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Intr IC #2:
odu
Aud ctio
itin
g n to
 Audit:

•Auditing is “a systematic process of objectively

obtaining and evaluating evidence regarding assertions
about economic actions and events to ascertain the

Introduction to Audit degree of correspondence between those assertions and

established criteria and communicating the results to the
interested users.”
Two processes of auditing:

a. Investigative process – involves the systematic gathering

and evaluation of evidence as a basis for determining whether
assertions made by responsible person correspond with the
established criteria

b. Reporting process – involves communicating the audit

opinion to interested users

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 1. Systematic process – auditing involves structured/logical series of sequential steps
or procedures known as the audit process

2. Objectively obtaining and evaluating evidence – auditing involves gathering and

evaluating sufficient appropriate audit evidence that will support the auditor’s opinion
 Objectivity refers to the combination of impartiality, intellectual honesty and freedom
from conflicts of interest.
Important Concepts
 Audit evidence is the information obtained by the auditor in arriving at the
conclusions on which the audit opinion is based.

3. Assertions about economic actions and events – assertions are the subject matter
of auditing
 In the context of audit of financial statements, assertions are representations of
management, explicit or otherwise, that are embodied in the financial statements .
Assertions include the accounts, balances/amounts and disclosures appearing on the
face of the financial statements (and in the notes to financial statements) and which
the management claims to be free of misstatements.
 Audit evidence gathered and evaluated by the auditor may support or contradict the
assertions of management.

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 4. Established criteria – the standards or benchmarks that are needed to
judge the validity of the assertions on the financial statements
 In the context of audit of financial statements, the established criteria are
the applicable financial reporting framework (for example, the PFRS).

5.  Ascertain the degree of correspondence between assertions and

established criteria – The auditor’s objective is to determine whether the
Important Concepts (1) assertions conform with established criteria, that is, whether the financial
statements are prepared, in all material respects, in accordance with the
applicable financial reporting framework (such as the PFRS).

6. Communicating the results to the interested users – The ultimate

objective of audit is the communication of audit findings/opinion on the
fairness of the financial statements to interested users.
 Communicating results is achieved through issuance of a written audit
report which contains the audit opinion (or disclaimer of opinion).
Interested users are the wide variety of financial statements users who rely
on the auditor’s opinion such as the stockholders, creditors, potential investors
and creditors, management, government agencies, and the public (in
general). 

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 Suitable Criteria

Elements FS Audit
Assurance Engagement Written assurance report in the form appropriate to a
reasonable assurance engagement or a limited assurance
engagement

Sufficient appropriate evidence

Appropriate subject matter

Three party relationship (involving a practitioner, a responsible party and

intended users)

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 Applicable financial reporting framework / GAAP
1.) Suitable Criteria
in the Philippines (PFRS) and Other Authoritative
Body

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 Independent auditor’s report contains the audit conclusion/opinion

a) Unmodified (unqualified) opinion—The opinion

2) Assurance Report-Levels of expressed when the FSs are prepared, in all material
Assurance respects, in accordance with the applicable FRF. 
b) Modified opinion—The three types of are:
i. Qualified opinion – the auditor is satisfied that the FSs
are presented fairly, except for a specific aspect of
them.
ii. Adverse opinion – the auditor does not believe the
FSs are fairly presented.
iii. Disclaimer of opinion – the auditor does not know if
the FSs are presented fairly.

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 Sufficient Appropriate Evidence:
3.) Sufficient Appropriate Auditor obtains sufficient appropriate audit evidence
Evidence as a basis for audit conclusion/opinion

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 Assertions/Financial statements of the client company
4.) Subject Matter
 confident and forceful statement of fact or belief.

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 a. Practitioner – CPA in public practice who performs the
assurance engagement
  b. Responsible party – person/s who is responsible for the
5.) Three Party Relationship subject matter or the assertion (subject matter
information)
c.  Intended user/s – person, persons or class of persons f
or whom the practitioner prepares the assurance report;
they are the users to whom the practitioner usually
addresses the report

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 Why the need for Independent Financial Statement Audit ?

Potential conflict of interest Consequence for

between users and preparers decision making
of the financial information

Complexity of subject
Remoteness of users matter requires
expertise

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 An audit benefits
the public. 

