OVERVIEW OF THE

AUDITING
PROFESSION
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1.
Nature of Auditing
“ AUDITING
the accumulation and evaluation of evidence
about information to determine and report on
the degree of correspondence between the
information and established criteria.
Auditing should be done by a competent,
independent person.
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INFORM ATION AND ESTABLISHED CRITERIA

▸ Information (verifiable form) vs. Criteria (standards).

▸ Information may be quantifiable (FS) or subjective
(effectiveness of systems).
▸ Criteria is dependent upon what information is audited.
Information Criteria
Financial statements PFRS
Internal control COSO Framework
Corporate governance SEC Rules on CG
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ACCUM ULATING AND EVALUATING
EVIDENCE
▸ Evidence is any information used by the auditor to determine
whether the information being audited is stated in
accordance with established criteria.
▸ Forms of evidence:
▸ Transaction data
▸ Communications with outsiders
▸ Observations
▸ Client Testimony
▸ Auditors must obtain sufficient and appropriate audit
evidence to satisfy the purpose of the audit.
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COMPETENT AND INDEPENDENT PERSON

▸ Competence
▹ Qualified to understand the criteria used
▹ Know the types and amount of evidence to accumulate in order
to reach proper conclusion after examining evidence
▹ Quality Control (PSQC)
▸ Independence
▹ Must no be biased in the accumulation and evaluation of
evidence
▹ Even internal auditors (although employed) should be
independent.
▹ Must be independent of mind and in appearance
▹ Code of Ethics for Professional Accountants in the Philippines
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REPORTING

▸ The final stage in the auditing process is preparing the audit

report, which communicates the auditor’s findings to users.
▸ Reports differ in nature, but all must inform readers of the
degree of correspondence between the information audited
and established criteria.
▸ Reports also differ in form and can vary from the highly
technical type usually associated with financial statement
audits to a simple oral report in the case of an operational
audit of a small department’s effectiveness.
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THE AUDIT PROCESS

PRE-
ENGAGE- PLANNING EVIDENCE
MENT REPORTING
ACTIVITIES GATHERING
ACTIVITIES
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DISTINCTION BETWEEN ACCOUNTING AND
AUDITING
▸ Accounting is the recording, classifying, and summarizing of
economic events to provide financial information for decision
making.

▸ Auditing focus on determining whether recorded information

properly reflects the economic events that occurred during
the accounting period.

▸ In addition to understanding accounting, auditors must

possess expertise in the accumulation and interpretation of
audit evidence.
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ECONOM IC DEM AND FOR AUDITING

▸ Information risk reflects the possibility that the information

upon which a business decision was made was inaccurate.

▸ Auditing of financial information reduces information risk to

the users of financial information.
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INFORM ATION RISK

▸ Causes of information risk:

▹ Remoteness of information
▹ Biases and Motives of the Provider
▹ Voluminous Data
▹ Complex Exchange Transactions
▸ How to reduce information risk:
▹ User verifies information – the user may go to the business to verify
the information. This is often costly and impractical.
▹ User shares information risk with management – Management may be
held responsible in a lawsuit if inaccurate information is provided.
▹ Audited financial statements are provided – External auditors are
engaged to provide assurance that the financial statements are reliable.
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2.
Assurance Services
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ASSURANCE SERVICES

▸ An assurance service is an independent professional service

that improves the quality of information for decision makers.

▸ Assurance services can be provided by CPAs or other

professionals.

▸ Assurance services by CPAs have been common for years,

especially regarding historical financial statement
information.
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ATTESTATION SERVICES

▸ An attestation service is a type of service in which the CPA

issues a report about a subject matter or assertion that is
made by another party.

▸ This is one category of assurance services provided by CPAs.

▸ Primary categories of attestation services include:
▹ Audits of historical financial statements
▹ Audits of internal control over financial reporting
▹ Reviews of historical financial statements
▹ Other attestation that may be applied to a broad range of
subjects
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OTHER ASSURANCE SERVICES

▸ Other assurance services do not meet the definition of

attestation services. A written report is not required, and it
need not be about reliability or compliance.

▸ Examples:
▹ Mystery shopping – Perform anonymous shopping to assess
sales personnel dealings with customers and procedures they
follow
▹ ISO 9000 certifications – Certify a company’s compliance with
ISO 9000 quality control standards, which help ensure company
products are of high quality
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NON-ASSURANCE SERVICES

▸ CPA firms perform numerous other services that generally

fall outside the scope of assurance services.

▸ Independence is not required since no assurance is provided.

