Drs r Poe SCS Tay aromas it Reporting Standards (PERSs) A guide in applying auditing peters Poy rire SAU Bens aaa JOE 0. ASUNGCION, CPA, MBA tL! 2018 MARK ALYSON B. NGINA, CPA, CMA ~ RAYMUND FRANCIS A. ESCALA, CPA, MBA t PyAPPLIED AUDITING With Comprehensive Review of Philippine Financial Reporting Standards (PFRSs) PART 1 A guide in applying auditing procedures to specific accounts of the financial statements, 2018 Edition By DARRELL JOE O. ASUNCION, MBA, CPA MARK ALYSON B. NGINA, CMA, CPA RAYMUND FRANCIS A. ESCALA, MBA, CPA= Philippine Copyright, 2018 By DARRELL JOE 0. ASUNCION, MBA, CPA MARK ALYSON B. NGINA, CMA, CPA RAYMUND FRANCIS A. ESCALA, MBA, CPA s book may be reproduced in any form or any means No part of thi ut the written permission from the authors. withot Any copy of this book not bearing the full signature of the authors, dered proceeding from an illegal source. Violators shall shall be consi be dealt with by law. rhe Sh ‘ALL RIGHTS RESERVED ISBN: 978-971-95940-2-4 Published and distributed by: REAL EXCELLENCE PUBLISHING 26-D Purok 4, East Bayan, Ambiong Road 1 y ‘Aurora Hill, Baguio City 2600 ext CELLENCEY Tel No, (074) 244-7873 f Distributed by: NATION'S FOREMOST CPA REVIEW INC. 4 Floor Pelizloy Centrum Lower Session Road Baguio City 2600Preface This book was written primarily to address the need for a textbook in Applied Auditing course in the Bachelor of Science in Accountancy program. The text addresses the basic concepts on how to audit and it also provides comprehensive and well-illustrated concepts of the Philippine Financial Reporting Standards. In addition, this book includes additional notes for PFRS for SMES. The content of this book is divided into the following modules: 1, Chapters 1 to 3 deal with the overview of audit, audit planning and internal control consideration; 2, Chapter 4 discusses the different transaction cycles; 3. Chapters 5 to 6 discuss the cash and accrual basis of accounting and the concepts of errors and their correction; 4. Chapters 7 to 34 discuss the substantive test of specific accounts (e.g. cash, receivables, etc.) and a comprehensive review of related Philippine Financial Reporting Standards (PFRSs); 5. Finally, Chapters 35 to 38 discuss the preparation of the financial statements and forming an audit opinion. For chapters dealing with review of PFRSs, problem solving questions are provided at the end of each chapter and these questions are organized based on the topic discussed in the text. The end of chapter review questions includes comprehensive problems that are intended to evaluate the depth of the reader's, understanding of each topic. Although this book is designed primarily for Applied Auditing subject (Auditing Theory and Practice), it may also serve as a reference material in Financial Accounting subjects in the Bachelor of Science in Accountancy and other related programs. It may also serve as a reference in the review of Financial Accounting and Reporting (formerly Theory of Accounts and Practical Accounting Problems 1). We hope that this book will provide students with a clear view and understanding of applied auditing concepts and related PFRSs that will help them hurdle the CPA Board examination. We provided suggested answers for theoretical questions that are given in some of the chapters that are for “self-study”. We will also provide a solution manual to the teacher of the school who will adopt this book as their main textbook in Applied Auditing. For comments, ordering instructions or suggestions on how we could improve this book, please e-mail us at [email protected] or Contact us at (074) 244-1894. Thank you! Darrell Joe 0. Asuncion Mark Alyson B. Ngina Raymund Francis A. EscalaChanges in this edition: «Addition of four new chapters: 1. Chapter 13 Agriculture 2. Chapter 29 Income Tax 3, Chapter 30 Employee Benefits 4. Chapter 33 Share-Based Payment Additional discussion on dividends in Chapter 15 «Incorporation of accounting for deemed disposal in Chapter 17 Incorporation of the new accounting treatment of non-substant modification of terms in Chapter 27 ntial «Refinements in most of the chapters. Note to examinees: As provided in the revised syllabus, only 1 standards, interpretations and other issuances shall be included in ee examinations if these are in effect for at least six (6) months at the date of the examination J ‘men erate eatin gneonecemrbmieiasiber aAcknowledgements We, the authors, express our heartfelt gratitude to our fellow reviewers, colleagues and friends who helped in their most valuable ways to finish this humble plece of work. Special thanks to Mr. Rex B. Banggawan for brotherly support in finishing and publishing this book. Finally, we want to dedicate this plece of work to our loving families, our very source of inspiration, as part of our greatest appreciation of their unending love and understanding, our most needed support when we were writing this book. From Darrell: To my Loving and ever supportive Mom, Mommy Anita; to my beloved wife, Ria; to ‘my two sons, Drenz Josiah and Brayden Luke; parents-in-law, Daniel and Julie Gacad; and my brothers, sisters and relatives. From Mark: ‘To my very supportive parents, Aryen and Rosalina; to my brother Jimar Rex; my lovely sisters, Levy Riza and Judycel; to Brenalyn and to my friends and relatives. From Raymund: To my loving wife, Joy Ashliy; my lovely daughters, Elisha Gabrielle and Eserah Gabrianne; my parents, Amor and Ma, Socorro; parents-in-law, Edmundo and Anabelle; my brothers, sisters and relatives, ‘And to God for all the endless blessings,Table of Contents Chapter 1: Overview of Audit Process and Pre-engagement Activities Definition of audi Audit Process. Pre-Engagement .. Acceptance of an engagemen Agreeing the terms of audit engagements Contents of engagement lette Audit of Components Recurring Audits... Acceptance of a change in engagement. Circumstances that could lead to Change in Chapter 1: Review Questions - Theoretical . ngagement. Chapter 2: Audit Planning Planning an audit of financial statements Major audit planning activities Overall audit strate, Audit plan. Changes to planning decisions Additional considerations in ini Direction, Supervision and Review. Considerations Specific to Smaller Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment .. Risk Assessment Procedures. Risk Assessment procedures and related activiti Analytical procedures during planning stag ‘The required understanding of the entity and it Assessment of Audit Risk and Materiality. Materiality. Audit risk.. Components of audit risk. Interrelationship of the components of audit risk Relationships of risk and mate: Summary of procedures performed in plann Chapter 2: Review Questions ~ Theoretical .. ring the course of the audit audit engagements Chapter 3: Internal Control Consideration Internal Control Consideration, Accounting and internal control system: Accounting system.Internal control system. Entity’s internal control Assurance provided by internal control Areas of internal control. Administrative control.. ‘Accounting control.. Controls relevant to the audi Components of internal control, The control environment. The entity's risk assessment proces: The information system, including the related business processes rel, to financial reporting, and communication. vant Control activities relevant to the audit. Monitoring of controls. Responses to assessed risks. Tests of controls.. Substantive procedures Summary of Procedures Perfor Effect of the reassessment of control risk on the au ion requirements. s - Theoretical .. med in Consideration of Internal Control... dit approach. Documentati Chapter 3: Review Question: Chapter 4: Transaction Cycles TRANSACTION CYCLES: Categories of transaction cycle 0 REVENUE AND RECEIPT CYCLI 48 Forms or documents received, initiated and processed .. 