Audits of Historical Financial

Information

Sources: Salosagcol, J.G., & Tiu, M.F. (2018). Auditing theory. Manila: CRC-ACE
Irineo, J (2018). Audit & Assurance Principle. Manila: Good Dreams Publishing
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 these assertions and
established criteria and communicating the results to
interested users.
Auditing
A systematic process
Objectively obtaining and evaluating
evidence
Assertions about economic actions and
events
Degree of correspondence between these
assertions and established criteria
Communicating the results to interested
users
An audit follows a logical sequence of procedures
Objectivity means a combination of impartiality, intellectual
honesty and a freedom from conflicts of interest. An audit
requires the gathering and evaluating of evidence
Assertions are representation of management, explicit or
otherwise, that are embodied in financial statement
components, records or systems.
Auditors use standards or benchmarks (criteria) for purposes of
expressing an opinion on the assertions of management. GAAP
After the audit has been completed, a CPA prepares a report
which contains, in writing, the opinion (or disclaimer of opinion)
of the CPA.
Auditing vs Accounting

• Accounting is the process of recording, classifying and

summarizing economic events in logical manner for the
purpose of providing financial information for decision
making.
• Auditing is not a branch of accounting.
• 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.
• Auditors need not only an understanding of accounting rules, but
also an expertise in the accumulation and interpretation of audit
evidence
Assurance Services and Audit Services

Assurance Engagements

Attestation
engagements
Direct
engagements
FS Audit
Types of Audits

According to subject matter or nature of data

• Financial Statement Audits – gathering of evidence on
assertions embodied in financial statements. This requires a
CPA.
• Operational Audits – involve a systematic review of an
organization’s activities in relation to specified objectives
for the purposes of assessing performance, identifying
opportunities for improvement, and developing
recommendations for improvement and further action.
• Compliance Audits – used to determine whether a person or
entity has adhered to laws and regulations. Results are
generally reported to a specific user within an organization.
Types of Audits

According to auditor performing in the engagement

• External Audits – performed by CPAs who are independent of the
organizations whose assertions are being audited.
• Internal Audits – an independent appraisal function established within an
organization. Internal audit staff often reports to audit committee of the
BOD.
• Government Audits – involves determination of whether government funds
are being handled properly and in compliance with existing laws and
whether gov’t programs are being conducted efficiently and economically.
• Compliance audit
• Financial audit
• Performance audit
• Economy and efficiency audit/management audit
• Effectiveness audit/program results audit
Types of Audits

Type Assertions Criteria Report Usual auditors

Financial Financial Identified Audit report on the fairness of External auditors
statement statements are financial financial statements. Interested
audit fairly presented reporting users include investors, creditors,
framework etc
Operational Operational or Management Report on efficiency and Internal auditors
audit performance objectives effectiveness, including
data constructive suggestions. Interested
users include management and the
board of directors
Compliance Compliance with Laws, rules and Degree of compliance report. Government
audit applicable laws regulations, or Interested users include auditors
and regulations management management and the board of
or management policy directors
policy
Financial Statement Audit

• Objective
• Expression of opinion on the fairness of such financial
statements.

• Scope
• The auditor determines the scope of an audit in accordance
with the requirements of legislation, regulations or relevant
professional bodies.
• The auditor must exercise his judgment in determining which
audit procedures are necessary in the circumstances to afford a
reasonable basis for his opinion.
Financial Statement Audit

• Responsibilities of management and those charged with

governance
• Prepare Financial Statements
• Set up internal controls
• Provide complete information to auditors

• Responsibilities of auditor
• Gather and evaluate evidence
• Issue audit report
Financial Statement Audit

• General principles governing audit of financial

statements
• The auditor should comply with the Code of Professional Ethics
of Certified Public Accountants. Auditor should also be
independent of the client.
• The auditor should conduct an audit in accordance with
Philippine Standards on Auditing.
• The auditor should plan and perform the audit with an attitude
of professional skepticism.
Financial Statement Audit

• Need for an independent financial statement audit

• Conflict of interest between management and users of financial
statements
• Expertise
• Remoteness
• Financial consequences
Financial Statement Audit

• Theoretical framework of auditing

• Audit function operates on the assumption that all financial data
are verifiable.
• The auditor should always maintain independence with respect to
the financial statements under audit.
• There should be no long-term conflict between the auditor and
the client management.
• Effective internal control system reduces the possibility of errors
and fraud affecting the financial statements.
• Consistent application of GAAP or PFRS results in fair
presentation of financial statements.
• What was held true in the pas will continue to hold true in the
future in the absence of known conditions to the contrary.
• An audit benefits the public.
Information Risk

• The risk that information is misstated or misleading

• Several factors are:
• Remoteness of information users from information provider
• Potential bias and motives of information provider
• Voluminous data
• Complex exchange transactions
Information Risk

• How to reduce information risk

• Allow users to verify information
• User shares information risk with management
• Have the financial statements audited
Audit Report

• PSA 700
• The audit report is the means through which the auditor
provides reasonable assurance that the financial
statements are fairly stated.
Limitations of an Audit

• An audit is not a guarantee of the exactness of accuracy

of assertions in the financial statements due to inherent
limitations:
• Nature of financial reporting
• Inherent limitations of client’s accounting and internal control systems
• Nature of audit procedures
• Use of testing/sampling risk
• Error in application of judgment/non-sampling risk
• Reliance in management’s representation
• Nature of audit evidence available
• Timeliness of financial reporting
History and Evolution of Audit

• Enron Accounting Scandal

• Enron's leadership fooled regulators with fake holdings and off-
the-books accounting practices.
• Enron used special purpose vehicles (SPVs), or special purposes
entities (SPEs), to hide its mountains of debt and toxic assets
from investors and creditors.
• Enron traded at the highest market price of $90.75 at the
period of December 2, 2001. And when the accounting scandal
emerged, stock prices went down to a record low of $0.26 per
share.
• The company paid its creditors more than $21.7 billion from
2004 to 2011.
History and Evolution of Audit

• Aftermath of Enron
• Renewed focus on internal control procedures
• Various acccounting standards introduced by FASB
• Sarbanes-Oxley Act
• Corporate responsibility
• Increased criminal punishment
• Accounting regulation
• New protections
• Code of Corporate Governance
• SEC Rule 68