SILLIMAN UNIVERSITY

COLLEGE OF BUSINESS ADMINISTRATION

ACCOUNTANCY DEPARTMENT

AUDIT PLAN

Submitted by:

Credo, Andren Rose

Malijao, Zaireen Jett
Salatan, Angelica Mae

Submitted to:
Asst. Prof. Romyr Bais - Dellona
Course Instructor

December 2023
 I. INTRODUCTION

A. INDUSTRY BACKGROUND

Manufacturing industry is a broad and diverse sector which involves the production of
goods through the processing of raw materials into finished goods accompanied by the use of
human labor or machinery. It plays a vital role in the economy for providing various products
essential in meeting the needs and wants of the consumers. This industry continues to grow and
contribute to the Gross Domestic Product (GDP) in the Philippines. It has the highest share of the
country’s GDP constituting 18.7% as of 2022. Specifically, it generated a gross added value of
3.7 trillion pesos in the prior year. Among the industries under this sector, food manufacturing
has the highest share making up approximately 49% of the gross added value (Statista, n.d.).

The following companies are the top 5 key players in the manufacturing industry:

1. San Miguel Corporation

2. Petron Corporation
3. Shell Pilipinas Corporation
4. El Coco Manufacturing and Trading Corporation
5. PMFTC, Inc.
Source: Dun & Bradstreet, 2023

B. THE AUDIT APPROACH – Risk-based Approach

A risk-based approach to auditing requires the identification of sections of the financial

statements that are at high risk of containing material misstatements and designing audit
procedures tailored to address these issues. A risk-based approach aims to achieve high levels of
efficiency and effectiveness in the audit process by prioritizing areas of high risk.
 II. THE AUDIT PLAN

A. UNDERSTAND THE CLIENT’S BUSINESS

To obtain an understanding of the company’s business, the following procedures will be

performed:

1. Understand the manufacturing company’s business operations, its surrounding

industry, and identify key products and processes through reading the company's
publications and websites, and having a discussion with the company’s personnel
regarding general operations.
2. Understand the flow of transactions between customers and suppliers through
visiting the company’s offices and sites first hand to observe the operations.
3. Familiarize applicable accounting standards, legislations, and other regulations
through inquiry of relevant personnel and examining documents.
4. Request management to authorize communication with the predecessor auditor
in order to review the prior working papers for review of the documentations of
planning, internal control, audit results, and other matters of continuing
accounting and auditing significance.

B. AUDIT OBJECTIVES AND SCOPE

The inventory account of the manufacturing company will be audited. This includes the
Inventory - Raw Materials account, the Inventory - Work in Process account, and the Inventory -
Finished Goods account.

In general this audit aims to provide an independent and objective review of the inventory
accounts of the manufacturing company to be audited. Specifically, the objectives of this audit in
relation to the inventory account is to:
 1. Verify the existence and the completeness of the inventory as stated in the
financial statements.
2. Determine whether the manufacturing firm has ownership rights over these
inventories.
3. Assess and evaluate if the inventory is being properly valued in accordance with
the applicable framework.

To achieve the objectives of this audit involves the examination of specific transactions,
records and documents that will aid in obtaining understanding of the company’s business and in
gathering evidence to draw a conclusion on the inventory account. Such transactions, records and
documents include:

1. Prior working papers to obtain information of the company’s previous audits

which are relevant to the current audit engagement.
2. Inventory valuation methods to understand the accounting methods used by the
company and to ensure that it is in compliance with relevant accounting
standards.
3. Internal control documentation to understand the internal control system of the
company and to assess its effectiveness.
4. Documents from the acquisition process such as purchase orders, vendor invoices,
shipping and receiving documents, and sales invoices to verify the authorization
and accuracy of the movement of inventory.
5. Analyses of obsolete items, inventory turnover and aging, and writedowns to
evaluate the provisions of slow-moving inventory and to assess the liquidity of
such items.
6. Regulatory compliance documents and records to help in assessing the risk of
material misstatement in the account that might materially affect the financial
statements.

The audit will be performed between May 2023 and March 2024. The scope of this
engagement is to assess the accuracy and completeness of the inventory accounts of the
manufacturing being audited. The auditors also assess if the inventory is appropriately valued in
accordance with the corresponding relevant framework. To assess this, the auditors will be
examining the following accounts/transactions enumerated below.

1. Inventory - Raw Materials

2. Inventory - Work in Process
3. Inventory - Finished Goods
4. Purchase orders sent to vendors
5. Sales orders from vendors
6. Sales invoices from vendors
7. Receiving reports of goods received
8. Purchase orders received from buyers
9. Sales orders issued to buyers
10. Sales invoices issued to buyers

C. RISK ASSESSMENT

After performing risk assessment procedures, we identify and assess the following risks
of material misstatements:

1. Inherent risks related to risks at the financial statements level including the
company’s business and operational risks, and financial reporting risks, and at the
account and assertion level; and
2. Control risks after considerations of both entity-wide and transactions controls at
the account and assertion level.

