Chapter 1:

AUDIT – an Overview
Kalven Perry T. Agustin
 Audit – an Overview
The primary function of an independent audit is to lend
credibility to the financial statements prepared by an entity.
The auditor's opinion enhances the value and usefulness of
the 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
The Philippine Standards on Auditing (PSA) defines
auditing by stating the objective of a financial statement
audit, that 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.
 Auditing Defined (cont’d)

A more comprehensive definition of auditing is given by the

American Accounting Association:
“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."
Illustrative Definition
 Types of Audits
 Financial Statement Audit
This is an audit conducted to determine whether the financial statements of an entity
are fairly presented in accordance with an identified financial reporting framework.
 Compliance Audit
Compliance audit involves a review of an organization’s procedure to determine
whether the organization has adhered to specific procedures, rules, or regulations.
 Operational Audit
An operational audit is a study of a specific unit of an organization for the purpose of
measuring its performance.
 Types of Auditors
Auditors can be classified according to their affiliation with the entity being examined.
 External Auditors
These are independent CPAs who offer their professional services to different clients on a
contractual basis. External auditors are the ones who generally perform financial statement audits
 Internal Auditors
Internal auditors are entity’s own employees who investigate and appraise the effectiveness
and efficiency of operations and internal controls.
 Government Auditors
These are government employees whose main concern is to determine whether persons or
entities comply with government laws and regulations. Government auditors usually conduct
compliance audits.
 Comparison
  Financial audit Compliance audit Operational audit
That the organization has That the organization’s
Assertions made by That the financial statements are fairly
complied with laws, activities are conducted
the auditee presented
regulations or contracts effectively and efficiently.

Financial reporting standards or other Laws, regulations and Objectives set by the
Established criteria
financial reporting framework. contracts. board of directors.

An opinion about whether the financial Reports on the degree of

Recommendations or
Content of the statements are fairly presented in compliance with applicable
suggestions on how to
auditor’s report conformity with an identified financial laws, regulations and
improve operations.
reporting framework. contracts.

Auditors who
External auditors Government auditors Internal auditors
generally perform
 The Independent
Financial Statement
Audit
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
or acceptable financial reporting standards.
 Responsibility for the
Financial Statements
The management is responsible for preparing and
presenting the financial statements in accordance with the
financial reporting framework.
The auditor’s responsibility is to form and express an
opinion on these financial statements based on his audit.
 Assurance Provided by
the Auditor
An audit conducted in accordance with Philippine
Standards on Auditing (PSAs) is designed to provide
only reasonable assurance (not absolute assurance)
that the financial statements taken as a whole are free
from material misstatements.
 Limitations Result
from such Factor as:
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
Role of Management
and Independent
Auditor
 General Principles
Governing the Audit of
Financial Statements
PSA provides the following guidelines when auditing financial statements:
1. The auditor should comply with the “Code of Professional Ethics for
Certified Public Accountants” promulgated by the BOA.
2. The auditor should conduct an audit in accordance with Philippine
Standards on Auditing.
3. 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.
 Need for an
Independent Financial
Statement Audit
1. Conflict of interest between management
and users of financial statements
2. Expertise
3. Remoteness
4. Financial consequences
 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.
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 or fraud affecting the financial statements.
 Theoretical Framework
of Auditing (cont’d)
5. Consistent application of generally accepted accounting
principle (GAAP) or Philippines Financial Reporting
Standard (PFRS) results in fair presentation of financial
statements.
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.