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At Lecture 1 - Overview of Auditing and Assurance
At Lecture 1 - Overview of Auditing and Assurance
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AT Lecture 1
6. The nature
of the Philippine Standards issued by the AASC requires professional
accountants to exercise professional judgment
in applying them. In
exceptional
circumstances, a professional accountant may judge it to depart from a basic principle or essential
procedure of an Engagement Standard to achieve more effectively the objective of the engagement.
When such a situation arises, the professional accountant should be prepared
to justify the
departure.
7. Authority attaching to the Practice Statements issued by the AASC:
PAPS are issued to provide interpretative guidance and practical assistance to professional
accountants in implementing PSAs and to promote good practice.
PREPSs, PAEPSs and PRSPSs are issued to serve the same purpose for the implementation of
PSREs, PSAEs and PSRSs, respectively.
8. Professional accountants should be aware of and consider Practice Statements applicable to the
engagement. A professional accountant who does not consider and apply the guidance included in a
relevant Practice Statement should be prepared to explain how the basic principles and essential
procedures in the Engagement Standard(s) addressed by the Practice Statement have been
complied with.
9. Exposure period for the proposed Philippine Standard or Practice Statement is generally not shorter
than 90 days. Exposure draft is widely distributed to interested organizations and persons for
comment. The exposure draft shall also be published in the PICPA Accounting Times and ACPAPP
Bulletin to give it further exposure.
10. Issuance of exposure drafts requires approval by a majority of the members of the Council; issuance
of the Philippine Standards and Practice Statements, as well as interpretations, requires approval of
at least ten (10) members.
11. Each final Philippine Standard and Practice Statement, as well as interpretations, if deemed
appropriate, shall be submitted to the Professional Regulation Commission (PRC) through the Board
of Accountancy (BOA) for approval after which the pronouncements shall be published in the Official
Gazette. After publication, the AASC pronouncement becomes operative from the effective date
stated therein.
12. Numbering of Philippine Standards and Practice Statements that are Philippine specific and are not
adopted from International pronouncements will be numbered consecutively with suffix Ph as
follows:
For Philippine Standards starting from 100Ph
For Philippine Practice Statements starting from 1000Ph
Philippine Standards and Practice Statements adopted from International pronouncements will use the
same numbers as their counterpart International pronouncements.
Philippine Framework for Assurance Engagements
1. Assurance engagement means an engagement in which a practitioner expresses a conclusion
designed to enhance the degree of confidence of the intended users other than the responsible party
about the outcome of the evaluation or measurement of a subject matter against criteria.
2. Objective of an Assurance Engagement
The objective of an assurance engagement is for a professional accountant to evaluate or measure a
subject matter that is the responsibility of another party against identified suitable criteria, and to
express about the subject matter. Assurance engagements performed by professional accountants
are intended to enhance the credibility of information about a subject matter by evaluating whether
the subject matter conforms in all material respects with suitable criteria, thereby improving the
likelihood that the information will meet the needs of an intended user. In this regard, the level of
assurance provided by the professional accountants conclusion conveys the degree of confidence
that the intended user may place in the credibility of the subject matter.
Assurance is a broad concept. Assurance services are designed to improve the quality of decision
making by improving confidence in the information on which decisions are made; the process by
which that information is developed, and the context in which the information is presented to users.
The field of assurance services is much broader than the traditional audits of financial statements.
3. Classification of Assurance Engagements
According to Level of Assurance
a. Reasonable assurance engagement
b. Limited assurance engagement
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An independent audit engagement provides a reasonable (but not absolute) level of assurance
that the subject matter (financial statements) is free of material misstatement.
A review engagement provides a moderate level of assurance that the information subject to
review is free from material misstatement; this is expressed in the form of negative assurance
(i.e. nothing has come to the auditors attention). For the purpose of expressing negative
assurance in the review report, the auditor should obtain sufficient appropriate evidence primarily
through inquiry and analytical procedures to be able to draw conclusions
In direct reporting engagement, the practitioner either directly performs the evaluation or
measurement of the subject matter, or obtains a representation from the responsible party that has
performed the evaluation or measurement that is not available to the intended users. The subject
matter is provided to the intended users in the assurance report.
