RECALL

Risk Assessment Procedure

- Audit procedure to obtain an understanding about the client, the
structure, framework,

Test of Control/Reliance Approach

- Control risk is low
- Validate that initial assessment whether it is true or not by
performing the test of control procedure
- Ex: Inquire, Inspect, Perform, Vavalidate nila kung yung internal
control policies sa manual nila ay effective or not from authorization
until the recording of the financial statements
- Mas malalim yung procedures ni auditor.
- Control risk is high
o The auditor will perform substantive testing, gathering of
sufficient auditing evidence
o Whether adverse,

Substantive Procedure
- Analytical procedure
o Risk assessment procedure
o Evaluation analysis
- Substantive test procedure

NON-CURRENT OPERATING ASSETS

- The auditor is more interested in whether the client has policies
regarding acquisition, disposal, or retirement. Kailangan mayroon
silang sistema don sa tatlo.
- Internal control the client must have a system of authorization which is
through capital budgeting
o Capital budgeting
 The amount involved is large amount of money, that may
affect the client a lot. So, therefore, dapat may process.
- There must be proper documentation when there is a transfer of fixed
assets. There must be a proper establishment of responsibility and
accountability. To ensure proper usage and maintenance of those
assets.
- Physical inspection will be done (magiinventory sila). The client must
submit an annual report of their fixed assets to the property custodian
of the entity.
- Insurance and warranties.

AUDIT PROCEDURES
- Disposals and retirements
 - Make an analysis or evaluation of the beginning balances by
conducting a historical analysis of the accounts (yung pagbago). You
may have to review the available working papers, as the case may be.
- Physical inspection to test
o The assertion of the management is that these fixed assets are
physically existing/verification.
o Show that the company has control (to test the management’s
control assertion), ask for proof of ownership, that is, addressing
their rights of the fixed assets (e.g., deed of sale, contracts,
taxes paid, etc.).
- Reconciliation
o Ask for a schedule from the management – make an analysis
(deprecation, amortization, changes in acquisition, disposal,
retirement).
- Analytical Procedure
- The auditor’s main focus is on the changes in acquisition.

OBJECTIVE OF AUDITOR
- “The objective of the ordinary audit of financial statements by the
independent auditor is the expression of an opinion on the fairness
with which they present, in all material respects, financial position,
results of operations, and its cash flows in conformity with generally
accepted accounting principles.”
- Based on the PFRS.
o Large Entities – Full
 Lower between NRV and Cost
o Medium – PFRS for SMEs or Full (?)
 The lower of Cost and Market Value
o Small – PFRS for Small (?)

PPE
- Tangible assets which have a life of more than one year kailangan
ginagamit for operation and not intended for sale (IAS 16).
- Recognition Principle
o There is an inflow of assets
- Initial Measurement
o At Cost (purchase price + + incidental expenses related to
acquisition like freight-in, installation fee, insurance if in transit
(but if not, expensed) + Provision for
dismantling/decommissioning cost at PV)
o You also have to include the method of acquiring them
(installment basis, account subject to discount, freight-in,
exchange, donation, grant, construction, share issuance) It
entails a different amount to be recorded.
 Donation – at fair value
  Cr. Donated Capital
 Exchange with commercial substance if expected inflows of
these assets differ from one another.
 Fair Value of asset given plus cash payment, if any
 Fair Value of asset received plus cash payment, if any
- Subsequent Measurement
o Dependent on the policy of the entity
 Cost Model
 Revaluation model

IAS 16
- The proceeds from sale from salvage materials
- Land and old building acquired so that to pave a way for the
construction of a new bldg. dapat binabawas sa cost ng new building
constructed so that only the net demolition cost will be added
[BALIKAN SA VM]
- If the building demolished is previously owned by the entity, the
proceeds from the sale of salvage materials whereas to be taken into
consideration in determining the loss of disposal that is to be taken sa
P/L
- 2024: in a situation where cost is incurred in the demolition of an old
building, materials may have been salvaged and sold, ideally said
proceeds from the sale of the said building are deducted from the
demolition cost – only the net demolition cost
- Others take the view of reporting the proceeds as other income, dapat
banggitin sa exam kung ano yung treatment.
- Pag deduction, mas maliit yung depreciation mo so the net effect is the
same.

