AIS REVIEWER pdf-2

Introduction to the Computer Information Function of the Information Systems
System Audit Regardless of the information system components used, the

architecture or the business task undertaken, information
What is the relevance of the CIS to Daily Operations? systems perform the five fundamental functions:
As Management process voluminous data, they heavily relies
A. Capture Input - Inputs are the data needed by the
on Computer to process and safekeep their accounting system. An information system must provide a
records. What if the following occurs: mechanism to capture input.
The system is not configured to process accurately. B. Process - The transformation of input into output is
called Processing. Performing the calculations,
Inappropriate individuals can access and make
validating information, updating records, and tracking
changes to the accounting information
raw materials are example of processing.
Changes in system can be made without sufficient
C. Convey Output - Outputs are the result of processing
approval
data.
Nature of IT and its Capabilities D. Collect Feedback - In order to determine whether the
Information Technology generally refers to a wide variety of system is working as planned feedback- data about
computer hardware and software technology that are used to the performance of the system is collected.
manage and control information, when it is organized to
perform task or organizational process, an information E. Controls - Refers to the process and procedures that
system is created. restrict and monitor the inputs, processing and output to
provide reasonable assurance and that organizational
Major Components of Information System objectives are met.
A typical information system records, process, stores and
disseminates information that consists of the methods and Characteristics of various type of IT-based Systems
records an entity's transactions and to maintain
1) Batch processing
accountability for the related assets, liabilities and equity.
- A system which like transactions are processed
Major Components of Information System periodically as a group. This does not provide up-to-
The Major components are the following: time or real time transaction information.
A. Hardware - Refers to the computer and peripheral 2) Real-time processing
equipment for input, output and storage of data. - A system that allows immediate update or access
data or instantaneous analysis of data
B. Software - Refers to the series of programs that provide
3) Online Transaction Processing (OTP)
instructions for operating the computer.
- is a processing method in which the IT systems
I. System Software - which controls the operations
process data immediately after it is captured and
of the computer itself
provide information to the users on a timely basis.
II. Application Software - designed to perform
4) Designing support system
specific task - Combine models and data to attempt to solve non-
C. Data - Refers to the inputs and outputs of the computer structured problems with extensive user involvement
system. Most accounting information systems are
structured to store in data in a database, which is 5) Expert System
organized collection of data. - Guides decision process with a well defined area and
allows the making of decision compared to expert
D. People - Refers to the users and the information
system professionals 6) Centralized Processing System
E. Procedures - These are the policies and practices - Performed by one computer or by a cluster of coupled
computer in a single location. Data are often input and
within a company for operating and maintaining the
reports printed using workstations.
information system.
F. Networks - These are specialized hardware and 7) Decentralized Processing System

software that allow different IT devices to connect - Computers are in different location. Although data
may be transmitted between computers periodically,
with each other to share data, software, and other
such system involves only limited communication
hardware resources.
among systems.
8) Client Server Architecture (IT Architecture) Internal Control for IT Environment
- Network system which multiple computers (clients) A. General Control Activities
share memory and other capabilities of a larger
B. Application Control activities
computer.
C. User control activities
9) Local Area Network (LAN)
Internal Control for IT Environment:
- Communication network that interconnects computer
within a limited area General Control Activities
In an IT environment, GENERAL CONTROLS are those that
10) Wide Area Network (WAN) Affect multiple application systems. In accordance of AICPA,
the general controls are as follows:
- A Communication network that interconnects within a
large geographical area network a) Organization and Operation
b) Systems development documentation controls
11) Cloud Computing
- A model for enabling on demand user network access c) Hardware and systems software controls
to a shared pool of computing resources d) Access controls
e) Data and Procedural controls
12) Virtualized Client/Server Infrastructure
- Software-based IT infrastructure being hosted on General Control Activities:
another physical infrastructure. Organizational and Operational Control
Controls:
13) Electronic Data Infrastructure (EDI) 1) Segregate functions between the IT Department and
- Data are exchanged electronically between the User Department
computers of different companies. In an EDI systems,
source documents are placed with electronic 2) Do not allow IT department to initiate or authorize
transactions created in standard format. transactions
3) Segregate functions within the IT department

Auditor's Responsibilities
To obtain an understanding adequate to: General Control Activities: Organizational and Operational
a) Aid in Planning the remainder of the audit and; Control
b) Assess Control Risk Key Functions in the IT department are:
Auditor's Responsibilities a) System analyst f) Quality assurance
Factors that may affect the study of internal control in the b) Applications g) Control Group
computer systems includes: Programmer h) Data Security
A. Results in transaction trails that exist for a short c) Systems i) Database
period of time or only in computer readable form Programmer Administrator
d) Operator j) Network technician
B. Program error that cause uniform mishandling of e) Data Librarian
transactions- clinical error becomes less
frequent; General Control Activities: Organizational and Operational
Control
C. Computer controls that need to be relied upon In an ideal IT set-up, the IT functions shall be separated
instead of segregation of functions but this is not the case fo many small company.
However, 2 key functions that are segregated are the
D. Increased difficulty in detecting an authorized
applications programmer and operator. When these
access;
functions are not segregated, irregularities in the IT can
E. Allow increased Management supervisory be penetrated and concealed and auditor cannot rely on
potential resulting from more timely reports. the IT controls.
F. Less documentation of initiation and execution of The Auditor test of controls shall include inquiry,
observation, discussion and review of the appropriate
transactions.
organizing chart, responsibility for initiating and
G. Computer controls that may affect the authorizing transactions, discrepancies should be
effectiveness of related manual control reported and the appropriate controls are
procedures that use computer output recommended.
General Control Activities: 3) Access to computer hardware should be limited
Systems development documentation controls to authorized individuals such as computer
Controls: operators and their supervisors
1) User department must participate in systems design
General Control Activities: Access Controls
2) Each system must have written specification, which are Access to IT Environment
reviewed and approved by Management a. Physical controls
I. Limited Physical access
3) Both user and IT personnel must test the new system
II. Visitor Entry Logs
4) Management, users, and IT must approve new systems b. Electronic Access Controls
before they are placed into operation I. Access control software (user identification)
5) All master and conversion file should be controlled to II. Call back
prevent unauthorized changed III. Encryption boards
6) After the new system is operating there should be a General Control Activities:
proper approval of all program change Data Procedural Controls
Controls
7) Proper documentation standards should exist to A control group should:
assure continuity of the system.
Receive all data processed
General Control Activities: Systems development
documentation controls Ensure data are recorded
Two Common Controls over system change are:
Follow-up in errors during processing and determine
1) Design Methodology
transactions are corrected and resubmitted by the
2) Change control process
proper use
General Control Activities:
Verify the proper distribution of output
Hardware and Software controls
Controls Written Manual of systems and procedures should be
1) The auditor shall be aware of control features prepared for all the computer operations and should provide
inherent in the computer hardware, operating for Management's general or specific authorization to
system and other supporting software and process transactions
ensure that they are utilized to the maximum
Internal Auditors should review and evaluate proposed
possible extent systems at critical stages of development and review and test
2) System software should be subjected to the computer procedures.
same control procedures as issue applied to the
installation of and changes to application General Control Activities: Access Controls
programs. Specific Controls
a) Operations Run Manual
General Control Activities: Hardware and Software b) Back-up and Recovery
controls
Controls built to detect and prevent equipment failures: c) Contingency Processing
Parity check d) Processing Controls
Echo check
e) File Protection ring
Diagnostic routines
Boundary protection f) Internal and External labels
Periodic Maintenance
Internal Control for IT Environment:
General Control Activities: Access Controls
Application Control activities
Controls
1) Access to program documentation should be Application controls are related to specific application. Each
limited to those persons who require it in the accounting application that is processed within IT includes:
performance of their duties
Input, Process and Output.
2) Access to data files and programs should be
limited to those individuals such computer
operators and their supervisors.
Application Control activities: Input Application Control activities: Output
Example of Output controls
Controls:
a) Data should be authorized and approved a) Control Total
b) Limiting the Quantity of Output and total processing time
b) System should verify all significant data fields used to
record information c) Error message and resolution
Reference
c) Conversion of data into machine-readable form should • Auditing Theory by Cabrera
be controlled and verified for accuracy. • AASC issuances
d) Movement of data between processing steps and Final QUIZ #1

Prepare a ¼ sheet of yellow paper. Wrong spelling and any form
departments should be controlled
or erasures are WRONG!
e) Correction of errors and resubmission of corrected
1. Refers to the computer and peripheral equipment for input,
transactions should be reviewed and controlled. output and storage of data.
Application Control activities: Input 2. Refers to the inputs and outputs of the computer system.
Example of Input controls Most accounting information systems are structured to
a) Preprinted form g) Menu Driven Input store in data in a database, which is organized collection of
data.
b) Checker Digit h) Field Checks
c) Control batch i) Validity checks 3. A system which like transactions are processed
d) Hash Total j) Missing data check periodically as a group. This does not provide up-to-time or
e) Record Count k) Field size check real time transaction information.
f) Reasonableness and l) Logic check
4. Generally refers to a wide variety of computer hardware
Limit test and software technology that are used to manage and
control information, when it is organized to perform task or
Application Control activities: Processing organizational process, an information system is created.
Controls:
a) Control totals should be produced and reconciled 5. Computers are in different location. Although data may be
transmitted between computers periodically, such system
with input total control
involves only limited communication among systems.
b) Control should prevent processing the wrong file and
6. Enumerate the 3 Internal Control Activities in the IT
detect errors in file manipulation Environment
c) Limit and reasonableness check should be 9. The person responsible for analyzing the present user
incorporated in programs environment/requirement and recommending the specific
changes which can be made
d) Run to run totals should be verified at appropriate
points in processing cycle. 10. Responsible for the custody of the removable media and for
maintenance of program and system documentation
Application Control activities: Processing
11. Is responsible for maintaining the integrity of the on-line
Example of Processing controls access control security and software
a. Checkpoint/ Restart Capacity
12. All new systems being developed should flow through a
b. Error resolution Procedure
documented process that has specific control points where
Application Control activities: Output the overall direction if the system can be evaluated and
changes if needed can be made.
Visual review of output should be done by the user or an
independent control group: 13. A special bit is added to each character stored in memory
that can detect if the hardware loses a bit during the
1) Output control totals should be reconciled with input internal movement of a character similar to a cheek digit
and processing control totals
14. Hardware or software supplier by the manufacturer to
2) Output should be scanned and tested by comparison check the internal operations and devices to check the
to original source documents internal operations and devices within the computer
system. These routines are often activated when the
3) System output should be distributed only to system is booted up.
authorized users
15. To ensure the preservation of historical record and the
ability to recover from an unexpected error, files created
within IT are backed up in a system that may occur.
What is Audit? in accordance with an applicable financial reporting
framework; and
Defining Assurance
Engagement in which a practitioner expresses a conclusion b) To report on the financial statements, and communicate as
designed to enhance the degree of confidence of the intended required by the PSAs, in accordance with the auditor's
findings.
users other than the responsible party about the outcome of
the evaluation or measurement of a subject matter against Types of Audit
criteria. As to nature of assertion or As to types of auditor
data External audit
Elements of Assurance Financial statement Internal audit
a) A three party relationship involving a practitioner, a (FS) audit Government audit
responsible party, and intended users Operational audit
Compliance audit
b) An appropriate subject matter
c) Suitable criteria Audit Risk

Audit risk is the risk that the auditor gives an inappropriate
d) Sufficient appropriate evidence
audit opinion when the financial statements are materially
e) A written assurance report in the form appropriate to misstated.
a reasonable assurance engagement or a limited
Audit risk has three components:
assurance engagement.
a) Inherent risk,
Two Types of Assurance Engagement b) Control risk and
1) Reasonable assurance engagement - the objective
c) Detection risk
is a reduction in assurance engagement risk to an
acceptably low level in the circumstances of the What is the Correlation of Control Risk to Audit?
engagement as the basis for a positive form of Internal Control
expression of the practitioner's conclusion. Internal control is the process designed, implemented and
maintained by those charged with governance, management
2) Limited assurance engagement - the objective is a
reduction in assurance engagement risk to a level and other personnel to provide reasonable assurance about
that is acceptable in the circumstances of the the achievement of an entity's objectives with regard to:
engagement, but where the risk is greater than for a
reasonable assurance engagement, as a basis for a Reliability of financial reporting,
negative form of expression of the practitioner's Effectiveness and efficiency of operations; and
conclusion. Compliance with applicable laws and regulations.
Different form of Assurance
A. Audit
5 Components of Internal Control
The control environment includes the governance and
B. Review
management functions and the attitudes, awareness, and
C. Compilation
actions of those charged with governance and management
D. Agreed upon procedures
concerning the entity's internal control and its importance in
Define Audit the entity.
As defined by the American Accounting Association, an audit
is a systematic process of objectively obtaining and 5 Components of Internal Control
evaluating evidence regarding assertions about economic Entity's Risk Assessment Process
actions and events to ascertain the degree of correspondence The auditor shall obtain an understanding of whether the
between these assertions and established criteria and entity has a process for:
communicating the results thereof.
a) Identifying business risks relevant to financial
OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND reporting objectives;
THE CONDUCT OF AN AUDIT IN ACCORDANCE WITH PSAS
b) Estimating the significance of the risks;
a) To obtain reasonable assurance about whether the
financial statements as a whole are free from material c) Assessing the likelihood of their occurrence; and
misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether the d) Deciding about actions to address those risks.
financial statements are prepared, in all material respects,
The auditor shall obtain an understanding of the information
system, including the related business processes, relevant to
financial reporting, such as the following areas.
The classes of transactions in the entity's operations

that are significant to the financial statements.
The procedures, within both IT and manual systems, by

which those transactions are initiated, recorded,
processed, corrected as necessary, transferred to the
general ledger and reported in the financial statements.