48 f Departments in the Revenue Cycl 49 49 Summary of Functions 0 Sales department. Credit department. Inventory control departmen Shipping department 50 Billing department. : 51 Accounting department Summary of Functions of Departmen' Mail room or Receptionist Treasury department.. Accounting department .. Other activities in the revenue an\ Uncollected accounts... Sales returns and allowances EXPENDITURE AND DISBURSEMENT CYCL: Forms or documents received, initiated and processed Summary of Functions of Departments in Expenditure Cycle. ts in the Receipt Cycl d receipt cycle:User department... Purchasing department Receiving department. Accounts (vouchers) payable department, Treasury department (Disbursement). HUMAN RESOURCES AND PAYROLL © Forms or documents received, initha Summary of Functions of Departments in Husman Hesouree Payroll department. Treasury department Accounting department PRODUCTION OR CONVERSION CYCLE. Summary of control-related dutie: FINANCE AND INVESTMENT CYCLE... Summary of control-related duties and r¢ Summary of control-related duties and responsibilities-Investment cycle 60 eview Questions - Theoretical... Chapter 4: Chapter 5: Cash and Accrual Basis Cash Basis Accounting... Accrual Basis Accounting... Comparison between Cash Basis and Accrual Basis Accounting, T-ACCOUNTS APPROACH......... Guidelines in using T-account approach. T-Account: Accounts Receivable, Notes Receivable and Advances from Supplier. Se T-account: Accounts Receivable. een eneeneenemenenen T-account: Allowance For Doubtful Accounts. T-account: Accounts Payable, Notes Payable And. T-account: Accounts Payable Trade T-account: Merchandise Inventory. T-account: Property, Plant and Equipment. T-account: Accumulated Depreciation -remveveeonee nnn T-account:Rent Receivable and Unearned Rent income... T-account: Prepaid Rent and Rent payable T-account: Capital... T-account: Retained Earnings T-account: Net Assets... iiChapter 6: Correction of Errors Error: Prior period errors. Accounting treatment of prior period error.. Basic concepts in the correction of errors Working capital Types of error: Statement of financial position or balance sheet errors. Income statement errors. Counterbalancing errors.. Omission of deferred expense. Omission of deferred Income. Nonrecording of Accrued Expense.. Nonrecording of Accrued Revenue : Sales not recorded in the first year and subsequently recorded the following year. “ls Purchases not recorded in the first year and subsequently recorded the following yea ‘Aig Error affecting ending inventory (e.g. overstatement) “16 Non-counterbalancing errors. “0 Prepayments under the Asset Methoc 1120 Precollection under the Liability Metho 120 Error in recording depreciation (e.g. understated). “121 Improper capitalization of expense. 121 Improper expensing of capital expenditures in Error in recording of proceeds of sale of an asset (e.g. PPE) as other incom Chapter 6: Review Questions - Computational Chapter 7: Substantive Test of Cash Introduction 134 Management assertions.. ‘Assertions about classes of transactions and events for the period under 135 audit. ‘Assertions about account balances at the period end... Assertions about presentation and disclosure Audit objectives... Audit procedures for cash.. Bank confirmations. Cash count..... Test on bank reconciliation, Tracing bank transfers...Analytical procedures on cash. Additional audit consideration Summary of audit procedures classified per assertior Chapter 7: Review Questions - Computational... Chapter 8: Cash and Cash Equivalents Summary of GAAP on Cash. Cash fund (for current operations} Fund for Noncurrent Operation: Cash Equivalents Some measurement issues an‘ equivalents computatio: Petty Cash Fund. Imprest fund system. Fluctuating fund system The petty cash fund count shee! ‘Accounting for petty cash items Petty cash impurities. Accountabilities... Computation of petty cash shortage Computation of petty cash accounted and petty cash accountabilities. Computation of adjusted PCF balanc Bank Reconciliation Forms of Bank Reconciliation. Reconciling items Guidelines in Bank Reconciliation and Proof of Cas! Proof of Cash (Two-Date Bank Reconciliation) Computation of Deposit in transit 180 Computation of the deposits made by the company and the deposits acknowledged by the bank.. 80 Computation of the checks issued by the company and the checks paid by 181 the bank Frequently Encountered Tricks in Proof of Cash.. Paid Out In Currency (Payment Out Of Collection} v 188 190racer Chapter 8: Review Questions - Computational... Chapter 9: Substantive Test of Receivables and Sales Introduction... Audit objectives. ‘Audit procedures for receivables and sales Reconciliation of subsidiary ledger with general ledger Confirmation of receivables & review of subsequent cash receip Positive confirmation. Negative confirmation. Exhibit 1: positive form of receivable confirmation. Analysis of notes receivable and related interest... Evaluation of allowance for doubtful accounts. Accounts receivable and sales cutoff. Receivables denominated in foreign currencies. Investigate any transactions with or related party receivables Credit balances and unusual items. ‘Ascertain whether any receivables have been pledged or assigned Perform analytical procedure: Other audit considerations. Sales returns and allowances... Imputed interest. Employee travel advances. Summary of audit procedures classified per assertiot Chapter 9: Review Questions - Theoretical . Chapter 10: Loans and Receivables Receivable: Classification of receivables As to source. Issue on Subscriptions Receivable As to statement of financial position classification. Initial Recognition Interrelationship of Revenue, Receivable and Inventory, Other Revenue recognition issues for sale of goods. Bill and hold sales. Goods shipped subject to conditions. Layaway sales, Sales to distributors or other intermediate parties.. Orders when payment (or partial payment) is received in advanc Subscriptions to publications and similar item: Initial Measurement viSubsequent Measurement Short-Term Receivables Initial Measurement: Short-Term Receivable: Financing Element. Gross price method.. Net price method .. Allowance method. Freight Charge. Synthetic FOB Destinatior Maritime shipping terms. Subsequent Measurement: Short Term Receivables. Methods of Accounting for Bad Debt Direct write-off (tax) Allowance method (GAAP).. Methods of estimating bad debt expense under the allowance metho Percentage of sales (Income Statement Approach] Percentage of A/R (Balance Sheet Approach) ‘Aging the A/R (Balance Sheet Approach) Doubtful accounts in the Income Statement T-account: accounts receivable... T-account: allowance for doubtful accounts, Allowance for sales discount... Allowance for sales return. Sale with a right of returt Sales on approval. Guide questions in the audit of AR and related accounts:. Long-Term Notes Receivable. Initial Measurement: Long-Term Notes Rec¢ Interest Bearing Notes Receivable - With Realistic Interest Rat Interest Bearing Notes Receivable - With Unrealistic Interest Rate.. Non-Interest Bearing Notes Receivable/Zero-Interest Bearing. Subsequent Measurement: Long-Term Notes Receivable Interest Bearing Notes Receivable - With Realistic Interest Rat Interest Bearing Notes Receivable - With Unrealistic Interest Rate. Non-Interest Bearing Notes Receivable/Zero-Interest Bearing. Computation of annual collection.. Loans Receivable... Initial Measurement - Loans Receivable. Origination fees Direct origination cost.. Indirect