MODULE 1: FUNDAMENTAL OF AUDITING & ASSURANCE SERVICES

Preface to Philippine Standards on Quality Control, Auditing, Review, Other Assurance

and Related Services

1. Auditing and Assurance Standards Council (AASC) has its mission to promulgate the auditing
standards, practices and procedures which shall be generally accepted by the accounting
profession in the Philippines.

2. To facilitate the preparation by the AASC of its pronouncements and to attain uniformity of those
pronouncements with international accounting standards , the AASC has approved the adoption of
the International Standards on Auditing (ISAs), International Standards on Assurance Engagements
(ISAEs), International Standards on Review Engagements (ISREs) and International Standards on
Related Services (ISRSs) issued by International Auditing and Assurance Board (IAASB) created by
the International Federation of Accountants (IFAC).

3. Pronouncements of the AASC shall be in the form of:

 Philippine Standards on Quality Control (PSQCs)
 Philippine Standards on Auditing (PSAs)
 Philippine Standards on Review Engagements (PSREs)
 Philippine Standards on Assurance Engagements (PSAEs)
 Philippine Standards on Related Services (PSRSs)
 Philippine Auditing Practice Statements (PAPSs)
 Philippine Review Engagement Practice Statements (PREPSs)
 Philippine Assurance Engagement Practice Statements (PAEPSs)
 Philippine Related Services Practice Statements (PRSPSs)

4. AASC was created by the Professional Regulation Commission upon the recommendation of the
Board of Accountancy (BOA) to assist the BOA in the establishment and promulgation of auditing
standards in the Philippines. The AASC replaced the Auditing Standards and Practices Council
(ASPC) which was established by the Philippine Institute of CPAs (PICPA) and the Association of
CPAs in Public Practice (ACPAPP) and previously set generally accepted auditing standards in the
Philippines, also based on International Standards and Practice Statements.

5. Authority attaching to the Philippine Standards issued by the AASC:

 PSAs are to applied, as appropriate, in the audit of historical financial statements.

 PSREs are to be applied in the review of historical financial information.
 PSAEs are to be applied in assurance engagements dealing with subject matters other than
historical information.
 PSRSs are to be applied to compilation engagements, engagements to apply agreed-upon
procedures to information and other related services engagements as specified by the AASC.
 PSAs, PSREs, PSAEs, PSRSs are collectively referred to as the AASC’s Engagements
Standards.
 PSQCs are to be applied for all services falling under the AASC’s Engagement Standards.
 The AASC’s engagement standards contain basic principles and essential procedures
(identified in bold type lettering) together with related guidance in the form of explanatory and
other material, including appendices. The basic principles and essential procedures are to be
understood and applied in the context of the explanatory and other materials that provide
guidance for their application. It is therefore necessary to consider the whole text of a Standard
to understand and apply the basic principles and essential procedures.

6. The nature of the Philippine Standards issued by the AASC requires professional
accountants to exercise professional judgment in applying them. In exceptional
circumstances, a professional accountant may judge it to depart from a basic principle or essential
procedure of an Engagement Standard to achieve more effectively the objective of the engagement.
MODULE 1: “Introduction to Assurance, Auditing & Related Services”
When such a situation arises, the professional accountant should be prepared to justify the
departure.

7. Authority attaching to the Practice Statements issued by the AASC:

 PAPS are issued to provide interpretative guidance and practical assistance to professional
accountants in implementing PSAs and to promote good practice.
 PREPSs, PAEPSs and PRSPSs are issued to serve the same purpose for the implementation
of PSREs, PSAEs and PSRSs, respectively.

8. Professional accountants should be aware of and consider Practice Statements applicable to the
engagement. A professional accountant who does not consider and apply the guidance included in
a relevant Practice Statement should be prepared to explain how the basic principles and essential
procedures in the Engagement Standard(s) addressed by the Practice Statement have been
complied with.

9. Exposure period for the proposed Philippine Standard or Practice Statement is generally not shorter
than 90 days. Exposure draft is widely distributed to interested organizations and persons for
comment. The exposure draft shall also be published in the PICPA Accounting Times and ACPAPP
Bulletin to give it further exposure.

10. Issuance of exposure drafts requires approval by a majority of the members of the Council;
issuance of the Philippine Standards and Practice Statements, as well as interpretations, requires
approval of at least ten (10) members.

