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Sunday, November 22, 2015

Introduction and Preface to PFRSs (Summarized Discussion)


The Financial Reporting Standards Council (FRSC) was established by the Board of Accountancy (BOA or the Board) in 2006 under the Implementing Rules and Regulations of the Philippine Accountancy Act of 2004 to assist the Board in carrying out its power and function to promulgate accounting standards in the Philippines. The FRSC's main function is to establish generally accepted accounting principles in the Philippines.

The FRSC is the successor of the Accounting Standards Council (ASC). The ASC was created in November 1981 by the Philippine Institute of Certified Public Accountants (PICPA) to establish generally accepted accounting principles in the Philippines. The FRSC carries on the decision made by the ASC to converge Philippine accounting standards with the international accounting standards issued by the International Accounting Standards Board (IASB).


The FRSC consists of a Chairman and members who are appointed by the BOA and include representatives from the Board of Accountancy (BOA), Securities and Exchange Commission (SEC), Bangko Sentral ng Pilipinas (BSP), Financial Executives Institute of the Philippines (FINEX), and Philippine Institute of Certified Public Accountants (PICPA). The FRSC has full discretion in developing and pursuing the technical agenda for setting accounting standards in the Philippines. Financial support is received principally from the PICPA Foundation.

The FRSC monitors the technical activities of the IASB and issues Invitations to Comment on exposure drafts of proposed IFRSs as these are issued by the IASB. When finalized, these are issued as Philippine Financial Reporting Standards (PFRSs). The FRSC similarly monitors issuances of the International Financial Reporting Interpretations Committee (IFRIC) of the IASB, which it adopts as Philippine Interpretations.

The FRSC issues news releases to announce the issuance of final Standards and Interpretations, expsoure drafts and other matters which are posted in the Philippine Accounting Standards section of the PICPA website (

Thursday, November 12, 2015

Audit Planning: Risk and Risk Assessment


  • Risk that auditor will suffer a loss or injury to professional practice due to litigation or adverse publicity in connection with an audit.
  • Always present whether or not the auditor conducts the audit in accordance with PSA hence cannot be directly controlled by auditor.


  • Definition: Risk that the auditor gives an inappropriate audit opinion when the FS are materially misstated.
  • Components:
  1. Risk of material misstatement
  2. Inherent risk
  3. Control risk
  4. Detection risk

The Audit Risk Model

AR = IR x CR x DR
AR = audit risk
IR = inherent risk
CR = control risk
DR = detection risk


  • As the desired level of audit risk decreases, the auditor should design more effective substantive procedures.
  • As the assessed level of inherent risk increases, the auditor should design more effective substantive procedures.
  • As the assessed level of control risk increases, the auditor should design more effective substantive procedures.
  • As the acceptable level of detection risk decreases, the assurance directly provided from substantive tests increases. Thus, the auditor should design more effective audit procedures in order to achieve the desired level of assurance.

Steps in using the audit risk model:

1. Set the desired level of audit risk.

2. Assess the level of inherent risk.
     - Knowledge of the client’s business and industry, preliminary analytical procedures.

3. Assess the level of control risk.
     - Studying and evaluating the effectiveness of the client’s accounting and internal control systems.

4. Determine the acceptable level of detection risk.
     - DR = AR / (IR x CR)

5. Design substantive tests.
     - Level of assurance provided is the complement of DR.
     - E.g. LOWER acceptable DR, greater assurance by:
             a. More effective substantive procedures (nature)
             b. Performing year-end procedures (timing)
             c. Using larger sample size (extent)
     - E.g. HIGHER acceptable DR, lower assurance by:
             a. Less effective substantive procedures (nature)
             b. Performing interim procedures (timing)
             c. Using smaller sample size (extent)

Monday, November 2, 2015

Accounting for Inventories: Fundamental Concepts and Principles

Adopted and Summarized from the Philippine Financial Reporting Standards (PFRS)

Nature of inventories 

Inventories include:
1. Assets held for sale in the ordinary course of business (finished goods),
2. Assets in the production process for sale in the
ordinary course of business (work in process), and
3. Materials and supplies that are consumed in production (raw materials).

Whose inventory is it? 

Goods in transit
1. Shipping terms determine when title to goods passes to the purchaser.
      a. FOB (free on board) shipping point - title passes to the buyer with the loading of goods at the point of shipment.
      b. FOB destination - legal title does not pass until the goods are received by the buyer.

2. Goods shipped FOB shipping point belong to the buyer while they are in transit and shOuld normally be included in the buyer's inventory while in transit.
3. Goods shipped FOB destination belong to the seller while in transit and are normally included in the seller's inventory.

Goods on consignment
1. Goods held by the dealer (consignee) for which title is held by the shipper (consignor).
2. Consigned goods are included in the inventory of the consignor.

Conditional sales, installment sales, and repurchase agreements
1. If title to the goods is retained by the seller, the seller may report as an asset the cost of the goods less the purchaser's equity in the goods such as established by collections.
2. Generally however, in the usual case where the possibilities of default or return are low, the seller, in anticipation of contract completion and ultimate passing of title, will recognize the transaction as a regular sale and remove the goods from reported inventory at the time of sale.
3. Repurchase agreements result in no sale being recorded; the inventory is thus not removed from the books, and instead the "seller" records a liability for the proceeds of the "sale", which more accurately in substance is a short-term loan secured by inventory as collateral.

Audit of Receivables: Internal Control Measures and Substantive Audit Procedures

Internal Control Measures

1. Proper internal control over receivables should observe the following:
    a. Sales must be separated from the accounting for them.
    b. Accounting for sales must be separated from the receipt of cash arising from the receivables.
    c. Returns, allowances, discounts, and uncollectible charge-offs must be properly approved and separated from the cash receipts function.
    d. Periodically, receivables should be aged in order to determine the actions and efficiency of the credit department.

2. Notes receivable custodian should not have access to cash or to the accounting record.

3. A responsible official who does not have access to the notes should approve note renewals as well as charge- offs of defaulted notes in writing.

4. Proper procedures should be adopted for the follow-up of defaulted notes.

Substantive Audit Procedures

Sales and Accounts Receivable Balances

Existence or occurrence: Sales and accounts receivable are for shipments made to customers
1. Confirm accounts receivable and perform procedures for confirmations not returned.
2. Perform analytical procedures to test sales and accounts receivable.

Completeness: Sales transactions that occurred and existing receivables are recorded
3. Perform a test of sales cutoff.

Rights and obligations: Accounts receivable are owned by the client
4. Review minutes of the board of directors' meetings, inquire of the client personnel, read contracts and agreements, and confirm with lenders any indications that accounts have been assigned, sold, or pledged.

Sunday, November 1, 2015

Audit Planning: Materiality

Three major conceptual issues in planning an audit to detect material misstatements:

  1. Establishing materiality levels
  2. The different ways in which management assertions, as reflected in the financial statement items, may contain misstatements
  3. Information on the susceptibility of these assertions to misstatement and the effectiveness of the client’s internal control in preventing and detecting the misstatement, or the AUDIT RISK MODEL


The magnitude or an omission or misstatement of accounting information that, in the judgment of a reasonable person relying on the information, would have been changed or influenced by the omission or misstatement.

Information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements.

Importance of materiality:

  1. Helps establish the extent of substantive tests
  2. Evaluate potential and actual misstatements
  3. Defines the threshold at which the auditor would require the client to make an adjustment to the financial statements.

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