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    28 views32 pages

    Auditing Theory 2018 Chapter 1

    Uploaded by

    Joseph Salido

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    Chapter 1 AUDIT- An Overview Dependable financial information is essential to our society. We often rely upon information provided by others in making economic decisions. The need of vatious users for more reliable financial ‘oformation has created a demand for an independent audit of financial statements. The primary function of an independent audit is to lerid credibility to the financial statements Prepared by an entity. The auditor's opinion enhances the value aad usefulness of the financial statements. By attaching a tepott to the financial statements, the auditor provides incteased assurance to users that the financial statements:are reliable. ® Auditing Defined The Philippine Standards on Auditing (PSA) defines auditing by stating the objective of a financial statement audit, that is, toccnable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. This definition confines the audit to examination of the financial statements. Although the geeat majority of audit work today deals with audit of financial statements, operational and compliance auditing ase becoming more and more important, A more comprehensive definition of auditing is given by the American Accounting Association: ‘An audit is 0 systematic process of objectively obtaining and evaluating evidence regarding assertions about economic cautions and events to ascertain the degree of correspondence between these assertions and established criteria and commmenicating the results to interested user.” “This definition conveys the fol 1 2 lowing, thoughts. ‘Auditing is a systematic process Auditing proceeds by means of an ordered and structireg seties of steps. An audit involves obtaining and evaluating evidence about assertions regarding economic actions and events “Auertions are reptesentations made by an auditce abour economic actions and events. The auditor’s objective is to determine whether these assertions are valid. To satisfy this objective, the auditor pesforms audit procedures and gathers evidence that corroborates or refutes the assertions. An audit is conducted objectively The auditor should conduct the audit without bias. Impartial attitude must be maintained by the auditor when evahuating evidence and formulating his conclusion, Auditors ascertain the degree of correspondence between assertions and established criteria Extablishid critria ate needed to judge the validity of the assertions, These criteria are important because they establish and inform the users of the basis against which the assertions have been evaluated or measured. In a0 audit, the auditor determines the degree by which the assertions conform to the established criteria. For example, when auditing financial statements, the auditor judges the fair presentation of the financial statements (asertions) by compating the statements with an identised Snancial reposting framework (ovferia). 'B: Digital Accounting Books PH Auditors communicate the audit results to various interested users The communication of audit findings is the ultimate objective of any audit. For the audit to be useful, the results must be communicated to interested users on a timely basis. Figure 1.1- Illustrative Definition of Auditing Independent Auditor Following a systematic process Objectively obtains and evaluates evidence Establishes the degree of cosrespondence between pce eeeew f : > * Botablished oi Criteria) Communicates the results to interested users ‘Types of Audits Based on primary audit ol bjectives, there axe three major types of audit. financial, compliance and operational audits a Financial statement audit This is an audit conducted to determine whether the financial statements of an entity are fairly presented in accordance with an identified financial reporting framework. This type of audit will be the focus of the discussion in this text. Compliance audit Compliance audit involves a review of an organization's procedures to determine whether the otganization has adhered to specific procedures, rules or regulations. The performance of compliance audit is dependent upon the existence of verifiable data and recognized criteria established by an authoritative body. A common example of this type of audit is the examination conducted by BIR examiners to determine whether entities comply with tax rules and regulations. Operational audit ‘An operational audit is a study of a specific unit of an organization for the putpose of measuring its performance. The main objective of this type of audit is to assess entity's performance, identify areas for improvements and make recommendations to improve performance. This type of audit is also known as performance audit or management audit, Te should be noted that, although there are different types of audit all audits possess the same general characteristics. They all involve: 1. Systematic examination and evaluation of evidence which arc undertaken to ascertain whether assertions comply with established criteria; and ital Accounting Books 2. Communication of the results of the examination, usually in a written report, to the party by whom, or on whose behalf, the auditor was appointed. Unlike compliance and financial statement audits, where the criteria are usually defined, criteria used in operational audit to evaluate the effectiveness and efficiency of operations are not clearly established, ‘Types of auditors Auditors can be classified according to their affiliation with the entity being examined. Hy External auditors ‘These are independent CPAs who offer their professional services to different clients on a contzactual basis. External auditors are the ones who generally perform financial statement audits. 2 Internal auditors Internal auditors are entity’: own employees who investigate and appraise the effectiveness and efficiency cof operations and internal controls, The main function of internal auditors is to assist the members of the organization in the effective discharge of their responsibilities. Internal auditors usually perform ‘operational audits. Government auditors ‘Thesé ate government employees whose main concern is to determine whether persons of entities comply with government laws and regulations. Government auditors usually conduct compliance audits. (oui Nee lb glare Maier)

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