AUDITING REVIEWER LECTURES

LECTURE 1 – AUDIT OVERVIEW

RA9298 - Accountancy of 2004

Practice of Accountancy in the Philippines
1. Private Practice - engagement in Private Companies under the "EMPLOYER - EMPLOYEE" relationship.
2. Public Practice - engagement with the PUBLIC (Public means either individual or business) on a CLIENT
relationship.
3. Government - engagement with GOVERNMENT AGENCIES (National or Local) under also the "EMPLOYER -
EMPLOYEE" relationship.
4. Academe / Education - engagement with schools accredited by Commission on Higher Education (CHED)
to
offer BSA program.

LECTURE 2 – AUDIT OVERVIEW

Takeway on Auditing Concepts
Public Practice:
1. The activity done with the Client is known as ENGAGEMENT.
2. Engagement in Public Practice can be ASSURANCE or NON-ASSURANCE.
3. In assurance engagement, INDEPENDENCE IS MUST INVESTMENT. We weigh more on independence in

appearance or what the public perceives than independence in mind. The assurance engagement observes
a three party relationship:

a. Client / Management / Responsible Party - this party relies on the representation made by the
practitioner to entice
more investors / creditors for the short and strategic goals of the company.
b. Interested Parties / Stakeholders - this party relies on the representation made by the practitioner to
help
them decide on what to engage with the responsible party.
c. Practitioner - the independent party sought by the responsible party and relied upon by the interested
parties.

A practitioner cannot provide an ABSOLUTE ASSURANCE in an assurance engagement as practitioners are

prone to HUMAN ERRORS. Nevertheless, the practitioner can offer the following assurance engagement:

a. AUDIT - provides REASONABLE ASSURANCE / HIGH LEVEL OF ASSURANCE

b. REVIEW - provides LIMITED / MODERATE LEVEL OF ASSURANCE

4. In a non-assurance engagement, the practitioner does not need to be independent. The practitioner just
needs to fulfill whatever agreement it/he/she has with the responsibility party, hence a 2 PARTY
RELATIONSHIP in this kind of engagement. The practitioner does not provide any LEVEL OF ASSURANCE in
a NON-ASSURANCE ENGAGEMENT.
Examples are:
a. Compilation or providing accounting services to the
b. Agreed Upon Procedures
c. Consultancy

LECTURE 3 – AUDIT OVERVIEW

Elements of Assurance Engagement
1. 3 Party Relationship
a. Client / Responsible Party / Management
b. Practitioner / Independent Party
c. Interested Party / Stakeholder

2. Subject Matter - the object of agreement between the practitioner and the client
B - Behavior / Compliance with Laws and Regulations
S - System / Policy such as internal control policy
P - Physical Assets - inventories, property, plant and equipment
F - Financial Information
N - Non-Financial Information

For Financial Information, the engagement will most likely revolve on the evaluation of
the financial statements of the company:
a. Statement of Financial Position / Balance Sheet
b. Statement of Comprehensive Income / Income Statement
c. Statement of Cashflows
d. Statement of Changes in Equity
e. Notes to Financial Statements

3. Assertions - claims / representations made by the client / responsibility / management

Assertions can be broken down into main categories - CREVP
C - Completeness
R - Rights and Obligations
E - Existence
V - Valuation and Allocation
P - Presentation and Disclosure

4. Established Criteria / Criteria - framework or standards to reconcile the assertions

of the management
a. PAS - Philippine Accounting Standards
b. PFRS - Philippine Financial Reporting Standards

5. Evidences - outputs produced by reconciling the criteria and assertions

Sufficiency - Quantity of evidences
Appropriateness - Quality of evidences
The evidence should be SUFFICIENT APPROPRIATE EVIDENCE.