Inherent Risks Assessment

Valuation Complexity High High risks of reporting inaccurate valuation of

inventory is present due to various cost items
considered such as raw materials, direct labor,
 and overhead costs.

Inventory Shrinkage High High risks of inventory shrinkage exist due to

the ease of transportation where theft or loss
might have occurred.

Quality Control Issues Medium The risk of producing defective and

substandard products is present due to complex
and numerous processes involved but assessed
as medium due to a stringent quality control
process implemented by the company.

Supplier Risks Low The company has diversified its key suppliers
and has established contingency plans for risks
associated with its current suppliers.

Control Risks Assessment

Obsolete Inventory High The company regularly reviews its inventory to

Monitoring identify obsolete items, however, due to the
large number of inventories, it is assessed as
high risk.

Risk in the Acquisition Medium The company has schedules of production and
Process monitors inventory levels where appropriate
employees take their roles properly in the
process of acquisition of materials and other
items needed for production.

Quality-control Tests Low Controls related to quality-control before new

products are introduced have been
implemented by the company through various
testing and market studies.
 Segregation of Duties Low The company has different departments
responsible for purchasing raw materials,
receiving the goods purchased, preparing
finished goods for shipment, and recording
inventory transactions.

D. REVIEW OF INTERNAL CONTROL FOR OPERATING EFFECTIVENESS

The internal control is reviewed in order to identify relevant controls to be relied on by

the auditor in performing audit procedures. After performing risk assessment procedures and
with the auditors’ professional judgment, the following controls are evaluated as follows:

Periodic inventory counts High control risks

Obsolete inventory policies High control risks

Consignment arrangements High control risks

Segregation of duties Low control risks

Authorization and approval of the movement Low control risks

of inventory in and out of the company

Physical security measures Low control risks

Inventory reconciliations Low control risks

E. MATERIALITY THRESHOLD

Materiality is the degree of significance of misstatement of accounting information that in

light of the surrounding circumstances, makes it probable that the judgment of a reasonable
person relying on the information would have been changed or influenced by the omission or the
misstatement. The determination of materiality is a matter of professional judgment, and is
affected by the auditor’s perception of the financial information needs of the users of the
financial statements. In the determination of materiality, the auditor will reasonably assume that
the the users: have reasonable knowledge of business and economic activities and accounting
and a willingness to study the information in the financial statements with reasonable diligence;
understand that financial statements are prepared, presented and audited to levels of materiality,
recognize the uncertainties inherent in measurement of amounts based on the use of estimates,
judgment, and the consideration of future events; and make reasonable economic decisions on
the basis of the information in the financial statements.

In our view, after careful consideration of the users’ needs, size of the company and its
nature, as well as the risks associated with the company, a quantitative materiality of 5% of the
net income is the appropriate planning materiality threshold for this year’s audit. We have
deemed it reasonable after comparing our judgment on the quantitative guidelines found in the
professional standards. The performance materiality will be 75% of the planning materiality and
the posting materiality will be 5% of the planning materiality. As a rule of thumb, the level of
misstatement that would be considered significant would be individual items in the financial
statements that would go over the materiality threshold.

The determination of performance materiality serves the purpose of evaluating the risks
of material misstatement and establishing the nature, timing, and scope of additional audit
procedures. Performance materiality is the threshold used by the audit team to identify
significant accounts, locations, and the appropriate audit procedures for those identified accounts
and locations. Conversely, posting materiality refers to the misstatements identified throughout
the audit, which will be considered at the conclusion of the audit to assess the overall material
accuracy of the financial statements. It's crucial to highlight that if, during the audit, the auditor
becomes aware of information that would have led to an initial determination of a different
amount, materiality for the financial statements as a whole should be revised.

