debit Credit

assets increase decrease

liabilities decrease increase
equity decrease increase
expense increase decrease
income/revenue decrease increase
 AUDITING THEORY  
  
CHAPTER 1:  
❖ Auditing Defined:  
- An audit is a systematic process of objectively obtaining and evaluating evidence regarding  assertions about economic acti
correspondence between  these assertions and established criteria and communicating the results to interested users. 
The definition conveys the following thoughts. 
1. Auditing is a systematic process 
2. An audit involves obtaining and evaluating evidence about assertions regarding economic actions and  events 
3. An audit is conducted objectively 
4. Auditors ascertain the degree of correspondence between assertions and established criteria 5. Auditors communicate
Comparison among the different types of audit  

Assertions made by the  

auditee 

Content of the auditor's  

Auditors who generally  

⮚ Responsibility for the financial statements  

o The management is responsible for preparing and presenting the financial statements in accordance  w
o The auditor’s responsibility is to form and express an opinion on these financial statements based  on h
⮚ Assurance provided by the auditor  
o Reasonable assurance 
In every audit, there are always inherent limitations that affect the auditor’s ability to detect material misstatements.  These limi
1. The use of testing / Sampling risk 
2. Error in application of judgment / Non-sampling risk 
3. Reliance on management’s representation 
 4. Inherent limitations of the client’s accounting and internal control systems. 
5. Nature of evidence 
⮚ Need for an independent financial statement audit  
o Conflict of interest between management and users of financial statements. 
o Expertise 
o Remoteness 
o Financial consequences
CHAPTER 2: THE PROFESSIONAL STANDARDS Generally Accepted Auditing Standards (GAAS)  
General  
Standards 
∙ Technical  
Training and  
Proficiency 
∙ Independence 
∙ Professional  
care 
⮚ Elements of a System of Quality Control  
Standards of  
Fieldwork 
∙ Planning 
∙ Internal  
Control  
Consideration ∙ Evidential  matter 
Standards of  
Reporting 
∙ Generally  Accepted  
Accounting  
Principles 
∙ Inconsistency ∙ Disclosure ∙ Opinion
- PSA 220 states that audit firm should implement policies and procedures designed to ensure that all  au
o Leadership Responsibilities for Quality on Audits 
o Ethical Requirements 
a. Integrity 
b. Objectivity 
c. Professional competence and due care 
d. Confidentiality 
e. Professional behavior 
o Threats to Independence 
a. Self Interest Threat – financials 
b. Self Review Threat – former employee 
c. Advocacy Threat – goodwill 
d. Familiarity 
e. Intimidation Threat 
o Acceptance and Continuance of Client Relationship 
a. Competence 
b. Ethical Requirements 
c. Integrity of client 
 o Human Resources and Assignment 
a. Recruitment 
b. Performance evaluation, compensation and promotion 
c. Capabilities and competence 
d. Career development 
e. Assignment of engagement teams 
o Engagement Performance 
- the firm should establish policies and procedures designed to provide it with reasonable  a
∙ That engagement are performed in accordance with professional standards and oth
∙ That the audit report issued is appropriate in the circumstances. 
▪ Direction – assistants should be informed of their responsibilities, the nature of the  entity’s business, potential problems tha
the performance of the engagement. 
▪ Supervision – this involves monitoring the progress of the audit, resolving  accounting and audit issues, and considering th
engagement. 
▪ Review – work performed by assistants should be reviewed to consider whether  the audit procedures, evidence and docu
conclusion reached. 
▪ Consultation – the firm should establish policies and procedures that encourage  firm personnel to seek assistance from aut
the firm. 
▪ Engagement Quality Control Review – the firm should establish policies and  procedures requiring an engagement quality
evaluation of the significant judgments made and conclusions reached in  formulating the auditor’s report. This requires the en
a. To determine that an engagement quality control reviewer has been appointed;
c. Not to issue the auditor’s report until completion of the engagement quality  con
▪ Differences of Opinion – the engagement team should follow the firm’s policies  and procedures for dealing with and resolvi
the engagement team, with those consulted and, where applicable, between  the engagement partner and the engagement qu
o Monitoring – the continued adequacy and operational effectiveness of quality control policies  and procedures is to be mo
adopted to provide  reasonable assurance that the system of quality control are relevant. Adequate and operating  effectively.
erested users  

Financial Audit  Compliance Audit  Operational Audit 

That the Financial   That the organization  has That the organization's  activities
complied with laws,  regulations are conducted  effectively and
or contracts efficiently.

statements are fairly  presented

Financial reporting  standards or Objectives set by the  

other  financial reporting  Laws, regulations and  contracts.
framework

board of directors.
Reports on the degree  of
An opinion about  
compliance with  
whether the financial 
statements are fairly  presented applicable laws,   Recommendations or 
in   suggestions on how to  improve
operations.
conformity with an  identified
regulations and  
financial  reporting framework.
contracts.

