Bataan Peninsula State University

Balanga Campus
Balanga, Bataan

Forever Manufacturing Company Audit Engagement

Submitted by:
Banzon, Trisha Anne N.
Caliwcaliw, Jennylou
Dela rosa, Apphle B.
Francisco, Rachel N.
Macaspac, Brianna
Masangcap, Miya
Punzalan, Kriezl
 PHASE 1 - RISK ASSESSMENT

A.  Preliminary Engagement Activities, Audit Planning and Understanding the Entity

Activity 1 -  Performance of  Preliminary Engagement Activities

1.  In compliance with PSA 220 & 210, enumerate the pre-engagement activities required
for this audit engagement

The pre engagement activities required for this audit engagement with Forever Manufacturing
Company are:

The head of the audit team should conduct a preliminary conference to discuss this
possibility of  having prospective clients with the team whether to accept it or not.
Assessing if the company is competent enough and has capabilities, resources and time to
perform the engagement.
Assessing if the company has compliance with independence and ethical requirements to
avoid questionable client associations.
Since communication between the predecessor auditor who migrated in Australia and
successor auditor was provided to be futile, successor auditor should make inquiries of
knowledgeable third parties within the business community as to the reputation of the
prospective client's business and the integrity of the prospective client's management and
principals. Comments of existing clients operating in the prospective client's industry are
frequently useful, as are the information from the prospective client's legal counsel and
bankers and other bankers and lawyers in the business community.
Obtain and analyze financial statements of the prospective client and other relevant
financial information.
  Assessing if the acceptable financial reporting framework is applied in the financial
statements.
As part of this analysis, obtain the names of the prospective client's key executives and
principals and gather some information about the people engaged in the company.
Assess whether the company considered the integrity of the client.

2. Summarize the information gathered which you assessed as critical in making decision to
accept or not to accept the engagement
● The affiliated businesses of the board of directors
● The new trend in the industry
● Unable to contact the predecessor auditor
● The Current Year’s unaudited figure
● The board resolutions
3.Determine the preliminary assessment of Audit Risk and Engagement Risk.  Quantify
preliminary assessment of Audit Risk. Correlate the assessment with your answer in no. 2
The affiliated businesses of the board of directors may have some parts that may produce
risks like conflict of interest and other related parties that may affect their decisions. The
new trend in the industry leads to a business risk and it may affect some factors that can
lead to a financial reporting risk. Communication with the predecessor auditor will be a
great help for the successor auditor. They can provide the successor auditor the
information and details that they need. In the case of Forever Manufacturing Company,
they are unable to contact the predecessor auditor. The current year’s unaudited figure
should also be checked properly and it needs a lot of supporting information and evidence
because it may also lead to a risk. The board resolution has a great impact on other
aspects especially to the financial statements because it serves as evidence and it will be a
great help to track other errors.

4.  How did you assess the following factors as precondition requirements in accepting this
audit engagement?
Auditor’s Related
a. Appropriate technical competency required by this engagement engagement

The appropriate technical competencies required by this engagement is having

professional judgment. The application of relevant training, knowledge and experience,
within the context provided by auditing, accounting and ethical standards, in making
informed decisions about the courses of action that are appropriate in the circumstances
of the audit engagement. Developing an appropriate audit opinion and related audit
report, including a description of key audit matters as applicable. An auditor has to
always be accurate with figures and data used and required in the office without any
guesswork or estimations to facilitate precise and correct information in every department
creating an authentic environment that will be respected by the workers.

b. Capability to mitigate possible risk of material misstatement in the financial statement to

lower audit risk

To lower the audit risk, capability such as striving for more information and doing
extensive research and working collaboratively when preparing for field audits has an
impact through comprehensive preparation that includes process, owner, and
management input. Know first those potential risk and how likely they are to occur.
 Transparency on each audit member is also necessary for them to know the process and
all information where the risk may take place. Such open communication and
collaboration helps address what they called “audit’s identity crisis.” Being open and
transparent while delivering value-added products that provide meaningful results
develop mutual respect along with the brand of the entity.

