AUDIT HIERARCHY

AUDIT
ASSERTIONS

AUDIT
OBJECTIVES

AUDIT
PROCEDURES

AUDIT EVIDENCE

AUDIT
DOCUMENTATION

This is the continuation of the audit process and involves the actual conduct of
the audit by the auditor. The auditor must understand the audit hierarchy that involves
audit assertions, audit objectives, audit procedures,audit evidence, and audit
documentation.

Audit Assertions and Audit Objectives

Assertions about classes of transactions and events for the period under audit

1. Occurrence - relates to whether recorded transactions and events actually

and are pertaining to the entity
2. Completeness - relates to whether all transactions and events that occurred
during the period which should have been recorded were actually recorded
 3. Accuracy - relates to whether amounts and other data relating to recorded
transactions and events have been recorded appropriately
4. Cut-off - relates to whether transactions and events have been recorded in the
correct accounting period
5. Classification - concerned with whether transactions and events have been
recorded in the proper accounts

Assertions about Account Balances at period end

1. Existence - addresses whether the assets, liabilities, and equity interests exist at
the date of the financial statements
2. Rights and Obligations - relates to whether the entity holds or controls the rights
to assets, and the obligation to pay the liabilities of the company
3. Completeness - addresses whether all assets, liabilities, and equity interests that
should have been recorded are recorded
4. Valuation and Allocation - relates to whether assets, liabilities, and equity
interests are included in the financial statements at appropriate amounts
and any resulting valuation or allocation adjustments are appropriately recorded

Assertions about Presentation and Disclosure

1. Occurrence,and Rights and Obligations - whether disclosed events, transactions,

and other matters have occurred and pertain to the entity
2. Completeness - relates whether all disclosures that should have been included in
the financial statements are included and presented
3. Classification and Understandability - relate to whether financial information is
appropriately presented and described and disclosures are clearly expressed
4. Accuracy and Valuation - relate to whether financial and other information are
disclosed fairly and at appropriate amounts.

Audit assertions and Audit Objectives should be congruent with one another.
Audit assertions serve as the starting point of the auditor to identify the specific goals
he or she has to accomplish.
 Audit Assertions are representations made by
management which are embodied either implicitly or explicitly
in the financial statements. These are the subject matter
information of an audit of financial statements.

Audit objectives are the goals of the auditor in an audit in

respect of the particular financial statement assertion that
involves a particular account balance or class of transactions.

Audit Procedures

In the auditing standards (PSA 200), the scope of an audit refers to the audit
procedures that, in the auditor’s judgment and based on the PSAs, are deemed
appropriate in the circumstances to achieve the objective of an audit.

These are the specific methods, techniques, or acts that the auditor uses to
gather evidence in order to determine the validity of the financial statement assertions.
Professional judgment must be used in determining which audit procedure (or
procedures) is the most appropriate to increase the amount of evidence obtained, its
persuasiveness, and its ability to support or contradict assertions made by
management.

Scope of audit:

1. Nature of audit procedure - refers to its innate applicability in relation to

the audit objective set for a particular assertion.
2. Timing of audit procedure - indicates when the audit procedure is likely to
be performed by the auditor.
3. Extent of audit procedure - relates to its ability to substantiate a particular
assertion pr class of transactions or account balance..

Audit Procedures according to purpose:

● Risk Assessment Procedures

Obtain an understanding of the entity and its environment, including
internal control, to assess the risks of material misstatement at the financial
statement level and assertion levels. These are always performed by the auditor
to provide a satisfactory basis for the assessment of risks at the financial
statement and assertion levels.
 ● Tests of Control
The auditor will test the operating effectiveness of control in preventing, or
detecting and correcting material misstatements at the assertion level. This is
necessary when the auditor’s risk assessment includes an expectation of the
operating effectiveness of controls ,and when substantive procedures do not
provide sufficient appropriate audit evidence.

● Substantive Tests
To detect material misstatements, substantive tests are used including
tests of details of classes of transactions, account balances, and
disclosures and substantive analytical procedures. It is planned and
performed by the auditor in order to be responsive to the related
assessment of the risks of material misstatement, which includes the
results of tests of controls.

Audit procedure according to nature:

● Inspection - examining records, documents, or tangible assets

● Observation - looking at a process or procedure being performed by others
● Inquiry - seeking information from knowledgeable persons inside and outside the
entity
● Confirmation - a more formal type of inquiry and consists of the response to an
inquiry made by a third party to corroborate the information contained in the
accounting records
● Recalculation - checking the mathematical accuracy of documents or records or
account balances
● Reperformance - auditor’s independent execution of procedures or controls that
were originally performed as part of an entity’s internal control
● Reconciliation - establishing agreements between two sets of independently
maintained but related records
● Vouching - following a transaction back to supporting documents to establish the
existence or occurrence of recorded transactions
● Tracing - following a transaction forward through the accounting records to
establish completeness of transaction processing
● Analytical Procedures - comparing relationships or determining the plausible
relationships that exist between data to determine the reasonableness or
recorded amounts.
 AUDIT PROCEDURE RISK TESTS OF SUBSTANTIVE
ASSESSMENT CONTROLS TESTS
PROCEDURE

Inquiry 🗸 🗸 🗸

Inspection 🗸 🗸 🗸

Observation 🗸 🗸 🗸

Reperformance 🗸

Confirmation 🗸

Recalculation 🗸 🗸

Analytical 🗸 🗸
Procedures

Audit Tests:

A. Compliance tests or Tests of Controls

These are conducted to provide reasonable assurance that accounting
control procedures are being applied as prescribed; to assess the operating
effectiveness of internal controls in the company and whether the control
procedures are followed.

