AUDIT SAMPLING

A. APPROACHES OF GATHERING EVIDENCE

When designing tests of controls and tests of details, the auditor shall determine means of selecting items for testing that
are effective in meeting the purpose of the audit procedure.

An effective test provides appropriate audit evidence to an extent that, taken with other audit evidence obtained or to be
obtained, will be sufficient for the auditor's purposes. In selecting items for testing, the auditor is required to determine the
relevance and reliability of information to be used as audit evidence; the other aspect of effectiveness (sufficiency) is an
important consideration in selecting items to test.

The means available to the auditor for selecting items for testing are:

1. Selecting all items (100% examination)

- The auditor may decide that it will be most appropriate to examine the entire population of fitems that make up a class
of transactions or account balance (or a stratum within that population). 100% examination is unlikely in the case of tests
of controls; however, it is more common for tests of details

100% examination may be appropriate when, for example:

- The population constitutes a small number of large value items;

- There is a significant risk and other means do not provide sufficient appropriate audit evidence; or
- The repetitive nature of a calculation or other process performed automatically by an information system makes
a 100% examination cost effective

2. Selecting specific items

The auditor may decide to select specific items from a population. In making this decision, factors that may be relevant
include the auditor's understanding of the entity, the assessed risks of material misstatement, and the characteristics of
the population being tested. The judgmental selection of specific items is subject to non-sampling risk.

Specific items selected may include:

- High value or key items.

- All items over a certain amount.
- Items to obtain information. –
- Items to test process or procedure.

3. Audit sampling

Audit sampling is designed to enable conclusions to be drawn about an entire population on the basis of testing a sample
drawn from it.

B. BASIC CONCEPTS OF AUDIT SAMPLING

1. Objective of the Auditor

The objective of the auditor when using audit sampling is to design and select the audit sample, perform audit procedures
on the sample items, and evaluate the results from the sample in a manner that will provide and appropriate basis for the
auditor to draw conclusions about the population from which the sample is drawn.

2. Definition

Audit sampling involves the application of audit procedures to less than 100% of items within a population of audit ‹
relevance such that all sampling units have a chance of selection.

Population means the entire set of data from which a sample is selected and about which the auditor wishes to draw
conclusions. A population may be divided into strata, or sub-populations, with each stratum being examined separately.

Sampling unit refers to individual item constituting a population.

3. Sampling is essential throughout audit as auditors attempt to gather sufficient evidence in a cost-efficient manner.

Sampling is used for both test of controls and for test of details of transaction and balances.

The following do not involve sampling:

- Inquiry and observation

- Analytical procedures
- Procedures applied to every item in a population
- Test of controls where application is not documented

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 - Procedures from which the auditor does not intend to extend the remaining items in the account
- Untested balances

C. RISKS IN GATHERING EVIDENCE

1. Sampling risk

The risk that the auditor's conclusion based on a sample may be different from the conclusion reached if the entire
population were subjected to the same audit procedure.

The mathematical complement of sampling risk is termed confidence levels

Sampling risk can lead to two types of erroneous conclusions:

a. In the case of a test of control, that controls, are more effective than they actually are, or in the case of a test of
details, that a material misstatement does not exist when in fact it does. Because it affects the audit effectiveness
and is more likely to lead to an inappropriate audit opinion, the auditor is primarily concern with this type of
erroneous conclusion.
b. In the case of a test of control, that controls are less effective than they actually are, or in the case of a test of
details, that a material misstatement exists when in fact ft does not. This type of erroneous conclusion affects
audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect.

Sampling risk can be either eliminated or controlled by:

- Increasing the sample size

- Using an appropriate sample selection method.

2. Non-sampling Risk

Non-sampling risk is the risk that the auditor does not recognize misstatements or deviations included in the sample for
what they are. It arises from factors that cause the auditor to reach an erroneous conclusion for any reason not related to
the size of the samples.

Examples:

- Inappropriate selection of audit procedures.

- Failure to recognize misstatements in sample tested.
- Misinterpretation of results of audit tests.