C. Compliance with the ethical requirements

The code of ethics requires auditors to practice integrity, objectivity, professional

competence and due care, confidentiality and professional behavior. The auditor should
demonstrating the highest level of professional conduct and personal integrity in the
performance of their duties and in serving the public, treating everyone, including the
public officers clients and members if the general public with courtesy, respect, fairness
and objectivity, displaying a positive attitude and being proactive in the exercise of their
duties, seeking to understand and satisfy the real needs of members of the public and
volunteering information and services as appropriate.

d. Sufficient resources to successfully carry out the engagement (manpower, time &
capital
The code of ethics requires auditors to practice integrity, objectivity, professional
competence and due care, confidentiality and professional behavior. The auditor should
demonstrating the highest level of professional conduct and personal integrity in the
performance of their duties and in serving the public, treating everyone, including the
public officers clients and members if the general public with courtesy, respect, fairness
and objectivity, displaying a positive attitude and being proactive in the exercise of their
duties, seeking to understand and satisfy the real needs of members of the public and
volunteering information and services as appropriate.

Client related:
 a. Auditability and Financial reporting framework to be applied in the financial
statements are acceptable
Preparing and presenting the financial statements is the responsibility of the management.
Financial statement should be in compliance with the Generally Accepted Accounting
Principles It should reflect the correct transactions that actually happen in the entity with
transparency. Forever Manufacturing Company should provide receipts, documents and
records to verify the content of Financial Statements. It is the responsibility of the
management and does not relieve the management in case of fraud.

b. Management Integrity
Giving the auditor full access to all the information that is needed throughout the audit.
The information that the management provides must be free from material misstatements
and disclosed the things that needed to be disclosed. The auditor examines financial
statements that are based upon assertions of management ranging from the existence of
an element in the financial statements to disclosures of information regarding that
element.

c. Engagement Risk
Engagement risk is the overall risk associated with an audit engagement. Financial losses
from unpaid fees and being unable to finance the expenses may occur due to the
companies previous losses and its current standing in the economy. The auditors integrity
may be damaged with regards to the issue of the client with the BIR.
d. Agreement of management that it acknowledges and understand its responsibility
Auditing standards require that the auditor and the client should agree on the terms of the
engagement. The agreed terms must be in writing and the usual form would be a letter of
engagement. Auditing standards require that the auditor and the client should agree on the
terms of the engagement. The agreed terms must be in writing and the usual form would
be a letter of engagement.

5. Are you going to accept the engagement or not?  Explain the critical factors considered
in the decision.

I am going to accept the engagement. Although the inherent and control risk is high that
doesn't mean that I should turn down the offer on the brighter side as an auditor should balance it
and make the detection risk at a lower level to keep the audit risk at an acceptable level. Inherent
risk and control cannot be controlled by the auditor but an auditor can somehow make these risk
balances to keep the overall audit risk in check. As an auditor to have a low detection risk, I can
rely less on the control testing and conduct further in the substantive procedures to form a valid
audit opinion.

Just by looking and examining the members of the organization they also have other
business aside from this company, in my opinion the personal integrity of management and
others was accordingly with the ethics. They have other business so that they will not let their
integrity be in jeopardy at the expense of a few cents. The company is willing to take high risk
even though there is no assurance that it will be a success it only indicates that by not taking the
risks the once in a lifetime opportunity might lose.

6. Prepare an engagement letter

BPSU CPA's & Associates
Don Manuel Banzon Avenue, City of Balanga, Bataan

December 11, 2020

Mr. Rafael, Chairman of the Board

Forever Manufacturing Company

Dear: Mr Rafael

You have requested that we audit the Financial Statement of Forever Manufacturing Company as of
December 31,2020
comprising the statement of Financial Position and statement of income for the year. We are pleased
to confirm our acceptance and our understanding of this engagement using this letter. Our audit will
be made with the objective of expressing an opinion on the financial statements.