Quiz 1 Coverage
- Until problem 12

REVALUATION SURPLUS
- Yung balance ng revaluation surplus mo sa SHE mo, over the remaining
useful life of the asset
- RS / Remaining UL = annual amortization
o Dr. RE
Dr. RS (?) [BALIKAN]
- Nagkaroon ng decrease in value, compare mo uli using proportionate
method
- Magkano yung balance ng RS mo that is after the amortization, if the
decrease in value, if the remaining balance mo ng RS 1m pero yung
decrease is 400k, enough yung RS mo to absorb the decrease in value,
no IL pa dun. Otherwise, may IL ka, taken sa P/L yan, kasi wala ka nang
enough RS, kulang na.
 - Increase in value, determine the limit, determine the unrecovered IL,
that will be reported as recovery from previous impairment. If it’s more
than recovery from previous impairment, panibagong RS. Pwede mo
ireport yung excess as panibagong RS. Unlike kapag cost model, kapag
narecover mo na yung unrecovered IL mo and may excess ka pa, hindi
mo pwede ireport yung excess mo.

INVESTMENT PROPERTY
- Capital Appreciation
o Look for investment opportunities like purchase of land or
building to hold it for several periods so that the management
sees that the price of the property increases, they will sell it.
- Hindi ginamit sa production or administrative purposes
o PPE kasi yan, IAS 16
- Hindi rin sale in the ordinary course of the business
o Inventory yun, IAS 2
- Intra company rentals
o The parent or the subsidiary may have this land or building that
is lease to either the parent or subsidiary as the case may be.
The classification will be dependent on whether the conso FS is
being repapred. If rented to a parent or subsidiary and for conso
FS, that is an owner-occupied property, that is from the
perspective of the group (?) The parent and subsidiary are
recorded as one economic unit. However, if for separate FS is
presented by both P & S, it will be counted as inv prop by the
lessor if the definition of inv prop is met.
- Building leased to an associate
o Considered as investment property because if the other company
is only an associate, youre not going to prepare a conso fs, the
interest is suppsed to be there is no control exerted by the
investor over the investee if the investment is counted as
investment as associate. If the investor owns land or building,
the investor, they’ll show it as inv prop.
- Ancillary services
o The appropriateness of classification is determined by the
significance of the services provided. It is inv priop if those
services are irrelatively significance of the component arranged
as the whole. Building owner supplies severity and maintenance
services to the lesse, that is inv propo. If the owner is only
supplying as an owner, it is supplying the maintenance and
services that is done by the occupant of the inv prop. If erlatively
significance, inv prop. Otherwise, it is PPE.
- Building leased to a 3rd party under a finance lease
 o Not inv prop. Because that will be recognized under IAS 16, the
payment received is considered as payment for the lease asset,
POV of lessor. It has to be operating lease. The rental payments
received by the lessor from the lessee, ownership will be
transferred to the lessee. Dapat operating lease not finance
lease./
- Portion that is held for rentals or cap appreciation and ppe for the
portion hgeld for use for operations
o If the use of the prop is mixed, that portion held ofr rentals is inv
prop and held ofr use ifor operations is ppe.
- Property cannot be apportioned,
o There is difficulty in pprotionng because the poriotn used in
operations is insignificant, the entirety is inv prop.
- Criteria when there is difficultuy in identifying the criteria.
o Difficulty to ascertain whether iv propr or ppe , there must be a
criteria.
INITIAL RECOGNITION
- If that is recordable as inv prop, measured initially at cost.
- Same rules as inv property. Acquiring PPE may be through different
methods, we are going to apply the same rule. The cost to be limited
to the cash paid, you have to consider the manner of acquisition.

MEASUREMENT AFTER INITIAL RECOGNITION

- FV Model or Cost Model
o FV Model
 If there is a change, you will recognize a gain or loss.
 Not be subjected to depreciation
- Shall apply that model to all of its investment property.