Control activities are the policies and procedures to help
ensure that management directives are carried out. Examples
of control activities include those relating to the following:
Authorization
Performance reviews
Information processing
Physical controls
Segregation of duties
Monitoring of controls involves assessing the design and

operation of controls on a timely basis and taking the
necessary corrective actions modified for changes in
conditions.
Limitations of Internal Control

Realities that human judgment in decision-making can
be faulty and that breakdowns in internal control can
occur because of human error.
Controls can be circumvented by the collusion of two or

more people or inappropriate management override of
internal control
Designing and implementing controls, management may

make judgments on the nature and extent of the controls
it chooses to implement, and the nature and extent of
the risks it chooses to assume
What is the Correlation of Control Risk to Audit? 5 Components of Internal Control
 Monitoring of controls involves assessing the design and
Internal Control operation of controls on a timely basis and taking the
Internal control is the process designed, implemented and necessary corrective actions modified for changes in
maintained by those charged with governance, management conditions.
and other personnel to provide reasonable assurance about Limitations of Internal Control
the achievement of an entity’s objectives with regard to:
Realities that human judgment in decision-making can
Reliability of financial reporting; be faulty and that breakdowns in internal control can
occur because of human error.
Effectiveness and efficiency of operations; and
Controls can be circumvented by the collusion of two
Compliance with applicable laws and regulations.
or more people or inappropriate management override
5 Components of Internal Control of internal control
The control environment includes the governance and Designing and implementing controls, management
management functions and the attitudes, awareness, and may make judgments on the nature and extent of the
actions of those charged with governance and management controls it chooses to implement, and the nature and
concerning the entity’s internal control and its importance in extent of the risks it chooses to assume
the entity.
The Entity’s Internal Control
 An understanding of internal control assists the auditor in
Entity’s Risk Assessment Process
identifying types of potential misstatements and factors
The auditor shall obtain an understanding of whether the
that affect the risks of material misstatement, and in
entity has a process for:
designing the nature, timing, and extent of further audit
procedures.
a) Identifying business risks relevant to financial reporting
objectives; The following application material on internal control
is presented in four sections, as follows:
b) Estimating the significance of the risks;
General Nature and Characteristics of Internal
c) Assessing the likelihood of their occurrence; and Control.
d) Deciding about actions to address those risks. Controls Relevant to the Audit.
Nature and Extent of the Understanding of
5 Components of Internal Control Relevant Controls.
The auditor shall obtain an understanding of the information Components of Internal Control.
system, including the related business processes, relevant to
financial reporting, such as the following areas: Limitations of Internal Control
 Internal control, no matter how effective, can provide an
➢ The classes of transactions in the entity’s operations
entity with only reasonable assurance about achieving the
that are significant to the financial statements.
➢ The procedures, within both IT and manual systems, by entity’s financial reporting objectives. The likelihood of
which those transactions are initiated, recorded, their achievement is affected by limitations inherent to
processed, corrected as necessary, transferred to the internal control. These include the realities that human
general ledger and reported in the financial
statements. judgment in decision-making can be faulty and that
breakdowns in internal control can occur because of
human error.
Control activities are the policies and procedures to
help ensure that management directives are carried out. Limitations of Internal Control
Examples of control activities include those relating to  Additionally, controls can be circumvented by the
the following: collusion of two or more people or inappropriate
1) Authorization management override of internal control.
2) Performance reviews  Further, in designing and implementing controls,
management may make judgments on the nature and
3) Information processing
extent of the controls it chooses to implement, and the
4) Physical controls nature and extent of the risks it chooses to assume.
5) Segregation of duties Controls Relevant to the Audit
 There is a direct relationship between an entity’s
objectives and the controls it implements to provide
reasonable assurance about their achievement.
 The entity’s objectives, and therefore controls, relate to Is Test of Control Required in Audit?
financial reporting, operations and compliance; however,
not all of these objectives and controls are relevant to Nature and Extent of the Understanding of Relevant
the auditor’s risk assessment Controls
 Evaluating the design of a control involves considering
Controls Relevant to the Audit
whether the control, individually or in combination with other
 Controls over the completeness and accuracy of
controls, is capable of effectively preventing, or detecting and
information produced by the entity may be relevant to correcting, material misstatements.
the audit if the auditor intends to make use of the  Implementation of a control means that the control exists
information in designing and performing further and that the entity is using it. There is little point in assessing
the implementation of a control that is not effective, and so
procedures. Controls relating to operations and
the design of a control is considered first.
compliance objectives may also be relevant to an audit
 An improperly designed control may represent a material
if they relate to data the auditor evaluates or uses in weakness in the entity’s internal control.
applying audit procedures  Obtaining an understanding of an entity’s controls is not
sufficient to test their operating effectiveness, unless there
 Internal control over safeguarding of assets against
is some automation that provides for the consistent
unauthorized acquisition, use, or disposition may operation of the controls.
include controls relating to both financial reporting and Components of Internal Control—Control Environment
operations objectives. The auditor’s consideration of Elements of the control environment that may be relevant
when obtaining an understanding of the control environment
such controls is generally limited to those relevant to
include the following:
the reliability of financial reporting
(a) Communication and enforcement of integrity and ethical
Controls Relevant to the Audit values
An entity generally has controls relating to objectives that (b) Commitment to competence
are not relevant to an audit and therefore need not be (c) Participation by those charged with governance
considered. (d) Management’s philosophy and operating sty
For example, an entity may rely on a sophisticated system of (e) Organizational structure
automated controls to provide efficient and effective
operations (such as an airline’s system of automated Components of Internal Control—Control Environment
controls to maintain flight schedules), but these controls Audit Evidence for Elements of the Control Environment :
ordinarily would not be relevant to the audit.  Relevant audit evidence may be obtained through a
combination of inquiries and other risk assessment
procedures such as corroborating inquiries through
observation or inspection of documents.
 For example, through inquiries of management and

employees, the auditor may obtain an understanding of
how management communicates to employees its
views on business practices and ethical behavior
Components of Internal Control—The Information System

The information system relevant to financial reporting objectives,
which includes the accounting system, consists of the procedures
and records designed and established:
Initiate, record, process, and report entity transactions

Resolve incorrect processing of transactions,
Process and account for system overrides or bypasses to
controls
Transfer information from transaction processing

systems to the general ledger;
Capture information relevant to financial reporting for prevent or detect error or fraud that could result in
events and conditions other than transaction
material misstatements in the financial statements.
Ensure information required to be disclosed by the
applicable financial reporting framework is accumulated, Operating Effectiveness Test
recorde  The auditor should test the operating effectiveness of a
control selected for testing by determining whether the
Components of Internal Control—Control Activities
control is operating as designed and whether the person
Control activities are the policies and procedures that help
ensure that management directives are carried out. Control performing the control possesses the necessary
activities, whether within IT or manual systems, have various authority and competence to perform the control
objectives and are applied at various organizational and
effectively.
functional levels. Examples of specific control activities include
those relating to the following:  The auditor should test the operating effectiveness of a
1) Authorization. control selected for testing by determining whether the
2) Performance reviews. control is operating as designed and whether the person
3) Information processing. performing the control possesses the necessary
4) Physical controls. authority and competence to perform the control
5) Segregation of duties. effectively.
Components of Internal Control—Control Environment What if there are Differences in our Test of
Elements of the control environment that may be relevant when
Controls?
obtaining an understanding of the control environment include
Differences in Test of Control
the following:
(f) Assignment of authority and responsibility Internal Audit does not have MATERIALITY. Internal Auditors
ONLY DO REPERFORMANCE and we ensure that differences
(g) Human resource policies and practices
are the same with Management findings.
Components of Internal Control—Monitoring of Controls
As INTERNAL AUDITOR WE ENSURE THAT THEY ARE NOTED,
 Monitoring of controls is a process to assess the RESOLVED AND EXPLAINED, ACCORDINGLY.
effectiveness of internal control performance over time. It
involves assessing the effectiveness of controls on a Timing of Test of Controls
timely basis and taking necessary corrective actions.  Auditors usually perform TOC during an interim visit in
advance of period end. However, Auditor need to obtain
 Management accomplishes monitoring of controls through
ongoing activities, separate evaluations, or a combination further evidence relating to the remainder of the period.
of the two. This may be performing TOC for the remainder period or
 Ongoing monitoring activities are often built into the by reviewing whether there are changes affecting the
normal recurring activities of an entity and include regular
management and supervisory activities. entity’s internal control.
Test of Control Timing of Test of Controls

What are the Test of Controls Procedures In determining whether or not to test the remaining period, the
➢ Observation following factors are to be considered:
➢ Inspection
Results of Interim test
➢ Inquiry
➢ Reperformance Length of the remaining period
Whether changes have occurred in the accounting
Design Test vs Operating Effectiveness Test and internal control systems during the period
Test of Design
 The auditor should test the design effectiveness of the Extent of Test of Control
 The Auditor CANNOT possibly examine all transactions
controls selected for testing by determining whether the
related to certain control procedures. The auditor should
company's controls, if they are operated as prescribed
determine the size of sample sufficient to support the
by persons possessing the necessary authority and
assessed level of control risk. We usually consider the
competence to perform the control effectively, satisfy
Risk Level (low, medium, high) and the Frequency of the
the company's control objectives and can effectively
control.
 For Internal Audit, we consider whether the control if
with RELIANCE or NON-RELIANCE
Documenting the Assessed Level of Control Risk

 After evaluating the test of controls, the auditor will
document the assessment of control risk (high or less
than high).
 Auditor who assess the Control Risk as LESS THAN HIGH

shall have a basis for the assessment, which is the
results of Test of Controls.
What are the ISSUES that can be noted during Test

of Control?
Under PSA 265:
For purposes of the PSAs, the following terms have the meanings
attributed below:
 (a) Deficiency in internal control
– This exists when: (i) A control is designed, implemented
or operated in such a way that it is unable to prevent, or
detect and correct, misstatements in the financial
statements on a timely basis; or (ii) A control necessary to
prevent, or detect and correct, misstatements in the
financial statements on a timely basis is missing.
 (b) Significant deficiency in internal control

– A deficiency or combination of deficiencies in internal
control that, in the auditor’s professional judgment, is of
sufficient importance to merit the attention of those
charged with governance. (Ref: Para. A5)
Control Deficiency vs Significant Deficiency vs Material

Weakness
References:
-AASC Announcements
-Auditing Theory by Jekell Salosagcol, et al
-PCAOB issuances
Activity #1:
Every quarter, the Controller reviews the monthly AR
Reconciliations by agreeing the General Ledger and Subsidiary
Ledger. Any differences above $10K are investigated and
explained. The Controller evidence the review through a sign-off
in the workbook.
TIP: In testing controls, remember the four (4) common
questions:
a. Was the item reviewed?
b. Do amounts agree to supporting documents?
c. Are there any differences
d. Is review performed timely?
QUESTION
A difference below client materiality was noted by Auditor but not by the
client. Is the control operating effectively?
The Business Performance dashboard helps identify
XERO : Initial Setup
important trends. You can add graphs to it. From Accounting,
Dashboard
select Reports, then click Business Performance under
The dashboard shows you a snapshot of the business
Financial to show the graphs. Select the stars to add them.
financials and cash flow. What you see depends on your user
Use the business performance dashboard and account
role.
watchlist to examine important business trends and
The dashboard is customizable which means you can
accounts, quickly and easily. All users see any changes made
configure the panels to show the most relevant information
to these panels.
about the organization. Changes made to the Business
Keep an eye on important accounts via Accounts Watchlist.
performance and Account watchlist panels, are seen by all
From Accounting select Advanced and click Chart of
users. Any changes made to the dashboard layout are unique
accounts. Choose which accounts to show on the account
to your login.
watchlist. Click an account, select Show on the Dashboard
The dashboard shows you a snapshot of the business Watchlist [1] and click Save [2].
role. Xero Navigations
ORGANIZATION MENU
The Organization menu lets you access uploaded files,
about the organization. Changes made to the Business
organization settings, and connected apps. If you have access to
performance and Account watchlist panels, are seen by all
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Manager if you're a Xero Partner.
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users. Any changes made to the dashboard layout are unique reports, and use the advanced settings and tools like Fixed
to your login. assets.
PAYROLL & PROJECTS MENU
If you have access to Payroll or Projects in an organization, you
role.
see the options on the navigation menu.
configure the panels to show the most relevant information CONTACTS MENU
about the organization. Changes made to the Business The Contacts menu contains information for customers,
performance and Account watchlist panels, are seen by all suppliers and other important contacts, to help you manage
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USER MENU
Use the business performance dashboard and account
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to these panels. own login.

