CHAPTER 7 the reasonableness of output, and distributes

(auditing in a computerized environment) output to authorized personnel.

GRANDFATHER, FATHER, SON
 a common practice in file retention that
7.1 CHARACTERISTICS OF COMPUTER requires an entity to keep the two most recent
INFORMATION SYSTEM (CIS) generation of master files and transaction
ESSENTIAL CHARACTERISTICS OF COMPUTER files, in order to permit reconstruction of
INFORMATION SYSTEM master files if needed.
(a) Lack of visible transaction trails APPLICATION CONTROLS
(b) Consistency of performance
 are policies and procedures that relate to
(c) Ease of access to data and computer
specific use of the system.
programs
 The processing of transaction involves three
(d) Concentration of duties
stages:
(e) Systems generated transactions
1) INPUT STAGE – involves capturing of a
(f) Vulnerability of data and program
mass of data
storage media
2) PROCESSING STAGE – involves
converting the mass of raw data into
7.2 INTERNAL CONTROL IN A CIS useful information
ENVIRONMENT 3) OUTPUT STAGE – involves preparation
 Internal control procedures can be classified of information in a form useful to those
into two types: general and application who need to use it.
controls.
APPLICATION CONTROLS INCLUDE:
GENERAL CONTROLS (1) Controls over input
 These are control policies and procedures  Input controls are designed to provide
that relate to the overall computer reasonable assurance that data
information system. submitted for processing are complete,
THESE CONTROLS INCLUDE: properly authorized, and accurately
translated into machine readable form.
(1) Organizational controls – the plan of
an organization for an entity’s computer  Examples of input controls include:
system should include:  Key verification – requires the
a. Segregation between the CIS department data to be entered twice.
and user departments  Field check – ensures that the input
data agree with the required field
 The function of CIS department is to
format.
process transactions.
b. Segregation of duties within the CIS  Validity check – information
department entered are compared with the
(2) Systems development and valid information in the master file
documentation controls to determine the authenticity of the
(3) Access controls input.
(4) Data recovery controls  Self-checking digit – a
(5) Monitoring Controls – are designed to mathematically calculated digit
ensure that CIS controls are working which is usually added to a
effectively as planned. document number to detect
common transpositional errors in
DUTIES WITHIN THE CIS DEPARTMENT data submitted for processing.
 CIS DIRECTOR – exercise control over the  Limit check – designed to ensure
CIS operation. that data submitted for processing
 SYSTEMS ANALYST – design new systems, do not exceed a pre-determined
evaluates and improves existing systems, limit or a reasonable amount.
and prepares specifications for  Control totals – ensure the
programmers. completeness of data before and
 PROGRAMMER – writes a program, tests after they are processed.
and debugs such programs, and prepares (2) Controls over processing
the computer operating instructions.  Processing controls are designed to
 COMPUTER OPERATOR – operates the provide reasonable assurance that
computer to process transactions. input data are processed accurately,
 DATA ENTRY OPERATOR – prepares and and that data are not lost, added,
verifies input data for processing. excluded, duplicated or improperly
changed.
 LIBRARIAN – maintains custody of systems
(3) Control over output
documentation, programs and files.
 Output controls are designed to
 CONTROL GROUP – reviews all input
provide reasonable assurance that
procedures, monitors computer processing,
the results of processing are complete,
follows-up data processing errors, reviews
accurate, and that these outputs are
 distributed only to authorized reporting in a format specified by the
personnel. auditor.
PURPOSE-WRITTEN PROGRAMS
7.3 TEST OF CONTROL IN A CIS  designed to perform audit tasks in specific
ENVIRONMENT circumstances.
 Test of control in a CIS environment involves
evaluating the client’s internal control policies Other CAATS
and procedures to determine if they are  Highly complicated computerized systems
functioning as intended. sometimes do not retain permanent audit
 Testing the reliability of general controls trails and would require capturing of the
may include observing client’s personnel in audit data as transactions are processed.
performing their duties; inspecting program Under this scenario, the CAATs available to
documentation; and observing the security the auditor may include:
measures in force. (1) SNAPSHOTS
 In testing application controls, the auditor - involves taking a picture of a transaction
may either: as it flows through the computer systems.