4. Elements of an Assurance Engagement
1. Three-party relationship involving
a. A practitioner (broader than the term auditor)
b. A responsible party (a private company, a government entity, etc)
1. In a direct reporting engagement, is responsible for the subject matter
2. In an assertion-based engagement, is responsible for the subject matter information (the
assertion), and may be responsible for the subject matter.
c. An intended user (often members of the public or investors or regulatory bodies)
- Are person, persons or class of persons for whom the practitioner prepares the
assurance report.
- Can be any one of the intended users, but not the only one.
2. An appropriate subject matter
a. Financial performance or conditions (e.g. historical or prospective financial position, financial
performance and cash flows) for which the subject matter information may be the recognition,
measurement, presentation and disclosure represented in the financial statements.
b. Non financial performance or conditions (e.g. performance of an entity) for which the subject
matter information may be key indicators of efficiency and effectiveness.
c. Physical characteristics (e.g. capacity of a facility) for which the subject matter information
may be specifications document.
d. Systems and processes (e.g. an entitys internal control or IT system) for which the subject
matter information may be an assertion about effectiveness.
e. Behavior (e.g. corporate governance, compliance with regulation, human resource practices)
for which the subject matter information maybe a statement of compliance or a statement of
effectiveness.
An appropriate subject matter is:
1. Identifiable, and capable of consistent evaluation or measurement against the identifiable
criteria, and
2. Such that the information about it can be subjected to procedures for gathering sufficient
appropriate evidence to support a reasonable assurance or limited assurance conclusion, as
appropriate.
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CPA Web Trust provide assurance to users of web sites in the Internet. The CPAs
electronic Web Trust Seal is affixed to the website. This seal assures the user that the
website owner has met established criteria related to business practices, transaction integrity
and information processes. Web Trust is an attestation service and Web Trust seal s a
symbolic representation of the CPAs report on management assertions about its disclosure
of electronic commerce practices.
SysTrust provide assurance on any defined electronic system. The system components
include its infrastructure, software, personnel, procedures and data, In a SysTrust
engagement, the CPA is engaged to examine only that a client maintained effective controls
over the system based on the Trust Services Principles and Criteria. The practitioner
performs tests to determine whether those controls were operating as effectively during the
specified report.
Both WebTrust and SysTrust are designed to incorporate a seal management process by
which a seal (logo) may be included on a clients Web site as an electronic representation of
the practitioners unqualified WebTrust report. If a client wishes to use the seal (logo), the
engagement must be updated at least annually. Also, the initial reporting period must include
at least two months.
Eldercare Plus focuses on the needs of the elderly and whether caregivers are providing
services that meet the specified objectives or at an acceptable level.
Information Reliability Services provide assurance that information system has been
designed and operated to produce reliable data including tests of the system to determine
whether the system protects against potential causes of data defects
Risk Assessment Services involves the study of the link between risks and organizations
vision, mission, objectives and strategies and development of new and relevant measures to
address these risks.
CPA Performance View. This service is intended to demonstrate that the public
accountants can aide client firms in developing an integrated set of financial and non financial
performance and measures to employ in managing the clients business. It also identifies
and measures key activities that are critical to the entity.
Health Care Performance Measurement involves the evaluation of the quality of health
care, medical services and outcome.
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Control risk: the risk that a material misstatement that could occur will not be prevented,
or detected and corrected, on a timely basis by related internal controls. When control
risk is relevant to the subject matter; some control risk will always exist because of the
inherent limitations of the design and operation of internal control; and
b) Detection risk: the risk that the practitioner will not detect a material misstatement that
exists.
The degree to which the practitioner considers each of these components is affected by the
engagement circumstances, in particular by the nature of the subject matter and whether a
reasonable assurance or a limited assurance engagement is being performed.
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Introduction to Auditing
Auditing is a systematic process of objectively obtaining and evaluating evidence regarding
selected assertions about economic actions and events to ascertain the degree of
correspondence between those assertions and established criteria and communicating the results
to interested users.
