GENERAL TYPES OF AUDIT

LEARNING OUTCOMES

At the end of this lesson, students should be able to:

1. Know the general principles of an FS audit as provided for in
Philippine Standards on Auditing (PSA) 200
2. Enumerate the major steps in a financial statements audit
3. Understand the basic requirements for an effective financial
statements audit
4. Understand the nature, objectives, and scope of an internal audit
and government audit
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Know the general principles of an FS audit as provided
for in Philippine Standards on Auditing (PSA) 200
Learning Outcome 1
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General Principles
Objectives of an FS Audit
In conducting an audit of financial statements, the overall objectives of
the auditor are:
a. To obtain reasonable assurance about whether the financial statements as
a whole are free from material misstatement, whether due to fraud or
error, thereby enabling the auditor to express an opinion on whether the
financial statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework; and
b. To report on the financial statements, and communicate as required by the
PSAs, in accordance with the auditor’s findings. 4
General Principles
Scope of an FS Audit
The term “scope of an audit” refers to the audit procedures deemed
necessary in the circumstances to achieve the objective of the audit.
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, legislation,
regulations and, where appropriate, the terms of the audit
engagement and reporting requirements.

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General Principles
Scope of an FS Audit
In doing so, the auditor will conduct a critical and systematic
examination of the statements and of the related documents, records,
procedures, and control. Audit evidences may be gathered to enable
him to substantiate the representations in the financial statements.
Internal controls will be evaluated for effectiveness since they affect
the reliability of the financial records. By inquiry, observation,
confirmation and inspection, the auditor can test the existence and
validity of assets, liabilities, and the overall reasonableness of the FS.
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WHAT ARE THE ADVANTAGES
OF AN FS AUDIT?
Advantages and Practical Benefits of an
Independent FS Audit
To the Auditee of Client
1. Independent audit makes the financial statements more credible and
reliable
2. Management is the beneficiary of constructive suggestions in improving
business operations
3. Commission of fraud by management and employee is minimized
4. Audited FS provide a more credible basis for preparation of tax returns
5. Better and sound management decisions may be made if financial records
and reports are accurately maintained and provided
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Advantages and Practical Benefits of an
Independent FS Audit
To Creditors, Prospective Investors, Employees
1. Financial institutions have more credible basis in deciding whether financial assistance
will be extended to the auditee
2. Suppliers and other creditor will have reliable basis in making decisions related to
extension of credit
3. Potential and current investors will have more credible basis in evaluating managerial
efficiency
4. Employees will have a better and credible basis in requesting for fringe benefits and
wage adjustments
5. In the event of a sale, purchase, or merger of a business, both buyer and seller will
have more confident basis for aiming at a decision to the terms of the arrangement 9
Advantages and Practical Benefits of an
Independent FS Audit
To Government Agencies and Legal Community
1. BIR has more assurance concerning accuracy and dependability of tax
return if they have been based on audited financial statements
2. Government institutions like GSIS, SSS, DBP will have a better basis in
extending financial assistance to business enterprises
3. Audited statements provide the legal community an independent basis for
administering estates and trust, selling action in bankruptcy and insolvency,
etc.

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Enumerate the major steps in a financial statements audit
Learning Outcome 2

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Overview of a Public Accounting Audit Engagement

Pre-engagement Activities

Planning Activities

Internal Control Risk Assessment Activities

Account Balance Audit Activities

Reporting Activities
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 Major Steps in a Financial Statements Audit

Pre
engagement Planning Execution Conclusion
activities 13
Phase 1: Pre-engagement and Planning
Audit process begins with the preliminary arrangements with
the client. Once the client signs the engagement letter, the
planning process starts by obtaining a detailed
understanding of the client’s business and an overall
strategy. In includes understanding of the client’s:
1. Industry environment
2. Business and management
3. Accounting and reporting systems
4. Internal control 14
Phase 1: Pre-engagement and Planning
On the basis of the initial information gathered by the auditor, he then
assesses the “audit risk” by assessing:
1. Inherent risk which refers to the susceptibility
of an account balance to material errors
assuming that the client does not have any
related internal controls
2. Control risk which refers to the risk that a
material error will not be prevented or
detected on a timely basis by internal
controls 15
Phase 2: Execution
Interim Audit Phase
In this phase, the auditor focuses his attention on both the design and
operation of aspects of internal control structure to determine whether
the necessary controls were functioning as intended, through:
1. Inquiries of client personnel
2. Inspection of documents are records
3. Observation of the application of specific policies and procedures
4. Reperformance of the application of specific policies and
procedures 16
Phase 2: Execution
Interim Audit Phase
The tests of controls performed in this stage cover basic transaction
cycles, namely:
1. Revenue and collection cycle
2. Expenditure cycle
3. Conversion cycle
4. Financing cycle
5. Investing cycle
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Phase 2: Execution
Interim Audit Phase
The purpose of tests of controls are to determine whether
1. The transactions are properly executed
2. The transactions are properly recorded
3. There is proper custody of assets,
liabilities, and other related resources
Performance of tests of transactions may
also be done at this stage.
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Phase 2: Execution
Final Audit Phase
This phase involves substantive tests of transactions, tests of details of
balances and analytical procedures. In performing substantive tests, the
auditor aims to substantiate assertions relative to:
1. Existence or occurrence
2. Completeness
3. Rights and obligations
4. Valuation or measurement
5. Presentation and disclosure 19
Phase 3: Conclusion
Final Audit Phase
The culminating step in the audit process is the preparation of the audit
report. Expressing an audit opinion is the auditor’s overriding goal. The
type of audit report issued depends on the evidence accumulated and
the audit findings.
The audit report concisely describes the auditor’s
responsibility, the nature of the examination, the audit
finding and his opinion on the financial statements.