USE OF THE FV MODEL

- Gain/Loss in the Change of Fair Value
- Inv prop is not subjected to depreciation
- Inclusive of the furnishings of the inv property.
- Any accrued rental, it must be recognized separately as receivable.
- Even if during period of construction, basta it meets the criteria for inv
prop, it will already be considered as inv prop.
- If for instance, the FV of the property that is in the process of
construction, it can be reported at cost until the FV of the asset is
reliably determinable or the asset is completed already, whichever is
earlier.
- If there is a inv prop where the FV cannot be determined, the company
can apply the cost model, but the entity must continue to measure the
remaining of the inv prop at FV. Only the period wherein the FV cannot
be determined reliably.

USE OF THE COST MODEL

 - It has to be shown at cost less acc dep less acc imp loss.

TRANSFERS TO AND FROM OTHER CLASSIFICATIONS

- Only when there is a change in use.
- Dependent on the model the management is using.
- If there is transfer of use and the management is using the FV model,
from inv prop to PPE or Inventories, the FV is the deemed cost in its
new classification. FV of the old classification must be updated.

TRANSFER OF USE
- FV MODEL
o From IP to PPE
 Update:
 Inv Prop
Gain from Change in FV
 Transfer:
 PPE (FV)
Inv Prop
o From PPE to IP
 Inv Prop (FV)
Acc Dep
PPE
Reval Surplus
 RS if Inv Prop (FV) > PPE
 If there is RS prior to the transfer, exhaust first the
balance of the RS, then the difference is accounted
as I/L or Revaluation Loss.
o From inventory to Inv Prop
 Inv Prop (FV)
Inventory (LCNV)
Gain from Reclassification
- COST MODEL
o From Inv Prop to PPE
 PPE (Cost)
Acc Dep – IP
IP (Cost)
Acc Dep – PPE
 There is only a change in account title, walang
nagbago sa amounts

FINANCIAL STATEMENT PRESENTATION & DERECOGNITION

- Inv Prop is a single-line item in the SFP
- It has to be at FV do not deduct CTS. The CTS will only be deducted
sale of inv prop took place only, but for measurement purposes, it has
to be at FV and CTS is not deducted.
INTANGIBLE ASSETS

INITIAL MEASUREMENT
- Should be initially recognized at Cost. Consider as well the method it
was acquired, same sa IAS 16.
- Internally generated IA
o Research & Development, expenditures incurred in the
development phase, capitalizable as intangible asset.

INTERNALLY GENERATED INTANGIBLE ASSET

- There has to be establishment of feasibility
- Kapag di identifiable, consider it to be incurred during the R&D phase,
R&D cost siya

MEASUREMENT AFTER INITIAL RECOGNITION

- Choose whether to use cost model or revaluation model

AMORTIZATION OF INTANGIBLE ASSETS

- Shorter between the legal life or the useful life if those IA with definite
useful life. Otherwise, of the life of the IA is indefinite, it will not be
subjected to amortization, it will be subjected to impairment annually.

AMORTIZATION METHODS TO AMORTIZE IA

- Should be allocated on a systematic basis

LIABILITIES
- Constructive obligation  provision to restore
- When you purchase goods on account, you have a contractual
obligation to pay
o Purchases
A/P
- Audit Objectives
o To obtain an understanding of the client’s internal control system
related sa kanyang liabilities to determine the actions to be done
subsequently
o Low control risk = test of control more in-depth study of the
client internal control system
 To validate yung kanyang initial assessment kung
taolagang mababa yung control risk. If you’re going to
perform trest of control, pwedeng the other way around
pala
o Nature of subsequent audit procedures that the auditor will be
performing. Economic constraints, time and money. Procedures
na medyo less constly. In terms of timing if control risk is low,
 pwede tayo magkaron ng interim testing and not that extensive
anymore since nakita mo maayos yung internal control system
nila. Not absolute assurance ang nabibigay mo, reasonable
assurance lang.
o High control risk = substantive na agad, skip test of control since
maayos yung internal control system.
 Nature – since mataas yung CR, you are going to
procedures na of quality para mas reliable yung
information na pwede mo obtain from those procedures.
 Timing – towards year-end
 Extent - Extensive dapat so more audit procedures, directly
related, high ang audit risk madami din dapat yung audit
procedures na gagawin mo.
- Internal Control system
o IC of the client on liabilities
o May segregation of duties ba so that before the client is paid,
there has to be involvement of the documents needed for the
purchasing of goods. See to it that all those information is
properly included for an effective control of liabilities.
o There must be someone who is authorized, the limit of his
authorization in making decisions
o Systems for non-compliance, this has to be addressed
immediately, preparing reconciliations.
o Completeness – all liabilities during the reporting period should
be included in the FS. More on completeness and valuation
because understatement of liabilities it may overstate the
entity’s assets or make its SFP better.
- Substantive test procedures
o The auditor should still perform ST regardless of the assessment
of the CR because it is the only way the auditor can gather
sufficient information.
o Examination of records magpapadala ka ng mga confirmation
records sa kanilang customers
o Analytical procedures can be risk assessment and, at the same
time, ST procedures. Towards the end, na ST, that is, to test
whether the account balance is reasonable or not. Comparing the
resource of the analysis vs the balance of the account
o Obtaining management representation cannot stand alone as
evidence because there is potential bias because it is they who
prepared the FS that is subjected to audit. Thus, there has to be
other pieces of evidence to support management
representations.
o Reconciliation – obtain an A/P schedule and vouch these balances
through vouchers, invoices, etc.
 - Before drawing an opinion, the auditor must perform completing the
audit procedures.
o Working papers mo andiyan dapat, procedures, and pieces of
evidence andiyan dapat. Bawat account may working paper.