What was held true

in the past will
Financial data and
continue to hold
statements to be
true in the future in
audited are
the absence of
verifiable
known conditions to
the contrary

Elements of
Theoretical
Framework The auditor should
always maintain
Consistent
application of GAAP
results in fair
of Auditing: independence with
respect to the client
whose financial
presentation of FS
statements are
subject to audit

Effective internal
There should be no
control system
long-term conflict
reduces the
between the
possibility of errors
auditor and the
and fraud affecting
client
the financial
management. 
statements PAGE 12

Importance of audit opinion/audit
report
 It lends credibility to the FS.
 It provides increased assurance (reasonable
assurance) to users as to the fairness of the FS.
An FS audit is:
 NOT a certification or guarantee as to
accuracy or fairness of the FS.
 NOT an assurance as to future viability
of the entity.
 NOT an assurance as to efficiency or
effectiveness of the client’s business
operations.
 NOT attestation as to the financial
strength of an entity, the wisdom of its
management decisions, or the risk of
doing business with it.
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 1.To obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error.

 Reasonable assurance means high, but not absolute, level of

assurance 
 Reasonable assurance is the basis for the auditor’s opinion.
Reasonable assurance is achieved when the auditor has
Overall Objectives of the obtained sufficient appropriate audit evidence to reduce
audit risk to an acceptably low level.
Independent Auditor:
2. To report on the financial statements and to communicate such report in accordance
with the auditor’s findings.
Auditor’s opinion and reasonable assurance:
The auditor's opinion, as expressed in the auditor’s report, enhances the credibility of the
financial statements by providing a reasonable assurance that the financial statements are
fairly presented or free from material misstatement.  
Audit opinion is based on whether reasonable assurance is obtained:
1. When reasonable assurance is obtained:  Auditor shall express an unqualified opinion
2. When reasonable assurance cannot be obtained:  The auditor is required to:
a. Express a qualified opinion in the auditor’s report
b. If qualified opinion is insufficient in the circumstances:
 Disclaim an opinion or 
 Withdraw from the engagement, where withdrawal is legally permitted

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 a. Independent auditor’s report – the primary product of audit
  engagement
End Products of Audit b. Certain other communication and reports – other
Engagement: communication and reporting responsibilities to users,
management, those charged with governance, or parties
outside the entity, in relation to matters arising from the
audit (as may be required by the PSAs or by applicable laws
or regulations)
Examples:
 Communication with those charged with governance
 Auditor’s responsibilities relating to fraud in an audit of
financial statements

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 1. Responsibility for the preparation and presentation of the
Management Responsibility for the financial statements in accordance with the applicable financial
Financial Statements: reporting framework which includes:
a. Identification of applicable financial reporting framework, in the
context of any relevant laws or regulations
b. Preparing the financial statements in accordance with that
framework
c. Adequate description of that framework in the financial statements
d. Making reasonable accounting estimates
e. Selecting and applying appropriate accounting policies

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Management Responsibility for the
Financial Statements(1):
2. Responsibility for designing, implementing and maintaining
internal control that is relevant or necessary to enable the
preparation of financial statements that are free from material
misstatement, whether due to fraud or error, and
3. Responsibility to provide the auditor with:
a. All information (such as records, documentation and
other matters) that are relevant to the preparation and
presentation of the financial statements
b. Any additional information that the auditor may
request from management for the purpose of the
audit; and
c. Unrestricted access to persons within the entity from
whom the auditor determines it necessary to obtain
audit evidence.
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  Auditing involves verification of FS and its fairness of presentation
while accounting involves preparation and presentation of FS
 Accounting precedes auditing because without FS there could be no
FS audit.
 Auditing begins when accounting ends.

