THE DEMAND FOR

AUDITING AND
ASSURANCE
SERVICES
Group 1

BUDDIN, JEAN-CLAUDE
LAROZA, DEXT JUDE
GUEVARRA, KATHLEEN
PIAMONTE, JOICE
TEOPE, EMERLIZA
Expected Learning Outcomes
After studying this chapter,
you should be able to :

1. Describe the role of auditing in meeting society's

demands for reliable financial information

2. Understand why individual external auditors are

expected to make professional and ethical judgments
about the information provided by business
organizations.

3. Explain the nature of assurance services.

4. Explain the importance of audited financial

statements.

5. Enumerate the various parties who are interested

in audited financial statements.

6. Understand the need for increased globalization

of accounting and auditing standards.
ECONOMIC DEMAND FOR AUDITING

Nature of Auditing

Auditing is the accumulation and evaluation of

evidence about information to determine and report
on the degree of correspondence between the
information and establish criteria. Auditing should be
done by a competent independent person.

Distinguish Between Auditing and Accounting

Accounting is the recording, classifying, and

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

Auditing is determining whether recorded

information properly reflects the economic events
that occurred during the accounting period.
The birth of modern accounting and auditing occurred
during the industrial revolution, when companies
became larger and needed to raise capital to finance
expansion.

A capital market allows a public company to sell

small pieces of ownership (i.e. stocks) or to borrow
money in the form of thousands of small loans (i.e.
bonds) so that vast amounts of capital can be raised
from a wide variety of investors and creditors.

Public company - is a company that sells its stocks or

bonds to the public, giving the public a valid interest in
the proper use of the company's resources.
Shareholders- diverse groups of owners who are not
directly involved in running the business.

Managers - serve as agents for the owners (who are

sometimes referred to as principals) and fulfill a
stewardship function by managing the corporation's
assets.

Information asymmetry - means that the manager

generally has more information about the "true"
financial position and results of operations of the
entity than does the absentee owner.
 ASSURANCE SERVICES
What are Assurance Services?
Is used to describe the broad range of
information enhancement services performed
by a Certified Public Accountant (CPA) that
are designed to enhance the degree of
confidence in the information.

Assurance services consists of two types:

a.) those that increase the reliability of
information.

b.) those that involve putting information in a

form of context that facilitates decision making.

Attestation Services
To attest information means to provide
assurance as to its reliability. In attestation
engagement, CPA's provides report on a
subject matter or an assertion about that
subject matter.
 PHILOSOPHY OF AN AUDIT
As the amount of capital involved and the number of potential
owners increase, the potential impact of accountability also
increases.
Auditor’s Role - is to determine whether the reports prepared
by the manager conform to the contract’s provisions. The
auditor’s verification of the financial information will:

Adds credibility to the report and

reduces information risk.
Reducing information risk potentially benefits
both the owner and the manager.
Economic decisions are made under conditions of uncertainty;
There is always a risk that the decision maker will select the
wrong alternative and incur a significant loss.
The credibility added to the information by auditors reduces the
decision maker’s risk. To be more precise, the auditors reduce
information risk, which is the risk that the financial information
used to decide is materially misstated.
RECORDS: Businesses, institutions and individuals must
maintain records of their financial condition and progress.
These records are necessary to evaluate and guide business
operations, to determine financial status, to meet legal
requirements and to serve as a basis for credit.

TACTICS: Creditors and investors, present and prospective,

may wish to study the financial statements of many enterprises
for credit extension and investment purposes.

SUPPORT: Government agencies will need financial reports

to help them carry out the duties imposed upon them by law
internal.
Management needs financial reports for planning, directing
and controlling business operations.

Auditing of financial records has become an important

factor in the dissemination of financial information and the
services of the independent certified public accountant are
considered indispensable. Increasingly, his written report is
required to add credibility to the financial statements.
COLLABORATION:
A free-market economy can exist only if there is sharing of
reliable information among parties that have an interest in the
financial performance of an organization.
The market is further strengthened if the information is
transparent and unbiased, that is, the data is not presented in such
a way that it favors one party over another.
DUTIES
Auditing requires the highest level of technical competence,
freedom from bias, and concern for integrity of the financial
reporting process. In essence, auditors should view themselves as
guardians of the capital markets.
The public expects auditors to
(a) find fraud,
(b) require accounting principles the best portray the spirit of
the concepts adopted by accounting standard setters, and
(c) be independent of management.

