
including, where relevant, presentation and disclosure, when used in similar circumstances by
similarly qualified practitioners.
d. Neutrality – contribute to conclusions that are free from bias.
e. Understandability – contribute to conclusions that are clear, comprehensive, and not subject to
significantly different interpretations.
 Criteria can either be established or specifically developed. Established criteria are those embodied in
laws or regulations, or issued by authorized or recognized bodies of experts that follow a transparent due
process. Specifically developed criteria are those designed for the purpose of the engagement. Whether
criteria are established or specifically developed affects the work that the practitioner carries out to assess
their suitability for a particular engagement.
Sufficient and appropriate evidence
 The practitioner plans and performs an assurance engagement with an attitude of professional
skepticism to obtain sufficient appropriate evidence about whether the subject matter information is free
of material misstatement. An attitude of professional skepticism means the practitioner makes a critical
assessment, with a questioning mind, of the validity of evidence obtained and is alert to evidence that
contradicts or brings into question the reliability of documents or representations by the responsible party.
 The practitioner considers materiality, assurance engagement risk, and the quantity and quality of available
evidence when planning and performing the engagement, in particular when determining the nature,
timing and extent of evidence-gathering procedures.
 Materiality is relevant when the practitioner determines the nature, timing and extent of
evidence-gathering procedures, and when assessing whether the subject matter information is free
of misstatement. When considering materiality, the practitioner understands and assesses what
factors might influence the decisions of the intended users.
 Assurance engagement risk is the risk that the practitioner expresses an inappropriate
conclusion when the subject matter information is materially misstated.
a. The risk that the subject matter information is materially misstated, which in turn consists of:
i. Inherent risk: the susceptibility of the subject matter information to a material
misstatement, assuming that there are no related controls; and
ii. Control risk: the risk that a material misstatement that could occur will not be prevented, or
detected and corrected, on a timely basis by related internal controls. When control risk is
relevant to the subject matter, some control risk will always exist because of the inherent

AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES 7

 limitations of the design and operation of internal control; and
b. Detection risk: the risk that the practitioner will not detect a material misstatement that exists.
 The quantity or quality of available evidence is affected by:
a. The characteristics of the subject matter and subject matter information. For example, less
objective evidence might be expected when information about the subject matter is future
oriented rather than historical (see paragraph 32); and
b. Circumstances of the engagement other than the characteristics of the subject matter, when
evidence that could reasonably be expected to exist is not available because of, for example, the
timing of the practitioner’s appointment, an entity’s document retention policy, or a restriction
imposed by the responsible party.
 Sufficiency is the measure of the quantity of evidence. Appropriateness is the measure of the quality of
evidence; that is, its relevance and its reliability. The quantity of evidence needed is affected by the risk of
the subject matter information being materially misstated (the greater the risk, the more evidence is likely
to be required) and also by the quality of such evidence (the higher the quality, the less may be required).
Accordingly, the sufficiency and appropriateness of evidence are interrelated. However, merely obtaining
more evidence may not compensate for its poor quality. While recognizing that exceptions may exist, the
following generalizations about the reliability of evidence may be useful:
 Evidence is more reliable when it is obtained from independent sources outside the entity.
 Evidence that is generated internally is more reliable when the related controls are effective.
 Evidence obtained directly by the practitioner (for example, observation of the application of a
control) is more reliable than evidence obtained indirectly or by inference (for example, inquiry
about the application of a control).
 Evidence is more reliable when it exists in documentary form, whether paper, electronic, or other
media (for example, a contemporaneously written record of a meeting is more reliable than a
subsequent oral representation of what was discussed).
 Evidence provided by original documents is more reliable than evidence provided by photocopies
or facsimiles.
 The practitioner considers the relationship between the cost of obtaining evidence and the usefulness of
the information obtained. However, the matter of difficulty or expense involved is not in itself a valid basis
for omitting an evidence gathering procedure for which there is no alternative.
Assurance Report
 The practitioner provides a written report containing a conclusion that conveys the assurance obtained
about the subject matter information.
 In an assertion-based engagement, the practitioner’s conclusion can be worded either:
a. In terms of the responsible party’s assertion (“In our opinion the responsible party’s assertion that
internal control is effective, in all material respects, based on XYZ criteria, is fairly stated”); or
b. Directly in terms of the subject matter and the criteria (“In our opinion internal control is effective, in all
material respects, based on XYZ criteria”).
 In a direct reporting engagement, the practitioner’s conclusion is worded directly in terms of the subject
matter and the criteria.
 In a reasonable assurance engagement, the practitioner expresses the conclusion in the positive form (“In
our opinion internal control is effective, in all material respects, based on XYZ criteria”).
 In a limited assurance engagement, the practitioner expresses the conclusion in the negative form (“Based
on our work described in this report, nothing has come to our attention that causes us to believe that
internal control is not effective, in all material respects, based on XYZ criteria”).

AUDMOD1.4 PSA 120 FRAMEWORK OF PHILIPPINE STANDARDS ON AUDITING

Introduction
 The AASC has been authorized to issue Philippine Standards on Auditing (PSAs). The purpose of this
document is to describe the framework within which PSAs are issued in relation to the services which may
be performed by auditors. 

 For ease of reference, except where indicated, the term “auditor” is used throughout the PSAs when
describing both auditing and related services which may be performed. Such reference is not intended to
imply that a person performing related services need be the auditor of the entity's financial statements..
Financial Reporting Framework
 Financial statements are ordinarily prepared and presented annually and are directed toward the common
information needs of a wide range of users. Many of those users rely on the financial statements as their
major source of information because they do not have the power to obtain additional information to meet
their specific information needs. Thus, financial statements need to be prepared in accordance with one, or
a combination of:
a. accounting standards generally accepted in the Philippines;
b. International Accounting Standards; and
c. another authoritative and comprehensive financial reporting framework which has been designed
for use in financial reporting and is identified in the financial statements.

8 AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES

Framework for Auditing and Related Services
 This Framework distinguishes audits from related services. Related services comprise reviews, agreed-
upon procedures and compilations. As illustrated in the diagram below, audits and reviews are designed to
enable the auditor to provide high and moderate levels of assurance respectively, such terms being used to
indicate their comparative ranking. Engagements to undertake agreed-upon procedures and compilations
are not intended to enable the auditor to express assurance.
AUDITING RELATED SERVICES
Nature of service Audit Review Agreed-upon Compilation
procedures