Basic Distinction between  The end product of the accounting process is a set of FS while the
end product of the audit process is an auditor’s report.
Auditing and Accounting:
 An auditor must be proficient/expert in accounting (since the auditor
will use GAAP in evaluating the fairness of the FS) as well as in
auditing (specifically in accumulation and interpretation of audit
evidence); an accountant need not be proficient in auditing
 Separate disciplines:  Auditing is a separate discipline or field of
study
 With different frameworks/foundations:
 Accounting – Framework for Preparation of FS
 Auditing – a) Philippine Framework for Assurance Engagements, and
b) Framework of Philippine Standards on Auditing
 Auditing – governed by GAAS; Accounting – governed by GAAP/PFRS
 Dissimilar bodies of knowledge (accounting – GAAP; auditing –
GAAS)

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 1. According to objectives or nature of assertion

a. Financial statement audit – an audit conducted to

determine whether the financial statements of an entity are
fairly presented in accordance with an identified financial
reporting framework (or PFRS)
b. Compliance audit:  a review of an entity’s degree of
General Types of Audit:
compliance with applicable laws and rules/regulations or
contracts; usually performed by government auditors
Examples: Examination conducted by:
i) BIR examiners:  compliance of taxpayers with tax law,
rules or regulations
ii) BSP examiners: compliance of banks with banking laws,
rules or regulations
iii) COA auditors: compliance of government
transactions/expenditures with the requirements of
applicable laws, rules or regulations

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 a. Operational audit involves a systematic review and evaluation of the specific operating
units (or procedures, methods or activities) of an organization in relation to specified
objectives for the purpose of measuring/assessing its performance in terms of efficiency
and effectiveness of operations, identifying opportunities for improvement and making
recommendations to improve performance (such as introduction of controls to reduce
waste).
 Also called performance audit or management audit
General Types of Audit (1):
 Example: Evaluation of a company’s computerized accounting system
 Usually performed by internal auditors
 Efficiency relates to use of its resources, while effectiveness relates to accomplishing
objectives. 

Internal auditor's responsibilities in operational audits:

In operational audits, the company's management is responsible for setting
operating standards.  The internal auditor's responsibilities are to determine that:
b. Management has established such standards.
c. The standards are being met.
d. Deviations from established standards are being identi­fied and corrected.
e. Corrective action has been taken.

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 Objective of operational auditing:  
a. To assess performance in terms of efficiency and effectiveness of operations
(1) Effectiveness – To verify fulfillments of plans and sound business
requirements
(2) Efficiency – To determine whether the entity is managing or utilizing its
General Types of Audit (2): resources economically and efficiently
b. To identify areas for improvement
c. To develop recommendations to improve performance (example of such as
introduction of controls to reduce waste)

Operational audit includes:

 Program or effectiveness audit :  an audit to determine whether the entity
has been effective in achieving the desired results or benefits of the program
or activity
 Economy audit:  an audit to determine whether company objectives or goals
are met at a cost commensurate with the task
Efficiency audit:  whether company objectives or goals are met at the least or
minimal Cost

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General Types of Audit According
to types of auditor or their
affiliation with the entity being
examined:
 
a. External / Independent audit:  performed by practitioners or
independent CPAs who offer their professional services for a fee to various
clients on a contractual basis
 Independent or external auditors are not employees of the client
 External audit complements internal audit
b. Internal audit:  audit performed by entity’s own employees known as   
internal auditors; internal auditors investigate and apprise the effectiveness
and efficiency of operations and internal controls of the firm
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General Types of Audit According
to types of auditor or their
affiliation with the entity being
examined(2):
 
Internal auditing is defined as "an independent, objective assurance and
consulting activity designed to add value and improve an organization's
operations. It helps an organization accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and improve the effectiveness of risk
management, control, and governance processes."
Internal auditing includes the audit of:
 Financial and operating information;
 Compliance with policies, plans, procedures, laws, regulations, and contracts;
 The means of safeguarding assets and verifying their existence;
 The economy and efficiency with which resources are employed; and
 Operations or programs to ascertain whether results are consistent with
established objectives and goals and whether they are being carried out as
prescribed.
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General Types of Audit According
to types of auditor or their
affiliation with the entity being
examined(3):
 