F. AUDIT PROCEDURES
To carry out an efficient and effective audit, the auditor must first make inquiries
about the controls client management has over the identified risks. If through the inquiry
made to management, the auditor is not satisfied with the control in place and assesses
control risk as high, the auditor need not test the control and may rely solely on
substantive testing. Similarly, if an area of inventory is determined to be high risk, the
auditor may opt to not perform a test of control and just increase the nature, timing, and
extent of related substantive tests. However, if the auditor deems the controls imposed by
the client to be appropriate for the related internal controls, the following tests of controls
are to be carried out.
The following are the tests of controls relevant to the objective of this audit in order
to assess the reliability of the internal control of the company:
1. Tour of the facilities.
Performing a walkthrough helps the auditor to observe and assess the
client's internal controls to determine if the controls are being observed
and are effective in reducing the risks of material misstatements.
 Additionally, a walkthrough of the facilities helps the auditor observe the
physical security measures established for the inventory and the
environment it is held.
2. Test the controls implemented to ensure that the classification and valuation of
any work in process are reasonable and accurate.
3. Test the controls implemented to ensure that the valuation and allocation of
overhead expenses are reasonable and accurate.
4. Test the controls in place for making any adjustments to the inventory account to
ensure that such adjustments are properly authorized and appropriate.
a. Test the controls in place for making any write-downs or scrapping of
inventory to ensure the write-downs or the scrapping are properly
authorized and appropriate.
5. Test client procedures for the recording of inventory movements (into and out of
inventory).
6. Understand management’s plan & procedures for the inventory count and assess if
the plan is being carried out properly. Physical attendance at the inventory count
is necessary.
7. Examine if the client is observing proper segregation of duties.
Identifying areas that lack segregation of duties when it should be
appropriate is essential to determine the nature, timing, and extent of substantive
procedures.
8. Test controls related to any consignment arrangements and bill-and-hold
arrangements the entity has entered into to ensure that the inventory is properly
accounted for.
Testing these controls is essential for the auditor to determine whether the
inventory under these arrangements is accurately stated or if it is at high risk of
being materially misstated.
9. Compare sales invoices received from suppliers, receiving reports, and any debits
made to inventory during the period being audited.
This is to test the effectiveness of controls related to this function to
determine if the auditor can rely on them.
 10. Check whether inventory reconciliations have been updated.
If client records are not updated, they may not be reliable and the auditor
may need to increase the nature and extent of substantive procedures.

The following are the analytical procedures to be performed in order to identify any
unusual transactions and to obtain additional audit evidence:
1. Use cost accounting techniques to determine the correctness of the ending balance
of ending inventory and compare independent calculations with client’s records.
This may be done by using supporting documents such as receiving
reports, shipping documents, sales invoices issued to customers, and
progress reports of work in process.
2. Determine any timing differences that may affect inventory ending balance.
After inquiring about the method the client uses (whether FOB shipping
point or FOB destination), determine if any timing differences exist and may
affect the inventory. If yes, the auditor may perform a recalculation of the ending
balance of inventory and compare it to the client's record of ending inventory.
This may be done by inspecting supporting documents related to any purchases
made or goods shipped to customers for the periods right before and after
year-end.
3. Use ratios such as inventory turnover or age of inventory to determine if specific
items need to be written down due to low turnover.
A low turnover or a high inventory age may be indicative of obsolescence
which affects the net realizable value of inventory. The turnover may be
compared to industry standards or to prior years’ inventory turnover to assess if
the inventory is being properly valued. The auditor needs to assess if an
adjustment to the value of inventory must be made.
4. Compare freight costs with shipping documents, prior year records, or with other
manufacturing companies in the same area.
 If the client capitalizes freight costs to the cost of inventories, the
inventory may be overstated because of high freight costs. The auditor must
ascertain that the freight cost is accurate and reasonable.
The following are the substantive tests to be performed in order to obtain sufficient
appropriate evidence:
1. Attend physical inventory counting.
This control serves as a dual-purpose test for test of controls and
substantive procedures. The auditor must be present at the periodic counting of
physical inventory for the raw materials, work in process, and finished goods of
the client. If the risk of material misstatement for inventories is assessed as high
risk, the auditor may choose not to attend the periodic counts but must be present
at the inventory counting at year-end. If there is no periodic count at year-end, the
auditor may request the client to perform such a procedure. However, if
considered to be low-risk, the auditor may choose to attend the periodic inventory
counting and compare the actual inventory counted to the inventory levels stated
in the client’s inventory sheet counts to ascertain whether the sheet counts are
reliable. Ensuring that a year-end inventory count takes place is not necessary if
the inventory account is determined to be of low risk as interim inventory
counting is already sufficient.
2. If applicable, obtain confirmation of inventories at locations outside of the main
warehouse or factory of the entity.
If the manufacturing entity has multiple warehouses or factories, the
auditor must reasonably ensure the correctness of the amounts of inventory stated
in the financial statements. This can be done by attending the physical inventory
counts of each significant location. If the risk of material misstatement is assessed
as high, the auditor can conduct surprise inventory counts to ensure that
inventories are not being transferred around causing an overstated ending
inventory balance at year-end.
3. If practicable, perform an independent physical inventory count.
 If the inventory account is assessed to be at high risk of material
misstatement, the auditor may need to perform an independent physical counting
of inventories if practicable.
4. Perform test of details for ending inventory balances.
a. Inquire of management if it uses FOB shipping point or FOB destination
in the transferring of ownership in relation to purchases made from
suppliers and sales made to customers
i. If applicable, review purchase orders, sales orders, or shipping
documentation for inventory items that are still in transit.
b. Examine overhead accounts for any deviations from prior year records or
techniques or with industry standards.
c. Verify the cost of materials, labor, and overhead of the inventory using
related source documents.
d. Perform independent inventory counting/valuation of high-value inventory
items. The use of an auditors’ specialist may be needed.
e. Examine for any damaged/broken inventory that may affect its value.
i. If needed, examine if the inventory is being properly valued. If not,
require the client to make the necessary adjustments.
f. Examine for obsolescence or other issues that may affect inventory value.
i. If needed, write down the values of inventory. If not, require the
client to make the necessary adjustments.
ii. If needed, recalculate inventory valuation using audited quantities
of inventory multiplied by the audited purchase cost.
g. The auditor may use industry-wide information to identify specific
inventory items that have been found to have a trend of error which may
call for more audit attention and perform substantive testing in those areas.
5. Trace source documentation such as sales invoices and shipping documents to
sales recorded.
This is done to ensure the completeness of the record of sales made to
customers and to ensure that the reduction from inventory is accurate.
6. Examine recorded purchases from suppliers and vouch the related source
documents such as invoices from suppliers and receiving reports.
This is done to ensure that purchases made actually exist and are properly
valued.
7. If determined to be an area of high risk, inquire to the management of any
consignment arrangements, bill-and-hold arrangements, or any related party
transactions relevant to the inventory account.
a. Obtain external confirmation from third parties regarding the quantity and
valuation of inventory held on consignment. If assessed as a high-risk
item, the auditor may insist on conducting a physical count or inspection
of any goods held by a consignee to ascertain that no overstatement of
inventory has taken place.
b. Inspect supporting documents related to bill-and-hold arrangements to
ascertain the correctness of the quantities and values of inventories under
bill-and-hold arrangements.
c. As for related party transactions, the auditor must review the financial
statement of the client to ensure that the proper identification and
disclosure of related party relationships and transactions have been made
in accordance with the relevant applicable frameworks.
8. Perform cut-off tests.
The auditors must observe and examine client procedures for halting any
shipping and receiving of goods from the warehouse at the time of the year-end
physical inventory account. The auditor must also inspect any sales transactions
or purchases made right before year-end and right after to ascertain whether they
were recorded in the right period and that the ending inventory at year-end is
correctly stated.
9. Perform other substantive procedures necessary to test areas with weak or
ineffective controls implemented.
For controls where the auditor is unsatisfied with the controls
implemented or if the test of controls reveals that the controls are ineffective, the
 auditor must increase the nature, timing and extent of substantive testing as
necessary.