1) Audit around the computer; or (2) SYSTEMS CONTROL AUDIT REVIEW
2) Use computer-assisted audit techniques FILES (SCARF)
- involves embedding audit software
AUDITING AROUND THE COMPUTER
modules within an application system to
 it involves examination of documents and provide continuous monitoring of the
reports to determine the reliability of the systems transactions.
system.
 also known as “black box approach”
because it does not permit direct assessment
of actual processing of transactions.
COMPUTER ASSISTED AUDIT TECHNIQUES
(CAATs)
 this is also called “white box approach”
 these are computer programs and data
which the auditor uses as part of the audit
procedures data of audit significance
contained in an entity’s information systems.
 Commonly used CAATs include:
 TEST DATA – primarily designed to test
the effectiveness of the internal control
procedures to determine whether the
client’s computer programs can correctly
handle valid and invalid conditions as
they arise.
 INTEGRATED TEST FACILITY (ITF) – the
auditor creates dummy or fictitious
employee or other appropriate unit for
testing within the entity’s computer
system.
 PARALLEL SIMULATION – requires the
auditor to write a program that simulates
key features or processes of the program
under review.
- can be accomplished by using generalized
audit software or purpose written
programs.
SIMULATED PROGRAM
 used to reprocess transactions that were
previously processed by the client’s
program.
GENERALIZED AUDIT SOFTWARE
 consists of generally available computer
packages which have been designed to
perform common audit tasks such as
performing or verifying calculations,
summarizing and totaling files, and
 CHAPTER 8 TEST OF CONTROL
(performing substantive tests)  provides evidence that indicates a
misstatement is likely to occur.
SUBSTANTIVE TEST
8.1 INTRODUCTION
 provides evidence about the existence of
SUBSTANTIVE TESTS misstatement in an account.
 are audit procedures designed to
substantiate the account balances or to 8.4 AUDIT EVIDENCE
detect material misstatements in the
financial statements. EVIDENCE
 The auditor’s substantive procedures may be  refers to the information obtained by the
either tests of details or substantive analytical auditor in arriving at the conclusions on
procedures. which the audit opinion is based.
AUDIT EVIDENCE
8.2 SUBSTANTIVE ANALYTICAL PROCEDURES  consists of underlying accounting and
 Analytical procedures applied as substantive corroborating information.
tests are performed to enable the auditor to
obtain corroborative evidence about a UNDERLYING ACCOUNTING DATA
particular assertion.  refers to the accounting records underlying
SUBSTANTIVE ANALYTICAL PROCEDURES the financial statements.

 involve comparison of financial information CORROBORATING INFORMATION

with auditor’s expectations to determine the  refers to the documents and other
reasonableness of an account reported in a information supporting the entity’s
financial statement. accounting data obtained from client and
 Suitability of Substantive Analytical other sources.
Procedures  Audit evidence is typically obtained as a
 The following generalizations may result of performing tests of control and
be helpful in assessing the substantive tests.
predictability of the accounts: SUFFICIENCY
 Income statement accounts are likely
to be more predictable compared to  refers to the amount of evidence that the
statement of financial position auditors should accumulate.
accounts.  The following factors may be considered in
 Accounts that are not subject to evaluating the sufficiency of evidence:
management discretion are generally (1) The competence of evidence
considered more predictable than (2) The materiality of the item being
those accounts that involve examined
management discretion. (3) The risk involved in a particular account.
 Relationships in a stable environment APPROPRIATENESS
are more predictable that those in a
 the measure of the quality of audit
dynamic or unstable environment. evidence and its relevance to a particular
assertion and its reliability.
8.3 TEST OF DETAILS RELEVANCE
TEST OF DETAILS  refers to the timeliness of evidence and its
 involves examining the actual details ability to satisfy audit objective.
making up the various accounts.
RELIABILITY
TEST OF DETAILS OF BALANCES  relates to the objectivity of evidence and is
 involves direct testing of the ending balance influenced by its source and by its nature.
of an account.  When reliability of audit evidence is
TEST OF DETAILS OF TRANSACTIONS dependent on individual circumstance, the
following generalizations may help the auditor
 involves testing the transactions which give in assessing the reliability of audit evidence:
rise to the ending balance of an account. (1) Audit evidence obtained from
 The potential effectiveness of the auditor’s independent sources outside the entity
substantive test if affected by its: (for example, confirmation received from
NATURE: the nature of substantive test a third party) is more reliable than that
relates to the quality of evidence. generated internally.
