INTRODUCTION TO AUDIT SERVICES AND FINANCIAL STATEMENT AUDIT

AUDITING – defined by AAA

 a systematic process – ordered and structured series of steps
 involves obtaining and evaluating evidence about assertions
 conducted objectively
 ascertain the degree of correspondence between assertions and established criteria
 communicating the results to users

Comparison of the types of audit

COMPARISONS FS AUDIT OPERATIONAL COMPLIANCE
Operations are Organization has
Assertions FS are fairly presented conducted effectively complied with laws,
and efficiently rules, and regulations
Established Criteria IAS, IFRS, GAAP, Objectives set by the Laws, rules, and
Conceptual Framework management itself contracts
Report Opinion on whether the Recommendations on Degree of compliance
FS are presented fairly in how to improve with applicable laws,
conformity with an operations rules and regulations
identified FRF
Auditors External Internal Government

Responsibilities:
 Management – prepare and present the FS in accordance with FRF
 Auditor – form and express an opinion on the FS prepared

General Principles on FS Audit Theoretical Framework of FS Audit

1. Code of Ethics  All financial data are verifiable

2. Philippine Standards on Auditing  Auditors should always maintain
3. Professional skepticism independence
4. Professional judgment  No long-term conflict between
5. Sufficient Appropriate Audit the auditor and manager
Evidence  Audit benefits the public
 Effective internal control system
 Consistent application of
Inherent Limitations of Audit accounting policies
 What was held true in the past
 Use of selective testing – sampling risk
will continue to be true in the
- Sample might not be a representative
future in the absence of known
of the population
conditions to the contrary
 Inherent limitations of internal control –
IC’s exposure to control risk
 Evidence is persuasive rather than conclusive – items that leaves some doubt
 Error in application of judgment – human error (non-sampling risk)
 Nature of assertions – exposure to inherent risk
- Heavy reliance on management’s representation
Need (Demand) for Audit – to manage business and information risks
 Voluminous data – the higher the number of data, the higher the risk of error
 Complexity of transactions – the more complicated the transactions are, the higher the risk
that they will not be recorded properly
 Remoteness of information – users have no access to records and documents
 Conflicts of interest between the provider and users
 Expertise
 Financial consequences

 Business Risk – event or activity that will prevent the entity in meeting its business
objectives such as wealth and profit maximization
 Information Risk – risk that the information prepared and presented is misstated

 Reducing information risk

o Verifying information – examine supporting records and documents
o Auditing financial statements
o Information risk is shared with the management – seek reimbursement

Regulators’ Requirements
- Submit an audited financial statements to the SEC

1. General Financial Reporting Requirements (SRC Rule 68)

Entity
Stock Corporation
Nonstock Corporation
Branch offices – stock
Branch offices - nonstock
ROHQs of foreign corporations
Threshold
Total Assets / Total Liabilities > 600,000
Total Assets / Total Liabilities > 600,000
Assigned Capital > 1,000,000
Total Assets > 1,000,000
Total Revenues > 1,000,000

2. Tax Compliance Requirements – required by the NIRC

Entity Threshold
Corporations, Companies, Gross annual sales, earnings, receipts, or
Partnerships, or Persons outputs > 3,000,000

Value of FS Audit
 Audit reduces information risk that may lead to lower cost of capital
 Audit may be used to deter inefficiency and fraud
 Audit may be used to enhance systems of internal controls