Summary of “Common Issues and Remedies in the Financial Statements Audit of Small Entities”

Atty. Yasser Aureada, CPA
Oct 9
2 min read

Overview

The presentation outlines the key stages, challenges, and remedies in conducting financial statement audits for small entities. While the Philippine Standards on Auditing (PSAs) apply equally to all entities, their application in smaller, less complex environments requires practical adjustments.

1. Steps in the Audit Process

Acceptance of Engagement – Includes client continuance review and issuance of engagement letter.
Audit Planning – Understanding the business, assessing risks, and determining materiality.
Considering Internal Control – Evaluating controls through inquiry, inspection, observation, and reperformance.
Performing Substantive Procedures – Vouching, reconciliation, and cut-off testing.
Completing the Audit – Reviewing subsequent events and adjusting entries.
Issuing the Report – Formulating and expressing the audit opinion.

2. Objective of a Financial Statement Audit

To provide reasonable assurance that financial statements are free from material misstatement due to error or fraud and present a fair view of the entity’s financial position.

3. Characteristics of Small Entities

Concentration of decision-making with owner-managers.
Limited internal controls and lack of segregation of duties.
Simpler operations, sometimes with undisclosed related parties.
Absence of formal systems, though informal oversight may exist.

These characteristics increase the risk of management override and potential misstatements.

4. Common Audit Issues and Remedies

a. Inappropriate Audit Procedures

Overuse of generic audit templates unrelated to actual risks.
Remedy: Link procedures to risk assessments (PSA 330) and tailor audit programs to the client.

b. Lack of Segregation of Duties

Staff handling incompatible functions (e.g., recording, approval, custody of cash).
Remedy: Use compensating controls, increase owner oversight, and apply more substantive procedures.

c. Client Misunderstanding of Auditor’s Role

Owners assume auditors prepare the financial statements.
Remedy: Clarify responsibilities through engagement letters (PSA 210).

d. Audit Documentation Issues

Limited teams struggle to maintain detailed records.
Remedy: Ensure documentation enables an independent auditor to understand evidence, procedures, and conclusions.

e. Going Concern Evaluation

Small entities face higher vulnerability to instability.
Remedy: Assess management’s evaluation (PAS 1) and disclose uncertainties when needed.

5. Common SEC Findings

Missing going concern disclosures and required legal matter paragraphs (per BIR RR 15-2010).
Weak audit planning and risk assessments.
Insufficient application of professional skepticism.

6. Causes of Audit Failures

Failure to plan and assess risks.
Lack of professional skepticism.
Failure to perform substantive audit work.

7. Key Audit Concepts

Audit Risk Model

Inherent Risk: Susceptibility to misstatement without controls.
Control Risk: Internal controls fail to prevent or detect misstatements.
Detection Risk: Audit procedures fail to uncover misstatements.

Materiality Considerations

Benchmarks: total assets, revenues, etc.
Adjustments for qualitative factors (e.g., loan covenants, profitability trends).

8. Upcoming Standard: PSA for Less Complex Entities (LCE)

Expected finalization: late 2025 or early 2026.
Provides simplified requirements for audits of small/less complex entities while retaining alignment with PSAs.

9. Key Takeaways

Apply risk-based auditing even for small entities.
Maintain clear documentation of planning, procedures, and conclusions.
Communicate effectively with client management.
Exercise professional skepticism throughout the audit.
Adapt audit approaches to the unique risks of small entities.

Conclusion

Auditing small entities requires flexibility, practical application of PSA requirements, and careful planning. By focusing on tailored risk responses, maintaining proper documentation, and fostering open communication with clients, auditors can uphold audit quality, compliance, and professional credibility in small entity environments.