OVERVIEW OF AUDITING

DEFINITION 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 degree of correspondence between those assertions and established criteria and
communicating results to interested users (AAA)
1. Systematic – Methodology (step by step and guided by standards)
This implies a structured, logical, and organized series of steps and
procedures. Auditing consists of a series of sequential steps that include
information testing system and testing of transactions and balances
2. Competent, independent person - The auditor must be qualified to understand the criteria
used and the competence to know how and what evidence to accumulate to reach the
proper conclusion. The auditor must also have an independent mental attitude which
involves impartial and objective thinking
3. Objectively obtains and evaluates evidence – free from bias, performed by a party
“external” to the entity under audit, (hindi dapat kasama sa organizational structure)
This means examining the bases for the assertions (representations) and judiciously
evaluating the results without bias or prejudice either for or against the individual (or
entity) making there presentations
4. Assertions about economic actions and events - These are the representations made by
the individual or entity. They comprise the subject matter of auditing. Assertions
include information contained in financial statements, internal operating reports, and tax
returns
5. Degree of correspondence - This refers to the closeness with which the assertions can be
identified with established criteria. The expression of correspondence may be quantified or it
may be qualitative
6. Established criteria - These are the standards against which the assertions or representations
are judged. (FINANCIAL REPORTING STANDARDS)
Ex. Philippine Financial Reporting Standards (PFRS), Philippines Accounting Standards
(PAS), Philippine Interpretations

7. Communicating the results - This is often referred to as attestation. The final stage in the
audit process is the audit report –the communication of the findings to users. The
communication of findings is achieved through a written report.
8. Interested users - These are individuals who use (rely on) the auditor’s findings

