Professional Documents
Culture Documents
to accompany
AUDITING AND ASSURANCE: PRINCIPLES, STANDARDS, AND FUNDAMENTALS 2012 ed.
MARK FRANCIS G. NG, CPA
A. ROLE OF AUDITING
• Owner provides capital and hires manager to manage it
• Manager is accountable to owner/ provides financial reports
• There will be possible conflict of interest/lead to information risk
• Manager hires auditor to report on the mgt’s fin. Report. The mgt pays auditor to reduce information risk /
reduce cost of capital
• The auditor gathers evidence to evaluate fin reports of the mgt.
• Auditor issues audit report, adding credibility to the mgt’s reports/ reduce owner’s information risk
ASSURANCE SERVICES
1. ASSURANCE refers to the auditor’s satisfaction as to the reliability of an assertion being made by one party for use
by another party.
2. ASSURANCE SERVICES are independent professional services that improve the quality of information, or its
context, for decision makers.
First concept is making a good decision which requires quality of information, which can be financial or non
financial.
Second concept relates to improving the quality of information, or its context, which increase confidence in the
information reliability and relevance. Context can be improved via the format in which information is presented.
Third concept is independence which is the hallmark of the profession.
Last concept is professional services which encompasses the application of professional judgment.
6. Assurance services encompass attestation services. The main difference between assurance services and
attestation services lie in the SCOPE OF THE SERVICES to be provided.
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Attestation engagement is one in which the professional accountant is engaged to issue, or does issue, a written
communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of
another party.
AUDITING SERVICES
THE DEMAND FOR FINANCIAL STATEMENT AUDITS
1. An audit provides written assurance from an independent party that assertions embodied in a set of financial
statements are reliable
• External parties who need financial statement audits include
Investors
Employees and labor unions
Regulatory and taxing authorities
• Internal parties include
Management
Financial officers
Sales executives
2. None of the parties who demand an audit are in a position to obtain information about a company except from
company management
• Management often has an incentive to misstate the financial statements for its own interest
3. Financial statements are audited by auditors
• Financial statements are the representations of and responsibility of management
• Auditors express an opinion regarding fair presentation
4. The client in the audit of a public company is not management
• The client is the Board of Directors, as representative of the shareholders (owners)
5. An audit is a systematic process
• Involves both an investigation and a report
Investigation is the gathering and evaluation of evidence
Reporting is the conveyance of the auditor’s opinion regarding fair presentation
DEFINITION OF AUDITING
AUDITING is a systematic process of objectively obtaining and evaluating 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 the interested users. (AMERICAN ACCOUNTANTS ASSOCIATION)
SYSTEMATIC PROCESS – audits are organized and structured activities
OBJECTIVELY – free from bias
OBTAINING & EVALUATING EVIDENCE – allows the auditor to determine the support for the
representations provided by the client’s management.
ASSERTIONS ABOUT ECONOMIC ACTIONS & EVENTS – describes the subject matter of the audit
DEGREE OF CORRESPONDENCE & ESTABLISHED CRITERIA – the closeness of assertion to the criteria
promulgated by the ASC.
COMMUNICATING RESULTS TO INTERESTED USERS – written report (AUDIT REPORT) about whether the
FS is fairly presented in all material respects in accordance with identified financial reporting framework
for all interested users.
An audit is an assurance engagement. It has all of the five elements of Assurance Engagement.
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Elements Required by Assurance Audit Engagement
Three – party relationship involving a Professional Accountant – External Auditor/CPA
professional accountant, responsible party, Responsible Party – The Management
and intended user. Intended User – User/s of the financial statements
Subject Matter The financial statements of the client company
Suitable Criteria GAAP
Sufficient Appropriate Evidence The auditors gather appropriate sufficient evidence to support
the opinion (if any).
Conclusion The conclusion expressed is contained in the Audit Report. An
audit provides a high level of assurance regarding the fairness
of the financial statements
OBJECTIVE OF AUDIT
1. The OBJECTIVE OF AUDIT is to enable the auditor to express an opinion whether the financial statement are
prepared, in all material respects, in accordance with an identified financial reporting framework.
