AuditingandAssuranceStandardsCouncil

PhilippineStandardonAuditing320(RevisedandRedrafted)MATE

RIALITYINPLANNINGANDPERFORMING
ANAUDITPhilippineStandardonAuditing450(RevisedandRedraft
ed)EVALUATIONOFMISSTATEMENTSIDENTIFIED

DURINGTHEAUDITConformingAmendmentstoOtherPSAs
CONTENTS
Page
PhilippineStandardonAuditing(PSA)320(RevisedandRedraft
ed),MaterialityinPlanningandPerforminganAudit.....
......................................3PSA450(RevisedandRedraft
ed),EvaluationofMisstatementsIdentifiedduringtheA
udit...........................................................................
.....................12ConformingAmendmentsPSA230(Re
drafted),AuditDocumentation..................................
................26PSA260(RevisedandRedrafted),Commu
nicationwithThoseChargedwithGovernance..............
......................................................26PSA300(Redraft
ed),PlanninganAuditofFinancialStatements.............
...26PSA315(Redrafted),IdentifyingandAssessingthe

RisksofMaterialMisstatementsThroughUnderstanding
theEntityandItsEnvironment........27PSA540(Revised
andRedrafted),AuditingAccountingEstimates,Includi
ngFairValueAccountingEstimates,andRelatedDisclosu
res...........27PSA600(RevisedandRedrafted),Specia
lConsiderations
AuditsofGroupFinancialStatements(IncludingtheWork
ofComponentAuditors)..............................................
.........................................28

PHILIPPINESTANDARDONAUDITING320(REVISEDANDREDRAFTE
D)
MATERIALITYINPLANNINGANDPERFORMINGANAUDIT

(Effectiveforauditsoffinancialstatementsforperiodsbeginning onorafterDecember15,2009)

CONTENTS
Paragraph
Introduction
ScopeofthisPSA..............................................................................
...................
MaterialityintheContextofanAudit..................................................
...............
EffectiveDate.................................................................................
.....................
Objective.......................................................................................
.......................
Definition.......................................................................................
......................
Requirements

1
26

7
8
9

DeterminingMaterialityandPerformanceMaterialitywhenPlanning
theAudit.........................................................................................
1011
................
RevisionastheAuditProgresses.......................................................
1213
..................
Documentation..............................................................................
14
.......................
ApplicationandOtherExplanatoryMaterial
MaterialityandAuditRisk.................................................................
A1
..................
DeterminingMaterialityandPerformanceMaterialitywhenPlanning
theAudit.
A2A12
RevisionastheAuditProgresses.......................................................
A13
..................

Acknowledgment

PhilippineStandardonAuditing(PSA)320(RevisedandRedrafted),Mate
rialityinPlanningandPerforminganAuditshouldbereadinthecontextof
PSA200(RevisedandRedrafted),OverallObjectivesoftheIndependent
AuditorandtheConductofanAuditinAccordancewithPhilippineStandard
sonAuditing.

[ReferencesinthisPSAto otherPSAsthathavenotyetbeen finalized reflecttheworkingtitleso

fthosePSAs.Thereferencesareindicated in bracketsandwillbeupdated whenthosePSAsar
efinalized.]

Introduction
ScopeofthisPSA
1.
ThisPhilippineStandardonAuditing(PSA)dealswiththeauditorsrespons
ibilitytoapplytheconceptofmaterialityinplanningandperforminganaud
1
itoffinancialstatements.PSA450(RevisedandRedrafted)
explainshowmaterialityisappliedinevaluatingtheeffectofidentifiedmis
statementsontheauditandofuncorrectedmisstatements,ifany,onthefi
nancialstatements.
MaterialityintheContextofanAudit
2.
Financialreportingframeworksoftendiscusstheconceptofmaterialit
yinthecontextofthepreparationandpresentationoffinancialstateme
nts.Althoughfinancialreportingframeworksmaydiscussmaterialityi
ndifferentterms,theygenerallyexplainthat:
Misstatements,includingomissions,areconsideredtobematerialifthey,
individuallyorintheaggregate,couldreasonablybeexpectedtoinfluenc
etheeconomicdecisionsofuserstakenonthebasisofthefinancialstatem
ents;
Judgmentsaboutmaterialityaremadeinlightofsurroundingcircumstanc
es,andareaffectedbythesizeornatureofamisstatement,oracombinatio
nofboth;and
Judgmentsaboutmattersthatarematerialtousersofthefinancialstatem
entsarebasedonaconsiderationofthecommonfinancialinformationnee
dsof

2
usersasagroup.Thepossibleeffectofmisstatementsonspecificindividualusers
,whoseneedsmayvarywidely,isnotconsidered.
3.
Suchadiscussion,ifpresentintheapplicablefinancialreportingfram
ework,providesaframeofreferencetotheauditorindeterminingmat
erialityfortheaudit.Iftheapplicablefinancialreportingframeworkdo
esnotincludeadiscussionoftheconceptofmateriality,thecharacteri
sticsreferredtoinparagraph2providetheauditorwithsuchaframeof
reference.

1
PSA450 (Revised andRedrafted),Evaluation ofMisstatementsIdentified duringtheAudit.
2
Forexample,theFramework forthePreparationand Presentation ofFinancialStatements,a
dopted bythePhilippineFinancialReportingStandardsCouncil,indicatesthat,foraprofitoriented entity,asinvestorsareprovidersofriskcapitalto theenterprise,theprovisionoffinan
cialstatementsthatmeettheirneedswillalso meetmostoftheneedsofotherusersthatfinanci
alstatementscan satisfy.

4.
Theauditorsdeterminationofmaterialityisamatterofprofessionaljudg
ment,andisaffectedbytheauditorsperceptionofthefinancialinformati
onneedsofusersofthefinancialstatements.Inthiscontext,itisreasonabl
efortheauditortoassumethatusers:
(a)
Haveareasonableknowledgeofbusinessandeconomicactivitiesandacc
ountingandawillingnesstostudytheinformationinthefinancialstateme
ntswithreasonablediligence;
(b)
Understandthatfinancialstatementsareprepared,presentedandaudite
dtolevelsofmateriality;
(c)
Recognizetheuncertaintiesinherentinthemeasurementofamountsbas
edontheuseofestimates,judgmentandtheconsiderationoffutureevent
s;and
(d)

Makereasonableeconomicdecisionsonthebasisoftheinformationinthe
financialstatements.
Theconceptofmaterialityisappliedbytheauditorbothinplanningandper
formingtheaudit,andinevaluatingtheeffectofidentifiedmisstatements
ontheauditandofuncorrectedmisstatements,ifany,onthefinancialstat
ementsandinformingtheopinionintheauditorsreport.(Ref:Para.A1)
1. 6.
Inplanningtheaudit,theauditormakesjudgmentsaboutthesizeofmi
sstatementsthatwillbeconsideredmaterial.Thesejudgmentsprovid
eabasisfor:
2. (a)
Determiningthenature,timingandextentofriskassessmentprocedu
res;
3. (b) Identifyingandassessingtherisksofmaterialmisstatement;and
4. (c)
Determiningthenature,timingandextentoffurtherauditprocedures.
Thematerialitydeterminedwhenplanningtheauditdoesnotnecessarily
establishanamountbelowwhichuncorrectedmisstatements,individuall
yorintheaggregate,willalwaysbeevaluatedasimmaterial.Thecircumst
ancesrelatedtosomemisstatementsmaycausetheauditortoevaluateth
emasmaterialeveniftheyarebelowmateriality.Althoughitisnotpractica
bletodesignauditprocedurestodetectmisstatementsthatcouldbemate
rialsolelybecauseoftheirnature,theauditorconsidersnotonlythesizebut
alsothenatureofuncorrectedmisstatements,andtheparticularcircumst
ancesoftheiroccurrence,whenevaluatingtheireffectonthefinancialstat
3
ements.

PSA450 (Revised andRedrafted),paragraphA16.