11. Each final Philippine Standard and Practice Statement, as well as interpretations, if deemed
appropriate, shall be submitted to the Professional Regulation Commission (PRC) through the
Board of Accountancy (BOA) for approval after which the pronouncements shall be published in the
Official Gazette. After publication, the AASC pronouncement becomes operative from the effective
date stated therein.

12. Numbering of Philippine Standards and Practice Statements that are Philippine specific and are not
adopted from International pronouncements will be numbered consecutively with suffix “Ph” as
follows:
 For Philippine Standards – starting from 100Ph
 For Philippine Practice Statements – starting from 1000Ph

Philippine Standards and Practice Statements adopted from International pronouncements will use the
same numbers as their counterpart International pronouncements.

Philippine Framework for Assurance Engagements

1. “Assurance engagement” means an engagement in which a practitioner 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.

2. Objective of an Assurance Engagement

The objective of an assurance engagement is for a professional accountant to evaluate or measure

a subject matter that is the responsibility of another party against identified suitable criteria, and to
express about the subject matter. Assurance engagements performed by professional accountants
are intended to enhance the credibility of information about a subject matter by evaluating whether
the subject matter conforms in all material respects with suitable criteria, thereby improving the
likelihood that the information will meet the needs of an intended user. In this regard, the level of
assurance provided by the professional accountant’s conclusion conveys the degree of confidence
that the intended user may place in the credibility of the subject matter.

1- 2
MODULE 1: “Introduction to Assurance, Auditing & Related Services”

Assurance is a broad concept. Assurance services are designed to improve the quality of decision
making by improving confidence in the information on which decisions are made; the process by
which that information is developed, and the context in which the information is presented to users.
The field of assurance services is much broader than the traditional audits of financial statements.

3. Classification of Assurance Engagements

According to Level of Assurance

a. Reasonable assurance engagement

b. Limited assurance engagement

The objective of a reasonable assurance engagement is a reduction in assurance engagement

risk to an acceptably low level in the circumstances of the engagement as the basis for a positive
form of expression of the practitioner’s conclusion.
The objective of a limited assurance engagement is a reduction in assurance engagement risk to
a level that is acceptable in the circumstances of the engagement, but where that risk is greater
than for a reasonable assurance engagement, as the basis for a negative form of expression of the
practitioner’s conclusion.

According to Structure

a. Assertion-based Engagement (Attestation)

b. Direct Reporting Engagement

In assertion-based engagement, the evaluation or measurement of the subject matter is

performed by the responsible party, and the subject matter information is in the form of assertion by
the responsible party that is made available to the intended users.

Four requisites of assertion-based engagements

a. There must be written assertion being made by one party, the reliability of which is of interest to
another party.
b. There must be agreed-upon and objective criteria that can be utilized to assess the accuracy of
the assertion.
c. The assertion must be amenable to verification by independent party.
d. The practitioner or accountant should prepare a written conclusion about the reliability of the
assertion or assertions.

Examples of Assertion-based Engagements

a. An independent audit engagement provides a reasonable (but not absolute) level of

assurance that the subject matter (financial statements) is free of material misstatement.
b. A review engagement provides a moderate level of assurance that the information subject to
review is free from material misstatement; this is expressed in the form of negative assurance
(i.e. “nothing has come to the auditor’s attention”). For the purpose of expressing negative
assurance in the review report, the auditor should obtain sufficient appropriate evidence
primarily through inquiry and analytical procedures to be able to draw conclusions

In direct reporting engagement, the practitioner either directly performs the evaluation or
measurement of the subject matter, or obtains a representation from the responsible party that has
performed the evaluation or measurement that is not available to the intended users. The subject
matter information is provided to the intended users in the assurance report.

1- 3
MODULE 1: “Introduction to Assurance, Auditing & Related Services”

4. Elements of an Assurance Engagement

1. Three-party relationship involving

a. A practitioner (broader than the term “auditor”)
b. A responsible party (a private company, a government entity, etc)
1. In a direct reporting engagement, is responsible for the subject matter
2. In an assertion-based engagement, is responsible for the subject matter information
(the assertion), and may be responsible for the subject matter.
c. An intended user (often members of the public or investors or regulatory bodies)
- Are person, persons or class of persons for whom the practitioner prepares the
assurance report.
- Can be any one of the intended users, but not the only one.