Can be minimized by:

- Adequate planning
- Proper direction, supervision and review of audit team
- Adherence to firm's quality control standards

D. STEPS IN SAMPLING

1. Determine the objective of sampling

2. Define the population

Population is the class of transactions being tested. This would involve defining the period covered by the test, defining
the sampling unit, and consideration of the completeness of the population.

a. ATTRIBUTE SAMPLING PLAN (Used in Test of Controls)

This is a sampling plan used to estimate) the rate or frequency of occurrence of a certain characteristic in a population.

Generally used when there is a trail of documentary evidence.

b. VARIABLE SAMPLING PLAN (Used in Substantive testing)

This is a sampling plan used to estimate numerical measurement of a population such as peso value. This is generally
platformed to substantive testing to estimate the amount of misstatements in the financial statements of the entity under
audit.

3. Determine the sample size

After determining the items to be tested, sample size should be determined. Sample size is determined by considering
the following factors:

a. Acceptable level of sampling risk

b. Risk of assessing control risk too low.

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 c. Tolerable deviation rate - A rate of deviation from prescribed by the auditor in respect of which the auditor seeks
to obtain an appropriate level of assurance that is not exceeded by the actual rate of deviation. (Tolerable
misstatement)
d. Expected population deviation rate - A rate of deviation the auditor expects to find in the population prior to
testing. This should not exceed tolerable deviation rate before testing. (Expected amount of misstatement).

ATTRIBUTE SAMPLING PLAN (Used in Test of Controls)

Factors Sample Size

Acceptable Sampling Risk Inverse
TDR Inverse
EDR Direct
Population Negligible
Increase in auditor’s reliance on internal control Direct

VARIABLE SAMPLING PLAN (Used in Substantive testing)

Factors Sample Size

Inherent risk Direct
Control risk Direct
Allowance for Sampling Risk Inverse
TM Inverse
Variation in the population Direct
EM Direct
Population Negligible

3. Determine the methods of selecting sample size

ATTRIBUTE SAMPLING PLAN (Used in Test of Controls)

a. Random-number sampling

Every sampling unit has the same probability of being selected.

The auditor selects the sample by matching random numbers with the population numbering system such as document
number.

Random numbers re generated from a random number table or computer program.

b. Systematic selection

Every nth item is selected after a random start.

A random starting point gives all items in the population an equal opportunity to be selected

The items in the population do not have to be consecutively numbered.

When using systematic selection, the auditor would need to determine that sampling units within the population are not
structured in such a way that the sampling interval corresponds with a particular pattern in the population.

c. Haphazard sampling

When using this method, the sample is selected without following an organized or structured technique.

It is not used in statistical sampling because the auditor cannot measure the probability of an item being selected.

d. Block selection

This method involves selecting block(s) of contiguous items from within the population.

Under this method, there is an ease of selecting samples.

This is the least desirable method because samples drawn may not be representative of the entire population.

Most population are structured such that items in sequence can be expected to have similar characteristics to each other,
but different characteristics from items elsewhere in the population.

VARIABLE SAMPLING PLAN (Used in Substantive testing)

a. Stratification

This method involves dividing a population into subpopulations, each of which is a group of sampling units which have
similar characteristics (often monetary value)

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This method enables the auditor to direct his efforts towards the items he considers would potentially contain the greater
monetary error.

It decreases the effect of variance in the population.

b. Value-weighted selection

Under this method, the probability of an item to be selected is directly proportional to the monetary value of such item.

Also, each peso is treated as one sampling unit.

4. Test the sample item.

The auditor shall apply the appropriate audit procedures to all items in the sample to determine if there are any deviations
from the prescribed controls procedures.

- In case of properly voided, unused, or inapplicable documents selected as samples can be replaced.
- In case of missing documents, it should be considered as a deviation/misstatement since the auditor was unable
to determine whether the control has been properly performed or in case of test of details.
- If in the early stage of the sampling process enough deviations had been found, the auditor need not continue
the test.

