AUDIT-An Overview: Auditing Defined
AUDIT-An Overview: Auditing Defined
AUDIT- An Overview
Auditing Defined
An audit involves obtaining and evaluating evidence about assertions regarding economic actions
and events
Assertions- representations made by an entity about economic actions and events. Auditor’s
overall objective is to determine whether these assertions are valid by obtaining and evaluating evidences.
An audit is conducted objectively
- Established criteria- needed to judge the validity of the assertions. It is the basis against
which the assertions have been evaluated or measured
Auditors communicate the audit results to various interested parties
Types of Auditors
1. External Auditors or Independent Auditors
- Independent CPAs who offer services on contractual basis
- Who generally perform financial statement audits
- CPA in public practice
2. Internal Auditors
- Entity’s own employees who investigate and appraise the effectiveness and efficiency of
operations and internal controls
- Usually perform operational audit
- To help the company in achieving its goals
3. Government Auditors/Internal Revenue Agents
- Government employees whose main concern is to determine whether the persons or entities
comply with government rules or regulations
- Conduct compliance audit
4. Government Accountability Office Auditors
- Evaluate effectiveness and efficiency of government programs
- Refer to Commission on Audit
Inherent Limitations
1. Nature of the procedures performed
1. The use of testing or sampling risk
- Auditors do not examine all evidence available.
- Many audit conclusions are made by examining only sample evidence
Note: Opinion of an auditor is not an assurance as to the future viability of the entity nor the efficiency or
effectiveness with which management has conducted the affairs of the entity
Prepares Financial
Statements
General Requirements when Auditing Financial Statements
Unaudited
1. Auditor comply with the relevant Ethical Requirements Evaluates Financial
should Financial
adhere to standards of ethical conduct that embody andStatements
- MustStatements demonstrate integrity,
objectivity and concern for public rather than self-interest
Audited Financial Statements Audit Report on Financial
Statements
2. Auditor should conduct an audit in accordance with the Philippine Standards on Auditing
(PSAs) Users of Financial Statements
- Standards contain the basic principles and essential procedures which the auditor should
follow.
- Includes explanatory and other materials that are designed to assist auditors in interpreting
and applying the auditing standards
3. Auditor should apply professional judgment in planning and performing the audit
- Essential to the proper conduct of the audit
4. Auditor should obtain sufficient appropriate audit evidence to reduce risk to an acceptably
low level
- Audit evidence is needed to support the opinion expressed in the auditor’s report.
- Should be sufficient and appropriate
5. The auditor should plan and performs the audit with an attitude of professional skepticism
recognizing that circumstances may exist which may cause the financial statements to be
materially misstated
- Means the auditor makes a critical assessment, with a questioning mind, of the validity of
audit evidence obtained and alert to audit evidence that contradicts or bring into questions the
reliability of documents or management representations
- The auditor neither assumes that management is honest nor assumes unquestioned honesty
- Public accounting firms have long recognized the value of industry specialization
- Firms believe that such organizational structure leads to higher-quality integrated services
Career Levels
1. Staff Auditors- entry level, performs tasks assigned by senior auditor
2. Senior Auditors- supervises some aspect of the audit
3. Managers- supervises the audit management
4. Partners- responsible for performance of audit in accordance with standards
5. Senior/Managing Partners- responsible for developing firm’s policies, planning activities, and
day to day management
Audit Season
- Busy season from December through April
- Followed by a period of slack demand
Assurance Engagements
- Designed to enhance the degree of confidence of the intended users about subject matter
Three-Party Relationship
1. Practitioner
- Requested to perform engagement
- May use any expert/professionals
2. Responsible Party
- Responsible for subject matter and subject matter info
3. Intended Users
- Whom practitioner prepares the assurance report
Criteria
- Benchmarks used to evaluate the subject matter and are available to intended users
- May be formal such as PFRS, COSO’s Internal Control, Integrated Framework, or Laws and
Regulations (Established Criteria)
- Or less formal such as internally developed code, rules and regulations, and policies
(Specifically Developed Criteria)
Reliability of Evidence
1. From independent or outside source
2. Controls are effective
3. Directly obtained
4. In documentary form
5. Original documents
Assurance Report
1. Audit- positive form of assurance
Unqualified- presented fairly in all material aspects
Qualified- presented fairly in all material aspects
(Material misstatement or scope limitation or uncertainty)
Adverse- “Do not present fairly”
(Material and pervasive/widespread misstatements)
Disclaimer- do not express and opinion
(high degree of scope limitation and uncertainty)
2. Review- negative/indirect form of assurance
General Standards
1. Examination is to be performed by person/s having adequate technical training and proficiency as
an auditor
2. In all matters relating to an engagement, an independent in mental attitude is to be maintained by
the auditor
3. Due professional care is to be exercised in the performance of the audit and in the preparation of
the report
Standards of Fieldwork
1. The work is to be adequately planned
2. There is to be a proper study and evaluation of existing internal control
3. Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries
and confirmations to afford a reasonable basis for an opinion regarding the financial statements
under examination
Standards of Reporting
1. The report shall state whether the financial statements are presented in accordance with GAAP
2. Which principles have not been consistently observed in the current period in relation to the