2. An appropriate subject matter

a. Financial performance or conditions (e.g. historical or prospective financial position,
financial performance and cash flows) for which the subject matter information may be the
recognition, measurement, presentation and disclosure represented in the financial
statements.
b. Non financial performance or conditions (e.g. performance of an entity) for which the subject
matter information may be key indicators of efficiency and effectiveness.
c. Physical characteristics (e.g. capacity of a facility) for which the subject matter information
may be specifications document.
d. Systems and processes (e.g. an entity’s internal control or IT system) for which the subject
matter information may be an assertion about effectiveness.
e. Behavior (e.g. corporate governance, compliance with regulation, human resource
practices) for which the subject matter information maybe a statement of compliance or a
statement of effectiveness.

An appropriate subject matter is:

1. Identifiable, and capable of consistent evaluation or measurement against the identifiable
criteria, and
2. Such that the information about it can be subjected to procedures for gathering sufficient
appropriate evidence to support a reasonable assurance or limited assurance conclusion,
as appropriate.

3. Suitable criteria (PFRS – formal; Code of Conduct – less formal)

- are the benchmarks used to evaluate or measure the subject matter
including, where relevant, benchmarks for presentation and disclosure.
- are required for reasonably consistent evaluation or measurement of
a subject matter within the context of professional judgment.

Characteristics of suitable criteria:

a. Relevance – contribute to conclusions that assist decision-making by the intended users.

b. Completeness – no omissions of relevant factors that could affect the conclusions in the
context of the engagement circumstances.
c. Reliability – allow reasonably consistent evaluation or measurement of the subject matter
d. Neutrality – contribute to conclusions that are free from bias.
e. Understandability – contribute to conclusions that are clear, comprehensive, and not subject
to significantly different interpretations.

Criteria are made available to the intended users in one or more of the following ways:
a. Publicly

1- 4
MODULE 1: “Introduction to Assurance, Auditing & Related Services”
b. Through inclusion in a clear manner in the presentation of the subject matter information
c. Through inclusion in a clear manner in the assurance report
d. By general understanding, for example the criterion for measuring time in hours and minutes.
Criteria may also be available to specific intended users, for example, the terms of a contract, or
criteria issued by an industry association that are available only those in the industry. When
identified criteria are available only to specific intended users, or are relevant only to a specific
purpose, use of the assurance report is restricted to those users or for that purpose.

4. Sufficient appropriate evidence

Sufficiency is the measure of the quantity of evidence.

Appropriateness is the measure of quality of evidence, that is relevance and its reliability.

Generalizations about the reliability of evidence:

 Evidence is more reliable when it is obtained from independent sources outside the entity.
 Evidence that is generated internally is more reliable when the related controls are effective.
 Evidence obtained directly by the practitioner (observation) is more reliable than evidence
obtained indirectly or by inference (inquiry).
 Evidence is more reliable when it exists in documentary form.
 Evidence provided by original documents is more reliable than evidence provided by
photocopies or facsimiles.

5. A written assurance report in the form appropriate to a reasonable assurance engagement

or a limited assurance engagement.

In a reasonable assurance engagement, the practitioner expresses the conclusion in the positive
form, for example: “In our opinion internal control is effective, in all material respects, based on
XYZ criteria.” This form of expression conveys “reasonable assurance”.

In a limited assurance engagement, the practitioner expresses the conclusion in the negative
form, for example: “Based on our work described in this report, nothing has come to our attention
that causes us to believe that the internal control is not effective, in all material respects, based on
XYZ criteria. This form of expression conveys a level of “limited assurance” that is proportional to
the level of the practitioner’s evidence –gathering procedures given the characteristics of the
subject matter and other engagement circumstances described in the assurance report

6. Limitations of Assurance Engagements

a.The use of selective testing.

b.The inherent limitations of internal control.
c. The nature of evidence. (persuasive rather conclusive)
d.The use of judgment in gathering and evaluating evidence and forming conclusions based on that
evidence.

7. Engagements Provided by Practitioners:

1. Assurance Engagements

1. Audits – high level of assurance that the f/s are free of material misstatements

2. Reviews – limited investigation of much narrower scope than the audit and undertaken for the
purpose of providing limited (negative) assurance that the statements are presented in
accordance with identified Financial Reporting Standards.