Auditor's Opinion contained in the audit report provides both internal and
external users with input to making logical and informed decisions about
financial position, managerial performance and economic vulnerability. Without
auditors, decisions such as these are more likely to be made from biased
financial information resulting from a business entity's undisclosed errors,
irregularities or illegal acts.
IMPORTANCE OF AUDITED FINANCIAL
STATEMENTS
Financial Statements – structured financial
representation of financial position and financial
performance of an entity.

Primary objective: To provide information

about entity’s financial position, financial
performance and cash flows that is to be used in
decision-making by the users (investors and
creditors).

Secondary objective: To show results of

stewardship of management of the resources
entrusted to them.

Stewardship- administration, care, supervision,

utilization (translation: pangangalaga)
Audited Financial Statements – financial
statements accompanied by an audit report prepared by
independent public accountants, expressing their
professional opinion as to the fairness of the company’s
financial statements.

Audited Financial Statements

What: Financial statements accompanied with an audit
report containing the auditor’s opinion as to the fairness of
company’s financial statements.
Why: To increase the credibility of the financial statements
and increase the confidence of its users.
When: After gathering sufficient and appropriate evidence.
Who: External Auditor/ Independent Auditor
How: In accordance with PSAs and by following the Audit
Process.

Philippine Standards in Auditing - deals with

the auditor's responsibility to form an opinion on
the financial statements. Includes Code of Ethics,
Audit process, etc.
4 Auditor’s Opinion (QUAD)

Qualified – cannot express unqualified opinion but not

because of limitation or disagreement with the
management. (Neutral)
Unqualified – financial information are prepared, in all
material respects, in accordance with the applicable
financial reporting framework. (PAS,IAS,PFRS,GAAP, and
Authoritative Financial Reporting framework)
Adverse – financial information prepared are materially
misstated and that the financial information is either
misleading or incomplete.
Disclaimer – cannot express opinion because there is no
sufficient audit evidence because of material or pervasive
limitation of the management.

Note: PSA/ GAAS are not considered as financial

reporting frameworks because they pertain to the auditing
process and not the preparation of financial statements
 The manager is in a position to manipulate the reports/
Conflict of interest (for extra-income of manager ex:
commission-based income
Management can be hardly expected to prepare FS
impartial and unbiased/ leaves credibility gap to the users
ex: for stability of work
Unaudited FS is prone to material misstatement because
of accidental errors. ex: arithmetical errors or omission of
accounts
There could be errors because of lack of knowledge of
financial accounting and reporting standards. ex:
outdated on new standards
There is possibility that unaudited FS have been
deliberately falsified in order to conceal theft and fraud or
as a means of inducing the read to invest or lend credit.
ex: corruption

Note: Commission on Audit (COA) – has the power to audit

government, any of its subdivisions, instrumentalities,
including GOCCs and recommend measures to improve
efficiency and effectiveness of government operations.
 USERS OF AUDITED FINANCIAL STATEMENT

USERS TYPE OF DECISIONS

Review of performance , make operational decisions. Report

MANAGEMENT
results to capital markets.

Stockholders Buy or sell bonds

Bondholders Buy or sell bonds

Financial Evaluate loan decisions, considering interest rates, terms, and

Institutions risk

Taxing Authorities Determine tax table income and tax due

Regulatory
Develop regulations and monitor compliance
Agencies

Labor Unions Make collective bargaining decisions

Court System Assess the financial position of a company in litigation

Vendors Assess the Credit risk

Retired Protect employees from surprises concerning pensions and

Employees other post-retirement benefits
PHILIPPINE STANDARDS ON AUDITING

The Auditing and Assurance Standards

Council (AASC)

It has been given the task to promulgate

auditing standards, practices and
procedures which shall be gently accepted
by the accounting profession in the
Philippines.
The Structure of AASC pronouncement is
show in the the figure 2.2
An audit provides reasonable assurance of
detecting material misstatements of the
financial statements (both errors and
fraud) and non compliance with laws that
have direct and material effect on the
determination of financial statement
amount.
International Auditing and
Assurance
.
Standards Board
(IAASB)
issues pronouncement design to foster the
development of consistent worldwide auditing
standards

Auditing and Standards

Practice Council of the
Philippines (AASC)
reviews and recommend for approval to the
PRC-BOA their adoption as the Philippine
Standards on Auditing
What is Philippine
Standards on
Auditing(PSA)?
In the Philippines , the law that
regulates the Practice of
Accountancy (RA 9298 provides
that the Professional Regulatory
Board of Accountancy shall
monitor the conditions affecting
the Practice of Accountancy