TIMING: substantive tests may be performed (2) Audit evidence generated internally is
at interim dates or at year end. more reliable when the related
EXTENT: the extent of substantive test accounting and internal control systems
relates to the amount of evidence needed to are effective.
satisfy a particular objective.
 (3) Audit evidence obtained directly by the determinable from the documentation
auditor is more reliable than that of the work performed or audit
obtained indirectly. evidence obtained.
(4) Audit evidence in the form of documents (g) The audit methodology and tools
and written representations is more used.
reliable than oral representations.  Working papers are typically classified into:
PERMANENT FILE
8.5 AUDIT DOCUMENTATION/WORKING  contains information of continuing
PAPERS significance to the auditor in performing
WORKING PAPERS recurring audits.
 records kept by the auditor that documents o This file would most likely include:
the audit procedures applied, information  copies of the articles of
obtained and conclusions reached. incorporation and by-laws;
 major contracts;
FUNCTIONS OF THE WORKING PAPERS  engagement letters;
 Working papers are prepared  organizational charts;
primarily to:  analyses of long-term accounts such
a) Support the auditor’s opinion on as plant assets, long-term liabilities
financial statements. and stockholders’ accounts;
b) Support the auditor’s representations  internal control analyses.
as to compliance with PSA.
c) Assist the auditor in the planning, CURRENT FILE
performance, review and supervision  contains evidence gathered and conclusions
of the engagement. reached relevant to the audit of a
 Secondarily, working papers also particular year.
assist the auditor in: o This file would normally include:
a) planning future audits;  a copy of the financial statements;
b) providing information useful in  audit program;
rendering other services (MAS or tax  working trial balance;
consultancy);  lead schedules;
c) providing adequate defense in case  detailed schedules;
of litigation.  correspondence with other parties
FORM, CONTENT, AND EXTENT OF AUDIT such as lawyers, customers, banks,
DOCUMENTATION and management.
 In deciding on the form, content and TECHNIQUES THAT MAY BE USED BY THE
extent of audit documentation, the AUDITOR WHEN PREAPRING WORKING
auditor should consider what would PAPERS
enable an experienced auditor, (1) HEADING
having no previous connection with - each working paper must be properly
the audit, to understand: identified with such information as the
(a) The nature, timing, and extent of the name of the client, type of working paper, a
audit procedures performed to description of its content, and the date or
comply with PSAs and applicable period covered by the examination.
legal and regulatory requirements. (2) INDEXING
(b) The results of the audit procedures - refers to the use of lettering or numbering
and the audit evidence obtained. system.
(c) Significant matters arising during the (3) CROSS-INDEXING/CROSS
audit and the conclusions reached REFERENCING
thereon. - important to provide a trail useful to
 The form, content and extent of audit supervisors in reviewing the working
documentation depend on factors such papers.
as: (4) TICK MARKS
(a) The nature of the audit procedures to - working papers must include symbols that
be performed. describe the audit procedures performed.
(b) The identified risks of material
misstatement.
8.6 AUDITING ACCOUNTING ESTIMATES
(c) The extent of judgement required in
performing the work and evaluating ACCOUNTING ESTIMATE
the results.  an approximation of the amounts of an item
(d) The significance of the audit evidence in the absence of a precise means of
obtained. measurement.
(e) The nature and extent of exceptions  Accounting estimates are often made in
identified. conditions of uncertainty regarding the
(f) The need to document a conclusion or outcome of events that have occurred or are
the basis for a conclusion not readily
 likely to occur and involve the use of ii. Owners who are close family
judgement. members;
EXAMPLES OF ACCOUNTING ESTIMATE iii. Common key management.