▸ Examples:
▹ Accounting and bookkeeping services
▹ Tax services
▹ Management consulting services
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Non-
Assurance
Assurance
Services
Services
Attestation Services
• Audits (PSA) • Bookkeeping
• Reviews (PSRE) services
• Tax services
• Agreed upon
procedures (PSRS)
• Management
consulting services
Other Assurance
Services (PSAE)
PSQC, Code of Ethics
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3.
Types of Audits and Auditors
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TYPES OF AUDITS

▸ Operational audit—Evaluates the efficiency and effectiveness

of any part of an organization’s operating procedures and
methods.

▸ Compliance audit—Determines whether the auditee is

following specific procedures, rules, or regulations set by
some higher authority.

▸ Financial statement audit—Determines whether the financial

statements are stated in accordance with PFRS.
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TYPES OF AUDITS
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TYPES OF AUDITORS

▸ CPA firms
▸ Government auditors
▸ Internal auditors
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4.
The CPA Profession
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ACTIVITIES OF CPA FIRMS

▸ CPA firms provide audit services as well as other attestation

and assurance services.

▸ CPA firms also provide accounting and bookkeeping

services, tax services, and management consulting and risk
advisory services.

▸ CPA firms vary in nature and range of services, which affects

the structure of the firms.
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ORGANIZATIO NAL HIERARCHY OF TYPICAL
CPA FIRM
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QUALITY CONTROL

▸ For a CPA firm, quality control includes the methods used to

ensure that the firm meets its professional responsibilities to
clients.

▸ Elements of Quality Control: Each firm should document

quality control policies and procedures. The quality control
system should address the six elements detailed in Table 2-3.
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5.
Professional Ethics
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WHAT IS ETHICS?

▸ Ethics can be defined broadly as a set of moral principles or

values. Ethical behavior is necessary for a society to function
in an orderly manner.

▸ The need for ethics in society is sufficiently important that

many commonly held values are incorporated into laws.

▸ There are two primary reasons why people act unethically:

• The person’s ethical standards differ from general society’s
• The person chooses to act selfishly
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CODE OF PROFESSIO NAL CONDUCT

▸ The Code consists of principles and rules, in addition to

interpretations.
▸ Only members in public practice can audit financial
statements, which is addressed in Part 1.
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CODE OF PROFESSIO NAL CONDUCT

▸ The Code establishes a conceptual framework for all professional

accountants to ensure compliance with the five fundamental
principles of ethics.
• Integrity - straightforward and honest in all professional and business
relationships
• Objectivity - should not allow bias, conflict of interest or undue influence of others
• Professional Competence and Due Care - maintain professional knowledge and
skill at the level required
• Confidentiality - should not disclose any such information to third parties without
proper and specific authority
• Professional Behavior – should comply with the relevant laws and regulations
and should avoid any action that discredits the profession
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THREATS TO COMPLIANCE

▸ Compliance with the fundamental principles may potentially be

threatened by a broad range of circumstances. Many threats fall into
the following categories:
• Self-interest threats - may occur as a result of the financial or other interests of a
professional accountant or of an immediate or close family member
• Self-review threats - may occur when a previous judgment needs to be re-
evaluated by the professional accountant responsible for that judgment
• Advocacy threats - may occur when a professional accountant promotes a
position or opinion to the point that subsequent objectivity may be compromised
• Familiarity threats - which may occur when, because of a close relationship, a
professional accountant becomes too sympathetic to the interests of others
• Intimidation threats - may occur when a professional accountant may be deterred
from acting objectively by threats, actual or perceived
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SAFEGUARDS TO THREATS

▸ Safeguards that may eliminate or reduce such threats to an

acceptable level fall into two broad categories:
• Safeguards created by the profession, legislation or regulation
• Safeguards in the work environment
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TEST YOUR KNO WLEDGE

Which of the following best describes why an independent
auditor is asked to express an opinion on the fair presentation of
financial statements?
A. It is difficult to prepare financial statements that fairly present a company’s
financial position, operations, and cash flows without the expertise of an
independent auditor.
B. It is management’s responsibility to seek available independent aid in the
appraisal of the financial information shown in its financial statements.
C. The opinion of an independent party is needed because a company may not
be objective with respect to its own financial statements.
D. It is a customary courtesy that all stockholders of a company receive an
independent report on management’s stewardship of the affairs of the
business.
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TEST YOUR KNO WLEDGE

Which of the following professional services is an attestation
engagement?
A. A consulting service engagement to provide computer-processing
advice to a client.
B. An engagement to report on compliance with statutory
requirements.
C. An income tax engagement to prepare income tax returns.
D. The preparation of financial statements from a client’s financial
records.
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THANKS!
Any questions?