External auditors  Government auditors  Internal auditors

ce with PSAs. 
rs arising during the audit engagement, including   those identified during the quality control review, with the engagement quality  control rev
gement quality  control reviewer; and 
Types of Audit
1. FS Audit - To determine if the given Financial Statements is in accordance to the Accounting Standard
External Auditor (may independence)

2. Operational Audit
To determine if the organization's
activities are conducted
effectively and efficiently.
Internal Auditor (walang independence - Employee)

3. Compliance Audit - if the organization

has complied with laws,
regulations or contracts
Government Auditor

Key word
Assurance - Reliability

Audit Reasonable Assurance Opinion

Absolute Assurance

Audit 3 Party Relationship

1. Client management
2. Users of FS
3. Auditor

Professional Skepticism hindi agad nag a assume / hindi nag dududa

Standard of Fieldwork
1. Audit Planning - Overall Strategy in Audit
a. Materiality - capability of a given information to influence a decision
b. Audit Risk - risk of incorrect opinion

Material Error?
Record
Cash P 10,000,000

Cash 10,000,000

2. Internal Control Consideration

a. Authorization PCF
b. Custodianship remaining
 c. Recording replenish

Cashier

Accountant

CFO

3. Evidential Matter
Source Document
Financial Records
Sales / Service Invoice
Official Receipt
Collection Receipt
Acknowledgement Receipt
Vouchers
Checks
F/S

Standard of Reporting
1. GAAP
2. Inconsistency
Balance Sheet (3years) 2019
2020
Current yr 2021
Income Statement (2 years) 2020
Current yr 2021

3. Disclosure
Notes to Financial Statements

Date of Reporting as of December 31, 2020

sunog sa warehouse Feb 14, 2021

Users of F/S Date of Issuance March 15, 2021

4. Audit Opinion Meaning

 1. Unmodified / Unqualified OpinOverall FS is presented fairly
b. Disclaimer of Opinion Cannot determine
c. Adverse Opinion Overall FS is not presented fairly
(not in accordance to acctg standard)

Elements of a System of Quality Control

1. Leadership Responsibilities for Quality on Audits
Engagement Partner - may overall responsibility

Associate
2. Ethical Requirements
a. Integrity
b. Objectivity unbiased
c. Professional competence and due care
d. Confidentiality
e. Professional behavior

3. Independence
Threats to Independence
a. Self Interest Threat – financials
b. Self Review Threat – former employee
c. Advocacy Threat – goodwill
d. Familiarity threat - auditor dati kaya familiar na, tapos auditor ulit kaya kampante na ok ung FS
e. Intimidation Threat - pananakot

4. Acceptance and Continuance of Client Relationship

a. Competence
b. Ethical Requirements
c. Integrity of client

5. Human Resources and Assignment

a. Recruitment
b. Performance evaluation, compensation and promotion
c. Capabilities and competence
d. Career development
e. Assignment of engagement teams

audit process - step by step procedure

1. Accepting an Engagement

Assessment: Issue:
Audit Firm engagement letter (contract)
Client Management
A. responsibility of author
form an opinion
B. Responsibility of client management
prepare FS
establish internal control

naguumpisa ang audit if may nakuha na sya engagement letter

2. Audit Planning

Overall Audit Strategy

materiality
estimation for audit risk

3. Consideration of Internal control

Basic Internal Control

1. Authorization
2. Recording
3. Custodianship

4. Substantive testiing

1. compute
2. collection of source document
3. sampling

5. completing the audit

Subsequent events
this are transacntion na nangyayari after dec. 31
requiring adjustment pagnagalaw mo yung amount
requiring disclosure subsequent event na hindi magagalwa yung amount