6. Opinion - the desired and intended output in an assurance engagement

As a rule NO EVIDENCE NO OPINION
Lecture 2 - Preliminary Engagement Activities Part 1

Characteristics of an Established Criteria

C - Completeness
R - Reliability
R - Relevance
U - Understandibility
N - Neutrality

Types of Audit
1. External / Financial Statement Audit
*Done by the external auditor serving as the INDEPENDENT PARTY.
*Output: Fairness of the Financial Statements of the Client

2. Operational / Internal Audit

*Done by the internal auditor serving as the INDEPENDENT EMPLOYEE / FUNCTION
with the organization.
*Examine the compliance of the company / departments on the
internal control policies as well relevant laws and regulations.
*Ouput: Effectiveness and Efficiency of the Established Policies

3. Compliance Audit / Government Audit / State Audit

*Done by the state auditor serving as the INDEPENDENT COMMISSION or
executive department wtihin the GOVERNMENT.
*COMMISSION ON AUDIT (COA)
*Ouput: Effectiveness and Efficiency of the Established Policies, Compliance and Fairness of the
Reports

Preliminary Engagement Activities / NEGOTIATION

OUTPUT: ENGAGEMENT LETTER

*The 1st phase in an assurance engagement dealing with the

NEGOTIATION between the practitioner and the client.
*For prospect / future clients, make sure to investigate comprehensively
the identity of the client(s) so as not to associate with management / client
that LACKS INTEGRITY.
*Before communicating with the predecessor auditor, the successor or
the incoming auditor must ask PERMISSION from the potential client to
go and discuss matters concerning the DIR:

a. Disagreements with the client.

b. Integrity
c. Reasons for change in audit.
*After evaluating the client, as auditor or practitioner, you must evaluate
yourself that you are also compliant with the following:
a. Code of Ethics
b. Elements of Quality Control under Philippine Standards on Quality
Control #1 (PSQC No.1)

1. Leadership Responsibilities
2. Ethical Requirements
3. Acceptance and Continuance of Clients
4. Human Resources
5. Engagement Performance
6. Monitoring

Lecture 2 - Preliminary Engagement Activities Part 2

Takeaway in Preliminary Engagement Activities

Engagement Letter is the output intended in the Preliminary Engagement Activities.

At the minimum, engagement letter contains the following:

a. Objective of the Audit:- To express an opinion regarding the fairness of the financial statements,
that is the financial statements are free from material misstatements (errors and fraud).

b. Scope of the Audit: - Financial Statements of the Client (Statement of Financial Position,
Statement of Comprehensive Income, Statement of Cash Flows, Statement of Changes
in Equity,
Notes to Financial Statements) for a specific period of time.

c. Responsibility of the Auditors: - In summary, the conduct of the audit should be in accordance
in the Philippine Standards on Auditing (PSA)

d. Responsibility of the Client:

1. Preparation of the Financial Statements in accordance with the Philippine Accounting Standards,
and Philippine Financial Reporting Standards.
2. Effective Internal Policy is established.
3. Access to all documents, information and resource persons should be made available.

*Billings and Fees are normally part of the engagement letter.

*Lead Engagement Partner represents the ENTITY / PRACTITIONER.
*Chief Executive Officer / Chief Finance Officer represents the CLIENT.
PRELIMINARY ENGAGEMENT ACTIVITIES
MULTIPLE CHOICE PART 1

1.) Before accepting an engagement to audit a new client, an auditor is required to

A. Obtain a copy of the client’s financial statements.

B. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit
plant.
C. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client.
D. Discuss the management representation letter with the client’s audit committee.

2.) A predecessor withdraw from the engagement after discovering that a client’s financial statements are
materially misstated that it would not revise. If asked by the successor auditor about the termination of
the engagement, the predecessor should

A. Suggest that the successor auditor should obtain the client’s consent to discuss the reasons.
B. Indicate that there was a misunderstanding.
C. State that the audit revealed material misstatement that the client would not revise.
D. Suggest that the successor auditor ask the client.

3.) Which of the following is not correct regarding the communications between successor/incoming and
predecessor/previous auditors?