SEARCH Business & accounting
Use the search function to look for specific transactions or  Users with the standard role can carry out day-to-day tasks,
contacts. and can have restricted access to reports.
CREATE NEW Types of user roles

Quickly create a new transaction from this menu, such as an Projects
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LOGIN HISTORY
others.
Keep an eye on your recent logins into the organization. View
the login location, time, and IP address for every time you login. Standard – gives the user similar access to a projects admin,
but can’t view or modify staff cost rates or see cost-related
Organisation Details
data in reports.
Organisation Details
Add basic information, such as contact details and a logo. Admin – has full access to projects, including reports, staff
On the organization details, it will prompt to ask you if you want cost rates, and can view financial information.
to include some of the organization details to the online invoices
that you will issue to clients. You may choose to turn this on or Expenses
off at your own discretion.
Submitter – users can enter, edit and submit their own
Notes:
expenses.
Display name - organisation name that shows in Xero
Legal / Trading name - shows on financial reports, invoices, Approver – has the ability to enter, edit, approve or decline
quotes, and batch deposit summaries.
expenses. An approver can also see other employee’s
Users expenses, pay them out and run reports.
User roles and permissions:
Subscriber Admin – this user level includes approver access plus the
 The subscriber is responsible for the Xero account, billing, ability to adjust settings within expenses.
and user accounts. There can only be one subscriber in each
organization. They can transfer the subscription to another Payroll
user at any time. Employee – has access to Xero Me to view payslips, submit
leave and enter timesheets.
Business & accounting
 Users with the standard role can carry out day-to-day tasks, Payroll admin – users can create and post pay runs, add
and can have restricted access to reports. employees, and run payroll reports.
Advisor
Types of user roles
 Advisors have full access including advanced accounting
features. Business and Accounting
Invoice only – there are four variations of the invoice only
Read-Only user role:
 Anyone with the read only role can view transactions, but
can’t add or edit. Only create drafts – the user has access to create draft
invoices, bills, quotes and purchase orders, but not
Subscriber approve them.
 The subscriber is responsible for the Xero account, billing,
Sales (quoting and invoicing) – the user can create,
and user accounts. There can only be one subscriber in each
approve and send invoices, quotes and credit notes. They
organization. They can transfer the subscription to another
can also record payment on invoices.
user at any time.
Purchases (purchase orders and bills) – the user can Ways to Add files in Xero:
Upload files
create and approve bills, credit notes and purchase
Drag and Drop
orders. They can also pay bills.
Email
Mobile Device
Approve and pay (sales and purchases) – the user
Wherever there is a file icon, you can attach files.
can create and approve invoices, quotes, credit notes,
You can attach files to the following:
bills and purchase orders. They can also record payment
Transactions
on invoices and pay bills.
Bank Reconciliation
Standard – the user has almost full access to Xero, with Contacts
optional access to cash coding and reports. You can also add files directly from the file library inbox.
Advanced Settings
Adviser – advisers have full access to all areas of Xero. If
they're not the subscriber, then they can’t change the pricing Financial Settings
plan or payment details. 1) Change Financial Year End
Read only – these users can view most areas of Xero, but 2) Set Sales Tax Information
can’t create or edit transactions, or run new reports. 3) Select the tax defaults for sales and purchases.
Based on last sale/purchase
Extra Permissions
Tax inclusive
Payroll admin – for users who need to post pay runs, Tax exclusive
manage employees and run payroll reports. No Tax
Cash coding – ability for users to reconcile statement lines 4) Lock Dates.
in bulk for cash transactions. 5) Set Time Zone.
Bank account admin – users with this permission can edit Tax Rates
bank account numbers for contacts and employees.  Tax rates control sales tax on transactions such as
invoices, bills and manual journals. You must add a default
Reports – users can run most reports and customise, print
tax rate to every account in the chart of accounts. When
or export them.
you select the account, Xero applies the default rate to the
Manage users – the ability to invite new users, change transaction.
user roles for existing users or delete users from an  You can change each rate on the transaction without
organization. affecting the default rate in the chart of accounts.
Tracking Categories
Multicurrency
 Set up tracking categories to see how different areas of
Add currencies to create foreign transactions, and add bank
the business are performing. Tag transactions such as
accounts with a different currency from the organization's
invoices, with a category option to report on departments,
base currency. The organization must be on a premium
cost centers, or locations.
pricing plan.
Chart of Accounts
Use Files in Xero  The chart of accounts is a list of all accounts you can use
Access the file library Inbox to record your transactions in Xero.

 It helps you categorize your transactions correctly and
Store important documents in the organization's file library
group similar accounts together to generate reports about
Inbox. The adviser and standard user roles have full access
your organization.
to files. Users with the invoice only role can view, add, and
remove files for transactions they have access to. Read
only users can view files attached to transactions they
have access to.
System and locked accounts 2) To prevent staff members entering transactions before the
 A lock icon beside an account in the chart of accounts, conversion date, select Lock balances. You must have the
means it’s either a system account or locked accounts adviser role to do this.
(locked by Xero). You can’t remove these accounts.
Conversion Balances
Chart of Accounts Uncleared items

Enter the bank statement balance from the conversion date
Add, edit and delete
 Add a new account to the chart of accounts or edit an (not the bank balance from your previous accounting
software).
existing one.
You must account for any differences when entering
Account types
balances for bank accounts. For example, bank transactions
 Every account in the chart of accounts has an account
that haven't cleared the bank account, such as uncleared
type. Xero uses this to manage transactions coded to the
cheques.
account, and present accounts in reports. Xero groups
account types into classes for reporting; revenue, Outstanding Transactions
expenses, assets, liabilities, and equity. Before you can save conversion balances, you must enter
any outstanding transactions as at the conversion date.
Import Chart of Accounts
 The template columns represent chart of accounts These unpaid invoices and bills make up the balances for
fields. Each row represents an account that you want accounts receivable and payable.
in the chart of accounts. The most efficient way to do this is to import them before
Notes: you enter the conversion balances.
1) Those with asterisk (*) are mandatory fields.
If you haven’t imported the unpaid invoices and bills, Xero
2) Positive amounts are debit.
opens a new screen to add the transactions manually.
3) Negative amounts are credit.
4) Tax Code used must be the same name as those in the Add comparative balances to show prior year comparisons
Tax Rates. in financial reports, without entering full historical data in

Xero.
Import invoices and bills
Import invoices and bills in bulk using an import template. You can't import comparative balances, you need to enter them
It’s an efficient way to bring outstanding transactions into manually in the Conversion balances screen.
Xero during conversion.
Set up Conversion Balances

Conversion Balances
Conversion balances are the opening amounts for the
organization's accounts, as at the conversion date.
Conversion Date
The conversion date is when the business starts using Xero
for everyday transactions. Unpaid invoices and bills are the
only transactions you should enter before this date.
Conversion Balances
Conversion balances are the opening amounts for the
organization's accounts, as at the conversion date.
Notes:
1) The column totals should be the same. If they're not, Xero
posts the difference to a historical adjustment account.
Introduction to Xero Traditional Accounting Software
The data in the system isn’t always up to date
What is Xero?
Xero is a technology company based in New Zealand that It only works on one computer and can’t be access
is listed in the Australian Stock Exchange (ASX). anywhere.
Only one person has user access which can mean key
Xero offers a cloud-based accounting software that
people can't access financial and customer details
functions as a software-as-a-service (Saas) model.
It's costly and complicated to keep backups.
The software is aimed to help small and medium
It's expensive, difficult and time consuming to upgrade.
enterprises to help run their business and manage their
finances. Needs for a third-party data security software.
History of Xero
What is Cloud Computing?
An on-demand technology that enables individuals, Founded in a Wellington studio apartment in 2006 by
developers, and businesses to access a wide variety of Rod Drury and his accountant Hamish Edwards.
services and platforms through the Internet. They felt traditional desktop accounting software has
become outdated.
Enables businesses to shift the burden of managing and They wanted small business owners and their
maintaining computer hardware from their own staff to accountants to be able to access date online.
providers whose business specialize on these fields. Original name is Accounting 2.0.
They changed the original name due to the staff not
Customers can only pay providers for what they use and
liking it and it would be difficult to register an internet
have access to important resources on demand. domain name with the decimal.
Enables both casual internet user and specialized They specifically wanted a four-letter name and that
Zero was a strong candidate for the new name.
developers to access information from around the world
History of Xero
almost instantaneously.
 Xero.com was already an existing domain name of a
Services and platforms include but not limited to the rock band fan site.
following:
 Xero was the original name of rock bank Linkin Park.
a) Accounting services
b) File storage and recovery  Convinced the domain administrator to sell domain
c) Video streaming services for $20,000.
d) Messaging platforms
Xero Today
e) Productivity
Xero entered Australia and United Kingdom in 2008.
Cloud Accounting Software vs Traditional Accounting Software
Entered United States in 2011.
Cloud Accounting Software
In 2017, Xero surpassed one million subscribers
Data about transactions can flow straight from bank to
globally.
books, saving time transcribing information.
See and access current financial position at any time, In December 2018, Xero hits 1 million subscribers in
anywhere, from any device as long as there is access to Australia and New Zealand.
the internet.
In 2019, Xero hits 2 million subscribers globally.
Multi-user access makes it easy to collaborate online. In 2023, Xero has 3.7 million subscribers.
There’s no need to install or update the software, and all
Xero has offices in New Zealand, Australia, United
your data is backed up automatically.
Kingdom, United States, Canada, Singapore, Hong
Data is securely stored online.
Kong, and South Africa with their headquarters
Can integrate with other software for additional functions. situated in Wellington, New Zealand.
Benefits of Using Xero
Get Paid Faster Time Saving Accessibility
Online Store Access
Payments Documents Anywhere and
Recurring Online Anytime
Payments Automated Bank Multiple Users
Automatic Feeds Can Work in Xero
Payment Simultaneously
Reminders Mobile
Application
Data Security No need to Update,

Multiple Layers of Upgrades & Back Up
Security Real Time Updates
Multifactor Easy Upgrades
Authentication for
No Backups Needed
Access
Improve Business Financial Information

Efficiency Availability
Integration with Real Time View of
Various Software for Finances
added functions. Powerful Forecasting
Xero 4) You may also want to set a default invoice theme and
due dates for customers and suppliers you work with on
Contacts Management a regular basis.
Contacts 5) If your customers or suppliers use Xero, ask them to
Contacts are automatically classified as customers or share their network key and enter it here. Click Save.
suppliers once you've entered an invoice, bill, or credit Xero Network Key
note transaction for them. You can't move contacts Each Xero organisation has a unique and private
manually into the Customers or Suppliers groups, and network key.
entering spend or receive money transactions won't Organisations with your key don't get access to log in or
affect a contact's grouping. see any of your organisation's data.
If you see a contact name listed as 'Unknown', it's likely When you give an organisation your network key, they
this contact was created during cash coding where the can send you a Xero to Xero sales invoice. The invoice is
payee field was left empty. If you can't find the details of automatically created as a draft bill in your organisation.
a contact you've created transactions for previously, Add the account code and make any other changes, then
they might have requested to have their details removed approve the bill.
for privacy reasons. You can only receive bills through the Xero to Xero
network that don't have tax adjustments or file
Navigations
Categories attachments other than the invoice PDF. You can't
Click an option to show contacts in the Customers, receive credit notes or any other types of transactions.
Suppliers or Archived categories. You can choose to
Import Contacts List
show contacts in any groups you’ve created. If you’re moving to Xero from another system, or have your
Groups contacts saved to an email account, you can import them into
Go to a contact group you’ve created or create a new Xero using a CSV or TXT file.
group to keep your contacts organized.
Contact Record Management
Smart Lists Open a contact to see their activity, create new
Choose one of the default options to find and list your
transactions and update their information.
customers based on their purchases or payments.
Files…
Search  Add files to a contact’s record, like a supplier contract or
Find a contact by searching for the business name or
terms and conditions.
name of the main contact person.
Transactions……
Sort  Xero shows invoices and bills awaiting payment here.
The contacts list displays in alphabetical order by
You’ll also see any outstanding quotes and purchase
default, but you can sort them by email, the date you orders.
added them or by amounts owing.
Contact activity…
Archive or Group  Use the money in and out graph to see what you’ve paid
When you select a contact in the list, you can add them to each other in the last 12 months. See their recent
to a group or archive them. activity, add notes and connect your Gmail or Office 365
email account to store relevant emails for your contact.
Create a New Contact
1) From the Contacts screen, click New contact. Contact Options
2) Enter the details. Contact Name is the only required field
to create a new contact. Send Statements…
Let’s a user send statements to customers about their
3) For customers and suppliers, it’s useful to set the
default sales or purchase settings. You can set the tax overdue invoices and give them a record of their recent
rate on sales, the account code and tracking option. transactions.
Add to a group…
Group similar contacts or make a group according to
their significance.
Merge Contacts…
Merge a contact’s details and transaction history into
another contact.
Archive Contacts…
Archive a contact you don’t need. You can undo this at
any time from your Archived contacts list.
Direct Debit powered by GoCardless
Xero : Invoices
Other Available Payment Services:
Customer Quotes and Invoices
 Chase Integrated Payment
Invoice Reminders
Turn on invoice reminders to follow up customers who  Windcave
have overdue invoices. Xero automatically sends a  eWay
reminder email when an invoice is 7, 14 and 21 days  Custom Payment URL
overdue. You can also add additional reminders or edit
the default ones. Branding Theme
 Xero branding themes are customizable templates to
Set default dates and numbers customize the look of invoices, quotes, purchase orders,
Set default due dates and expiry dates for invoices, bills and
credit notes and statements so they match the business’
quotes to save time. You can also change the prefix and
brand.
sequence number to suit the business, and show
Two ways of creating branding theme:
customers all of their outstanding bills.
1. Standard template
Navigation: Organization Menu->Settings->Invoice
2. Custom DOCX template
Settings->Default Settings
Custom DOCX template
Default Settings Use the tables to customise the document, but don’t
Due dates change any headings that are field codes. For example,
 Set the default due dates for your invoices and bills. Xero
<<InvoiceCurrency>>.
automatically applies the defaults to new transactions.
You can have a set date each month or choose a number Custom Email Settings
of days after the invoice or bill date. Reply-to email address
 Add a new reply-to email address to manage the flow
Transaction Labels
of customer replies. The reply-to email address is set
 Xero sets the prefix and sequence number for invoices,
credit notes, purchase orders and quotes automatically, to the logged in user by default.
however you can change them if you need. Email Template

