What is the objective of external auditing?

•To provide opinions on the reliability of the financial statements

•As part of an integrated audit –provide opinions on internal control effectiveness.

When is the value of the external auditing profession affirmed?

•It is when the public show confidence in its objectivity and the accuracy of opinion.

•The accounting profession through its independent audit opinion can provide users information
from which they base their decisions

What is the special function performed by external auditing profession?

•It is the attestation to the fairness of the financial statement of clients.

What is an assurance engagement according to IESBA handbook?

•An engagement in which a professional accountant in public practice 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.

Why audit services are needed?

A. Remoteness between a user and the organization

-owners are divorced from management (a situation where although a firm is owned by
shareholders, it is actually controlled by the firm’s management or board of directors, appointed by
the shareholders at the annual general meeting to run the business on their behalf. https://financial-
dictionary.thefreedictionary.com

-directors not involved in daily operations or decision

-Businesses located in various geographic locations or there is a complex corporate structure

B. Conflicts of interest –biased in favor of the provider when his goals are inconsistent with the
decision maker’s goals

C. Voluminous data ( millions of transactions, multiple production lines)

D. Complex Transactions and Processing systems.

Does audit guarantee a fair presentation of a company’s financial statements?

•It does not necessarily guarantee a fair presentation of the financial statements of a company.

•Audit provides reasonable assurance about the accuracy of the financial statements.

•Audit does not provide absolute assurance about the accuracy of the financial statements.

•Fairness is judged within a framework of PFRS.

What are the situations where the audited financial statements/reports by an independent
accountant are required?

•Application for a loan (bank) -

•Reporting operating results, financial positon and cash flows to absentee owners or stockholders or
partners.

•Required by SEC –upon issuance of securities by a corporation

•Required by lenders –establish credit for purchase of merchandise or other assets

•Annual financial statement reporting of a corporation

•Sale of business

•Termination of partnership

The special function performed by external auditing profession is _________

ANS: attestation to the fairness of the financial statement of clients.

An engagement in which a professional accountant in public practice 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 is
________________

ANS: assurance engagement

What kind of assurance audit provides about the accuracy of the financial statements.

ANS: reasonable assurance

PROFESSIONAL PRACTICE OF ACCOUNTANCY AN OVERVIEW

What is the scope of the practice of Accountancy as stated in the Philippine Accountancy Act of
2004 (RA 9298) Article 1?

•Scope of the practice of Accountancy

a.Practice of Public Accountancy

b.Practice in Commerce and Industry

c.Practice in Education/Academe

d.Practice in the Government

What are the major services provided by CPAs?

I -Assurance Services –Are independent professional services that improve the quality of information
for decision makers.

•Includes attestation services, which are any services in which the CPA firm issues a written
communication that expresses a conclusion about the reliability of a written assertion that is the
responsibility of another party.

•3 categories of attestation services

a.Audit of historical financial statement

b.Reviews of historical financial statements

c.Other attestation services

•II –Accounting and Bookkeeping Services (preparing client’s FS from client’s records and
Preparation of clients journals, ledgers and financial statements)

•III –Tax services –Preparation of corporate, individual and estate returns and tax planning)

•IV –Management Consulting Services. –Includes consulting services on installation of new

accounting or computerized accounting systems

How would you differentiate audit from review?

ASSURANCE TYPE Nature of Work Example of conclusion Positives Negatives

Audit Reasonable Detailed testing “the financial -Higher level -Can cost more
Assurance and statements present a of assurance -Takes more time
substantiating true and fair view” -Higher level -requires a registered
of balances of company auditor
examination

Review Limited Enquiries and “We have not become -Generally -Lower level of
Assurance analysis, less aware of any matter cheaper than assurance
detailed to cause us to believe an audit -Less likely to pick up
the financial -Does not financial reporting
statements do not require a issues
present a true and fair Registered -Lower level of
view company examination
auditor

How would you show the relationship of assurance, attestation and non-assurance services in a
diagram?

NON-ASSURANCE SERVICES
ASSURANCE SERVICES

ATTESTATION SERVICES
Other Management
Consulting
AUDIT REVIEW
Certain
Internal Control Management
over Financial Reporting Consulting Accounting and
Bookkeeping
Attestation Services on
Information Technology and
Other Attestation Services
Tax Services

Other Assurance Services

Assurance, Attestation, Audit

•An assurance service is an independent professional service to improve the quality of information
for decision makers.

•An attestation service is a form of assurance service in which the CPA firm issues a written
conclusion about an assertion made by a third party. (Ex. Report on the effectiveness of an entity’s
internal control over financial reporting)

•Audit services are a form of attestation service, in which the auditor expresses a written conclusion
about the degree of correspondence between information and established criteria.

What are trust services?