A. The burden of initiating the communication rests with the predecessor auditor.
B. The burden of initiating the communication rests with the successor auditor.
C. The predecessor auditor may choose to provide a limited response to a successor auditor.
D. The predecessor auditor must receive his/her former client’s permission to prior to disclosing client
information to the auditor.

4.) The auditor may accept or continue an audit engagement only when the basis upon which it is to be
performed has been agreed upon through

I. Establishing whether the preconditions for an audit are present.

II. 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.

5.) An audit is conducted on the premise that management, and where appropriate, those charged with
governance, have acknowledged and understand that they have responsibilities that are fundamental
to the conduct of an audit in accordance with PSAs, which of the following is not of those
responsibilities?

A. The preparation of financial statements in accordance with relevant pronouncements issued by the
AASC.
B. The establishment and maintenance of an adequate internal control system that is necessary to enable
 the preparation of financial statements.
C. To provide the auditor with access to all information that is relevant to the
preparation of financial statements.
D. To provide the auditor with unrestricted access to persons within entity from
which the auditor determines it necessary.

6.) The auditor shall agree the terms of the audit engagement with management or those charged with
governance, as appropriate. The agreed terms shall be recorded in a/an

A. Engagement letter
B. Letter of audit inquiry.
C. Management representation letter
D. Confirmation letter

7.) The following matters are generally included in an auditor’s engagement letter, except

A. The factors to be considered in determining the overall materiality.

B. The fact that because of the test nature and other inherent limitations of an audit, together with the
inherent limitations of internal control, there is an unavoidable risk that even some material
misstatements may remain undiscovered.
C. The scope of the audit.
D. Management’s responsibility for the financial statements.

8.) The following are usually included in an auditor’s engagement letter, except

A. List of audit procedures to be used in inventory observation.

B. The financial statements are the responsibility of the company’s management.
C. A reference to PFRS.
D. A reference to PSAs.

9.) Which of the following statements would least likely appear in an auditor’s engagement letter?

A. Our audit will be made with the objective of our expressing an opinion on the financial statements.
B. We remind you that the responsibility for the preparation of financial statements including adequate
disclosure is that of the management of the entity.
C. After performing our preliminary analytical procedures, we will discuss with you the other
procedures we consider necessary to complete the engagement.
D. Our fees, which will be billed as work progresses, are based on the time required by the individuals
assigned to the engagement plus out of pocket expenses.

10.) An auditor is required to establish an understanding with a client regarding the services to be
performed for each engagement. This understanding generally includes

A. The auditor’s responsibilities to apply the concept of materiality in planning and performing the audit.
B. Management’s responsibility for providing the auditor with an assessment of the risk of material
misstatements due to fraud.
 C. The auditor’s responsibility for ensuring that those charged with governance are aware of any
significant deficiencies in internal control that may come to the auditor’s attention.
D. Management’s responsibility for errors and the illegal activities of employees that may cause
material misstatement.

11.) An auditor’s engagement letter most likely will include

A. A request for permission to contact the client’s lawyer for assistance in identifying litigation, claims, and
assessments.
B. A reminder that management is responsible for illegal acts committed by employees.
C. The auditor’s preliminary assessment of the risk factors relating to misstatements arising from
fraudulent financial reporting.
D. Management’s acknowledgement of its responsibility for such internal control as it determines is
necessary to enable the preparation of financial statements.

12.) On recurring audits, the auditor may decide not to send a new engagement letter each period.
Which of the following factors may not make it appropriate to send a new engagement letter?

A. Any revised or special terms of the audit engagement.

B. A recent change of senior management.
C. A change in legal or regulatory requirements.
D. A significant change change in nature or size of the entity’s business.

13.) The auditor shall not agree to a request from the entity to change the terms of the audit
engagement or to change the audit engagement to an engagement that conveys a lower level of
assurance when there is no reasonable justification for doing so. Which of the following may be
considered reasonable justifications for the change in the audit engagement?

