An audit is a systematic process of gathering evidences about assertion
to ascertain the degree of correspondence between the assertion and established criteria
Information and records
Generally accepted displayed in subject accounting frameworks, matter Thus, follows the established internal control. Philippine Standards on Auditing (PSA)
Key concept of audit services:
Systematic process Composed with logical order, series of steps, and procedures
It involves objectively obtaining and evaluating evidence about
assertions Audit evidence is an information obtained by the auditor used to conclude an audit opinion. Additionally, when searching for evidence the auditor must observe the principle of objectivity. Meaning an obligation imposed to ALL CPAs not to compromise their professional judgement because of bias, conflict of interest, or undue influence of others.
It ascertains the degree of correspondence between assertion and
suitable criteria Auditor must use criteria against the assertion of the responsible party to meet the objective of audit.
Includes communication of the results to the users
After obtaining evidence, the auditor must establish a report his conclusion to the interested users. Failure to communicate will render the audit engagement useless. Types of audit as to nature of assertion 1. Financial Statement Audit Pertaining to gathering of evidence on assertion of FS of the entity to see if it is fairly presented and in accordance to GAAP
2. Operation Audit (management audit or performance audit)
A review of the organization’s activities to see if it is on accordance of the primary objective of the management: assessing performance and opportunities
3. Compliance Audit A review of organization activities if it is in accordance of law
Type of audit as to auditor
1. External auditor An independent CPA on contractual basis. Outside of entity
2. Internal auditor A dependent accountant with independent appraisal function to evaluate internal activities. Thus, can only do operation and compliance audit due to its dependent status
To establish independence, they are required to be independent from the
difference operating unit they audited. In addition, they shall also report to the audit committee, any equivalent supervisory board, or BOD.
3. Government auditor A public agent with sole purpose to analyze public entities (GOCCs)
Additional notes: Both FS and compliance audit rely on established criteria (formal) while operation audit rely on self-developed criteria (less formal)
FS statements and compliance audit have external users as intended
users while operation audit have internal users. Financial Statement audit A common audit service up to this day, rendered by CPAs. It involves examination of financial statement to see if it is in accordance to a specified criterion
Accounting standards generally accepted din Philippines,
PFRS. Accounting standard generally accepted internationally, IFRS Other authoritative and comprehensive financial reporting framework, PFRS SMEs, PFRS small entities.
Ordinarily prepared and presented annually and are directly towards to
the needs of wide range of users. Thus, FS need to be prepared in accordance of: PFRS IFRS Another authoritative accounting framework
Objectives of FS audit: 1. To obtain reasonable assurance to subject matter from being free from material misstatement, whether due to fraud or error, in order for decision making of intended users and in accordance of applicable accounting framework
2. To report financial statements and communicate the findings of
auditor as required by PSA
General principle of FS audit
Theoretical Framework of FS audit This conceptual structure for auditing financial statement is to provide aid to have favorable result. Conditions that should exist whenever financial audit is conducted: (VIC BPI)
All financial data are Verifiable through existence of
evidence/documents
Auditor must always have Independence (3 party relationship rule)
No long-term Conflict between auditor and management should
exist
Audit Benefits the Public
Effective Internal control
Element of Financial statement audit is the same with elements of
Assurance engagement To issue a warrant for unmodified opinion, the auditor shall conclude that there is no: 1. Material limitation on the scope of auditor There is a material limitation when the auditor is unable to gather sufficient appropriate evidence (Qualified or disclaimer of opinion)
2. Material disagreement with management
In regards to accounting policies selected, method of their application, adequacy of financial statement disclosures. ( Qualified or adverse) Assurance provided by Auditor An auditor’s opinion intends to enhance the degree of confidence to the intended users by providing reasonable assurance, not absolute
Taken as a whole, auditor can only conduct up to reasonable assurance
of the financial statements free from material misstatement, whether due to fraud or error. The following reason: (SIEPA)
Use of Selective sampling
PSA does not require to examine all data for practical reason. Such reason is the time consumption and cost constraints.
Inherent limitation to Internal control
Despite the effectivity, internal controls cannot fully guarantee the validity and accuracy (control risk) due to some inherent limitation
Cost benefit consideration
Management override Human errors
Most audit Evidence are persuasive than conclusive
Auditor’s opinion is Permeated by judgement
an inherent limitation of auditor’s judgement since there is a possibility of committing mistake due to fatigue, carelessness, misinterpretation of facts, and other human weaknesses.
Nature/characteristic of Assertion (inherent risk)
In some cases, it is best to rely on the information provided by the management. However, the risk of integrity issue of the client will have the auditor left with unreliable information
Due to limitation stated above, audit engagement is subject to audit
risk. (in introduction of assurance, the term used is assurance engagement risk) Demand for FS Audit all external users demand for high quality and reliable information. This help them to make educated financial decision that will assist them for business and information risk
Information Risk is a risk that information prepared and asserted contains
misstatement
Business risk is an event or activity that will prevent entity from achieving its business objective and profit maximization. The more significant this risk, the more likely for the business to fail.
Due to information risk, users are skeptical of the information
presented by the management. The following are the things to do for users to reduce the said risk: 1. Information is verified Users directly verify the supporting documents held by the entity. However, the common problem encounters by users are: a) Users are separate from entity’s record by distance and time b) Users do not possess the necessary skill to verify such documents c) Most often, users cannot directly access the company records
2. Financial statement audited
Users rely on independent auditors output. This solves the problem of users do not possess the necessary skill and competence
3. Information risk is shared with the management
In the event of users incur a loss due to incorrect decision based on inaccurate information, users may ask for reimbursement from the entity. Regulatory requirements
