Professional Documents
Culture Documents
We will not dive directly into “Audit”. And that might confuse you. The term assurance
will most likely appear first in books. And you might think that it might be another term for
audit when “audit” is just one of the assurance services. So, let's establish the term
“Assurance” first.
★ It is from the SMI where the practitioner gathers sufficient appropriate evidence
as the basis for the practitioner’s conclusion.
➔ What do you mean by appropriate subject matter?
◆ It must be in verifiable form:
● Can be measured against the identified criteria
● Can be subjected to procedures
b. Materiality
➔ Why do we consider materiality in assurance engagements?
◆ To emphasize the need of the users (decision-makers)
● The practitioners will focus the engagement on
material financial information which will be
relevant in decision-making.
◆ For practicability (the practitioners cannot consider
everything with limited resources)
● Do auditors have to go through every receipt of
McDonalds PH for its annual sales?
○ It is impractical, thus, there’s a need to set a
materiality level.
➔ What is the relationship of Materiality Level with the Audit
Evidence?
◆ Inverse →the higher the materiality level, the lesser
evidence needed
● E.g. What matters for the practitioner are receipts
amounting to P100,000 and above. Thus, the
engagement will not have to go through those
receipts with sales less than P100,000. (lesser
evidence to go through)
● Compare this to a materiality level set at
P50,000, there will be additional evidence
ranging from P50,000 to P99,999.
d. Cost-benefit consideration ➔
Relationship between:
◆ Cost of obtaining evidence
◆ Usefulness (benefit) of information obtained
➔ However, for evidence which does not have an alternative, the
difficulty or expense is not in itself a valid basis for omission.
e. Professional skepticism
➔ Attitude that includes a questioning mind
◆ Being alert to conditions which may indicate possible
misstatement due to error or fraud
➔ Critical assessment of evidence
➔ But caution is advised because professional skepticism is still
subject to the practitioner’s own judgment ◆ Thus, still affected
by biases.
➔ Ethical ● Objectivity
Requirement: ● Professional Behavior
◆ I - Independence B. Introduction to
◆ COBID auditing
● Confidentiality ● Integrity
● Professional Competence and
Due Care
“An audit is a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the degree of
correspondence between these assertions and established criteria and communicating the
results to interested users.” - American Accounting Association
1. Auditing is a systematic process
➔ Auditing proceeds by means of an ordered and structured series of steps.
2. An audit involves obtaining and evaluating evidence regarding assertions
about economic actions and events
➔ Assertions - representations made by the client about economic actions and
events
➔ Evidence - information obtained by the auditor in arriving at the conclusions
on which the audit opinion is based
3. An audit is conducted objectively
➔ The auditor should conduct the audit without basis.
4. Auditors ascertain the degree of correspondence between assertions and
established criteria
➔ Established criteria - standards or benchmark used to verify the validity of the
assertions given by the audit client.
5. Auditors communicate the audit results to various intended users ➔
Communication of audit findings is the ultimate objective of any audit.
Types of Audit
Made by:
Kathleen Grace A. Magsombol
Financial Statement Audit
➔ Management (Responsible party)
◆ Responsible for preparing and presenting FS in accordance with the financial
reporting framework
➔ Auditor
◆ Responsibility: to express an opinion
◆ Does being audited mean that it is 100% free from material misstatements? ●
No. Remember, only reasonable assurance is given (not absolute).
● Why can’t we have 100% assurance?
○ As mentioned above under Assurance Engagement Risk, there
are risks that are beyond the control of the auditors (IR & CR).
○ An auditor can manage to increase the level of assurance by
adjusting the detection risk through conducting more intensive
substantive procedures.
➔ What are the limitations on an audit? [SEPIA]
◆ Use of selective testing
● Philippine Standards on Auditing (PSA) do not require auditors to
examine all available information.
◆ Nature of evidence
● Most audit evidence is persuasive rather than conclusive in
nature.
● The evidence gathered will not prove or disprove the validity of
assertions
○ The evidence gathered will be combined to persuade the
auditor
◆ Professional judgment
● The work undertaken by the auditor to form an opinion is
permitted by judgment.
● There might be errors in the application of judgment.
◆ Inherent limitations of internal control
● Audit procedures may not be effective in detecting misstatements
resulting from:
○ Collusions among employees
○ Management’s circumvention of internal control.
◆ Nature of assertions
● Assertions: Management’s representations
● If the management lacks integrity, the management may provide the
auditor with false representations causing the auditor to rely on
unreliable evidence.
➔ General Principles of an FS Audit:
◆ The auditor should comply with the “Code of Professional Ethics for CPA”
promulgated by the BOD.
◆ The auditor should conduct an audit in accordance with the PSAs.
◆ The auditor should plan and perform the audit with an attitude of professional
skepticism.
➔ Theoretical Framework of Auditing:
1. All financial data are verifiable.
➔ All balances reported in the FS must have supporting documents
or evidence to prove their validity.
2. Independence is essential for ensuring the credibility of the
auditor’s report.
➔ The auditor should always maintain independence with respect to
the FS under audit.
3. There should be no long-term conflict between the auditor and
the client management.
➔ Can short-term conflicts exist?
◆ Yes, provided that:
● It may exist regarding the application of auditing
procedures and accounting principles.
● In the end, both the auditor and the management
must be interested in the fair presentation of the FS
(conflict must be resolved)
4. Effective internal control system reduces the possibility of
errors and fraud affecting the FS.
➔ The condition of the entity’s internal control system directly affects
the reliability of the FS.
5. Consistent application of GAAP and IFRS results in fair
presentation of FS.
➔ GAAP and IFRS are usually the criteria in an independent audit of
FS.
➔ Consistent application = Fair presentation
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.
➔ Does this mean that we can use our past experience and knowledge
from prior years' audit of a client?
◆ Yes, it can be used as a basis in determining the procedures to
be performed for the current year.
7. An audit benefits the public.
➔ Ordinarily, FS are prepared in order to meet the common information
needs of a wide range of users (public).
Made by:
Kathleen Grace A. Magsombol
II. The Professional Practice of Public Accounting (Setting Up and Maintaining an
Accounting Practice)
➔ An auditing firm may be set up as a:
◆ Sole proprietorship
◆ Partnership
● But it cannot be a corporation.
➔ Rules on Names:
◆ Individual
● Registered name with BOA and PRC (as printed on CPA certificate)
◆ Firms
● Registered name appearing in the documents issued by DTI, which
includes the real name of the sole proprietor
◆ Partnership
● Partnership names as indicated in the Articles of Partnership and
certificates issued by SEC
● Must not include any fictitious name, nor specialization
● A partner surviving the death or withdrawal of all the other partners in
a partnership may continue to practice under the partnership name for
a period of not more than 2 years after becoming a sole proprietor.
References:
1. Irineo, J., Irineo, S., & James, G. (2018). Auditing and assurance principle. Good
Dreams Publishing.
2. Salosagcol, J., Tiu, M., & Hermosilla, R. (2018). Auditing Theory. GIC Enterprises &
Co., Inc.
3. International Federation of Accountants (IFAC). (2008). International framework for
assurance engagements. International Auditing and Assurance Standards Board.
https://www.ifac.org/system/files/downloads/International_Framework_for_Assuranc
e_Engagements.pdf