AUDIT – AN OVERVIEW Auditing Theory

AUDITING
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.
AUDITING
Auditing and systematic process
Auditing proceeds by means of an ordered and structured series of steps
An audit involves obtaining and evaluating evidence about assertions
regarding economic actions and events
Assertions are representations made by an audience about economic actions
and events. The auditor’s objective is to determine whether these assertions
are valid. To satisfy this objective, the auditor performs audit procedures and
gathers evidence that corroborates or refutes the assertions.
AUDITING
An audit is conducted objectively
The auditor should conduct the audit without bias. Impartial attitude must be
maintained by the auditor when evaluating evidence and formulating his
conclusion.
AUDITING
Auditors ascertain the degree of correspondence between assertions
and established criteria
Established criteria are needed to judge the validity of the assertions. These
criteria are important because they established and inform the users of the
basis against which the assertions have been evaluated or measured. In an
audit, the auditor determines the degree by which the assertions conform to
the established criteria. For example, when auditing financial statements, the
auditor judges the fair presentation of the financial statements (assertions) by
comparing the statements with an identified financial reporting framework
(criteria)
AUDITING
Auditors communicate the audit results to various interested users
The communication of audit findings is the ultimate objective of any audit.
For the audit to be useful, the results must be communicated to interested
users on timely basis.
TYPES OF AUDIT
Financial statement audit
- Determine whether the financial statements of an entity are fairly presented
in accordance with an identified financial reporting framework
Compliance audit
- Review of an organization’s procedures to determine whether the
organization has adhered to specific procedures, rules or regulations.
Operational audit
- Study of a specific unit of an organization for the purpose of measuring its
performance. It is also known as performance audit or management audit.
GENERAL
CHARACTERISTICS OF
AUDIT
Systematic examination and evaluation of evidence
Communication of the results of the examination
Unlike compliance and financial statement audits, where the criteria are
usually defined, criteria used in operational audit to evaluate the effectiveness
and efficiency of operations are not clearly established
TYPES OF AUDITORS
External auditors
Independent CPAs; generally perform financial statement audits
Internal auditors
Entity’s own employees; main function of internal auditors is to assist the
members of the organization in the effective discharge of their
responsibilities; usually perform operational audits
Government auditors
Government employees; 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
RESPONSIBILITY FOR
FINANCIAL STATEMENTS
The management is responsible for preparing and presenting the financial
statement is in accordance with the financial reporting framework.
The auditors’ responsibility is to form and express an opinion on these
financial statements based on his audit. An audit of financial statements does
not relieve management of its responsibilities. Hence, it is management’s
responsibility to adopt and implement adequate accounting and internal
control systems that will help ensure, among others, the preparation of
reliable financial statements.
ASSURANCE PROVIDED BY
THE AUDITOR
The auditors’ opinion on the financial statements is not a guarantee that the
financial statements are dependable. An audit conducted in accordance with
the Philippine standards on auditing (PSAs) is designed to provide only a
reasonable assurance (not absolute assurance) that the financial statements
taken as a whole are free from material misstatements. In every audit, there
are always inherent limitations that affect the auditor’s ability to detect
material misstatements.
FACTORS AFFECTING
ASSURANCE
The use of testing / sampling risk
For practical reasons, auditors do not examine all evidence available. Many
audit conclusions are made by examining only the sample of evidence.
Whenever a sample is taken, there is always a possibility that the auditor’s
conclusion, based on the sample, may be different from the conclusion that
would have been reached if the auditors examines the entire population
Error in application of judgement/ non-sampling risk
The work undertaken by the auditor to form an opinion is permeated by
judgement. Human weaknesses can cause auditors to commit mistakes in the
application of audit procedures and evaluation of evidence
FACTORS AFFECTING
ASSURANCE
Reliance on management’s representation
Some evidence supporting the financial statements must be obtained by
obtaining oral or written representations from management. For example, it is
difficult for the auditor to determine the proper valuation of accounts
receivable without management honest assessment. If the management lacks
integrity, management may provide the auditor with false representations
causing the auditor to rely on unreliable evidence.
FACTORS AFFECTING
ASSURANCE
Inherent limitations of the client’s accounting and internal control
system
Although the auditor performs procedure to detect material misstatements
when auditing financial statements, such procedures may not be effective in
detecting misstatements resulting from collusion among employees or
management’s circumvention of internal control.
FACTORS AFFECTING
ASSURANCE
Nature of evidence
Evidence obtained by the auditor does not consist of “hard facts” which prove
or disapprove the accuracy of the financial statements. Instead, it comprises
pieces of information and impressions which are gradually accumulated
during the course of an audit and which, when taken together, persuade the
auditor about the fairness of the financial statements. Thus audit evidence is
generally persuasive rather than conclusive in nature.
GENERAL PRINCIPLES GOVERNING
THE AUDIT OF FINANCIAL
STATEMENTS
The procedures required to conduct an audit in accordance with PSAs should
be determined by the auditor having regard to the requirements of PSAs,
relevant professional bodies, legislations, regulations, and where appropriate,
the terms of the engagement and the reporting requirements. PSA provides
the following guidelines when auditing a financial statements.
The auditor should comply with the “Code of Professional Ethics for Certified
public accountants” promulgated by the Board of Accountancy (BOA).
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 recognizing that circumstances may exist which may cause the financial
statements to be materially misstated.
NEED FOR AN INDEPENDENT
FINANCIAL STATEMENT AUDIT
The need for an independent audit of financial statements stems from the
following interrelated sources:
Conflict of interest between management and users of financial statements
Expertise
Remoteness
Financial consequences
THEORETICAL FRAMEWORK
OF AUDITING
The audit function operates within a theoretical framework. Below are the
selected postulates, assumptions or ides that support many auditing concepts
and standards.
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
THEORETICAL FRAMEWORK
OF AUDITING
Effective internal control system reduces the possibility of errors and fraud
affecting the financial statements.
Consistent application of generally accepted accounting principles (GAAP)
or Philippine Financial Reporting Standards (PFRS) results in fair
presentation of financial statements.
What was held true in the past will continue to hold true in the future in the
absence of known conditions to the country.
An audit benefits the public.
THE PROFESSIONAL Auditing Theory
STANDARDS
THE PROFESSIONAL
STANDARDS
Standards are established to measure the quality of performance of
individuals, and organizations. Standards relating to the accounting
profession concern themselves with CPAs’ professional qualities, the
judgement exercised by the CPAs in the performance of their professional
engagement, and the CPA firm’s quality control policies and procedures
The board of accountancy promulgated ten generally accepted auditing
standards (GAAS) that established required level of quality for performing
financial statement audits. These standards must be followed by CPAs when
auditing financial statements.
GENERALLY ACCEPTED
AUDITING STANDARDS (GAAS)
GAAS represents measures of the quality of the auditor’s performance.
These standards should be looked at as a minimum standard of performance
that auditors should follow. These ten GAAS are grouped into general,
fieldwork and reporting standards.
GENERALLY ACCEPTED
AUDITING STANDARDS (GAAS)
Generally Accepted Auditing Standard (GAAS)