 The auditor needs to be aware with the
(a) Allowance for credit losses
existence of related parties and transactions
(b) Warranty obligation
between such parties because:
(c) Inventory obsolescence
(a) Most financial reporting frameworks
(d) Depreciation and amortization
require disclosure in the financial
(e) Loss contingencies
statements of certain related party
(f) Percentage of completion income on
relationships and transactions.
construction contracts
(b) A related party transaction may be
(g) Fair value of securities that are not
motivated by other than ordinary
publicly traded
business considerations such as profit
 The auditor’s responsibility is to obtain
sharing or even fraud.
sufficient appropriate evidence as to whether:
(c) The nature of related party relationships
 Accounting estimate is properly and transactions may, in some
accounted for and disclosed; circumstances, give rise to higher risks of
 Accounting estimate is reasonable in the material misstatement of the financial
circumstances. statements than transactions with
 When evaluating reasonableness, the auditor unrelated parties.
concentrates on assumptions or factors that  The auditor initially obtains information about
are: related party relationship and transactions by
(a) Significant to the estimate making inquiry from management regarding:
(b) Sensitive to variation (a) The identity of the entity’s related
(c) Apparent deviations from historical parties, including changes from the prior
patterns period;
(d) Subjective and susceptible to bias and (b) The nature of the relationships between
misstatement the entity and theses related parties;
 The auditor can obtain satisfaction about the (c) Whether the entity entered into any
reasonableness of the accounting estimates transactions with these related parties
through: during the period and, if so, the type
1) Review and test the process used by and purpose of the transactions.
management to develop the estimate.
This will often involve: EXAMPLES OF CONDITIONS IN WHICH RELATED
(a) evaluating data and management PARTY TRANSCTIOONS ARE LIKELY WOULD
assumptions; INCLUDE:
(b) testing of calculations; (a) Transactions which have abnormal terms
(c) comparing prior periods estimates of trade, such as unusual prices, interest
with actual results; rates, guarantees and repayment terms;
(d) considering management approval (b) Transactions which lack an apparent
procedures. logical business reason for their
2) Make an independent estimate. occurrence;
3) Review subsequent events which (c) Transactions in which substance differs
confirm the estimate made. from form;
(d) Transactions not processed in an
unbiased manner;
8.7 RELATED PARTIES
(e) High volume or significant transactions
RELATED PARTY with certain customers or suppliers as
 refers to persons or entities that may have compared with others;
dealings with one another in which one (f) Unrecorded transactions such as the
party has the ability to exercise significant receipt or provision of management
influence or control over the other party in services at no charge.
making financial and operating decisions.
RELATE PARTY INCLUDES: 8.8 USING THE WORK OF AN EXPERT
(a) Any person or other entity that has EXPERT
control or significant influence, directly or  a person or firm possessing special skill,
indirectly through one or more; knowledge and experience in a particular
intermediaries, over the reporting entity; field other than accounting and auditing.
(b) Another entity over which the reporting
entity has control or significant influence, COMMON EXAMPLES OF AN EXPERT’S WORK
directly or indirectly through one or more (a) Valuation of precious stones, works of
intermediaries; arts, real estate, and other specialized
(c) Another entity that is under common assets.
control with the reporting entity through (b) Determination of amounts using
having: specialized techniques like actuarial
i. Common controlling ownership; computations.
 (c) Interpretation of technical requirements, 2) Obtain an understanding expert’s field.
regulations, or contracts such as legal 3) Evaluate the appropriateness of that
documents or legal title to property. expert’s work as audit evidence for the
TWO KINDS OF EXPERTS relevant assertion.
(1) Auditor’s Expert
- an individual or organization possessing 8.9 CONSIDERING THE WORK OF INTERNAL
expertise in a field other than accounting AUDITORS
or auditing, whose work in that field is used INTERNAL AUDIT
by the auditor to assist the auditor in
obtaining sufficient appropriate audit  a function of an entity that performs
evidence. assurance and consulting activities designed
- may be either: to evaluate and improve the effectiveness
of the entity’s governance, risk management
 Internal expert – who is a partner
and internal control processes.
or staff, including temporary staff
of the auditor’s firm or a network CONSIDERING THE WORK OF INTERNAL
firm. AUDITOR INVOLVES TWO IMPORTANT PHASES
 External expert 1) Making a preliminary assessment of
(2) Management’s Expert internal auditing.
- an individual or organization possessing 2) Evaluating and testing the work of
expertise in a field other than accounting internal auditing.
or auditing, whose work in that field is used
[Preliminary Assessment of the Internal Audit
by the entity to assist the entity in preparing
Function]
the financial statements.