3. Other assurance services

1- 5
MODULE 1: “Introduction to Assurance, Auditing & Related Services”
 CPA Web Trust – provide assurance to users of web sites in the Internet. The CPA’s
electronic Web Trust Seal is affixed to the website. This seal assures the user that the
website owner has met established criteria related to business practices, transaction
integrity and information processes
 Eldercare Plus – focuses on the needs of the elderly and whether caregivers are providing
services that meet the specified objectives or at an acceptable level.

 Business Performance Measurement Services – provide assurance about whether financial

and non-financial information being reported from the entity’s performance measurement
system (e.g. balanced scorecard) is reliable and whether the performance measures being
used are accurately leading the entity toward meeting its strategic goals and objectives.

 Information Reliability Services – provide assurance that information system has been
designed and operated to produce reliable data including tests of the system to determine
whether the system protects against potential causes of data defects

 Risk Assessment Services – involves the study of the link between risks and organization’s
vision, mission, objectives and strategies and development of new and relevant measures
to address these risks.

 Health Care Performance Measurement – involves the evaluation of the quality of health
care, medical services and outcome.

2. Non Assurance Engagements

1. Agreed-upon procedures – one in which the party engaging the professional accountant or
the intended user determines the procedures to be performed and the professional accountant
provides a report of factual findings as a result of undertaking those procedures.

2. Compilation of financial or other information – “presenting in the form of financial statements

that is the representation of management (owners) without undertaking to express any
assurance engagements.”

3. Preparation of tax returns where no conclusion is expressed, and tax consulting.

4. Management consulting and other advisory services – professional services that employ
the practitioner’s technical skills, education, observation, experiences and knowledge of the
analytical approach and procedures used in consulting engagement. Those procedures may
involve determining client objectives, fact-finding definition of problems or opportunities,
evaluation of alternatives, formulation of proposed action, and communication of results,
implementation and follow-up.

Management consulting and other advisory services

 Design and installation of accounting system
 Computer risk management
 Corporate finance
 Tax services
 E-businesses

8. Assurance Engagement Risk

Assurance engagement risk is the risk that the practitioner expresses an inappropriate conclusion
when the subject matter information is materially misstated.
In a reasonable assurance engagement, the practitioner reduces assurance engagement risk to
an acceptably low level in the circumstances of the engagement to obtain reasonable assurance
1- 6
MODULE 1: “Introduction to Assurance, Auditing & Related Services”
as the basis for a positive form of expression of the practitioner’s conclusion. The level of
assurance engagement risk is higher in a limited assurance engagement than in a reasonable
assurance engagement because of the different nature, timing or extent of evidence-gathering
procedures. However, in a limited assurance engagement, the combination of the nature, timing
and extent of evidence gathering procedure is at least sufficient for the practitioner to obtain a
meaningful level of assurance as the basis for a negative form of expression. To be meaningful,
the level of assurance obtained by the practitioner is likely to enhance the intended users’
confidence about the subject matter information to a degree that is clearly more than
inconsequential.

In general, assurance engagement risk can be represented by the following components,

although not all of these components will necessarily be present or significant for all assurance
engagements:

a) The risk that the subject matter information is materially misstated, which in turn consists of:
i) Inherent risk: the susceptibility of the subject matter information to a material
misstatement, assuming that there are no related controls; and

ii) Control risk: the risk that a material misstatement that could occur will not be
prevented, or detected and corrected, on a timely basis by related internal controls.
When control risk is relevant to the subject matter; some control risk will always exist
because of the inherent limitations of the design and operation of internal control; and

b) Detection risk: the risk that the practitioner will not detect a material misstatement that
exists.

The degree to which the practitioner considers each of these components is affected by the
engagement circumstances, in particular by the nature of the subject matter and whether a
reasonable assurance or a limited assurance engagement is being performed.

Introduction to Auditing

Auditing is a systematic process of objectively obtaining and evaluating evidence regarding

selected 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.