G. SAMPLING METHODS

Audit sampling will be conducted when testing the effectiveness of internal controls and
the direct tests of the inventory account and the related assertions. Specifically, attribute
sampling will be utilized to test the operating effectiveness of relevant controls that have been
determined to be reliable in minimizing the likelihood of material misstatement in the account
balances. While, a random sampling is used for substantive testing. However, due to the large
inventory items, data analytics tools may be appropriate to accurately examine a large volume of
transactions related to the inventory account. This can be used to efficiently analyze the data and
identify possible misstatements in the account balance.

Attribute sampling is a statistical sampling technique used to estimate the rate of control
procedure failures based on determining a sample and executing the appropriate audit
procedures. In this case, the attribute to be examined is the effective operation of a control such
as the control system implemented by the client in the acquisition process of inventory. In
determining the sample to be tested, a random sampling will be used due to the large population
of the inventory items which have similar characteristics.

H. TIMETABLE

Audit Phase Date Activities

Phase I: Making Client May ● Understand the client’s

Acceptance and business
Continuance Decisions ● Request management to
authorize auditor to
communicate with the
 predecessor auditor
June (2 weeks) ● Send audit engagement

Phase II: Performing June - July (4 weeks) ● Brainstorming

Risk Assessment ● Perform risk assessment
procedures
July (2 weeks) ● Develop audit plan

Phase III: Obtaining August ● Perform tests of controls

Evidence About ● Evaluate assessed control risks
Internal Control in relation to the evidence
Operating Effectiveness obtained by tests of controls

Phases IV: Obtaining September - December ● Perform substantive tests

Substantive Evidence
About Accounts,
Disclosures, and
Assertions

Phase V: Completing January ● Continue fieldwork and audit

the Audit and Making procedures
Reporting Decisions ● Evaluate evidence obtained
● Communicate and address any
significant issues
● Draft the audit report
February ● Present audit findings to
management
● Obtain approvals and finalize
the audit report
March ● Issue the audit report
 I. RESOURCE ALLOCATION

Sufficient and effective staffing is critical in order to successfully perform the audit
engagement. The following staff are plays an important role in the audit:
● Engagement partner - they play a pivotal role as the overseer of the entire audit process.
Their responsibility involves coordinating and managing the various components of the
audit, ensuring that each phase is conducted effectively and aligned with professional
standards.
● Engagement team - It constitutes the personnel directly involved in the conduct of the
audit such as the audit manager and junior auditors. They work under the guidance and
supervision of the engagement partner. They are responsible for the execution of the audit
procedures, gathering evidence, and ultimately contributing to the formation of the audit
opinion. The composition of the engagement team may vary based on the factors such as
the size and complexity of the auditee and the specific requirements of the engagement.