 When determining the need to use the work of  For this purpose, the external auditor should
an expert, the auditor would consider: consider the internal auditor’s:
(a) Whether management has used a (1) Competence
management’s expert in preparing the - refers to the attainment and maintenance
financial statements. of knowledge and skills at the level
(b) The nature and significance of the required to enable assigned tasks to be
matter, including its complexity. performed diligently and in accordance
(c) The risks of material misstatement in the with applicable professional standards.
matter. (2) Objectivity
(d) The expected nature of procedures to - refers to the ability to perform those tasks
respond to identified risks, including the without allowing bias, conflict of interest or
auditor’s knowledge of and experience undue influence of others to override
with the work of experts in relation to professional judgements.
such matters; and the availability of (3) Due professional care
alternative sources of audit evidence. - achieved when the internal audit function
 After concluding that the help of the auditor’s has a systematic and disciplined approach
expert is needed to assist the auditor in to planning, performing, supervising,
obtaining sufficient appropriate evidence, the reviewing and documenting the internal
auditor must: audit activities.
1) Assess the competence and objectivity
of the expert.
The following factors must be considered
when assessing the competence of the
expert:
 Professional certification or licensing
by, or membership in, an
appropriate professional body.
 Experience and reputation in the
field in which the auditor is seeking
audit evidence.
2) Understand the field of the expertise of
auditor’s expert.
3) Establish the terms of the agreement
with the expert.
4) Evaluate the results of the work of the
expert.
 Auditor is required to perform certain steps to
evaluate the management’s expert work. In
this regard:
PSA 500 REQUIRES THE AUDITOR TO:
1) Evaluate the competence, capabilities,
and objectivity of that expert.
 CHAPTER 9 STATISTICAL SAMPLING HELPS THE AUDITOR
(audit sampling) TO:
(a) Design an efficient sample.
(b) Measure the sufficiency of evidence
9.1 INTRODUCTION obtained.
(c) Objectively evaluate the sample results.
AUDIT SAMPLING
 it is performed on the assumption that the 9.4 AUDIT SAMPLING PLANS
sample selected for testing is representative
of the population. ATTRIBUTE SAMPLING
 may be used when performing tests of  sampling plan used to estimate the
controls or substantive tests. frequency of occurrence of a certain
characteristic in a population (occurrence
rate).
9.2 RISKS IN SAMPLING
VARIABLE SAMPLING
SAMPLING RISK
 sampling plan used to estimate a numerical
 refers to the possibility that the auditor’s
measurement of a population such as peso
conclusion, based on the sample, may be
value.
different from the conclusion reached if the
entire population were subjected to the BASIC STEPS IN AUDIT SAMPLING
same audit procedures. 1) Define the objective (of the test).
ALPHA RISK 2) Determine the (audit) procedure (to be
performed).
 type of sampling risk that results in an 3) Determine the sample size.
auditor performing audit procedures more 4) Select the sample.
than what is necessary, thus affecting audit 5) Apply the procedures.
efficiency. 6) Evaluate the results.
BETA RISK
 type of sampling risk that results in an 9.5 SAMPLING FOR TESTS OF CONTROLS
auditor performing audit procedures less THREE FACTORS AFFECTING THE
than what is necessary, thereby affecting DETERMINATION OF SAMPLE SIZE FOR TESTS
the auditor’s ability to detect material OF CONTROLS
misstatements in the FS (effectiveness).
 Acceptable sampling risk.
NON-SAMPLING RISK - sampling risk is inherent in an audit
 refers to the risk that the auditor may draw sampling application.
incorrect conclusions about the account  Tolerable deviation rate.
balance or class of transactions because of - the maximum rate of deviations the auditor
human errors. is willing to accept, without modifying the
 something that cannot be eliminated. planned degree of reliance on the internal
 Auditors control sampling risk by: control.
 Increasing the sample size.  Expected deviation rate.
 Using an appropriate sample selection - the rate of deviation rate the auditor
method. expects to find in the population before
testing begins.
WAYS TO MINIMIZE NON-SAMPLING RISK
THREE PRINCIPAL METHODS OF SELECTING
(a) Proper planning.
