Internal Quality Review Procedures 5o5250

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INTERNAL QUALITY REVIEW PROCESS 1. The Internal Quality Review Process is the sequence of difference activities involved in the practice of ancy. For example, the auditor may place greater emphasis on the thoughtful understanding of the business and internal control environment and thorough development of a detailed audit plan prior to carrying out the fieldwork. In other instances, the auditor may place less emphasis on the review and preliminary evaluation of ing system and internal control. HE may, then accomplish the audit objectives through the performance of substantive procedures 2. The term “auditor” as used in this manual refers to “the auditor and his firm” and “the engagement team”. The term “engagement team” implies that there is individual who is responsible for making work assignments and for assuming ultimate responsibility for the audit. Major Audit Objectives 3. The major audit activities are categorized as follows; A. Pre-Engagement and Planning B. Study and Evaluation of ing System and Control Environment C. Compliance or Functional Procedures D. Substantive Test Procedures E. Audit Conclusions and Reporting PRE-ENGAGEMENT Professional Qualifications and Ethical Requirements 4. The independent auditor should possess proficiency in ing practice and auditing procedures acquired through a combination of general education, technical knowledge obtained through study and formal courses concluded by qualifying examination, and practical experience under proper supervision. In addition, the auditor must be aware of developments including relevant international and national pronouncements on ing and auditing matters, and relevant regulations and statutory requirements. 5. When auditing in an EDP environment, the auditor should have general understanding of computer hardware, software and processing system sufficient to plan the engagement and to understand how EDP affects the study and evaluation of internal control and the application of auditing procedures, including computer assisted audit techniques. 6. In other instances, the auditor may also require the services of industry specialists and technical experts. If the auditor decides to use the work of others, coordination with them should be made at an early stage of the engagement. 7. In all matters relating to an audit, the auditor should maintain independence in mental attitude and the confidentiality of all information obtained in the course of professional engagement.

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The auditor should exercise reasonable care and diligence in carrying out his professional work. He should only accept an engagement, which he can expect to complete with professional care and competence.

Perform new client investigation/Consider change in circumstances of existing client 9. The first step in the audit process is to determine the acceptability of a new client and to consider changes in circumstances, which may have an impact on the retention of existing clients. Some of the matters the auditor should take in to consideration are the business reputation of the clients communication with the predecessor or incumbent auditors and any significant change in the ownership or management of the entity. The auditor should have established policies and procedures as bases for decision on the acceptance of new client or retention of existing ones. This is in order to minimize the likelihood of being associated with a client that could cause discredit to the auditor and his firm. Establish of Engagement 10.Once a new client is accepted, the of the engagement should be established. The auditor should prepare an engagement letter to document and confirm his acceptance to the appointment, the objective and scope of the audit, the extent of responsibilities to the client and the form of any reports proposed to be issued. The engagement letter is a useful means of communication and helps to avoid misunderstanding as to the specific of engagement. A copy of the engagement letter signed by the client is the auditor’s evidence of the client’s agreement t the of engagement. On recurring audits, the auditor may decide to send a new engagement letter each year. If not, he may wish to remind the cooperative of the assigned letter. PLANNING Understand the Client’s Business 11.The auditor should possess a level of knowledge of the client business and industry that will enable him to identify the events, transactions and practices, which in his judgment may have a significant effect on the financial statements. The auditor can obtain such knowledge through inquiry inspection of documents, observation and use of reference materials and experts such as the regulatory bodies like CDA, BIR and SEC, as well as from within the entity. 12.The auditor must obtain sufficient knowledge of the client’s business in order to develop the overall audit plan, identify areas for special audit consideration, evaluate the reasonableness of ing estimates and management representation and make judgment regarding the appropriateness of ing policies and disclosures. Understand the ing system 13.The auditor should have an updated knowledge and documentation of significant ing systems. He should review the effectiveness of the system, changes