Utilizing technological tools also plays a crucial aspect of the audit process as it enhances
efficiency and analytical capabilities of the auditor. Technological tools include:
● Data Analytics tools - this can be used to perform analytical procedures and gain insights
from large datasets efficiently. This plays an important role in identifying trends,
anomalies, or potential risks.

Other Resources include:

● Time - adequate time is a fundamental resource in the audit process. It is required for
comprehensive planning, meticulous execution of audit procedures, and the thorough
review of the audit findings. Therefore, insufficient time may compromise the quality and
effectiveness of the audit which could potentially lead to oversight or inaccuracies.
● Financial resources - these are essential to cover the various costs associated with the
audit which could include personnel expenses, technological expenses, and other
 resources essential to the audit. This ensures that the audit engagement is adequately
resourced, allowing for the deployment of necessary expertise and tools.

J. DOCUMENTATION AND WORKING PAPERS

Audit documentation is the record that forms the basis for the auditor’s representations
and conclusions. It facilitates the planning, performance, and supervision of the audit and forms
the basis for the review of the quality of the work performed. In documenting the risk assessment
procedures, this serves as the foundation of the audit as it serves as an important planning
function for the audit. Documentation about the audit procedures that have been performed is
critical in demonstrating that the auditor conducted the audit in a quality manner in accordance
with the standards.

Moreover, audit documentation serves as a proof that auditors diligently considered

potential issues or unique circumstances during the risk assessment phase, showcasing their
commitment to their responsibilities. Its significance in quality review lies in providing a written
account of the evidence supporting the auditor's major findings. In essence, audit documentation
stands as primary evidence of an audit, holding immense importance in the overall audit process.

K. MATERIALITY MISSTATEMENTS

When material misstatements are identified in the account, the following are possible
courses of action the auditors can take, such as:
1. Ask the client to correct factual misstatements
2. Analyze detected misstatements for common problems
3. Design an alternative audit strategy or perform suitable alternative procedures
4. Expand sample size
5. Change the audit objective to estimating the correct value

In gathering sufficient appropriate evidence and sampling, the total estimated material
misstatements exceeding the tolerable misstatement will trigger further investigation and
communication with the client. However, it should also be noted that quantitative thresholds in
materiality are not the only factor used in evaluating materiality. Qualitative considerations are
also important in determining materiality as relatively small misstatements may be material due
to qualitative factors.

The procedures involved in addressing and resolving material misstatements, as per PSA
450, will encompass the following steps: firstly, engaging in communication with management;
secondly, evaluating the identified misstatements; thirdly, considering the nature of uncorrected
misstatements; fourthly, discussing the matter with those responsible for governance; fifthly,
forming an opinion; and lastly, reporting.

All accumulated misstatements identified during the audit, except those deemed
extremely trivial, will be promptly communicated to management. The auditor shall request
corrections for these misstatements and concurrently assess their impact on the overall audit
strategy and plan. This assessment becomes particularly critical if the identified misstatements
are potentially material, and the aggregate of misstatements approaches the auditor's set
materiality threshold.

In instances where management declines to rectify misstatements, the auditor must

understand the reasons behind the refusal. This understanding informs the evaluation of whether
the financial statements, in their entirety, are free from material misstatement. Subsequently, the
auditor shall determine the materiality of uncorrected misstatements, both individually and in
aggregate, by considering their size, nature, and the impact on relevant transactions, account
balances, disclosures, and the financial statements overall.

The next step involves communicating the uncorrected misstatements and their potential
impact, individually or in aggregate, on the auditor's report to those charged with governance.
This communication also extends to the effects of uncorrected misstatements from prior periods
on relevant transactions, balances, disclosures, and the financial statements as a whole. The
auditors will request those responsible for governance to have the uncorrected misstatements be
corrected.
 The auditor will seek a written representation from management and, when applicable,
those charged with governance, regarding whether they believe the effects of the uncorrected
misstatements are immaterial, both individually and in aggregate, to the financial statements as a
whole. Subsequently, the auditor will assess the effect of uncorrected misstatements, individually
and in aggregate, on the financial statements and the auditor's report. If it is concluded that these
misstatements, individually or in aggregate, could reasonably be expected to influence the
economic decisions of users, the auditors will express either a qualified or an adverse opinion.

L. COMMUNICATION WITH MANAGEMENT

PSA 260 governs the auditor's responsibilities regarding communication with those
charged with governance in financial statement audits, excluding requirements for
communication with an entity's management unless they also hold a governance role. It
underscores the importance of pre-audit communication with both the client and those charged
with governance to establish the audit's scope, objectives, and key parameters. This initial
communication includes defining criteria, standards, and requirements, agreeing on the audit
plan, schedule, methodology, and confirming roles and responsibilities to ensure a shared
understanding of the audit's nature.