Our Responsibilities

Audit Objectives.  The objective of our audit is the expression of opinions as to whether your basic
financial statements are fairly presented, in all material respects, in conformity with Generally
Accepted Accounting Principles, the objective also includes reporting on:

 Internal control related to the financial statements and compliance with laws, regulations, and
the provisions of contracts and grant agreements, noncompliance with which could have a
material effect on the financial statements.
  Internal control related to major programs and an opinion in compliance with laws,
regulations, and the provisions of contracts and grant agreements that could have a direct and
material effect on each major program.
 Our audit will be conducted in accordance with generally accepted auditing standards
established by the Auditing Standards Board.

If our opinions on the financial statements or the Single Audit compliance opinions are other than
unqualified, we will fully discuss the reasons with you in advance.  If, for any reason, we are unable to
complete the audit or are unable to form or have not formed opinions, we may decline to express
opinions or to issue a report as a result of this engagement.  Should such a situation arise, we will
notify you.

We will use professional judgment in determining the standards that apply to the work to be
conducted.  If this engagement will not satisfy the requirements of all audit report users, laws, and
regulations, we will notify you as soon as this comes to our attention.  We will then submit another
engagement letter for your approval that complies with the applicable requirements and will seek
approval of the Legislative Auditor for the engagement.  We will consider all standards that may
apply.

Management’s Responsibilities

         Management is responsible for the basic financial statements and all accompanying
information, as well as all representations contained therein.  Management is also responsible for
establishing and maintaining internal controls, including monitoring ongoing activities; for the
selection and application of accounting principles; for the fair presentation in the financial statements
of the respective financial position of the governmental activities, the business-type activities, the
aggregate discretely presented component units, each major fund, and the aggregate remaining fund
information, and the respective changes in financial position.

Management is responsible for making all financial records and related information available to us,
including identifying significant vendor relationships in which the vendor has responsibility for
program compliance, and for the accuracy and completeness of that information.  Your
responsibilities include adjusting the financial statements to correct material misstatements, and
confirming to us in the representation letter that the effects of any uncorrected misstatements
aggregated by us during the current engagement and pertaining to the latest period presented are
immaterial, both individually and in the aggregate, to the financial statements taken as a whole.

You are responsible for the design and implementation of programs and controls to prevent and detect
fraud, and for informing us about all known or suspected fraud or illegal acts affecting the government
involving management, employees who have significant roles in internal control, and  others where
the fraud or illegal acts could have a material effect on the financial statements.  Your responsibilities
include informing us of your knowledge of any allegations of fraud or suspected fraud affecting the
government received in communications from employees, former employees, grantors, regulators, or
others.  In addition, you are responsible for identifying and ensuring that the entity complies with
applicable laws, regulations, contracts, agreements, and grants
Management is responsible for establishing and maintaining a process for tracking the status of audit
findings and recommendations.  Management is also responsible for identifying for us previous audits
or other engagements or studies related to the objectives discussed in the Audit Objectives section of
this letter.  This responsibility includes relaying to us corrective actions taken to address significant
findings and recommendations resulting from those audits or other engagements or studies. 

Fee

Our fees for all services are related to our standard hourly rates in effect at the time services are
performed.  Our standard hourly rates vary according to the degree of responsibility involved and the
experience level of the personnel assigned to your engagement.  Our fee for this engagement will be
100,000 and will be billed as work progresses.

This letter will be effective for future periods unless it is terminated, amended and superseded.

Approval.  We appreciate the opportunity to be of service to you, and believe this letter accurately
summarizes the significant terms of our engagement.  If these comments and arrangements meet with
your approval, please sign below and return the agreement to us.

We look forward to a pleasant association and the opportunity to provide the services included in this
engagement.  If you have any questions, please let us know.

                                                                      Very yours truly,

 
 
___________________
                                                                          BPSU CPA's & Associates
 

This letter correctly sets forth the understanding of Forever Manufacturing Company

____________________________

Mr. Rafael
Chairman of the Board
December 11, 2020