SAMPLES
(b) Adequate direction, review, and
supervision of the audit team.  Random number selection
- the auditor selects the sample by matching
random numbers, generated by a random
9.3 GENERAL APPROACHES TO AUDIT number table or a computer software
SAMPLING generator.
STATISTICAL SAMPLING  Systematic selection
 a sampling approach that - involves determining a constant sampling
interval and then selects the sample based
 uses random based selection of sample;
on the size of the interval.
and
 Haphazard selection
 uses statistics (law of probability) to
- the sample is selected without following an
measure sampling risk and evaluate
organized or structured technique.
sample results.
- useful for non-statistical sampling.
NON-STATISTICAL SAMPLING
VOIDED DOCUMENTS
 a sampling approach that purely uses
 cancelled document in a sample.
auditor’s judgement in estimating risks,
determining sample size, and evaluating
sample results.
 SOME GENERAL GUIDELINES THAT MAY BE ANOMALOUS ERRORS
USED WHEN EVALUATING SAMPLE RESULTS  these are errors or misstatements that arise
FOR TESTS OF CONTROLS from an isolated event that has not recurred
(1) Determine the sample deviation rate other than specifically identifiable occasions
(2) Compare the sample deviation rate with and are therefore not representative of
the tolerable deviation rate and draw errors in the population.
an overall conclusion about the
population.
SEQUENTIAL SAMPLING
 can be used as an alternative form of
testing controls when an auditor expects
very few deviations within the population.
 sometimes called stop-or-go sampling.
DISCOVERY SAMPLING
 most appropriate when no deviations are
expected.
 normally used when the auditor suspects
that an irregularity might have been
committed.

9.6 SAMPLING FOR SUBSTANTIVE TESTS

SUBSTANTIVE ANALYTICAL PROCEDURES
 performed by comparing the financial
statements with the auditor’s expectations
and these procedures do not involve
sampling.
AUDIT SAMPLING
 used when performing tests of details to
estimate the amount of misstatements in the
financial statements.
FACTORS THAT MUST BE CONSIDERED WHEN
DETERMINING SAMPLE SIZE FOR SUBSTANTIVE
TESTS
(a) Acceptable sample risk
(b) Tolerable misstatement
(c) Expected misstatement
(d) Variation in the population
STRATIFIED SAMPLING
 Stratification – the process of dividing a
population into sub-populations, each of
which is group of sampling units which have
similar characteristics.
VALUE WEIGHTED SELECTION
 allows each item in the population to have
an opportunity to be selected.
 sometimes called probability proportional to
size sampling.
STEPS IN EVALUATING SAMPLE RESULTS
1) Project the misstatements to the
population
2) Compare the projected misstatements
with the tolerable misstatements and
draw an overall conclusion.
RATIO ESTIMATION
 uses the book value of the population size
and sample size to project misstatement.
DIFFERENCE ESTIMATION
 uses the number of customers to project the
misstatements to the population.
 C H A P T E R 10 5) Inquiring of the entity’s lawyers
(completing the audit and post audit concerning litigation, claims, and
responsibilities) assessments.
 Failure on the part of the client to make
appropriate amendments will cause the
auditor to issue either qualified or adverse
10.1 INTRODUCTION
opinion.
 After the fieldwork is almost complete, a
series of procedures are generally carried DATE OF THE AUDITOR’S REPORT
out to complete the audit. These procedures  the date when the auditor’s responsibility
include: for subsequent events ends.
1) Identifying subsequent events that may  The auditor should consider the adequacy of
affect the financial statements under disclosure and should date the report either:
audit.  As of the date of the subsequent event;
2) Identifying litigation claims.  Dual date the report.
3) Obtaining written management
representation.
4) Performing wrap-u p 10.3 LITIGATION AND CLAIMS
5) p procedures. SOME EFFECTIVE AUDIT PROCEDURES THAT
CAN BE PEFORMED TO LITIGATION AND
CLAIMS
10.2 SUBSEQUENT EVENTS
(a) Inquiry of management.