5. Evaluate sampling result

6. Document the sampling procedures.

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 COMPLETING THE AUDIT
A. WRAP-UP PROCEDURES

Audit procedures generally performed by the auditor to complete the audit include the following:

a. Identifying liability items not given appropriate accounting treatment

- Search for unrecorded liabilities

- Perform other procedures such as inquiry to entity’s legal counsel to identify loss contingency.

b. Addressing required disclosures

Address required disclosures for the fair presentation of financial statements include the following:

- Perform review for related parties

- Review of entity's ability to continue as a "going concern" entity

- Perform review for subsequent events that may affect the financial statements

- Review of adequacy of disclosures using a disclosure checklist that lists all specific disclosures required by

PFRS/IFRS and the SEC, if appropriate

c. Overall review of the audit engagement and formation of the audit opinion / renew phase

In forming an opinion, procedures to be performed include:

- Perform final review stage analytical procedures

- Review working papers.

- Evaluate audit findings

- Communicate with the audit committee

- Forming an audit opinion

d. Other wrap-up procedures

- Obtain management representation letter.

**Audit documentation

**Communication with those charged with governance

B. RELATED PARTIES

1. In performing review for related parties, the auditor's primary concerns are whether the management had

a. completely provided information regarding the identification of related parties; and

b. adequately disclosed information regarding related parties in the financial statements.

Related party - parties are considered to be related if one party has the ability to control the other party or exercise significant
influence over the other party in making financial and operating decisions.

Related party transactions - a transfer of resources or obligations between related parties, regardless of whether a price is
charged.

2. Management and those charged with governance responsibility

Management is responsible for the identification and disclosure of related partes and transactions with such parties. This
responsibility requires management to implement adequate accounting and internal control systems to ensure that
transactions with related parties are appropriately identified in the accounting records and disclosed in the financial statements.

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Those charged with governance are responsible for monitoring how management's discharging its responsibilities for such
controls. They need to obtain information from manage men no enable them is understand the nature and business rationale
of the entity's related party relationships and transactions.

3. Auditor's responsibility

The auditor should perform audit procedures designed to obtain sufficient appropriate audit evidence regarding the
identification and disclosure by management of a

- related parties
- effects of related party transactions that are material to the financial statements.

Procedures to check the completeness of client-provided information regarding related parties include:

a. Review prior year working papers for names of known related parties;

b. Review the entity's procedures for identification of related parties;

c. Inquire as to the affiliation of directors and officers with other entities;

d. Review shareholder records to determine the names of principal shareholders or, if appropriate, obtain a listing of principal
shareholders from the share register;

e. Review minutes of the meetings of shareholders and the board of directors and other relevant statutory records such as the
register of directors interests;

f. Inquire of other auditors currently involved in the audit, or predecessor auditors, as to their knowledge of additional related
parties; and

g. Review the entity's income tax returns and other information supplied to regulatory agencies.

The auditor should consider the adequacy of control procedures over the authorization and recording of related party
transactions.

In examining the identified related party transactions, the auditor should obtain sufficient appropriate audit evidence
as to whether these transactions have been properly recorded and disclosed.

After identifying related party transactions, the auditor should become satisfied about their purpose, nature, extent, and effect.

The following should be considered:

a. Obtain an understanding of the business purpose of the transaction.

b. Examine invoices, executed copies of agreements, contracts and other documents.

c. Determine whether the transaction has been approved by board of directors or other officials.

d. Test for reasonableness of the amounts to be disclosed in the financial statements.

Given the nature of related party relationships, evidence of a related party transaction may be limited, for example, regarding
the existence of inventory held by a related party on consignment or an instruction from a parent company to a subsidiary to
record a royalty expense.

Because of the limited availability of appropriate evidence about such transactions, the auditor would consider performing
procedures such as:

- Confirming the terms and amount of the transaction with the related party.

- Inspecting evidence in possession of the related party.

- Confirming or discussing information with persons associated with the transaction, such as banks, lawyers, guarantors and
agents.

Management representations

The auditor should obtain a written representation letter from management concerning:

- the completeness of information provided regarding the identification of related parties; and

- the adequacy of related party disclosure in the financial statements.

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Audit Conclusions and Reporting

- If the auditor is unable to obtain sufficient appropriate audit evidence concerning related parties and transactions with suc h
parties or concludes that their disclosure in the financial statements is not adequate, the auditor should modify the audit report
appropriately.