origination cos ‘Subsequent Measurement: Loans Receivable viiee r—Sr—r——mLmC Perl Computation of effective interest rate through interpolation Loans and Receivable Impairment Lifetime expected credit loss 12-month expected credit loss.. Receivable Financing. Pledging / Hyphotecating .. With recourse. Discounting Own Not Derecognition Of Receivable: Gain or loss on derecognition Financial Statement Presentation. Chapter 10: Review Questions - Computational Chapter 11: Substantive Test of Inventories and Cost of Sales Introduction | ‘Audit objectives | ‘Audit procedures for inventories and cost of sale: Observation during inventory count and test counts Confirmation of inventories held by others. Reconciliation of inventory summary sheet with general ledge Year-end inventory/purchase cutoff. Valuation in accordance with accounting policies Lower of cost or net realizable value test Determine whether any inventories have been pledge purchase commitment Perform analytical procedures. Summary of audit procedures classified per assertion Chapter 11: Review Questions - Theoretic: xd and review Chapter 12: Inventories Inventorie ~350 Initial Recognition. viiiInitial Measurement: Cost of Inventories. Costs of purchas Costs of conversion. Other costs. Excluded from cost of inventories Inventories of Merchandising and Manufacturing Companies. Overview of Cost Flows. ‘T-accounts.. Direct materials, Workin Process Finished Goods. Statement of Cost of Goods Manufactured and Sold Items to Be Included In Inventory. Repurchase agreements.. Consignment Arrangement ‘Two systems of accounting for inventories Perpetual Inventory System . Periodic Inventory System Trade Discounts vs. Cash Discounts ‘Two Methods Of Accounting For Purchases ... Gross Method. Net Method. Subsequent Measurement of Inventories... Net Realizable Value Raw Materials and Factory supplies Work in process or partially damaged goods. Finished Goods.. Write-down and reversal Two methods of accounting for the lower of cost or net realizable value Direct metho Allowance method. Cost Formula. Specific identification of cost. Change in the method of invento Purchase commitments, Foreign currency inventory transactions Inventory Estimatior Use of estimate in inventory estimation.. Two approaches in estimating the value of inventory . Gross Profit Method. Retail Inventory Method. Derecognition: Recognition as an Expense. ixFinancial Required disclosures.. Inventory erro! Guide questions in the au it of Accounts Payable and related account.” ts Additional notes on PFRS for SMEs. Initial measurement Subsequent measurement Chapter 12: Review Questions - Computation: : 14 iS Chapter 13: griculture ‘Agricultural activity. Biological transformation Biological asset Agricultural produc Consumable biological asset. Bearer biological asset. Mature biological asset. Initial recognitio! Initial and subsequent measurement... ” Biological assets.. Agricultural produc Measurement at fair value Cost approximates fair value Inability to measure fair value reliably. Fair value becomes reliably measurable Costs to sell. Costs incurred after harves Biological assets attached to land. _ Gains and losses Initial recognition. Subsequent to reporting date. Changes in fair value less costs to sell costs of a biological asse Due to physical change. Dueto price change... Government grants related to a biological asset Additional notes on PFRS for SME: Chapter 13: Review Questions - Computational jubstantive Test of InvestmentsEvaluate the accounting methods used and test the valuation. Test impairments of investments... Review financial statement presentation and disclosure of investments including related account. Summary of audit procedures classified per assertion.. Chapter 14; Review Questions - Theoretical Chapter 15: Introduction to Financial Asset and Investment in Equity Securities Investments. Financial instrument Financial asset Examples of financial asse' Examples of nonfinancial assets, Financial liability. Examples of financial liabilities Examples of nonfinancial liabilities.. Categories of financial assets.. Basis of classificatio! Business model assessment. Contractual cash flow characteristics. Overview of Categories of Financial Assets.. Categories of Financial Assets-Debt Securities Categories of Financial Assets-Equity Securities Summary of Classification of Financial Assets Accounting for financial asse Initial recognition: Initial measurement. What is Fair value’ Bid Price and Asking Price (aka “current offer price) Transaction costs. Subsequent measurement... Impairment and Reversal of impairement 12-month expected credit los: Lifetime expected credit loss Derecognition of financial assets. ‘Transfers that qualify for derecognitio Gain or loss on derecognition xiTransfers that do not qualify for derecognitior Reclassification... : Statement of financial position presentation. ‘Accounting for Equity Securities. Equity Instrument Classification of investment in equity securities.. Standards applicable for investments in preference shares. Standards applicable for investments in ordinary shares Initial Measurement Acquisitions in between dates of declaration and record of dividen; Subsequent classification and measuremen Computation of unrealized gains or losse: Derecognition of Equity Securities. Gain or loss on derecognitio Transactions Subsequent To Acquisitions. Dividends at Date of declaration.. aL Date of recor 01 Date of payment.. 01 Dividends out of earnings Liability dividends.. Cash received in lieu of share dividends Shares received in lieu of cash dividend. Dividends Out Of Capital /Liquidating Divi ends/Return of Investment. Wasting asset doctrine. Stock split or share split. Split up Split down or reverse share split. Accounting treatment of stock split Special assessments.. Stock Right. ‘Accounting for stock right Theoretical Value of the rights. Reclassifications. Statement of Financial Position presentation... Accounting for Regular purchase or sale of financial asset Regular way purchases or sales of a financial asset. Trade Date Accounting. Settlement Date Accounting. Exchange of one financial asset into another financial asset. Exchange of a property, plant and equipment for financial asset. xiiExchange of a financial asset for property, plant and equipment. ‘Additional notes on PFRS for SMEs. Basic financial instrument. Other financial instrument Initial Measurement... Subsequent measurement. Impairment... Reversal of Impairment Chapter 15: Review Questions - Computational. Chapter 16: Investment in Debt Securities Debt securities Investment in debt securities Classification. 52 Measurement 52 52 Financial statement presentation. Financial asset at fair value through profit or loss (FVTPL). Initial measurement - FVTP! Subsequent measurement - FVTPL. Nonamortization of premium or discount. Computation of interest incom Derecognition of FVTPL. Financial Asset at Amortized Cost. Initial Measurement - FAAC Term bonds. Acquired on the interest date. Acquired in between interest dates. Serial bonds.. Acquisition of investment in bonds with warrants.. Subsequent Measurement - FAA ‘Amortization of premium or discount. Computation of interest income... Computation of effective interest rate through interpolatio1 Derecognition - FAAC. Financial asset at fair value throug other comprehensive income (FVTOC)I Initial measurement - FVTOCL. 69 Subsequent measurement - FVTOC! 570 Computation of Unrealized Gain or Loss. 70 Computation of Interst Income. 