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AUDITS OF FINANCIAL
STATEMENTS
CHAPTER 2
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AUDITING DEFINED

AUDITING IS “A SYSTEMATIC PROCESS OF OBJECTIVELY OBTAINING

AND EVALUATING EVIDENCE REGARDING ASSERTIONS ABOUT
ECONOMIC ACTIONS AND EVENTS TO ASCERTAIN DEGREE OF
CORRESPONDENCE BETWEEN THESE ASSERTIONS AND
ESTABLISHED CRITERIA AND COMMUNICATING THE RESULTS TO
INTERESTED USERS”.
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AUDITING DEFINED
AN AUDIT FOLLOWS A LOGICAL SEQUENCE OF
A SYSTEMATIC PROCESS
PROCEDURES.

OBJECTIVELY MEANS A COMBNATION OF IMPARTIALITY,

INTELLECTUAL HONESTY AND A FREEDOM FROM CONFLICT
OF INTEREST. AN AUDIT REQUIRES THE GATHERING AND
OBJECTIVELY OBTAINING AND EVALUATION OF EVIDENCE, WHICH MAY COME IN THE FORM
EVALUATING EVIDENCE OF ORAL REPRESENTATIONS, WRITTEN DOCUMENTS,
ELECTONIC MEDIA, ETC. A CPA CANNOT EXPRESS AN
OPINION WITHOUT SUPPORTING EVIDENCE TO BACKUP
THEIR CLAIM.
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AUDITING DEFINED
ASSERTIONS ARE REPRESENTATIONS OF MANAGEMENT,
EXPLICIT OR OTHERWISE, THAT ARE EMBODIED IN
ASSERTIONS ABOUT FINANCIAL STATEMENT COMPONENTS, RECORDS, OR
ECONOMIC ACTIONS AND
EVENTS SYSTEMS. THE CPA’S JOB IS TO OBTAIN AND EVALUATE
EVIDENCE, WHICH MAY SUPPORT, CONTRADICT, THE
ASSERTIONS OF MANAGEMENT.

AUDITORS USE STANDARDS OR BENCHMARKS (CRITERIA)

DEGREE OF FOR PURPOSES OF EXPRESSING AN OPINION ON THE
CORRESPONDENSE
ASSERTIONS OF MANAGEMENT. IN THE CASE OF AUDIT OF
BETWEEN THESE
ASSERTIONS AND FINANCIAL STATEMENTS, THE ESTABLISHED CRITERIA ARE
ESTABLISHED CRITERIA GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
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AUDITING DEFINED

AFTER THE AUDIT HAS BEEN COMPLETED, A CPA

PREPARES A REPORT WHICH CONTAINS, IN WRITING, THE
COMMUNICATING THE OPINION (OR DISCLAIMER OF OPINION) OF THE CPA. IN
RESULTS TO INTERESTED
USERS FINANCIAL STATEMENT AUDITS, THE OPINION IS IN THE
FAIRNESS OF THE REPRESENTATION OF FINANCIAL
STATEMENTS FOR THE PERIOD UNDER AUDIT.
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AUDITING AND ACCOUNTING

DISTINGUISHED

ACCOUNTING IS THE PROCESS OF RECORDING, CLASSIFYING AND

SUMMARIZING ECONMIC EVENTS IN LOGICAL MANNER FOR THE
PURPOSE OF PROVIDING FINANCIAL INFORMATION FOR DECISION
MAKING. IT IS A SERVICE ACTIVITY, THE PURPOSE OF WHICH IS TO
PROVIDE FINANCIAL INFORMATION WHICH IS QUANTITATIVE IN
NATURE TO HELP MANAGEMENT IN DECISION MAKING.
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AUDITING AND ACCOUNTING

DISTINGUISHED

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. AN AUDITOR MUST POSSESS,
NOT ONLY AN UNDERSTANDING OF THE ACCOUNTING RULES, BUT
ALSO AN EXPERTISE IN THE ACCUMULATION AND INTERPRETATION
OF AUDIT EVIDENCE.
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ASSURANCE SERVICES AND AUDIT

SERVICES DISTINGUISHED

ASSURANCE SERVICES IS ONE WHERE A PROFESSIONAL

ACCOUNTANT WILL EVALUATE A SUBJECT MATTER THAT IS
RESPONSIBILITY OF ANOTHER PARTY AGAINST SUITABLE CRITERIA,
AND EXPRESSES AN OPINION WHICH PROVIDES THE INTENDED
USERS WITH LEVEL OF ASSURANCE ABOUT THE PARTICULAR
SUBJECT MATTER.
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ASSURANCE SERVICES AND AUDIT