6. Issuing a Report

Audit Opinion
1. unwualified '
2. qualified
3. disclaimer
4. adverse

Audit Process actrivities / procedure to gather audit evidence

1. inquiry
2. Observation
3. Inspection
4. Analytical Procedure
january feb
sales 1,500,000
tignan mo titignan if ano nangyari sa slaes bakit biglang tumaas
6. reperformance
if gust mo ba maalaman kung paano mag ouput and input ng data yung company
7. recalculation
8. confirmation
pagpositive confirmation maganatay ka ng confirmation pag negative kahit hindi sumagot its means yes
Audit Process actrivities / procedure to gather audit evidence
Risk Assessment Procedure
audit planning test of control
1. inquiring ; ;
2. obervation ; ;
3. Inspection ; ;
4. Analytical ;
5. Reperformce ;
6. Recalculation
7. Confirmation
ordance to the Accounting Standard

e - Employee)

me / hindi nag dududa

nfluence a decision

Audit
P 9,999,100 P 900
Immaterial error

8,000,000 P 2,000,000
20 % difference
Material error

P 50,000
5,000
 45,000

Summary = expenses
P 45,000
record

Check

/
/
X
X
/
/
/

Correct Incorrect
Weighted Average FIFO
Weighted Average FIFO
Weighted Average Weighted Average
Weighted Average FIFO
Weighted Average Weighted Average

Notes to F/S

Hugot Term
 napansin ko kasing totoo yung
pinakita mo, na realize ko mahal
din kita _x000D_
(in accordance to acctg
standard) _x000D_
_x000D_
2. Modified Opinion
_x000D_
a. Qualified Opinion
Material error (but overall FS is
presented fairly) napansin ko
kasing totoo yung pinakita mo,
mahal din kita peroooo"
hindi ko masabi kung mahal kita
sinungaling ka, hnd nmn totoo pinakita mo. Hindi kita mahal
acctg standard)

ner - may overall responsibility

ent management
 march april
1,300,00 5,000,000

ot its means yes

substantive testing completing audit

; ;
; ;
; ;
optional ;

;
;
 Case 1: Troop Company had budgeted 50,000 units of output using 50,000 units of raw materials at a  total material c
Case 2: Information on Kenon Company’s direct material costs is as follows: 
Standard unit price P3.60 
Actual quantity purchased 1,600 
Standard quantity allowed for actual production 1,450 
Materials purchase price variance P240 favorable  
What was the actual purchase price per unit, rounded to the nearest cent? __________________
Case 3: Information on Ex Company’s direct material costs for May 2014 is as follows: 
Actual quantity of direct materials purchased and used 30,000 lbs. Actual cost of direct materials P
Unfavorable direct materials usage variance P3,000 
00 lbs.  For the month of May, what was Ex’s direct materials price variance? ________________________ 

Labor Variance
Case 1: Below are FXL Corporation’s standard costs to produce one concrete table: 
Direct raw materials 2 kgs at P375 per kg. 
Direct labor 30 minutes at P31.25 per hour 
In September, FXL produced 250 concrete tables, 520 kgs of raw materials were used at a total costs  of P193,440. A
1. What is the direct labor rate variance? ____________ 
2. What is the direct labor efficiency variance? __________ 
Case 2: The information on Barber Company’s direct labor costs for the month of January 2014 is as  follows: 
Actual direct labor hours 34,500 
Standard direct labor hours 35,000 
Total direct labor payroll P241,500 
bor efficiency variance P3,200 favorable 
What is Barber’s direct labor rate variance? ___________________________________ Case 3: Lion Company’s dir
Actual direct labor hours 20,000 
Standard direct labor hours 21,000 
Direct labor rate variance P3,000 unfavorable 
Total payroll P126,000 
What was direct labor efficiency variance? ____________________ 
Case 4: For the month of April, Thorp Co.’s records disclosed the following data relating to direct  labor: 
Actual Cost P10,000 
Rate Variance 1,000 favorable 
Efficiency Variance 1,500 unfavorable 
Standard Cost P9,500 
For the month of April, actual labor hours amounted to 2,000. In April, Thorp’s standard direct labor rate per hour wa
materials at a  total material cost of P100,000. Actual output was 50,000 units of product requiring 45,000 units of  raw materials

ual cost of direct materials P84,000 

total costs  of P193,440. A total of 128 direct labor hours were used at a cost of P4,096.  

y 2014 is as  follows: 