70 xiiiDerecognition - FVTOCI Unrealized Gain or Loss on FVTOCI: Debt vs Equity. RECLASSIFICATION.. Reclassification from FVTPL to FVTOCI. Reclassification from FVTPL to FAAC. Reclassification from FVTOCI to FVTPL. Reclassification from FVTOCI to FAA( Reclassification from FAAC to FVTPL, Reclassification from FAAC to FVTOC! Reclassification gain or loss vs. Reclassification adjustment. Impairment (PFRS 9) Credit Los: 12-month expected credit loss. Lifetime Expected Credit Loss.. Credit Ris! Cash Shortfall.. Estimating Cash Flows Developing Credit Risk Assessment Simplified approach for trade receivables, contract assets and lease receivables... Measurement of Expected Credit Los: Undue Cost or Effort.. Impairment Flow Chart. Impairment Gain or Loss.. T-Account: Expected Credit Loss Impairment Loss: FVTOCI vs FAAC. Approaches in computing expected credit loss Explicit probability of default approach Impairment Reversal: PAS 39 vs PFRS 9 Comparative Journal Entries of FVTPL (debt), FVTOCI (debt) and FAAC. Summary of classification, measurement (initial and subsequent) and derecognition of financial asset... Summary of reclassification of financial assets. Chapter 16: Review Questions - Computation: Chapter 17: Investment in Associate Investment in associate. Identification of associate: Equity method Comparison of cost and equity method. T-accounts arising from the journal entries.. Investment in associate. Net investment income Adjustments for amortization: xivAssociate having outstanding preference share: Redeemable preference share: Possible scenarios of changes in ownership interest Change from cost to equity method. Discontinuance of equity method-chany Accounting for deemed disposal Remeasurement gains (loss) related to Disposal, dilution or deemed disposal. Associate having heavy losses, Impairment losses Adjustment of investee’s operations Upstream transactions Downstream transaction: Financial statement presentation. Additional Notes on PFRS for SME! Cost model. Equity mod Fair value model Chapter 17: Review Questions - Computational ge from equity change in ownership Chapter 18: Substantive Test of Property, Plant and Equipment Introduction Audit objectives Audit of property, plant and equipment (PPE Reconciliation of subsidiary ledger with general ledge! Examination of additions and disposals (including retirements Physical inspection of major additions of plant and equipment. Examine evidence of legal ownership of property, plant and equipment Analyze lease, repair and maintenance expense accounts Test the provision for depreciation or depletion Examine impairments of property, plant and equipment. Perform analytical procedures for property, plant and equipment Evaluate financial statement presentation and disclosures for plant assets and for related revenue and expense: Lapsing schedule... Sample audit program - property, plant & equipment Summary of audit procedures classified per assertion Chapter 18: Review Questions - Theoretical. Chapter 19: Property, Plant and Equipment Property, Plant and Equipment. Initial Recognition Recognition Issues. xvSpare parts, standby and servicing equipment: Safety and environmental equipment. Initial Measurement Components of Cost. Directly Attributable Costs: Cost of machinery when purchased. Old and new installation cost Non-recoverable purchase tax: value added tax. Royalty payment on machine: Costs chargeable to land. Land account. Building account Costs chargeable to building when purchased Cost of building when constructed. Acquisition of land and building PIC Q&A No. 2012- Acquisition of property. ‘Acquisition on cash basis Acquisition on account Gross method. Net metho Acquisition on deferred settlement term: Issuance of shares of stock. Issuance of bonds payabl Exchange transactio! Exchange with commercial substance.. Exchange with no commercial substance Trade-in. Donation Government grants (PAS 20). Classification of government grants.. Grants related to assets. Grants related to income. Recognition and measurement of government grant: Accounting for government grants Presentation of grants related to assets. By setting up the grant as deferred income (liability) or gross method.732 By deducting the grant in arriving at the carrying amount of the asset" net method.. 73 Presentation of grants related to income. Repayment of government grants.. Repayment of a grant related to income Repayment of a grant related to an asset. Deferred income approach or gross method: Deduction from asset approach or net method: xviForgivable loan Government assistanc Borrowing cost (PAS 23) Qualifying asset. Commencement, suspension and cessation of capitalization. Additional guidelines on cessation of borrowing cost, Accounting for borrowing cost. Asset financed by specific borrowing. Asset financed by general borrowing. Asset financed by both specific and general borrowing. Expenditures Incurred Evenly. Specific borrowing that was used for general purposes.. Subsequent Expenditures... Recognition of subsequent cost. Future economic benefit. Major replacement. Separate identification practicable... Separate identification not practicable. Subsequent Measurement. Cost model Revaluation model... Depreciation. Depreciation period. Kinds of depreciation. Component depreciatio Depreciation methods Straight line Working hours method. Output method. Sum of years’ digits Declining balance method. Inventory metho Retirement metho Replacement method Composite and group method. Depreciation based on Revenu Change in Estimate Fully Depreciated PPE Still in Us Derecognition.. Gain or loss on derecognitio Financial Statement Presentatior Fixed asset turnover... Additional notes on PFRS for SMEs. Property, plant and equipment xviiGovernment grants . Borrowing cost. Chapter 19: Review Questions - Computational Chapter 20: Wasting Assets Natural Resources ... Recognition of explo PERS 6: Exploration For and Eval ‘Applicability of PFRS 6 Inapplicability of PFRS 6 Mining value chain . Initial Measuremen! Cost.. ‘Acquisition cost, Exploration and evaluation costs... Development cost. Tangible equipment Intangible development cost Estimated restoration cost Subsequent Measurement. Depletio Depletion metho Change in the units estimat development costs . Change in asset retirem Depreciation of mining equipmen Immovable Equipment Movable Equipmen Shutdown Liquidating Dividends. ‘Trust fund doctrine. Wasting asset doctrins Changes in Accounting Policy. Impairment... Financial Statement Presentation: Disclosure: Chapter 20: Review Questions - Computal ration and evaluation assets. uation Of Mineral Resources... tional Chapter 21: Investment Property Investment property Examples of investment property. Examples of items that are not investment properties. Other classification issues.. Partial own use. Ancillary services.Intracompany rentals Initial recognition. Initial measurement. Cost of self-constructed investment propel Investment property held under finance lease. Acquisition through non-monetary exchange (or combination of monetary and non-monetary exchange) .. 830 Commercial substance. Subsequent measurement Cost model... Fair value model. Inability to Determine Fair Value Reliably ‘Transfers from or to investment property Transfers to and from investment property - cost metho ‘Transfers from investment property - fair value model ‘Transfers from PPE to investment property — fair value mode Transfers from inventories to investment property - fair value model .841 Completion of self-constructed or developed investment property wm 843 Financial statement presentatio1 B43 Derecognition, 843 Replacement parts. 