 Create and edit the email templates that accompany
Outstanding Bills
 Send customers a link to view their outstanding bills documents to make them more personalized. Xero
from their online invoices, credit notes and includes placeholders in email templates for dynamic
prepayments. customer information, such as customer name, due

dates and amounts owing.
Quote expiry date
 Choose a default expiry date for quotes. Xero displays Sales Overview
this date underneath the sent date on a quote so The sales overview summarizes the status of invoices,
customers can clearly see how long the quote is valid quotes and billable expenses. It shows you the money
for. due in each month and who owes the business the
most. You can also create new quotes, invoices and
Connect a Payment Service…
 Add a payment service to your invoices to get paid statements or search for a specific transaction.
faster. When you link a payment service to Xero, a Pay You can create a new invoice, quote, repeating invoice
Now button appears on your invoices. When a customer
or credit note. You can also invoice any contact groups
pays through a payment service, the service is
you’ve set up.
responsible for depositing the funds into your account.
Credit Cards powered by Stripe

Paypal
Search
Search for a customer name, invoice or quote number,
Create and Send Invoice
New Invoice
transaction amount or reference. You can narrow
To* - Type and/or select new/existing contact.
down the search to a timeframe based on due date or
Date* - Date of the invoice. Usual date is when the invoice is
transaction date. created.
Due Date* - Date the invoice is expected to be paid.
Invoices
Invoice #* - Invoice number is already prefilled by Xero.
See the total amounts for invoices at each stage.
Reference - helps search for the invoice and to match with
Money Coming In Graph
bank account transactions.
Use the graph to see money coming in and click a
Branding Theme - change branding theme if needed.
section to see who owes what. Xero estimates money
Automatically set to standard.
coming in for each month based on the due date or Currency* - Set automatically to your default currency in
expected date of approved invoices. Xero.
Xero lists the business names that owe the most next Preview – see how the invoice would look like in pdf format.
to how much they owe. Amounts shown in red are Items – Choose a product or service from the list, is there is
any.
overdue.
Description* – Enter a description what the invoice is for.
Quotes Qty* - Quantity of the product/service you are invoicing.

See the total amounts for draft, sent, accepted and Unit Price* - Standard price/unit of a product or service.
expired quotes Disc% - Rate of discount to be applied if applicable.
Billable Expenses Account* - Account to which the product/service must be

The billable expenses table shows which five recorded. Must already be existing in Chart of Accounts.
Tax Rate* - Applicable tax rate to the service/invoice. Set to
customers have the greatest value of billable the default tax rate of account.
expenses assigned to them.
Create and Send Invoice
Billable Expenses Invoice Stages

Xero organizes invoices under Draft, Awaiting Approval,
Billable expenses are costs you've been charged
Awaiting Payment, Paid and Repeating tabs. This helps
that you want to recover from your customer.
you track an invoice at each stage. Under the All tab, you
Billable expenses can also be referred to as
can see a quick summary of each invoice, and check
oncharging, onbilling, recharging, reimbursables,
which ones have been sent and viewed.
disbursements or pass on costs.
Reconciliation
How to Assign Billable Costs: When a customer pays their invoice, Xero can
1. When reconciling transactions - Add Details -> automatically match the payment to the invoice if you
Below the Item Lines click Assign. have a connected bank feed.
This works when the customer pays by bank transfer or

2. When creating bills – Below the Item Lines click
through a payment service.
Assign.
Repeating Invoices
Create a repeating invoice template to schedule future
3. Already created bills – In a bill -> bill options ->
invoices for regular sales, like subscriptions.
Edit-> Below the Item Lines click Assign.
Steps:
1. From the Invoices screen, click the New Invoice arrow
Billable expenses can be added to invoices being made to and select New Repeating Invoice.
similar contact.
2. Choose how often the invoice repeats, and the due date. 3. Xero shows partially refunded invoices under
You can also set when the repeating invoice ends. Awaiting Payment and moves fully refunded invoices
3. Decide whether the invoice is saved as draft, approved to Paid. Click the link in the notification to see the
or automatically approved and sent to the customer. updated payment.
Complete the rest of the invoice as normal. Click Save. 4. Click Cash Refund in the transaction to view the
4. If you approve the invoice for sending, Xero asks you to details.
confirm the message that sends with the repeating
Quotes
invoice. Click Done to confirm. Create a quote to let a customer know the cost of work
they want done. Break down each part of the job by
Credit Note
Create a credit note from an invoice to update the amount entering line by line details and attach relevant files, such
owed or to record a price adjustment. For example, a as images or your businesses' terms and conditions.
customer purchase that has a defect. Quotes Dashboard
See all quotes or use the tabs to find a quote based on its
Steps:
1) Business->Invoices-> New Credit Note or choose an status. Use this overview to get a quick idea on which
invoice in Awaiting Payments tab. quotes to action next.
2) Click Invoice Options -> Add Credit Note. To view the quotes dashboard, click Business and select
3) By default, the credit note is for the total invoice amount. Quotes.
Edit details.
Note: If you have a limited user role in Xero, you might not be
4) When done, click Approve. able to create or send quotes.
5) The invoice shows the credit note as part of the total. Creating a Quote
Click the link to see the full details and edit it if you need. Creating a quote is the same as creating an invoice as
the basis for the finished invoice will be the customer
Edit Invoice
 Edit a part or fully-paid invoice to fix certain errors, like accepted quote.
changing an account code selected by mistake. Remove Quote terms can be entered if they’re different to the
payments from the invoice to edit any area of the invoice. default on the branding theme.
For example, change the items you’re invoicing for or
A quote can be copied to create a new quote, new
their descriptions.
invoice, purchase order, new bills, new repeating
Notes: invoice.
When payment is already applied, certain details
When quotes are sent, customers have the option to
can’t be change. To edit these details, the payment
accept or reject them.
must be removed first before editing the invoice.
To reconcile, you can make a payment application in An accepted quote can be copies to a new invoice by
the invoice itself or go back to the unreconciled clicking on the Create Invoice button in the accepted
payment in the bank account and match the invoice. quote. This will make a new invoice with prefilled
contents based on the accepted quote.
Refund a Customer
Refund customers for overpayments made, prepayment or
credit notes.
Steps:
1. From Invoices, find the overpayment, prepayment or
credit note to refund.
2. Enter the details in Make a cash refund. Confirm the
refund amount and enter a reference to identify the
refund. Click Add Refund.
Every tracked item has an average cost. Xero recalculates the
Xero : Inventory
cost each time you record a purchase. Average cost
Using Inventory
determines the cost of goods sold value.
Benefits of using Inventory in Xero
1. Save Time Every time a purchase is recorded, and a tracked inventory
− Use inventory items so Xero can automatically item is selected, Xero selects the inventory asset account by
complete transactions, saving time and effort. default. Once approved, Xero posts a journal to the inventory
2. Track Products asset account.
− Xero inventory tracks items the business
regularly buys and sells. When an invoice is created for a tracked inventory item, Xero
− When adding a tracked inventory item to a lets users select an account code. Once approved, Xero posts
transaction, Xero will show how many are left. a journal reducing the value of inventory asset account and
This helps on giving an idea of what to reorder. increases the cost of goods sold value.
3. Project Invoicing Accuracy Xero doesn’t calculate the quantity or the value on hand for
− You can set up tasks or expenses you regularly untracked items, so it doesn’t post any journals to the cost of
use in Projects as inventory items goods sold or inventory asset accounts.
4. Inventory Reporting
− Run reports to get real-time information, such as Set up Products and Services
changes to the value and quantities on hand of Set up Products and Services
If you use a different chart of accounts to the Xero default, you
tracked inventory items.
need to create accounts for inventory asset and cost of goods
Inventory Options sold. You must select these accounts on items you want to
There are two types of inventory items, tracked and track.
untracked. The inventory method you select depends on how Steps:
the business operates. 1. Go to Accounting and select Advanced.
2. Under Advanced settings, click Chart of accounts.
Tracked Inventory 3. Click Add Account and select the account type
− Tracked inventory is a great option if the business Inventory. You can’t change the account type of an
keeps quantities of physical items on hand. existing account to inventory, as it’s a locked account.
4. The Account Type, Code and Name are mandatory
− Xero automatically calculates the Quantity on Hand
fields. Enter the details and click Save.
and Total Value for tracked items. 5. Also, add an account for cost of goods sold. The
Xero’s default chart of accounts uses Direct Costs as
Untracked Inventory
the account type.
− This is a great option to use for services the
Set up Products and Services
business offers on a regular basis, or products that
Add inventory items to keep track of the quantity and value of
doesn’t need tracking.
items on hand and speed up data entry. Adviser or standard
− Xero doesn’t calculate the quantity on hand or
user role is needed to add tracked or untracked inventory
value for untracked inventory items.
items from products and services.
Note that if a business offers products and services, a Steps:
combination of tracked and untracked items can be used. 1. Go to Business and select Products and services.
Accounting for Inventory 2. Click New Item.

Xero uses the average cost method to calculate the value of 3. Enter a Code to make searching for items easier.
tracked inventory. Item codes are compulsory and must be unique.
Enter a Name for the product or service.
The average cost method works by dividing the total value of
inventory by the total number of items available for sale. 4. Select Track inventory item to track the quantity and
value on hand for an item, then select an Inventory
Asset account. The details entered here flow through
to transactions when selecting the item code.
5. Select a Cost of Goods Sold account. Enter the rest Troubleshoot Importing Items
of the details such as cost and sale price, tax rates
If the import is unsuccessful, Xero displays an import
and sales account.
summary and highlights the rows that have errors. Use this
6. Leave Track inventory item empty for services or
as a guide to identify and resolve any error messages.
products you don’t want to track. Select Purchase or
Sell and enter the details. For a product or service,
Invalid accounts
you buy and sell, select both.
The accounts in the template must match the accounts
Notes on adding items in transactions: exactly as they appear in your chart of accounts. If you
If you have permission to approve invoices, you can add new wish to include new account codes in the import template,
inventory items while entering a transaction. create them in Xero first.
Import Products and Services Duplicate item codes

Up to one thousand inventory items can be imported with the Item codes in the template need to be unique. Using
use of Xero's template. Adviser or standard user role is duplicate item codes will result in an error. Add an
needed to do this. additional character to make item codes unique.
Steps:
Incorrect column headers
1. Go to Business and select Products and services.
Xero won’t import the template if there’s something
2. Click Import and select Items. wrong with its structure. For example, a column header
3. Download and open the template. has been edited, or removed. Make sure you don’t edit
4. The item code is mandatory. Enter the inventory column headers.

asset and cost of goods sold accounts for items that
needs tracking. Before importing, make sure the Avoid customizing
Xero includes data from the tracked inventory items in
accounts are set up in the chart of accounts. Save as
a CSV or TXT file. the template when downloaded. Leave the first three
5. Click Browse to select the template and click columns as they are. Xero shows an error message and
Continue. prevents users from importing the template if these
6. Xero checks the file and confirms the number of columns were edited.
items created or updated. Click Complete Import to
finish. Update opening balances
If incorrect opening balances were entered, the correct
Enter Opening Balances figures can be re-imported. When updating the opening
Steps: balances, keep in mind any transactions recorded since
1. From the Products and services screen, click Import
and select Opening Balances. the last import. For example, you import four of Item A,
and have sold all four items. You won't be able to reduce
2. Enter a date. Use conversion date, if new to Xero. If an
existing user, select the date you want to start using the opening balance for this, as Xero doesn't support
tracked inventory. negative inventory quantities or values. This is where
3. Select the account with the current inventory value. you'd make an inventory adjustment or void the sales
This is the adjustment account. invoices if needed.
4. Download the template
5. Enter the quantity and total value of items on hand. Add data
Enter the account chosen in the adjustment account If additional items are added directly to the opening
column. Save as a CSV or TXT file. balances template, Xero shows an error message upon
6. Click Browse to find and upload the completed import. First create the additional items in Xero, then
template. Click Continue.
import the opening balances.
7. Review the opening balances and complete the import.
8. If new to Xero and the inventory asset account is used

as the adjustment account, enter opening balances for
this account in the conversion balances screen.
Update/Edit Products and Services Tracked inventory items
Update inventory item details such as the item code, name or Delete a tracked inventory item if you haven’t used it on a
unit price. Adviser or standard user role is needed to edit transaction[1]. You can’t delete an item if you've used it on
inventory items. a transaction or if it has an opening balance or an
Steps: adjustment recorded against it.
Historical transactions
2. Click the inventory item you want to edit.
Xero removes the deleted item[1] from any approved
3. Click Edit item.
transaction you edit and decide to update. It also removes
4. Xero updates all existing transactions if you edit the item
the inventory item from any draft or awaiting approval
code. Any other changes you make impact future
transactions only. transactions.
5. You can't edit the inventory asset account of a tracked

