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Auditing 2

The objective of a financial statement audit is to enable the auditor to express an opinion on whether the financial statements are prepared in accordance with the applicable financial reporting framework. This involves obtaining reasonable assurance that the financial statements as a whole are free from material misstatement due to fraud or error. Key elements of a financial statement audit include the three-party relationship between the auditor, management, and intended users; use of appropriate criteria; obtaining sufficient appropriate audit evidence; and issuing a written audit report expressing the auditor's opinion. The auditor's opinion aims to enhance the credibility of financial statements by providing reasonable but not absolute assurance. There are inherent limitations to an audit due to factors such as selective testing and limitations of internal controls.

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58 views4 pages

Auditing 2

The objective of a financial statement audit is to enable the auditor to express an opinion on whether the financial statements are prepared in accordance with the applicable financial reporting framework. This involves obtaining reasonable assurance that the financial statements as a whole are free from material misstatement due to fraud or error. Key elements of a financial statement audit include the three-party relationship between the auditor, management, and intended users; use of appropriate criteria; obtaining sufficient appropriate audit evidence; and issuing a written audit report expressing the auditor's opinion. The auditor's opinion aims to enhance the credibility of financial statements by providing reasonable but not absolute assurance. There are inherent limitations to an audit due to factors such as selective testing and limitations of internal controls.

Uploaded by

tooru oikawa
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FINANCIAL STATEMENT AUDIT

Objective of the Financial Statement Audit


PSA 120 dictates that 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 generally accepted accounting principles or other identified
financial reporting framework

PSA 200 (Revised and Redrafted) further supported the above objective by stating that "in conducting an
audit of financial statements, the overall objectives of the auditor are:
• 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 reporting framework, and
• To report on the financial statements, and communicate as required by the PSAs, in accordance
with the auditor's findings

• Reasonable assurance that the FS are free from material misstatements

• Expression of an opinion
• Financial Statements are taken as a whole. (e.g. nag-express ng whole opinion si auditor sa
entire set; paghihiwalayin 'yun although dapat for entire set, tapos ibinigay sa client tapos
naging qualified so may kulang)

Maling procedures - Audit failure


Tamang procedures, maling opinion - No failure kasi sumunod ka sa standards so Audit Risk 'to.

• Reasonable Assurance - mathematical complement ng audit risk


• In all material respects - material items lang nakafocus ang mga procedures tapos sa
immaterial, pwedeng i-ignore
• Presence of criteria
• Communication of the results

Elements of Assurance Engagement

Review of Elements of FS Audit


Three-Party Relationship
• Auditor (represents the practitioner)
1. Express opinion; Independent; adheres to code of ethics; Determines the nature, time and extent of
audit procedures

1. Management and those charged with governance (represents the responsible party)
1. FS Preparation and Presentation (All items in included in the FS are the responsibility of the
management regardless kung nasaan man); Prevention and detection of fraud and error
(The FSs are fairly presented if they are free from material misstatements and ang cause ng
misstatements ay fraud and error; OPINIONS ARE NOT FREE FROM MATERIAL
MISSTATEMENTS); Adoption of Implementation Adequate Accounting and Internal Control
Systems (Lahat ng systems and processes used to produce the items in the FS will also be
the responsibility of the management and ones with governance)

1. Users of FS (represent the intended users)


1. Use the audit report which contains the opinion expressed by the auditor
Primary Users - provide the assets/resources of the entity (e.g. lenders, creditors, investors)
Other Users (e.g. employees, government, public, researchers)

Appropriate Subject Matter (Auditability - ability to be engaged in being audited)

Adequate supporting records and documents should be available


Bago ka mag-audit, dapat may supporting documents and records para ma-audit mo siya.

Suitable Criteria
PFRS/IFRS/GAAP/other applicable financial reporting framework

Sufficient Appropriate Evidence


Concepts discussed in assurance engagements to apply audit engagements. Terms are revised to
specifically related to audit engagements (e.g. assurance engagement risk is changed to audit risk)

Written Assurance Report of Conclusion


Means of the auditor to communicate the results of their work

Audit Report
Contains the conclusion or opinion conveying the assurance obtained about the financial statements
Auditor considers other reporting responsibilities, including communicating with those charged with
governance

Types of Opinion
Unmodified/Unqualified - Present fairly, in all material respect
Qualified - Except for
Adverse - Do not present fairly, in all material respect
Disclaimer of Opinion - We do not express a conclusion

Issuance of Modified Opinion


Qualified or Disclaimer of Opinion - limitation on the scope of the auditor's work

e.g. The auditor was not able to gather sufficient evidence. Hindi niya alam kung tama or mali kasi wala
siyang evidence so dahil hindi niya masabi kung tama 'yung nasa FS kasi may scope of limitations.

Qualified or Adverse Opinion - disagreement with management regarding the acceptability of the
accounting policies selected, the method of their application or the adequacy of financial statement
disclosures

e.g. Alam mo naman na mali. The auditor was able to gather proper, sufficient evidence that will enable
him to conclude na the FS contain material misstatements. Alam niyang may mali pero ayaw itama ng
management.
Kailan qualified?
If material ang item.

If Adverse?
Both material and pervasive. Dahil may misstatements, the entire FS is considered material na lahat.
(pervasive kapag in all; kapag material, sa isang item lang)

Assurance Provided by the Auditor

The auditor's opinion is intended to enhance the credibility of financial statements by providing a high,
but not absolute, level of assurance.

Reasonable Assurance - Inherent Limitations


Use of Selective Testing
Whenever you perform FS Audit, you'll always be performing sampling.

Impractical na 100% so need ng sampling. Portion lang ang titingnan sa sampling.

e.g. Sa isang klase of 100 students, pumili ka ng 10 para malaman kung naligo lahat pero may possibility
na kapag tinetest mo lahat ng student, hindi 100%.

Audit Sampling

Inherent Limitations of Internal Control


The entity cannot fully guarantee na lahat ng reports generated ay tama. 'Yung controls mismo, hindi
niya kayang i-guarantee ang accuracy ng reports niya.
IC Consideration

Audit Evidence is persuasive rather than conclusive


It is rare to gather conclusive evidence. Conclusive means kasi wala ng room for doubt so persuasive kasi
is may room for doubt. Maghahanap ng additional info si auditor to express an opinion/make a
conclusion.

Work undertaken by the auditor to form opinion is permeated by judgment


The hallmark of auditing is judgment. No matter how well we plan the audit or how effective the
procedures are, because of human limitations, pwedeng magkamali. Possible na mali 'yung maging
conclusion because we're only humans.

Nature/characteristics of assertions
Kahit wala kang gawin by the nature of assertion, possible na may mali sa FS. Eto 'yung
acknowledgement ng inherent risk.

Components of Audit Risk


Control Risk (item 2)
Inherent Risk (item 5)
Detection Risk (item 1, 3 and 4)
Kaya we can't express ABSOLUTE ASSURANCE.
Demand for FS Audit - Management

Business Risk
Any event or activity that will prevent the entity in obtaining its objective which is obtaining wealth.
Possible na the events or conditions will lead the entity to fail kaya dapat decisions made should be
evaluated and dapat reliable ang info before the management makes a decision.
Demand for FS Audit was created because of the need for reliable information.

Information Risk
Risk that the information prepared and presented by the entity contains misstatement
Mathematical complement of reliability level. This means that as information risk increases from 5% to
10%), reliability level decreases (from 95% to 90%)
Gusto mo ng reliable information. Ayaw mong ma-expose sa information risk.

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