844 Cost model Fair value model. Additional notes on PFRS for SME: Chapter 21: Review Questions ~ Computational. Chapter 22: Substantive Test of Intangible Assets, Prepaid Expenses and Deferred Charges Introductio1 Audit objectives. ‘Audit procedures for intangible assets, prepaid expenses and deferred charge: 58 58 ‘Analyze and examine evidence of valuation of intangible: Verify existence and valuation of prepaid expense and deferred charges 60 Special audit consideration for goodwill. Summary of audit procedures classified per assertion. 61 Chapter 22: Review Questions - Theoretical. 862-863 Chapter 23: Intangible Assets Intangible asset. 864 Identifiability. Control Future economic benefits. xixExamples of possible intangible assets Marketing-related intangibles, Customer-related intangibles. Artistic-related intangibles. Contract-based intangible: Technology-based intangibles Initial Recognition Initial Measurement .. By separate purchase. As part of a business combination. By a government grant (ie,, By exchange of assets. By self-creation (internal generation) Research and Development Cost. Research Development. Unable to distinguish research phase from development phase Activities that not considered research and development. Costs that might be capitalized. Costs that are expensed Initial recognition: In-process research and development acquired in a business combination Internally Generated Intangible Asset That Cannot Be Capitalized. Subsequent Expenditure Subsequent Measurement Cost model. Revaluation model Classification of intangible assets based on useful life. Amortizatio Amortization period.. Amortization method. Revenue based amortization Residual value Cost of patent Costs that are expensed as incurre Amortization of patent... Copyright. Cost of copyright, Amortization of copyright. Franchis: Franchise cost .. Amortization of franchise ..Leasehold or lease right. Leasehold improvement Depreciation of leasehold improvements. Renewal option. Trademar! Cost of trademarl Amortization of trademark... Customer list Cost of customer list Internally developed computer software.. Website cos Stages of web site's development Organization costs. Advertising and promotional activities. Goodwill Recognition of goodwill Measurement of goodwill Indirect valuation approach. Direct valuation or excess of earnings approach Non-amortization of goodwill Gain on bargain purchse (negative goodwill) . Derecognition of intangible asse' Financial statement presentatio! Additional notes on PFRS for SMEs. Initial Recognition Initial Measurement Subsequent Measurement. Chapter 23: Review Questions - Computational. Chapter 24: Revaluation, Impairment and Noncurrent Asset Held for Sale Subsequent Measurement - Revaluation Model. Necessity of revaluation... Frequency of revaluation Revaluation of entire class of PPE Fair value of land and buildings Revaluation of depreciable PPE. Revaluation increase or decrease. Two methods of recording revaluation. Proportional method.. Elimination method ‘Transfer of revaluation surplus to retained earnings. Journal entries: Proportional and elimination method. PAS 36: Impairment of Assets... xxiApplicability of PAS 3 Inapplicability of PAS 36 Impairmen' Key stages in the impairment process. i Indicators of impairmen| 2 Recoverable amount... : Fair value less costs to sell.. a Value in use... “Mp Considerations for cash flow projection: Discount Rate... Recognition of an impairment loss. Cash-Generating Units. Impairment of cash generating units. Impairment of goodwill Frequency of impairment Allocation of Impairmen Allocation to OTHER ASSETS. Limitation on Impairment. Reversal of an Impairment Loss of cash generating unit Reversal of impairment loss for goodwill Summary of concept and formula for impairment and revaluation Non-Current Asset Held For Sale. Held-for-sale classificatiot Measurement.. Changes to a plan of sal Non-depreciatio Statement of financial position presentation. Discontinued Operations. Classification as discontinuing. Presentation of discontinued operation: Cash flow statement presentation No retroactive classification Noncurrent assets held for sale - Additional notes on PFRS for SMEs, Revaluation .. vestment in associate.Chapter 1 - Overview of Audit Process and Pre-engagement Activities CHAPTER 1 OVERVIEW OF AUDIT PROCESS AND PRE-ENGAGEMENT ACTIVITIES TOPIC OVERVIEW: This chapter discusses the definition of audit, phases of audit and the different considerations of auditor in accepting an audit engagement. LEARNING OBJECTIVES: After studying this chapter, you should be able to: 1. Describe what an audit is. 2. Enumerate and describe different phase of an audit. 3. Identify and explain pre-engagement activities. 4. Identify the different considerations in accepting an au AUDIT ‘An audit is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results thereof. (American Accounting Association) AUDIT PROCESS The audit process is the sequence of different activities involved in an audit. This process normally includes the following steps: PHASE DESCRIPTION |.Pre-engagement | This phase will require a decision from the auditor whether or not to accept a new client or continue relationship with an existing one. This process would require evaluation not only of the auditor's qualification, but also the integrity and auditability of the client's financial statements. Primary objective: To minimize the likelihood of being associated to a client whose management lacks integrity ZAuditplanning | Audit planning involves the development of an overall audit strategy, audit plan and audit program. The auditor usually obtained more detailed knowledge about the client's business and industry in order to understand the transactions and events affecting the financial statements. Preliminary assessment of risk and materiality is also made during this phase. 1Primary objective: To assess the associated with the audit to determine the natury yt and extent of further audit procedures necessary oe performed ¢ fferent Ta 3. Consideration of internal controls Since entity's internal control directly affegy reliability of the financial statements, it is appropriate study and evaluate these controls. | Primary objective: To establish a basis for rel; internal controls, in determining the nature, extent of audit procedures to be performed. eliance al timing ang 4.Evidence- gathering (Substantive testing) Using the information obtained in audit planning ap consideration of internal controls, the auditor perforny substantive test to determine whether entity's financiay statements are presented fairly in accordance with financial reporting standards. Substantive procedure could either be analytical procedures or test of details ¢| transactions and balances. This phase will always be performed by the auditor, Primary objective: To ascertain the degree of correspondence between the financial statements prepared by client's management and the financid reporting framework. With this, the auditor will be able to conclude whether or not the financial statements are Presented fairly in accordance with financial reporting standards. 5.Completing the audit Wrapping-up procedures are performed; conclusions reached are reviewed; and an overall opinion is formed during this phase. Primary objective: To assist the auditor in assessing conclusion reached is consistent with evidence gathered 6.Issuance of the audit report 7.Post-audit Tesponsibilities In this stage, auditor prepares and issues audit report which describes the scope of the audit and states the auditor's conclusion regarding the fairness of the financial statements. Primary objective: To communicate the conclusios reached by the auditor to various intended users : After completion of the audit engagement, aude Performs procedures that will enable him/her ident) areas for improvement in-the current and futul engagements. of Primary objective: To assess and evaluate the quality 1 s delivered by the engagement team —Chapter 1 - Overview of Audit Process and Pre-engagement Activities PRE-ENGAGEMENT ‘Acceptance of an engagement In making a decision whether to accept or reject an engagement, an auditor should consider the following: 1. Its competence; 2, Its independence; 3. Its ability to serve the client properly; and 4. The integrity of the prospective client's management. Furthermore, the auditor is expected to perform the following: 1. Obtain a preliminary knowledge of the client’s business and industry to determine whether the auditor has the degree of competence required by the engagement. 