New Adjustment Account
item if it has an opening balance, transactions, or an
Add a new adjustment account to post inventory adjustments.
adjustment recorded against it. Click Save. Steps:
6. Apart from the item code, repeating transaction 1. Go to Accounting and click Advanced.
templates aren’t updated automatically. Reselect the 2. Under Advanced settings, click Chart of accounts.
inventory item on the repeating template to pull through 3. Click Add Account and enter the details. The account
the new details. Click Save. type you select determines where the account
appears in your reports.
Edit Items in Bulk
Save time by updating multiple inventory items in one go, for Inventory Adjustments
example bulk update the unit price for inventory items that There are three types of inventory adjustments in Xero:
have increased in price. Decrease quantity
 Enter a decrease quantity adjustment to reduce the
Steps:
1. From Products and services click Export and select CSV. quantity on hand or write off damaged stock.
2. Item codes can’t be edited in bulk, as Xero treats these Increase quantity
as new inventory items. Edit item codes individually  Enter an increase quantity adjustment to increase the
from the Products and services screen. Add inventory
asset and cost of goods sold accounts to convert quantity on hand, if a stock count was higher than the
untracked items to tracked. Save as a CSV file. quantity in Xero.
3. Click Import and select Items.
Revaluation
4. Click Browse and select the file. Click Continue to
 Enter a revaluation adjustment if the item has
import.
changed in value since it was purchased. For
5. Xero displays an import summary. Review the changes
and complete the import. example, an item has become obsolete and only be
able to be sold at a reduced price.
Delete/Remove Inventory Items
Keep the product list up to date by deleting inventory items Entering Inventory Adjustments
you no longer need. Post adjustments to reflect changes in the quantity and value
of tracked inventory items. It isn't possible to add inventory
Untracked inventory items
adjustments using manual journals. Adviser or standard user
From the products and services screen, select the
role is needed for this.
untracked inventory item you want to remove, and click
Steps:
Delete.
Xero prevents users from deleting an untracked item that 2. Click the inventory item you want to adjust.
3. Click Options and select New adjustment.
has been used on a repeating bill or an invoice template.
4. Choose an Adjustment type. Enter the details and
Remove the item from the repeating template, then click Review Adjustment.
delete. 5. Review the adjustment details and click Post
Adjustment.
you won’t be able to reduce your opening balances from the
Resolving Common Inventory Problems original quantity of 5 items as you've already sold them.
Import Inventory Items
Xero displays a message confirming which items it will Negative Inventory
Xero displays an error message if a tracked inventory
import. Use the row numbers to quickly find any errors to
item’s quantity or value falls below zero. Xero also prevents
fix in your template.
an inventory item from having a quantity on hand that equals
Resolving Common Inventory Problems zero but has a total value that is more than zero.
If an error was shown when importing inventory items, make
adjustments in the import template before attempting the
import again. These are Format Errors.
Columns
 Xero shows an error message if default columns
have been removed or renamed.
 Columns with an asterisk are mandatory, meaning
they must have a value.
Account codes
 Enter account codes exactly as they appear in Xero.
Tax rates
 Enter tax rates exactly as they appear in the
organisation.
Unit price
 Just use numbers and decimals, as you’ll get an
import error if you include any currency symbols.
Resolving Common Inventory Problems

Invalid Inventory Asset Account
Xero displays an invalid inventory asset account error
when you import tracked inventory items with a missing
or incorrect inventory asset account.
Check chart of accounts to view the inventory accounts,

and make sure to use the correct one in the import file.
Resolving Common Inventory Problems

Opening Balances
Xero might display a negative quantity or value error
message if you re-import your inventory opening balances to
make an adjustment. This can happen if you enter invoices or
bills after recording incorrect opening balances.
If you sell more items than you have due to incorrect

opening balances, Xero shows you an error message when
you try to reduce the quantity on hand values by re-importing
your opening balances. For example, if you had an opening
balance of 5 items and you record selling these items in Xero,
Xero Add and Register Fixed Assets
Fixed Assets Add an asset from the Fixed Assets screen
Add assets manually for quick additions to the register, to
Setting up Fixed Assets
reflect existing purchases, or when entering fixed asset
Set a fixed asset start date
opening balances.
Set a start date in Xero, before you can add fixed assets and
calculate depreciation. Steps:
1. From Accounting select Advanced and click Fixed assets.
Steps:
1. From Accounting select Advanced and click Fixed assets. 2. Click New Asset.
3. Enter the asset name, purchase price and purchase date.
2. Click Set Start Date.
Select an asset type or add a new one. Xero then
3. Select the first day of the financial year you want to start populates the account and depreciation details. Edit the
calculating depreciation, then click Save. The start date Asset Number and Book Value fields, if needed.
can be a financial year in the past, starting from the year
4. The remaining fields are optional. Click Show more
you converted to Xero, the current financial year, or the
options to enter a cost limit or residual value.
next financial year from now.
The cost limit is the value of the asset you want to
Notes: depreciate, if less than the cost of the asset.
If you’ve set a lock date in financial settings, depending on
The residual value is the value of the asset remaining when
your user role and the type of lock date, you may not be able
fully depreciated.
to select a start date within the locked period. Review the lock
dates and adjust, if needed. 5. If the depreciation start date is earlier than the fixed asset
start date, enter the amount of accumulated depreciation
the asset had, up to the start date.
Set up fixed asset types
6. Xero uses this amount to automatically calculate the value
Xero uses asset types to group similar assets for consistent of the asset as at the fixed asset start date.
reporting. Assign an asset type to every fixed asset, and Xero 7. Click Save as Draft if you’re likely to make changes or
will apply account codes and depreciation details. Register to add the asset to the fixed asset register.
Steps: Add a draft asset from a purchase transaction

1. Check that the chart of accounts contains the fixed asset, Add an asset from a purchase transaction if you want it to
accumulated depreciation and depreciation expense
show in both the register and the balance sheet.
accounts you want to assign to the asset types.
2. Add new accounts, if needed. Assign the Fixed Asset Transaction types
account type to fixed asset and accumulated depreciation Xero creates a draft asset when you approve a bill, expense
accounts, so you can select them when setting up asset
claim or spend money transaction that you’ve coded to a fixed
types. Click Save, once you’ve entered all the details.
asset account and given a description.
3. On the Advanced accounting screen, select Fixed assets
settings. You need the adviser user role to access these
Making changes
settings.
If you edit a transaction to include a fixed asset account after
4. Click New Asset Type.
you’ve approved it, Xero won't create a draft asset. If you edit
5. Enter the account and depreciation details, then click
or delete an asset from the register, the transaction won’t
Save. Refer to the learn more section below for a link to
Xero Central, for information on depreciation methods. reflect this, and vice versa. You need to make the changes to
Set default accounts for disposing of assets both the asset and transaction.
In Fixed asset settings, click Accounts, and select the default Add a draft asset from a purchase transaction
accounts you want to use for asset disposals. Click Save. Xero Add an asset from a purchase transaction if you want it to
preselects these accounts for all future asset disposals. show in both the register and the balance sheet.
Draft assets
Xero adds the asset to the Draft tab of the register. Complete
the asset details before you register it.
See Original Transaction Opening Balances
The asset contains a link back to the purchase transaction. If you’ve maintained fixed assets in a previous accounting
system, enter opening fixed asset balances in Xero.
Notes:
Xero combines multiple assets into a single asset, Steps:
1. From Advanced accounting click Conversion balances.
when the quantity on a purchase transaction is more
Enter the fixed asset opening balances to show in the
than nine. Split the line items if you have more than nine
balance sheet, then click Save.
assets that you don’t want Xero to combine.
2. From the Fixed assets screen, click Set Start Date. If the
Import Assets conversion date is the start of a financial year, you can set
the fixed asset start date to match this.
Xero provides a template to import draft fixed assets. Use
3. Add or import the assets from the Fixed Assets screen. If
this method if you've been using another system to the depreciation start date is earlier than the fixed asset
manage fixed assets, or to add multiple assets to the start date, enter the amount of accumulated depreciation
the asset had, up to the start date. Xero uses this amount
register at once. to automatically calculate the opening value of the asset
Steps: in the register, as at the fixed asset start date.
1. From the Fixed assets screen, click Import. 4. Select the assets from the Draft tab on the Fixed Assets
2. Download the template. screen and click Register.
3. Enter the asset details. Columns with an asterisk (*) are 5. From Accounting select Reports. Search for the report to
mandatory. Xero applies the default depreciation details to quickly find it or scroll down and select the Fixed Asset
the asset, if you enter an asset type and leave the book Reconciliation report.
value fields blank. Save as a CSV or TXT file.
6. Run the report from the purchase date of the oldest fixed
4. Return to the Import Fixed Assets screen and select the asset, to the day before the conversion date, to check that
date format used on the template. Click Browse to select the asset register agrees with the balance sheet.
the file, then Continue.
7. The Fixed Asset Reconciliation report won’t agree if you’ve
5. Xero lets you know if there are any errors in the file. entered items in the asset register, but not the balance
Correct the errors and upload the file again. Then click sheet, and vice versa. For example, you haven’t entered a
Import. You need to register imported draft assets to add purchase transaction for a registered asset.
them to the fixed asset register
Tips for completing the template Run Depreciation on Fixed Assets

Data Run depreciation to reduce the book value of registered
Remove the sample data but leave the header row in
place. Don't delete or re-order any columns. assets. Adviser user role is needed to run depreciation.
Add and Register Fixed Assets Steps:

1. From Accounting select Advanced and click Fixed assets.
Asset Number
2. Click Run Depreciation. You can’t run depreciation if an
The asset number must be unique. Xero updates
'all users' lock date is set in the depreciation period.
existing draft assets that have the same asset number
Remove the lock date before continuing.
but won’t import any that match existing registered
3. The From date can't be changed. It defaults to the fixed
assets.
asset start date, or the day following the last depreciated
Date Formats period. Select a date you want to run depreciation to, up
Dd/mm/yyyy to an entire financial year.
Mm/dd/yyyy 4. Review the depreciation preview, then Confirm.
Yyyy/mm/dd
Click Confirm to advance the current depreciation date, if there
Register Draft Assets are no assets to depreciate in a period.
Register assets to add them to the fixed asset register and
start calculating depreciation. Run Depreciation on Fixed Assets
Select one or multiple assets from the Draft tab on the Fixed Depreciation Schedule
assets screen, then click Register. Run the Depreciation Schedule to track depreciation, with
opening and closing asset values.
Steps: 4. Click Options and select Delete. Depreciated assets with a
1. From Accounting, select Reports. depreciation start date on or before an all users lock date
can’t be deleted. Review the lock date and adjust in
2. Click More reports to expand the Fixed Assets section and
financial settings, if needed.
select Depreciation Schedule.
5. Click Delete to confirm. Xero reverses all depreciation
3. Select a date range from the fixed asset start date onwards,
posted for this asset, which can’t be restored.
to the date you want to report up to. If you run it from a date
earlier than this, the figures may not be correct. Click
Report Settings to customise the report. Manage the Fixed Asset Register
4. Change the layout, add or remove columns and filters. Click Edit individual assets
Update to view the report. You can edit draft assets individually or in bulk, but you can
only edit registered assets one at a time.
Manage the Fixed Asset Register Steps:
Dispose of Assets 1. Click the asset number to open the asset, from the Draft
Dispose of a registered asset in the case of a sale or loss, if or Registered tabs on the Fixed assets screen.
you have the adviser user role. 2. For draft assets, make the changes and click Save as
Draft or Register. You need the standard or adviser user
Steps:
role to edit draft assets and only adviser users can
1. Enter an invoice or receive money transaction to record
register them.
the sale of the asset.
2. From Accounting, select Advanced and click Fixed assets. 3. For registered assets, click Options and select Edit. You
need the adviser user role to edit registered assets.
3. Before you can record the disposal in the register, you
must run depreciation to at least the financial year of the 4. Make the changes and click Save.
disposal. 5. Xero rolls back depreciation to the depreciation start
4. Click the asset number, from the Registered tab. date and re-calculate it for the asset, if you change the
Purchase Price, Asset Type or Book Value fields, except
5. Click Options and select Dispose.
the Rate. Click Continue, if you made a change that
6. Enter the date and tax exclusive amount of the sale. Enter affects depreciation.
0 if you gave away or threw out the asset. The Sales
Proceeds Account is the account you used when recording Edit multiple draft assets
the sale. Select whether or not Xero should calculate Update draft assets in bulk using a CSV template, if you
depreciation for this financial year. Click Show Summary
to review the details. imported them incorrectly or entered them with missing
7. If you make any changes, click Update to see the revised

details.
summary. Then click Review Journals. Steps:
8. Select the account to use for the gain or loss on disposal, 1. Click Export from the Fixed assets screen, to download the
or capital gain. Xero will preselect the account if you’ve set CSV file.
these in Fixed Asset Settings. Click Post.
2. Make the changes to the draft assets. Remove registered
and disposed assets, as these can’t be edited in bulk. Save
Delete Assets
as a CSV file.
Delete assets to remove them from Xero. Adviser users can
delete draft assets individually or in bulk, but can only delete 3. Click Import. You need the standard or adviser user role to
import draft assets.
registered assets one at a time.
4. Select the date format you've used on the template. Click
Browse to select the file, then Continue.
Steps:
1. To delete draft assets, select one or more assets from the 5. Xero lets you know if there are any errors in the file. Correct
Draft tab on the Fixed assets screen, then click Delete. the errors and upload the file again. Then click Import.
2. Click Delete to confirm. Deleting an asset created by a
purchase transaction won't affect the original transaction.
Change the account code to a non fixed asset type on the
original transaction, or void it, to ensure the Fixed Asset
Reconciliation report balances.
3. To delete a registered asset, click the asset number from

