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    Auditing and assurance principle

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    41 views13 pages

    Auditing Theory Chapter 1

    Uploaded by

    Sheila Mae Plancia
    Auditing and assurance principle

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 13
    Chapter 1 AUDIT- An Overview Dependable financial intormation is essential wo our sociery. We often rely ‘pon information provided by others in making economic decisions. ‘The reed of various users for more reliable financial information has created a Gemand for an independent audit of financial statements. The primary function of an independent audit isto lend credibility to the finareial statements of an entity. The auditor’s opinion enhances the value wnt usefulness of these financial statements, By attaching a report to the financial statements, the auditor provides increased assurance to users that the financial statements are reliable. Auditing Defined PSA 200 defines auditing by stating the objective of a financial statement audit, that is, to enable the auditor to express an opinion Sthether the financial statements are prepared, in all materia respects, in Secordance with the applicable financial reporting framework. “This definition confines the audit to examination of the financial statements. Although the great majority of audit. work today deals with Sadit of financial statements, operational and anpliane auditing are becoming more and more important. ‘A more comprehensive definition of auditing is giver. by the American ‘Accounting Association: An audit isa steric prcss of gaily cbtanirg and exiuating cider regrdingessetiors abut exec airs and ext to ascertain the dag of corespordone been tse assertions and eta erteria ‘ard commacriatig the rss to irersted ses.” 1 ‘This definition conveys the following thoughts. hk Auditing is a systematic process Auditing proceeds by means of an ordered and structured series of steps. . An audit involves obtaining and evaluating evidence about assertions regarding economic actions and events Asseriors are representations made by an auditee about economic actions and events. The auditor's objective is to determine whether these assertions are valid. To satisfy this objective, the auditor performs 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 evaluating evidence and formulating his conclusion. |. Auditors ascertain the degree of correspondence between assertions and established criteria Establhed criteria are 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 an 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 (ascarirs) by comparing the starements with the applicable financial reporting framework (citeri). ».. Auditors communicate the audit results to various interested users mAMUNC: findis i »bjective of ion of audit findings is the ultimate ol The communication of sult Gig Tal che els mast Be Be riscated to intefested users on a timely basis. Figure 1.1 Mlustrative Definition of Auditing Following a systematic process Objectively obtains and evaluates evidence Establishes the degree of correspondence Established *, Criteria ‘Communicates the results to interested. ee 3 \ > Types of Audits 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. Based on primary audit objecti ? financial, compliance and. ee three major types of audit- 3 Financial statement audit ‘This is an audit conducted to determi : ste af ty a ly pened nase: wh he sep Bethe focus of the ducuadn grteee eee mat wal E a ‘Types of auditors ‘Auditors can be classified according to their affiliation with the entity being examined. © Exteralauditos & Andre. "These are independent CPAs who offer their professional services to different clients on a contractual basis. External auditors are = Compliance audit Compliance audit involves i aniza procedures to determine whether he sguseatin Mees “i 8 also known as performance audit or management avcit, Ie should be nored tha, although ; audi possess the same gates arcu, te ta al 1, Systematic examination and evaluat : ah tion of evidence whic! Seca oe asserions comply. wid criteria; and 4 the ones who generally conduct financial statement audits. Internal auditors OPE ATOWAL AUTOR Internal auditors are entity's own employees who investigate and appraise the effectiveness and efficiency of operations and intemal controls. The main function of intemal auditors is to assist the members of the organization in the effective discharge of their responsibilities. Internal auditors usually perform operational audits. Government auditors (°A/B1R CommymlCE AMD IDR These are govemment employees whose main concern is to determine whether persons or entities comply with government Jaws and regulations. Govemment auditors usually conduct compliance audits. * The Independent Financial Statement Audit Higure 12 Comparison among the different types of audit ‘The purpose of an independent financial statement 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 the fair presentation of the financial statements. An audit conducted in accordance with PSAs and relevant ethical requirements enables the auditor to form that opinion. Financial audit Compliance audit Operational a Assertions That the financial ‘That the organizati made bythe statements are has complied with on tate auditee faitly presented. Jaws, regulations or atvitce sn contracts. conducted a effect previ ‘An audit in accordance with PSAs is conducted on the premise ; ; f that management, and where appropriate, those charged with Established Financial Laws, regulations and Objectives seb governance have the responsibility for the preparation and ore reporting, contracts, the board of presentation of financial statements in accordance with the Standards or eae reporting framework. ‘This responsibility other financial implementation and maintenance of pane eal control relevant to the preparation and presentation of Peo ial starements that are free from material misstatement, oe c whether due to fraud or error and to provide the auditor with pena: aot opinion |Report onthe Recommendat unrestricted. access to all information, records and documents degree of compliance orsuggestions relevant to the financial statements. report the financial with applicable laws, how to improve {temenss are regulstons and operations, | a pA ‘contracts. © Assurance provided by the auditor with the ‘The auditor’s opinion on the financial statements is not a applicable guarantee that the fina atementts are dependable. An audit financial conducted in accordance with Philippine Standards on Auditing reporting (PSAs) is designed to provide only reasonable assurance (not framework, absolute assurance) that the financial statements taken, as a whole ‘Naa io are free from material misstatement. The auditor 's not and genta cannot obtain absolute assurance because there are inherent a4 limitations of audit that affect the auditor's ability to detect perform Extemal auditors Government auditors Internal auditors material misstatements. These limitations result from such factors as: -. ee |. The use of testing / Sampling risk For practical reasons, auditors do not examine all evidence available. Many audit conclusions are made by examining only sample of evidence. Whenever'a sample is taken, there is always a possibility that the auditor's conclusion, based on the sample, may be different from the conclusion that would have been reached if the auditor examines the entire population. Error in application of judgment /Non-sampling risk ‘The work undertaken by the auditor to form an opinion is permeated by judgment. Human weaknesses can cause auditors to commit mistakes in the application of audit | procedures and evaluation of evidence. Reliance on management's representation Some evidence supporting the financial statements must be obtained by obtaining oral or written representations from ‘management. For example, it is difficult for the auditor to determine the proper valuation of accounts receivable without management's honest assessment. If the management lacks integnity, management may provide the auditor with false representations causing the auditor to rely on unreliable evidence. Inherent limitations of the client's accounting and internal control systems. Although the auditor performs procedures to detect material misstatements, when auditing financial statements, such procedures may not be effective in detecting misstatements resulting from collusion among employees or management's circumvention of internal control. 