C. GOING CONCERN (PSA 570)

The going concern assumption is a fundamental principle in the preparation of financial statements. Under the going concern
assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future with neither intention nor the
necessity of liquidation, ceasing trading or seeking protection from creditors pursuant to laws or the regulations.

When planning and performing audit procedures and in evaluating the results thereof, the auditor should consider
appropriateness of management's use of the going concern he assumption in the preparation of the financial statements.

Management's Responsibility

Management shall make a specific assessment of the entity's ability to continue as a going concern, and standards regarding
matters to be considered and disclosures to be made in connection with going concern

Assessment of the Going Concern Assumption

When there is a history of profitability operation and a ready access to financial resources, management may hake is

assessment without detailed analysis.

Management’s assessment of going concern assumption involves making a judgment at a particular point in time, about the
future outcome of events or conditions which are inherently uncertain.

- In general terms, the degree of uncertainty associated with the outcome of an event or condition increases significantly the
further into the future a judgment is being made about the outcome of an event or condition.

- Any judgment about the future is being made on information available at the time at which the judgment is made. Subsequent
events can contradict a judgment which was reasonable at the time it was made.

- The size and complexity of the entity, the nature and Condition of its business and the degree to which it is affected by
external factors all affect the judgment regarding the outcome of events or conditions.

Examples of events or conditions, which individually or collectively, may cast significant doubt about the goingconcern
assumption are set out below.

Financial

a. Net liability or net current liability position.

b. Fixed term borrowing approaching maturity without realistic prospects of renewal or repayment; or excessive

reliance on short-term borrowings to finance long-term assets.

c. Indications of withdrawal of financial support by debtors and other creditors.

d. Negative operating cash flows indicated by historical or prospective financial statements.

e. Substantial operating losses or significant deterioration in the value of assets used to generate cash flows.’

f. Arrears or discontinuance of dividends.

g. Inability to pay creditors on due dates.

Operating

a. Management intentions to liquidate the entity or to cease operations.

b. Loss of key management without replacement.

c. Loss of a major market, key customers), franchise, license, or principal suppliers).

d. Labor difficulties or shortages of important supplies.

e. Emergence of a highly successful competitor.

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Other

a. Non-compliance with capital or other statutory requirements.

b. Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that are unlikely to be
satisfied

c. Uninsured catastrophe

Auditor's Responsibility

The auditor's responsibilities include the following:

a. To consider the appropriateness of management's use of the going concern assumption in the preparation of the financial
statements;

b. To consider whether there are material uncertainties about the entity's ability to continue as a going concern that need to
be disclosed in the financial statements.

c. To evaluate management's assessment of the entity's ability to continue as a going concern

d. To inquire of management as to its knowledge of events or conditions beyond the period of assessment used by
management that may cast significant doubt on the entity's ability to continue as a going concern.

The auditor should consider the same period as that used by management in making its assessment under the financial
reporting framework. If management's assessment of the entity's ability to continue as a going concern covers less than twelve
months from the reporting date, the auditor should ask management to extend its assessment period to twelve months from
the reporting date.

The auditor should inquire of management as to its knowledge of events or conditions beyond the period of assessment used
by management that may cast significant doubt on the entity's ability to continue as a going concern.

Considering the entity's plans to deal with unfilled customer orders.

Reviewing events after period end to identify those that either mitigate or otherwise affect the entity's ability to continue as a
going concern.

Audit Conclusions and Reporting

Based on the audit evidence obtained, the auditor should determine if. in the auditor's judgment, a material uncertainty exists
related to events or conditions that alone or in aggregate, may cast significant doubt on the entity's ability to continue as a
going concern.

a. Going Concern Assumption Appropriate but a Material Uncertainty Exists

If adequate disclosure is made in the financial statements, the auditor should express an unqualified opinion but modify the
auditor report by adding an emphasis of matter paragraph.