EffectiveDate
7.
ThisPSAiseffectiveforauditsoffinancialstatementsforperiodsbeginning
onorafterDecember15,2009.
Objective
8.
Theobjectiveoftheauditoristoapplytheconceptofmaterialityappropria

telyinplanningandperformingtheaudit.
Definition
9.
ForpurposesofthePSAs,performancematerialitymeanstheamountora
mountssetbytheauditoratlessthanmaterialityforthefinancialstatemen
tsasawholetoreducetoanappropriatelylowleveltheprobabilitythatthea
ggregateofuncorrectedandundetectedmisstatementsexceedsmateri
alityforthefinancialstatementsasawhole.Ifapplicable,performancema
terialityalsoreferstotheamountoramountssetbytheauditoratlessthant
hematerialitylevelorlevelsforparticularclassesoftransactions,account
balancesordisclosures.

Requirements
DeterminingMaterialityandPerformanceMaterialitywhenPlanningtheAudit
Whenestablishingtheoverallauditstrategy,theauditorshalldetermine
materialityforthefinancialstatementsasawhole.If,inthespecificcircum
stancesoftheentity,thereisoneormoreparticularclassesoftransactions
,accountbalancesordisclosuresforwhichmisstatementsoflesseramou
ntsthanmaterialityforthefinancialstatementsasawholecouldreasonab
lybeexpectedtoinfluencetheeconomicdecisionsofuserstakenontheba
sisofthefinancialstatements,theauditorshallalsodeterminethemateri
alitylevelorlevelstobeappliedtothoseparticularclassesoftransactions,
accountbalancesordisclosures.(Ref:Para.A2A11)
Theauditorshalldetermineperformancematerialityforpurposesofasse
ssingtherisksofmaterialmisstatementanddeterminingthenature,timi
ngandextentoffurtherauditprocedures.(Ref:Para.A12)
RevisionastheAuditProgresses

Theauditorshallrevisematerialityforthefinancialstatementsasawhole(
and,ifapplicable,thematerialitylevelorlevelsforparticularclassesoftra
nsactions,accountbalancesordisclosures)intheeventofbecomingawar
eofinformationduringtheauditthatwouldhavecausedtheauditortohav
edeterminedadifferentamount(oramounts)initially.(Ref:Para.A13)
Iftheauditorconcludesthatalowermaterialityforthefinancialstatement
sasawhole(and,ifapplicable,materialitylevelorlevelsforparticularclass
esoftransactions,accountbalancesordisclosures)thanthatinitiallydete
rminedisappropriate,theauditorshalldeterminewhetheritisnecessaryt
oreviseperformancemateriality,andwhetherthenature,timingandexte
ntofthefurtherauditproceduresremainappropriate.

Documentation
14.

Theauditdocumentationshallincludethefollowingamountsandthe
factorsconsideredintheirdetermination:
(a)
Materialityforthefinancialstatementsasawhole(seeparagraph10);
(b)
Ifapplicable,thematerialitylevelorlevelsforparticularclassesoftransact
ions,accountbalancesordisclosures(seeparagraph10);
(c)
Performancemateriality(seeparagraph11);and
(d)
Anyrevisionof(a)(c)astheauditprogressed(seeparagraphs1213).
***

ApplicationandOtherExplanatoryMaterial
MaterialityandAuditRisk(Ref:Para.5)
A1.Inconductinganauditoffinancialstatements,theoverallobjectivesoftheau
ditoraretoobtainreasonableassuranceaboutwhetherthefinancialstate
mentsasawholearefreefrommaterialmisstatement,whetherduetofrau
dorerror,therebyenablingtheauditortoexpressanopiniononwhetherth
efinancialstatementsareprepared,inallmaterialrespects,inaccordance
withanapplicablefinancialreportingframework;andtoreportonthefinan
cialstatements,andcommunicate
4

asrequiredbythePSAs,inaccordancewiththeauditorsfindings.Theaudit
orobtainsreasonableassurancebyobtainingsufficientappropriateaudit
5
evidencetoreduceauditrisktoanacceptablylowlevel.
Auditriskistheriskthattheauditorexpressesaninappropriateauditopinio
nwhenthefinancialstatementsaremateriallymisstated.Auditriskisafun
ctionoftherisksofmaterialmisstatement

4
PSA200 (Revised andRedrafted),OverallObjectivesoftheIndependentAuditorand theCond
uctofan Auditin Accordancewith PhilippineStandardson Auditing,paragraph11.
5
PSA200 (Revised andRedrafted),paragraph17.
6

anddetectionrisk.Materialityandauditriskareconsideredthroughoutth
eaudit,inparticular,when:
7

(a)
(b)

Identifyingandassessingtherisksofmaterialmisstatement;

Determiningthenature,timingandextentoffurtherauditprocedures;
and
(c)

Evaluatingtheeffectofuncorrectedmisstatements,ifany,onthefinancia
9
10
lstatements andinformingtheopinionintheauditorsreport.
DeterminingMaterialityandPerformanceMaterialitywhenPlanningtheAudit
ConsiderationsSpecifictoPublicSectorEntities(Ref:Para.10)
A2.Inthecaseofapublicsectorentity,legislatorsandregulatorsareoftenthepri
maryusersofitsfinancialstatements.Furthermore,thefinancialstateme
ntsmaybeusedtomakedecisionsotherthaneconomicdecisions.Thedet
erminationofmaterialityforthefinancialstatementsasawhole(and,ifap
plicable,materialitylevelorlevelsforparticularclassesoftransactions,ac
countbalancesordisclosures)inanauditofthefinancialstatementsofapu
blicsectorentityisthereforeinfluencedbylegislativeandregulatoryrequi
rements,andbythefinancialinformationneedsoflegislatorsandthepubli
cinrelationtopublicsectorprograms.
UseofBenchmarksinDeterminingMaterialityfortheFinancialStatementsasaW
hole
(Ref:Para.10)
A3.Determiningmaterialityinvolvestheexerciseofprofessionaljudgment.A
percentageisoftenappliedtoachosenbenchmarkasastartingpointind
eterminingmaterialityforthefinancialstatementsasawhole.Factorsth
atmayaffecttheidentificationofanappropriatebenchmarkincludethe
following:

Theelementsofthefinancialstatements(forexample,assets,li
abilities,equity,revenue,expenses);

6
PSA200 (Revised andRedrafted),paragraph13(c).
7
PSA315 (Redrafted),Identifyingand AssessingtheRisksofMaterialMisstatementsThroughUn
derstandingtheEntityand ItsEnvironment.

8
PSA330 (Redrafted),TheAuditorsResponsestoAssessed Risks.
9
PSA450 (Revised andRedrafted).
10

[PSA700 (Redrafted),Formingan Opinion and Reportingon FinancialStatements.]