Key elements:

1. Systematic process – audits are structured activities

2. Objectivity – freedom from bias
3. Obtaining and evaluating evidence – allows the auditor to determine the support for assertions or
representations. The auditor must gather evidence that the client’s processes are working correctly,
the financial data are recorded and presented correctly and the financial statements as a whole are
fairly presented. The requirement is that the auditor is systematic and objective in obtaining and
evaluating evidence.
4. Assertions about economic actions and events – describes the subject matter of the audit. An
assertion is a positive statement about an action, event, condition, or performance over a specified
period of time.
5. Degree of correspondence between those assertions and established criteria – the purpose of the
audit is to determine conformity with some specified criteria. To have unbiased and clear
communication, criteria must exist whereby independent observers can assess whether or not such
assertions are appropriate. When management prepares financial statements, they assert those
statements are fairly presented with GAAP. Generally accepted accounting principles become the

1- 7
MODULE 1: “Introduction to Assurance, Auditing & Related Services”
criteria by which “fairness” of a financial statement presentation is judged. Other criteria exist for
other types of audits.
6. Communicating the results – the results must be communicated to interested parties.
Communication of audit results to management and interested third parties completes the audit
process. To minimize understandings, this communication generally follows a prescribed format by
clearly outlining the nature of the work performed and the conclusions reached. Most audits result
in audit reports that do not contain any reservations about the fairness of the organization’s
presentation of its financial statements. This is referred to as an unqualified audit report .

The audit adds value if the auditor :

o Has expertise in both obtaining and evaluating evidence regarding the financial statements and
the economic assertions embodied in the financial statements.

o Is independent of management and the third-parties, and can thus provide an objective opinion
on the fairness of financial statements.

PSA 200 Revised and Redrafted, “Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with PSAs” sets out the overall objective of the independent
auditor, and explains the nature and scope of an audit designed to enable the independent auditor to
meet those objectives.

The purpose of an audit is to enhance the degree of confidence of intended users in the financial
statements. This is achieved by the expression of an opinion by the auditor on whether the financial
statements are prepared, in all material respects, in accordance with applicable financial reporting
framework.

Overall Objectives of the Auditor

In conducting an audit of financial statements, the overall objectives of the auditor are:

a. To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the auditor to express an
opinion on whether the financial statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework,
b. To report on the financial statements, and communicate as required by the PSAs, in accordance
with the auditor’s findings.

Applicable Financial Reporting Framework

- The financial reporting framework adopted by management and, where appropriate, those charged
with governance in the preparation and presentation of the financial statements that is acceptable in
view of the nature of the entity and the objective of the financial statements, or that is required by
law or regulation.

“Fair presentation framework” is used to refer to a financial reporting framework that requires
compliance with the requirements of the framework and
1. Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements,
it may be necessary for management to provide disclosures beyond those specifically required
by the framework.
2. Acknowledges explicitly that it may be necessary for management to depart from a requirement
of the framework to achieve fair presentation of the financial statements. Such departures are
expected to be necessary only in extreme rare circumstances.

1- 8
MODULE 1: “Introduction to Assurance, Auditing & Related Services”
“Compliance framework” is used to refer to a financial reporting framework that requires
compliance with the requirements of the framework, but does not contain the acknowledgements in
1 or 2 above.

Scope of an Independent Audit

The term “scope of the audit” refers to the audit procedures deemed necessary in the circumstances to
achieve the objective of the audit. The procedures required to conduct an audit in accordance with
PSAs should be determined by the auditor having regard to the requirements of PSAs, relevant
professional bodies, legislation, regulations and where appropriate, the terms of the audit engagement
and reporting requirements.

Other Types of Audits

1. Government audit – determination of whether government funds are being handled properly and in
compliance with existing laws and whether the programs are being conducted efficiently and
economically.

Scope of Government Audit

 Financial and compliance audit – determines whether financial operations are properly
conducted , the financial reports of an audited entity are presented fairly, and the entity has
complied with applicable laws and regulations.

 Economy and efficiency audit – determines whether the entity is managing and utilizing its
resources economically and efficiently, the causes of inefficiencies or uneconomical practices
and whether the entity has complied with laws and regulations concerning matters of economy
and efficiency.
 Programs results – determines if the desired results and benefits are being achieved, if the
objectives established by the legislative or other authorizing body are being met and if the
agency has considered alternatives which might yield results at a lower cost.