If adequate disclosure is not made in the financial statements, the auditor should express a qualified or adverse opinion, as
appropriate.

b. Going Concern Assumption Inappropriate

If, in the auditor's judgment, the entity will not be able to continue as a going concern, the auditor should express an adverse
opinion if the financial statements have been prepared on a going concern basis

c. Management Unwilling to Make or Extend its Assessment

If management is unwilling to make or extend its assessment when requested to do so by the auditor, the auditor should
consider the need to modify the auditor's report as a result of the limitation on the scope of the auditor's work. The auditor
should express either qualified or disclaimer of opinion.

In extreme cases, such as situations involving multiple material uncertainties that are significant to the financial statements,
the auditor may consider it appropriate to express a disclaimer of opinion instead of adding an emphasis of matter paragraph.

Significant Delay in the Signature or Approval of Financial Statements

When there is significant delay in the signature or approval of the financial statements by management after the balance sheet
date, the auditor considers the reasons for the delay.

When the delay could be related to events or conditions relating to the going concern assessment, the auditor considers

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a. the need to perform additional audit procedures

b. the effect on the auditor's conclusion regarding the existence of a material uncertainty

D. SUBSEQUENT EVENTS

The auditor should consider the effect of subsequent events on the financial statements and on the auditor's report.

These events could either be

a. Events that provide evidence of conditions that existed at the date of the financial statements;

b. Events that are indicative of conditions that arose after the date of the financial statements. NON-AVITNE EENT

Examples of Type l Events

- Loss on receivables resulting from the bankrupicy of major customer that was in a deteriorating condition.

- Settlement of litigation for an amount different from an estimate at year-end.

- Disposal of an investment or of obsolete or scrapped inventory at a price below book value

- Disposal of a segment that has been incurring operating losses if the disposal is at a price below book value.

Examples of Type lI Events

- Sale of a bond or capital stock issue.

- Purchase of a business.

- Settlement of litigation when the event give rise to claim occurred subsequent to the balance sheet date.

- Loss of plant or inventories as a result of fire or flood.

- Loss on receivables resulting from conditions arising subsequent to the balance sheet date.

Subsequent events are those events occurring between the date of the financial statements and the date of the auditor's
report, and facts that become known to the auditor after the date of the auditor's report.

Date of the financial statements - the date of the end of the latest period covered by the financial statements, which is
normally the date of the most recent statement of financial position in the financial statements subject to audit.

Date of approval of the financial statements - the date on which those with recognized authority assert that they have
prepared the entity's complete set of financial statements, including the related notes, and that they have taken responsibility
for them.

Date of the auditor's report the date the auditor dates the report on the financial statement

Date the financial statements are issued -- the date the auditor's report and the audited financial statements are made
available to third parties, which may be, in many circumstances, the date that they are filed with a regulatory authority.

Auditor's responsibility

The auditor should perform procedures designed to obtain sufficient appropriate audit evidence that all events up to the date
of the auditor's report that may require adjustment of, or disclosure in, the financial statements have been identified

To identify these events, the following procedures may be performed:

- Reviewing procedures management has established to ensure that subsequent events are identified.

- Reading minutes of the meetings of shareholders, the board of directors, and audit and executive committees held after the
date of the financial statements and inquiring about matters discussed at meetings for which the minutes are not yet available.

- Reading the entity's latest available interim financial statements and, as considered necessary and appropriate, budgets,
cash flow forecasts and other related management reports.

- Inquiring, or extending previous oral or written inquiries, of the entity's lawyers concerning litigation and claims.

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- Inquiring of management as to whether any subsequent events have occurred which might affect the financial statements.
Example of inquiries of management on specific matters are:

When the auditor becomes aware of events which materially affect the financial statements, the auditor should consider
whether such events are properly accounted for and adequately disclosed in the financial statements:

Facts discovered after the date of the auditor's report but before the date the financial statements are issued

The auditor does not have any responsibility to perform procedures or make any inquiry regarding the financial statements
after the date of the auditor's report. During the period from the date of the auditor's report to the date the financial statements
are issued, the responsibility to inform the auditor of facts which may affect the financial statements rests with management.

The auditor should

a. Consider whether the financial statements need amendment

b. Discuss matter with the management;
c. Should take the appropriate action in the circumstances.