Key elements:
1. Systematic process audits are structured activities
2. Objectivity freedom from bias
3. Obtaining and evaluating evidence allows the auditor to determine the support for assertions or
representations. The auditor must gather evidence that the clients processes are working correctly,
the financial data are recorded and presented correctly and the financial statements as a whole are
fairly presented. The requirement is that the auditor is systematic and objective in obtaining and
evaluating evidence.
4. Assertions about economic actions and events describes the subject matter of the audit. An
assertion is a positive statement about an action, event, condition, or performance over a specified
period of time.
5. Degree of correspondence between those assertions and established criteria the purpose of the
audit is to determine conformity with some specified criteria. To have unbiased and clear
communication, criteria must exist whereby independent observers can assess whether or not such
assertions are appropriate. When management prepares financial statements, they assert those
statements are fairly presented with GAAP. Generally accepted accounting principles become the
criteria by which fairness of a financial statement presentation is judged. Other criteria exist for
other types of audits.
6. Communicating the results the results must be communicated to interested parties. Communication
of audit results to management and interested third parties completes the audit process. To minimize
understandings, this communication generally follows a prescribed format by clearly outlining the
nature of the work performed and the conclusions reached. Most audits result in audit reports that do
not contain any reservations about the fairness of the organizations presentation of its financial
statements. This is referred to as an unqualified audit report.
The audit adds value if the auditor:
a. Has expertise in both obtaining and evaluating evidence regarding the financial statements and
the economic assertions embodied in the financial statements.
b. Is independent of management and the third-parties, and can thus provide an objective opinion
on the fairness of financial statements.
PSA 200 Revised and Redrafted, Overall Objectives of the Independent Auditor and the Conduct
of an Audit in Accordance with PSAs sets out the overall objective of the independent auditor, and
explains the nature and scope of an audit designed to enable the independent auditor to meet those
objectives.
The general purpose of an audit is to enhance the credibility of the financial statements, thus ensuring the
user of the financial statements can make reasonable, informed decisions about an entity. This is
achieved by the expression of an opinion by the auditor on whether the information contained within the
financial statements is presented fairly, in all material respects, in accordance with applicable financial
reporting framework. Auditors who follow the PSAs and the ethical guidelines will be able to form an
opinion provided evidence is available to support their opinion. If the evidence is lacking, the auditor will
not able to form an opinion and should modify their report accordingly.
Overall Objectives of the Auditor
In conducting an audit of financial statements, the overall objectives of the auditor are:
a. To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the auditor to express an
opinion on whether the financial statements are prepared, in all material respects, in accordance with
an applicable financial reporting framework,
b. To report on the financial statements, and communicate as required by the PSAs, in accordance with
the auditors findings.
Applicable Financial Reporting Framework
-
The financial reporting framework adopted by management and, where appropriate, those charged
with governance in the preparation and presentation of the financial statements that is acceptable in
view of the nature of the entity and the objective of the financial statements, or that is required by law
or regulation.
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Fair presentation framework is used to refer to a financial reporting framework that requires
compliance with the requirements of the framework and
1. Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it
may be necessary for management to provide disclosures beyond those specifically required by
the framework.
2. Acknowledges explicitly that it may be necessary for management to depart from a requirement
of the framework to achieve fair presentation of the financial statements. Such departures are
expected to be necessary only in extreme rare circumstances.
Compliance framework is used to refer to a financial reporting framework that requires
compliance with the requirements of the framework, but does not contain the acknowledgements in 1
or 2 above.
Scope of an Independent Audit
The term scope of the audit refers to the audit procedures deemed necessary in the circumstances to
achieve the objective of the audit. The procedures required to conduct an audit in accordance with PSAs
should be determined by the auditor having regard to the requirements of PSAs, relevant professional
bodies, legislation, regulations and where appropriate, the terms of the audit engagement and reporting
requirements.
Types of Procedures
1.
2.
3.