While the auditor is responsible for forming and expressing an opinion on the financial statements, the
responsibility for preparing and presenting the financial statements is that of the management of the company.
2. Information Risk - is the risk that unreliable information will be provided to decision makers. Factors that
contribute to information risk are:
a. Remoteness of information users from information providers
Decision makers, almost always, do not get first hand knowledge about the business enterprise with which
they do business for the reasons that *in many cases,
1. owners are divorced from management,
2. directors are not involved in day-to-day operations or decisions,
3. business may be dispersed among numerous geographic locations and complex corporate structure.
b. Potential bias and motives of information provider
• A conflict of interest may be assumed to exist between management and owners regarding the financial
statements.
• Management usually desires to present the results of its stewardship in the most favorable light.
• Information may possibly be biased in favor of the provider when his goals are inconsistent with the
decision maker.
• This could be attributed to either an international emphasis designed to influence users in a certain
manner or maybe an honest optimism about future events.
c. Voluminous data
• As businesses grow, possibly millions of exchange transactions are processed daily via manual or
sophisticated computerized systems.
• This increases therefore the likelihood that improperly recorded information may be included or buried in
the records.
d. Complex exchange transactions
• New and changing business relationships may lead to innovative accounting and reporting problems.
• Transactions are so complex and hence more difficult to record properly. Also, transactions not
quantifiable will require increased disclosures.
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THEORETICAL FRAMEWORK OF AUDITING
Audit function operates on the assumption that all financial data are VERIFIABLE.
The auditor should always maintain INDEPENDENCE with respect to the financial statements under audit.
There should be NO LONG-TERM CONFLICT between the auditor and the client management.
EFFECTIVE ACCOUNTING AND INTERNAL CONTROL SYSTEMS reduces the possibility of errors and fraud
affecting the financial statements.
Consistent application of GAAP or financial reporting standards results in FAIR PRESENTATION OF FINANCIAL
STATEMENTS.
What was held true in the past will continue to hold true in the future in the absence of known conditions to
the contrary.
An audit BENEFITS THE PUBLIC.
SCOPE OF AN AUDIT refers to the audit procedures deemed necessary in the circumstances to achieve the objective
of the audit.
REASONABLE ASSURANCE is a concept relating to the accumulation of the audit evidence necessary for the auditor to
conclude that there are no material misstatements in the financial statements taken as a whole. It relates to the
whole audit process.
LIMITATIONS OF AN AUDIT:
a. An audit is not guarantee of the exactness or accuracy of assertions in the financial statements.
b. Absolute assurance in auditing is not attainable.
c. Human weakness, such as fatigue and carelessness, may cause auditors to overlook pertinent evidence,
examine the wrong type of evidence, or even draw the wrong conclusion from the evidenced examined.
RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
a. AUDITOR – responsible for forming and expressing an opinion on the financial statements. The audit opinion:
Enhances the credibility of the FS
Is not an assurance as to the future viability of the entity and the efficiency or effectiveness with which
management has conducted the affairs of the entity
b. MANAGEMENT – responsible for the preparation and fair presentation of the financial statements.
4. Auditing vs. Accounting. An auditor must possess not only an understanding of accounting principles but also an
expertise in the accumulation and interpretation of audit evidence. This is the main difference between auditors
and accountants.
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Types of audits according to the type of auditor:
d. EXTERNAL OR INDEPENDENT FINANCIAL STATEMENT AUDIT
- examinations of financial statements to determine whether they are stated in accordance with specified
criteria.
e. INTERNAL AUDIT
– an independent appraisal activity established within an entity as a service to the entity. Its objective is to
assist all members of the management in the effective discharge of their responsibilities by furnishing them
with analyses, appraisals, recommendations and pertinent comments concerning the activities reviewed.
f. GOVERNMENT AUDIT
– involves the determination of whether government funds are being handled properly and in compliance with
existing laws; and whether programs are being conducted efficiently and economically.
REVIEWS
• The objective of a review of financial statements is to enable an auditor to state whether, on the basis of
procedures which do not provide all the evidence that would be required in an audit, anything has come to the
auditor's attention that causes the auditor to believe that the financial statements are not prepared, in all
material respects, in accordance with an identified financial reporting framework.