When management amends the financial statements, the auditor would

a. Carry out the procedures necessary in the circumstances; and

b. Provide the management with a new report on the amended financial statemeN

Facts discovered after the financial statements are issued

After the financial statements have been issued, the auditor has no obligation to make any inquiry regarding such financial
statements.

The new auditor's report should include an emphasis of a matter paragraph referring to a note to financial statements that
more extensively discusses the reasons for the revision of the previously issued financial statements and to the earlier report
issued by the auditor.

E. OMITTED PROCEDURES

A post engagement review performed as part of the firm's quality control inspection program could lead to identification or
discovery of omitted procedures.

In case of omitted procedures, the following shall be the procedures to be performed by the auditor:

a. After issuing a report an auditor concludes that an auditing procedure considered necessary at the time of the examination
was omitted from the examination. The auditor should assess the importance of the omitted procedure to the auditor’s ability
to support the opinion expressed on the financial statements taken as a whole.

b. if the auditor concludes that the omission of a substantive procedure considered necessary at the time of the examination
may impair the auditor's present ability to support the previously expressed opinion, the auditor determines whether or not the
results of other procedures that were applied tend to compensate for the procedure omitted (this is popularly known as
compensating procedures)

c. If there are no compensating procedures, the auditor shall undertake to apply the omitted procedure or alternative

procedure that would provide a satisfactory basis for the auditor's opinion

The results of procedures may lead the auditor to conclude:

a. The auditor concluded that there are no necessary revisions to be made on the financial statements and the entity's audit
committee or board of directors. no communication is required to be made

b. The auditor concluded that necessary revisions to be made on the financial statements and auditor's report issued should
not be relied upon by users. In this case, the auditor shall apply the same procedures required for facts discovered after the
date of the auditor's report.

F. WRITTEN REPRESENTATION LETTER

1. The auditor should obtain appropriate representations from management.

Acknowledgment by Management of its Responsibility for the Financial Statements

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The auditor should obtain evidence that management acknowledges its responsibility for the fair presentation of the financial
statements in accordance with generally accepted accounting principles in the Philippines, and has approved the financial
statements.

The auditor can obtain this acknowledgment.

a. from relevant minutes of meetings of the board of directors or similar body; or,

b. by obtaining a written representation from management or a signed copy of the financial statements.

Basic Elements of Management Representation Letter

5. The auditor would request that it

- be addressed to the auditor

- contain specified information

- be appropriately dated (date of the auditor’s report) and signed by the members of management who have primary
responsibility for the entity and its financial aspects (ordinarily the senior executive officer and the senior

Representations by Management as Audit Evidence

The auditor should obtain written representations from management on matters material to the financial statements when
other sufficient appropriate audit evidence cannot reasonably be expected to exist.

The possibility of misunderstandings between the auditor and management is reduced when oral representations are
confirmed by management in writing.

Representations by management cannot be a substitute for other audit evidence that the auditor could reasonably expect to
be available.

If a representation by management is Contradicted by other audit evidence, the auditor should investigate the circumstances
and, when necessary, reconsider the reliability of other representations made by management.

Documentation of Representations by Management

The auditor would ordinarily include in audit working papers evidence of managements representations in the form of a
summary of oral discussions with management or written representations from management.

A written representation is better audit evidence than an oral representation and can take the form of:

a representation letter from management.

b. a letter from the auditor outlining the auditor's understanding of management's representations, duly

acknowledged and confirmed by management; or

c. relevant minutes of meetings of the board of directors or similar body or a signed copy of the financial statements.

Action if Management Refuses to Provide Representations

If management refuses to provide a representation that the auditor considers necessary, this constitutes a scope limitation,
and the auditor should express a qualified opinion or a disclaimer of opinion.

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 AUDIT DOCUMENTATION
The auditor should prepare on a timely basis, audit documentation that provides:

a. a sufficient and appropriate record of the basis of the auditor’s report; and
b. evidence that the audit was performed in accordance with PSAs and applicable legal and regulatory
requirements.

Audit documentation (working papers) is the principal support for the representation that the audit is performed in
accordance with PSAs and for the opinion.

Ownership of working papers: The auditor keeps and owns the audit working papers.