Whetherthereareitemsonwhichtheattentionoftheusersoftheparticula
rentitysfinancialstatementstendstobefocused(forexample,forthepur
poseofevaluatingfinancialperformanceusersmaytendtofocusonprofit,
revenueornetassets);
Thenatureoftheentity,wheretheentityisinitslifecycle,andtheindustrya
ndeconomicenvironmentinwhichtheentityoperates;
Theentitysownershipstructureandthewayitisfinanced(forexample,ifa
nentityisfinancedsolelybydebtratherthanequity,usersmayputmoree
mphasisonassets,andclaimsonthem,thanontheentitysearnings);and
Therelativevolatilityofthebenchmark.
A4.Examplesofbenchmarksthatmaybeappropriate,dependingonthecircums
tancesoftheentity,includecategoriesofreportedincomesuchasprofitbe
foretax,totalrevenue,grossprofitandtotalexpenses,totalequityornetas
setvalue.Profitbeforetaxfromcontinuingoperationsisoftenusedforprofi
torientedentities.Whenprofitbeforetaxfromcontinuingoperationsisvola
tile,otherbenchmarksmaybemoreappropriate,suchasgrossprofitortot
alrevenues.
A5.Inrelationtothechosenbenchmark,relevantfinancialdataordinarilyinclude
spriorperiodsfinancialresultsandfinancialpositions,theperiodtodatefinancialresultsandfinancialposition,andbudgetsorforecastsforth
ecurrentperiod,adjustedforsignificantchangesinthecircumstancesofth
eentity(forexample,asignificantbusinessacquisition)andrelevantchan
gesofconditionsintheindustryoreconomicenvironmentinwhichtheentit
yoperates.Forexample,when,asastartingpoint,materialityforthefinanc
ialstatementsasawholeisdeterminedforaparticularentitybasedonaper
centageofprofitbeforetaxfromcontinuingoperations,circumstancesth
atgiverisetoanexceptionaldecreaseorincreaseinsuchprofitmayleadth
eauditortoconcludethatmaterialityforthefinancialstatementsasawhol
eismoreappropriatelydeterminedusinganormalizedprofitbeforetaxfro
mcontinuingoperationsfigurebasedonpastresults.
A6.Materialityrelatestothefinancialstatementsonwhichtheauditorisreport
ing.Wherethefinancialstatementsarepreparedforafinancialreportin
gperiodofmoreorlessthantwelvemonths,suchasmaybethecasefora
newentityorachangeinthefinancialreportingperiod,materialityrelat
estothefinancialstatementspreparedforthatfinancialreportingperio
d.
A7.Determiningapercentagetobeappliedtoachosenbenchmarkinvolvesthe

exerciseofprofessionaljudgment.Thereisarelationshipbetweentheper
centageandthechosenbenchmark,suchthatapercentageappliedtopr
ofitbeforetaxfromcontinuingoperationswillnormallybehigherthanape
rcentageappliedtototalrevenue.Forexample,theauditormayconsider
fivepercentofprofitbeforetaxfromcontinuingoperationstobeappropri
ateforaprofitorientedentityinamanufacturingindustry,whiletheauditormayconsid
eronepercentoftotal
revenueortotalexpensestobeappropriateforanotforprofitentity.Higherorlowerpercentages,however,maybedeemedappropriatei
nthecircumstances.
ConsiderationsSpecifictoSmallEntities
A8.Whenanentitysprofitbeforetaxfromcontinuingoperationsisconsistentlyn
ominal,asmightbethecaseforanownermanagedbusinesswheretheownertakesmuchoftheprofitbeforetaxinth
eformofremuneration,abenchmarksuchasprofitbeforeremunerationa
ndtaxmaybemorerelevant.
ConsiderationsSpecifictoPublicSectorEntities
A9.Inanauditofapublicsectorentity,totalcostornetcost(expenseslessrevenue
sorexpenditurelessreceipts)maybeappropriatebenchmarksforprogra
mactivities.Whereapublicsectorentityhascustodyofpublicassets,asset
smaybeanappropriatebenchmark.
MaterialityLevelorLevelsforParticularClassesofTransactions,AccountBalan
cesorDisclosures(Ref:Para.10)
A10.Factorsthatmayindicatetheexistenceofoneormoreparticularclassesoftr
ansactions,accountbalancesordisclosuresforwhichmisstatementsofl
esseramountsthanmaterialityforthefinancialstatementsasawholeco
uldreasonablybeexpectedtoinfluencetheeconomicdecisionsofuserst
akenonthebasisofthefinancialstatementsincludethefollowing:
Whetherlaw,regulationortheapplicablefinancialreportingframeworka
ffectusersexpectationsregardingthemeasurementordisclosureofcert
ainitems(forexample,relatedpartytransactions,andtheremunerationo
fmanagementandthosechargedwithgovernance).
Thekeydisclosuresinrelationtotheindustryinwhichtheentityoperates(f
orexample,researchanddevelopmentcostsforapharmaceuticalcompa
ny).
Whetherattentionisfocusedonaparticularaspectoftheentitysbusiness
thatisseparatelydisclosedinthefinancialstatements(forexample,anew
lyacquiredbusiness).
A11.Inconsideringwhether,inthespecificcircumstancesoftheentity,suchclass
esoftransactions,accountbalancesordisclosuresexist,theauditormayfi
nditusefultoobtainanunderstandingoftheviewsandexpectationsofthos

echargedwithgovernanceandmanagement.
PerformanceMateriality(Ref:Para.11)
A12.Planningtheauditsolelytodetectindividuallymaterialmisstatementsover
looksthefactthattheaggregateofindividuallyimmaterialmisstatements
maycausethefinancialstatementstobemateriallymisstated,andleaves
nomarginforpossibleundetectedmisstatements.Performancemateriali
ty(which,asdefined,isoneormoreamounts)issettoreducetoanappropri
atelylowleveltheprobabilitythattheaggregateofuncorrectedandundet
ectedmisstatementsinthefinancialstatementsexceedsmaterialityfort
hefinancialstatementsasawhole.Similarly,performancematerialityrel
atingtoamaterialityleveldeterminedforaparticularclassoftransactions,
accountbalanceordisclosureissettoreducetoanappropriatelylowlevelt
heprobabilitythattheaggregateofuncorrectedandundetectedmisstate
mentsinthatparticularclassoftransactions,accountbalanceordisclosur
eexceedsthematerialitylevelforthatparticularclassoftransactions,acc
ountbalanceordisclosure.Thedeterminationofperformancemateriality
isnotasimplemechanicalcalculationandinvolvestheexerciseofprofessi
onaljudgment.Itisaffectedbytheauditorsunderstandingoftheentity,up
datedduringtheperformanceoftheriskassessmentprocedures;andthen
atureandextentofmisstatementsidentifiedinpreviousauditsandthereb
ytheauditorsexpectationsinrelationtomisstatementsinthecurrentperi
od.
RevisionastheAuditProgresses(Ref:Para.12)
A13.Materialityforthefinancialstatementsasawhole(and,ifapplicable,thema
terialitylevelorlevelsforparticularclassesoftransactions,accountbala
ncesordisclosures)mayneedtoberevisedasaresultofachangeincircum
stancesthatoccurredduringtheaudit(forexample,adecisiontodispose
ofamajorpartoftheentitysbusiness),newinformation,orachangeinthe
auditorsunderstandingoftheentityanditsoperationsasaresultofperfo
rmingfurtherauditprocedures.Forexample,ifduringtheaudititappears
asthoughactualfinancialresultsarelikelytobesubstantiallydifferentfro
mtheanticipatedperiodendfinancialresultsthatwereusedinitiallytodet
erminematerialityforthefinancialstatementsasawhole,theauditorrevi
sesthatmateriality.

Acknowledgment
ThisPSAisbasedonInternationalStandardonAuditing320(RevisedandRedraf
ted),MaterialityinPlanningandPerforminganAudit,issuedbytheInternatio
nalAuditingandAssuranceStandardsBoard.
TherearenosignificantdifferencesbetweenthisPSA320(RevisedandRedraft
ed)andISA320(RevisedandRedrafted).
ThisPSA320(RevisedandRedrafted),MaterialityinPlanningandPerformingan
Audit,wasunanimouslyapprovedforadoptiononOctober27,2008bythemem
bersoftheAuditingandAssuranceStandardsCouncil.

BenjaminR.Punongbayan,Chairman

FelicidadA.Abad

AntonioP.Acyatan

ErwinVincentG.Alcala

FroilanG.Ampil

DavidL.Balangue

Ma.GraciaF.CasalsDiaz

EliseoA.Fernandez

JaimeP.Naranjo

Ma.CeciliaF.Ortiz

NestorioC.Roraldo

JoaquinP.Tolentino

EdithaO.Tuason

JaimeE.Ysmael

PHILIPPINESTANDARDONAUDITING450(REVISEDANDREDRAFTE
D)
EVALUATIONOFMISSTATEMENTSIDENTIFIEDDURINGTHEAUDIT

(Effectiveforauditsoffinancialstatementsforperiodsbeginning onorafterDecember15,2009)

CONTENTS
Paragraph
Introduction
ScopeofthisPSA................................................................................
....................
EffectiveDate...................................................................................
.......................
Objective.........................................................................................
........................
Definitions.......................................................................................
........................

