AUDIT T1 General Characteristics
1. Systematic examination and evaluation of evidence
An Overview
AUDITING DEFINITION
Philippine Standards on Auditing (PSA)
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. (objective of a financial
statement audit)
American Accounting Association (AAA)
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.
 Primary Function of an Independent Audit is to
lend credibility to the financial statements of an entity.
 Auditor's Opinion - enhances the value and
usefulness of the financial statements. (a report
attached to the FS // reliable)
This (AAA) Audit definition conveys the following:
1. Systematic Process - ordered/structured series of steps.
2. Obtaining And Evaluating Evidence about assertions
regarding economic actions and events
3. Degree Of Correspondence - between assertions and
established criteria
4. Objective - without bias
5. Communicate audit results to various interested users.
Assertions - are representations made by an audience
about economic actions and events.
 The auditor's objective is to determine whether these
assertions are valid.
 The communication of audit finding is the ultimate
objective of any audit. (timely basis)
(3) THREE TYPES OF AUDITS
(Based on primary audit objectives)
1. Financial Statement Audit
- to determine whether the FS of an entity are fairly
presented in accordance with an identified financial
reporting framework.
- established criteria is defined
2. Compliance Audit
- review of an organization’s procedures to determine
whether the organization has adhered to specific
procedures, rules. or regulations.
- is dependent upon the existence of verifiable data
and recognized criteria established by an authoritative
body.
- established criteria is defined
3. Operational Audit (Performance / Management)
- a study of a specific unit of an organization to
measure its performance.
- main objective is to assess entity’s performance,
improvements and make recommendations.
- criteria is NOT defined
which are undertaken to ascertain whether assertions
comply with established criteria;
2. Communication of the results of the examination,
usually in a written report, to the party by whom, or on
whose behalf, the auditor was appointed.
TYPES OF AUDITORS (affiliation to client entity)
1. External Auditors
- independent CPAs who offer professional services to
clients on a contractual basis.
- generally perform financial statement audits.
2. Internal Auditors
- entity’s own employees who investigate the efficiency
of operations and internal controls.
- main function is to assist the members of the
organization in the effective discharge of their
responsibilities.
- usually perform operational audits.
3. Government Auditors
- government employees who determine whether entities
comply with laws and regulations.
- usually conduct compliance audits.
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.
 An audit of FS does not relieve management of its
responsibilities.
 The auditor’s opinion on the FS is NOT a guarantee
that the financial statements are dependable.
 An audit in accordance with PSA is designed to
provide ONLY REASONABLE ASSURANCE (not
absolute assurance) that the FS taken as a whole are
free from material misstatements.
 there are always inherent limitations that affect the
auditor’s ability to detect material misstatements.
Management Responsibility
- preparing/presenting the FS in accordance with the
financial reporting framework
- to adopt and implement adequate accounting and
internal control systems that will help ensure, the
preparation of reliable FS
Auditor’s Responsibility - is to form and express an
opinion on these financial statements based on his audit.
INHERENT LIMITATIONS
1. Sampling Risk / Use Of Testing
- auditors do not examine all evidence available.
- conclusions are made by examining sample of evidence.
2. Non-Sampling Risk/ Error In Application Of Judgment
- Auditors opinion is permeated by judgment.
- Human weaknesses/ Error can cause mistakes in the
application of procedures and evaluation
3. Reliance On Management’s Representation
- If the management lacks integrity, management may
provide the auditor with false representations causing the
auditor to rely on unreliable evidence.
- Some evidence must be obtained by oral or written
representations from management.
4. Limitations Of Client’s Internal Control Systems
- Auditor’s procedures to detect material misstatements
may not be effective resulting from collusion among
employees or management’s circumvention of internal
control
5. Nature Of Evidence
- NOT hard facts
- comprises pieces of information and impressions
gradually accumulated during an audit
- Evidence is generally persuasive rather than conclusive
PSA Provides Guidelines When Auditing FS:
1. Comply with the “ Code of Professional Ethics for
CPAs promulgated by the (BOA).
- Auditors must adhere to standards of ethical
conduct that demonstrate integrity, objectivity, and
concern for the public rather than self-interest.
2. Conduct an audit in accordance with PSA
- contain the basic principles and essential procedures
which the auditor should follow.
- include explanatory materials which, rather than
being prescriptive (that is mandatory), is designed to
assist auditors in interpreting and applying the
auditing standards.
2. Professional Skepticism
- should plan and perform the audit with an attitude of
professional skepticism
An attitude of professional skepticism means the
auditor makes a critical assessment, with a
questioning mind of the validity of audit evidence
obtained and is alert to audit evidence that
contradicts or bring into questions the reliability of
documents or management representations.
- auditor neither assumes that the management is honest
nor assumes unquestioned honesty.
- Thus, representations from management are not a
substitute for obtaining sufficient audit evidence
Need For An Independent Financial Statement Audit
1. Conflict Of Interest Between Management And
Users Of Financial Statements.
- FS may be viewed as the report by management as
to how the entity performed under their supervision.
- Outside parties, want unbiased, realistic financial
statements.
- users of FS have become skeptical of unaudited FS
2. Expertise
- most of the users of financial information are not
equipped with the 'necessary skills to determine whether
the FS are reliable, a qualified person is hired to verify
the reliability of the FS on their behalf.
3. Remoteness
- Most users do not have access to the entity’s records
- an independent auditor is needed to assist them in
verifying the reliability of the financial information.
4. Financial consequences
- Misleading financial information could have
substantial economic consequences for a decision maker.
THEORETICAL FRAMEWORK OF AUDITING
(postulates, assumptions or ideas)
1. All Financial Data Are Verifiable.
- All balances reported must have supporting documents to
prove their validity. If no evidence exists then there can be no
audit to perform.
2. Always Maintain Independence
- Independence is essential for ensuring the credibility of the
auditor’s report.
3. No Long-Term Conflict Between the Auditor and the
Client Management
- Short-term conflicts may exist regarding the application of
auditing procedures and accounting principles
- both the auditor and the management must be interested in
the fair presentation of the FS .
4. Effective Internal Control System
- reduces the possibility of errors and fraud
- entity’s internal control system directly affects the reliability
of the FS.
- The stronger the internal control is, the more assurance it
provides about the reliability
5. Consistent Application Of GAAP / PFRS
- results in fair presentation of financial statements.
6. What was held true in the past will hold true in the future
in absence of known conditions to the contrary.
- Experience and knowledge accumulated from prior years
can be used to determine the appropriate audit procedures
7. An Audit Benefits The Public.
- FS are prepared to meet the common needs of wide range of
users, who rely on them as their major source of information
(primary beneficiary)