SERVICES DISTINGUISHED

ASSURANCE ENGAGEMENT

ATTESTATION
ENGAGEMENTS

DIRECT ENGAGEMENT
FS AUDIT
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TYPES OF AUDITS
TYPE ASSERTIONS CRITERIA REPORT
FINANCIAL FINANCIAL IDENTIFIED AUDIT REPORT ON THE FAIRNESS OF
STATEMENT STATEMENTS ARE FINANCIAL FS. INTERESTED USERS INCLUDE
AUDIT FAIRLY PRESENTED REPORTING INVESTORS, CREDITORS, ETC.
FRAMEWORK
OPERATIONAL OPERATIONAL OR MANAGEMENT REPORT ON EFFICIENCY AND
AUDIT PERFORMANCE OBJECTIVES EFFECTIVENESS, INCLUDING
DATA CONSTRUCTIVE SUGGESTIONS.
USERS-MANAGEMENT AND BOD.
COMPLIANCE COMPLIANCE WITH LAWS, RULES AND DEGREE OF COMPLIANCE REPORT.
AUDIT APPLICABLE LAWS REGULATIONS, OR USERS-MANAGEMENT AND BOD.
AND REGULATIONS MANAGEMENT
OR MANAGEMENT POLICY
POLICY
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AUDITING AND ACCOUNTING

DISTINGUISHED
EXTERNAL AUDITS

THESE ARE AUDITS PERFORMED BY CPAs WHO ARE INDEPENDENT OF

THE ORGANIZATIONS WHOSE ASSERTIONS BEING AUDITED. THESE CPAs
ARE ALSO KNOWN AS INDEPENDENT AUDITORS OR EXTERNAL AUDITORS.
THE AUDITS PERFORMED BY THE EXTERNAL AUDITORS COMPRISE MAINLY
OF FINANCIAL STATEMENT AUDITS, THOUGH COMPLIANCE AND
OPERATIONAL AUDITS MAY ALSO BE PERFORMED BY THEM.
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AUDITING AND ACCOUNTING

DISTINGUISHED
INTERNAL AUDITS

AN INTERNAL AUDIT IS “AN INDEPENDENT APPRAISAL FUNCTION

ESTABLISHED WITHIN AN ORGANIZATION TO EXAMINE AND EVALUATE ITS
ACTIVITIES AS A SERVICE TO THE ORGANIZATION”. THE INTERNAL
AUDITING STAFF OFTEN REPORTS TO THE AUDIT COMMITTEE OF THE BOD,
AND ALSO TO THE PRESIDENT OR ANOTHER HIGH EXECUTIVE. INTERNAL
AUDITOR ARE NOT INDEPENDENT IN THE SAME SENSE AS EXTERNAL
AUDITORS. IA COMPRISE MAINLY OF OPERATIONAL AND COMPLIANCE
AUDIT.
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AUDITING AND ACCOUNTING

DISTINGUISHED

GOVERNMENT AUDITS

INVOLVES THE DETERMINATION OF WHETHER GOVERNMENT FUNDS ARE

BEING HANDLED PROPERLY AND IN COMPLIANCE WITH EXISTING LAWS
AND WHETHER THE GOVERNMENT PROGRAMS OF A PARTICULAR AGENCY
ARE BEING CONDUCTED EFFICIENTLY AND ECONOMICALLY. THE
COMMISSION ON AUDIT IS RECOGNIZED AS THE SUPREME AUDIT
INSTITUTION IN THE REPUBLIC OF THE PHILIPPINES.
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GOVERNMENT AUDITS

1. COMPLIANCE AUDIT – THE EXAMINATION, AUDIT AND

SETTLEMENT IN ACCORDANCE WITH LAWS AND REGULATIONS.

2. FINANCIAL AUDIT – AUDIT OF ACCOUNTING AND FINANCIAL

SYSTEM AND CONTROLS TO ENSURE RELIABILITY OF RECORDED
FINANCIAL DATA.
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GOVERNMENT AUDITS

3. PERFORMANCE AUDIT – AN OBJECTIVE EXAMINATION OF THE

FINANCIAL AND OPERATIONAL PERFORMANCE OF AN
ORGANIZATION, PROGRAM, ACTIVITY OR FUNCTION AND IS
ORIENTED TOWARDS OPPORTUNITIES FOR GREATER ECONOMY,
EFFICIENCY AND EFFECTIVENESS.
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GOVERNMENT AUDITS
A. ECONOMY AND EFFICIENCY AUDIT – ALSO KNOWN AS
MANAGEMENT AUDIT. THIS IS THE APPRAISAL OF MANAGEMENT
PERFORMANCE FROM A LATEST COST POINT OF VIEW AND THE
ANALYSIS OF COST-BENEFIT.