A. FUNCTIONS OF THE WORKING PAPERS

Primary functions:

- Support the auditor's opinion on financial statements

- Support the auditor's representation as to compliance with PSAs
- Assist the auditor in the planning, performance, review and supervision of the engagement.

Secondary functions:

- Planning future audits

- Providing information useful in rendering other services
- Providing adequate defense in case of litigation

1. The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having no
previous connection with the audit, to understand:

- The nature, timing and extent of the audit procedures performed to comply with PSAs and applicable legal and regulatory
requirements;
- Results of the audit procedures and the audit evidence obtained; and
- Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments
made in reaching those conclusions.

In documenting the nature, timing and extent of audit procedures performed, the auditor shall record:

- The characteristics of the specific items or matters tested;

- Who performed the audit work and the date such work was completed; and
- Who reviewed the audit work performed and the date and extent of such review.

2. The form, content and extent of audit documentation depend on factors such as:

- Nature of the audit procedures to be performed;

- Identified risks of material misstatements;
- Extent of judgment required in performing the work and evaluating the results;
- The significance of the audit evidence obtained;
- Nature and extent of exceptions identified;
- The need to document a conclusion or the basis for a conclusion not readily determinable from the documentation of
the work performed or audit evidence obtained; and
- The audit methodology and tools used.

Auditing and financial reporting issues relevant to the entity's industry. 6.0 Retention of Audit working papers: not less
than five (5) years for audit purposes and ten (10) years for tax purposes.

B. CLASSIFICATION OF WORKING PAPERS

Audit file - one or more folders or other storage media, in physical or electronic form, containing the records that comprise
the audit documentation for a specific engagement.

1. Permanent file - contains information of continuing significance to the auditor in performing recurring audits which
may include:

- Copies of the Articles of Incorporation and bylaws

- Major contracts and long-term covenants
- Engagement letter
- Organizational chart

2. Current file - contains evidence gathered and conclusions reached relevant to the audit of a particular year which may
include:

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- Financial statements
- Overall audit strategy
- Audit plan
- Audit program
- Working trial balance
- Lead schedules
- Detailed schedules - details of items
- Administrative working paper

C. ASSEMBLY OF THE FINAL AUDIT FILE

1. Per PSQM 1, within 60 days after the date of the auditor's report.

2. Per SOX, within 45 days after the date of the auditor's report.

The completion of the assembly of the final audit file after the date of the auditor's report is an administrative process;
hence, no additional audit procedures must be performed or no changes in the conclusion must be made.

Changes may be made in the audit documentation during the assembly process if they are administrative in nature such
as:

- Deleting or discarding of superseded documentation

- Sorting, collating and cross-referencing working papers
- Signing off on completion checklists relating to the file assembly process
- Documenting audit evidence that auditor has obtained, discussed and agreed with the relevant members of the audit
team before the date of the auditor's report.

D. CHANGES TO AUDIT DOCUMENTATION

Circumstances after the Date of the Auditor's Report:

When exceptional circumstances warrant the need for the auditor to perform new or additional audit procedures or that
lead the auditor to reach new conclusions, the auditor should document:

- The circumstances encountered;

- The new or additional audit procedures performed, audit evidence obtained, and conclusions reached; and
- When and by whom the resulting changes to audit documentation were made, and reviewed.

E. GUIDELINES FOR THE PREPARATION OF WORKING PAPERS:

1. Heading - each working paper must be appropriately identified and includes the following:
- Name of the client
- Descriptive title of the contents of the working paper; and
- The covered period of the audit

2. Indexing - refers to the use of a lettering or numbering system to make a reference about an account or transaction.

3. Cross-indexing or cross referencing - used to connect and interrelate one working paper to another that provides a
trail useful to supervisors in reviewing working papers

4. Tick marks - symbols that describe the audit procedures performed

C. Work performed - working papers should clearly indicate the audit work performed and how exceptions and unusual
matters, if any, were resolved.

D. Conclusions - Conclusions reached should be clearly indicated.

E. Signatures and Dates - both the preparer and the reviewer should include their initials and the date the working paper
were performed.

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