preceding period
3. Informative disclosures are to be regarded as reasonably adequate unless otherwise stated in the
report
4. The report should contain a clear-cut indication of the character of the auditor’s examination if
any and the degree of responsibility he is taking
AASC PRONOUNCEMENTS
Adoption of International Standards
To facilitate the preparation by the AASC of its pronouncements and to attain uniformity of those
Framework for Assurance and Engagements Related Services
with the international auditing standards, AASC adopts the ff issued by the International Auditing and
Assurance Board (IAASB) created by the International Federation of Accountant (IFAC)
1.Audit
International Standards
Review on Auditing (ISAs)
Others Agreed-upon Compilation
2. International Standards on Assurance Engagements (ISAEs)
Procedures Engagement
Engagement
Philippine Philippine Philippine Philippine Philippine
Standards Standards Standards Standards on Standards on
on Auditing on Review on Related Services Related Services
Engagement Assurance
3. International Standards on Review Engagements (ISREs)
4. International Standards on Related Services (ISRSs)
1. Leadership Responsibilities
- To promote an internal culture based on recognition that quality is essential in the
performance of the engagements
- The engagement partner should:
Take responsibility for the overall quality on each audit engagement
Set example regarding the quality of audit by emphasizing through actions and
messages
Performing work that complies with professional standards
Complying with the firm’s quality control policies and procedures
Issuing appropriate audit reports
Engagement’s team ability to raise concerns without fear of reprisals
2. Ethical Requirements
- To provide reasonable assurance that firm and its personnel comply with ethical requirements
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behavior
- The engagement partner should consider whether the members of the engagement team have
complied with these ethical principles
- Issues involving engagement team member’s non-compliance with ethical requirements must
be properly resolved and documented
3. Independence
- That the members of the engagement team, the firm, and, where applicable, the network firms
maintain independence when providing audit services
- Engagement partner
Should form a conclusion on compliance with independence requirements that apply
to audit engagement
- Engagement partner should:
Obtain relevant information that identifies threats to independence
Evaluate information on identified breaches of the firm’s independence
Take appropriate safeguards to eliminate or reduce such threats
Document conclusions on independence
6. Engagement Performance
- That engagements are performed in accordance with professional standards and other
regulatory and legal requirements; and that the audit report issued is appropriate in the
circumstances
- Engagement partner should take responsibility for the direction, supervision, review and
overall performance of the audit engagement
a) Direction- informing
b) Supervision- monitoring
c) Review
d) Consultation
e) Engagement Quality Review
f) Differences in Opinion
7. Monitoring
- Continued adequacy and operational effectiveness of quality control policies and procedures
is to be monitored
- Assurance that the systems of quality control are relevant, adequate and operating effectively
CHAPTER 3
Auditor’s Responsibility
Responsibility of Client’s Management
- Fair representation of the financial statements
Auditor’s Responsibility
- To design the audit to provide reasonable assurance of detecting material misstatements in
financial statements
Misstatements emanate from:
Error
Fraud
Noncompliance with Laws and Regulations
Error
- Unintentional misstatements
- Omission of an amount or a disclosure
Mathematical or clerical mistakes in underlying records and accounting data
Incorrect accounting estimates arising from oversight or misinterpretation of facts
Mistakes in the application of accounting policies
Fraud
- Intentional act involving use of deception to obtain an unjust or illegal advantage
- Fraudulent acts that cause material misstatements in financial statements
- Involves motivation to commit the act and a perceived opportunity to do so
Types of Fraud
1. Fraudulent Financial Reporting
- Also known as “management fraud”
- Intentional misstatements or omissions of amounts or disclosures in financial statements
- Usually involves members of management or those charged with governance
Manipulation, falsification or alteration of records or documents
Misrepresentation in or intentional omission of the effects of transactions from records or
documents
Recording of transactions without substance
Intentional misapplication of accounting policies
2. Misappropriation of Assets
- Also called “employee fraud”
- Theft of an entity’s assets committed by employees
- Accompanied by false misleading records or documents in order to conceal the fact that
assets are missing
Embezzling receipts
Stealing entity’s assets as cash, marketable securities and inventory
Lapping of accounts receivable
Auditor’s Responsibility
- Cannot be held responsible for the prevention of fraud and error
- Responsibility is to design the audit to provide reasonable assurance that the financial
statements are free from material misstatements, whether caused by error or fraud
Fraud Risk Factors Relating to Misstatements Resulting from Fraudulent Financial Reporting
1. Management’s Characteristics and Influence over the Control Environment
- Pertains to management’s abilities, pressures, style, and attitude relating to internal control
and the financial reporting process
2. Industry Conditions
- Involve the economic and regulatory environment in which the entity operates
3. Operating Characteristics and Financial Stability
- Pertain to the nature and complexity of the entity and its transactions, the entity’s financial
condition, and its profitability
Fraud Risk Factors Relating to Misstatements Resulting from Misappropriation of Assets
1. Susceptibility of Assets to Misappropriation
- Pertain to the nature of an entity’s assets and the degree to which they are subject to theft
2. Controls
- Involve the lack of controls designed to prevent or detect misappropriation of assets
CHAPTER 4
The Audit Process- Accepting an Engagement