SUBSEQUENT EVENTS (b) Reading minutes of meeting and
 those events or transactions that occur correspondence with lawyers.
subsequent to the financial statement date (c) Reviewing legal expense account.
that may affect the financial statements and  The entity’s management is the primary
the auditor’s report. source of information about litigation and
 may be classified as either requiring claims.
adjustment or disclosure in the FS.  In certain circumstances, the auditor may deem
it necessary to meet with the entity’s external
REQUIRING ADJUSTMENT legal counsel to discuss the likely outcome of
 those that provide further evidence of the litigation or claims. This may be the case
conditions that existed at the financial where:
statement date such as:  The auditor determines that the matter is
 settlement of litigation in excess of the a significant risk.
recorded liability.  The matter is complex.
 loss on uncollectible receivables as a  There is disagreement between
result of customer’s deteriorating management and the entity’s external
financial condition. legal counsel.
REQUIRING DISCLOSURE
 those that are indicative of the conditions 10.4 WRITTEN MANAGEMENT
that arose after the financial statement REPRESENTATION
date. For example: WRITTEN REPRESENTATION
 issuance of stocks or bonds after the  an important source of audit evidence.
financial statement date.
 it complements the audit evidence but does
 loss on inventory due to fire that
not substitute for the performance of audit
occurred in the subsequent period.
procedures.
 loss on uncollectible receivable
because a major casualty suffered by FORM AND CONTENTS OF WRITTEN
that customer after the financial REPRESENTATIONS
statement date. (a) A representation that management has
PROCEDURES TO IDENTIFY SUBSEQUENT fulfilled its responsibility for the
EVENTS preparation and presentation of the
financial statements as set out in the
1) Inquiring of management as to the terms of the engagement.
occurrence of subsequent events; (b) A representation that the financial
2) Reviewing procedures management has statements are prepared and presented
established to ensure that subsequent in accordance with the applicable
events are identified; financial reporting framework.
3) Reading the minutes of board of (c) A representation that management has
directors and stockholders’ meetings provided the auditor with all relevant
after the financial statement date; information agreed in the terms of the
4) Reading the latest available subsequent engagement, and that all transactions
interim financial statements as well as have been recorded and reflected in the
management reports such as budgets financial statements.
and forecasts;
 (d) A representation that describes (1) Assess the importance of the omitted
management’s responsibilities as procedure.
described in the terms of the  In determining whether there were
engagement. other procedures applied that could
(e) Other representations required by other compensate for the omitted
PSAs. procedure, the auditor may:
BASIC ELEMENT OF A WRITTEN MANAGEMENT  Review the working papers.
REPRESENTATION  Discuss the circumstances with the
(a) The written representation should be engagement personnel.
addressed to the auditor.  Reevaluate the scope of the
(b) The auditor of the written representation audit.
shall be as near as practicable to, but (2) Undertake to apply the omitted
not after, the date of the auditor’s procedures or the corresponding
report. alternative procedures.
(c) The written representation should be
signed by the appropriate level of
management who has the primary
responsibility for the financial
statements.

10.5 WRAP-UP PROCEDURES

WRAP-UP PROCEDURES
 those procedures done at the end of the
audit that generally cannot be performed
before the other audit work is complete.
 These include:
1) Financial analytical procedures.
2) Evaluation of the entity’s ability to
continue as a going concern.
3) Evaluating audit findings and obtaining
client’s approval for the proposed
adjusting entries.
EXAMPLES OF CONDITIONS OR EVENTS THAT
MAY CAST SIGNIFICANT DOUBT ABOUT THE
GOING CONCERN ASSUMPTION
(a) Non-compliance with the terms of loan
agreements or other statutory
requirements.
(b) Pending major legal or regulatory
proceedings.
(c) Changes in legislation or government
policy expected to adversely affect the
entity.
(d) Net liability or net current asset liability.
(e) Substantial operating losses.
(f) Inability to pay creditors on due dates.
(g) Loss of major market, franchise, license
or principal supplier.
 The effect of an entity’s not being able to
make its normal repayments may be mitigated
by management’s plans to maintain adequate
cash flows by alternative means such as:
 Disposal of assets.
 Rescheduling of loan repayments.
 Obtaining additional capital.

10.6 POST AUDIT RESPONSIBILITIES: EVENTS

AFTER THE FINANCIAL STATEMENTS ARE
ISSUED
 CPA firm’s internal inspection program may
disclose the omission of auditing procedures
considered necessary at the time of the audit.
In this situation, the auditor should follow these
guidelines: