Auditing 3 | Course Paper

PAPS 1013

Philippine Auditing Practice Statement 1013

ELECTRONIC COMMERCE—EFFECT ON

THE AUDIT OF FINANCIAL STATEMENTS

Auditing Standards and Practices Council

PAPS 1013

PHILIPPINE AUDITING PRACTICE STATEMENT 1013

ELECTRONIC COMMERCE—EFFECT ON THE AUDIT

OF FINANCIAL STATEMENTS

This Philippine Auditing Practice Statement (PAPS) has been issued by theAuditing

Standards and Practices Council. It was approved in June 2003.

The Preface to Philippine Standards on Auditing and Related Services sets out the

purpose and authority attached to PAPSs.

CONTENTS

Paragraph

s

Introduction 1–5

Skills and Knowledge 6–7

Knowledge of the Business 8–18

Risk Identification 19–24

Internal Control Considerations 25–34

The Effect of Electronic Records on Audit Evidence 35–36

Effective Date 37

Acknowledgment 38-39

PAPS 1013

Philippine Auditing Practice Statements (“Statements” or “PAPSs”) are issued by the

Auditing Standards and Practices Council to provide practical assistance to auditors in

implementing the Philippine Standards on Auditing (PSAs) or to promote good

practice. Statements do not have the authority of PSAs.

This Statement does not establish any new basic principles or essential procedures: its

purpose is to assist auditors of financial statements, and promote good practice, by

providing:

(a) guidance on the application of the PSAs where an entity uses a public network,

such as the Internet, for electronic commerce, and

(b) material to enhance awareness of financial statements audit issues in this

rapidly developing area.

The auditor exercises professional judgment to determine the extent to which any of

the audit procedures described in this Statement may be appropriate in the light of the

requirements of the PSAs and the entity’s particular circumstances.

This Statement was approved by the ASPC in June 2003.

PAPS 1013

Introduction

1. The purpose of this Philippine Auditing Practice Statement is to provide

guidance to assist auditors of financial statements where an entity engages in

commercial activity that takes place by means of connected computers over a

public network, such as the Internet (e-commerce

1

). The guidance in this

Statement is particularly relevant to the application of PSA 300, “Planning,”

PSA 310, “Knowledge of the Business” and PSA 400, “Risk Assessments and

Internal Control.”

2. This Statement identifies specific matters to assist the auditor when

considering the significance of e-commerce to the entity’s business activities

and the effect of e-commerce on the auditors’ assessments of risk for the

purpose of forming an opinion on the financial statements. The purpose of the

auditor’s consideration is not to form an opinion or provide consulting advice

concerning the entity’s e-commerce systems or activities in their own right.

3. Communications and transactions over networks and through computers are

not new features of the business environment. For example, business

processes frequently involve interaction with a remote computer, the use of

computer networks, or electronic data interchange (EDI). However the

increasing use of the Internet for business to consumer, business to business,

business to government and business to employee e-commerce is introducing

new elements of risk to be addressed by the entity and considered by the

auditor when planning and performing the audit of the financial statements.

4. The Internet refers to the worldwide network of computer networks, it is a

shared public network that enables communication with other entities and

individuals around the world. It is interoperable, which means that any

computer connected to the Internet can communicate with any other computer

connected to the Internet. The Internet is a public network, in contrast to a

private network that only allows access to authorized persons or entities. The

use of a public network introduces special risks to be addressed by the entity.

Growth of Internet activity without due attention by the entity to those risks

may affect the auditor’s assessment of risk.

1

The term e-commerce is used in this PAPS. E-business is also commonly used in a similar context. There are no

generally accepted definitions of these terms, and e-commerce and e-business are often used interchangeably. Where a

distinction is made, e-commerce is sometimes used to refer solely to transactional activities (such as the buying and

selling of goods and services) and e-business is used to refer to all business activities, both transactional and non-

transactional, such as customer relations and communications.

PAPS 1013

-2-

5. While this Statement has been written for situations where the entity engages

in commercial activity over a public network such as the Internet, much of the

guidance it contains can also be applied when the entity uses a private

network. Similarly, while much of this guidance will be helpful when auditing

entities formed primarily for e-commerce activities (often called “dot coms”) it

is not intended to deal with all audit issues that would be addressed in the

audit of such entities.

Skills and Knowledge

6. The level of skills and knowledge required to understand the effect of e-

commerce on the audit will vary with the complexity of the entity’s

e-commerce activities. The auditor considers whether the personnel assigned

to the engagement have appropriate IT

and Internet business knowledge to

perform the audit. When e-commerce has a significant effect on the entity’s