B. EFFECTIVENESS AUDIT – ALSO KNOWN AS PROGRAM RESULT

AUDIT. THIS IS THE EVALUATION OF PROGRAMS, PROJECTS AND
ACTIVITIES TO DETERMINE THE EXTENT OF ACHIEVEMENT OF
PREVIOUSLY SET GOALS AND OBJECTIVES.
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OBJECTIVE OF FINANCIAL
STATEMENT AUDIT
THE OBJECTIVE OF AN AUDIT OF FINANCIAL STATEMENT IS THE EXPRESSION
OF AN OPINION ON THE FAIRNESS OF SUCH FINANCIAL STATEMENTS. THE
AUDITOR’S REPORT IS THE MEDIUM THROUGH WHICH HE EXPRESSES HIS
OPINION OR, IF CIRCUMSTANCES REQUIRE, DISCLAIMS AN OPINION. IN
EITHER CASE, HE STATES WHETHER HIS EXAMINATION HAS BEEN MADE IN
ACCORDANCE WITH PHILIPPINE STANDARDS ON AUDITING or PSAs.

PSA REQUIRE THE AUDITOR TO STATE WHETHER IN HIS/HER OPINION, THE

FINANCIAL STATEMENTS ARE PRESENTED IN CONFIRMITY WITH GAAP.
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SCOPE OF FINANCIAL STATEMENT

AUDIT
THE AUDITOR NORMALLY DETERMINES THE SCOPE OF AN AUDIT IN
ACCORDANCE WITH THE REQUIREMENTS OF LEGISLATION, REGULATION OR
RELEVANT PROFESSIONAL BODIES.

IN THE OBSERVANCE OF PSAs, THE AUDITOR MUST EXERCISE HIS JUDGMENT

IN DETERMINING WHICH AUDITING PROCEDURES ARE NECESSARY IN THE
CIRCUMSTANCES TO AFFORD THE REASONABLE BASIS FOR HIS OPINION. HIS
JUDGEMENT IS REQUIRED TO BE THE INFORMED JUDGMENT OF A QUALIFIED
PROFESSIONAL PERSON.
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INFORMATION RISK

THE RISK THAT THE INFORMATION IS MISSTATED OR MISLEADING IS KNOWN

AS INFORMATION RISK. SEVERAL FACTORS CONTRIBUTE TO THE EXISTENCE
OF INFORMATION RISK, INCLUDING THE FOLLOWING:

1. REMOTENESS OF INFORMATION USERS FROM INFORMATION PROVIDER.

2. POTENTIAL BIAS AND MOTIVES OF INFORMATION PROVIDER.

3. VOLUMINOUS DATA.

4. COMPLEX EXCHANGE TRASACTIONS.

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REDUCING THE INFORMATION RISK

TO REDUCE INFORMATION RISK, MANAGEMENT OF BUSINESSES AND THE

USERS OF THEIR FINANCIAL STATEMENTS MAY ADOPT ANY OR ALL OF THE
FOLLOWING APPROACHES:

1. ALLOW USERS TO VERIFY INFORMATION.

2. USER SHARES INFORMATION RISK WITH MANAGEMENT.

3. HAVE THE FINANCIAL STATEMENTS BE AUDITED.

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THE AUDIT REPORT

THE AUDIT REPORT IS THE MEANS THROUGH WHICH THE AUDITOR PROVIDES
REASONABLE ASSURANCE THAT THE FINANCIAL STATEMENTS ARE FAIRLY
STATED. THIS REPORT IS UNIFORM IN FORMAT AND SUITABLY TITLED TO
AVOID CONFUSION REGARDING THE LEVEL OF ASSURANCE BEING PROVIDED
AND TO DIFFERENCIATE IT FROM OTHER REPORTS WHICH CLIENT
MANAGEMENT MIGHT INLCUDE WITH THE FINANCIAL STATEMENTS.
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LIMITATION OF AN AUDIT

AN AUDIT IS NOT A GUARANTEE OF THE EXACTNESS OF ACCURACY OF

ASSERTIONS IN THE FINANCIAL STATEMENTS. AN AUDIT IS UNDERTAKEN TO
ENHANCE THE DEGREE OF CONFIDENCE OF INTENDED USERS IN THE
FINANCIAL STATEMENTS. BASED ON THE CONCLUSIONS DRAWN, FROM THE
AUDIT EVIDENCE OBTAINED, THE AUDITOR EXPRESSES AN OPINION ON THE
FINANCIAL STATEMENTS. HOWEVER, AN AUDIT IS NOT INTENDED TO, AND
CANNOT, PROVIDE A GUARANTEE OR ABSOLUTE ASSURANCE (I.E.,
CERTAINTY) THAT THE FINANCIAL STATEMENTS ARE FREE FROM MATERIAL
MISSTATEMENT DUE TO FRAUD OR ERROR.
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INHERENT LIMITATION OF AN AUDIT

1. THE NATURE OF FINANCIAL REPORTING;

2. THE NATURE OF AUDIT PROCEDURES; AND

3. THE NOTED FOR THE AUDIT TO BE CONDUCTED WITHIN A REASONABLE

PERIOD OF TIME AND AT A REASONABLE COST.