the Registered tab.
Continuance and Acceptance of the Client Relationship
Risk Assessment (Part 1)
PSQC 1 (Redrafted) requires the firm to obtain information
Preliminary Activities Prior Audit
considered necessary in the circumstances before accepting an
Overview of the Audit Opinion Process
engagement with a new client, when deciding whether to
Phase I Risk Assessment
a. Performing Risk Assessment including Client continue an existing engagement, and when considering
Acceptance and Continuation Decision acceptance of a new engagement with an existing client:
Phase II Risk Response
a. Obtaining Evidence about Internal Control Operating Information such as the following assists the engagement
Effectiveness
partner in determining whether the conclusions reached
b. Obtaining Substantive Evidence about Accounts,
Disclosures and Assertions regarding the acceptance and continuance of client relationships
Phase III Reporting and audit engagements are appropriate:

a. Completing the Audit and Making Reporting Decisions
The integrity of the principal owners, key management and
Phase I Risk Assessment those charged with governance of the entity;
a. Performance of Preliminary Engagement
Whether the engagement team is competent to perform the
i. Continuance and Acceptance of the Client
audit engagement and has the necessary capabilities,
Relationship
including time and resources;
ii. Agreeing the Terms of the Audit
Whether the firm and the engagement team can comply
b. Planning the Audit
with relevant ethical requirements; and
i. Overall Audit Strategy
ii. Materiality Significant matters that have arisen during the current or
iii. Audit Plan previous audit engagement, and their implications for
continuing the relationship.
Importance of Quality Control
To ensure that Audit firm will comply with ethical and relevant
Continuance and Acceptance of the Client Relationship
requirements, PSA requires Audit Firm to implement quality
Performing Preliminary engagement activities helps to ensure
control on their performance of audit. Such Quality control
that the audit plans an audit engagement for which:
requires them to consider the following:
a) The Auditor maintains necessary independence and
A. Leadership Responsibilities for Quality on Audits
ability to perform the engagement.
B. Relevant Ethical Requirements
b) There are no issues with Management integrity that may
C. Acceptance and Continuance of Client Relationships and
affect the auditor's willingness to continue the
Audit Engagements
engagement
D. Human Resources (Assignment of Engagement Teams)
E. Engagement Performance c) There is no misunderstanding with the client as to the
F. Monitoring terms of the engagement.
PSA 220: QUALITY CONTROL FOR AN AUDIT OF FINANCIAL Client Acceptance and Client Retention
STATEMENTS
Strictly, client acceptance/continuance guidelines should be
The objective of the auditor is to implement quality control
established to screen-out the following:
procedures at the engagement level that provide the auditor with
reasonable assurance that:  Clients that are in financial and/or organizational difficulty
 Clients that constitute a disproportionate percentage of the
a) The audit complies with professional standards and
firm’s total practice
regulatory and legal requirements; and
 Disreputable Clients
b) The auditor’s report issued is appropriate in the
 Clients that offer an unreasonably low fee for the auditor's
circumstances
services.
Audit Firm Limitations c. Unrestricted access to persons within the entity
from whom the auditor determines it necessary to
In general, an external audit firm should not undertake an
obtain audit evidence.
engagement that is not qualified to handle. It is essential for a
CPA Firm to maintain its integrity, objectivity and reputations for Engagement Letter
The agreed terms of the audit engagement shall be recorded in
providing high quality services. Before accepting an engagement,
an audit engagement letter or other suitable form of written
the CPA should investigate the history of the prospective client,
agreement and shall include:
including such matters as the identifies and reputation of the
directors and major shareholders. (a) The objective and scope of the audit of the financial
statements;
In addition to evaluation engagement risk, the auditor should
assess whether they can complete the audit in accordance with (b) The responsibilities of the auditor;
the Philippines Standards on Auditing. The CPA must determine (c) The responsibilities of management;
whether there are conditions that would prevent them from (d) Identification of the applicable financial reporting framework
performing an independent audit of the client for the preparation of the financial statements; and
(e) Reference to the expected form and content of any reports to

Audit Firm Limitations be issued by the auditor and a statement that there may be
In summary, before accepting an engagement with new client, the
circumstances in which a report may differ from its expected
CPA firm shall assess whether it: form and content.
Is competent to perform the engagement Recurring Audits

Can comply with the relevant ethical requirements and On recurring audits, the auditor shall assess whether
Has considered the integrity of the client and does not have circumstances require the terms of the audit engagement to be
information that would lead it conclude that client lacks revised and whether there is a need to remind the entity of the
integrity existing terms of the audit engagement
Preconditions of Audit Acceptance of a Change in the Terms of the Audit

In order to establish whether the preconditions for an audit are Engagement
present, the auditor shall:
The auditor shall not agree to a change in the terms of the
a) Determine whether the financial reporting framework to be
audit engagement where there is no reasonable justification
applied in the preparation of the financial statements is
acceptable; and for doing so.
b) Obtain the agreement of management that it acknowledges If, prior to completing the audit engagement, the auditor is
and understands its responsibility: requested to change the audit engagement to an engagement
i. For the preparation of the financial statements in that conveys a lower level of assurance, the auditor shall
accordance with the applicable financial reporting determine whether there is reasonable justification for doing
framework, including where relevant their fair
so.
presentation;
If the terms of the audit engagement are changed, the auditor
ii. For such internal control as management determines is
necessary to enable the preparation of financial and management shall agree on and record the new terms of
statements that are free from material misstatement, the engagement in an engagement letter or other suitable
whether due to fraud or error; and
form of written agreement.
iii. To provide the auditor with:
If the auditor is unable to agree to a change of the terms of
a. Access to all information of which management is
aware that is relevant to the preparation of the the audit engagement and is not permitted by management to
financial statements such as records, continue the original audit engagement, the auditor shall:
documentation and other matters;
a) Withdraw from the audit engagement where possible
b. Additional information that the auditor may under applicable law or regulation; and
request from management for the purpose of the
b) Determine whether there is any obligation, either
audit; and
contractual or otherwise, to report the circumstances to
other parties, such as those charged with governance,
owners or regulators.
 Locations of the components of the entity
Audit Planning
PSA 300 Audit Planning In establishing the overall audit strategy, the auditor shall:
This Philippine Standard on Auditing (PSA) deals with the (B) Ascertain the reporting objectives of the engagement to plan
auditor’s responsibility to plan an audit of financial statements. the timing of the audit and the nature of the communications
This PSA is framed in the context of recurring audits. required:

 Deadlines for interim and financial reporting
This Philippine Standard on Auditing (PSA) deals with the
 Key dates and organization of meetings with Management
auditor’s responsibility to plan an audit of financial statements.
 Discussion with Management regarding the expected
This PSA is framed in the context of recurring audits.
communication on the status of the audit work
Once the client obtained and signed the engagement letter, the
(C) Consider the factors that, in the auditor’s professional
planning process intensifies as the auditor concentrate their
judgment, are significant in directing the engagement team’s
efforts in obtaining a detailed understanding of the client’s
efforts:
business in developing the Overall Audit Strategy and assess
 Determination of appropriate materiality levels
the risk of material misstatements of the financial statements.
 Evaluation of whether the auditor may plan to test the
PSA 300 Audit Planning effectiveness of the control
By definition, the Audit planning involves the establishment of
 Identification of recent significant entity-specific, industry,
the Overall Audit Strategy and developing an audit plan in order
financial reporting
to reduce audit risk to an acceptably low level.
(D) Consider the results of preliminary engagement activities
The Nature and Extent of planning activities will vary according and, where applicable, whether knowledge gained on other
to the size and complexity of the entity, the auditor’s previous engagements performed by the engagement partner for the
experience with the entity and changes in circumstances that entity is relevant; and
occur during the engagement.
(E) Ascertain the nature, timing and extent of resources
Audit Planning Benefits necessary to perform the engagement
Adequate planning benefits the audit of financial statements in
several ways, including the following:
Audit Plan
Helping the auditor to devote appropriate attention to
 Planning is not a discrete phase of an audit, but rather a
important areas of the audit.
continual and iterative process that often begins shortly after
Helping the auditor identify and resolve potential problems
(or in connection with) the completion of the previous audit
on a timely basis.
and continues until the completion of the current audit
Helping the auditor properly organize and manage the audit engagement.
engagement so that it is performed in an effective and
 Planning, however, includes consideration of the timing of
efficient manner.
certain activities and audit procedures that need to be
Assisting in the selection of engagement team members
completed prior to the performance of further audit
with appropriate levels of capabilities and competence to
procedures
respond to anticipated risks, and the proper assignment of
work to them. Application of the Concept of Materiality
The importance of materiality to reasonable users who rely on
Overall Audit Strategy
The auditor shall establish an overall audit strategy that sets the the statement to make decisions. Auditors, therefore, must have
scope, timing and direction of the audit, and that guides the knowledge of the likely uses of their client’s statements and the
development of the audit plan. In establishing the overall audit decisions that are being made.
strategy, the auditor shall: Materiality involves Quantitative and Qualitative considerations.
(A) Identify the characteristics of the engagement that define its Quantitative is for the peso amount of the error to the financial
scope;
statements and qualitative relate to the causes of the error.
 Financial Reporting Framework
 Industry Specific reporting requirements
Application of the Concept of Materiality  For purposes of the PSAs, performance materiality means
In planning the audit, the auditor makes judgments about the size the amount or amounts set by the auditor at less than
of misstatements that will be considered material. These materiality for the financial statements as a whole to reduce
to an appropriately low level the probability that the
judgments provide a basis for:
aggregate of uncorrected and undetected misstatements
a) Determining the nature, timing and extent of risk exceed materiality for the financial statements as a whole. If
applicable, performance materiality also refers to the
assessment procedures;
amount or amounts set by the auditor at less than the
b) Identifying and assessing the risks of material materiality level or levels for particular classes of
misstatement; and transactions, account balances or disclosures.
c) Determining the nature, timing and extent of further audit Overall Materiality Specific Materiality Performance
procedures. Materiality
Matter of Establish a lower, No specific
Auditor’s Determination of Materiality Professional specific materiality guidance per PSA.
Judgement rather amount for the Percentages ranges
The auditor’s determination of materiality is a matter of than technical audit of specific or from 60% (of Overall
professional judgment, and is affected by the auditor’s perception existence. As a sensitive statement or specific
result, no specific areas. materiality)where
of the financial information needs of users of the financial guidance provided there is a higher
statements. In this context, it is reasonable for the auditor to in the PSA. risk of material
misstatement, up to
assume that users: 85% where the
assessed risk of
a) Have a reasonable knowledge of business and economic material
activities and accounting and a willingness to study the misstatement is
less
information in the financial statements with reasonable
diligence; Determining Materiality
 When establishing the overall audit strategy, the auditor
b) Understand that financial statements are prepared,
shall determine materiality for the financial statements as a
presented and audited to levels of materiality;
whole. If, in the specific circumstances of the entity, there is
c) Recognize the uncertainties inherent in the measurement
one or more particular classes of transactions, account
of amounts based on the use of estimates, judgment and
balances or disclosures for which misstatements of lesser
the consideration of future events; and
amounts than materiality for the financial statements as a
d) Make reasonable economic decisions on the basis of the whole could reasonably be expected to influence the
information in the financial statements.
economic decisions of users taken on the basis of the
Levels Materiality financial statements, the auditor shall also determine the
1. Overall Materiality (or materiality level for the Financial materiality level or levels to be applied to those particular
Statements as a whole)
classes of transactions, account balances or disclosures
2. Specific Materiality (or materiality level for the classes of
transactions, account balances or disclosures)
3. Performance Materiality Relationship between Materiality and Audit Risk
 The auditor’s assessment of materiality, related to specific
Overall Materiality
account balances and classes of transactions helps the
 Based on the auditor’s professional judgement as to the
highest amount of misstatement(s) that could be included in auditor decide such questions as what items to examine and
the financial statements without affecting the economic whether to select audit procedures that, in combination, can
decisions take by a financial statement user. be expected to reduce audit risk to an acceptably low level.
 If the uncorrected misstatements, individually or aggregate,
is higher than overall materiality established, it would mean  There is an inverse relationship between materiality and the
that the financial statements are materially misstated. level of risk hence higher materiality level, the lower audit
risk and vice versa.
Specific Materiality
 In some cases, there may be a need to identify misstatements Audit Plan
of lesser amounts that overall materiality that would affect
The auditor shall develop an audit plan that shall include a
the economic decisions of financial statements users.
description of:
Performance Materiality
a) The nature, timing and extent of planned risk assessment the entire audit. When particularly complex or unusual
procedures, as determined under PSA 315, “Identifying and issues are involved, and the audit is performed by a sole
Assessing the Risks of Material Misstatement Through
practitioner, it may be desirable to consult with other
Understanding the Entity and Its Environment.”
suitably-experienced auditors or the auditor’s professional
b) The nature, timing and extent of planned further audit
procedures at the assertion level, as determined under PSA body
330, “The Auditor’s Responses to Assessed Risks.”
Audit Planning Documentation
c) Other planned audit procedures that are required to be
 The documentation of the audit plan is a record of the
Direction, Supervision and Review planned nature, timing and extent of risk assessment
The nature, timing and extent of the direction and supervision of procedures and further audit procedures at the assertion
engagement team members and review of their work vary level in response to the assessed risks. It also serves as a
depending on many factors, including: record of the proper planning of the audit procedures that
can be reviewed and approved prior to their performance.
The size and complexity of the entity.
The area of the audit.  The auditor may use standard audit programs or audit
completion checklists, tailored as needed to reflect the
The assessed risks of material misstatement (for example,
an increase in the assessed risk of material misstatement particular engagement circumstances.
for a given area of the audit ordinarily requires a
corresponding increase in the extent and timeliness of Additional Considerations in Initial Audit Engagements
direction and supervision of engagement team members,
The auditor shall undertake the following activities prior to
and a more detailed review of their work)
starting an initial audit:
The capabilities and competence of the individual team
a) Performing procedures required by PSA 220 regarding
members performing the audit work. PSA 220 contains
further guidance on the direction, supervision and review of the acceptance of the client relationship and the specific
audit work. audit engagement; and
Changes to Planning Decisions During the Course of the b) Communicating with the predecessor auditor, where
Audit there has been a change of auditors, in compliance
 As a result of unexpected events, changes in conditions, or
with relevant ethical requirements.
the audit evidence obtained from the results of audit
procedures, the auditor may need to modify the overall audit Other Critical Matters in Engagement Planning
strategy and audit plan and thereby the resulting planned 1. Application of Analytical Procedures in Planning the
nature, timing and extent of further audit procedures, based Audit
on the revised consideration of assessed risks.  The purpose is to assist in understanding the business
and identifying areas of potential risk. This will assist
 This may be the case when information comes to the
the auditor in planning the nature, timing and extent of
auditor’s attention that differs significantly from the
auditing procedures that will be used to obtain
information available when the auditor planned the audit
evidential matter for specific account balances.
procedures.
Considerations Specific to Smaller Entities 2. Establishment of an engagement or audit team

