INTRODUCTION TO AUDITING

A systematic process of objectively obtaining and evaluating

AUDITING evidence regarding assertions about economic actions and
events to ascertain the degree of correspondence between
these assertions and established criteria and communicating
the results thereof.
Objectives: To improve the quality of r lend credibility to the information prepared by a
particular entity.
HISTORICAL DEVELOPMENT OF AUDITING: Auditing predates acctng. & can
be found in Mesopotamia, Greece, Egypt, Rome, United Kingdom, and India.
 An independent auditor is typically used to avoid conflicts of interest and to ensure the
integrity of performing an audit.
The notion of accountability, stewardship, and agency:
 Stewardship Theory (Agency Theory) - states that management wants credibility; an
audit enhances stewardship and lessens the mistrust of owners towards the management
PHILIPPINE STANDARDS ON ACCOUNTING (PSA): Deals with the auditor’s
responsibility to form an opinion on the FS.
General types of audit:
a. External Independent Financial Statements Audit – a type that is performed by
independent or external CPAs on a contractual basis, rendered by PAPPs and the
auditor must not be a member of the entity being audited
b. Internal Audit – an independent appraisal function established with an organization to
examine and evaluate its activities as a service to organizations, and its primary
objective is to assist all members of the organization in the effective discharge of their
responsibilities
c. Government Audit – the primary objective of this type is to determine whether gov’t
funds are being handled properly and in compliance with existing laws and whether
programs are being conducted efficiently and effectively
d. Special Purpose Audit - refer to those circumstances in which the auditor is required to
report on specific financial information for specific purposes to specific users, in
comparison with the general audit of financial statements
Types of audit according to nature of assertion or data:
a. Financial Statement (FS) Audit
o Type of audit pertaining to the gathering of evidence on the assertions embodied
in the FS to determine whether the FS of entity are fairly presented in
accordance with GAAP or another comprehensive and authoritative financial
reporting framework.
o OBJECTIVE: To express an opinion on the fairness of FS in which audit should
have been made in accordance with PSAs and FS in conformity with GAAP
o ASSERTION: FS are fairly presented
o SUITABLE CRITERIA: GAAP or any other identified financial reporting
framework
o Generally performed by External Auditors
b. Operational Audit (a.k.a Management Audit or Performance Audit)
o Type of audit involving a systematic review of the organization’s activities in
relation to specified objectives for the purpose of assessing the performance,
identifying opportunities for improvement, and developing recommendations
for improvement or further action.
o ASSERTION: Operations are conducted efficiently and effectively
o SUITABLE CRITERIA: Objective set by the management
o Generally performed by Internal Auditors
 c. Compliance Audit
o Type of audit involving the review of organizations procedures to determine
whether the organization has adhered (sticked) to specific procedures and rules
set down by some higher authority.
o ASSERTION: Activities complied with applicable laws, rules, regulations,
contracts, or management policy
o SUITABLE CRITERIA: Applicable contracts, rules, regulations, laws, or
management policy
o Generally performed by Government Auditors
Types of auditors:
a. External Audit – PAPPs but can provide FS, operational and compliance audit to
private entities
b. Internal Audit – can perform operational and compliance audits (for internal use) but
not FS audit because of independence requirement
c. Government Audit – can provide FS, operational and compliance audits to public
entities including gov’t owned and controlled corps. (GOCCs)

WHY THERE IS A DEMAND FOR FS AUDIT?

 Because investors, creditors, and other users of financial information demand high-
quality, relevant, and reliable information because it will enable them to come up with
financial decisions that will assist them in managing business and information risks.
o Business Risk – any event or activity that will prevent the entity in meeting its
business objectives such as wealth and profit maximization.
o Information Risk – risk that the information prepared and presented by the
entity contains misstatement.
 Other circumstances as follows: CERF
o Conflict of interest between the responsible party and intended users of the FS
o Complexity of accounting and auditing requires expertise
o Remoteness of users w/c means, users of information frequently are prevented
from directly assessing the quality of information
o Financial consequence w/c means, misleading financial information could have
substantial economic consequence for a decision maker
SIGNIFICANCE OF FS AUDIT
 Audit reduces information risk that may lead to lower cost of capital.
 Audit may be used to defer inefficiency and fraud.
 Audit may be used to enhance systems of internal controls.