DISCUSSION

Auditing Standards:

• Popularly known as the Generally Accepted Auditing Standards (GAAS)

• The general guidelines that the auditors must follow in conducting the audit.

• The minimum standards of auditor’s performance that must be achieved on each audit engagement

• The guidance for measuring the quality of the auditor’s performance

GAAP vs. GAAS:

• GAAP: the principles for the preparation and presentation of financial statements that are used by
the auditor as criteria in determining the overall fairness of the financial statements; foundation of
accounting

• GAAS: standards/measures/guidance that the auditors must follow when conducting an audit;
foundation of auditing

Auditing Standards vs. Auditing Procedures:

a. Definition:

• Auditing standards: the measures of the quality or minimum standard of auditor’s

performance

• Auditing procedures: the means used (or the acts to be performed) by the auditor to
attain the quality or minimum standard of auditor’s performance

b. Basic difference: "auditing procedures" relate to acts to be performed, whereas "auditing

standards" deal with measures of audit quality and the objectives to be achieved in an audit.

c. Relationship: Every independent audit engagement involves both auditing standards and
auditing procedures. From one engagement to another engagement, auditing standards are
applied uniformly but auditing procedures may vary.

THE 10 GENERALLY ACCEPTED AUDITING STANDARDS (GAAS):

GENERAL STANDARDS – standards/criteria which present guidance in the personal qualifications an auditor must
possess to undertake the audit engagement

1. Adequate technical training and proficiency: This standard refers to professional competence

• Professional competence of the auditor is primarily met by having professional education/training

and practical experience in auditing

• Competence can also be acquired by the auditor through the following:

➢ Continuing professional development

➢ Consulting others if additional technical information is needed

➢ Coaching by more experienced staff

➢ Research to obtain knowledge of client business and industry

 • Competence does not include warranting the infallibility of the work performed.

2. Independence: This standard requires that the auditor must be impartial when dealing with the client or
without bias with respect to the client entity. The auditor must be independent in fact and in appearance.

a. Independence of mind – The state of mind that permits the expression of a conclusion without being
affected by influences that compromise professional judgment, allowing an individual to act with
integrity, and exercise objectivity and professional skepticism; this is also known as “independence in
fact” or “independence in mental attitude.”

b. Independence in appearance – The avoidance of facts and circumstances or situations that are so
significant that would lead a reasonable and informed third party or the public to believe or conclude
that the auditor is not independent. In other words, independence in appearance requires that activities
or relationships that even suggest or imply a possible lack of independence must be avoided by the
auditor.

• Independence is often called the cornerstone of the profession since it is necessary to add
credibility to the auditor’s work.

• Auditor strives to achieve independence in appearance in order to: maintain public

confidence in the profession or to achieve public confidence. The audit opinion and the audit
report would be of little or no value if auditor is not independent because of absence of public
confidence.

• The auditor ultimately decides whether or not he/she is independent.

• Independence in mental attitude cannot be regulated.

• However, to encourage independence in fact and to maintain the appearance of independence,

the auditor can have no direct financial interest in the client. “Direct” includes the auditor and
members of immediate family. “Financial interest” is ownership of equity shares, other client
financial instruments, or any other potential financial benefit.

• In addition, there can be no material indirect financial interest such as ownership through a
mutual fund.

• To ensure independence, auditor cannot render an opinion on statements of one year until all
fees from the prior year audit have been paid.

• To emphasize independence from management, auditor is usually appointed by audit

committee of the board of directors.

• Independence may be impaired by performing consulting services, especially those that involve
making management decisions.

3. Due professional care: This standard requires that an auditor, in fulfilling his duties, should act diligently
and carefully, exercise reasonable prudence, and apply judgment in a conscientious manner, carefully
weighing the relevant factors before reaching a decision.

• Due professional care is often called the "average auditor" concept. The auditor
should do what the average auditor would do and never less, including review of work
performed by assistants and maintaining an attitude of professional skepticism.
 • Due professional care does not mean/imply infallibility or exercise of error-free
judgment. The auditor is not and cannot be held responsible for losses because of
errors of pure judgment.

• Exercise of due professional care in the performance of the audit requires:

a. Observance of the standards of field work and reporting

b. Critical review of the audit work performed at every level of supervision

c. Degree of skill commonly possessed by others in the profession

d. Exercise of the same components of professional care as a reasonable auditor

would exercise

e. Exercise of professional skepticism

STANDARDS OF FIELD WORK – the standards / criteria for planning and evidence-gathering

1. Adequate planning and proper supervision:

• Planning involves establishing the overall audit strategy for the engagement and developing an
audit plan. The auditor should also supervise the work of assistants. Supervision is critical
because of assistants’ lack of experience.

• Audit programs are designed to enumerate appropriate action, and all work of staff auditors should
be reviewed by a qualified auditor. Audit program is developed before substantive testing to
ensure that adequate planning has occurred.

2. Sufficient understanding of the entity and its environment, including internal control:

• As part of the planning activities, the auditor is required to obtain sufficient understanding of the entity and its
environment. This means that the auditor should obtain a more detailed knowledge of the client's business
and the environment/industry in which the entity operates.