I. A change in circumstances affecting the need for the service.

II. A misunderstanding as to the nature of an audit as originally requested.

III. A restriction on the scope of the engagement, whether imposed by management or caused by other
circumstances.

14.) The auditor of a parent entity is also the auditor of its component. Which of the following
factors may influence the auditor’s decision whether to send a separate engagement letter to the
entity’s component?

A. Whether a separate auditor’s report is to be issued on the component.

B. The component’s management does not accept its responsibilities that are fundamental to the conduct
of an audit.
C. The financial reporting framework used by the component is unacceptable.
D. The preconditions for an audit of the component’s financial statements are not present.

PRELIMINARY ENGAGEMENT ACTIVITIES

MULTIPLE CHOICE PART 2

Give at least three element of System of Quality Control (PSQC#1)

Give at least one ethical requirement consideration

1.) Preliminary arrangements agreed to by the auditor and the audit client should be reduced to writing by
the auditor. The best place to set forth these arrangements is in
A. A memorandum to be placed in the permanent section of the auditing working papers.
B. An audit engagement letter.
C. A client representation letter.
D. A confirmation letter attached to the constructive services letter.

2.) Engagement letters are widely used in practice for professional engagements for all types. The primary
purpose of the engagement letter is to
A. Remind management that the primary responsibility for the financial statements rests with
management.
B. Provide a written record of the agreement with the client as to the services to be provided.
C. Satisfy the requirements of the CPA’s liability for insurance policy.
D. Provide a starting point for the auditor’s preparation of the preliminary audit program.

3.) It is the interest of both client and auditor that the auditor sends an audit engagement letter, preferably
before

A. The performance of substantive testing.

B. The commencement of the engagement.
C. The completion of audit.
D. Before the issuance of audit report.

4.) Assuming a recurring audit, in which of the following situations would the auditor be unlikely to send a
new engagement letter to the client?

A. A recent change in partner and/or staff involved in the audit engagement.

B. A change in the terms of the engagement.
C. A recent change of client management.
D. A significant change in the nature or size of the client’s business.

5.) On recurring audits, the auditor may decide not to send a new engagement letter each year. However,
he might decide to send a new letter when:

A. There is a change in the auditors who will assist in the conduct of the audit.
B. There is a legal requirement.
C. There is a change in the client’s accounting policy for inventories.
D. There is a change in the estimated life of the client’s property and equipment.

6.) On recurring audits, the auditor may decide not to send a new engagement letter each year. However,
he might decide to send a new letter when:

A. Any indication that the entity misunderstands the objective and scope of the audit.
B. A change in the financial reporting framework adopted in the preparation of the financial statements or
other reporting requirements.
C. A significant change in ownership.
D. All of the above.

7.) An audit engagement letter least likely includes:

A. A reference to the inherent limitations of an audit that some material misstatements may remain
undiscovered.
B. Identification of specific audit procedures that the auditor needs to undertake.
C. Description of any letters or reports that the auditor expects to submit to the client.
D. Arrangements concerning the involvement of internal auditors and other client’s staff.

8.) The form and content of audit engagement letters may vary for each client but they would generally
include reference to the following, except

A. The objective of the audit of financial statements.

B. Auditor’s responsibility for the financial statements.
C. The form of any reports or other communication of results of the engagement.
D. Unrestricted access to whatever records documentation and other information requested.

10. ) When a change in the type of engagement from higher to lower level of assurance is reasonably
justified, the report based on the revised engagement

A. Should not contain a separate paragraph that refers to the original engagement.
B. Should not refer to any procedures that may have been performed in the original engagement.
C. Omits reference to the original engagement.
D. All of the above.

11. ) Which of the following actions may be appropriate if the auditor is unable to agree to a change of the
engagement and is not permitted to continue the original engagement

I. Issue a qualified opinion due to a significant scope limitation.

II. Auditor should withdraw from the engagement.
III. Consider whether there is any obligation to report to the board of directors or shareholders
the circumstances necessitating withdrawal) Which of the following will an auditor least likely
discuss with the former auditors of a potential client prior to acceptance of an audit
engagement?