1
2
3
4

Requirements
AccumulationofIdentifiedMisstatements..........................................
5
..................
ConsiderationofIdentifiedMisstatementsastheAuditProgresses.......
67
...............
CommunicationandCorrectionofMisstatements............................
89
................
EvaluatingtheEffectofUncorrectedMisstatements............................
1013
................
WrittenRepresentation.....................................................................
14
.....................
Documentation................................................................................
15
......................
ApplicationandOtherExplanatoryMaterial
Misstatements.................................................................................
A1
.....................
AccumulationofIdentifiedMisstatements..........................................
A2A3
...............
ConsiderationofIdentifiedMisstatementsastheAuditProgresses.......
............
A4A6

CommunicationandCorrectionofMisstatements...................................
...........A7A10EvaluatingtheEffectofUncorrectedMisstatements..........................
................A11A23WrittenRepresentation...............................................................
....................A24Documentation......................................................
..........................................A25

[ReferencesinthisPSAto otherPSAsthathavenotyetbeen finalized reflecttheworking titlesofth

osePSAs.Thereferencesareindicated in bracketsandwillbeupdated whenthosePSAsarefinaliz
ed.]

Acknowledgment
PhilippineStandardonAuditing(PSA)450(RevisedandRedrafted),Evaluation
ofMisstatementsIdentifiedduringtheAuditshouldbereadinthecontextofPSA
200(RevisedandRedrafted),OverallObjectivesoftheIndependentAuditorand
theConductofanAuditinAccordancewithPhilippineStandardsonAuditing.

Introduction

ScopeofthisPSA
1.
ThisPhilippineStandardonAuditing(PSA)dealswiththeauditorsrespons
ibilitytoevaluatetheeffectofidentifiedmisstatementsontheauditandof
uncorrectedmisstatements,ifany,onthefinancialstatements.PSA700(
Redrafted)dealswiththeauditorsresponsibility,informinganopinionont
hefinancialstatements,toconcludewhetherreasonableassurancehasb
eenobtainedaboutwhetherthefinancialstatementsasawholearefreefro
mmaterialmisstatement.TheauditorsconclusionrequiredbyPSA700(R
edrafted)takesintoaccounttheauditorsevaluationofuncorrectedmisst
1
atements,ifany,onthefinancialstatements,inaccordancewiththisPSA.
2
PSA320(RevisedandRedrafted)
dealswiththeauditorsresponsibilitytoapplytheconceptofmaterialityap
propriatelyinplanningandperforminganauditoffinancialstatements.
EffectiveDate
2.
ThisPSAiseffectiveforauditsoffinancialstatementsforperiodsbeginning
onorafterDecember15,2009.
Objective
3.

Theobjectiveoftheauditoristoevaluate:
(a)
(b)

Theeffectofidentifiedmisstatementsontheaudit;and

Theeffectofuncorrectedmisstatements,ifany,onthefinancialstatemen
ts.
Definitions
4.
ForpurposesofthePSAs,thefollowingtermshavethemeaningsattri
butedbelow:
(a) Misstatement
Adifferencebetweentheamount,classification,presentation,ordi
sclosureofareportedfinancialstatementitemandtheamount,clas
sification,presentation,ordisclosurethatisrequiredfortheitemtob
einaccordancewiththeapplicablefinancialreportingframework.M
isstatementscanarisefromerrororfraud.(Ref:Para.A1)

1
[PSA700(Redrafted),ForminganOpinion andReportingon FinancialStatements,paragraphs
[tobeinserted].]
2
PSA320 (Revised andRedrafted),Materialityin PlanningandPerforminganAudit.

Whentheauditorexpressesanopiniononwhetherthefinancialstate
mentsgiveatrueandfairvieworarepresentedfairly,inallmaterialre
spects,misstatementsalsoincludethoseadjustmentsofamounts,c
lassifications,presentation,ordisclosuresthat,intheauditorsjudg
ment,arenecessaryforthefinancialstatementstogiveatrueandfair
vieworpresentfairly,inallmaterialrespects.
(b) Uncorrectedmisstatements
Misstatementsthattheauditorhasaccumulatedduringtheauditand
thathavenotbeencorrected.

Requirements
AccumulationofIdentifiedMisstatements
5.
Theauditorshallaccumulatemisstatementsidentifiedduringtheaudit,
otherthanthosethatareclearlytrivial.(Ref:Para.A2A3)
ConsiderationofIdentifiedMisstatementsastheAuditProgresses
6.
Theauditorshalldeterminewhethertheoverallauditstrategyandauditp
lanneedtoberevisedif:

(a)

Thenatureofidentifiedmisstatementsandthecircumstancesoftheirocc
urrenceindicatethatothermisstatementsmayexistthat,whenaggregat
edwithmisstatementsaccumulatedduringtheaudit,couldbematerial;o
r(Ref:Para.A4)
(b)
Theaggregateofmisstatementsaccumulatedduringtheauditapproach
esmaterialitydeterminedinaccordancewithPSA320(RevisedandRedra
fted).(Ref:Para.A5)

7.
If,attheauditorsrequest,managementhasexaminedaclassoftransacti
ons,accountbalanceordisclosureandcorrectedmisstatementsthatwer
edetected,theauditorshallperformadditionalauditprocedurestodeter

minewhethermisstatementsremain.(Ref:Para.A6)
CommunicationandCorrectionofMisstatements
Theauditorshallcommunicateonatimelybasisallmisstatementsaccum
ulatedduringtheauditwiththeappropriatelevelofmanagement,unless
3
prohibitedbylaworregulation.
Theauditorshallrequestmanagementtocorrectthosemisstatements.
(Ref:Para.A7A9)
Ifmanagementrefusestocorrectsomeorallofthemisstatementscommu
nicatedbytheauditor,theauditorshallobtainanunderstandingofmanag
ementsreasonsfornotmakingthecorrectionsandshalltakethatunderst
andingintoaccountwhenevaluatingwhetherthefinancialstatementsas
awholearefreefrommaterialmisstatement.(Ref:Para.A10)
PSA260 (Revised andRedrafted),Communicationwith ThoseCharged with Governance,pa
ragraph A4.

EvaluatingtheEffectofUncorrectedMisstatements
Priortoevaluatingtheeffectofuncorrectedmisstatements,theauditorsh
allreassessmaterialitydeterminedinaccordancewithPSA320(Reviseda
ndRedrafted)toconfirmwhetheritremainsappropriateinthecontextofth
eentitysactualfinancialresults.(Ref:Para.A11A12)
1. 11.
Theauditorshalldeterminewhetheruncorrectedmisstatementsare
material,individuallyorinaggregate.Inmakingthisdetermination,th
eauditorshallconsider:
2. (a)
Thesizeandnatureofthemisstatements,bothinrelationtoparticularc
lassesoftransactions,accountbalancesordisclosuresandthefinanci
alstatementsasawhole,andtheparticularcircumstancesoftheiroccu
rrence;and(Ref:Para.A13A17,A19A20)
3. (b)
Theeffectofuncorrectedmisstatementsrelatedtopriorperiodsonthe
relevantclassesoftransactions,accountbalancesordisclosures,and
thefinancialstatementsasawhole.(Ref:Para.A18)
CommunicationwithThoseChargedwithGovernance

Theauditorshallcommunicatewiththosechargedwithgovernanceunco
rrectedmisstatementsandtheeffectthatthey,individuallyorinaggregat
e,mayhaveontheopinionintheauditorsreport,unlessprohibitedbylawo
4
rregulation.
Theauditorscommunicationshallidentifymaterialuncorrectedmisstat
ementsindividually.Theauditorshallrequestthatuncorrectedmisstate
mentsbecorrected.(Ref:Para.A21A23)

Theauditorshallalsocommunicatewiththosechargedwithgovernancet
heeffectofuncorrectedmisstatementsrelatedtopriorperiodsontherele
vantclassesoftransactions,accountbalancesordisclosures,andthefina
ncialstatementsasawhole.