Clear expectations are set for those charged with governance, emphasizing their role in
facilitating the audit process. They are expected to ensure senior management's participation in
key meetings, provide adequate staff support, collaborate on the audit agenda, supply necessary
documents, and create a conducive working environment for auditors. Any significant difficulties
encountered during the audit, as per PSA 260, must be communicated to those overseeing
governance promptly, as these challenges may impact the audit scope and lead to adjustments in
the auditor's opinion.

Various matters may require communication with management, including business

conditions affecting the entity, business plans, and strategies influencing material misstatement
risks. Oral or written communication methods are employed, and when dealing with individual
governance members, oral summaries may be provided to ensure comprehensive understanding.
Documentation of oral communication may include minutes retained as part of audit
documentation, serving as a reliable record.

Timing of communication varies based on the significance and nature of the matter, as
well as anticipated actions by those overseeing governance. Planning-related matters are
addressed early, and challenges encountered during the audit are communicated promptly to seek
timely assistance.

The communication of findings related to the inventory account will involve a detailed
description of how the audit process addressed these issues, particularly focusing on how the
auditor responded to the assessed risk of material misstatements, covering both inherent risks and
control risks associated with the inventory account. The auditors will present an overview of the
procedures undertaken and share the results of these procedures. The discussion will emphasize
key observations related to the inventory account. These observations may encompass, but are
not limited to, findings related to weaknesses in internal controls related to inventory discovered
during the audit, disparities between the recorded and actual physical inventory numbers,
inventory valuation, and the outcomes of cost calculations.

M. REVIEW AND SUPERVISION

According to PSA 300, the nature, timing and extent of direction and supervision of
engagement team members and review of their work vary depending on many factors, including
the size and complexity of the entity, the area of audit, the risks of material misstatement, and the
capabilities and competence of personnel performing the audit work. The auditor plans the
nature, timing, and extent of direction and supervision of engagement team members based on
the assessed risk of material misstatement. As the assessed risk of material misstatement
increases, for the area of audit risk, the auditor ordinarily increases the extent and timeliness of
direction and supervision of engagement team members and performs a more detailed review of
their work. Similarly, the auditor plans the nature, timing, and extent of review of the
engagement team’s work based on the capabilities and competence of the individual team
members performing the audit work.
Throughout the performance of the engagement, the engagement partner is tasked with
assuming responsibility for several key aspects. These include overseeing, supervising, and
managing the audit engagement in adherence to professional standards, as well as meeting
regulatory and legal requirements. Additionally, the engagement partner is responsible for
ensuring the suitability of the auditor's report given the specific circumstances surrounding the
engagement. The supervision of the engagement team encompasses various aspects, including
monitoring the advancement of the audit engagement, evaluating the proficiency and skills of
individual team members, handling significant issues that emerge throughout the audit and
assessing their significance, adjusting the planned audit strategy as needed, and recognizing
topics for consultation or review by more seasoned members of the engagement team during the
audit process.

On the other hand, the review of the work performed by the junior auditors is needed to
maintain the quality of the audit process. As stated in PSA 220, “the engagement partner shall
take responsibility for the direction and supervision of the members of the engagement team and
the review of their work.” The engagement partner or the senior auditor should review the work
to determine whether it complies with the requirements of professional and ethical standards.
Regular reviews ensure that the procedures and documentation performed by the junior auditors
are appropriate in achieving the objective of the engagement. This enhances the communication
between senior and junior auditors that further adds to the quality of the audit. In addition, the
junior auditors will be able to learn and improve their knowledge and skills through the feedback
provided by their senior auditor.

N. LEGAL AND ETHICAL CONSIDERATIONS

Adhering to professional ethics is a fundamental requirement for auditors, ensuring that

they approach their responsibilities with honesty, independence, and impartiality. This
commitment enables auditors to deliver unbiased and objective assessments of financial
information. Given the sensitive nature of the data handled by auditors, professional guidelines
underscore the critical importance of maintaining confidentiality. This not only protects client
information but also plays a pivotal role in building and maintaining trust.
In addition to upholding ethical standards, auditors are obligated to exercise due
professional care when performing audit procedures. Legal requirements, which encompass
auditing standards and regulations, provide the necessary framework for conducting audits.
Failure to comply with these standards can result in legal consequences for both auditors and the
entities they audit.

The adherence to professional ethics and legal requirements is paramount for the
credibility and effectiveness of auditing. Upholding the highest standards of ethical conduct and
complying with applicable laws are imperative for auditors to fulfill their responsibilities and
contribute to the integrity of the financial reporting process.