Case 3: Lion Company’s direct labor costs for the month of January 2014 were as follows: 

to direct  labor: 

direct labor rate per hour was: _______________________ 

000 units of  raw materials at a cost of P2.10 per unit. The direct material price variance and usage variance were: ___________
ariance were: ____________________________________ 
CASE 1
Given: Budget 50,000 output
50,000 raw materials at total cost of P100,000 Unit Cost = P2 (P100,000 / 50,000 raw materials)

Actual 50,000 output When the data do not contain quantity purchased
45,000 raw materials at unit cost of P2.10

Actual Standard Variance Status Multiplier Total VarianCost Variance Analysis

Materials Price Variance 2.1 2 0.1 UF 45,000.00 4,500.00 If the variance is positive it
Materials Usage Variance 45,000.00 50,000.00 -5,000.00 F 2 -10,000.00 higher than the standard, th
NET VARIANCE F -5,500.00 If the variance is negative it
lower than the standard, th

CASE 2

Actual Standard Variance Status Multiplier Total Variance

Materials Price Variance 3.45 3.6 -0.15 F 1,600.00 -240 (A-S-A)
Materials Usage Variance 1,450.00 3.6 (A-S-S)

MPV = (ACTUAL PRICE - STANDARD PRICE) X ACTUAL QUANTITY PURCHASE

-240 = (ACTUAL PRICE - 3.60) X 1600
(240)/1600 = (ACTUAL PRICE - 3.6)
(0.15) = (ACTUAL PRICE - 3.60) (0.15)+3.6 = ACTUAL PRICE; ACTUAL PRICE = 3.45

CASE 3

Actual Standard Variance Status Multiplier Total Variance

Materials Price Variance 2.8 3 -0.2 F 30,000.00 -6,000.00 (A-S-A)
Materials Usage Variance 30,000.00 29,000.00 1,000.00 UF 3 3,000.00 (A-S-S)

MPV = (ACTUAL PRICE - STANDARD PRICE) X ACTUAL QUANTITY PURCHASE

MUV = (ACTUAL USAGE - STANDARD USAGE) X STANDARD PRICE
FIRST MUV WILL BE USED SECOND SOLVE THE MISSING IN MPV
1. 3,000 = (30,000 - 29,000) X STANDARD PRICE 1. MPV = (2.80 - 3.00) X 30,000
2. 3,000 = 1,000 X STANDARD PRICE 2. MPV = (0.20) X 30,000
3. P3 = STANDARD PRICE 3. MPV = (P6,000)

Labor Variance

CASE 1
Standard: 1 product = 30 minutes; 2 products = 1 hour - P31.25 per hour
Total Standards Hours (250 product / 2 products per hour) = 125 hours
Actual Rate per Hour = P4,096 / 128 hours = P32 per hour
Labor Rate Variance - Human Resource Department
ACTUAL STANDARDVARIANCE MULTIPLIETOTAL VARSTATUS
32 31.25 0.75 128 96 UF

Labor Efficiency - Production Department

ACTUAL STANDARDVARIANCE MULTIPLIETOTAL VARSTATUS
128 125 3 31.25 93.75 UF

CASE 2

Labor Rate Variance - Human Resource Department

ACTUAL STANDARDVARIANCE MULTIPLIETOTAL VARSTATUS
7 6.4 0.6 34,500.00 20,700.00 UF

Labor Efficiency - Production Department

ACTUAL STANDARDVARIANCE MULTIPLIETOTAL VARSTATUS
34,500.00 35,000.00 -500 6.4 -3,200.00 F

LEV = (ACTUAL - STANDARD) X STANDARD RATE

(3,200) = (34,500 - 35,000) X STANDARD RATE
(3200) = (500) X STANDARD RATE
STANDARD RATE = (3200) / (500) = 6.40

CASE 4

Labor Rate Variance - Human Resource Department

ACTUAL STANDARDVARIANCE MULTIPLIETOTAL VARSTATUS
5 5.5 -0.5 2,000.00 -1,000.00 F

Labor Efficiency - Production Department

ACTUAL STANDARDVARIANCE MULTIPLIETOTAL VARSTATUS
2,000.00 1,727.00 273 5.5 1,500.00 UF
000 / 50,000 raw materials)

contain quantity purchased, use the quantity used.

Cost Variance Analysis

If the variance is positive it means that the actual is
higher than the standard, therefore unfavorable.
If the variance is negative it means that the actual is
lower than the standard, therefore favorable.