Seefootnote3.

WrittenRepresentation
14.
Theauditorshallrequestawrittenrepresentationfrommanagementand
,whereappropriate,thosechargedwithgovernancewhethertheybeliev
etheeffectsofuncorrectedmisstatementsareimmaterial,individuallya
ndinaggregate,tothefinancialstatementsasawhole.Asummaryofsuch
itemsshallbeincludedinorattachedtothewrittenrepresentation.
(Ref:Para.A24)
Documentation
15.

Theauditdocumentationshallinclude:(Ref:Para.A25)

(a)

Theamountbelowwhichmisstatementswouldberegardedasclearlytrivi
al(paragraph5);
(b)

Allmisstatementsaccumulatedduringtheauditandwhethertheyhaveb
eencorrected(paragraphs5,8and12);and
(c)
Theauditorsconclusionastowhetheruncorrectedmisstatementsarem
aterial,individuallyorinaggregate,andthebasisforthatconclusion(para
graph11).
***

ApplicationandOtherExplanatoryMaterialMisstatements(Ref:Para.4(
a))A1.Misstatementsmayresultfrom:

(a)

2
3

Aninaccuracyingatheringorprocessingdatafromwhichthefinancialstat
ementsareprepared;
(b)
Anomissionofanamountordisclosure;
(c)
Anincorrectaccountingestimatearisingfromoverlooking,orclearmisint
erpretationof,facts;and

(d)
Judgmentsofmanagementconcerningaccountingestimatesthattheau
ditorconsidersunreasonableortheselectionandapplicationofaccountin
gpoliciesthattheauditorconsidersinappropriate.
ExamplesofmisstatementsarisingfromfraudareprovidedinPS
5
A240(Redrafted).

AccumulationofIdentifiedMisstatements(Ref:Para.5)
A2.Theauditormaydesignateanamountbelowwhichmisstatementswouldbec
learlytrivialandwouldnotneedtobeaccumulatedbecausetheauditorex
pectsthattheaccumulationofsuchamountsclearlywouldnothaveamate
rialeffectonthefinancialstatements.Clearlytrivialisnotanotherexpre
ssionfornotmaterial.Mattersthatareclearlytrivialwillbeofawhollydiff
erent(smaller)orderofmagnitudethanmaterialitydeterminedinaccorda
ncewithPSA320(RevisedandRedrafted),andwillbemattersthatareclear
lyinconsequential,whethertakenindividuallyorinaggregateandwhethe
rjudgedbyanycriteriaofsize,natureorcircumstances.Whenthereisanyu
ncertaintyaboutwhetheroneormoreitemsareclearlytrivial,thematteris
considerednottobeclearlytrivial.
A3.Toassisttheauditorinevaluatingtheeffectofmisstatementsaccumulateddu
ringtheauditandincommunicatingmisstatementstomanagementandt
hosechargedwithgovernance,itmaybeusefultodistinguishbetweenfac
tualmisstatements,judgmentalmisstatementsandprojectedmisstate
ments.
Factualmisstatementsaremisstatementsaboutwhichthereisnodoubt.
Judgmentalmisstatementsaredifferencesarisingfromthejudgmentsof
managementconcerningaccountingestimatesthattheauditorconsider
sunreasonable,ortheselectionorapplicationofaccountingpoliciesthatt
heauditorconsidersinappropriate.
Projectedmisstatementsaretheauditorsbestestimateofmisstatement
sinpopulations,involvingtheprojectionofmisstatementsidentifiedinau
ditsamplestotheentirepopulationsfromwhichthesamplesweredrawn.
Guidanceonthedeterminationofprojectedmisstatementsandevaluatio
6
noftheresultsissetoutinPSA530(Redrafted).
ConsiderationofIdentifiedMisstatementsastheAuditProgresses(Ref:Para.67)
A4.Amisstatementmaynotbeanisolatedoccurrence.Evidencethatothermiss
tatementsmayexistinclude,forexample,wheretheauditoridentifiesth
atamisstatementarosefromabreakdownininternalcontrolorfrominap
propriateassumptionsorvaluationmethodsthathavebeenwidelyappli
edbytheentity.

5
PSA240 (Redrafted),TheAuditorsResponsibilitiesRelatingtoFraud in an AuditofFinancialSta
tements,paragraphsA1A6.
6
PSA530 (Redrafted),AuditSampling,paragraphs1415.

A5.Iftheaggregateofmisstatementsaccumulatedduringtheauditapproaches
materialitydeterminedinaccordancewithPSA320(RevisedandRedraft
ed),theremaybeagreaterthanacceptablylowlevelofriskthatpossibleu
ndetectedmisstatements,whentakenwiththeaggregateofmisstatem
entsaccumulatedduringtheaudit,couldexceedmateriality.Undetecte
dmisstatementscouldexistbecauseofthepresenceofsamplingriskand
7
nonsamplingrisk.
A6.Theauditormayrequestmanagementtoexamineaclassoftransactions,ac
countbalanceordisclosureinorderformanagementtounderstandtheca
useofamisstatementidentifiedbytheauditor,performprocedurestodet
erminetheamountoftheactualmisstatementintheclassoftransactions,
accountbalanceordisclosure,andtomakeappropriateadjustmentstoth
efinancialstatements.Sucharequestmaybemade,forexample,basedo
ntheauditorsprojectionofmisstatementsidentifiedinanauditsamplet
otheentirepopulationfromwhichitwasdrawn.
CommunicationandCorrectionofMisstatements(Ref:Para.89)
A7.Timelycommunicationofmisstatementstotheappropriatelevelofmanage
mentisimportantasitenablesmanagementtoevaluatewhethertheite
msaremisstatements,informtheauditorifitdisagrees,andtakeactionas
necessary.Ordinarily,theappropriatelevelofmanagementistheonetha
thasresponsibilityandauthoritytoevaluatethemisstatementsandtota
kethenecessaryaction.
A8.Laworregulationmayrestricttheauditorscommunicationofcertainmisstat
ementstomanagement,orothers,withintheentity.Forexample,lawsorre
gulationsmayspecificallyprohibitacommunication,orotheraction,that
mightprejudiceaninvestigationbyanappropriateauthorityintoanactual
,orsuspected,illegalact.Insomecircumstances,potentialconflictsbetwe
entheauditorsobligationsofconfidentialityandobligationstocommunic
atemaybecomplex.Insuchcases,theauditormayconsiderseekinglegal
advice.
A9.Thecorrectionbymanagementofallmisstatements,includingthosecom
municatedbytheauditor,enablesmanagementtomaintainaccuratea
ccountingbooksandrecordsandreducestherisksofmaterialmisstate
mentoffuturefinancialstatementsbecauseofthecumulativeeffectofi
mmaterialuncorrectedmisstatementsrelatedtopriorperiods.
A10.PSA700(Redrafted)requirestheauditortoevaluatewhetherthefinancialst
atementsarepreparedandpresented,inallmaterialrespects,inaccordan

cewiththerequirementsoftheapplicablefinancialreportingframework.T
hisevaluationincludesconsiderationofthequalitativeaspectsoftheentit
ysaccountingpractices,includingindicatorsofpossiblebiasinmanagem
8
entsjudgments,
7
PSA530 (Redrafted),paragraphs5(c)and(d).
8
[PSA700(Redrafted),paragraph [tobeinserted].]

