Auditing

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Recap:
 Engagement standards Auditing and Assurance Standards Council (AASC)

 Practice Statements
PAPS
PREPS
PAEPS

 Assurance engagements
PRSP
Three-party relationship
2. Appropriate subject matter

 Non-assurance engagements 3. Suitable criteria

4. Sufficient appropriate evidence
5. Written assurance report in the form appropriate to a
reasonable engagement or a limited assurance
Expressly excluded from PFAE engagemen

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 Practice A
Application Standards
Statements s
s
Audit of historical financial information PSAs PAPSs u
r
Review of historical financial information PSREs PREPSs a
Assurance engagements dealing with n
c
subject matters other than historical PSAEs PAEPSs
e
financial information
compilation engagements Non-
engagements to apply agreed upon Assu-
procedures to information PSRSs PRSPSs
other related services engagements as
rance
specified by the AASC

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Supplemental Readings:
o Philippine Framework for Assurance Engagements (PFAE)
o PSA 200 (Revised and Redrafted) – Overall Objectives of
the Independent Auditor and the Conduct of an Audit in
accordance with PSA
o PSA Glossary of Terms

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Auditing

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 Definition of Terms

Auditing
To obtain reasonable assurance about whether the financial
report as a whole is free from material misstatement, whether due to
fraud or error, thereby enabling the auditor to express an opinion on
whether the financial report is prepared, in all material respects, in
accordance with an applicable financial reporting framework. And
To report on the financial report, and communicate as required by
the PSAs, in accordance with auditor’s findings.

-Philippine Standards on Auditing

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 Definition of Terms

Auditing
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.

-American Accounting Association in a Statement of Basic

Auditing Concepts (ASCOBAC).

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 Assertions about economic Disclosures
actions and events Statement of Cash Flows
Statement of Changes in Equity
Statement of Comprehensive Income
Obtains and evaluates
Statement of Financial
evidence
Position

Knowledge of client’s business,

observation of physical assets,
inquiry with the management, Ascertain the degree of
confirmations form outsiders, correspondence
inspection of documents Other communications
Audit Report
FRSC COA
Indepen- IASB SEC
dent BSP
Auditor
GAAP
Objective outsider PAS/PFRS

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Types of audit

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Types of audit
Financial statement audit – involves obtaining and evaluating
evidence about an entity’s presentation of its financial position,
results of operations, and cash flows for the purpose of
expressing an opinion as to whether they are presented fairly in
accordance with a specified financial reporting framework.

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Types of audit
Compliance Audit – involves obtaining and evaluating evidence
to determine whether certain financial or operating activities of an
entity conform to established policies and procedures,
conditions, laws, rules or regulations.

Operations Audit – involves obtaining and evaluating evidence

about the efficiency, economy, and effectiveness of an entity’s
operating activities, policies, and procedures in relation to
specified objectives.

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 Comparison among the different types of audit

Financial Compliance Operational

Assertions That the financial That the organization That the
made by the statements are fairly has complied with laws, organization’s
auditee presented. regulations, established activities are
policies and conducted effectively
procedures, conditions. and efficiently
Established Financial reporting laws, regulations, Objectives set by the
criteria standards or other established policies and board of directors
financial reporting procedures, conditions.
framework.
Content of the An opinion about whether Reports on the degree of Recommendations or
auditor’s report the financials statements are compliance with applicable suggestions on how
fairly presented in conformity laws, regulations,
with an identified financial to improve
established policies and
reporting framework. operations.
procedures, conditions
Auditor External auditor Government auditors Internal auditors
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Types of auditors

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Types of auditors
External auditors – are CPAs who have their own
independent accounting practices that provide independent
auditing services of client’s financial statements.

Internal auditors – entity’s own employees and are primarily

concerned in determining whether organizational policies and
procedures have been followed in safeguarding the entity’s
assets.

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Types of auditors
Government auditors – government employees who are
engaged to provide assurance that all local and national
governmental agencies, including government-owned and
controlled corporations, have complied with laws, rules,
regulations, policies, and procedures.

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Financial Statement Audit

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Financial Statement Audit
Objective
General Principles
Scope
Demand
Economic benefits
Limitation

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 Financial Statement Audit

Objective of Financial Statement Audit

To obtain reasonable assurance about whether the financial
report as a whole is free from material misstatement, whether due to
fraud or error, thereby enabling the auditor to express an opinion on
whether the financial report is prepared, in all material respects, in
accordance with an applicable financial reporting framework. And
To report on the financial report, and communicate as required by
the PSAs, in accordance with auditor’s findings.

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 Financial Statement Audit

General Principles of Financial Statement Audit

The auditor should:
 Comply with the “Code of Professional Ethics for CPAs”
promulgated by the Board of Accountancy and approved by
the Professional Regulation Commission.
 Conduct an audit in accordance with PSA.
 Plan and perform the audit with an attitude of professional
skepticism recognizing that circumstances may exist which
cause the financial statements to be materially misstated.

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 Financial Statement Audit

Scope of Financial Statement Audit

It refers to the audit procedures deemed necessary in the
circumstances to achieve the objective of the audit.

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 Financial Statement Audit

Demand of Financial Statement Audit

Complexity of transactions
Remoteness of information
Biases and motive of the provider
Consequences

Information risk is the possibility that the financial statements may be

incorrect, incomplete, or biased. Reducing the information risk are as
follows: users verifies information; users shares information risk with
management and users are provided with audited financial
statements.

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 Financial Statement Audit

Demand of Financial Statement Audit

Information risk is the risk that the information used to assess
business risk is not accurate or misleading.

Information risk is the possibility that the financial statements may be

incorrect, incomplete, or biased. Reducing the information risk are as
follows: users verify information; users share information risk with
management and users are provided with audited financial
statements.

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 Financial Statement Audit

Economic benefits of Financial Statement Audit

Access to capital markets
Lower cost of capital
Deterrent to inefficiency and fraud
Control and operational improvements

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 Financial Statement Audit

Limitations of Financial Statement Audit

Reasonable cost
Reasonable length of time
Alternative accounting principles
Accounting estimates

 The use of testing

 Error in application of judgment
 Reliance on management’s representation
 Inherent limitations of the client’s accounting and internal control system
 Nature of evidence

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 Financial Statement Audit

Responsibility for Financial Statement Audit

Management: the responsibility for preparing and presenting the
financial statements

Auditor: the responsibility for forming and expressing on the financial

statements

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Auditing versus Accounting

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 Auditing versus Accounting

Accounting - process of recording, classifying, and summarizing of

economic events fro the purpose of providing financial information
used in decision making.

Auditing – determining whether recorded information properly reflects

the economic events that occurred during the accounting period.

The auditor must possess expertise in the accumulation and

interpretation of audit evidence.

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 Recording of Accounting
transactions and
preparation of financial
statements
FRS
Recording of
transactions and
preparation of financial
statements Auditing

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Supplemental Readings:
Next Topic: Professional Practice of Accountancy

o RA No. 9298 – The Philippine Accountancy Act of 2004

including its Implementing Rules and Regulations
o PRC, BOA, SEC Issuances, Resolutions and Circulars
o PSA Glossary of Terms

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Questions

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