In light of these principles, the auditors conducting this audit will strictly adhere to the
Code of Professional Ethics and the Accountancy Act of 2004. This commitment is not only a
legal obligation but also a demonstration of the auditors' dedication to maintaining public trust
and confidence. Throughout the audit process, the auditors will uphold the values of integrity,
objectivity, professional competence, due care, confidentiality, and professional behavior,
ensuring a thorough and trustworthy audit that prioritizes the public interest over individual
interests.

O. REPORTING

The audit findings are reviewed by the engagement team, led by the engagement partner,
encompassing an assessment of identified risks, material misstatements, and the overall
sufficiency and appropriateness of acquired audit evidence. Subsequently, the team drafts the
audit report, which includes essential components such as the title, addressee, introductory
paragraph identifying the audited financial statements, delineation of management's and the
auditor's responsibilities, the scope of the audit, the auditor's opinion, other reporting
responsibilities, auditor's signature, date of the report, auditor's address, and, if applicable,
explanatory or emphasis-of-matter paragraphs.
 Following the draft, the report undergoes an internal review within the engagement team,
led by the engagement partner and senior members, to ensure precision, completeness, and
adherence to auditing standards and regulatory requirements. Occasionally, the draft report may
be shared with the client's management for factual accuracy verification, emphasizing a process
that upholds the auditor's independence and professional judgment.

The engagement partner, serving as the team leader, assumes responsibility for finalizing
the audit report. This entails addressing any comments or feedback received during the internal
review, confirming compliance with relevant standards, and making the final determination of
the auditor's opinion. Before issuance, the engagement partner may communicate key audit
findings and the intended content of the report with those charged with governance, facilitating
discussions and ensuring alignment on the report's content.

Upon finalization and approval, the audit report, along with the audited financial
statements, is issued to the client. Throughout the entire process, the engagement team
meticulously documents the audit procedures, evidence gathered, and the rationale underlying
the audit opinion, ensuring comprehensive and well-documented audit files.

In accordance with PSA 700, the auditor shall form an opinion on whether the financial
statements are prepared, in all material respects, in accordance with the applicable reporting
framework. In order to form that opinion, the auditor shall conclude as to whether the auditor has
obtained reasonable assurance about whether the financial statements as a whole are free from
material misstatements, whether due to error or fraud. The conclusion shall take into account:
a. Whether sufficient appropriate evidence has been obtained,
b. Whether uncorrected misstatements are material, individual or in aggregate,
c. Whether the financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting framework
d. Whether in view of the requirements of the applicable financial reporting
framework:
 i. The financial statements adequately disclose the significant accounting
policies selected and applied;
ii. The accounting policies selected and applied are consistent with the
applicable financial reporting framework and are appropriate;
iii. The accounting estimates are reasonable;
iv. The information presented in the financial statements is relevant, reliable,
comparable, and understandable;
v. The financial statement provide adequate disclosures to enable the intended
users to understand the effect of material transactions and events on the
information conveyed in the financial statements; and
vi. The terminology used in the financial statements,including the title of each
financial statement is appropriate.
e. Whether the financial statements achieve fair presentation and shall be evaluated
based on the following:
i. The overall presentation, structure, and content of the financial statements;
and
ii. Whether the financial statements, including the related notes, represent
the underlying transactions and events in a manner that achieves fair
presentation
h. Whether the financial statements adequately refer to or describe the applicable
financial reporting framework

The auditor shall express an unmodified opinion when the auditor concludes that the
financial statements are prepared, in all material respects, in accordance with the applicable
financial reporting framework. However, if the auditor concludes that, based on the audit
evidence obtained, the financial statements as a whole are not free from material misstatement;
or the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements are free from material misstatements, the auditor shall modify the opinion in
the auditor’s report in accordance with PSA 705.
 P. CONTINUAL MONITORING

The need for continual monitoring and updating the audit plan is significant for ensuring
that the audit is performed in a quality manner throughout the engagement. As emphasized in
PSA 220, monitoring the progress of the audit plan is needed to assess whether the objective of
work performed has been achieved. The emergence of new information may cause changes in the
audit process to appropriately address the issues and risks identified in a timely manner. It is also
important to regularly monitor the audit work performed to assess the adequacy of resource
allocation, thus assessing the efficiency of audit procedures.

Q. CLIENT COOPERATION

Client cooperation plays a crucial role in the successful collection of audit evidence
(Rimkus, 2021). The auditor's capacity to secure the information and documentation necessary
for forming an opinion on the financial statements is directly influenced by the client's
collaboration throughout the audit process. The information provided by the client is paramount,
serving as the basis for the auditor's understanding of the business, risk assessment, and the
execution of audit procedures essential for opinion formulation. Without access to pertinent
information and data, the auditor's ability to arrive at a well-informed opinion is compromised.

Primarily, during the pivotal risk assessment phase, crucial for effective audit planning,
client cooperation becomes imperative. It is instrumental in comprehending the intricacies of the
client's business processes, internal controls, and the accounting systems in use. This
collaboration is vital for identifying and evaluating the risks of material misstatements,
encompassing a detailed understanding of the client's industry, internal control environment, and
any significant events that may impact the financial statements.