• A review comprises inquiry and analytical procedures which are designed to review the reliability of an
assertion that is the responsibility of one party for use by another party.
• While a review involves the application of audit skills and techniques and the gathering of evidence, it does
not ordinarily involve an assessment of accounting and internal control systems, tests of records and of
responses to inquiries by obtaining corroborating evidence through inspection, observation, confirmation and
computation, which are procedures ordinarily performed during an audit.
• Although the auditor attempts to become aware of all significant matters, the procedures of a review make
the achievement of this objective less likely than in an audit engagement, thus the level of assurance provided
in a review report is correspondingly less than that given in an audit report.
RELATED SERVICES
Agreed-upon Procedures
• In an engagement to perform agreed-upon procedures, an auditor is engaged to carry out those procedures of
an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to
report on factual findings.
• The recipients of the report must form their own conclusions from the report by the auditor.
• The report is restricted to those parties that have agreed to the procedures to be performed since others,
unaware of the reasons for the procedures, may misinterpret the results.
Compilation
• In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to auditing
expertise to collect, classify and summarize financial information.
• This ordinarily entails reducing detailed data to a manageable and understandable form without a requirement
to test the assertions underlying that information.
• The procedures employed are not designed and do not enable the accountant to express any assurance on the
financial information. However, users of the compiled financial information derive some benefit as a result of
the accountant's involvement because the service has been performed with due professional skill and care.
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OTHER SERVICES OF CPAS ASIDE FROM AUDITS
5. The services provided by the CPA may be classified as follows:
a. Whether the service is an assurance engagement or not:
Assurance engagement Audits, reviews, other assurance services
Non-assurance engagement Agreed-upon procedures, tax consulting, management consulting,
and other advisory services
b. Pronouncements applicable for services:
Covered by PSA Audits
Covered by PSRE Reviews and Examination of Financial Information
Covered by PSRS Agreed-upon procedures, and compilation engagements
Not Covered by PSA, PSRE, PSRS Taxation, consultancy, financial and other accounting advice
or PSAE
6. The following illustration is the summary of facts related to auditing and related services:
AUDITING REVIEW RELATED SERVICES
Agreed-upon
Nature of Service Audits Reviews procedures Compilation
Applicable PSA PSRE 2400 PSRS 4400 PSRS 4410
Pronouncement(s)
Types and extent of GAAS – TOC & ST Inquiry and Depends on terms of Accounting
procedures ARPs engagement
Independence YES YES NO NO
required?
Comparative level of High but not Moderate NO NO
assurance provided by absolute
auditor
Report provided Positive Negative Factual findings of Identification of
(Reasonable) (Limited) procedures information
assurance on assurance on complied
assertions assertions
1. Operational audits
• Assess effectiveness and efficiency
Focus on information systems and operating procedures
Scope can be entity’s entire operation, or selected procedures
• Internal auditors are employed by a single entity (not independent)
To be effective, internal auditors should report to the highest levels of the organization
Preferably, the Audit Committee of the Board of Directors
• Operational audits may occasionally be performed by outside parties
2. Compliance audits
• Most often performed in governmental agencies
• Similar to a financial statement audit
• Can be designed to
Determine whether an entity’s financial statements are fairly presented in accordance with GAAP
Determine whether the entity is in compliance with applicable laws and regulations
• Can be conducted by either independent auditors or governmental auditors
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D. OTHER ATTESTATION SERVICES
1. Other attestation services include agreed-upon procedures attesting to
• The reliability of software specifications
• Representations about market feasibility
• Efficacy of college-exam prep courses
E. CONSULTING AND OTHER ASSURANCE SERVICES
1. In response to criticism regarding the lack of value provided by traditional financial reporting, the accounting
profession expanded the scope of services to include value-added consulting and assurance services
• Consulting engagements are two-party contracts
Consultant recommends uses for information
Services such as business valuation, financial planning, and litigation support are common
• Other assurance services report on or improve the quality of information
Some public accounting firms have been aggressive in offering these services
The profession’s task is to anticipate the future needs of decision makers and develop assurance
services to improve the quality of that information