whichmaybeaffectedbytheauditorsunderstandingofmanagement
sreasonsfornotmakingthecorrections.
EvaluatingtheEffectofUncorrectedMisstatements(Ref:Para.1011)
A11.TheauditorsdeterminationofmaterialityinaccordancewithPSA320(Revi
sedandRedrafted)isoftenbasedonestimatesoftheentitysfinancialresul
ts,becausetheactualfinancialresultsmaynotyetbeknown.Therefore,pri
ortotheauditorsevaluationoftheeffectofuncorrectedmisstatements,it
maybenecessarytorevisematerialitydeterminedinaccordancewithPSA
320(RevisedandRedrafted)basedontheactualfinancialresults.
A12.PSA320(RevisedandRedrafted)explainsthat,astheauditprogresses,m
aterialityforthefinancialstatementsasawhole(and,ifapplicable,them
aterialitylevelorlevelsforparticularclassesoftransactions,accountba
lancesordisclosures)isrevisedintheeventoftheauditorbecomingawa
reofinformationduringtheauditthatwouldhavecausedtheauditortoh
ave
9

determinedadifferentamount(oramounts)initially.Thus,anysignificant
revisionislikelytohavebeenmadebeforetheauditorevaluatestheeffecto
funcorrectedmisstatements.However,iftheauditorsreassessmentofm
aterialitydeterminedinaccordancewithPSA320(RevisedandRedrafted)
(seeparagraph10ofthisPSA)givesrisetoaloweramount(oramounts),the
nperformancematerialityandtheappropriatenessofthenature,timinga
ndextentofthefurtherauditproceduresarereconsideredsoastoobtainsu
fficientappropriateauditevidenceonwhichtobasetheauditopinion.
A13.Eachindividualmisstatementisconsideredtoevaluateitseffectonthere
levantclassesoftransactions,accountbalancesordisclosures,includi
ngwhetherthematerialitylevelforthatparticularclassoftransactions,
accountbalanceordisclosure,ifany,hasbeenexceeded.
A14.Ifanindividualmisstatementisjudgedtobematerial,itisunlikelythatitcanb
eoffsetbyothermisstatements.Forexample,ifrevenuehasbeenmaterial
lyoverstated,thefinancialstatementsasawholewillbemateriallymisstat
ed,eveniftheeffectofthemisstatementonearningsiscompletelyoffsetb
yanequivalentoverstatementofexpenses.Itmaybeappropriatetooffset
misstatementswithinthesameaccountbalanceorclassoftransactions;h

owever,theriskthatfurtherundetectedmisstatementsmayexistisconsi
deredbeforeconcludingthat
10

offsettingevenimmaterialmisstatementsisappropriate.

9
PSA320 (Revised andRedrafted),paragraph12.
10

Theidentificationofanumberofimmaterialmisstatementswithin thesameaccountbalanceor
classoftransactionsmayrequiretheauditorto reassesstheriskofmaterialmisstatementforth
ataccountbalanceorclassoftransactions.

A15.Determiningwhetheraclassificationmisstatementismaterialinvolvesthe
evaluationofqualitativeconsiderations,suchastheeffectoftheclassifica
tionmisstatementondebtorothercontractualcovenants,theeffectonind
ividuallineitemsorsubtotals,ortheeffectonkeyratios.Theremaybecircumstanceswheretheau
ditorconcludesthataclassificationmisstatementisnotmaterialinthecon
textofthefinancialstatementsasawhole,eventhoughitmayexceedthem
aterialitylevelorlevelsappliedinevaluatingothermisstatements.Forexa
mple,amisclassificationbetweenbalancesheetlineitemsmaynotbecon
sideredmaterialinthecontextofthefinancialstatementsasawholewhent
heamountofthemisclassificationissmallinrelationtothesizeoftherelate
dbalancesheetlineitemsandthemisclassificationdoesnotaffecttheinco
mestatementoranykeyratios.
A16.Thecircumstancesrelatedtosomemisstatementsmaycausetheauditort
oevaluatethemasmaterial,individuallyorwhenconsideredtogetherwit
hothermisstatementsaccumulatedduringtheaudit,eveniftheyarelow
erthanmaterialityforthefinancialstatementsasawhole.Circumstances
thatmayaffecttheevaluationincludetheextenttowhichthemisstateme
nt:
Affectscompliancewithregulatoryrequirements;
Affectscompliancewithdebtcovenantsorothercontractualrequirement
s;
Relatestotheincorrectselectionorapplicationofanaccountingpolicytha
thasanimmaterialeffectonthecurrentperiodsfinancialstatementsbuti
slikelytohaveamaterialeffectonfutureperiodsfinancialstatements;
Masksachangeinearningsorothertrends,especiallyinthecontextofgen
eraleconomicandindustryconditions;
Affectsratiosusedtoevaluatetheentitysfinancialposition,resultsofope
rationsorcashflows;
Affectssegmentinformationpresentedinthefinancialstatements(forex
ample,thesignificanceofthemattertoasegmentorotherportionoftheen
titysbusinessthathasbeenidentifiedasplayingasignificantroleintheen
titysoperationsorprofitability);

Hastheeffectofincreasingmanagementcompensation,forexample,by
ensuringthattherequirementsfortheawardofbonusesorotherincentive
saresatisfied;
Issignificanthavingregardtotheauditorsunderstandingofknownprevio
uscommunicationstousers,forexample,inrelationtoforecastearnings;
Relatestoitemsinvolvingparticularparties(forexample,whetherextern
alpartiestothetransactionarerelatedtomembersoftheentitysmanage
ment);
Isanomissionofinformationnotspecificallyrequiredbytheapplicablefin
ancialreportingframeworkbutwhich,inthejudgmentoftheauditor,isim
portanttotheusersunderstandingofthefinancialposition,financialperf
ormanceorcashflowsoftheentity;or
Affectsotherinformationthatwillbecommunicatedindocumentscontai
ningtheauditedfinancialstatements(forexample,informationtobeinclu
dedinaManagementDiscussionandAnalysisoranOperatingandFina
ncialReview)thatmayreasonablybeexpectedtoinfluencetheeconomi
cdecisionsoftheusersofthefinancialstatements.PSA720
11

(Redrafted)dealswiththeauditorsconsiderationofotherinformatio
n,onwhichtheauditorhasnoobligationtoreport,indocumentscontai
ningauditedfinancialstatements.
Thesecircumstancesareonlyexamples;notallarelikelytobepresentin
allauditsnoristhelistnecessarilycomplete.Theexistenceofanycircum
stancessuchasthesedoesnotnecessarilyleadtoaconclusionthatthe
misstatementismaterial.
12

A17.PSA240(Redrafted)
explainshowtheimplicationsofamisstatementthatis,ormaybe,theresul
toffraudoughttobeconsideredinrelationtootheraspectsoftheaudit,eve
nifthesizeofthemisstatementisnotmaterialinrelationtothefinancialstat
ements.
A18.Thecumulativeeffectofimmaterialuncorrectedmisstatementsrelatedtop
riorperiodsmayhaveamaterialeffectonthecurrentperiodsfinancialstat
ements.Therearedifferentacceptableapproachestotheauditorsevalua
tionofsuchuncorrectedmisstatementsonthecurrentperiodsfinancialst
atements.Usingthesameevaluationapproachprovidesconsistencyfro
mperiodtoperiod.
ConsiderationsSpecifictoPublicSectorEntities
A19.Inthecaseofanauditofapublicsectorentity,theevaluationwhetheramis
statementismaterialmayalsobeaffectedbylegislationorregulationa
ndadditionalresponsibilitiesfortheauditortoreportothermatters,incl
uding,forexample,fraud.

11

PSA720(Redrafted),TheAuditorsResponsibilityinRelation toOtherInformation in Docu

mentsContainingAuditedFinancialStatements.
12

PSA240(Redrafted),paragraph 35.