In addition to information gathering for risk assessment and audit planning, client
cooperation is indispensable for executing procedures such as substantive procedures and tests of
controls to obtain sufficient and appropriate audit evidence. The effectiveness and efficiency of
these procedures depend on the client's cooperation.

Given that clients are responsible for preparing the financial statements, their cooperation
is essential to ensuring the accuracy and completeness of the financial information presented.
Throughout the audit, client availability for meetings and discussions is crucial for addressing
any clarifications and providing general support to the audit process. In essence, client
cooperation is a linchpin in facilitating a smooth and effective audit engagement.

However, challenges may arise in obtaining information and documentation, such as

limitations in staff resources, potential delays in evidence collection processes, and insufficient
documentation. To address these challenges effectively, auditors should initiate open and
transparent communication with the client right from the beginning of the engagement. It is
crucial to clearly convey the required information and documentation, the purpose of audit
procedures, and the specified timeframe for submission. This communication is formalized
through the engagement letter, which outlines the responsibilities of both parties and serves as a
reference in case of disputes.

To ensure that the client has sufficient time to prepare the necessary information and
documentation, it is essential to identify required information in advance. This involves thorough
planning of the audit, identification of needed information, and providing the client with lists of
required documentation well in advance. Additionally, conducting regular follow-up meetings
with the client helps track progress and ensures that any identified issues are promptly addressed
and resolved. Timely communication between the auditor and the client is vital to minimizing, if
not preventing, delays and maintaining the audit schedule.

In instances where obtaining information poses challenges, auditors may need to explore
alternative methods and sources of information. It is important to document any challenges
encountered, including their nature, the efforts made to address them, and the impact on the
audit. This documentation ensures transparency and accountability throughout the audit process.
 R. QUALITY CONTROL

Quality control procedures are paramount in guaranteeing the accuracy and adherence to
auditing standards in the audit process. These procedures serve as a systematic framework to
monitor and assess the entire audit, ensuring that it aligns with established standards and
regulations. By implementing rigorous quality control measures, auditors can enhance the
reliability and credibility of their work.

Quality controls are policies and procedures adopted by the CPAs to provide reasonable
assurance of conforming with professional standards in performing audit and related services.
Under the Philippine Standards on Quality Control 1, a firm has an obligation to establish a
system of quality control to provide reasonable assurance that the firm and its personnel: comply
with professional standards and regulatory and legal requirements; and the reports issued by the
firm are appropriate in the circumstances.

Audit firms are required to implement quality control policies and procedures in order to
ensure that all audits are conducted in accordance with PSAs. PSA 220 has identified the
following quality control policies that may serve as a guide to audit firms in establishing their
own system of quality control: Leadership Responsibilities, Ethical Requirements, Independence,
Acceptance and Continuance of Client Relationships, Human Resources and Assignment,
Engagement Performance, Engagement Quality Control Review, and Monitoring.

S. CONCLUSION

This audit plan should be reviewed and approved before its commencement to ensure the
quality of the audit work to be performed. The plans set forth in this paper should align with the
objective of the audit engagement which should be also in compliance with relevant regulatory
requirements. The audit manager should regularly review this paper to ensure that the plan
adequately identifies and addresses important risks and other significant matters that might have
a material impact on the accuracy of financial statements. It is important that the audit manager,
who leads the audit team, ensures that the plan includes sufficient and appropriate approaches in
order to achieve the objective in a quality manner. Then after the completion of this paper, the
engagement partner should review the overall audit strategy and approach outlined in the plan.
And after it has been reviewed and approved by the engagement partner, the review function of
the audit firm should review this paper to ensure that it adheres with the firm policies and
auditing standards.
After all the reviews and approval of the appropriate individuals, the audit team may
execute the audit plan.

III. ONGOING LEARNING

This project enables us to obtain valuable knowledge and a deeper understanding of what
we have learned in auditing theory. We are able to apply our theoretical knowledge and
internalize the concepts better. To be able to make this paper, we have to exercise our critical
thinking skills and analytical skills that further allows us to practice our judgment, which is an
important aspect when we pursue this profession.

In the process of making this paper, we are encouraged to think critically in analyzing
and identifying risks since the company is imaginary. This has strengthened our problem-solving
abilities as we have to determine certain issues and generate solutions to address them.
Developing effective strategies has also improved our communication skills as we collaborate
with each other. This audit plan includes time management which also challenges us as we don’t
have the experience yet. However, through research and judgment we manage to create a
timetable that we think is appropriate.

As accountancy students, we have encountered and familiarized financial transactions.

Through this project, we are able to apply the things we have learned in class discussions in a
scenario that is applicable in the real world. Thus, this is one of the preparations that can equip us
with skills necessary for our future career in accounting, auditing and other related fields.