A. I only
B. I and II
C. II and III
D. I, II and III

12. ) Which of the following will an auditor least likely discuss with the former auditors of a potential client
prior to acceptance of an audit engagement?

A. Integrity of the management

B. Fees charged for the services
 C. Disagreements between the predecessor auditor and the management regarding accounting principles
D. Reasons for changing audit firms

QUIZZER #1 - Preliminary

1. Hill CPA, has been retained to audit the financial statements of Monday Co. Monday’s predecessor
auditor was Post, CPA, who has been notified by Monday that Post’s Services have been terminated.
Under these circumstances, which party should initiate the communications between Hill and Post?

a. Hill, the successor auditor

b. Post, the predecessor auditor
c. Monday’s controller or CFO
d. The chairman of Monday’s board of directors

2. An auditor’s engagement letter most likely would include:

a. Management’s acknowledgement of its responsibility for maintaining effective internal

control.
b. The auditor’s preliminary assessment of the risk factors relating to misstatements arising from
fraudulent financial reporting.
c. A reminder that management is responsible for illegal acts committed by employees.
d. A request for permission to contact the client’s lawyer for assistance in identifying litigation,
claims and assessments.

3. Which of the following factors most likely would cause an auditor not to accept a new audit
engagement?

a. An inadequate understanding of the entity’s internal control structure.

b. The close proximity to the end of the entity’s fiscal year.
c. Concluding that the entity’s management probably lacks integrity.
d. An inability to perform preliminary analytical procedures before assessing control risk.

4. Which of the following matters does an auditor usually include in the engagement letter?

a. Arrangements regarding fees and billing.

b. Analytical procedures that the auditor plans to perform.
c. Indications of negative cash flows from operating activities.
d. Identification of working capital deficiencies.

5. Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
a. The prospective client has already completed its physical inventory count.
b. The CPA lacks an understanding of the prospective client’s operations and industry.
c. The CPA is unable to review the predecessor auditor’s documentation.
d. The prospective client is unwilling to make all financial records available to the CPA.
6. Which of the following would an auditor least likely perform as part of the auditor’s preliminary
engagement activities?
a. Perform procedures regarding the continuance of the client relationship and the specific audit
engagement.
b. Evaluate compliance with ethical requirements including independence.
 c. Establish an understanding of the terms of the engagement.
d. Obtain understanding of the legal and regulatory framework applicable to the entity.
7. Which of the following is not one of the reasons why auditor should perform preliminary engagement
activities?
a. To ensure that the auditor maintains the necessary independences and ability to perform the
engagement.
b. To help ensure that there are no issues with management integrity that may affect the auditor’s
willingness to continue the engagement.
c. To ensure that there is no misunderstanding which the client as to the terms of the
engagement.
d. To ensure that sufficient appropriate evidence will be obtained to support the auditor’s
opinion on the financial statements.
8. Before accepting an engagement to audit a new client, a CPA is required to obtain
a. A preliminary understanding of the prospective client’s industry and business.
b. The prospective client’s signature to the engagement letter.
c. An understanding of the prospective client’s control environment.
d. A representation letter from the prospective client.
9. In audit, communication between the predecessor and incoming auditor should be
a. Authorized in an engagement letter.
b. Acknowledged in a representation letter.
c. Either written or oral
d. Written and included in the working papers.
10. Arnel CPA, is succeeding Von, CPA, on the audit engagement of Almar Corporation. Arnel plans to
consult Von and to review Von’s prior year working papers. Arnel may do so if
a. Von and Almar consent
b. Almar consents.
c. Von consents.
d. D. Von and Arnel consent.
11. Upon discovering material misstatements in a client’s financial statements that the client would not
revise, the auditor withdrew from the engagement. If asked by the incoming auditor about the
termination of the engagement, the predecessor should

a. State that he found material misstatements that the client would not revise.
b. Suggest that the incoming auditor ask the client.
c. Suggest that the incoming auditor obtain the client’s permission to discuss the reasons
d. Indicate that a misunderstanding occurred.