Three Main Divisions of State Audit (based on 1984 Primer on Government and Auditing in the
Philippines)
a. Compliance Audit - examination, audit, and settlement in accordance with laws and regulations.
b. Financial Audit – audit of the accounting, and financial system and controls to ensure reliability
of recorded financial data. The objective of this audit is the expression of an opinion on the
fairness with which the financial condition and results of operation are presented
c. Performance audit – objective examination of the financial and operational performance of an
organization, program, activity or function and is oriented towards opportunities for greater
economy, efficiency and effectiveness.

Two forms of performance audit

1. Management audit (economy and efficiency audit) – appraisal of management performance
from a least cost point of view and the analysis of relationship between benefits attained and
cost incurred.
2. 2. Program results audit (effectiveness audit) – evaluation of program results vis-à-vis
management goals and objectives.

2. Internal audit – an independent, objective assurance and consulting activity designed to add value
and improve an organization’s operations. It helps an organization to accomplish its objectives by
bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk
management, control and governance processes.

1- 9
MODULE 1: “Introduction to Assurance, Auditing & Related Services”
a. Management audit - future-oriented, independent, systematic evaluation of the activities of all
levels of management performed by internal auditor for the purpose of improving the
organizational profitability and increasing attainment of other organizational objectives.

b. Operational audit – future-oriented, independent, systematic evaluation performed by internal

auditor for management of the operational activities controlled by top, middle and lower-level
management for the purpose of improving organizational profitability and increasing attainment
of other organizational objectives.

c.Financial audit – historically oriented, independent evaluation performed by the internal auditor
for the purpose of ensuring the fairness, accuracy, and reliability of the financial data.
3. Comprehensive audit – usually includes the components of compliance, performance and financial
statements audit.

4. Integrated audit - covers financial statements audit and internal control audit.

5. Environmental audit – covers environmental issues which may have an impact on the financial
statements.

6 Forensic audit (Fraud Audit) – refers to the examination of evidence regarding an assertion to
determine its correspondence to established criteria carried out in a manner suitable to the court.

Types of auditors

1. External (independent) auditors – public accountants, both individuals and firms, who perform audit,
tax, consulting and other types of services for external clients.
2. Internal auditors – perform services for a single organization for which they are employed on a full-
time basis, typically reporting to the board of directors who are the primary users of their work.
3. Government auditors – are full-time employees of the government tasked to determine compliance
with laws, statutes, policies and procedures.
4. Forensic auditors – financial auditing specialists who focus on unearthing the truth and/or providing
evidence in a legal/financial disputes and/or irregularities (including fraud), as well as providing
preventive advice on the subject.

Limitations of Audit

1. The use of testing or sampling risk

2. Error in application of judgment or non sampling risk
3. Reliance on management’s representations
4. Inherent limitations of the client’s accounting and internal control systems.
5. Nature of evidence. (Audit evidence is generally persuasive rather than conclusive in nature).

General Principles Governing The Audit of Financial Statements

a. The auditor should comply with the “Code of Professional Ethics for Certified Public
Accountants” promulgated by the Board of Accountancy.

Part A of the Code sets out the fundamental ethical principles that all professional accountants are
required to observe, including: ( P O P I C)

1. Integrity;
2. Objectivity;
3. Professional competence and due care;
4. Confidentiality; and
5. Professional behavior.

1 - 10
MODULE 1: “Introduction to Assurance, Auditing & Related Services”

b. The auditor should conduct an audit in accordance with Philippine Standards on Auditing.

c. The auditor should plan and perform the audit with an attitude of professional skepticism
recognizing that circumstances may exist which may cause the financial statements to be materially
misstated.

Why Financial Statements Are Audited

1. There is a potential conflict between those who prepare information (management) and those who
use information (owners, creditors, investors and regulators). This potential conflict can result in
biased information.
2. Information can have substantial economic consequences for a decision maker. (Financial
Consequences)
3. Expertise is often required for preparing and verifying information.
4. Users of information frequently are prevented from directly assessing the quality of information.
(Remoteness)

Elements of the Theoretical Framework of Auditing

1. The data to be audited can be verified.

2. Short-term conflicts may exist between managers who prepare data and auditors who examine the
data.
3. Auditors must have independence and freedom from managerial constraint.
4. Effective internal control system reduces the possibility of errors and fraud affecting the financial
statements.
5. Consistent application of generally accepted accounting principles (GAAP) or financial reporting
standards results in fair presentation of financial statements.
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.
7. An audit benefits the public.

*******************

1 - 11