General Standards Standards of Fieldwork Standards of Reporting

 Technical Training  Planning  Generally Accepted

and Proficiency  Internal Control Accounting
Principles
 Independence Consideration
 Inconsistency
 Professional care  Evidential matter
 Disclosure
 Opinion
PHILIPPINE STANDARDS ON
AUDITING (PSA)
The auditing and assurance standards council (AASC) has been given the task
to promulgate auditing standards, practices and procedures which shall be
generally accepted by the accounting profession in the Philippines. The
structure of AASC pronouncements is shown in fig. 2.2.
STRUCTURE OF AASC
PRONOUNCEMENTS
AASC Pronouncements

Framework for Assurance

Related Services
Engagements

Other Assurance Agreed-upon Compilation

Audit Review
Engagements Procedures Engagement Engagement

PSA PSA PSA

PSA
2000 - 3000 - 4000 -
100 - 999
2699 3699 4699

PSA PSA PSA PSA

1000 - 2700 - 3700 - 4700 -
1999 2999 3999 4999
SYSTEM OF QUALITY
CONTROL
Quality control are policies and procedures adopted by CPA’s to provide
reasonable assurance of conforming with professional standards in
performing audit and related services.
Under Philippine standards on quality control (PSQC) 1, a firm has an
obligation to establish a system of quality control designed to provide it with
reasonable assurance that the firm and its personnel comply with professional
standards and regulatory and legal requirements, and that the report issued
by the firm are appropriate in the circumstances.
SYSTEM OF QUALITY
CONTROL
In this regard, engagement teams:
Implement quality control procedures that are applicable to audit
engagement
Provide the firm with relevant information to enabling the functioning of
that part of the firm’s system of quality control relating to independence; and
Are entitled to rely on the firm’s system unless information provided by the
firm or other parties suggest otherwise.
ELEMENTS OF A SYSTEM OF
QUALITY CONTROL
PSA 220 states that the audit firm should implement policies and procedures
designed to ensure that all audits are conducted in accordance with PSAs.
Leadership responsibilities for quality on audits
Ethical requirements
Independence
Acceptance and continuance of client relationships
Human resources and assignment
Engagement performance
Monitoring
ENGAGEMENT
PERFORMANCE
Direction
Assistants should be informed of their responsibilities, the nature of the
entity’s business, potential problems that may arise and the detailed approach
to the performance of the engagement.
Supervision
This involves monitoring the progress of the audit, resolving accounting and
audit issues, and considering the level of consultation appropriate for the
engagement.
ENGAGEMENT
PERFORMANCE
Review
Work performed by assistants should be reviewed to consider whether the
audit procedures, evidence and documentation are appropriate to support the
conclusion reached.
Consultation
The firm should establish policies and procedures that encourage firm
personnel to seek assistance from authoritative sources wither within or
outside the firm.
ENGAGEMENT
PERFORMANCE
Engagement quality control review
The firm should establish policies and procedures requiring an engagement
quality control review that provides an objective evaluation of the significant
judgements made and conclusions reached in formulating the auditor’s report.
Difference of opinion
The engagement team should follow the firm’s policies and procedures for
dealing with and resolving differences of opinion that arise within the
engagement team, with those consulted and, where applicable, between the
engagement partner and the engagement quality control reviewer.
QUALITY CONTROL REVIEW
Recognizing the importance of professional accountants’ services to the
society, the government has also taken steps to ensure that CPAs work to the
highest standards which can reasonably be expected from them. The
government thru the Professional Regulatory Board of Accountancy (BOA)
has required all CPA firms and individual CPAs in public practice to obtain a
certificate of accreditation to practice public accountancy. Such certificate is
valid for three years and can be renewed after complying with the
requirements of board of accountancy.
QUALITY CONTROL REVIEW
As a condition to the renewal of the certificate of the accreditation to practice
public accountancy, the board requires individual CPAs and CPA firms to
undergo a quality control review to ensure that these CPAs comply with
accounting and auditioning standards and practices.
The PRC has created a Quality Review Committee (QRC) which shall
conduct a quality review on applicants for registration to practice public
accountancy and shall recommend the revocation of the certificate of
registrations of CPAs who have not observed the quality control measures or
those who have not complied with the standards of quality prescribed for the
practice of public accountancy.