FINANCIAL

STATEMENT
AUDIT

1
 Philippine Standards on
Auditing
 PSA 120, The objective of an audit
of financial statements is to enable
the auditor to express an opinion
whether the financial statements
are prepared, in all material
respects, in accordance with an
identified financial reporting
framework.
 Types of Audits

1. Financial Statements Audit

2. Compliance Audit
3. Operational Audit
 Fairly
presented
Financial
Statement
Complied with
Audit
an identified
financial
reporting
framework
 Adhered to:
Compliance • procedures
Audit • rules or
• regulations
 Assess
Operational
entity’s
Audit
performance

Identify areas
for
improvements
Measuring of
Performance
Make
recommendations
 Types of Auditors
1. External Auditors
➢ independent CPA
2. Internal Auditors
➢ entity’s own employees
3. Government Auditors
➢ government employees
 Financial Compliance Operational
Statement Audit Audit
Audit
 Financial Compliance Operational
Statement Audit Audit
Audit
 The Independent Financial
Statement Audit

 Responsibility for the financial

statements
 Assurance provided by the auditor
 Factors
Inherent Limitations

1. The use of Testing/Sampling Risk

➢ use of sample of evidence
2. Error in Application of
Judgment/Non-sampling Risk
➢ Inappropriate procedure,
misinterpret the audit
evidence and unable to
recognize misstatement
 Factors
Inherent Limitations

3. Reliance on Management’s representation

➢ Written representations from management
4. Inherent Limitations of the Client’s Accounting
and Internal Control Systems
➢ Collusionamong employees or management’s
circumvention of internal control
5. Nature of Evidence
➢ Persuasive rather than conclusive
 General Principles Governing
the Audit of Financial
Statements
 Compliance with the CODE OF
ETHICS
 Accordance
with PHILIPPINE
STANDARS on ACCOUNTING
 Attitude of SKEPTICISM
 Need for an Independent
Financial Statement Audit

 Conflict
of Interest between
management and users of financial
statements
 Expertise
 Remoteness
 Financial Consequences
Need for Financial statement audit:

 Conflict of interest: Many users of financial

statement are concerned about an actual or
potential conflict of interest between
themselves and the management of the
reporting entity. Thus users seek assurance
from outside independent auditors that the
information is both:
 Free from management bias, and
 Neutral with respect to the various
user groups.
 Need for Financial statement audit:
Consequence: Because of the significant
economic, social and other consequence of their
decisions, statement users look to the independent
auditor for assurance that the financial statements
have been prepared in conformity with GAAP
including all the appropriate disclosures.

Remoteness: Distance, time and cost make it

impractical even for the most knowledgeable users
of financial statement to seek direct access to the
underlying accounting records. An independent
auditor helps to meet their needs.
 Need for Financial statement audit:

 Complexity: As the level of complexity

increases, so does the risk of
misinterpretations and unintentional
errors. Finally, it more difficult or even
impossible to evaluate the quality of the
financial statements themselves, users
rely on independent auditors to assess
the quality of the information contained
there in.
 Theoretical Framework of
Auditing
1. Audit function operates on the
assumption that all financial data
are verifiable.
2. The auditor should always maintain
independence with respect to the
financial statements under audit.
 Theoretical Framework of
Auditing
3. There should be no long-term
conflict between the auditor and
the client management.
4. Effective internal control system
reduces the possibility of errors and
fraud affecting the financial
statements.
 Theoretical Framework of
Auditing
5. Consistent application of Generally
Accepted Accounting Principle
(GAAP) or Philippine Financial
Reporting Standards (PFRS) results in
fair presentations of financial
statements.
 Theoretical Framework of
Auditing
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.
 FINANCIAL STATEMENT
ASSERTIONS
Audit Assertions are the implicit or
explicit claims and representations
made by the management responsible
for the preparation of financial
statements regarding the
appropriateness of the various
elements of financial statements and
disclosures.
 FINANCIAL STATEMENT
ASSERTIONS
According to PSA 315, Assertion refers
to the representations by
management, explicit or otherwise,
that are embodied in the financial
statements, as used by the auditor to
consider the different types of
potential misstatements that may
occur.
Transaction-level assertions.
STATEMENT OF COMPREHENSIVE INCOME
The following five items are classified as assertions related to
transactions, mostly in regard to the income statement:
ASSERTIONS DEFINITIONS
Accuracy The full amounts of all
transactions were recorded
without error.
Classification All transactions have been
recorded within the correct
accounts in the general
ledger.
Completeness All business events to
which the company was
subjected were recorded.
Cutoff All transactions were
recorded within the correct
reporting period.
Occurrence Transactions recognized in
the financial statements
have occurred.
EXAMPLES
The correct and total
amount of the supplies
purchased has been
recorded.
The supplies used and
purchased have been fairly
allocated in prepaid
supplies and supplies
expense.
All the supplies used and
purchased have been fully
accounted for.
All the supplies used have
been taken off correctly in
the prepaid supplies at the
end of the period.
Recording acquisition of
supplies that actually took
place.
Account balance assertions
STATEMENT OF FINANCIAL POSITION
The following four items are classified as assertions related to
the ending balances in accounts, and so relate primarily to the
balance sheet:
ASSERTIONS DEFINITIONS EXAMPLES
Completeness All reported asset, liability, All equipment recognized
and equity balances have in the balance sheet
been fully reported. exists at the period end.

Existence All account balances exist All equipment units that

for assets, liabilities, and should have been
equity recorded have been
recognized in the
financial statements.

Rights and obligations The entity has the rights Audit entity owns or
to the assets it owns and controls the equipment
is obligated under its recognized in the
reported liabilities. financial statements.

Valuation All asset, liability, and All the equipment have

equity balances have been recorded at its
been recorded at their proper depreciated cost.
proper valuations.
Presentation and disclosure assertions.
NOTES TO FS/DISCLOSURES
The following five items are classified as assertions related to
the presentation of information within the financial
statements, as well as the accompanying disclosures:
ASSERTIONS DEFINITIONS
Accuracy All information disclosed is in the
correct amounts, and which reflect
their proper values.
Completeness All transactions that should be
disclosed have been disclosed.
Occurrence All disclosed transactions have indeed
occurred.
Understandability All the information included in
the financial statements has
been appropriately presented
and is clearly understandable.
EXAMPLES
Related party transactions,
balances and events have
been disclosed accurately at
their appropriate amounts.
All related parties, related
party transactions and
balances that should have
been disclosed have been
disclosed in the notes of
financial statements.
Transactions with related
parties disclosed in the notes
of financial statements have
occurred during the period.
The nature of related party
transactions, balances and
events has been clearly
disclosed in the notes of
financial statements.