BONDS PAYABLE
- One company need capitalization instead of borrowing money from the
bank. The public will purchase the bonds as a form of investment.
There is a creditor and debtor relationship.
- Bond Issue Costs
o Printing of the bonds, legal fees, engraving of bonds certificates,
taxes, commissions, and similar charges.
o Expenditures incurred related to the issuance of the bonds.
o Decreases the carrying value of the bonds
- Presented at year-end at Amortized Cost
o Face Value +/- Unamortized Premium/Discount on B/P

ISSUANCE OF BONDS
- Bonds issued during interest payments date (Bonds issuance is
coinciding with the interest payment date)
- Bonds issued between interest payment date
o Issued on 3/31, interest payment date every 12/31

ISSUANCE OF BONDS (WITH BOND ISSUE COSTS)

- Issued at a discount (payment of interest)
o Dr. Discount on B/P Cr. Cash

PREMIUM AND DISCOUNT AMORTIZATION

- Discount
o Increases Int Exp Dr. Interest Expense Cr. Discount on B/P

AMORTIZED COST
- Bonds Payable
Premium on B/P (unamortized)
Amortized Cost/Carrying Value
- Bonds Payable (CV, Beg of the year)
Less: Amortization of Premium
Amortized Cost/Carrying Value
- [BALIKAN PPT NI SIR]

SHE
- Components of SHE
o Contributed/Paid-in Capital
o Accumulated Profits (Retained Earnings)
  Cumulative balance of the entity’s net income
 RE, Beg
Prior Period Errors, net of tax
Cumulative Effect of Change in Accounting Policy, net of
tax
RE, End
o Accumulated Other Comprehensive Income
 Other Contra-Shareholders’ Equity Accounts:
 Share Capital Subscription Receivable
 Treasury Shares
o Part of the authorized shares
 UGL-OCI, Revaluation Surplus, Actuarial G/L
- Legal Capital
o The amount required by law to protect the interest of the
creditors of the corporation.
o Share Capital w/ Par Value
 SC
 Subscribed SC
 Hindi binabawas diyan ang Subscription Receivable
o Share Capital w/o
 SC
 Subscribed SC
 SP – Excess over Stated Value
- Obtain an understanding of the internal control policies relating to SHE.
o Transactions relating to issuance, repurchase (TS), re-issuance
(TS), profit/loss, gains and losses taken to OCI, prior period error.
- Auditing Procedures
o These transactions must be heavily documented.
o Maintenance of segregation of duties.
- Auditor will now make an assessment whether the control risk is high
or low
o Low – perform test of control procedures (reliance approach)
 Acquire, observe, inspect, reperformance
 Reassessment on the first assessment
o High – Substantive Test Procedure
 Gathering sufficient and appropriate basis in determining
the approapriate approach.
 No Test of Control
 Substantive Test Procedures cannot be dispensed.
- Substantive Analytical Procedure
o Whether an accounting balance is reasonable or not.
o Ex: Ratio Analysis
- Disclosure
o Relating to the issuance, Par Value, etc.