•Trust Services are defined as a set of professional assurance services based on a common
framework, which is comprised of a core set of principle and criteria. The framework has been
designed to address the risk and opportunities associated with information technology. SysTrust and
WebTrust are two specific services jointly developed by the American Institute of Certified Public
Accountants (AICPA)and the Canadian Institute of Chartered Accountants (CICA)that use the
following Trust Services Principles and Criteria:

Security- The system is protected against unauthorized access (both physical and logical)

Availability- The system is available for operation and use as committed or agreed

Processing Integrity- System processing is complete, accurate, timely, and authorized.

Online Privacy- Personal information obtained as a result of e-commerce is collected, used,

disclosed, and retained as committed or agreed

Confidentiality- Information designated as confidential is protected as committed or agreed.

What are operational audit, compliance audit and audit of financial statements?

OPERATIONAL COMPLIANCE AUDITS OF

AUDITS AUDITS FINANCIAL
STATEMENTS
PURPOSE To evaluate whether To determine whether To determine whether
operating procedures the client is following the overall financial
are efficient and specific procedures statements are
effective set by higher authority presented in
accordance with
specified criteria
(usually GAAP)
USERS OF AUDIT Management of Authority setting Different groups for
REPORT organization down procedures, different purposes —
internal or external many outside entities
NATURE Highly nonstandard; Not standardized, but Highly standardized
often subjective specific and usually
objective
PERFORMED BY: Frequently Occasionally Almost universally
CPAs
GAO Frequently Frequently Occasionally
AUDITORS
IRS Never Universally Never
AUDITORS
INTERNAL Frequently Frequently Frequently
AUDITORS

What are examples of operational audits that CPA could conduct in a manufacturing company?

Five examples of specific operational audits that could be conducted by an internal auditor in
manufacturing company are:

•Examine employee time cards and personnel records to determine if sufficient information is
available to maximize the effective use of personnel.
•Review the processing of sales invoices to determine if it could be done more efficiently.

•Review the acquisitions of goods, including costs, to determine if they are being purchased at the
lowest possible cost considering the quality needed.

•Review and evaluate the efficiency of the manufacturing process.

•Review the processing of cash receipts to determine if they are deposited as quickly as possible.

What documents will the internal revenue agent examines when he audits taxable income?

•Internal revenue agent audits taxable income

•major source of information -bank statement, cash receipts journal and deposit slips.

•The internal revenue is likely to emphasize unrecorded receipts and revenues.

•For expenses, major sources of evidence are likely to be cancelled checks, vendors’ invoices and
other supporting documentation

What are the major differences in the scope of audit responsibilities?

1. Public Practice -CPAs perform audits in accordance with Philippine Standards on Auditing of
published financial statements prepared in accordance with generally accepted accounting
principles.

2. Government -COA auditors perform compliance or operational audits in order to assure the
Congress of the expenditure of public funds in accordance with its directives and the law.

3. Government with commerce and industry. BIR agents perform compliance audits to enforce the
tax laws as defined by Congress, interpreted by the courts, and regulated by the BIR.

4. With commerce and industries. Internal auditors perform compliance or operational audits in
order to assure management of the board of directors that controls and policies are properly and
consistently developed, applied and evaluated.

What is an agreed upon procedure?

•An agreed-upon procedure is a standard a company or client outlines when it hires an external
party to perform an audit on a specific test or business process. The procedures, which are called
audit standards, are designed and agreed upon by the entity conducting the audit, as well as any
appropriate third parties

•Philippine Accountancy Act of 2004 is (RA 9298)

What are the services performed by accountants?

•Assurance Services

•Accounting and Bookkeeping Services

•Tax services

•Management Consulting Services.

What type of assurance is being rendered by review?

•Limited assurance

•____________is a form of assurance service in which the CPA firm issues a written conclusion
about an assertion made by a third party.

•An attestation service

A form of attestation service, in which the auditor expresses a written conclusion about the degree
of correspondence between information and established criteria is ______________

•Audit service

Services jointly developed by the American Institute of Certified Public Accountants (AICPA)and
the Canadian Institute of Chartered Accountants (CICA)that use the following Trust Services
Principles and Criteria

•SysTrustand WebTrust

Audits and purposes

•OPERATIONAL AUDITS

To evaluate whether operating procedures are efficient and effective

•COMPLIANCE AUDITS

To determine whether the client is following specific procedures set by higher authority

•AUDITS OF FINANCIAL STATEMENTS

To determine whether the overall financial statements are presented in accordance with specified
criteria (usually GAAP)

PUBLIC ACCOUNTING PROFESSION ENVIRONMENT

What are the requirements to be a CPA?

•CPA must meet educational requirements (BSA graduate with a minimum of 173 units )

•and legal and regulatory requirement (pass CPA board exam).

What are the requirements for accreditation of a CPA in public practice with BOA?

•Accomplished Application Form from PRC.

•Appropriate business registration with the SEC, BIR Municipality of place of business.

•Continuing Professional Development of 120 units earned within the last three years of audit
partners and staff.

•PICPA Certification of membership in good standing.

•Payment of accreditation fee.

What are competencies?