A20.Furthermore,issuessuchaspublicinterest,accountability,probityandens
uringeffectivelegislativeoversight,inparticular,mayaffecttheassessm
entwhetheranitemismaterialbyvirtueofitsnature.Thisisparticularlysof
oritemsthatrelatetocompliancewithregulation,legislationorotherauth
ority.
CommunicationwithThoseChargedwithGovernance(Ref:Para.12)
A21.Ifuncorrectedmisstatementshavebeencommunicatedwithperson(s)wit
hmanagementresponsibilities,andthoseperson(s)alsohavegovernanc
eresponsibilities,theyneednotbecommunicatedagainwiththosesamep
erson(s)intheirgovernancerole.Theauditornonethelesshastobesatisfie
dthatcommunicationwithperson(s)withmanagementresponsibilitiesa
dequatelyinformsallofthosewithwhomtheauditorwouldotherwisecom
municateintheir
13

governancecapacity.
A22.Wherethereisalargenumberofindividualimmaterialuncorrectedmissta
tements,theauditormaycommunicatethenumberandoverallmonetar
yeffectoftheuncorrectedmisstatements,ratherthanthedetailsofeachi
ndividualuncorrectedmisstatement.
A23.PSA260(Redrafted)requirestheauditortocommunicatewiththosecharge
dwithgovernancethewrittenrepresentationstheauditorisrequesting(s
14
eeparagraph14ofthisPSA).
Theauditormaydiscusswiththosechargedwithgovernancethereasonsf
or,andtheimplicationsof,afailuretocorrectmisstatements,havingregar
dtothesizeandnatureofthemisstatementjudgedinthesurroundingcircu
mstances,andpossibleimplicationsinrelationtofuturefinancialstateme
nts.
WrittenRepresentation(Ref:Para.14)
A24.Becausemanagementand,whereappropriate,thosechargedwithgovern
anceareresponsibleforadjustingthefinancialstatementstocorrectmat
erialmisstatements,theauditorisrequiredtorequestthemtoprovideaw
rittenrepresentationaboutuncorrectedmisstatements.Insomecircum
stances,managementand,whereappropriate,thosechargedwithgove
rnancemaynotbelievethatcertainuncorrectedmisstatementsaremiss
tatements.Forthatreason,theymaywanttoaddtotheirwrittenrepresen
tationwordssuchas:Wedonotagreethatitemsand
constitutemisstatementsbecause[descriptionofreasons].Obtainingt
hisrepresentationdoesnot,however,relievetheauditoroftheneedtofor
maconclusionontheeffectofuncorrectedmisstatements.

13

PSA260(Revised and Redrafted),paragraph 9.

14

PSA260(Revised and Redrafted),paragraph 12(c)(iii).

Documentation(Ref:Para.15)

A25.Theauditorsdocumentationofuncorrectedmisstatementsmaytakeintoa
ccount:
(a)
Theconsiderationoftheaggregateeffectofuncorrectedmisstatements;
(b)
Theevaluationofwhetherthematerialitylevelorlevelsforparticularclass
esoftransactions,accountbalancesordisclosures,ifany,havebeenexce
eded;and
(c)
Theevaluationoftheeffectofuncorrectedmisstatementsonkeyratiosort
rends,andcompliancewithlegal,regulatoryandcontractualrequiremen
ts(forexample,debtcovenants).

Acknowledgment
ThisPSAisbasedonInternationalStandardonAuditing450(RevisedandRedra
fted),EvaluationofMisstatementsIdentifiedduringtheAudit,issuedbytheI
nternationalAuditingandAssuranceStandardsBoard.
TherearenosignificantdifferencesbetweenthisPSA450(RevisedandRedraft
ed)andISA450(RevisedandRedrafted).
ThisPSA450(RevisedandRedrafted),EvaluationofMisstatementsIdentifiedd
uringtheAudit,wasunanimouslyapprovedforadoptiononOctober27,2008byt
hemembersoftheAuditingandAssuranceStandardsCouncil.

BenjaminR.Punongbayan,Chairman

FelicidadA.Abad

AntonioP.Acyatan

ErwinVincentG.Alcala

FroilanG.Ampil

DavidL.Balangue

Ma.GraciaF.CasalsDiaz

EliseoA.Fernandez

JaimeP.Naranjo

Ma.CeciliaF.Ortiz

NestorioC.Roraldo

JoaquinP.Tolentino

EdithaO.Tuason

JaimeE.Ysmael

CONFORMINGAMENDMENTSASARESULTOFPSA320(REVISEDAN
DREDRAFTED),MATERIALITYINPLANNINGANDPERFORMINGANA
UDIT
PSA230(Redrafted),AuditDocumentation
A17.
Examplesofmattersthatmaybedocumentedtogetherintheauditofasm
allerentityincludetheunderstandingoftheentityanditsinternalcontrol,t
heoverallauditstrategyandauditplan,materialitydeterminedinaccorda
1
ncewithPSA320(RevisedandRedrafted),
assessedrisks,significantmattersnotedduringtheaudit,andconclusion
sreached.

PSA260(RevisedandRedrafted),CommunicationwithThoseChar
gedwithGovernance
A15.Communicationregardingtheplannedscopeandtimingoftheauditmay:
(a)
Assistthosechargedwithgovernancetounderstandbettertheconse
quencesoftheauditorswork,todiscussissuesofriskandtheconcept
ofmaterialitywiththeauditor,andtoidentifyanyareasinwhichthey
mayrequesttheauditortoundertakeadditionalprocedures
A17.Matterscommunicatedmayinclude:
Theapplicationoftheconceptofmaterialityinthecontextofanaudit.

PSA300(Redrafted),PlanninganAuditofFinancialStatementsAp
pendixConsiderationsinEstablishingtheOverallAuditStrategy
SignificantFactors,PreliminaryEngagementActivities,andKnowledgeGained
onOtherEngagements

Thedeterminationofappropriate materiality levels

2
inaccordancewithPSA320(RevisedandRedrafted),
and,whereapplicableincluding:

oSettingmaterialityforplanningpurposes.

1
PSA320 (Revised andRedrafted),MaterialityinPlanningandPerforminganAudit.

2
PSA320 (Revised andRedrafted),MaterialityinPlanningandPerforminganAudit.

Setting
Determinationofmaterialityforcomponentsandcommunicationg
materialityforthereoftocomponentauditors of components in
accordance
3

withPSA600(RevisedandRedrafted).

a
b

oReconsideringmaterialityasauditproceduresareperformedduringthe
courseoftheaudit.
oPreliminaryidentificationofmaterial significant
componentsandmaterialclassesoftransactions,accountbalancesandd
isclosures.

PSA315(Redrafted),IdentifyingandAssessingtheRisksofMateria
lMisstatementThroughUnderstandingtheEntityandItsEnvironm
ent
A1.
Theunderstandingestablishesaframeofreferencewithinwhichtheau
ditorplanstoauditandexerciseprofessionaljudgmentthroughoutthe
audit,forexample,when:

Establishing Determining materiality

inaccordancewithPSA320(RevisedandRedrafted)andevalu
atingwhetherthejudgmentaboutmaterialityremainsappro
4
priateastheauditprogresses;

PSA540(RevisedandRedrafted),AuditingAccountingEstimates
,IncludingFairValueAccountingEstimates,andRelatedDisclosur

es
A94.Ordinarily,arangethathasbeennarrowedtobeequaltoorlessthantheamo
untlowerthanthematerialitylevelforthefinancialstatementsasawholed
eterminedforpurposesofassessingrisksofmaterialmisstatement,andd
esigningfurtherauditproceduresperformancematerialityisadequatefo
rthepurposesofevaluatingthereasonablenessofmanagementspointes
timate
A122.
Theauditorsevaluationoftheadequacyofdisclosureofestimationunce
rtaintyincreasesinimportancethegreatertherangeofpossibleoutcome
softheaccountingestimateisinrelationtomateriality(seerelateddiscus
sioninparagraphA9594).

3
PSA600 (Revised andRedrafted),SpecialConsiderations
AuditsofGroupFinancialStatements(Including theWorkofComponentAuditors),paragraphs
2123 and 40(c).

4
PSA320 (Revised andRedrafted),Materialityin PlanningandPerforminganAudit.

PSA600(RevisedandRedrafted),SpecialConsiderations
AuditsofGroupFinancialStatements(IncludingtheWorkofCompo
nentAuditors)
9.
ForpurposesofthePSAs,thefollowingtermshavethemeaningsattri
butedbelow:
(d) ComponentmaterialityThematerialitylevel
foracomponentdeterminedbythegroupengagementteam
21.

