Module #02: Audits of Historical Financial Information

Definition of Audit
 Auditing is a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the degree of
correspondence between assertions and established criteria and communicating the
results to interested users.

a. Systematic process
o an audit follows a logical sequence of procedures
b. Objectively obtaining and evaluating evidence
o an audit requires the gathering and evaluation of evidences to express an opinion
c. Assertions about economic actions and events
o assertions are representation of management, explicit or otherwise, that are
embodied in financial statement components, records, or systems
d. Degree of correspondence between assertions and established criteria
o auditors use standards or benchmarks for purposes of expressing an opinion on
the assertions of management
e. Communicating the results to interested users
o CPAs prepares a report which contains, in writing, the opinion of the CPA

Auditing and Accounting Distinguished

Accounting
 Accounting is the process of recording, classifying and summarizing economic
events in a logical manner for the purpose of providing financial information for
decision making.
 It is a service activity, the purpose of which is to provide information which is
quantitative in nature to help management in decision making.

Auditing
 Auditing is concerned with the determination of whether the recorded accounting
information for the entity properly reflects the economic events that occurred during
the accounting period.

Assurance Services and Audit Services Distinguished

 Assurance services assertion-based engagements.

 Assurance services is an engagement that expresses an opinion giving assurance to users
of such reports on information which is the responsibility of others.
 Assurance service is the broadest concept, while audit is the narrowest.

Type of Audits

A. Financial Statement Audits

o Refers to the gathering of evidence on the assertion embodied in the financial
statements of an entity and using the evidence to determine whether the
assertions adhere to financial reporting frameworks (ex. GAAP).
 B. Operational Audits
o A systematic review of an organization’s activities in relation to specified
objectives for the purpose of assessing the performance, identifying
opportunities, recommendation for improvement, and developing for
improvements.
o It is a future-oriented, systematic, and independent evaluation of organizational
activities.
C. Compliance Audits
o Used to determine whether a person or entity has adhered to laws and
regulations.
D. External Audits
o These are audits performed by CPAs who are independent of the organizations
whose assertions are being audited.
E. Internal Audits
o An independent appraisal function established within an organization to examine
and evaluate its activities as a service to the organization.
F. Government Audits
o It involves the determination of whether the government funds are being handled
properly and in compliance with existing laws and whether the government
programs of a particular agency are being conducted efficiently and
economically.
o The Commission on Audit is recognized as the Supreme Audit Institution in the
Republic of the Philippines.

Classified into three main divisions:

1. Compliance Audit
o The examination, audit and settlement in accordance with laws and
regulations.
2. Financial Audit
o Audit of the accounting and financial system and controls to ensure
reliability of recorded financial data.
3. Performance Audit
o An objective examination of the financial and operational
performance of an organization and is oriented towards
opportunities for greater economy, efficiency and effectiveness.
a. Economy and Efficiency Audit (Management Audit) -
appraisal of management performance from a least cost
point of view and the analysis of the cost-benefit
relationship.
b. Effectiveness Audit (Program Results Audit) - the
evaluation of programs, projects and activities to determine
the extent of achievement previously set goals and
objectives.

Objectives and Scope of a Financial Statement Audit

Objectives
 The expression of an opinion on the fairness of such financial statements.
 The auditor’s report is the medium through which he expresses his opinion or
disclaims an opinion.
  He states whether his examination has been made in accordance with the
Philippine Standards on Auditing or PSAs.
o PSAs require the auditor to state whether in his/her opinion the financial
statements are presented in conformity with GAAP.
Scope
 The auditor normally determines the scope of an audit in accordance with the
requirements of legislation, regulations or relevant professional bodies.
 In the observance of PSAs, the auditor must exercise his judgment in
determining which auditing procedures are necessary in the circumstances to
afford a reasonable basis for his opinion.

Information Risk
1. Remoteness of information users from information provider
2. Potential bias and motives of information provider
3. Voluminous data
4. Complex exchange transaction

Reducing Information Risk:

1. Allows users to verify information
2. User shares information risk with management
3. Have the financial statement audited

Audit Report
 The audit report is the means through which the auditor provides reasonable assurance
that the financial statements are fairly stated.
 This report is uniform in format and suitably title to avoid confusions regarding the level
of assurance being provided and to differentiate it from other reports which client
management might include with the financial statements.

Limitations of Audit
1. The Nature of Financial Reporting
o Preparation of financial statements involves judgment by management in
applying the applicable financial reporting framework and subjective decisions
or assessment by management involves a range of acceptable interpretations or
judgments.
2. The Nature of Audit Procedures
o Audit procedures will not 100% detect every misstatement.
3. Nature of Audit Evidence Available
o This evidence tends to be persuasive in character rather than conclusive.
4. Timeliness of Financial Reporting
o Users of financial statements expect that the auditor will form his or her opinion
within a reasonable period of time and at a reasonable cost.