Auditing and

Assurance Principles

Introduction to Auditing
(An Overview)
“AUDITING” as defined by the Philippine Standards on Auditing (PSA)

PSA defines auditing by stating the objective of financial statement audit, that
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.

“AUDITING” as defined by the American Accounting Association

An 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.
Based on the definition given by the American Accounting Association, auditing
conveys the following:

1. Auditing is a systematic process

2. An audit involves obtaining and evaluating evidence about assertions regarding
economic actions and events
3. An audit is conducted objectively
4. Auditors ascertain the degree of correspondence between assertions and
established criteria
5. Auditors communicate the audit results to various interested users
 Illustrative Definition of Auditing

Independent Auditor

Following a systematic process

Objectively obtains and evaluates evidence

Establishes the degree of correspondence

between
Established
Assertions
Criteria

Communicates the results to interested users

Types of Audits

1. 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.
 This is the focus of the discussions on Auditing and Assurance Principles.

2. Compliance Audit
 Involves a review of an organization’s procedures to determine whether the
organization has adhered to specific procedures, rules or regulations.
 The performance of compliance audit is dependent upon the existence of
verifiable data and recognized criteria established by an authoritative body.
 Example is the tax compliance audit conducted by the Bureau of Internal
Revenue (BIR).
Types of Audits

3. Operational Audit
 A study of a specific unit of an organization for the purpose of measuring its
performance.
 The main objective of this type of audit is to assess entity’s performance,
identify areas for improvements and make recommendations to improve
performance.
 Also known as performance audit or management audit.

Note:
 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

1. External Auditors
 These are independent CPAs who offer their professional services to
different clients on a contractual basis.
 The ones who generally perform financial statement audits.

2. Internal Auditors
 Internal auditors are entity’s own employees who investigate and appraise the
effectiveness and efficiency of operations and internal controls.
 Their main function is to assist the members of the organization in the
effective discharge of their responsibilities.
 The ones usually perform operational audits.
Types of Auditors

3. Government Auditors
 These are government employees whose main concern is to determine whether
persons or entities comply with government laws and regulations.
 The ones who usually conduct compliance audits.
 Comparison among the different types of audit

Financial Audit Compliance Audit Operational Audit

Assertions That the financial That the organization That the organization’s
made by the statements are fairly has complied with laws, activities are conducted
auditee presented regulations or contracts effectively and efficiently

Financial reporting
Established Laws, regulations and Objectives set by the
standards or other financial
criteria reporting framework
contracts board of directors

An opinion about whether the Reports on the degree of

Recommendations or
Content of the financial statements are fairly
compliance with applicable
presented in conformity with an suggestions on how to
auditor’s report identified financial reporting laws, regulations and
improve operations
framework contracts

Auditors who
generally External Auditors Government Auditors Internal Auditors
perform
The Independent Financial Statement Audit (FS Audit)

Objective of FS 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.
The Independent Financial Statement Audit (FS Audit)

Responsibility for the Financial Statements

A. Management

The management is responsible in the preparation and presentation of the

financial statements in accordance with the financial reporting framework.

B. Auditor

To provide reasonable assurance (not absolute assurance) the financial

statements taken as a whole are free from material misstatements.
Reasonable assurance is a high level of assurance, but it is not a guarantee that
an audit conducted in accordance with PSAs will always detect a material misstatement
when it exists. This is because of the inherent limitations of an audit.
The Independent Financial Statement Audit (FS Audit)

Inherent limitations of FS Audit

1. The use of testing / Sampling risk

 Practically, auditors do not examine all evidence available. Many audit conclusions are
made by examining only sample of evidence.

2. Error in application of judgement / Non-sampling risk

 Human weaknesses can cause auditors to commit mistakes in the application of audit
procedures and evaluation of evidence.

3. Reliance on management’s representation

 Some evidence supporting the FS must be obtained by obtaining oral or written
representations from management. False representations from management that lacks
integrity may cause the auditor to rely on unreliable evidence.
The Independent Financial Statement Audit (FS Audit)

Inherent limitations of FS Audit

3. Inherent limitations of the client’s accounting and internal control system

 Audit procedures may not be effective in detecting misstatements resulting from
collusion among employees or management’s circumvention of internal control.

4. Nature of evidence
 Audit evidence is generally persuasive rather than conclusive in nature.
 Role of Management and Independent Auditor

Management Independent Auditor

Prepares financial
statements

Unaudited financial Evaluates financial

statements statements

Audited financial Audit Report on

statements financial statements

Users of Financial Statements

The Independent Financial Statement Audit (FS Audit)

General principles governing the audit of financial statements

1. Compliance with the “Code of Professional Ethics for Certified Public Accountants”
promulgated by the Board of Accountancy

2. Conduct the audit in accordance with Philippine Standards on Auditing (PSAs)

3. Plan and perform the audit with an attitude of “Professional Skepticism”

The Independent Financial Statement Audit (FS Audit)

The need for an independent financial statement audit

1. Conflict of interest between management and users of financial statements

2. Expertise

3. Remoteness of intended users

4. Financial consequences
The Independent Financial Statement Audit (FS Audit)

Theoretical framework of Auditing

1. Audit function operates on the assumption that all financial data are verifiable
2. The auditor should always maintain independence with respect to the financial
statements under audit
3. There should be no long-term conflict between the auditor and the client management
4. Effective internal control system reduces the possibility of errors and fraud affecting
the financial statements
5. Consistent application of GAAP or PFRS results in fair presentation of financial
statements
6. What was held true in the past will continue to hold true in the future in the absence of
known conditions to the contraty
7. An audit benefits the public
REFERENCES AND/OR SOURCES:

Salosagcol, J. G., Tiu, M. F., & Hermosilla, R. (2021). Auditing Theory (A Guide in Understanding
the Philippine Standards on Auditing). 2017 C.M. Recto, Manila, Philippines : GIC Enterprises
& Co., Inc.

Auditing and Assurance Standards Council, Philippine Standards on Auditing, effective as of

2016

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