THE NEED OF INDEPENDENT AUDIT

1. Remoteness of information users from information providers (walang connection yung
information provider sa information user)
 2. Potential bias and motives of information provider
3. Voluminous data – large volume of data
4. Complex exchange transaction - The complexity of business transactions might cause
an inability to analyze them, increasing informational risk.
The definition of an exchange transaction, according to the FASB ASC glossary,
is a reciprocal transfer between two entities that results in one of the entities acquiring
assets or services or satisfying liabilities by surrendering other assets or services or
incurring other obligations
Information risk is a calculation based on the likelihood that an unauthorized
user will negatively impact the confidentiality, integrity, and availability of data
that you collect, transmit, or store.
Never transaction siya tas di alam pano ijournalize kasi bago lang
Recurring and Non-Recurring (di pa naeentry kahit once bago)
WAYS TO REDUCE INFORMATION RISK
1. Allow users to verify data - Cross-verification by users and consumers can reduce
informational risk significantly. The drawback of this is that the user might not have
the requisite capability and resources at his or her disposal to cross-check the
reliability of information.
Vouching is done to cross-check the transactions recorded in books by verifying its
authority and authenticity. Verification is done by the auditor to cross-check
and verifying asset existence, ownership, and possession.
Control Risk is the risk of a material misstatement in the financial statements arising
due to absence or failure in the operation of relevant controls of the entity.
Organizations must have adequate internal controls in place to prevent and detect
instances of fraud and error.
2. User shares information risk with management - Management is legally responsible for
providing accurate information to users. Users can bring lawsuits if they made decisions
based on inaccurate information and subsequently incurred a loss because of it. If the user
reports the informational risk to management they might be unable to collect on their loss
and will not be made whole again
3. Have the financial statement audit - A regular audit of financial statements helps to
significantly reduce the information risk. Audits can diminish the layers involved in the
process of communication between the source of information and the ultimate user of
information. The most effective way of ensuring accurate information would be to
perform an independent audit.
GENERAL TYPES OF AUDIT
● FINANCIAL STATEMENT AUDIT
 Conducted to determine whether the financial statements of an entity are fairly presented
in accordance with an identified financial reporting framework.
● COMPLIANCE AUDIT (part of Government Audit)
Review of organization’s procedures to determine whether the organization has adhered
(followed) to specific procedures, rules or regulations.
● OPERATIONAL AUDIT (part if Internal Control)
A study of a specific unit of an organization for the purpose of measuring its
performance.
Every transactions has SOP (Standard Operating Procedures) mga dapat sundin
TYPES OF AUDITOR
● EXTERNAL AUDITOR
Independent CPAs who offer their professional services to different clients on a
contractual basis
● INTERNAL AUDITOR (directly reported on the BOD/High authority)
Entity’s own employees who investigate and appraise the effectiveness and efficiency of
operations and internal controls
● GOVERNMENT AUDITOR (BIR (focus sa mga business) and COA (focus sa
Municipality)
These are government employees whose main concern is to determine whether persons or
entities comply with government laws and regulations. (BIR)
THE INDEPENDENT FINANCIAL STATEMENT AUDIT (PSA 120) nandito and objective ng
audit
The objective of an audit of financial statements is 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 or acceptable financial reporting standards
● RESPONSIBILITY FOR THE FINANCIAL STATEMENT
Management is responsible for preparing and presenting the financial statements in
accordance with financial reporting framework
Auditor’s responsibility is to form and express an opinion on these financial statements
based on his audit.
Unqualified Opinion – Walang material statement na nakita
Qualified/Modifed – May nakitang konting mali
Adverse – Materially misstatement, maling mali
Disclaimer – Ayaw magbigay ng opinion kasi kulang yung supported evidence for ex. Si
management di nakikicoordinate kay Auditor.
● ASSURANCE PROVIDED BY THE AUDITOR
An audit conducted in accordance with PSA is designed to provide only reasonable
assurance that the financial statement taken as a whole are free from material
misstatement
Inherent Limitation:
1. The use of testing/Sampling Risk
Sa sample kukuha lang ng ilan or sample evidence kaya di maaassure na
100%. Sufficient and Appropriate
2. Error in application of judgement/Non Sampling Risk
Mali yung judgment or estimates na nagawa
3. Reliance on management’s representation
We have a skeptic mind, hindi agad agad maniniwala sa mga sinasabi ng
management
4. Inherent limitation on client’s accounting and internal control system
Merong certain errors talaga for ex. Habang nag acc, mali yung natype na
amount or account
5. Nature of Evidence
Generally Persuasive (kapanipaniwala na yung evidence for ex 75% na
nagsabing tama kaya yung remaining 25% di na ittest) rather than Conclusive
(may solid evidences for ex 100% testing yung ginawa natin)
Audit season starting ber months – April 15, (filling of tax)
Cost-Benefit Theory (bawal mag exceed yung cost sa makukuhang
benefit, kasi costly yung pag aaudit kaya kadalasan sapling testing lang ginagawa
di 100%)
● GENERAL PRINCIPLES GOVERNING THE AUDIT OF FINANCIAL
STATEMENTS
1. Compliance with Code of Ethics (for external auditor)
2. Conduct audit in accordance with PSA
3. Plan and perform audit with an attitude of professional skepticism
● THEORETICAL FRAMEWORK OF AUDITING
1. All data are verifiable
 2. Independence in fact (not bias) and appearance (not part of management)
3. No long term conflict between management and auditor
4. Effective internal control reduces the possibility of errors and fraud
5. Consistent application of GAAP or PFRS results in fair presentation of FS
6. What was held true in the past will continue to hold true in the future in the
absence of known conditions to the contrary (history repeat itself)
7. Audit benefits the public
INTEGRITY
OBJECTIVITY
PROF COMPETENCE AND DUE CARE
CONFIDENTIALITY
PROF BEHAVIOR

CONCEPTUAL FRAMEWORK APPROACH

THREATS TO COMPLIANCE
1. IDENTIFY THE THREAT
1. SELF INTEREST THREAT – PAG IKAW AY AUDITOR TAS IKAW RIN AY MAJOR
STOCKHOLDER NG COMPANY NA INOAUDIT MO
2. SELF REVIEW THREAT – PAG IKAW AY CEO DATI TAS NAGING AUDITOR NG
COMPANY NA PINAGTTRABAHUHAN MO TAS MAGKAKABIAS PAG INAUDIT MO,
PAG AUDIT SA SARILI NIYANG GAWA
3. ADVOCACY THREAT – EXAMPLE PROMOTING CLIENTS STOCKS, MAGIGING
PROMOTER SI AUDITOR OR ACCOUNTANT NG COMPANY KAYA SOMEWAY
MAGKAKABIAS
4. FAMILIARITY THREAT – EX. AUDITOR BESTFRIEND NG CLIENTS CEO
5. INTIMIDATION THREAT – PINIPRESSURE KA NG CLIENT OR TINATAKOT
2. SAFEGUARDS – ACTIONS TO MEASURE THAT MAY ELIMINATE THREATS