Types of Audits
1. Financial Statements Audit
- Also referred to as Independent Audit or External Audit involves the examination of financial
statements to determine whether they are presented in accordance with applicable reporting
framework (generally accepted accounting principles).
2. Operational Audit
- Also known as Management Audit and Performance Audit are examination of all or part of an
organization for the purpose of determining the effectiveness and/or efficiency of its operations.
- Management implies that the information obtained in the audit process is useful to management.
- Performance implies an evaluation of the performance of persons or units executing the entitys
objectives.
-
Effectiveness is the measure of how well an entity or unit of an entity achieves its goal or
purpose.
Efficiency is the measure of minimization of cost in the achievement of its objective.
Characteristics:
a. Auditors performing the audit are independent of the activity they audit.
b. The audit report is directed to an official or department within the organization that employs the
auditor.
3. Compliance Audit
- Determination of whether the auditee is following specific procedures or rules set down by some
higher authority.
- Are performed by auditors independent of the activity being audited.
- Results are generally reported to someone within the organization/unit audited rather than a
broad spectrum of users.
4. Government audit determination of whether government funds are being handled properly and in
compliance with existing laws and whether the programs are being conducted efficiently and
economically.
Scope of Government Audit
Financial and compliance audit determines whether financial operations are properly
conducted, the financial reports of an audited entity are presented fairly, and the entity has
complied with applicable laws and regulations.
Economy and efficiency audit determines whether the entity is managing and utilizing its
resources economically and efficiently, the causes of inefficiencies or uneconomical practices and
whether the entity has complied with laws and regulations concerning matters of economy and
efficiency.
Programs results determines if the desired results and benefits are being achieved, if the
objectives established by the legislative or other authorizing body are being met and if the agency
has considered alternatives which might yield results at a lower cost.
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The Commission on Audit (formerly General Auditing Office) is recognized as the Supreme Audit
Institution in the Republic of the Philippines. It is the highest and final authority in state auditing,
Three Main Divisions of State Audit (based on 1984 Primer on Government and Auditing in the
Philippines)
a. Compliance Audit - examination, audit, and settlement in accordance with laws and regulations.
b. Financial Audit audit of the accounting, and financial system and controls to ensure reliability of
recorded financial data. The objective of this audit is the expression of an opinion on the fairness
with which the financial condition and results of operation are presented
c. Performance audit objective examination of the financial and operational performance of an
organization, program, activity or function and is oriented towards opportunities for greater
economy, efficiency and effectiveness.
Two forms of performance audit
1. Management audit (economy and efficiency audit) appraisal of management performance
from a least cost point of view and the analysis of relationship between benefits attained and
cost incurred.
2. Program results audit (effectiveness audit) evaluation of
program results vis--vis
management goals and objectives.
5. Internal audit an independent, objective assurance and consulting activity designed to add value
and improve an organizations operations. It helps an organization to accomplish its objectives by
bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk
management, control and governance processes.
a.
b.
c.
Financial audit historically oriented, independent evaluation performed by the internal auditor for
the purpose of ensuring the fairness, accuracy, and reliability of the financial data.
6. Comprehensive audit usually includes the components of compliance, performance and financial
statements audit.
7. Integrated audit - covers financial statements audit and internal control audit.
8. Environmental audit covers environmental issues which may have an impact on the financial
statements.
9. Forensic audit (Fraud Audit) refers to the examination of evidence regarding an assertion to
determine its correspondence to established criteria carried out in a manner suitable to the court.
Types of auditors
1. External (independent) auditors public accountants, both individuals and firms, who perform audit,
tax, consulting and other types of services for external clients.
2. Internal auditors perform services for a single organization for which they are employed on a fulltime basis, typically reporting to the board of directors who are the primary users of their work.
3. Government auditors are full-time employees of the government tasked to determine compliance
with laws, statutes, policies and procedures.
4. Forensic auditors financial auditing specialists who focus on unearthing the truth and/or providing
evidence in a legal/financial disputes and/or irregularities (including fraud), as well as providing
preventive advice on the subject.
Audit Risk Engagement Process
1.