 When an audit is carried out entirely by the engagement  An Audit team consist people with different levels of
partner, questions of direction and supervision of expertise and experience. Usually composed of an
engagement team members and review of their work do not engagement partner, manager, at least one senior and
arise. In such cases, the engagement partner, having one or more staff. An auditor usually considers the size,
personally conducted all aspects of the work, will be aware complexity of audit and availability of experience
of all material issues. personnel.
 Forming an objective view on the appropriateness of the 3. Consideration of Work Performed by other
judgments made in the course of the audit can present Auditors/Parties
 The following factors should be considered in assessing
practical problems when the same individual also performs
the work performed by the other auditors/parties:
The involvement of other auditors in the audit 9. Assignment of Personnel in the engagement
components  The engagement partner shall be satisfied that the
Involvement of Experts
engagement team, and any auditor’s experts who are
Number of Locations
not part of the engagement team, collectively have the
Other Auditors/Parties that can help the Audit
appropriate competence and capabilities to:
1. Predecessor Auditor
2. Other CPAs a) Perform the audit engagement in accordance with
3. Specialist professional standards and regulatory and legal
4. Use of Clients’ Staff requirements; and
5. Internal Auditors b) Enable an auditor’s report that is appropriate in the

circumstances to be issued.
4. Assessment of Going Concern Assumptions
10. Scheduling of work
 PSA 570 requires auditors to evaluate whether
 Audit work that can always be performed during the
substantial doubt exist about an entity’s ability to
interim period includes the consideration of internal
continue as a going concern based on procedures
control, issuance of management letter and substantive
planned and performed to obtain evidence about the
test of transactions.
management assertions embodied in the financial
statements  Interim tests of certain financial statement balances
may also be performed but this results in additional risk
5. Identification of Related Parties
that must be controlled by the auditors.
 Because material related party transactions must be
disclosed, it is important that all related parties be
Planning a Repeat Engagement
identified and included in the permanent files in the
 The working papers in previous years audit provide
engagement. Finding undisclosed related party
information useful in planning the recurring
transactions is thereby enhance.
engagement. The auditor however should not merely
6. Client’s Legal Obligations duplicate last year audit program but should modify his
 By reading the minutes, an auditor will obtain approach to the audit for any changes in the clients
information about the significant events that have or will operations, internal control structure or business
have impact on the client. environment.
 For new clients for which historical information is

unavailable, the auditor should review information
relating to prior years.
7. Completion of the Initial Audit Program

 The Audit Program is asset of audit procedures
specifically designed for each audit, including the
substantive audits and test of controls.
 The auditor should develop and document the audit

program setting out the nature, timing and extent of
planned audit procedures required to implement overall
audit plan.
8. Preparation of Time Budgets

 A time budget is an estimate of the total hours an audit
is expected to take. Time budget also serves as the basis
for estimating fees.
Risk Assessment (Part 2) Risk Assessment: Inquiries
Much of the information obtained by the auditor’s inquiries is
Risk Assessment Procedures
obtained from management and those responsible for financial
Overview of the Audit Opinion Process reporting. However, the auditor may also obtain information, or a
Phase I Risk Assessment
a. Performing Risk Assessment including Client different perspective in identifying risks of material
Acceptance and Continuation Decision misstatement, through inquiries of others within the entity and
Phase II Risk Response other employees with different levels of authority:
a. Obtaining Evidence about Internal Control Operating
Effectiveness Examples:
1) Inquiries directed towards those charged with
b. Obtaining Substantive Evidence about Accounts,
governance may help the auditor understand the
Disclosures and Assertions
environment in which the financial statements are
Phase III Reporting prepared.
a. Completing the Audit and Making Reporting Decisions
2) Inquiries directed toward internal audit personnel may
provide information about internal audit procedures
Risk Assessment: Objectives performed during the year relating to the design and
PSA 315 deals with auditors’ responsibilities to identify the risk effectiveness of the entity’s internal control and
and assess the risk of material misstatements in the Financial whether management has satisfactorily responded to
findings from those procedure
statements, through understanding the entity, it's environment
3) Inquiries of employees involved in initiating, processing
and its internal controls
or recording complex or unusual transactions may help
Risk Assessment Procedures and Related Activities the auditor to evaluate the appropriateness of the
selection and application of certain accounting policies.
The Required Understanding of the Entity and Its
Environment, Including the Entity’s Internal Control Risk Assessment: Analytical Procedures
Identifying and Assessing the Risks of Material Misstatement Analytical procedures may help identify the existence of unusual
Material Weakness in Internal Control transactions or events, and amounts, ratios, and trends that
Documentation might indicate matters that have audit implications. Unusual or
unexpected relationships that are identified may assist the
Risk Assessment: Objectives
The objective of the auditor is to identify and assess the risks auditor in identifying risks of material misstatement, especially
of material misstatement, whether due to fraud or error, at risks of material misstatement due to fraud.
the financial statement and assertion levels, through
Risk Assessment: Observation and Inspection
understanding the entity and its environment, including the
Observation and inspection may support inquiries of
entity’s internal control, thereby providing a basis for
management and others, and may also provide information about
designing and implementing responses to the assessed risks
the entity and its environment. Examples of such audit
of material misstatement.
procedures include observation or inspection of the following:
I. Risk Assessment Procedures The entity’s operations.
The auditor shall perform risk assessment procedures to provide Documents (such as business plans and strategies),
a basis for the identification and assessment of risks of material records, and internal control manuals.
misstatement at the financial statement and assertion levels. Reports prepared by management (such as quarterly
Risk assessment procedures by themselves, however, do not management reports and interim financial statements)
provide sufficient appropriate audit evidence on which to base and those charged with governance (such as minutes of
the audit opinion. The risk assessment procedures shall include board of directors’ meetings).
the following: The entity’s premises and plant facilities
a) Inquiries of management, and of others within the entity Information Obtained in Prior Periods
who in the auditor’s judgment may have information that The auditor is required to determine whether information
is likely to assist in identifying risks of material
obtained in prior periods remains relevant, if the auditor intends
misstatement due to fraud or error.
to use that information for the purposes of the current audit. This
b) Analytical procedures.
c) Observation and inspection.
is because changes in the control environment, for example, may b) Assess the identified risks, and evaluate whether they
affect the relevance of information obtained in the prior year relate more pervasively to the financial statements as a
whole and potentially affect many assertions;
II. The Required Understanding of the Entity and its
Environment, Including the Entity’s Internal Control c) Relate the identified risks to what can go wrong at the
The auditor shall obtain an understanding of the following: assertion level, taking account of relevant controls that
a) Relevant industry, regulatory, and other external factors the auditor intends to test; and
including the applicable financial reporting framework.
d) Consider the likelihood of misstatement, including the
b) The nature of the entity, including:
possibility of multiple misstatements, and whether the
i. Its operations;
potential misstatement is of a magnitude that could
ii. Its ownership and governance structures;
result in a material misstatement.
iii. The types of investments that the entity is making and
plans to make; and IV. Material Weakness
iv. The way that the entity is structured and how it is The auditor shall evaluate whether, on the basis of the audit work
financed, to enable the auditor to understand the performed, the auditor has identified a material weakness in the
classes of transactions, account balances, and design, implementation or maintenance of internal control.
disclosures to be expected in the financial statements.
The auditor shall communicate material weaknesses in internal
The auditor shall obtain an understanding of the following:
c) The entity’s selection and application of accounting control identified during the audit on a timely basis to
policies, including the reasons for changes thereto. The management at an appropriate level of responsibility, and, with
auditor shall evaluate whether the entity’s accounting those charged with governance (unless all of those charged with
policies are appropriate for its business and consistent governance are involved in managing the entity).
with the applicable financial reporting framework and

V. Documentation
accounting policies used in the relevant industry.
The auditor shall evaluate whether, on the basis of the audit work
The auditor shall obtain an understanding of the following: performed, the auditor has identified a material weakness in the
d) The entity’s objectives and strategies, and those related design, implementation or maintenance of internal control.
business risks that may result in risks of material The auditor shall communicate material weaknesses in internal
misstatement. control identified during the audit on a timely basis to
e) The measurement and review of the entity’s financial management at an appropriate level of responsibility, and, with
performance. those charged with governance (unless all of those charged with
III. Identifying and Assessing the Risks of Material governance are involved in managing the entity).
Misstatement
The auditor shall document:
The auditor shall identify and assess the risks of material a) The discussion among the engagement team where
misstatement at:
required, and the significant decisions reached;
a) The financial statement level; and
b) The assertion level for classes of transactions, account b) Key elements of the understanding obtained regarding
balances, and disclosures, each of the aspects of the entity and its environment
To provide a basis for designing and performing further audit specified in of each of the internal control components
procedures. specified; the sources of information from which the

understanding was obtained; and the risk assessment
For this purpose, the auditor shall:
a) Identify risks throughout the process of obtaining an procedures performed;
understanding of the entity and its environment, c) The identified and assessed risks of material
including relevant controls that relate to the risks, and misstatement at the financial statement level and at the
by considering the classes of transactions, account assertion level; and
balances, and disclosures in the financial statements;
d) The risks identified, and related controls about which Control risk is the risk that a misstatement that could occur
the auditor has obtained an understanding, as a result in an account balance or class of transactions and that could
of the requirements be material, individually or when aggregated with
Assessing the Inherent Risk and Control Risk at Assertion misstatements in other balances or classes, will not be
Level prevented or detected and corrected on a timely basis by the
In performing audits, auditors test the validity of Financial accounting and internal control systems.
statements assertions related to classes of transaction.
Detection risk is the risk that an auditor’s substantive
At the assertion level, a misstatement is material if it exceeds the procedures will not detect a misstatement that exists in an
tolerable misstatement specific for the assertion. The risk that a account balance or class of transactions that could be
financial statement assertion is materially misstated is material, individually or when aggregated with misstatements
frequently referred to as Risk of the assertion level. in other balances or classes.
Assessing the Inherent Risk and Control Risk at Assertion Level Inherent risk is the susceptibility of an account balance or
For each financial statement account, audit risk consist of the
class of transactions to misstatement that could be material,
possibility that
individually or when aggregated with misstatements in other
1. A material misstatement in a assertion about the
account has occurred and; balances of classes, assuming that there were no related
2. The auditors do not detect the misstatament internal controls.
Hence, we can say that Audit Risk can be split into two: Risk of
Material Misstatements and Detection Risk. AUDIT RISK
Risk of Material
Management Assertions by Category
Misstatements Detection Risk
Classes of Transactions and events (related disclosures):
a. Occurrence Inherent Risk Non-Sampling Risk
b. Completeness Control Risk Sampling Risk
c. Accuracy Figure I. Connection of Risk

d. Classification
e. Cut-off
Assessing the Inherent Risk and Control Risk at
Assertion Level
Classes of Account Balances (related disclosures): Synonymously, we can interpret the risk as:
a. Existence
Audit Risk= Inherent Risk x Control Risk x (Sampling
b. Completeness + Non-Sampling Risk)
c. Rights and Obligation
Wherein, Non-Sampling risk can never be equal 0 since
d. Valuation and allocation there is a risk of human judgement in the side of the Auditor.
Classes of Presentation (related disclosures):

Audit Risk Model
a. Occurrence and rights and obligations Sometimes called as Audit Risk Model, auditors use the
b. Completeness relationship of risk to determine the nature, timing and extent
c. Classification and understandability of Audit Procedures to manage and control audit risk.
d. Accuracy and valuation
Audit Risk Model: Step 1 Determine the Planned Audit Risk
Assessing the Inherent Risk and Control Risk at An auditor plans audit risk on each financial statement assertion
Assertion Level level so that they will be able to express an opinion on the
Audit risk is the risk that the auditor gives an inappropriate financial statements as a whole with the appropriate low level of
audit opinion when the financial statements are materially audit risk. The factors considered are:
misstated. Audit risk has three components: inherent risk, External user’s reliance on financial statements
control risk and detection risk. Likelihood of financial difficulties
Management integrity
Audit Risk Model: Step 2 Assess Inherent Risk
Inherent risk implies that the auditor attempts to predict where
misstatements are most and least likely in the financial
statements. This affects the total amount of evidence that the
auditor is required to accumulate and influences how the
auditor's efforts to gather evidence.
Audit Risk Model: Step 3 Assess Control Risk

