Chapter 1 audit, the auditor determines the degree by which the assertions conform to the established criteria.
audit, the auditor determines the degree by which the assertions conform to the established criteria. For example, when auditing
AUDIT- An Overview
Dependable financial information is essential to our society. We often rely upon information provided by others in
making economic decisions. The need of various users for more reliable financial information has created a demand
for an independent audit of financial statements.
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.
This definition confines the audit to examination of the financial statements. Although the great majority of audit
work today deals with audit of financial statements, operational and compliance auditing are becoming more and
more important.
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.”
This definition conveys the following thoughts:
1. Auditing is systematic process
Auditing proceeds by means of an ordered and structured series of steps.
2. An audit involves obtaining and evaluating evidence about assertions regarding economic actions and
events
Assertions 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.
3. An audits 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.
4. Auditors ascertain the degree of correspondence between assertions and established criteria
Established criteria are needed to judge the validity of the assertions. These criteria are important because they
established and inform the users of the basis against which the assertions have been evaluated or measured. In an
financial statements, the auditor judges the fair presentation of the financial statements (assertions) by comparing the statements
with an identified financial reporting framework (criteria).
5. Auditors communicate the audit results to various interested users
‘The communication of audit findings is the ultimate objective of any audit. For the audit to be useful the, results most be
communicated to interested users on timely basis.
Figure 1.1.- Illustrative Definition of Auditing
Independent Auditor ----- Following a systematic process ----- Objectively obtains and evaluates evidence ----- Established the
degree of correspondence between ( Assertion -- Established Criteria ) ------ Communicates the results to interested users
@ Types of Audits
Based on primary suit objectives there are three major types of audit- financial, compliance, and operational 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. This type of audit will be the focus of the discussion in this text.
Compliance audit
Compliance audit involves a review of an organization's procedures to determine whether the organization has adhered to specific
procedures, rules or regulations.The performance of compliance audit is dependent upon the existence of verifiable data and
recognized criteria established by an authoritative body.A common example of this type of audit is the examination conducted by
BIR examiners to determine whether entities comply with tax rules and regulations.
Operational audit
An operational audit is a study of a specific unit of an organization for the purpose of measuring: its performance. The main
objective of this type of audit is to assess entity’s performance, identify areas for improvements and make recommendations to
improve performance. This type of audit is also known as Performance audit or management audit.
Unlike compliance and financial statement audits, where the criteria are usually defined, the criteria for evaluating the effectiveness
and efficiency of operations are not clearly established. The criteria used for Operating audits would typically vary depending on the
Organization's standards and objectives;
Its should be ‘noted that, although there are different types of audit; all audits possess the same general characteristics. They all
involve:
1. Systematic examination and evaluation of evidence which are undertaken to ascertain whether assertions comply with
established criteria; and
2. Communication of the results of the examination, usually in a written to the party by whom, or on whose behalf, the auditor was
appointed.
The table below shows a comparison of the three different types of audits:

Financial Audit Compliance Audit Operational Audit

Assertions made by That the financial statement That the organization has That the organization’s
the auditee are fairly presented. complied with laws, activities are conducted
regulation, or contracts. effectively and efficiently.
Established criteria