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in control procedures, and any significant or major revisions to the ing system. Such review should be carried out before completing the audit plan. 14.The auditor should also be able to identify significant audit areas which are material to the expression of an opinion on the overall financial statements. Establish Engagement Team 15.After obtaining a sufficient level of knowledge of the client’s business, the auditor should make staff assignments and undertake the preliminary determination of the timing of fieldwork. Professionals assigned to the engagement should have the degree of technical training and proficiency required in the particular circumstances. Staff assignments and the timing of fieldwork must be monitored as the engagement progresses to determine changes in events and circumstances. Consider Materiality and Audit Risk 16.In forming an opinion on the financial statements, the auditor carries out procedures designed to obtain reasonable assurance that the financial statements are properly stated in all material respects. In planning an examination, the auditor should consider areas that require special attention, financial statement items likely to contain material errors, conditions likely to require extension or modification of audit tests and preliminary judgments about materiality and audit risk for audit purposes. 17.The auditor should recognize that preliminary judgments about materiality and audit risk may change as new information develops during the audit. Consider Work to be Performed by Others 18.During the planning phase of an audit, the auditor should determine the extent to which there is a planned reliance on the work performed by others, such as the auditors, internal auditors or specialists. When using the work performed by others, the auditor should consider the of the relationship, division of responsibility, skills and competence of those performing such work, and procedures necessary to assess the quality and sufficiency of work performed. 19.When relying on the work performed by others, the auditor should never delegate the responsibility for forming important audit conclusions or for forming and expressing an opinion on the financial statements. Accordingly, the auditor should review the work performed by others to obtain reasonable assurance that the work performed is adequate for his purpose. Develop Overall Audit Plan 20.On the basis of the information obtained during the planning phase, the auditor should develop an overall audit plan. The following matters should be considered when developing the overall audit plan for the expected scope and conduct of audit;

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The of the engagement and any statutory responsibilities. The client’s business and industry including the structure of the organization and the ing system used. The audit risks and procedures to be performed to achieve audit objectives. The need to rely on the work of others. The audit team, timetable and budgets.

21.The overall audit plan provides a framework for making judgments. Normally, when results obtained are anticipated, the overall audit plan need not be changed. However, in cases where the audit yields unexpected results or business circumstance change, the overall audit plan has to be revised. STUDY AND PRELIMINARY EVALUATION OF ING SYSTEM AND CONTROL ENVIRONMENT Obtain Understanding of the ing System and Control Environment 22.After developing an overall audit plan, the auditor should review both the overall control environment and the ing system to gain understanding of the flow of transactions. Such a review usually includes a survey of the organization, management, personnel and the nature of transaction processes. In a continuing engagement, the auditor need not review certain matters again. Make Preliminary Determination of Whether to Rely On Internal Controls 23.If in the course of the audit, the auditor desires to rely on any internal controls, he should identify and make a preliminary evaluation of those controls in which it might be effective and efficient to rely on. The auditor’s preliminary evaluation includes the identification of both the manual and computer procedures, which help to achieve the overall objectives of internal control. 24.Different techniques are used to record information relating to an internal control system. Selection of a particular technique is a matter of the auditor’s judgment. Common techniques, used alone or in combination are narrative description, questionnaires and flow charts. The extent of the auditor’s record of internal controls varies depending upon the controls on which he intends to rely. In a continuing engagement, the auditor must update his knowledge of the internal controls that he is already aware of through previous work. 25.If preliminary evaluation by the auditor indicates weaknesses, which preclude reliance on certain internal controls, documentation or performance of compliance procedures related to such controls, these should not be carried out or at once be discontinued. In other instances, the auditor may opt for more efficient ways of obtaining sufficient appropriate evidence than by means of identifying, evaluating and testing internal controls. Under ether circumstance, the auditor may accomplish his audit objectives through the application of other procedures. Accordingly, he should modify the overall audit plan.

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Develop Audit Program 26.The auditor should prepare a written audit program setting forth the necessary procedures to implement the overall audit plan. He should consider all the information obtained during the planning phase of the audit process together with the results of the preliminary evaluation of the ing system and related control environment. In particular instances, the auditor may choose to rely on certain internal controls in reducing the nature, timing and extent of required auditing procedures, concluding that such reliance constitutes an effective and efficient way to achieve the audit objectives. 27.The audit program should have sufficient detail to serve as a set of instructions to the of the engagement team involved in the audit and as a means of control on the proper execution of the work. The progresses on the basis of the auditor’s review of internal control, the preliminary evaluation thereof, and the results of compliance and substantive procedures. COMPLIANCE AND SUBSTANTIVE PROCEDURES Perform Compliance Procedures 28.Compliance procedures are tests designed to obtain reasonable assurance that those internal controls on which audit reliance is to be placed are present and are effective. The auditor should conduct such compliance tests to gain evidence that those controls on which he intends to rely generally are identified and function effectively throughout the period of intended reliance. 29.In obtaining audit evidence from compliance procedures, the auditor is concerned with the existence, effectiveness, and continuity of the controls throughout the period of intended reliance. 30.Computer assisted audit techniques may be used in testing controls for greater effectiveness and efficiency. The use of such techniques may9 be more effective when the computer based system has no visible evidence documenting the performance of the controls to be relied on. 31.Compliance testing procedures provide the auditor assurance that: › › ›

he fully understands the system the descriptions obtained, as documented with flowcharts, narratives and questionnaires, are accurate the controls which are being relied upon are functioning as intended at the level of compliance assumed.

32.Given these assurances, the evaluation of the system can be completed and the auditor can intelligently proceed with the substantive portion of his examination.

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Evaluate Internal Controls/Consider Results of Compliance Procedures 33.Based on the results of compliance procedures, the auditor should evaluate whether internal controls were functioning properly throughout the intended reliance and whether they can be relied on as planned in the preliminary evaluation and overall audit plan. 34.If, based on the results of compliance procedures, the auditor concludes that it is not appropriate to rely on particular internal control to the degree previously planned or that the control was not operating as designed, the auditor should ascertain whether there is another efficient means to satisfy the audit objective. Alternatively, the auditor may discontinue the planned reliance and modify the nature, timing or extent of substantive audit procedures. Perform Substantive Procedures 35.Substantive procedures are designed to obtain evidence as to the completeness, accuracy and validity of the data produced by the ing system. These procedures include tests of details of transaction and balances, and analytical review procedures (e.g. analysis of significant ratios and trends, including the resulting investigation of unusual fluctuations and items.) 36.Test of details of transactions and balances usually consist of procedures that make the auditor focus either on specific types of transactions (e.g. additions to property, plant, and equipments) or on balances comprising several types of transactions (e.g. s receivable) 37.Analytical review procedures include comparison of financial information. This is done by comparing the following: › › ›

information for a prior or periods, anticipated results, such as budgets or forecasts, and similar industry information, such as comparison of the entity’s ratio of sales to s receivable with industry averages or with other entities of comparable size in the same industry.

Study of relationships among the following: › ›

elements of financial information that would be expected to conform to a predictable pattern based on the entity’s experience, such as a study of gross margin percentages, and between financial information and relevant non-financial information, such as a study of payroll costs in relation to number of employees.

38.Various methods may be used in performing analytical review procedures ranging from simple comparisons to complex analyses using advanced statistical techniques. The choice of procedures, methods and level of application is a matter of professional judgment.

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39.The effectiveness and efficiency of performing substantive procedures may be improved by using computer assisted audit techniques such as the use of audit software to test all, or a sample, of the transactions in a computer file, or to identify unusual fluctuations or items. 40.In obtaining audit evidence from substantive procedures, the auditor is concerned with the following assertions: › › › › ›

Existence or occurrence; Completeness; Rights and obligations; Valuation or allocation; and Presentation and disclosure.

Extent and Timing of substantive Tests 41.The auditor should determine the extent of substantive tests on a particular engagement. The extent of substantive procedures should be based on the various factors such as the intended ing control, the materiality of and correlation between items or s, and the degree to which errors are disclosed. As much as possible, the auditor should aim to perform only the minimum substantive test procedures necessary to obtain audit satisfaction. 42.Substantive test can be performed at either the balance sheet date or at an earlier or interim date. Early substantive test may permit early consideration of significant matters affecting the year end financial statements. To control the potential incremental audit risk between the balance sheet fate and the interim date, the year end substantive tests can be designed in a way that will provide a reasonable basis for extending to the balance sheet date the audit conclusions from the tests of details at the interim date. Perform Subsequent Event Procedures 43.The auditor should perform procedures as near as possible to the date of report, designed to satisfy that all events occurring after the balance sheet date, and up to the date of report, which might affect the financial statements that have been identified. AUDIT CONCLUSIONS AND REPORTING Review and Evaluate Findings of All Audit Procedures 44. The auditor should review and evaluate the finding from all audit procedures performed and the appropriateness of all audit evidence obtained as a basis for the expression of an opinion on the financial statements. These review and evaluation involve forming an overall conclusion whether:

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the financial statements have been prepared using acceptable ing principles, the financial statements comply with the regulations and statutory requirements, the view presented by the financial statement as a whole is consistent with the auditor’s knowledge of the business of the entity, and there is adequate disclosure of all material matters relevant to the proper presentation of the financial statements.

45. The treatment of material errors, adjustments, and inadequate disclosures, if any, should be discussed and resolved with the client. The auditor should consider the impact of those matters in his report. Formulate Type of Opinion and Issue Report 46. The final step in the process is to arrive at an opinion on the financial statements taking into the results of the audit. Ensure All Audit and Conclusions are Properly Documented 47. Audit documentation should record the auditor’s planning, the nature, timing and extent of the auditing procedures performed and the conclusions drawn from the evidence obtained. The extent of documentation is a matter of professional judgment. Working papers should be retained for a period of time sufficient to meet the needs of the auditor’s practice and satisfy any pertinent legal or professional requirements of record retention.