2. Consider whether there are any threats to the firm's independence and objectivity, and if so, whether adequate safeguards can be established. 3. Evaluation of the firm’s ability to serve the prospective client. 4. Evaluate auditability. 5. Investigation of the integrity of the client's management through inquiry to appropriate parties or communication with the predecessor auditor. Matters to be discussed with predecessor auditor include the following: (RID) a. The predecessor's understanding as to the Reasons for change in auditors; b. Information that might bear on the Integrity of the management; and c. Disagreements between the predecessor auditor and management as to accounting principles, auditing procedures, etc. Note: Every time communication is made to parties other than the client, the auditor shall seek permission from the client and document the items discussed. 6. Agree on the terms of the engagement and prepare an engagement letter. Agreeing the Terms of Audit Engagements The auditor and the client shall agree on the terms of engagement. The agreed terms would need to be recorded in an audit engagement letter or other suitable form of contract.Chapter 1 - Overview of Audit Process and Pre-engagement Activ engagement letter, preferably before the commencement Of the en, Seng, to help avoid misunderstandings with respect to the engage, Ragen, engagement letter documents and confirms: Ment, % a. Auditor's acceptance of the engagement b. Objective and scope of the audit c. Extent of auditor's responsibilities to the client d. Form of any reports Contents of engagement letter (RA FORMS) ‘The form and content of audit engagement letters may va but they would generally include reference to: The presence of audit Risk Unrestricted Access to whatever records ‘The financial reporting Framework used | Objective of the audit The form of any Reports or other communication Management's responsibility The Scope of the audit TY for each ay Bereaose ‘The auditor may also wish to include in the letter: (FRAP Reports) a. Basis in which Fees are computed and any billing arrangements b. Expectation of receiving Representation letter c. Acknowledgment of management of terms of agreement d. Arrangements regarding the Planning of the audit e. Description of any other letters or Reports When relevant, the following points could also be made: * Arrangements concerning the involvement of other auditors and experts in some aspects of the audit. © Arrangements concerning the involvement of. internal auditors and other staff. * Arrangements to be made with the predecessor auditor, ifany inthe case of initial. * Any restriction of the auditor's liability when such possibility exists ° a reference to any further agreements between the auditor and the client. Audit of Components Sa the auditor of a parent entity is also the auditor of its subsidiary, ranch, or division (component), the factors that influence the decision whether to send a separate engagement letter to the component include the following: * Who appoints the Component auditor; © Legal Tequirements in relation to audit appointments; 4Chapter 1 - Overview of Audit: Process and Pre-engagement Activities Degree of Ownership by parent; Whether a Separate auditor's reports to be issued on the component; and Degree of Independence of the component's management from the parent entity. Recurring Audits On recurring audits, the auditor should consider whether circumstances require the terms of the engagement to be revised and whether there isa need to remind the client of the existing terms of the engagement. The auditor may decide not to send a new engagement letter each period. However, the following factors may make it appropriate to send a new letter: * Any indication that the client misunderstands the objective and scope of the audit. Any revised or special terms of the engagement. Arecent change of management, board of directors or ownership. A significant change in ownership. A significant change in nature or size of the client’s business. A change in legal or regulatory requirements. A change in financial reporting framework adopted in the preparation of the financial statements. A change in other reporting requirements. Acceptance of a Change in Engagement a. Stop performing the old engagement b,Stop referring to the old engagement, except Yes Le] when the new engagement involves agreed- upon procedures Istherea ¢, Start performing the new engagement reasonable justification? a, Continue the original audit engagement No_ >| b.When prohibited to continue, withdraw from the audit engagement Note: Every time withdrawal is made, the auditor should consider the necessity of communicating the reasons to appropriate level of management.’ Chapter 1 - Overview of Audit Process and Pre-engagement Activities Circumstances that could lead to Change in Engagement Circumstances ustifiaby [4.Change in circumstances affecting the need for the service | wt 2.A misunderstanding as to the nature of an audit or related services originally requested 3.A restriction on the scope of the engagement, whether X imposed by management or caused by circumstances 4.If the change relates to information that is incorrect, incomplete or otherwise unsatisfactory 5.The auditor is unable to obtain sufficient appropriate audit x evidence regarding assertions-—.. Chapter 1 - Overview of AuditiProcess and Pre-engagement Activities CHAPTER 1: REVIEW QUESTIONS - THEORETICAL 1. Set the following phases in proper order: i. Pre-Engagement iv. Planning ii, Internal Controls v. Post-Audit Responsibilities ii. Evidence-Gathering _vi. Reporting a. iii itiiv,v,vi «. i,iv, ili, b. iv, iii, viv 4. ii, iii v, vi 2. Acts to be performed in order to obtain audit evidence. a. Audit standards c. Audit program b. Audit procedures d. Audit strategy 3. Audit procedures performed to obtain an understanding of the entity and its environment, including its internal control, and to assess the risks of material misstatements at the financial statement and assertion levels. a. Riskassessment procedures _c. Substantive procedures b. Tests of control d. Analytical procedures 4, Audit procedures to test the operating effectiveness of controls in preventing or detecting and correcting material misstatements at the assertion level, a. Risk assessment procedures c. Substantive procedures b. Tests of control d. Analytical procedures 5, Audit procedures to detect material misstatements at the assertion level. a. Riskassessment procedures _c. Substantive procedures b. Tests of control d. Analytical procedures 6. If the auditor believes that the scope of the audit examination has resulted in the auditor being unable to acquire sufficient appropriate evidence with respect to an item included in the financial statements then the materiality of the item will determine the choice of the proper audit opinion. The choice could be a. Either a qualified opinion or an adverse opinion b. Either a qualified opinion or disclaimer of opinion c. Either an adverse opinion or disclaimer of opinion d. Either an unqualified opinion or an adverse opinion 7. Ifa company’s external auditor expresses an unqualified opinion as a result of the audit of the company’s financial statements, readers of the audit report can assume that a, The company is financially sound and the financial statements are accurate b. The external auditor found no fraud c. Internal control is effective 4. All material disagreements between the company and the auditor about the application of accounting principles were resolved in the satisfaction of the external auditor. 