Accounting competencies are the technical competencies of the profession that add value to
business and contribute to a prosperous society.

Competencies include both what individual auditors know and what individual auditors and audit
teams do.

Competencies are evidenced by auditors applying their skills in the delivery of services to clients or
supporting the delivery of those services.

These competencies categorized as “High Opportunity Competencies” and “Low Opportunity

Competencies” are as follows: (Cabrera)

What are high opportunity competencies?

High Opportunity Competencies have a high likelihood of being building blocks for selling or
delivering new assurance services.

•Analytical Skills

•Business Advisory Skills

•Business Knowledge

•Capacity for Work

•Comprehension of Client’s Business Processes

High Opportunity Competencies

 Communication Skills  Efficiency  Intellectual Capability  Learning and Rejuvenation  Marketing

and Selling  Model Building  People Development  Relationship Management  Responsiveness
and Timeliness  Technology  Verification

•Low Opportunity Competencies, while important to the delivery of current assurance services, are
less likely to be exploited in the development of future services.

•Accounting and Auditing Standards

•Administrative Capability

•Managing Audit Risk

Independence

Independence of Mind

The state of mind that permits the expression of a conclusion without being affected by influences
that compromise professional judgment, thereby allowing an individual to act with integrity and
exercise objectivity and professional scepticism

Independence in Appearance

The avoidance of facts and circumstances that are so significant that a reasonable and informed
third party would be likely to conclude, weighing all the specific facts and circumstances that a
firm’s, of a member of the audit team’s, integrity, objectivity or professional scepticism has been
compromised
MANAGEMENT OF A PUBLIC ACCOUNTING PRACTICE

What is the function performed by the public accounting profession?

•Attestation to the fairness of the financial statements of clients.

The business environment in which the auditor must function is increasingly complex. The major
forms of complexity relate to:

a. Computer systems –interdependent across organizations

b. Increased complexity of financial instruments and transactions entered into by organizations

c. The economic environment in which we all must operate.

Changing environment –increased need to have a global outlook in providing goods and services

Need to be attuned to societal regulation (environmental protection)

What is a network of accounting firms?

•It is a body to which individual CPA firms come together to pursue common interest. The services
generally provide by the network include:

•centralized staff that provides accounting and auditing expertise to its members on a world-wide
basis,

•a referral service for audit firms that have clients in different parts of the country or world,

•a referral service for a firm to utilize when clients desire expertise or consulting services that the
audit firm does not provide.

•standard audit programs and/or procedure’s manuals for the member audit firms.

PROFESSIONAL ETHICS

•The International Ethics Standards Board for Accountants® (IESBA®) sets high-quality,
internationally appropriate ethics standards for professional accountants, including auditor
independence requirements.

What are the 5 fundamental principles?

•Integrity

•Objectivity

•Professional Competence and Due Care

•Confidentiality

•Professional Behavior

What is independence of mind and in appearance?

•Independence is linked to the fundamental principles of objectivity and integrity. It comprises:

a. Independence of mind

b. Independence in appearance
•Independence in fact exists when the auditor is actually able to maintain an unbiased attitude
throughout the audit,

•Independence in appearance is dependent on others’ interpretation of this independence and

hence their faith in the auditor.

What is conscience?

In ethical philosophy, the word “conscience” is used to describe the “undefinable mental process
that yields moral decisions.”

•Conscience might not be a sufficient guide for personal ethics decisions because the individual’s
undefinable mental processes may be based on caprice, immaturity, ignorance, stubbornness, or
misunderstanding.

•A professional accountant must be prepared to be an agent, spectator, advisor, instructor, judge,

and critic.

What is Ethical Behaviour?

Acting in ways consistent with what society and individuals typically think are good values.

Activities which may not affect independence in fact, but which are likely to affect independence
in appearance are:

1. Ownership of a financial interest in the audited client.

2. Directorship or officer of an audit client.

3. Performance of management advisory or bookkeeping or accounting services and audits for the
same company.

4. Dependence upon a client for a large percentage of audit fees.

5. Engagement of the CPA and payment of audit fees by management.

What are examples of threats?

a. Self-interest threats

•A self-interest threat exists if the auditor holds a direct or indirect financial interest in the company
or depends on the client for a major fee that is outstanding. Example. The audit team is preparing to
conduct its 2020 audit for ABC Company.

b. Self-review Threats

•This occurs when an auditor has to review work that they previously performed.

For example: if the external auditor prepared the financial statements and then audited them.

c. Advocacy Threats

•An advocacy threat exists if the auditor is involved in promoting the client, to the point where their
objectivity is potentially compromised. Example. The auditor is assisting in selling ABC Company
while also serving as the auditor for the company.
d. Familiarity Threats

•A familiarity threat is the threat that due to a long or close relationship with a client or employer, a
professional accountant will be too sympathetic to their interests or too accepting of their work.

e. Intimidation Threats

●An intimidation threat exists if the auditor is intimidated by management or its directors to the
point that they are deterred from acting objectively.