Control risk represents:
 an assessment whether the client's internal control are
effective for preventing and detecting misstatements and;
 the auditor's intention to make that assessment at a level
below the maximum (100%) as part of the audit plan
Before auditors can set control risk less than 100%, they must:
 Obtain understanding of internal control
 Evaluate how well it should function based on the
understanding
 Test the internal control for effectiveness
Audit Risk Model: Step 4 Determine Allowable Detection

Risk
Allowable or Planned detection risk is the amount of risk the
auditor can allow for an assertion or a measure of the risk that
audit evidence for a segment will fail to detect misstatements
exceeding a tolerable misstatements, should misstatements
exists. The key points for planned detection risk:
 It is dependent on the other three factors in the model

 It determines the amount of substantial evidence that the
auditor plans to accumulate, inversely with the size of
planned detection risk
So when can state that:

AAR
PDR =
IR x CR
PDR= Planned Detection Risk

AAR= Acceptable Audit Risk
IR= Inherent Risk
CR= Control Risk
So in Summary….
What would be the effect on Detection Risk and evidence for
the following scenarios, in case that we want to maintain the
Acceptable Audit Risk?
 Management assessed that amounts are highly
vulnerable to miscalculation
 Internal controls are determined to be effective
 Increasing substantive audit procedures
 Materiality was lower than expected
Fraud and Error Responsibilities of the Auditor
An auditor conducting an audit in accordance with PSAs is
Fraud and Error: Objectives
responsible for obtaining reasonable assurance that the
PSA 240 deals with the auditor’s responsibilities relating to financial statements taken as a whole are free from material
fraud in an audit of financial statements. Specifically, it misstatement, whether caused by fraud or error.
expands on how PSA 315, “Identifying and Assessing the Risks
of Material Misstatement Through Understanding the Entity The risk of not detecting a material misstatement resulting
and Its Environment,” and PSA 330, “The Auditor’s Responses from fraud is higher than the risk of not detecting one
to Assessed Risks,” are to be applied in relation to risks of resulting from error. This is because fraud may involve
material misstatement due to fraud. sophisticated and carefully organized schemes designed to
conceal it, such as forgery, deliberate failure to record
Characteristics of Fraud
transactions, or intentional misrepresentations being made to
Misstatements in the financial statements can arise from the auditor.
either fraud or error. The distinguishing factor between fraud
and error is whether the underlying action that results in the Collusion may cause the auditor to believe that audit
misstatement of the financial statements is intentional or evidence is persuasive when it is, in fact, false.
unintentional. The auditor’s ability to detect a fraud depends on factors such

as the skillfulness of the perpetrator, the frequency and
FRAUD is a broad legal concept, for the purposes of the
extent of manipulation, the degree of collusion involved, the
PSAs, the auditor is concerned with fraud that causes a
relative size of individual amounts manipulated, and the
material misstatement in the financial statements.
seniority of those individuals involved. While the auditor may
Two types of intentional misstatements are relevant to the be able to identify potential opportunities for fraud to be
auditor:
perpetrated, it is difficult for the auditor to determine whether
a. misstatements resulting from fraudulent financial
reporting and; misstatements in judgment areas such as accounting
b. misstatements resulting from misappropriation of estimates are caused by fraud or error.
assets.
Although the auditor may suspect or, in rare cases, identify
the occurrence of fraud, the auditor does not make legal Characteristics of Fraud
determinations of whether fraud has actually occurred Fraud, whether fraudulent financial reporting or
misappropriation of assets, involves:
Responsibility for the Prevention and Detection of Fraud
a. Incentive or pressure to commit fraud,
The primary responsibility for the prevention and detection of
b. A perceived opportunity to do so and
fraud rests with both those charged with governance of the
c. Some rationalization of the act
entity and management.
It is important that management, with the oversight of those Incentive or pressure to commit fraudulent financial
charged with governance, place a strong emphasis on fraud reporting may exist when management is under pressure,
prevention, which may reduce opportunities for fraud to take from sources outside or inside the entity, to achieve an
place, and fraud deterrence, which could persuade individuals expected (and perhaps unrealistic) earnings target or
not to commit fraud because of the likelihood of detection and financial outcome – particularly since the consequences to
punishment. management for failing to meet financial goals can be

significant. Similarly, individuals may have an incentive to
Responsibilities of the Auditor misappropriate assets, for example, because the individuals
An auditor conducting an audit in accordance with PSAs is
are living beyond their means.
responsible for obtaining reasonable assurance that the
financial statements taken as a whole are free from material
misstatement, whether caused by fraud or error.
A perceived opportunity to commit fraud may exist when Stealing physical assets or intellectual property (for
example, stealing inventory for personal use or for sale,
an individual believes internal control can be overridden,
stealing scrap for resale, colluding with a competitor by
for example, because the individual is in a position of trust disclosing technological data in return for payment).
or has knowledge of specific weaknesses in internal Causing an entity to pay for goods and services not
control. received (for example, payments to fictitious vendors,
kickbacks paid by vendors to the entity’s purchasing
agents in return for inflating prices, payments to fictitious
Individuals may be able to rationalize committing a
employees).
fraudulent act. Some individuals possess an attitude,
Using an entity’s assets for personal use (for example,
character or set of ethical values that allow them using the entity’s assets as collateral for a personal loan
knowingly and intentionally to commit a dishonest act or a loan to a related party).
Fraud: Risk Assessment

Fraudulent Financial Reporting
When performing risk assessment procedures and related
Fraudulent financial reporting involves intentional
activities to obtain an understanding of the entity and its
misstatements including omissions of amounts or
environment, including the entity’s internal control, required
disclosures in financial statements to deceive financial
by ISA 315, the auditor shall perform the procedures to obtain
statement users. It can be caused by the efforts of
information for use in identifying the risks of material
management to manage earnings in order to deceive financial
misstatement due to fraud.
statement users by influencing their perceptions as to the
entity’s performance and profitability. When identifying and assessing the risks of material
misstatement due to fraud, the auditor shall, based on a
Fraudulent financial reporting may be accomplished by the
presumption that there are risks of fraud in revenue
following:
Manipulation, falsification (including forgery), or recognition, evaluate which types of revenue, revenue
alteration of accounting records or supporting transactions or assertions give rise to such risk. The
documentation from which the financial statements are documentation required when the auditor concludes that the
prepared. presumption is not applicable in the circumstances of the

engagement and, accordingly, has not identified revenue
Misrepresentation in, or intentional omission from, the
recognition as a risk of material misstatement due to fraud
financial statements of events, transactions or other
significant information. Responsibility for the Prevention and Detection of Fraud
The primary responsibility for the prevention and detection of
Intentional misapplication of accounting principles
fraud rests with both those charged with governance of the
relating to amounts, classification, manner of
entity and management. It is important that management, with
presentation, or disclosure.
the oversight of those charged with governance, place a
Misappropriation of Assets strong emphasis on fraud prevention, which may reduce
Misappropriation of assets involves the theft of an entity’s opportunities for fraud to take place, and fraud deterrence,
assets and is often perpetrated by employees in relatively which could persuade individuals not to commit fraud
small and immaterial amounts. However, it can also involve because of the likelihood of detection and punishment.
management who are usually more able to disguise or
This involves a commitment to creating a culture of honesty
conceal misappropriations in ways that are difficult to detect.
and ethical behavior which can be reinforced by an active
Misappropriation of Assets oversight by those charged with governance. In exercising

Embezzling receipts (for example, misappropriating oversight responsibility, those charged with governance
collections on accounts receivable or diverting receipts consider the potential for override of controls or other
in respect of written-off accounts to personal bank
inappropriate influence over the financial reporting process,
accounts).
such as efforts by management to manage earnings in order
to influence the perceptions of analysts as to the entity’s Examples of Possible Audit Procedures to Address the
performance and profitability. Assessed Risks of Material Misstatement Due to Fraud
The following are specific examples of responses:
Fraud Risk Factors Visiting locations or performing certain tests on a
Events or conditions that indicate an incentive or pressure
surprise or unannounced basis.
to commit fraud or provide an opportunity to commit fraud.
Requesting that inventories be counted at the end of the
The auditor shall evaluate whether the information obtained reporting period or on a date closer to period end to
from the other risk assessment procedures and related minimize the risk of manipulation of balances in the
activities performed indicates that one or more fraud risk period between the date of completion of the count and
factors are present. While fraud risk factors may not the end of the reporting period.
necessarily indicate the existence of fraud, they have often
Altering the audit approach in the current year. For
been present in circumstances where frauds have occurred
example, contacting major customers and suppliers
and therefore may indicate risks of material misstatement
orally in addition to sending written confirmation,
due to fraud.
sending confirmation requests to a specific party within
Examples of Fraud Risk Factors: an organization, or seeking more or different
Incentives/Pressures information. Performing a detailed review of the entity’s
Financial stability or profitability is threatened by economic, quarter-end or year-end adjust
industry, or entity operating conditions, such as (or as
indicated by):
FRAUD: Communications To Management
High degree of competition or market saturation, When the auditor has obtained evidence that fraud exists or
accompanied by declining margins.
may exist, it is important that the matter be brought to the
High vulnerability to rapid changes, such as changes in attention of the appropriate level of management as soon as
technology, product obsolescence, or interest rates.
practicable. This is so even if the matter might be considered
Significant declines in customer demand and increasing
inconsequential (for example, a minor defalcation by an
business failures in either the industry or overall
economy. employee at a low level in the entity’s organization).
Operating losses making the threat of bankruptcy, The determination of which level of management is the
foreclosure, or hostile takeover imminent.
appropriate one is a matter of professional judgment and is
Examples of Fraud Risk Factors: Opportunities affected by such factors as the likelihood of collusion and the
The nature of the industry or the entity’s operations provides nature and magnitude of the suspected fraud. Ordinarily, the
opportunities to engage in fraudulent financial reporting that appropriate level of management is at least one level above
can arise from the following:
the persons who appear to be involved with the suspected
Significant related-party transactions not in the ordinary fraud.
course of business or with related entities not audited or
audited by another firm. FRAUD: Those Charged With Governance
The auditor’s communication with those charged with
A strong financial presence or ability to dominate a
governance may be made orally or in writing. PSA 260
certain industry sector that allows the entity to dictate
(Revised) identifies factors the auditor considers in
terms or conditions to suppliers or customers that may
determining whether to communicate orally or in writing. Due
result in inappropriate or non-arm’s-length transactions.
to the nature and sensitivity of fraud involving senior
Assets, liabilities, revenues, or expenses based on management, or fraud that results in a material misstatement
significant estimates that involve subjective judgments or in the financial statements, the auditor reports such matters
uncertainties that are difficult to corroborate. on a timely basis and may consider it necessary to also report
such matters in writing.
FRAUD: Communications to Regulatory and
Enforcement Authorities
The auditor’s professional duty to maintain the confidentiality
of client information may preclude reporting fraud to a party
outside the client entity. However, in certain circumstances,
the duty of confidentiality may be overridden by regulatory
requirements, statute, the law or courts of law.

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Introduction to the Computer Information Function of the Information Systems

System Audit Regardless of the information system components used, the

F. Networks - These are specialized hardware and 7) Decentralized Processing System

3) Segregate functions within the IT department

d) Movement of data between processing steps and Final QUIZ #1

c) Suitable criteria Audit Risk

The classes of transactions in the entity's operations

The procedures, within both IT and manual systems, by

5 Components of Internal Control

Monitoring of controls involves assessing the design and

Limitations of Internal Control

Controls can be circumvented by the collusion of two or

Designing and implementing controls, management may

 For example, through inquiries of management and

Components of Internal Control—The Information System

Initiate, record, process, and report entity transactions

Transfer information from transaction processing

Test of Control Timing of Test of Controls

Documenting the Assessed Level of Control Risk

 Auditor who assess the Control Risk as LESS THAN HIGH

What are the ISSUES that can be noted during Test

 (b) Significant deficiency in internal control

Control Deficiency vs Significant Deficiency vs Material

to these panels. own login.

contacts. and can have restricted access to reports.

CREATE NEW Types of user roles

in bulk for cash transactions. 5) Set Time Zone.

Access the file library Inbox to record your transactions in Xero.

Chart of Accounts Uncleared items

Tax Rates. in financial reports, without entering full historical data in

Set up Conversion Balances

is listed in the Australian Stock Exchange (ASX). anywhere.

Data Security No need to Update,

Improve Business Financial Information

however you can change them if you need. Email Template

prepayments. customer information, such as customer name, due

Credit Cards powered by Stripe

Quotes Qty* - Quantity of the product/service you are invoicing.

Billable Expenses Account* - Account to which the product/service must be

Billable Expenses Invoice Stages

This works when the customer pays by bank transfer or

Accounting for Inventory 2. Click New Item.

Import Products and Services Duplicate item codes

4. The item code is mandatory. Enter the inventory column headers.

8. If new to Xero and the inventory asset account is used

5. You can't edit the inventory asset account of a tracked

Resolving Common Inventory Problems

Check chart of accounts to view the inventory accounts,

Resolving Common Inventory Problems

If you sell more items than you have due to incorrect

Steps: Add a draft asset from a purchase transaction

Tips for completing the template Run Depreciation on Fixed Assets

Add and Register Fixed Assets Steps:

7. If you make any changes, click Update to see the revised

3. To delete a registered asset, click the asset number from

Phase III Reporting and audit engagements are appropriate:

(e) Reference to the expected form and content of any reports to

Is competent to perform the engagement Recurring Audits

Preconditions of Audit Acceptance of a Change in the Terms of the Audit