12. Engagement letter that documents and confirms the auditor’s acceptance of the engagement would
normally be sent to the client.
a. Before the audit report is issued.
b. After the audit report is issued.
c. At the end of fieldwork.
d. Before the commencement of the engagement.
13. An engagement letter would not normally include
a. Billing arrangement
b. Details of the procedure that will be performed
c. Arrangement concerning client’s assistance
d. Expectation of management’s representation letter
Lecture 3 - Audit Planning Part 1

Audit Compliance
Robinsons' National
Jollibee Starbucks
Supermarket Bookstore
Corporation Corporation Corpoation Corporation
Annual Gross Sales 7,000,000.00 5,000,000.00 10,000,000.00 8,000,000.00
Annual Gross Receipts 2,800,000.00 2,000,000.00 4,000,000.00 3,200,000.00
Net Income 1,050,000.00 750,000.00 1,500,000.00 1,200,000.00
Total Assets 2,861,461.00 4,773,067.00 6,049,658.00 2,624,546.00
Tax Nature of the
A A B B
Business
Is Audit Required
NO NO YES YES
BIR?
Is Audit Required
YES YES YES YES
SEC?
Decision Audit Audit Audit Audit

A - Sale of Service / Lease - Gross Receipt (Cash Only)

B - Sale of Merchandise or Property - Gross Sales (Cash + Receivable)

1. Audit is required by the BIR when the annual gross sales or receipts exceed
P3,000,000.
2. Audit is required by the SEC when the total assets or liabilities are P600,000 or
more.
Audit Planning - Expected Output: Audit Program
1. In audit planning, this is the formal stage in audit where
the intended output
is the AUDIT PROGRAM.
2. Evaluation of the business and its environment which
involves the evaluation
of the business risk and the audit risk through: RISK
ASSESSMENT PROCEDURE
a. INQUIRY
b. INSPECTION
c. OBSERVATION
d. ANALYTICAL PROCEDURE
3. Output of Risk Assessment Procedures: AUDIT RISK and
MATERIALITY
a. Audit Risk - risk of expressing unqualified opinion where in
fact there exists
risk of material misstatements. Sources of Misstatements:
a.1 Fraud - Intentional
a.2 Error - Mistake
b. Materiality - tolerable level of misstatements
c. There is an inverse relationship between audit risk and
materiality.

Lecture 3 - Audit Planning Part 2

Audit Planning
Continuation
Audit
Audit Risk Materiality Materiality
Risk
Level HIGH LOW LOW HIGH

Nature MORE EXTENSIVE LESS EXTENSIVE

Extent LARGER SAMPLE SIZE SMALL SAMPLE SIZE

Timing YEAR-END INTERIM

*Sample serves as the REPRESENTATIVE OF THE

POPULATION. The challenge
is to get an appropriate sample size out of the population.
Sample is very important
in gathering sufficient appropriate evidence in audit to lessen
the time and cost of
conducting the audit.

Audit Risk has 3 components:

1. Inherent Risk - the risk that the assets will be susceptible
to FRAUD and ERROR
in the absence of any internal control. Susceptibility can be
caused by ease of
access and complexity of the asset invovled.

2. Control Risk - the risk that even if there is an internal

control (refers to policies that
the company use to protect or SAFEGUARD its assets
against fraud and error)
misstatements are still able to be observed on the assets
and business as a whole.