Comparative High, but not Moderate No assurance No assurance

level of assurance absolute, assurance
provided by the assurance
auditor
Report provided Positive assurance Negative Factual findings Identification of
on assertions assurance on of procedures information
(Audit Report) assertions compiled
(Review Report) (Compilation Report)
 The Framework does not apply to other services provided by auditors such as taxation, consultancy, and
financial and accounting advice.
Levels of assurance
 Assurance refers to the auditor's satisfaction as to the reliability of an assertion being made by one
party for use by another party. To provide such assurance, the auditor assesses the evidence collected as
a result of procedures conducted and expresses a conclusion. The degree of satisfaction achieved and,
therefore, the level of assurance, which may be provided, is determined by the procedures performed and
their results.
 In an audit engagement, the auditor provides a high, but not absolute, level of assurance that the
information subject to audit is free of material misstatement. This is expressed positively in the audit report
as reasonable assurance.
 In a review engagement, the auditor provides a moderate level of assurance that the information subject to
review is free of material misstatement. This is expressed in the form of negative assurance.
 For agreed-upon procedures, as the auditor simply provides a report of the factual findings, no assurance is
expressed. Instead, users of the report assess for themselves the procedures and findings reported by the
auditor and draw their own conclusions from the auditor's work.
 In a compilation engagement, although the users of the compiled information derive some benefit from the
accountant's involvement, no assurance is expressed in the report.
Audit
 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. The phrase used to express the auditor's opinion is “present fairly, in all
material respects.” A similar objective applies to the audit of financial or other information prepared in
accordance with appropriate criteria.
 In forming the audit opinion, the auditor obtains sufficient appropriate audit evidence to be able to draw
conclusions on which to base that opinion.
 The auditor's opinion enhances the credibility of financial statements by providing a high, but not absolute,
level of assurance. Absolute assurance in auditing is not attainable as a result of such factors as the:
a. need for judgment
b. the use of testing
c. the inherent limitations of any accounting and internal control systems and
d. the fact that most of the evidence available to the auditor is persuasive, rather than conclusive, in
nature.
Related Services
Reviews
 The objective of a review of financial statements is to enable an auditor to state whether, on the basis of
procedures which do not provide all the evidence that would be required in an audit, anything has
come to the auditor's attention that causes the auditor to believe that the financial statements are
not prepared, in all material respects, in accordance with an identified financial reporting
framework. A similar objective applies to the review of financial or other information prepared in
accordance with appropriate criteria.
 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. While a review involves the
application of audit skills and techniques and the gathering of evidence, it 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.

AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES 9

Agreed-upon Procedures
 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. The recipients of the report must form their own
conclusions from the report by the auditor. 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.
Compilations
 In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to
auditing expertise to collect, classify and summarize financial information. This ordinarily entails
reducing detailed data to a manageable and understandable form without a requirement to test the
assertions underlying that information. The procedures employed are not designed and do not enable the
accountant to express any assurance on the financial information. However, users of the compiled financial
information derive some benefit as a result of the accountant's involvement because the service has been
performed with due professional skill and care.

AUDMOD1.5 PSA 200 OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND

THE CONDUCT OF AN AUDIT IN ACCORDANCE WITH PHILIPPINE
STANDARDS ON AUDITING

Introduction
Scope of this PSA
 This PSA deals with the independent auditor’s overall responsibilities when conducting an audit of financial
statements in accordance with PSAs. Specifically, it sets out the overall objectives of the independent
auditor, and explains the nature and scope of an audit designed to enable the independent auditor
to meet those objectives.
 It also explains the scope, authority and structure of the PSAs, and includes requirements establishing the
general responsibilities of the independent auditor applicable in all audits, including the obligation to
comply with the PSAs. The independent auditor is referred to as “the auditor” hereafter.
An audit of financial statements
 The purpose of an audit is to enhance the degree of confidence of intended users in the financial
statements. This is achieved by the expression of an opinion by the auditor on whether the financial
statements are prepared, in all material respects, in accordance with an applicable financial reporting
framework.
 The financial statements subject to audit are those of the entity, prepared by management of the entity with
oversight from those charged with governance. PSAs do not impose responsibilities on management or
those charged with governance and do not override laws and regulations that govern their
responsibilities.
 However, an audit in accordance with PSAs is conducted on the premise that management and, where
appropriate, those charged with governance have acknowledged certain responsibilities that are
fundamental to the conduct of the audit. The audit of the financial statements does not relieve management
or those charged with governance of their responsibilities.
 As the basis for the auditor’s opinion, PSAs require the auditor to obtain reasonable assurance about
whether the financial statements as a whole are free from material misstatement, whether due to
fraud or error.
 Reasonable assurance is a high level of assurance. It is obtained when the auditor has obtained sufficient
appropriate audit evidence to reduce audit risk (that is, the risk that the auditor expresses an inappropriate
opinion when the financial statements are materially misstated) to an acceptably low level.
 The concept of materiality is applied by the auditor both in planning and performing the audit, and
in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements,
if any, on the financial statements.
 In general, misstatements, including omissions, are considered to be material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the
basis of the financial statements.
 Judgments about materiality are made in the light of surrounding circumstances, and are affected by the
auditor’s perception of the financial information needs of users of the financial statements, and by
the size or nature of a misstatement, or a combination of both. The auditor’s opinion deals with the
financial statements as a whole and therefore the auditor is not responsible for the detection of
misstatements that are not material to the financial statements as a whole.
 The PSAs require that the auditor exercise professional judgment and maintain professional
skepticism throughout the planning and performance of the audit and, among other things:
 Identify and assess risks of material misstatement, whether due to fraud or error, based on an
understanding of the entity and its environment, including the entity’s internal control.
 Obtain sufficient appropriate audit evidence about whether material misstatements exist,

10 AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES

 through designing and implementing appropriate responses to the assessed risks.
 Form an opinion on the financial statements based on conclusions drawn from the audit
evidence obtained.
 The auditor may also have certain other communication and reporting responsibilities to users,
management, those charged with governance, or parties outside the entity, in relation to matters arising
from the audit. These may be established by the PSAs or by applicable law or regulation.
Overall Objectives of the Auditor
 In conducting an audit of financial statements, the overall objectives of the auditor are:
a. To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the auditor to express an
opinion on whether the financial statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework; and
b. To report on the financial statements, and communicate as required by the PSAs, in accordance
with the auditor’s findings.
 In all cases when reasonable assurance cannot be obtained and a qualified opinion in the auditor’s report is
insufficient in the circumstances for purposes of reporting to the intended users of the financial statements,
the PSAs require that the auditor disclaim an opinion or withdraw (or resign) from the engagement,
where withdrawal is possible under applicable law or regulation.
Requirements
Ethical requirements
 The auditor shall comply with relevant ethical requirements, including those pertaining to independence,
relating to financial statement audit engagements.
Professional skepticism
 The auditor shall plan and perform an audit with professional skepticism recognizing that circumstances
may exist that cause the financial statements to be materially misstated.
 Professional skepticism includes being alert to, for example:
 Audit evidence that contradicts other audit evidence obtained.
 Information that brings into question the reliability of documents and responses to inquiries to be used
as audit evidence.
 Conditions that may indicate possible fraud.
 Circumstances that suggest the need for audit procedures in addition to those required by the PSAs.
 Maintaining professional skepticism throughout the audit is necessary if the auditor is, for example, to
reduce the risks of:
 Overlooking unusual circumstances.
 Over generalizing when drawing conclusions from audit observations.
 Using inappropriate assumptions in determining the nature, timing and extent of the audit procedures
and evaluating the results thereof.
 The auditor may accept records and documents as genuine unless the auditor has reason to believe the
contrary. Nevertheless, the auditor is required to consider the reliability of information to be used as audit
evidence. The auditor cannot be expected to disregard past experience of the honesty and integrity of the
entity’s management and those charged with governance. Nevertheless, a belief that management and
those charged with governance are honest and have integrity does not relieve the auditor of the need to
maintain professional skepticism or allow the auditor to be satisfied with less than persuasive audit
evidence when obtaining reasonable assurance.
Professional judgment
 The auditor shall exercise professional judgment in planning and performing an audit of financial
statements. Professional judgment is necessary in particular regarding decisions about:
 Materiality and audit risk.
 The nature, timing and extent of audit procedures used to meet the requirements of the PSAs and gather
audit evidence.
 Evaluating whether sufficient appropriate audit evidence has been obtained, and whether more needs to
be done to achieve the objectives of the PSAs and thereby, the overall objectives of the auditor.
 The evaluation of management’s judgments in applying the entity’s applicable financial reporting
framework.
 The drawing of conclusions based on the audit evidence obtained, for example, assessing the
reasonableness of the estimates made by management in preparing the financial statements.
 Professional judgment needs to be exercised throughout the audit. It also needs to be appropriately
documented. In this regard, the auditor is required to prepare audit documentation sufficient to enable an
experienced auditor, having no previous connection with the audit, to understand the significant
professional judgments made in reaching conclusions on significant matters arising during the audit.
 Professional judgment is not to be used as the justification for decisions that are not otherwise supported
by the facts and circumstances of the engagement or sufficient appropriate audit evidence.
Sufficient appropriate audit evidence
 To obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit evidence to reduce
audit risk to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on
which to base the auditor’s opinion.

AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES 11

 Audit evidence is necessary to support the auditor’s opinion and report. It is cumulative in nature and is
primarily obtained from audit procedures performed during the course of the audit. It may, however,
also include information obtained from other sources such as
a. previous audits (provided the auditor has determined whether changes have occurred since the
previous audit that may affect its relevance to the current audit)
b. a firm’s quality control procedures for client acceptance and continuance
c. the entity’s accounting records
d. information prepared by an expert employed or engaged by the entity
 Audit evidence comprises both information that supports and corroborates management’s assertions, and
any information that contradicts such assertions. In addition, in some cases, the absence of information (for
example, management’s refusal to provide a requested representation) is used by the auditor, and
therefore, also constitutes audit evidence. Most of the auditor’s work in forming the auditor’s opinion
consists of obtaining and evaluating audit evidence.
Audit risk
 Audit risk is a function of the risks of material misstatement and detection risk. The assessment of
risks is based on audit procedures to obtain information necessary for that purpose and evidence obtained
throughout the audit. The assessment of risks is a matter of professional judgment, rather than a matter
capable of precise measurement.
 The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain
absolute assurance that the financial statements are free from material misstatement due to fraud
or error. This is because there are inherent limitations of an audit, which result in most of the audit
evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather
than conclusive. The inherent limitations of an audit arise from:
 The nature of financial reporting;
 The nature of audit procedures; and
 The need for the audit to be conducted within a reasonable period of time and at a reasonable cost.
 The risks of material misstatement may exist at two levels:
 The overall financial statement level – relate pervasively to the financial statements as a whole
and potentially affect many assertions
 The assertion level for classes of transactions, account balances, and disclosures – assessed
in order to determine the nature, timing and extent of further audit procedures necessary to obtain
sufficient appropriate audit evidence.
 The risks of material misstatement at the assertion level consist of two components: inherent risk and
control risk. Inherent risk and control risk are the entity’s risks; they exist independently of the audit of
the financial statements.
 Inherent risk is higher for some assertions and related classes of transactions, account balances, and
disclosures than for others. For example, it may be higher for complex calculations or for accounts
consisting of amounts derived from accounting estimates that are subject to significant estimation
uncertainty. External circumstances giving rise to business risks may also influence inherent risk. For
example, technological developments might make a particular product obsolete, thereby causing inventory
to be more susceptible to overstatement.
 Control risk is a function of the effectiveness of the design, implementation and maintenance of
internal control by management to address identified risks that threaten the achievement of the
entity’s objectives relevant to preparation of the entity’s financial statements. However, internal
control, no matter how well designed and operated, can only reduce, but not eliminate, risks of material
misstatement in the financial statements, because of the inherent limitations of internal control. These
include, for example, the possibility of human errors or mistakes, or of controls being circumvented by
collusion or inappropriate management override. Accordingly, some control risk will always exist.
 The assessment of the risks of material misstatement may be expressed in quantitative terms, such as in
percentages, or in non-quantitative terms. In any case, the need for the auditor to make appropriate risk
assessments is more important than the different approaches by which they may be made.
 For a given level of audit risk, the acceptable level of detection risk bears an inverse relationship to
the assessed risks of material misstatement at the assertion level. For example, the greater the risks of
material misstatement the auditor believes exists, the less the detection risk that can be accepted and,
accordingly, the more persuasive the audit evidence required by the auditor. Detection risk, however, can
only be reduced, not eliminated, because of the inherent limitations of an audit. Accordingly, some
detection risk will always exist.
Conduct of an audit in accordance with PSAs
 The auditor shall comply with all PSAs relevant to the audit. A PSA is relevant to the audit when the PSA is
in effect and the circumstances addressed by the PSA exist.
 If an objective in a relevant PSA cannot be achieved, the auditor shall evaluate whether this prevents the
auditor from achieving the overall objectives of the auditor and thereby requires the auditor, in accordance
with the PSAs, to modify the auditor’s opinion or withdraw from the engagement (where withdrawal
is possible under applicable law or regulation).
 Failure to achieve an objective represents a significant matter requiring documentation in accordance with
PSA 230.

12 AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES

AUDMOD1.6 PSQC 1 QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND
REVIEWS OF FINANCIAL STATEMENTS, AND OTHER ASSURANCE AND
RELATED SERVICES ENGAGEMENTS

