I.

PURPOSE To establish standards and provides guidance on the following: o Agreeing the terms of the engagement with the client. o The Auditors responsibility to a request by a client to change the terms of an engagement to one that provides a lower level of assurance. To assist the auditor in the preparation of engagement letters relating to audit s of FS. This PSA is also applicable to related services. o The Auditor and client should agree on the terms of engagement. o Agreed terms would need to be recorded in an audit engagement letter or other suitable form of contract. II. AUDIT ENGAGEMENT LETTERS Prepaid in the interest of both client and auditor before the commencements of t he engagement. HELP AVOID MISUNDERSTANDINGS with respect to the engagement. Documents and confirms: o The auditors acceptance of the engagement. o The objective and scope of the audit o The extent of the auditors responsibilities o The form of any reports Principal Contents o The objective of the audit of the FS. o Managements responsibility for the FS. o The financial reporting framework adopted by management in preparing the FS. o The fact that because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and intern al misstatement may remain undiscovered. o The unrestricted access to whatever records, documentation and other inf ormation requested in connection with the audit. o Arrangements regarding the planning of the audit. o Expectation of receiving from management written confirmation concerning representations made in connection to confirm the terms of the engagement. o Description of any other letters or reports the audit expects to issue t he client. o Basis on which fees are computed and any billing agreements. Other point which could be included o Arrangements concerning the involvement of -other auditors and experts; and -internal auditors and other client staff o Arrangement to be made with the predecessor auditor o Any restriction of auditors liability when such possibly exists o A reference to any further agreements between the auditor and the client Audit of Components Components- a subsidiary, branch, or division of a parent entity o When the auditor of parent entity is also auditor of each component, the auditor should consider whether to send a separate engagement letter to the com ponent. o Factors to consider whether to send a separate letter to a components: Who appoints the auditor of the components Whether a separate auditor report is to be issued on the component Legal requirements The extent of any work performed by the auditors Degree of ownership by the client Degree of independence by the components management III. AGREEMENT ON THE APPLICABE FINANCIAL REPORTING The terms of the engagement should identify the applicable financial reporting f ramework. In the Philippines, the applicable financial reporting framework for g eneral purposes FS is established by FRSC.

The auditor should ACCEPT an engagement for an audit of FS ONLY when the auditor concludes that the financial reporting framework adopted by management is accep table or when It is required by law or regulation. Without an acceptable financial reporting framework o management does not have an appropriate basis for preparing FS o auditor does not have suitable criteria for evaluating the entitys FS Unless use of the financial reporting framework is required by law or regulation, the auditor encourages the ,management to o Address the deficiencies o Adopt that another that is acceptable When the financial reporting framework required by law or regulation and managem ent has no choice to adopt this framework, the auditor ACCEPTS the engagement on ly if the deficiencies can be adequately explained to avoid misleading users. When the auditor ACCEPTS an engagement involving an applicable financial reporti ng framework that is not established by an organization that is authorized to p romulgate standards for general purposes FS: o The auditor may encounter deficiencies in that framework that were Not anticipated when the engagement was initially accepted, and That indicates that the framework is not acceptable for general purposes FS. o The auditor discusses the deficiencies with management. IV. RECURRING AUDITS Consider whether: o The term need to be REVISED o There is a need to REMIND the client of the existing terms of engagement The auditor may deicded NOT TO SEND a new letter each period. However, the audit or may deiced to send a new engagement letter if there is/are: o Any indication that the client misunderstands the objective and scope of audit o Revised or special terms of the engagement o A recent change of senior management, board of directors and ownership o Significant change in nature or size of the clients business o Legal requirements o A change in the FS reporting framework adopted by management V. o o o o ACCEPTANCE OF CHANGE IN AN AUDIT ENGAGEMENT Possible REASON FOR A CHANGE in engagement Change in circumstances Misunderstanding as to the nature of an audit or elated service Restriction on the scope of the engagement Audit Procedures when Change in engagements where the REASONS FOR THE CHANGE IS APPROPRIATE Agree on the new term engagement and proceed with the new engagement Issue the report appropriate for the revised terms of engagement Generally, the report issued would not include reference to the original engagem Change in engagements where the REASONS FOR THE CHANGE IS NOT APPROPRIAT

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Auditor should decline managements request for a change in engagement If unable to a change of the engagement and is not permitted to continue the ori ginal engagement, the auditor should WITHDRAW from the engagement and consider r eporting responsibilities.

I.

PURPOSE To establish standards and provide guidance on the auditors responsibility to con sider fraud in an audit of FS and expand on how the standards and guidance in: o PSA 315,understanding the entity and its environment and assessing the ri sks of material misstatements, and o PSA 330,the auditors procedures in response to assessed risks are to be app lied in relation to the risks to material misstatement due to fraud. Distinguishes fraud from error and Describe the types of fraud that are relevant to the auditor, Describe the respective responsibilities of those charged with governance and th e management of the entity for the prevention and detection of fraud. Describe the inherent limitations of an audit in the context of fraud, and Sets out the responsibilities of the auditor for detecting material misstatement due to fraud Requires the auditor to maintain an attitude of professional skepticism recogniz ing the possibility that a material misstatement due to fraud could exist Requires embers of the engagement team to discuss the susceptibility of the enti tys FS to material misstatement Requires the auditor to: o Perform procedures to obtain information that is used to identify the ri sks of material misstatement due to fraud o Identify and assess the risks of material misstatement due to fraud o And for those assessed risks that could result in a material misstatemen t due to fraud, evaluate the design of the entitys related controls, including re levant control activities, and to determine whether they have been implemented; This standards requires auditor to: o Determine overall responses to address the risks of material misstatemen t due to fraud at a FS level o Incorporate an element of unpredictability in the selection of the natur e, timing and extent of the audit procedures to be performed o Design and perform audit procedure to respond to the risks of management override of controls; o Determine responses to address the assessed risks of material misstateme nt due to fraud; o Consider whether the identified misstatement may be indicative of fraud; o Obtain written representations from management relating to fraud, and o Communication with management and those charged with governance; This standard Provides guidance on communications with regulatory and enforcemen t authorities; This standard provide guidance if, as a result of a misstatement resulting from fraud of suspected fraud, the auditor encounters exceptional circumstances that bring into question the auditors ability to continue performing the audit; and These standard establishes documentation requirements In planning and performing the audit to reduce risk to an acceptably low level t he auditor should consider the risks of material misstatements in the FS due to fraud. II. Characteristics of Fraud Misstatement Misstatement in the FS can arise from fraud or error. The distinguishing factor between fraud and error is whether the underlying action that results in the mis statement of the FS is intentional or Unintentional. Error

The term error refers to an unintentional misstatement in FS, including the omissi on of an amount or a disclosure, such as the following: o A mistake in gathering or processing data from which FS are prepared. o An incorrect accounting estimates arising from oversight or misinterpret ation of facts. o A mistake in the application of accounting principles relating to measur ement, recognition, classification, presentation, or disclosure. Fraud The term fraud refers to intentional act by one or more individuals among manageme nt, those charged with governance, employees, or third parties, involving the us e of deception to obtain an unjust or illegal advantage. Although fraud is abroa d legal concept, for the purposes of this PSA, the auditor is connected with fra ud that causes a material misstatement in the FS. Auditors do not make legal det erminations of whether fraud actually occurred. Types of fraud: o Fraud involving one or more members of management or those charged with governance is referred to as management fraud; o fraud involving only employees of the entity is referred to as employee f raud; o III.