3. Detection Risk - the risk that the auditor will not be able
to detect the material
misstatements on the subject matter of the client.
Lecture 3 - Audit Planning Part 3

Audit Planning
1. Formulate OVERALL AUDIT STRATEGY; Output = Audit Program
2. Understand the business and its environment by doing risk assessment procedures.
a. Risk Assessment Procedures - Inquiry, Inspection, Observation and Analytical
Procedures
*Analytical Procedures - evaluate plausible relationship of accounts / financial statement
analysis.
a.1 - Develop the benchmark / criteria (industry best practice, history / records of the company)
a.2 - Calculate the client's result (FS Analysis - liquidity ratio, profitability, management
efficiency, solvency)
a.3 - Compare the benchmark from the client's result
a.4 - Investigate the variance
Client Industry

Example: Accounts Receivable Turnover 10x 20x

*Analytical procedure is helpful in directing the auditor of accounts that need to be prioritize in the
evaluation of accounts.

Output:
b. Audit Risk / Impression - risk that the auditor will issue an unmodified
opinion where
in fact material misstatements exist.
*Sources of Misstatements - Fraud (Intentional Act) and Error (Unintentional
Act)
*Sources of Fraud - Fraud Triangle (Donald Cressey) - P-O-R
P - Pressure; O - Opportunity - R - Rationalization

*Levels of Fraud: Employee Fraud (Theft); Management Fraud / Fraudulent

Financial Reporting
c. Materiality - tolerable amount of misstatements that the auditor is willing to
overlook.
*Smallest amount of misstatements that can be tolerated.
*Audit Risk and Materiality have inverse relationship.
3. Audit Risk has 3 components: INHERENT RISK / CONTROL RISK /
DETECTION RISK
*The combination of the inherent risk and control risk = materiality risk - POV of the Client

Audit Risk and Detection Risk have direct relationship.

Materiality Risk and Detection Risk have inverse relationship.

Audit Inherent Control Detection

Risk Risk Risk Risk
5% 100% 100% 5%

*The audit risk from the first impression, we will set an ACCEPTABLE AUDIT RISK (TARGET)
*Inherent risk is obtained also by the doing the risk assessment procedures.
Lecture 4 - Consideration of Internal Control
Consideration of Internal Control
Initial Objectives:
a. To understand the design of internal control
b. To determine whether the internal control is implemented or
not

Procedures:
1. Inquiry
2. Inspection
3. Observation
4. Walk Through Test

Documentation:
1. Narrative Report
2. Flow Chart
3. Internal Control
Questionnaire

Considerations:
Based on COSO (Committee on Sponsoring Organization of the
Treadway Commission)
a. 1st Dimension - OBJECTIVES of Internal Control - COR
1. C - Compliance with relevant laws and regulations
2. O - Operation relative to its effectiveness and efficiency
3. R - Reports
b. 2nd Dimension - LEVELS of Application of Internal Control - EDOF
1. E - Entity 3. O - Operating Unit
2. D - Division 4. F - Function (Per Employee)
c. 3rd Dimension - FACTORS affecting the internal control - CRIMC
1. C - Control Environment - Culture / Tone
2. R - Risk Assessment - Level of Exposure of Business Risk
3. I - Information and Communication
4. M - Monitoring
5. C - Control Activities which can be divided into PIPS
a. P - Physical Control c. P - Performance Review
b. I - Information
d. S- Segregation of Duties - ARC
Processing
d.1 - A - Authorization
d.2 - R - Recording
d.3 - C - Custody

Output:
1. If the auditor sets the control risk to MAXIMUM level, more evidence gathering will be done.
This also means that the auditor doesn't want to rely on the client's internal control.
2. If the auditor sets the control risk at LESS THAN MAXIMUM, then the auditor is assumed to
rely on the
client's internal control and therefore must do additional procedure called TEST OF CONTROL

Test of Control - used to determine the effectiveness of internal control in

preventing the
fraud and error

Procedures:
1. Inquiry 3. Observation
2. Inspection 4. Reperformance
Output:
Reliance on the internal control of the client, less evidence gathering procedure.
Caution: This procedure may take a lot of time, cost and effort so the auditor
must
weigh in if the test of control is really worth or not (cost benefit analysis)