5. Nature of evidence wvidence obtained by the auditor does not consist of “bard fas” which prove or disprove the accuracy of the financial statements. Instead, it comprises pieces of information and impressions which are gradually accumulated during the course of an audit and which, when taken together, persuade the auditor about the faimess of the financial statements. Thus, audit evidence is generally persuasive rather than conclusive in nature. Figure 13- Role of Management and Independent Auditor ety: : ~~ Prepares Financial Statements Evaluates Financial Statements J tes ‘Audited Audit Report Financial ‘on Financial Statements ‘Statements Users of Financial Staterets Because of the inherent limitations of an audit, there avoidable stat tome material misatements ofthe rel statements may not be detected, even though the audit is planned and performed in accordance with PSAs. pei ae subsequent discovery of a material misstatement of the financial statements does notin itself indicate a failure to conduct an audit in accordance with PSAs. General principles governing the audit of financial statements ‘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, legislations, regulations, and where appropriate, the terms of the engagement and the reporting requirements. PSA 200 provides the following guidelines when auditing financial statements: 1. ‘The auditor should comply with relevant ethical requirements, including those relating to independence, relating to financial statement audit engagements. In order to retain public confidence in the credibility of the audom work auditors must adhere to standards ot ol conduct that embody and demonstrate integrity, objectivity, fend couse or he paler peat ee 2 2, The auditor should conduct an audit in accordance wit Philippine Standards on Auditing. a Tete standuats leponin(che Dac principles and (Coe procedures which the auditor should tee the pre) also include explanatory and other materalé which, rather than being prescriptive (that is mandatory), is designed 10: perdi Layeagriteniiator pra: ee Eee ee oe 10 3, The auditor should exercise professional judgment in planning and performing an audit of financial statements. Professional judgment is the hallmark of auditing, The distinguishing feature of the professional judgment expected of an auditor is that it is exercised by an auditor whose training, knowledge and experience have assisted in making competent and reasonable judgment. Professional judgment is essential because informed decisions required throughout the audit cannot be made without the application of auditor's knowledge and experience to the facts and circumstances. 4. ‘The auditor should obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level to tenable the auditor to express an opinion on the financial’ statements. ‘Audit evidence is necessary to support the auditor's opinion and report. It is cumulative in nature and is primarily obtained from audit procedures performed during the audit. Audit evidence must be both sufficient and appropriate to afford a reasonable basis for an opinion on the financial statements. 5, 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. ‘An attitude of professional skepticism means the auditor males a critical assessment, with a questioning mind, of the validity of audit evidence obtained and is alert to audit evidence that contradicts or bring into questions the reliability of documents or management representations. In planning and performing an audit, the auditor neither assumes that the management is honest nor assumes tunguestioned honesty. Thus, representations from iu management are not a substitute for obtaining sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. © Need for an independent financial statement audit ‘The need for an independent audit of financial statements stems from the following interrelated sources: As Conflict of interest between management and users of financial statements. Ina sense, financial statements may be viewed as the report by management as to how the entity performed under their direction and supervision. Managers are frequently placed in positions where they can benefit by providing outside parties with overly optimistic or even false financial information. Outside parties, however, want unbiased, realistic financial statements. Recognizing this inherent conflict of interest, users of financial statements have become skeptical of unaudited financial statements. . Expertise ‘The complexity of accounting and auditing requires expertise Gueetrie Ue anes ie altos cast most of the users of financial information are not equipped with the necessary skills and competence to determine whether the financial statements are reliable, a qualified person is hired by users to verify the reliability of the financial statements on their behalf. Remoteness Users of financial information are usually precluded from directly assessing the reliability of the information. Most of the users do not have access to the entity's records: to personally verify the reliability of the financial statements. As 12 independent auditor is needed to assist them in Serres te wichaiey of the fatal foreaton 4, Financial consequences Ba Gsleading financial information could have substantial ease consequences for 2 decision male. Iti therefore important that financial statements be audited before these statements are used for making important decisions. {8 Theoretical framework of Auditing it function’ operates within a theoretical framework. ee selected postulates, assumptions or ideas that support many auditing concepts and standards. 1. Audit fretion cpenates on the asiarption that all fiveeial data are verifiable , it balances reported in the financial statements must have aproning Jocaments or evidence to prove their vali. I no evidence exits in relation to the financial statements on ‘which an auditor is to express an opinion, then there can no audit to perform. 2. The edi shad cs marin inckperene «th respect to the Tadependence is essential for ensuring the credibility of the auditor's report. The report of the auditor will be of linle or no value to the readers of the financial statements if the readers are aware that the auditor is not independent with respect to the client. 3, There should be ro longterm crf between the aucitr ard the dire Short term conflicts may exist regatding the spplaon of auditing procedures and accounting polices, but in the e 13~ N both the auditor and the management must be interested in the fair presentation of the financial statements. Effective irternal creel syste recs the pssibility of ers ard feed

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