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Phase 3: Conclusion
Types of Audit Opinion

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Understand the basic requirements for an effective
financial statements audit
Learning Outcome 3
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Basic Requirements for an Effective FS Audit
The following is a comprehensive list of the relevant qualities an auditor
must possess:

1. The auditor must have a thorough understanding

of the entity being audited and the industry of
which it is part. Complex transactions must be
thoroughly understood if the auditor is to detect
material errors and ensure adequate disclosure in
the financial statements.
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Basic Requirements for an Effective FS Audit
The following is a comprehensive list of the relevant qualities an auditor
must possess:

2. The auditor must have a comprehensive

knowledge of financial reporting standards in order
to audit effectively, as it is the standard by which
fairness of financial presentation is judged by the
auditor. Therefore, the auditor must be able to
recognize material departures from FRS.
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Basic Requirements for an Effective FS Audit
The following is a comprehensive list of the relevant qualities an auditor
must possess:

3. The auditor must have a solid grasp of the

concepts of internal control and competence in
reviewing and evaluating the client’s underlying
system of internal control.

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Basic Requirements for an Effective FS Audit
The following is a comprehensive list of the relevant qualities an auditor
must possess:

4. The auditor must also be knowledgeable in the

area of evidence gathering and evaluation. The
auditor has the opportunity to choose among
alternative forms of evidence and alternative means
of doing so.

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Understand the nature, objectives, and scope of an
internal audit and government audit
Learning Outcome 4
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Internal Audit
Nature
Internal auditing is 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 government
processes.

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Internal Audit
Objective and Scope
The objective of internal auditing is to assist all members of
management in the effective discharge of their responsibilities, by
furnishing them with analyses, appraisals, recommendations, and
pertinent comments concerning the activities reviewed.
The internal auditor is concerned with any phase of business activity
where he or she can be of service to management, even going beyond
accounting and finance.

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Internal Audit
Responsibility and Authority
The responsibilities of internal auditing in the organization should be
clearly established by management policy. The related authority should
provide the internal auditor full access to all of the organization’s
records, properties, and personnel relevant to the subject under review.
The internal auditor should be free to review and appraise policies,
plans, procedures, and records.

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Internal Audit
Independence
Independence is essential to the effectiveness of internal auditing. This is
obtained primarily through organizational status and objectivity.

Relationship to External Audit

The public accountant and the internal auditor are not competitors, nor
their work can be substituted with each other.

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Internal Audit
Major Internal Audit Responsibilities
1. Appraisal of controls
2. Protection of assets
3. Verification of internal management reports
4. Appraisal of performance
5. Recommendations for operating performance

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Internal Audit
Reporting
Internal audit reports are not standardized. The form and content of
such reports is usually left to the discretion of the internal auditor.

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Government Audit
Nature and Scope
Government auditing involves the determination of whether government
funds are being handled properly and in compliance with existing laws
and whether the programs are being conducted efficiently and
economically.
Recognizing the need for independence, governments have developed
internal audit staff which report to the highest practicable official within
their governmental bodies.

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Government Audit
The Commission on Audit (COA)
The Commission on Audit (COA, formerly the General Auditing Office) is
the highest and final authority in state auditing, which was created
under Sec. 1, Art. XII-D of the Philippine Constitution, whose jurisdiction
and responsibility is defined by the law of the land. As the highest audit
office of the Republic of the Philippines, the COA wields the final
authority in the audit of the government and its instrumentalities.

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Government Audit
Principal Duties of the COA
a. Examine, audit, and settle all accounts pertaining to the revenue or
receipts and expenditures or uses of government funds and
property
b. Keep the general accounts pertaining thereof
c. Preserve the vouchers pertaining thereof
d. Promulgate accounting and auditing rules and regulations including
those for the prevention of irregular, unnecessary, excessive or
extravagant expenditures uses of funds and property 36
Government Audit
Principal Duties of the COA
e. Submit to the President, and the time fixed by law, an annual
financial report of the government, its subdivisions, agencies, and
instrumentalities, including government-owned or controlled
corporation, and recommend measures necessary to improve their
efficiency and effectiveness
f. Decide any case brought before it within sixty days from date of its
submission for resolution
g. Perform such other duties and functions as may be prescribed by law
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QUESTIONS?
THANK YOU!