Thegroupengagementteamshalldeterminethefollowing:
(Ref:Para.A42)

1
2

(a)
The mMateriality level
forthegroupfinancialstatementsasawholewhenestablishingtheoverall
groupauditstrategy.
(b)
Whether, If,
inthespecificcircumstancesofthegroup,thereareparticularclassesoftr

ansactions,accountbalancesordisclosuresinthegroupfinancialstatem
entsforwhichmisstatementsoflesseramountsthanthe materiality
level
forthegroupfinancialstatementsasawholecouldreasonablybeexpecte
dtoinfluencetheeconomicdecisionsofuserstakenonthebasisofthegrou
pfinancialstatements.Insuchcircumstances,thegroupengagementtea
mshalldeterminethematerialitylevel or
levelstobeappliedtothoseparticularclassesoftransactions,accountbal
ancesordisclosures.
(c)

Componentmaterialityforthosecomponentswherecomponentauditor
swillperformanauditorareviewforpurposesofthegroupaudit.Toreducet
oanappropriatelylowlevelthe risk probability
thattheaggregateofdetected uncorrected
andundetectedmisstatementsinthegroupfinancialstatementsexceed
sthe materiality level
forthegroupfinancialstatementsasawhole,componentmaterialityshall
belowerthanthe materiality level
forthegroupfinancialstatementsasawhole.(Ref:Para.A43A44)
(d)
Thethresholdabovewhichmisstatementscannotberegardedasclearlyt
rivialtothegroupfinancialstatements.(Ref:Para.A45)
Wherecomponentauditorswillperformanauditforpurposesofthegroup
audit,thegroupengagementteamshallevaluatetheappropriatenessoft
heamountoramountslowerthanthecomponentmaterialitylevel(andth
eamountoramountslowerthanthematerialitylevelforparticularclasses
oftransactions,accountbalancesordisclosures,ifapplicable)performan
cematerialitydetermined
forpurposesofassessingtherisksofmaterialmisstatementanddesignin
gfurtherauditprocedurestorespondtoassessedrisksatthecomponentle
vel.(Ref:Para.A46)
1. 23.
Whenacomponentissubjecttoauditbystatute,regulationorotherrea
son,andthegroupengagementteamdecidestousethataudittoprovi
deauditevidenceforthegroupaudit,thegroupengagementteamshal
ldeterminewhether:
2. (a) the materiality
leveldeterminedforthecomponentfinancialstatementsasawhole;a
nd
3. (b)
theloweramountsdeterminedforpurposesofassessingtherisksofm
aterialmisstatementanddesigningfurtherauditprocedurestorespo
ndtoassessedrisksperformancematerialityatthecomponentlevel
meettherequirementsofthisPSA.

40.
Thegroupengagementteamshallcommunicateitsrequirementstothec
omponentauditoronatimelybasis.Thiscommunicationshallsetoutthew
orktobeperformed,theusetobemadeofthatwork,andtheformandconte
ntofthecomponentauditorscommunicationwiththegroupengagement
team.(Ref:Para.A57,A58,A60)Itshallalsoincludethefollowing:
(c)
Inthecaseofanauditorreviewofthefinancialinformationofthecomp
onent,componentmateriality(and, if applicable,
theamountoramountslowerthanthematerialitylevelor levels
forparticularclassesoftransactions,accountbalancesordisclosures
, if
applicable)andthethresholdabovewhichmisstatementscannotbe
regardedasclearlytrivialtothegroupfinancialstatements
A42.Theauditorisrequired:
(a) Whenestablishingtheoverallauditstrategy,todetermine:

1
2

(i)
(ii)

a mMateriality level forthefinancialstatementsasawhole;and

(b)Whenestablishingtheoverallauditstrategy,toconsiderwhether,If,
inthespecificcircumstancesoftheentity,thereareparticularclassesoftr
ansactions,accountbalancesordisclosuresforwhichmisstatementsofle
sseramountsthanthe materiality level
forthefinancialstatementsasawholecouldreasonablybeexpectedtoinfl
uencetheeconomicdecisionsofuserstakenonthebasisofthefinancialst
atements.Insuchcircumstances,theauditordeterminesthematerialityl
evel or
levelstobeappliedtothoseparticularclassesoftransactions,accountbal
ancesordisclosures;and
(cb) To determine
oneormoreamountslowerthanthematerialitylevelforthefinanci
alstatementsasawholeforpurposesofassessingtherisksofmateri
almisstatementanddesigningfurtherauditprocedurestorespond
toassessedrisksperformancemateriality.
Inthecontextofagroupaudit,materialitylevelsareis
establishedforboththegroupfinancialstatementsasawhole,andforthe
financialinformationofthecomponents.The mMateriality level
forthegroupfinancialstatementsasawholeisusedwhenestablishingthe
overallgroupauditstrategy.
A43.Toreducetoanappropriatelylowlevelthe risk probability
thattheaggregateofdetected uncorrected
andundetectedmisstatementsinthegroupfinancialstatementsexceed

sthe materiality level forthegroupfinancialstatementsasawhole,the

componentmaterialitylevel issetlowerthanthegroupmateriality level
forthegroupfinancialstatementsasawhole. Different component
materiality levels maybeestablishedfordifferentcomponents.The
cComponentmaterialitylevelneednotbeanarithmeticalportionofthegr
oupmateriality level
forthegroupfinancialstatementsasawholeand,consequently,theaggr
egateofthe componentmaterialitylevels
forthedifferentcomponentsmayexceedthegroupmateriality level
forthegroupfinancialstatementsasawhole. The
cComponentmaterialitylevel
isusedwhenestablishingtheoverallauditstrategyforacomponent.
A44.Componentmaterialitylevelsareis
determinedforthosecomponentswhosefinancialinformationwillbeaudi
tedorreviewedaspartofthegroupauditinaccordancewithparagraphs26
,27(a)and29.Componentmaterialityisusedbythecomponentauditorto
evaluatewhetheruncorrecteddetectedmisstatementsarematerial,indi
viduallyorintheaggregate.
A45.Athresholdformisstatementsisdeterminedinadditiontothe
componentmaterialitylevels.Misstatementsidentifiedinthefinancial
informationofthecomponentthatareabovethethresholdformisstate
mentsarecommunicatedtothegroupengagementteam.
A46.Inthecaseofanauditofthefinancialinformationofacomponent,thecompo
nentauditor(orgroupengagementteam)determinesoneormoreamount
slowerthanthecomponentmaterialitylevelforpurposesofassessingther
isksofmaterialmisstatementofthefinancialinformationofthecomponen
tandtodesignfurtherauditproceduresinresponsetoassessedrisksperfo
rmancematerialityatthecomponentlevel.Thisisnecessarytoreducetoa
nappropriatelylowlevelthe risk probability
thattheaggregateofdetected uncorrected
andundetectedmisstatementsinthefinancialinformationofthecompon
entexceedsthe
componentmaterialitylevel.Inpractice,thegroupengagementteamma
ysetcomponentmaterialityatthislowerlevel.Wherethisisthecase,theco
mponentauditorusescomponentmaterialityforpurposesofassessingth
erisksofmaterialmisstatementofthefinancialinformationofthecompon
entandtodesignfurtherauditproceduresinresponsetoassessedrisksas
wellasforevaluatingwhetherdetectedmisstatementsarematerialindivi
duallyorintheaggregate.

Appendix 5
RequiredandAdditionalMattersIncludedintheGroupEngagemen
tTeamsLetterofInstruction
MattersrequiredbythisPSAtobecommunicatedtothecomponentauditorare
showninitalicizedtext.

Mattersthatarerelevanttotheplanningoftheworkofthecomponentauditor:

Inthecaseofanauditorreviewofthefinancialinformationofthecomponent,com
ponentmateriality(and,ifapplicable,thematerialitylevelorlevelsforparticular
classesoftransactions,accountbalancesordisclosures),andthethresholdabov
ewhichmisstatementscannotberegardedasclearlytrivialtothegroupfinancial
statements