Introduction
Scope of this PSQC
 This PSQC deals with a firm’s responsibilities for its system of quality control for audits and reviews
of financial statements, and other assurance and related services engagements. This PSQC is to be
read in conjunction with relevant ethical requirements.
 This PSQC applies to all firms of professional accountants in respect of audits and reviews of financial
statements, and other assurance and related services engagements. The nature and extent of the policies
and procedures developed by an individual firm to comply with this PSQC will depend on various factors
such as the size and operating characteristics of the firm, and whether it is part of a network.
Objective
 The objective of the firm is to establish and maintain a system of quality control to provide it with
reasonable assurance that:
a. The firm and its personnel comply with professional standards and applicable legal and regulatory
requirements; and
b. Reports issued by the firm or engagement partners are appropriate in the circumstances.
Elements of a System of Quality Control
 The firm shall establish and maintain a system of quality control that includes policies and procedures that
address each of the following elements:
a. Leadership responsibilities for quality within the firm
b. Relevant ethical requirements
c. Acceptance and continuance of client relationships and specific engagements
d. Human resources
e. Engagement performance
f. Monitoring
 The firm shall document its policies and procedures and communicate them to the firm’s personnel.
Leadership Responsibilities for Quality within the Firm
 The firm shall establish policies and procedures designed to promote an internal culture recognizing that
quality is essential in performing engagements. Such policies and procedures shall require the firm’s chief
executive officer (or equivalent) or, if appropriate, the firm’s managing board of partners (or equivalent) to
assume ultimate responsibility for the firm’s system of quality control.
Relevant ethical requirements
 The firm shall establish policies and procedures designed to provide it with reasonable assurance that the
firm and its personnel comply with relevant ethical requirements.
Acceptance and Continuance of Client Relationships and Specific Engagements
 The firm shall establish policies and procedures for the acceptance and continuance of client relationships
and specific engagements, designed to provide the firm with reasonable assurance that it will only
undertake or continue relationships and engagements where the firm:
 Is competent to perform the engagement and has the capabilities, including time and resources, to do so;
 Can comply with relevant ethical requirements; and
 Has considered the integrity of the client, and does not have information that would lead it to conclude
that the client lacks integrity.
Human Resources
 The firm shall establish policies and procedures designed to provide it with reasonable assurance that it
has sufficient personnel with the competence, capabilities, and commitment to ethical principles necessary
to:
a. Perform engagements in accordance with professional standards and applicable legal and
regulatory requirements; and
b. Enable the firm or engagement partners to issue reports that are appropriate in the circumstances.
Engagement Performance
 The firm shall establish policies and procedures designed to provide it with reasonable assurance that
engagements are performed in accordance with professional standards and applicable legal and regulatory
requirements, and that the firm or the engagement partner issue reports that are appropriate in the
circumstances. Such policies and procedures shall include:
a. Matters relevant to promoting consistency in the quality of engagement performance;
b. Supervision responsibilities; and
c. Review responsibilities.
 The firm’s review responsibility policies and procedures shall be determined on the basis that work of less
experienced team members is reviewed by more experienced engagement team members.
Monitoring
 The firm shall establish a monitoring process designed to provide it with reasonable assurance that the
policies and procedures relating to the system of quality control are relevant, adequate, and operating
effectively. This process shall:

AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES 13

 a. Include an ongoing consideration and evaluation of the firm’s system of quality control including,
on a cyclical basis, inspection of at least one completed engagement for each engagement partner;
b. Require responsibility for the monitoring process to be assigned to a partner or partners or other
persons with sufficient and appropriate experience and authority in the firm to assume that
responsibility; and
c. Require that those performing the engagement or the engagement quality control review are not
involved in inspecting the engagement.
Documentation of the System of Quality Control
 The firm shall establish policies and procedures requiring appropriate documentation to provide evidence
of the operation of each element of its system of quality control.
 The firm shall establish policies and procedures that require retention of documentation for a period of
time sufficient to permit those performing monitoring procedures to evaluate the firm’s compliance with its
system of quality control, or for a longer period if required by law or regulation.
 The firm shall establish policies and procedures requiring documentation of complaints and allegations and
the responses to them.

AUDMOD1.7 PSA 220 QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS

Introduction
Scope of this PSA
 This PSA deals with the specific responsibilities of the auditor regarding quality control procedures
for an audit of financial statements. It also addresses, where applicable, the responsibilities of the
engagement quality control reviewer. This PSA is to be read in conjunction with relevant ethical
requirements.
System of Quality Control and Role of Engagement Teams
 Quality control systems, policies and procedures are the responsibility of the audit firm. Under ISQC 1, the
firm has an obligation to establish and maintain a system of quality control to provide it with reasonable
assurance that:
a. The firm and its personnel comply with professional standards and applicable legal and regulatory
requirements; and
b. Reports issued by the firm or engagement partners are appropriate in the circumstances.
 Engagement teams are entitled to rely on the firm’s system of quality control, unless information provided
by the firm or other parties suggests otherwise.
Requirements
Leadership Responsibilities for Quality on Audits
 The engagement partner shall take responsibility for the overall quality on each audit engagement to which
that partner is assigned.
Relevant Ethical Requirements
 Throughout the audit engagement, the engagement partner shall remain alert, through observation and
making inquiries as necessary, for evidence of non-compliance with relevant ethical requirements by
members of the engagement team.
 If matters come to the engagement partner’s attention through the firm’s system of quality control or
otherwise that indicate that members of the engagement team have not complied with relevant ethical
requirements, the engagement partner, in consultation with others in the firm, shall determine the
appropriate action.
Acceptance and Continuance of Client Relationships and Audit Engagements
 The engagement partner shall be satisfied that appropriate procedures regarding the acceptance and
continuance of client relationships and audit engagements have been followed, and shall determine that
conclusions reached in this regard are appropriate.
 If the engagement partner obtains information that would have caused the firm to decline the audit
engagement had that information been available earlier, the engagement partner shall communicate that
information promptly to the firm, so that the firm and the engagement partner can take the necessary
action.
Human Resources
 The engagement partner shall be satisfied that the engagement team, and any auditor’s experts who are not
part of the engagement team, collectively have the appropriate competence and capabilities to:
a. Perform the audit engagement in accordance with professional standards and applicable legal and
regulatory requirements; and
b. Enable an auditor’s report that is appropriate in the circumstances to be issued.
Engagement Performance
 Direction, Supervision and Performance
 The engagement partner shall take responsibility for:
a. The direction, supervision and performance of the audit engagement in compliance with professional
standards and applicable legal and regulatory requirements; and
b. The auditor’s report being appropriate in the circumstances.

14 AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES

 Reviews
 The engagement partner shall take responsibility for reviews being performed in accordance with the
firm’s review policies and procedures.
 On or before the date of the auditor’s report, the engagement partner shall, through a review of the audit
documentation and discussion with the engagement team, be satisfied that sufficient appropriate audit
evidence has been obtained to support the conclusions reached and for the auditor’s report to be issued.
 Consultation
 The engagement partner shall:
a. Take responsibility for the engagement team undertaking appropriate consultation on difficult or
contentious matters;
b. Be satisfied that members of the engagement team have undertaken appropriate consultation during
the course of the engagement, both within the engagement team and between the engagement team
and others at the appropriate level within or outside the firm;
c. Be satisfied that the nature and scope of, and conclusions resulting from, such consultations are
agreed with the party consulted; and
d. Determine that conclusions resulting from such consultations have been implemented
 Engagement Quality Control Review
 For audits of financial statements of listed entities, and those other audit engagements, if any, for which
the firm has determined that an engagement quality control review is required, the engagement partner
shall:
a. Determine that an engagement quality control reviewer has been appointed;
b. Discuss significant matters arising during the audit engagement, including those identified during the
engagement quality control review, with the engagement quality control reviewer; and
c. Not date the auditor’s report until the completion of the engagement quality control review.
 If differences of opinion arise within the engagement team, with those consulted or, where applicable,
between the engagement partner and the engagement quality control reviewer, the engagement team shall
follow the firm’s policies and procedures for dealing with and resolving differences of opinion.
Monitoring
 An effective system of quality control includes a monitoring process designed to provide the firm with
reasonable assurance that its policies and procedures relating to the system of quality control are relevant,
adequate, and operating effectively. The engagement partner shall consider the results of the firm’s
monitoring process as evidenced in the latest information circulated by the firm and, if applicable, other
network firms and whether deficiencies noted in that information may affect the audit engagement.
Documentation
 The auditor shall include in the audit documentation:
a. Issues identified with respect to compliance with relevant ethical requirements and how they were
resolved.
b. Conclusions on compliance with independence requirements that apply to the audit engagement, and
any relevant discussions with the firm that support these conclusions.
c. Conclusions reached regarding the acceptance and continuance of client relationships and audit
engagements.
d. The nature and scope of, and conclusions resulting from, consultations undertaken during the course
of the audit engagement.
 The engagement quality control reviewer shall document, for the audit engagement reviewed, that:
a. The procedures required by the firm’s policies on engagement quality control review have been
performed;
b. The engagement quality control review has been completed on or before the date of the auditor’s
report; and
c. The reviewer is not aware of any unresolved matters that would cause the reviewer to believe that the
significant judgments the engagement team made and the conclusions it reached were not
appropriate.