Audit Trail - a processing sequence or path that allows for managers and
auditors to “walk through” a particular transaction and ascertain whether it has
been executed properly following required policies and procedures set by the
company.

B. Substantive tests
These are applied to determine whether the peso amount of the account is
properly stated.

1. Tests of details of transactions or balances - involve obtaining audit

evidence on the items or details involved in a class of transactions or a
particular account balances
2. Analytical procedures - involve the study and comparison of
relationships among accounting data and related information
a. Comparing inventory levels for the current year to that of prior years
 b. Comparing research and development expense with the budgeted
amount
c. Comparing interest expense with the average outstanding balance
of the interest-bearing debt
d. Comparing client’s gross profit percentage to published industry
averages
e. Comparing production records in units with sales

The specific procedures to be conducted by the auditor in

order to obtain and evaluate audit evidence to support or
contradict the representations made by management.

Audit Evidence

Information used by the auditor in arriving at the conclusions on which the

auditor’s opinion is based. It includes both information contained in the accounting
records underlying the financial statements and other information.

Sources of Evidence

Some sources of evidence is obtained by performing audit procedures to test

the accounting records, for example, through analysis and review, reperforming
procedures followed in the financial reporting process, and reconciling related types and
applications of the same information. Through the performance of such audit procedure,
the auditor may determine that the accounting records are internally consistent and
agree to the financial statements.

Information from sources independent of the entity that the auditor may use as
audit evidence may include confirmations from third parties, analysts’ reports, and
comparable data about competitors.

General audit procedures for obtaining audit evidence as provided by PSA 500
are as follows:

 Inspection
 Observation
 Inquiry
 Confirmation
  Recalculation
 Reperformance
 Analytical Procedures

Hierarchy of Competence and Persuasiveness of Audit Evidence

Auditor's direct personal knowledge, obtained through

physical obseration and his or her own mathematical
computation.

Documentary evidence obtained directly from

independent external sources.

Documentary evidence outside the

client's data-processing system but
which has been received and
processed by the client.

Internal evidence

Verbal and
written
representation

Sufficiency and Appropriateness of Audit Evidence

In order for an audit evidence to be competent it must be both sufficient and

appropriate.

Sufficiency is the measure of the quantity of audit evidence. The concept of sufficiency
is important to an audit since it is not sound or practicable for an auditor to collect
unlimited amounts audit evidence since an audit is to be conducted only within
reasonable and economic limits. Professional judgement should be used to determine
the extent of audit procedures necessary to obtain sufficient evidence.
Appropriateness is the measure of the quality of audit evidence; that is, its relevance
and its reliability in providing support for, or detecting misstatements in, the financial
statements.

In order for audit evidence to be appropriate and competent, it has to satisfy

certain factors.

 Relevance of the audit assertion being tested

 Objectivity of the evidence
 Qualification of the provider of the evidence
 Timeliness of the evidence

Audit Documentation

Audit documentation serves as the auditor’s principal record of the work

performed and the basis for conclusions in the audit report. This serves as proof that the
auditor indeed has conducted the audit and also contains supporting evidence on how
the auditor was able to arrive at the conclusions and opinion on an audit report.

Audit documentation is also referred to as working papers or the audit file.

Working papers generally have two functions: (1) to provide support for the auditor’s
report; and (2) to aid in the conduct and supervision of the audit.

Oral explanations by the auditor, on their own, do not represent adequate

support for the work the auditor performed or conclusions the auditor reached, but may
be used to explain or clarify information contained in the audit documentation.

Working papers ordinarily should include documentation showing that:

 The work has been adequately planned and supervised, indicating observance of
the first standard of fieldwork.
 The system of internal accounting control has been studied and evaluated to the
degree necessary to determine whether, and to what extent other auditing
procedures are to be restricted, indicating observance of the second standard of
fieldwork; and
 The audit evidence obtained, the auditing procedures applied, and the testing
performed have provided sufficient appropriate audit evidence to afford a
reasonable basis for an opinion indicating observance of the third standard of
fieldwork.
Classification of Working Papers

 Permanent File
It consists of working papers intended to contain historical information or
information of continuing nature or information pertinent to the current audit.

 Current File
It consists of working papers that contain evidence gathered, descriptions of
auditing procedures performed and conclusions reached relevant to the audit of a
particular year. The current file or working papers are usually arranged in the following
order:
 Working trial balance
 Proposed adjusting and reclassifying entries
 Lead schedule
 Supporting schedules

The auditor should complete the assembly of the final audit file on a
timely basis which is sixty (60) days after the date of the auditor’s report.
After the assembly of the final audit file has been completed, the
auditor should not delete or discard audit documentation before the end of
its retention period.
A PSQC 1 indicates, the retention period for audit engagements
ordinarily is no shorter than five years from the date of the auditor’s report,
or, if later, the date of the group auditor’s report.