Internal auditors assist in the prevention of fraud by examin­ing and evaluating
the system of internal control.
Internal auditors are required to review the means employed by the company to
safeguard its assets from various types of losses such as those resulting from fire,
theft, unscrupulous or illegal activities, and exposure to the elements.
I. Internal auditing:  An independent appraisal function or control or activity
established within an entity to examine and evaluate its activities or other
controls as a service to the entity.  It is an independent, objective assurance
and consulting activity designed to add value and improve an organization’s
operations.  It helps an organization to accomplish its objectives by bringing a
systematic disciplined approach to evaluate and improve the effectiveness of
risk management, control, and governance processes.
II.) Overall objective of internal auditing: to assist the members of the
organization, particularly management and board of directors, in the effective
discharge of their responsibilities; in short, to provide assistance to
management or board of directors (it serves the needs of management).
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General Types of Audit According
a. Government auditing: audit performed by government employees whose main concern is to
to types of auditor or their determine whether persons or entities comply with government laws, rules and regulations
affiliation with the entity being
examined(4): Scope of government audit: may extend beyond FS audit to include:
  i) FS audit
ii) Performance audit (includes (a) program results (effectiveness) audit and (b) economy and
efficiency audit)
iii) Compliance audit

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General Types of Audit According
to types of auditor or their
affiliation with the entity being
examined(5):
A governmental audit is typically designed to determine whether the auditee has complied with
applicable laws and regulations.
The types of audits conducted by the Commission on Audit (COA) are financial audit and performance
audit. Performance audits include economy, efficiency, and program audits. Included in the scope of
financial and performance audits is determining whether the entity has complied with applicable laws
and regulations.
Government auditors are required to prepare a written report on the entity's internal control and
assessment of control risk made as part of a financial statement audit. The auditor's report should
include the following:
1. The scope of the auditor's work in obtaining an under­standing of the entity's internal control and in
his/her assessment of control risk.
2. The entity's significant controls including those that are established to ensure compliance with
laws and regulations that have a material impact on the financial
statements.
3. The conditions, including the identification of material weaknesses, identified as a result of the
auditor's work.
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 1. Independent auditors or external auditors – are CPA firms and
individual practitioners who perform audit services on contractual basis for
more than one client
 Independent auditor – because the auditor is independent with respect
General Types of Auditors to the client whose FS are being audited; External auditor – the auditor
is an outsider (not an employee of the client)
 Practitioners perform operational audits and compliance audits as part
of consultancy services
2. Internal auditors – they are employed by the entity thus they are not
independent.  However, to operate effectively, an internal auditor must be
independent of the line functions of the entity.  Internal auditors perform
operational and compliance audits.
3. Government auditors –  employed in government agencies
 BIR examiners perform compliance audits
 BSP examiners perform compliance and operational audits
 COA auditors perform compliance and operational audits

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 Point of distinction FS Audit Compliance audit Operational audit

Primary objective To enable the auditor to express an To determine degree To assess entity’s
opinion on the fairness of the FS of compliance performance (in terms of
efficiency and
  effectiveness)

Subject matter Assertion that the FS are presented Assertion that the Assertion that the
(Assertion) in accordance with identified organization has organization’s
financial reporting framework complied with laws, activities/operations are
(GAAP) regulations and conducted effectively and
specific procedures efficiently in relation to
Distinction: Types of audit specified objectives

according to objectives or nature

Established criteria GAAP – Identified financial
of assertion/data reporting framework (as by
standard setting bodies)
Applicable laws, Objectives (as set by the
regulations and board of directors)
specific procedures
(as set by
authoritative bodies)

Sufficient appropriate Audit findings whether the FS are in Findings on degree of Findings on assessment
evidence / outcome accordance with Identified financial compliance of performance /
reporting framework (GAAP) operations

Communication of Auditor’s report containing an Reports on the Recommendations or

results to intended opinion whether the FS are fairly degree of compliance suggestions on how to
users presented in accordance with with applicable laws, improve operations
identified financial reporting regulations or specific
framework (GAAP) procedures

Users of audit report Different groups for different Authoritative bodies Management of the
purposes; wide variety of users that sets down the entity
(both internal and external users) regulations, rules and
procedures

Type of auditor Independent / external auditors – Government auditors Internal auditors

performing the audit practitioners PAGE 28
Organizational Structure of a Listed Company

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  Select the external auditors.
The following are some of the audit
 Review the external auditor's overall audit plan.
committee's functions:
 Evaluate the results of external and internal audits.
 Review the internal auditing work schedule, budget, etc.
 Meet regularly with the internal auditing director.
 The above functions should increase public confidence on the
fair presentation of the company's financial statements.

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 Thank
You