AUDMOD1.8 PSA 210 AGREEING THE TERMS OF AUDIT ENGAGEMENTS

Introduction
Scope of this PSA
 This PSA deals with the auditor’s responsibilities in agreeing the terms of the audit engagement with
management and, where appropriate, those charged with governance. This includes establishing that
certain preconditions for an audit, responsibility for which rests with management and, where appropriate,
those charged with governance, are present. PSA 220 deals with those aspects of engagement acceptance
that are within the control of the auditor.
Objective
 The objective of the auditor is to accept or continue an audit engagement only when the basis upon
which it is to be performed has been agreed, through:
a. Establishing whether the preconditions for an audit are present; and

AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES 15

 b. Confirming that there is a common understanding between the auditor and management and,
where appropriate, those charged with governance of the terms of the audit engagement.
Preconditions of an Audit
 In order to establish whether the preconditions for an audit are present, the auditor shall:
a. Determine whether the financial reporting framework to be applied in the preparation of the
financial statements is acceptable; and
b. Obtain the agreement of management that it acknowledges and understands its responsibility:
i. For the preparation of the financial statements in accordance with the applicable financial
reporting framework, including where relevant their fair presentation;
ii. 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;
iii. To provide the auditor with:
 Access to all information of which management is aware that is relevant to the preparation of
the financial statements such as records, documentation and other matters;
 Additional information that the auditor may request from management for the purpose of the
audit; and
 Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence.
 If the preconditions for an audit are not present, the auditor shall discuss the matter with management.
Unless required by law or regulation to do so, the auditor shall not accept the proposed audit engagement:
a. If the auditor has determined that the financial reporting framework to be applied in the
preparation of the financial statements is unacceptable, except as provided in paragraph 19; or
b. If the agreement referred to in paragraph 6(b) has not been obtained.
Limitation on Scope prior to Audit Engagement Acceptance
 If management or those charged with governance impose a limitation on the scope of the auditor’s work in
the terms of a proposed audit engagement such that the auditor believes the limitation will result in the
auditor disclaiming an opinion on the financial statements, the auditor shall not accept such a limited
engagement as an audit engagement, unless required by law or regulation to do so.
Agreement on Audit Engagement Terms
 The auditor shall agree the terms of the audit engagement with management or those charged with
governance, as appropriate.
 The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other
suitable form of written agreement and shall include:
a. The objective and scope of the audit of the financial statements;
b. The responsibilities of the auditor;
c. The responsibilities of management;
d. Identification of the applicable financial reporting framework for the preparation of the financial
statements; and
e. Reference to the expected form and content of any reports to be issued by the auditor and a
statement that there may be circumstances in which a report may differ from its expected form and
content.
Recurring audits
 On recurring audits, the auditor shall assess whether circumstances require the terms of the audit
engagement to be revised and whether there is a need to remind the entity of the existing terms of the audit
engagement.
Acceptance of a Change in the Terms of the Audit Engagement
 The auditor shall not agree to a change in the terms of the audit engagement where there is no
reasonable justification for doing so.
 A change in circumstances that affects the entity’s requirements or a misunderstanding concerning
the nature of the service originally requested may be considered a reasonable basis for requesting a
change in the audit engagement.
 In contrast, a change may not be considered reasonable if it appears that the change relates to
information that is incorrect, incomplete or otherwise unsatisfactory. An example might be where
the auditor is unable to obtain sufficient appropriate audit evidence regarding receivables and the
entity asks for the audit engagement to be changed to a review engagement to avoid a qualified
opinion or a disclaimer of opinion.
 If the auditor concludes that there is reasonable justification to change the audit engagement to a review or
a related service, the audit work performed to the date of change may be relevant to the changed
engagement; however, the work required to be performed and the report to be issued would be those
appropriate to the revised engagement.
 In order to avoid confusing the reader, the report on the related service would not include reference to:
a. The original audit engagement; or
b. Any procedures that may have been performed in the original audit engagement, except where the
audit engagement is changed to an engagement to undertake agreed-upon procedures and thus
reference to the procedures performed is a normal part of the report.
 If the terms of the audit engagement are changed, the auditor and management shall agree on and record

16 AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES

 the new terms of the engagement in an engagement letter or other suitable form of written agreement.
 If the auditor is unable to agree to a change of the terms of the audit engagement and is not permitted by
management to continue the original audit engagement, the auditor shall:
a. Withdraw from the audit engagement where possible under applicable law or regulation; and
b. Determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as those charged with governance, owners or regulators.
Example of an Audit Engagement Letter
To the appropriate representative of management or those charged with governance of ABC Company:
[The objective and scope of the audit]
You have requested that we audit the financial statements of ABC Company, which comprise the balance
sheet as at December 31, 20X1, and the income statement, statement of changes in equity and cash flow
statement for the year then ended, and a summary of significant accounting policies and other explanatory
information. We are pleased to confirm our acceptance and our understanding of this audit engagement by
means of this letter. Our audit will be conducted with the objective of our expressing an opinion on the
financial statements.
[The responsibilities of the auditor]
We will conduct our audit in accordance with Philippine Standards on Auditing (PSAs). Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about 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 auditor’s judgment, including the assessment of the risks
of material misstatement of the financial statements, whether due to fraud or error. 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.
Because of the inherent limitations of an audit, together with the inherent limitations of internal control,
there is an unavoidable risk that some material misstatements may not be detected, even though the audit is
properly planned and performed in accordance with PSAs.
In making our risk assessments, we consider internal control relevant to the entity’s preparation 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 entity’s internal control. However, we will
communicate to you in writing concerning any significant deficiencies in internal control relevant to the audit
of the financial statements that we have identified during the audit.
[The responsibilities of management and identification of the applicable financial reporting framework]
Our audit will be conducted on the basis that [management and, where appropriate, those charged with
governance] acknowledge and understand that they have responsibility:
a. For the preparation and fair presentation of the financial statements in accordance with International
Financial Reporting Standards;
b. 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; and
c. To provide us with:
i. Access to all information of which [management] is aware that is relevant to the preparation of the
financial statements such as records, documentation and other matters;
ii. Additional information that we may request from [management] for the purpose of the audit; and
iii. Unrestricted access to persons within the entity from whom we determine it necessary to obtain
audit evidence.
As part of our audit process, we will request from [management and, where appropriate, those charged with
governance], written confirmation concerning representations made to us in connection with the audit.
We look forward to full cooperation from your staff during our audit.
[Other relevant information]
[Insert other information, such as fee arrangements, billings and other specific terms, as appropriate.]
[Reporting]
[Insert appropriate reference to the expected form and content of the auditor’s report.]
The form and content of our report may need to be amended in the light of our audit findings.
Please sign and return the attached copy of this letter to indicate your acknowledgement of, and agreement
with, the arrangements for our audit of the financial statements including our respective responsibilities.
XYZ & Co.
Acknowledged and agreed on behalf of ABC Company by
(signed)
......................
Name and Title
Date

AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES 17

 MULTIPLE CHOICE QUESTIONS

1. Which of the following statements BEST describes assurance services?

A. Independent professional services that are intended to enhance the credibility of information to meet
the needs of an intended user.
B. Services designed to express an opinion on the fairness of historical financial statements based on
the results of an audit.
C. The preparation of financial statements or the collection, classification, and summarization of other
financial information.
D. Services designed for the improvement of operations, resulting in better outcomes.

2. Assurance engagements involve

A. Two separate parties: a professional accountant and intended users
B. Two separate parties: a professional accountant and a responsible party
C. Two separate parties: a responsible party and intended users
D. Three separate parties: a professional accountant, a responsible party, and intended users

3. The subject matter of an assurance engagement may include

I. Historical or prospective financial information
II. Internal controls
III. Compliance with regulation
A. I and II only B. I and III only C. II and III only D. I, II and III

4. When performing an assurance service, professional accountants use standards or benchmarks to

evaluate or measure the subject matter of an assurance engagement. This element of an assurance
engagement is called
A. Criteria B. Conclusion C. PFRS D. Assertion

5. Suitable criteria are required for reasonably consistent evaluation or measurement of the subject matter
of an assurance engagement. Which of the following statements concerning the characteristics of suitable
criteria is CORRECT?
A. Reliable criteria contribute to conclusions that are clear, comprehensive, and not subject to
significantly different interpretations. Understandable
B. Relevant criteria allow reasonably consistent evaluation or measurement of the subject matter
including, where relevant, presentation and disclosure, when used in similar circumstances by
similarly qualified practitioners. Reliable
C. Neutral criteria contribute to conclusions that are free from bias.
D. Criteria are sufficiently complete when they contribute to conclusions that are clear, comprehensive,
and not subject to different interpretations.

6. Criteria that are embodied in laws or regulations, or issued by authorized or recognized bodies of experts
that follow a transparent due process are called
A. Suitable criteria C. Specifically developed criteria
B. Established criteria D. General criteria

7. In an assurance engagement, the person or persons, either as individuals or representatives of an entity,

responsible for the subject matter is the
A. Intended user B. Responsible party C. Professional accountant D. Client

8. In an assurance engagement, the person or class of persons for whom the professional accountant
prepares the report for a specific use or purpose is the
A. Intended user B. Responsible party C. Management D. Client

9. In an assurance engagement, the outcome of the evaluation or measurement of a subject matter against
criteria is called
A. Subject matter information B. Subject matter C. Assurance D. Conclusion

10. In some assurance engagements, the evaluation or measurement of the subject matter is 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. These engagements are called
A. Direct reporting engagements C. Non-assurance engagements
B. Assertion-based engagements D. Recurring engagements

11. A practitioner's assurance report contains the following conclusion;

“Based on our work described in this report, nothing has come to our attention that causes us to believe that
internal control is not effective, in all material respects, based on ABC criteria.”
What type of assurance engagement was performed?

18 AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES

 A. Limited assurance engagement C. Negative assurance engagement
B. Reasonable assurance engagement D. Positive assurance engagement

12. A proposed assurance engagement can be accepted when the practitioner's preliminary knowledge about
the engagement circumstances indicates that relevant ethical requirements will be satisfied and
I. The subject matter of the engagement is appropriate.
II. The criteria to be used are suitable and are available to the intended users.
III. The practitioner has access to sufficient appropriate evidence to support the conclusion.
IV. The conclusion is to be contained in a written report.
V. There is a rational purpose for the engagement.
A. I, II and III only B. I, II, IV and V only C. I, II, III and IV only D. I, II, III, IV and V

13. Assurance engagement risk is the risk

A. That the practitioner expresses an inappropriate conclusion when the subject matter information is
materially misstated.
B. Of expressing an inappropriate conclusion when the subject matter information is not materially
misstated.
C. Through loss from litigation, adverse publicity, or other events arising in connection with a subject
matter reported on. ,
D. Of expressing an inappropriate conclusion when the subject matter information is either materially
misstated or not materially misstated.

14. The Auditing and Assurance Standards Council (AASC)

A. Replaced the Auditing Standards and Practices Council (ASPC) which was established by the Board of
Accountancy (BOA), upon the recommendation of the Philippine Institute of Certified Public
Accountants (PICPA).
B. Was created by the Professional Regulation Commission (PRC) upon the recommendation of the
BOA.
C. Has 17 regular members.
D. Assists the PRC in the establishment and promulgation of auditing standards in the Philippines.

15. The Chairman and the members of the AASC shall have a term of
A. 5 years B. 7 years C. 2 years D. 3 years

16. Which of the following standards are to be applied, as appropriate, in the audit of historical financial
information?
A. PSREs B. PSAEs C. PSRSs D. PSAs

17. PSRE 2400 (Engagements to Review Financial Statements), as amended by the AASC in February 2008,
applies to
A. Reviews of any historical financial information of an audit client.
B. Reviews of any historical financial information by a practitioner other than the entity's auditor.
C. Reviews of historical financial or other information by a practitioner other than the entity's auditor.
D. Reviews of historical financial or other Information of an audit client.

18. The Philippine Standards on Assurance Engagements (PSAEs) are to be applied in

A. Assurance engagements dealing with subject matters other than historical financial information.
B. Compilation engagements and agreements to apply agreed-upon procedures to information.
C. The audit or review of historical financial information.
D. Assurance engagements dealing with historical financial information.

19. The Philippine Standards on Quality Control (PSQCs) are to be applied to

A. Assurance engagements only.
B. Review engagements only.
C. Compilation and review engagements only.
D. All services that fall under the AASC's engagement standards.

20. These statements are issued by the AASC to provide interpretive guidance and practical assistance to
auditors in the implementation of PSAs and to promote good practice.
A. PREPSs B. PAPSs C. PAEPs D. PRSPSs

21. What level of assurance is provided by the auditor in an audit engagement?

A. Absolute B. High, but not absolute C. Moderate D. No assurance

22. What level of assurance is provided by the practitioner in a review engagement?

A. No assurance B. High, but not absolute C. Reasonable D. Moderate

AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES 19

23. The following statements relate to a review of financial statements. Which is INCORRECT?
A. 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 required 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.
B. 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.
C. A review ordinarily involves 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.
D. The level of assurance provided in a review report is less than that given in an audit report.