• A sufficient understanding of internal control is to be obtained to plan the audit. Appropriate internal controls
provide the auditor with confidence that material misstatements will be prevented or detected on a timely
basis.

➢ Strong internal control implies that the auditor will require less evidence.

➢ Weak internal control implies that the auditor will require more evidence.

3. Sufficient appropriate audit evidence:

• The auditor should obtain sufficient appropriate audit evidence by performing audit procedures to
be able to draw reasonable conclusions on which to base the opinion regarding the financial
statements under audit.

• Evidence gathering is sometimes called substantive testing. Any testing that

confirms the ending balance of an account is known as a test of a balance.
Evidence gathered to support an account by looking at the various transactions
that have affected it during the period is called a test of details.
 • All specific audit work is performed in order to gather evidence.

• The quantity and quality of evidence to be gathered depends on the judgment of

the auditor.

• The decision as to how much evidence to be accumulated requires professional

judgment; not provided in the PSAs; the rule is, evidence must be sufficient to
afford a reasonable basis for opinion

STANDARDS OF REPORTING – standards on auditor’s expression of audit opinion through a medium known as the
auditor’s report

1. Whether the financial statements are in accordance with GAAP/PFRS: Conformity with GAAP/PFRS is
explicit in the auditor’s report

• Explicit statement means that the auditor should state whether or not the financial statements
subject to audit are prepared in accordance with GAAP/PFRS.

• When an overall opinion cannot be expressed, as where the auditor disclaims an opinion, the
reasons therefore should be stated.

2. Consistent application of GAAP/PFRS: Consistency is implicit in the auditor’s report

• If there is no material consistency as to application of GAAP/PFRS, no statement as to consistency

is required in the auditor’s report. However, if a material inconsistency exists, auditor shall identify
such inconsistency in the auditor’s report.

In short:

• If GAAP/PFRS is consistently applied: no express statement as to

consistency is necessary because consistency is implicit in the auditor’s report

• If GAAP/PFRS is not consistently applied: auditor shall identify in the

auditor’s report such inconsistency

3. Adequacy of informative disclosures: Adequacy of disclosure is implicit in the auditor’s report. If

informative disclosure is adequate, no statement as to adequacy of disclosure is required in the auditor’s
report. However, if informative disclosure is inadequate, auditor must state such inadequacy in the auditor’s
report.

• If disclosure is adequate: no statement as to adequacy of disclosure is necessary because

adequacy of disclosure is implicit in the auditor’s report

• If disclosure is inadequate: auditor must state in the audit report such inadequacy

4. Opinion regarding the financial statements taken as a whole: expression of audit opinion is explicit in
the auditor’s report

Objective of 4th standard of reporting:

 • To indicate the character of the engagement and the degree of responsibility assumed by the
auditor. This would prevent FINANCIAL STATEMENTS users from misinterpreting the degree of
responsibility the auditor is assuming/taking.

• Reference to the expression "taken as a whole" in the fourth generally accepted auditing standard
of reporting means that the audit opinion applies equally to a complete set of financial statements
and to each individual financial statement.

Philippine Standards on Auditing (PSAs):

• The PSAs are interpretations of GAAS, meaning, they are intended to clarify the meaning of "generally
accepted auditing standards."

• The PSAs contains basic audit principles and essential procedures together with related guidance in the
form of explanatory and other material which the auditor should follow when conducting financial statements
audit.

• Application of PSAs: PSAs apply to independent examination of (historical) financial statements of any
entity conducted for the purpose of expressing an opinion.

• Compliance with PSA: The auditor should conduct an audit in accordance with PSA. Compliance with
PSAs means application of basic audit principles and performance of essential audit procedures.
Compliance with relevant PSAs is mandatory. Only in exceptional instances where departure from relevant
PSA is allowed such as when the auditor believes that the:

➢ Amount involved is insignificant; or

➢ Requirement of the PSA is impractical to perform; or

➢ Requirement of the PSA is impossible to perform.

An audit in accordance with PSAs includes:

a. Compliance with PSAs relevant to the audit

1) Compliance with all PSAs relevant to the audit (a PSA is relevant to the audit when the PSA is in
effect and the circumstances addressed by the PSA exist)

Complying with relevant requirements means the auditor shall comply with each requirement of a PSA unless, in
the circumstances of the audit:

a. The entire PSA is not relevant (for example, if an entity does not have an internal audit function, nothing
in PSA 610 is relevant)

b. The requirement is not relevant because it is conditional (implicit or explicit) and the condition does not
exist.

Examples of conditional requirements:

• The requirement to modify the auditor’s opinion if there is a limitation of scope represents an explicit
conditional requirement.

• The requirement to communicate significant deficiencies in internal control identified during the audit
to those charged with governance, which depends on the existence of such identified significant
deficiencies; and

• The requirement to obtain sufficient appropriate audit evidence regarding the presentation and
disclosure of segment information in accordance with the applicable financial reporting framework,
which depends on that framework requiring or permitting
 2) Having an understanding of the entire text of a PSA (including its application and other explanatory
material) to understand its objectives and to apply its requirements properly

3) Prohibition from the auditor from representing compliance with PSAs in the auditor’s report when
he has not complied with the requirements of PSAs relevant to the audit

b. The use of the objectives stated in relevant PSAs in planning and performing the audit to achieve the
overall objectives of the auditor.

• In using the objectives, the auditor is required to have regard to the interrelationships among the
PSAs. This is because the PSAs deal in some cases with general responsibilities and in others with
the application of those responsibilities to specific topics.

The auditor is required to use the objectives to evaluate whether sufficient appropriate audit evidence has been
obtained in the context of the overall objectives of the auditor. If as a result the auditor concludes that the audit
evidence is not sufficient and appropriate, then the auditor may follow one or more of the following approaches:

• Evaluate whether further relevant audit evidence has been, or will be, obtained as a result of
complying with other PSAs;

• Extend the work performed in applying one or more requirements; or

• Perform other procedures judged by the auditor to be necessary in the circumstances.

c. In addition, the auditor should also consider Philippine Auditing Practice Statements (PAPSs). PAPSs
provide interpretative guidance and practical assistance to auditors in implementing the PSAs and to
promote good practice in the accountancy profession.

Contents/Structure of the PSAs

a. Objectives – each PSA contains one or more objectives which provide a link between the requirements and
the overall objectives of the auditor

The objectives in individual PSAs serve to focus the auditor on the desired outcome of the PSA.

b. Requirements (requirements are expressed in the PSAs using “shall”) – the requirements of the PSAs are
designed to enable the auditor to achieve the objectives specified in the PSAs, and thereby the overall
objectives of the auditor

c. Related guidance in the form of application and other explanatory material that are designed to support the
auditor in obtaining reasonable assurance

Application and other explanatory material:

• It provides further explanation of the requirements of a PSA and guidance for carrying them out

• It may explain more precisely what a requirement means or is intended to cover

• It may include examples of procedures that may be appropriate in the circumstances.

• While such guidance does not in itself impose a requirement, it is relevant to the proper application of
the requirements of an PSA.

• It may also provide background information on matters addressed in a PSA.

• It may include appendices which form part of the application and other explanatory material.

• When appropriate, it may include additional considerations specific to audits of smaller entities and
public sector entities.

PSAs may also contain:

 • Introductory material – provides context relevant to a proper understanding of the PSA

Introductory material may include, as needed, such matters as explanation of:

a. The purpose and scope of the PSA (including how the PSA relates to other PSAs)

b. The subject matter of the PSA

c. The respective responsibilities of the auditor and others in relation to the subject matter of the PSA

d. The context in which the PSA is set

• Definitions – a description of the meanings attributed to certain terms for purposes of the PSAs

→ Assist in the consistent application and interpretation of the PSAs

→ Not intended to override definitions that may be established for other purposes, whether in law,
regulation or otherwise

The Glossary of Terms relating to PSAs contains a complete listing of terms defined in the PSAs. It
also includes descriptions of other terms found in PSAs to assist in common and consistent
interpretation and translation.

Nature of the PSAs

The PSAs, taken together, provide the standards for the auditor’s work in fulfilling the overall
objectives of the auditor. The PSAs deal with the general responsibilities of the auditor, as well as
the auditor’s further considerations relevant to the application of those responsibilities to specific
topics.

The scope, effective date and any specific limitation of the applicability of a specific PSA is made
clear in the PSA. Unless otherwise stated in the PSA, the auditor is permitted to apply a PSA
before the effective date specified therein.

In performing an audit, the auditor may be required to comply with legal or regulatory requirements
in addition to the PSAs. The PSAs do not override law or regulation that governs an audit of
financial statements. In the event that such law or regulation differs from the PSAs, an audit
conducted only in accordance with law or regulation will not automatically comply with PSAs.

Departure from a relevant requirement in a PSA:

In exceptional circumstances wherein the auditor may judge it necessary to depart from a relevant requirement in a
PSA, the auditor shall perform alternative audit procedures to achieve the aim of that requirement.

The need for the auditor to depart from a relevant requirement is expected to arise only where the requirement is for
a specific procedure to be performed and, in the specific circumstances of the audit, that procedure would be
ineffective in achieving the aim of the requirement.

The PSAs do not call for compliance with a requirement that is not relevant in the circumstances of the audit.

As the basis for the auditor’s opinion, PSAs require the auditor to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement, whether due to fraud or error. To obtain
reasonable assurance, the auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an
acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor’s
opinion.
SUMMARY

• TEN GAAS (or TIP-PIE-GIDO)

General Standards (TIP)

o Adequate Technical training and proficiency
o Independence
o Due Professional Care

Standards on Fieldwork (PIE)

o Adequate Planning and Proper supervision

o Sufficient understanding of the entity and its environment, including Internal control
o Sufficient appropriate audit Evidence

Standards on Reporting (GIDO)

o Whether the financial statements are in accordance with GAAP

o Consistent application of GAAP/PFRS. (Check for any Inconsistency)
o Adequacy of informative Disclosures
o Opinion regarding the financial statements taken as a whole