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AUDITING OUTLINE

Audit team: Partner – Manager – Senior Associate – Junior Associate

- To verify if the statements are reliable.


a. Vouching – to check supporting documents
*Vouching – confirmation of transactions through supporting documents; EXISTENCE ASSERTION
*Tracing – tracing of supporting documents to transactions; COMPLETENESS ASSERTION
b. Inquiry – converse with client
c. Inspection – physical inspection of inventory
d. Observation
e. Assertion
i. Existence (balance sheet); occurrence (income statement)
ii. Valuation (balance sheet); allocation (income statement)
iii. Completeness
iv. Rights and obligations
v. Presentation and disclosure

CHAPTER 1: ACCOUNTANCY AS A PROFESSION

Five major characteristics of an ideal profession:

1. Systematic Theory – validation through the use of standards i.e. PFRS, Auditing standards
2. Professional Authority – clients who do not understand their needs seek for professional judgement; basis
of authority is the systematic theory.
3. Community Sanction – must satisfy requirements and pass the CPA Board controlled by the Professional
Regulation Commission through the Board of Accountancy. Performance is judged by the standards of
the profession.
4. Regulations Code – code of ethics, rules of professional conduct, accountancy law, etc.
5. Culture – the profession has created a set norms of the code of ethics.

A professional accountant is an individual who holds a valid certificate issued by the board of accountancy

1. Public practice 3. Academe


2. Commerce and Industry 4. Government

Regulatory Boards:

1. Professional Regulation Commission (PRC) 4. Commission on Audit


2. Board of Accountancy 5. Bureau of Internal Revenue
3. Securities and Exchange Commission

CHAPTER 2: PRACTICE OF PUBLIC ACCOUNTANCY

Types of services:

1. Assurance Services – services that provide b. Reviews


reasonable assurance c. Other services
a. Independent financial statement
audit
2. Non-assurance Services
a. Agreed-upon procedures d. Management advisory services/consultancy
b. Compilation e. Accounting and data processing
c. Tax f. Other non-assurance service

Assurance Engagement – the auditor assesses evidence collected as a result of procedures conducted and
expresses a conclusion to enhance the degree of confidence (credibility) that intended users can have.

Objective: to evaluate or measure a subject matter that is the responsibility of another party against identified
suitable criteria, and to express a conclusion that provides the intended user with a level of assurance about the
subject matter.

Elements of an assurance engagement:

1. Three-party relationship
a. Practitioner – the one who performs the audit or engagement with respect to historical financial
information.
b. Responsible party – responsible for the subject matter
c. Intended users – the people or persons for whom the practitioner prepares the assurance report. (the
responsible party can be one of the intended users, but not alone)
2. Appropriate subject matter and information
a. Financial performance or condition – recognition, measurement, presentation and disclosure in the
financial statements.
b. Non-financial performance or conditions – key indicators of efficiency and effectiveness.
c. Physical characteristics – specifications document i.e. capacity.
d. Systems and processes –assertion about effectiveness i.e. internal control
e. Behavior – statement of compliance or effectiveness

*Appropriate subject matter is: a. Identifiable and capable of consistent evaluation or measurement against the
identifiable criteria; b. can be subjected to procedures for gathering sufficient appropriate evidence to support a
reasonable or limited assurance.

3. Suitable Criteria - standards that are being used as basis depending on subject matter
4. Appropriate Evidence
a. Professional Skepticism – recognizing that circumstances may exist that cause the subject matter to
be materially misstated. Makes a critical assessment, with a questioning mind, of the validity of
evidence obtained and is alert to evidence that contradicts or bring into question the reliability of
documents brought about by the responsible party.
b. Sufficiency and Appropriateness of Evidence – sufficiency = quantity; appropriateness = quality (both
are not interrelated). Risk is affected by quantity and quality.
c. Materiality – nature, timing and extent of auditing.
d. Assurance Engagement Risk – the risk that the practitioner expresses an inappropriate conclusion
when the subject matter is appropriately misstated.
*lower in reasonable assurance engagement
*higher in limited assurance engagement
a. Inherent Risk – the subject matter is susceptible to material misstatement inherently (no related
controls.
b. Control Risk – misstatements could not be prevented by the limited design and operation
internal controls.
c. Detection Risk – risks that the practitioner will not be able to detect the misstatement.
5. Assurance Report (Written Report) – provides a written report containing a conclusion that conveys the
assurance obtained about the subject matter information.

CHAPTER 3: OVERVIEW OF AUDITING

Auditing is a systematic process by which a competent, independent person objectively obtains and evaluates
evidence regarding 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.

Objective: to enable the auditor to express an opinion whether the financial statements are prepared, in all
material respects, in accordance with an identified financial reporting framework.

Factors that affect Information Risk - factors that can cause information to be materially misstated.