7| ‘gir ~-y sia hapter 1 - Overview of Audit Process ahd'Pre. engagement Activit, chap! 7 tS that ines that there: are it, then the materi: dete If the auditor uncorrected by the sstateme; ty ofthese missing ln determine the choice ofthe proper audit opinion, The choi mete te ce co Either a qualified opinion or an adverse opinion led be | a i alified opinion or disclaimer of opinion Bernier agces onion ot olay of opinion 4 Bither an unqualified opinion or an adverse opinion it independence, which of the followin, : Cee nae provide assurance to a 1 ce canseceently boll ieepen dete Inia appearance are of particular importance, b Only the engagement partner is required by the Code of gthiz toh independent from their assurance clients. ¢. In case of audits of financial statements, the Code of Ethics "ing "member of the assurance team, the firm but not network firms tg : i ant of the client. 4. Tacos efaudts of financial statements, the Code of Ethics require ; "auditor to be independent from their assurance team from the stag performing procedures required by the engagement of the report. g statements isco, wide range of oe ind and independene Th Up to the issuany 10. Ultimately, the decision about whether or not an auditor is independent must be made by a. Auditor ¢. Client's management b. Public d. Audit committee 11, Which of the following would not be deciding whether to accept a new client? a. The client's financial ability, b. The client’s relations with its Previous CPA firm, © The client's standing in the business community, a. The client's probability of achieving an unqualified opinion, 12. Which of the following factors most likely would influence an auditor's determination of the auditability of an entity’s financial statements? a. The operating effectiveness of control procedures b. The existence of related-party transactions © The complexity o f the accounting system @. The adequacy of the accounting records 15. Management's integrity affects al of the following risks except: @ Business risk © Audit risk Financial Reporting risk d. All of these risks are affected a consideration of a CPA firm inChapter 1 - Overview of Audit Process and Pre-engagement Activities 14. 15. 16. 17. Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor auditor, the CPA should a. Contact the predecessor auditor without advising the prospective client and request a complete report of the circumstances leading to the termination of the engagement with an understanding that all information disclosed will be kept confidential. Accept the engagement without contacting the predecessor auditor since the CPA can include audit procedures to verify the reason given by the client for the termination. Not communicate with the predecessor auditor because this would in effect be asking the auditor to violate the confidential relationship between an auditor and the client. Advise the client of the intention to contact the predecessor auditor and Tequest a permission for the contact, d. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding: a. The predecessor's evaluation of matters of continuing accounting significance b. Disagreement which the predecessor had with the client concerning auditing procedures and accounting principles c. The degree of cooperation the predecessor received concerning the inquiry of the client's legal counsel d. The predecessor's assessment of inherent risk and judgments about materiality If the prospective client refuses to permit the predecessor to respond or limits the predecessor's response, the successor should: a. Continue to ask the predecessor auditor questions on facts that might bear on the integrity of management b. Accept the engagement but only after an equitable increase in the professional fee ¢. Inquire as to the reasons and consider the implications in deciding whether to accept the engagement d. Issue a disclaimer of opinion because the limited response of the predecessor auditor constitutes a significant scope limitation When an independent auditor is approached to perform an audit for the first time, he or she should make inquiries of the predecessor auditor. Inquiries are necessary because the predecessor may be able to provide the successor with information that will assist the successor in determining whether a. The company rotates auditors b. The engagement should be accepted c. The predecessor's work should be used d. Inthe predecessor's opinion, control risk is less than highCo Chapter 1 - Overview of Audit Process and Pre-engagement Actiyiy 18, Ifpermission from the client to discuss its affairs with the les isttenied by the client, the predecessor auditor should; a, Keepsilent of the denial i Disclose the fact that the permission to disclosure is denieg client OF a Disclose adequately to proposed auditor all noncompliance ma the client ; le by «Seek legal advice before responding to the proposed aucitor Proposed audhy 19. A firm has obtained information that would have caused it to d engagement had the information been available earlier. Actions the auditor would include the following, except: a. Reporting the information and its implications to the person, Is appointed the CPA ho b. Withdraw from the client relationship Withdraw from the engagement d._ Issuea disclaimer of opinion lectin vallben 20, According to PSA 210, the auditor and the client should agree on the term of engagement. The agreed terms would need to be recorded in a(n) 2 ‘2, Memo placed in the permanent section of the working papers b. Client representation letter c. Engagementletter d. Comfort letter 21. An engagement letter is best described as ‘a, A letter from the company to the auditors specifying managements expectations for completion of the audit on a timely basis and the fees, b. A letter from the auditors to company management specifying that management is responsible for the financial statements, and the auditors will issue an opinion on the financial statements. c Aletter from the auditors to company management that specifies the responsibilities of both the company and the auditors in completing the audit and the timing for its completion. d. A letter from the Board of Directors’ audit committee to the auditor that indicates the auditor has been engaged to perform the audit and the fees to be paid. 22, An engagement letter is prepared with the interest(s) of a. The auditor only c. The public b. The client only d. Both the client and the auditor 23, Which of the following statements is/are correct? Statement 1: The auditor and the client should agree on the terms of the engagement. Such an agreement may be in the form of audit engagemett letter or other suitable form of contract. Statement 2: Even in those countries where the scope of the audit s established by law, an engagement letter may be informative for the client 10Chapter 1 - Overview of Audit Process and Pre-engagement Activities a, Only statement 1 is correct b. Only statement 2 is correct c, Both statements are correct d, Both statements are incorrect 24, Engagement letters are widely used in practice for: a, Professional engagements ofall types b. Assurance engagements only c. Related services only 4. Audits only 25. The primary purpose of the engagement letter is to: a. Satisfy the requirements of the CPA's liability insurance policy b. Remind management that the primary responsibility for the financial statements rests with management Provide a written record of the agreement with the client as to the services to be provided Provide a starting point for the auditor's preparation of the preliminary audit program 26, Engagement letter that documents and confirms the auditor's acceptance of the engagement would normally be sent to the client. a. Before the commencement of the engagement b. Before the auditor report is issued After the audit report is issued d. Atthe end of the fieldwork 27. An audit engagement letter least likely include: a. A reference to the inherent limitations of an audit that there is an unavoidable risk that some material misstatements may remain undiscovered b. Description of any letters or reports that the auditor expects to submit to the client ¢. Identification of specific audit procedures that the auditor needs to undertake dd. Basis on which fees are computed and any billing arrangements 28, Which of the following matters is generally included in an auditor's engagement letter? a, The factors to be considered in setting preliminary judgments about materiality b. Management's vicarious liability for illegal acts committed by its employees ©. Management's responsibility for the entity's compliance with laws and regulations d. The auditor's responsibility to search for significant internal control deficiencies a7a napter 1 ~ overview of Audit Process arid Pre-engagement Activiti, at s ae and content ofthe audlt engagement letters may q 29, The form they would generally include reference to except,” “* for : & Wanagement responsibility for all the financial statements, b The scope of the audit, excluding reference to applicabi: r : regulations, of pronouncements Of professional bodies ty Weel, auditor adheres. : ch ¢, The form of any reports or any communication of ty engagement. Is y dQ. Unrestricted access to whatever records, docum r Teco mentation ang information requested in connection with the audit. they 30, Arrangements concerning with which of the following are le » included in the engagement letter? a. Fees and billing b. Apredecessor auditor = c. CPA investment in client securities a. Other services to be provided in addition to the audit Ast likely he 31, Which of the following statements would least likely appear in an audit engagement letter? tory a. “ees for our services are based on regular per diem rates, ls ry and other out-of-pocket expenses,” el b. “During the course of our audit, we may observe OPPortunities economy in, or improved controls over your operations.” " c. “Our engagement is subject to the risk that material misstatements fraud, if they exist, will not be detected.” a d. “After performing our preliminary analytical discuss with you the other procedures we co complete the engagement.” Procedures we yj sider necessary 1, 32. When a CPA is the auditor of a parent entity and also the auditor of its Subsidiary, branch or division (component), which ofthe fallowing fate need not be considered in deciding whether to send a seranin engagement letter to the component? a. Who appoints the auditor of the component b. Legal requirements c. Number of reports to be prepared during the peak audit season 4. Whether a separate audit report is to be issued on the component 33. Which of the following statements is/are correct? Statement 1: On recurring audits, the auditor should consider whette circumstances require the terms of the engagement to be revised and Whether there is a need to remind the client of the existing terms of engagement. Statement 2: The auditor should send a new engagement letter each yest toan established client, a Only statement 1 is correct c. Both statements are correct b. Only statement 2 is correct d. Both statements are incorrect 12Chapter 1 - Overview of Audit Process and Pre-engagement Activities 34, 35. 36. 37. On recurring audit engagements, the auditor may decide not to send a new engagement letter each period. In which of the following situations will there be no need to send a new letter? a. Revisions or special terms of the engagement b. Significant change in nature or size of the client's business ©. Indications of misunderstanding of the objective and scope of the audit a Recent change of middle management and rank and file organizational structure A client's insistence that the audited results are reported quickly after the fiscal year end is of concern to auditors because: a, Many uncertainties inherent in the financial statements cannot be resolved until several months after the year-end closing of the books. b. The financial statements are less reliable because the period covered by the review for subsequent events is shortened ¢. Many clients have December 31 year ends and it is difficult to complete the audit when many of the client's personnel are on holidays. d. Time pressure created by unrealistic deadlines increases the risk of errors in judgment and in the performance of audit procedures. If the auditor concludes that there is reasonable that there is a reasonable justification for the change in engagement, the report to be issued would a. Include reference to the original engagement b. Be that appropriate for the revised terms of the engagement © Include reference to any procedures that may have been performed in the original engagement Not include reference to any procedures that may have been performed, particularly when the new engagement is to undertake agreed-upon procedures a. Which of the following statements is/are correct? Statement 1: Where the terms of the engagement are changed, the auditor and the client should agree on the new terms. Statement 2: The auditor should not agree to a change of ‘engagement when there is no reasonable justification for doing so. Statement 3: Ifthe auditor is unable to agree to a change of the engagement and is not permitted to continue the original engagement, the auditor should withdraw and consider whether there is any obligation, either contractual or otherwise, to report to other parties, such as the board of directors or shareholders, the circumstances necessitating the withdrawal. Only one statement is correct Only two statements are correct All statements are correct All statements are incorrect nose 13Ex s ¢ Chapter 1 38, Ifa chal not justi a. b. 39. 40. c d. Overview of Audit Process and Pre-engagement Aeti thes nge in the type of engagement from higher to lower assura ee k ified, the auditor should: Withdraw from the engagement. Qualify the report on the original engagement. Continue with the revised engagement, but make explic; about the original engagement. plicit Refuse to agree to management's request on the change of, and continue with the original engagement. eng releten Geman Which of the following helps prevent misunderstandings durin, 1 au planning? a, Auditor involvement in the preparation of the client's financial b.. Client involvement in determining specific audit planning ems cA preliminary meeting conference with the client to discus timing, client assistance and related issues. SS fees, d._ Involvement of the client's internal auditors in setting materiality ley, is Fl and determining the scope of audit tests. One of the first things that the auditor will do after accepting a new client; i a. b. c d. Contact the client's attorney to discover legal obligations. Communicate with the predecessor auditor. Study the client's internal control structure. Tour the client's facilities.