24. The following statements relate to a review of interim financial information performed by the entity's
independent auditor. Which is INCORRECT?
A. Similar to a financial statement audit, a review of interim financial information is designed to obtain
reasonable assurance that the interim financial information is free from material misstatement.
B. A review of interim financial information does not provide a basis for expressing an opinion whether
the financial information is presented fairly, in all material respects, in accordance with an applicable
financial reporting framework.
C. In a review of interim financial information, the auditor should have an understanding of the entity
and its environment, including its internal control, as it relates to the preparation of both annual and
interim financial information, sufficient to plan and conduct the engagement.
D. A review of interim financial information may bring significant matters affecting the interim financial
information to the auditor's attention, but it does not provide all of the evidence that would be
required in an audit.

25. Which of the following statements concerning compilation engagement is INCORRECT?

A. In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to
auditing expertise to collect, classify, and summarize financial information.
B. The procedures employed in a compilation engagement enable the accountant to express a moderate
level of assurance on the compiled financial information.
C. Users of the compiled financial information derive some benefit as a result of the accountant's
involvement because the service has been performed with due professional skill and care.
D. A compilation engagement ordinarily entails reducing detailed data to a manageable and
understandable form without a requirement to test the assertions underlying that information.

26. When performing a compilation engagement, the accountant is required to

A. Assess internal controls.
B. Make inquiries of management to assess the reliability and completeness of the information
provided.
C. Verify matters and explanations.
D. Obtain a general knowledge of the business and operations of the entity.

27. When performing a compilation engagement, the accountant is required to

A. Assess internal controls.
B. Make inquiries of management to assess the reliability and completeness of the information
provided.
C. Verify matters and explanations.
D. Obtain a general knowledge of the business and operations of the entity.

28. What assurance is provided by the auditor in an agreed-upon procedures engagement?

A. Reasonable B. Absolute C. Moderate D. No assurance

29. In an engagement to perform agreed-upon procedures, an auditor is engaged to

A. 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.
B. Use accounting expertise as opposed to auditing expertise to collect, classify, and summarize
financial information.
C. Provide a moderate level of assurance that the information is free of material misstatement.
D. Provide a high, but not absolute, level of assurance that the information is free of material
misstatement.

30. An engagement to perform agreed-upon procedures may involve the auditor in performing certain
procedures concerning
I. Individual items of financial data.
II. A single financial statement.

20 AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES

 III. A complete set of financial statements.
A. I and II only B. II and III only C. I and III only D. I, II, and III

31. Independence is not a requirement for which of the following engagements?

Compilation Review Agreed-upon Procedures
A. No Yes No
B. No No No
C. Yes No Yes
D. Yes Yes Yes

32. Which of the following engagements require compliance with the requirements of the Code of Ethics for
Professional Accountants in the Philippines?
Compilation Review Agreed-upon Procedures
A. Yes Yes No
B. No No Yes
C. No No No
D. Yes Yes Yes

33. A practitioner is associated with financial information when

I. The practitioner attaches a report to that financial information.
II. The practitioner consents to the use of his/her name in a professional connection.
A. I only B. II only C. Either I or II D. Neither I nor II

34. The auditor is required to comply with all PSAs relevant to the audit of an entity's financial statements. A
PSA is relevant to the audit when
I. The PSA is in effect.
II. The circumstances addressed by the PSA exist.
A. I only B. II only C. Either I or II D. Both I and II

35. The overall objectives of the auditor in conducting an audit of financial statements are
I. To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether caused by fraud or error.
II. To report on the financial statements.
III. To obtain conclusive rather than persuasive evidence.
IV. To detect all misstatements, whether due to fraud or error.
A. I and II only B. II and IV only C. I, II, and III only D. I, II, III, and IV

36. An audit in accordance with PSAs is performed on the premise that management and, where appropriate,
those charged with governance have responsibilities that are fundamental to the conduct of the audit.
Which of the following is NOT one of those responsibilities?
A. To comply with all relevant PSAs in the preparation and presentation of the entity's financial
statements.
B. To provide the auditor with all information, such as records and documentation, and other matters
that are relevant to the preparation and presentation of the financial statements.
C. To provide unrestricted access to those within the entity from whom the auditor determines it
necessary to obtain audit evidence.
D. To design, implement, and maintain internal control relevant to the preparation and presentation of
financial statements that are free from material misstatement, whether caused by fraud or error.

37. The auditor is required to maintain professional skepticism throughout the audit. Which of the following
statements concerning professional skepticism is FALSE?
A. A belief that management and those charged with governance are honest and have integrity relieves
the auditor of the need to maintain professional skepticism.
B. Maintaining professional skepticism throughout the audit reduces the risk of using inappropriate
assumptions in determining the nature, timing, and extent of the audit procedures and evaluating the
results thereof.
C. Professional skepticism is necessary to the critical assessment of audit evidence.
D. Professional skepticism is an attitude that includes questioning contradictory audit evidence
obtained.

38. A financial statement audit aids in the communication of economic data because the audit
A. Assures the readers of financial statements that any fraudulent activity has been corrected.
B. Guarantees that financial data are fairly presented.
C. Lends credibility to the financial statements.
D. Confirms the accuracy of management's financial representations.

AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES 21

39. What is the proper organizational role of internal auditing?
A. To serve as an independent, objective assurance and consulting activity that adds value to
operations.
B. To assist the external auditor in order to reduce external audit fees.
C. To perform studies to assist in the attainment of more efficient operations.
D. To serve as the investigative arm of the audit committee of the board of directors.

40. Operational audits generally have been conducted by internal and COA auditors, but may be performed
by certified public accountants. A primary purpose of an operational audit is to provide
A. A measure of management performance in meeting organizational goals.
B. The results of internal examinations of financial and accounting matters to a company's top-level
management.
C. Aid to the independent auditor, who is conducting the examination of the financial statements.
D. A means of assurance that internal accounting controls are functioning as planned.

41. A governmental audit may extend beyond an audit leading to the expression of an opinion on the fairness
of financial presentation to Include
Program Results Compliance Economy and Efficiency
A. Yes Yes Yes
B. Yes Yes No
C. Yes No Yes
D. No Yes Yes

42. A pervasive characteristic of a CPA's role in a consulting services engagement is that of being a(an)
A. Independent practitioner C. Confidential reviewer
B. Computer expert D. Objective advisor

43. Which of the following statements concerning consulting services is FALSE?

A. The performance of consulting services for audit clients does not, in and of itself, impair the auditor's
independence.
B. Consulting services differ fundamentally from the CPA's function of attesting to the assertions of
other parties.
C. Consulting services ordinarily involve external reporting.
D. Most CPAs, including those who provide audit and tax services, also provide consulting services to
their clients.

44. Which of the following is the MOST appropriate action to be taken by a CPA who has been asked to
perform a consulting services engagement concerning the analysis of a potential merger if he/she has
little experience with the industry involved?
A. Accept the engagement but he/she should conduct research or consult with others to obtain
sufficient competence.
B. Decline the engagement because he/she lacks sufficient knowledge.
C. Accept the engagement and issue a report that contains his/her opinion on the achievability of the
results of the merger.
D. Accept the engagement and perform it in accordance with Philippine Standards on Auditing (PSAs).

45. Assurance services differ from consulting services in that they

I. Focus on providing advice.
II. Involve monitoring of one party by another.
A. I only B. II only C. Both I and II D. Neither I nor II

46. One of a CPA firm's basic objectives is to provide professional services that comply with professional
standards and regulatory and legal requirements. Reasonable assurance of achieving this basic objective
is provided through
A. A system of quality control.
B. Continuing professional education.
C. Compliance with generally accepted reporting standards.
D. Compliance with the fundamental principles of the Philippine Code of Ethics.