1. Remoteness of information users and information providers


2. Potential bias and motives of information provider
3. Voluminous data
4. Complex exchange transactions

How information risk may be reduced:

1. Allow users to verify information


2. Users share information risk with providers or management
3. Have financial statement audited

General Types of Audit:

1. Independent Financial Statement Audit – consists of methodical review and objective examination of
financial statements prepared by an enterprise to determine if such statements have been in conformity
with financial reporting practices that are appropriate for the auditee.
*the expression of opinion is called the attest function

Independent Audit Engagement:

a. Pre-engagement activities:
investigate new and existing clients – obtain letter of engagement – assign audit team
b. Planning activities:
obtain knowledge about the client’s business – obtain preliminary understanding of internal control –
design preliminary account balance audit program
c. Internal control risk assessment activities:
gather evidence and evaluate the client’s internal control structure; document – modify the audit program
to final form
d. Account balance audit activities:
gather evidence about the account balance peso amounts and related footnote disclosures. Prepare audit
working papers. – decide whether evidence is sufficient – evaluate evidence and make audit decisions,
document.
e. Reporting activities: appropriate audit report
Ethical Requirements:

a. Integrity – honesty
b. Independence – in mind (must be objective in perception, avoid conflict) and in appearance (to avoid
third party doubts, to protect the auditor’s independence)
c. Objectivity – must not be easily influenced by the client; impartial
d. Professional competence and due care – update with the standards and other information; to avoid
negligence
e. Confidentiality – information
f. Professional behavior
g. Technical standards

*the auditor should conduct an audit in accordance with the Philippine Standards on Auditing

Requirements for effective audit:

1. Thorough understanding of the entity being audited and the industry of which it is a part
2. Comprehensive knowledge of PFRS
3. Solid grasp of the concepts of internal control and competence in reviewing and evaluating the client’s
underlying system of internal control
4. Knowledgeable in the area of evidence gathering and evaluation

2. Internal Auditing – independent, objective assurance and consulting activity designed to add value and
improve an organization’s operations.
Objective: assist all members of management in the effective discharge of their responsibilities, by
furnishing them with analyses, appraisals and recommendations, and pertinent comments concerning the
activities reviewed.
a. Operational Audit – future-oriented, for operational activities controlled by top-, middle-, lower-
level management for the purpose of improving organizational profitability and increasing the
attainment of the other organizational objectives.
b. Management Audit – future-oriented, activities of all levels of the management.
c. Financial Audit – historically oriented, ensuring the fairness, accuracy and reliability of the financial
data

3. Government Audit – determines whether government funds are being handled properly and in
compliance with existing laws and whether the programs are being conducted efficiently and
economically.
a. Financial and Compliance Audit – whether financial operations are properly conducted, financial
reports are presented fairly and has complied with applicable laws and regulations.
b. Economy and Efficiency Audit – whether the entity is managing and utilizing its resources
economically and efficiently.
c. Program Results – whether desired results and benefits are being achieved.

4. Special Audits – not audits of historical financial statements in accordance with PFRS but fall within
Auditing Standards.
CHAPTER 4: REGULATION OF THE PRACTICE OF PUBLIC ACCOUNTANCY

Sanctions:

1. Payment of damages to those claiming injury


2. Public censure
3. Injunction
4. Suspension or prohibition from practice before the SEC
5. Temporary or permanent loss of license to practice

Misstatements can be: a. improper or inadequate disclosure; b. inappropriate valuation

Legal Concepts Related to the Auditor’s Liability:

a. Due professional care – prudence or prudent person concept


b. Sources of responsibility
i. Common Law – laws that have developed through court decisions rather than through
government statutes.
ii. Statutory Law – body of laws passed by legislative bodies such as Congress.
c. Degree of Wrongdoing
i. Ordinary Negligence – failed to practice prudence in the engagement or absence of reasonable
care expected of a person in the circumstances.
ii. Gross Negligence – fraud, consistently fail to follow the standards of the profession and on
engagement.
d. Lack of Privileged Communication – disclosure of client information.
General rule: consent of the client
Exception: Subpoena from Court
Exception-Exception: Privileged Communication (the law cannot require you to disclose
information)
e. Liability for the acts of others – partners are JOINTLY liable.

Grounds for removal:

a. Neglect of Work
b. Misconduct or Violation
c. Conflict of Interest

CHAPTER 5: CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

Threats and Safeguards:

Threats:

a. Self-interest Threat – interest over the client will inappropriately influence the professional judgement or
behavior.
b. Self-review threat – the accountant will be able to appropriately evaluate the results of a previous
judgment made or services performed.
c. Advocacy threat – promotion of client or employer that independence and objectivity is compromised.
d. Familiarity threat – long or close relationship with the client cause the auditor to be too sympathetic.
e. Intimidation threat – deterred from acting objectively because of actual or perceived pressure, undue
influence.

Safeguards:

a. Safeguard created by the profession, legislation or regulation;


a. Educational, training, and experience requirements for entry into the profession
b. Continuing professional development requirements
c. Corporate governance regulations
d. Professional standards
e. Professional or regulatory monitoring and disciplinary procedures
f. External review by a legally empowered third party
b. Safeguard in the work environment.