2.
3.
4.
5.
6.
7.
Pre-engagement
Audit Planning
Study and Evaluation of Internal Control
Substantive Testing
Completing the Audit
Issuance of the Audit Report
Post-audit Responsibilities
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The auditor should plan and perform the audit with an attitude of professional skepticism
recognizing that circumstances may exist which may cause the financial statements to be materially
misstated.
Information Risk risk that information upon which a business decision is made is inaccurate,
How Information Risk May Be Reduced
1. Allow the users to verify information.
2. Users share information risk with management.
3. Have the financial statements audited.
Philosophical Theories of Audit
1.
2.
3.
4.
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Core Values are the essential and enduring beliefs that a CPA professional upholds over time. These
enable the CPAs to retain their unique character and value as they embrace the changing dynamics of
the global economy.
1.
2.
3.
4.
5.
6.
Integrity
Competence
Lifelong Learning
Objectivity
Commitment to Excellence
Relevance in the Global Marketplace
Core Competencies are the unique combination of human skills, knowledge and technology that
provides value and results to users.
1.
2.
3.
4.
5.
6.
Communication Skills
Leadership Skills
Critical Thinking and Problem Solving Skills
Anticipating and Serving Evolving Needs
Synthesizing Intelligence to Insight
Integration and Collaboration
Risks involved.
Complexity.
Time and volume involved.
Responsibility involved.
Conditions of accounting records and supporting documents.
Cooperation to be extended by the clients staff.
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1
1
1
1
1
1
1
2
2
2
2
8
____ ____
15
____
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The AASC shall be composed of seventeen (17) members with a Chairman who had been or
presently a senior practitioner in public accountancy and sixteen (16) representatives/members from
various sectors of the profession:
Chairman
Representatives/Members
a. Board of Accountancy
b. Securities and Exchange Commission
c. Bangko Sentral ng Pilipinas
d. An association or organization of CPAs in active
public practice of accountancy
e. Commission on Audit
f Accredited National Professional Organization of CPAs
Public Practice
Commerce and Industry
Academe/Education
1
1
1
1
1
1
9
1
1
11
____ ____
Total
17 ***
____
*** In 2009, the Board of Accountancy amended the composition of the AASC.
Term is three (3) years and renewable for another term
3. International Federation of Accountants (IFAC)
It is the worldwide organization for the accountancy profession. Founded in 1977, it is comprised of
173 members and associates in 129 countries worldwide, representing approximately 2.5 million
accountants in public practice, industry and commerce, the public sector, and education.
Primary activities:
a. Serving the public interest.
b. Contributing to the efficiency of global economy
c. Providing leadership and spokesmanship
4. International Accounting Standards Board (IASB)
This board is began its operations in 2001 and is based in London. It is composed of fourteen board
(14) members of whom are full-time and is committed to developing in the public interest, a single
set of high quality, global accounting standards that require transparent and comparable information
in general-purpose financial statements.
In April 2001, the IASB assumed from the IASC the responsibility for setting international accounting
standards. IASB adopted the IASs issued by the IASC and retained designation and format of the
Standards. New standards issued by the IASB were designated as International Financial Reporting
Standards (IFRS). In December 2003, the IASB issued 15 revised IASs, withdrew IAS 15,
Information Reflecting the Effects of Changing Prices and issued IFRS 1 to 5.
5
Other Bodies
1. Education Technical Council
This council was created by PRC upon the recommendation of BOA to assist the Board in carrying
out its powers and functions provided in the RA 9298 in the attainment of objective of continuously
upgrading the accountancy education in the Philippines to make the Filipino CPAs globally
competitive.
The ETC shall be composed of seven (7) members with a Chairman who had been or presently a
senior practitioner in the academe/education and six (6) representatives from the following:
Chairman
1
Representatives/Members
a. Board of Accountancy
1
b Accredited National Professional Organization of CPAs
Public Practice
1
Commerce and Industry
1
Academe/Education
2
Government
1
5
____ ____
Total
7
____
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1
1
2
1
1
1
5
____ ____
7
____