47. Which of the following are elements of a CPA firm's quality control that should be considered in
establishing its quality control policies and procedures?
Human Resources Monitoring Engagement Performance
A. Yes Yes No
B. Yes Yes Yes
C. No Yes Yes
D. Yes No Yes

22 AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES

48. Quality control policies and procedures should provide the firm with reasonable assurance that the
policies and procedures relating to the other elements of quality control are being effectively applied.
This statement defines the quality control element
A. Acceptance and continuance of client relationships and specific engagements.
B. Ethical requirements.
C. Monitoring.
D. Leadership responsibility for quality within the firm.

49. A CPA firm should establish procedures for conducting and supervising work at all organizational levels
to provide reasonable assurance that the work performed meets the firm's standards of quality. To
achieve this goal, the firm most likely would establish procedures for
A. Evaluating prospective and continuing client relationships.
B. Reviewing engagement working papers and reports.
C. Requiring personnel to adhere to the applicable independence rules.
D. Maintaining personnel files containing documentation related to the evaluation of personnel.

50. The primary purpose of establishing quality control policies and procedures for deciding whether to
accept a new client is to
A. Enable the CPA firm to attest to the reliability of the client.
B. Satisfy the CPA firm's duty to the public concerning the acceptance of new clients.
C. Minimize the likelihood of association with clients whose management lacks integrity.
D. Anticipate before performing any field work whether an unqualified opinion can be expressed.

51. A CPA firm's quality control procedures pertaining to the acceptance of a prospective audit client would
most likely include
A. Inquiry of management as to whether disagreements between the predecessor auditor and the
prospective client were resolved satisfactorily.
B. Consideration of whether sufficient appropriate evidential matter may be obtained to afford a
reasonable basis for an opinion.
C. Inquiry of third parties, such as the prospective client's bankers and attorneys, about information
regarding the prospective client and its management.
D. Consideration of whether internal control is sufficiently effective to permit a reduction in the extent
of required substantive tests.

52. According to PSQC 1, a firm should establish policies and procedures to provide it with reasonable
assurance that the policies and procedures relating to the system of quality control are relevant,
adequate, operating effectively and complied with in practice. Such policies and procedures should
include an ongoing consideration and evaluation of the firm's system of quality control, including a
periodic inspection of a selection of completed engagements. The inspection of a selection of completed
engagements is ordinarily performed on a cyclical basis. Engagements selected for inspection include
A. At least one engagement for each engagement partner over an inspection cycle, which ordinarily
spans no more than 2 years.
B. At least one engagement for each engagement partner over an inspection cycle, which ordinarily
spans no more than 1 year.
C. At least 3 engagements for each engagement partner over an inspection cycle, which ordinarily spans
no more than 5 years.
D. At least one engagement for each engagement partner over an inspection cycle, which ordinarily
spans no more than 3 years.

53. Under PSQC 1, the firm should communicate the results of the monitoring of its quality control system to
engagement partners and other appropriate individuals within the firm at least
A. Monthly B. Weekly C. Quarterly D. Annually

54. As defined in PSQC 1, it is a process designed to provide an objective evaluation, before the report is
issued, of the significant judgments the engagement team made and the conclusions they reached in
formulating the report.
A. Engagement quality control review C. Monitoring
B. Engagement performance D. Continuing professional education

55. Which of the following statements would least likely appear in an auditor's engagement letter?
A. Fees for our services are based on our regular per diem rates, plus travel and other out-of- pocket
expenses.
B. Management is responsible for making all financial records and related information available to us.
C. Our engagement is subject to the risk that material errors or fraud, if they exist, will not be detected.
D. After performing our preliminary analytical procedures, we will discuss with you the other
procedures we consider necessary to complete the engagement.

AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES 23

56. PSA 220 requires the engagement partner to consider whether members of the engagement team have
complied with the ethical requirements relating to audit engagements. The Code of Ethics establishes the
fundamental principles of professional ethics, which include
I. Integrity; III. Professional competence and due care; V. Professional behavior
II. Objectivity; IV. Confidentiality;
A. I, II, IV, and V only B. II, III, IV, and V only C. I, III, IV, and V only D. I, II, III, IV, and V

57. For audits of financial statements of listed entities, the engagement partner should
A. Determine that an engagement quality control reviewer has been appointed.
B. Discuss significant matters arising during the audit engagement, including those identified during the
engagement quality control review, with the engagement quality control reviewer.
C. Not issue the auditor's report until the completion of the engagement quality control review.
D. All of the above

58. An engagement quality control review should include an objective evaluation of

I. The significant judgments made by the engagement team.
II. The conclusions reached in formulating the auditor's report.
A. I only B. II only C. Both I and II D. Neither I nor II

59. A firm's system of quality control should ordinarily provide for the maintenance of
A. A file of minutes of staff meetings.
B. Updated personnel files.
C. Documentation to provide evidence of the operation of each element of its system of quality control.
D. Documentation to demonstrate compliance with regulatory requirements.

60. The audit work performed by each assistant should be reviewed to determine whether it was adequately
performed and to evaluate whether the
A. Auditor's system of quality control has been maintained at a high level.
B. Results are consistent with the conclusions to be presented in the auditor's report.
C. Audit procedures performed are approved in the professional standards.
D. Audit has been performed by persons having adequate technical training and proficiency as auditors.

61. The nature and extent of a CPA firm's quality control policies and procedures depend on
The CPA Firm’s Size The Nature of the CPA Firm’s Practice Cost-Benefit Considerations
A. Yes Yes Yes
B. Yes Yes No
C. Yes No Yes
D. No Yes Yes

62. The engagement letter documents and confirms the

A B C D
Auditor's acceptance of the appointment Yes Yes Yes Yes
Objective and scope of the audit Yes No Yes Yes
Extent of the auditor's responsibilities to the client No Yes No Yes
Form of any reports Yes No No Yes

63. An auditor's document includes the following:

“We will conduct our 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.”
The above passage is most likely from a/an
A. Auditor’s report B. Love letter C. Engagement letter D. Management representation letter

64. Statement I: The auditor of a parent entity who is also the auditor of its subsidiary, branch or division
(component) should send a separate engagement letter to the entity's component. TRUE
Statement II: On recurring audits, the auditor should send a new engagement letter each period. FALSE
A. True; True B. False; False C. True; False D. False; True

65. An auditor who, before the completion of the engagement, is requested to change the engagement to one
which provides a lower level of assurance, should
A. Withdraw and consider whether there is any obligation to report to other parties the circumstances
necessitating the withdrawal.
B. Issue a report that includes reference to the original engagement and any procedures that may have
been performed in the original engagement.
C. Not agree to a change of engagement where there is no reasonable justification for doing so.
D. Consider the change reasonable if it relates to information that is incorrect, incomplete or otherwise
unsatisfactory.

24 AUDMOD1 OVERVIEW OF AUDITING AND PRE-ENGAGEMENT ACTIVITIES