AUDITING AND ASSURANCE:

CONCEPTS AND APPLICATIONS

1
Auditing and Assurance: Concepts and
Applications
This course deals with the study and application
of audit procedures in the external audit of
financial statements. It tackles detailed process
and approaches to situational problems usually
encountered in the audit of cash, revenue and
receipt cycle, expenditure and disbursement
cycle, and production cycle.
Content and Subject Matter
• Audit Planning, Internal Control Considerations and
Audit Documentation
• Audit of Cash
• Audit of Revenue and Receipt Cycle
• Audit of Expenditure and Disbursement Cycle
• Audit of Production Cycle
Audit Planning, Internal Control
Considerations and Audit Documentation
• Analytical Procedures in Audit Planning
• Internal Controls Considerations: Test of Controls and
Substantive Test
• Audit Documentation and its types
• Overview of Revenue and Receipt Cycle
• Overview of Expenditure and Disbursement Cycle
• Overview of Production Cycle
Audit of Cash
• Audit of cash receipt transactions
• Audit of cash disbursement transactions
Audit of Revenue and Receipt Cycle
• Audit of sales and revenue transactions
• Audit of receivable balances
Audit of Expenditure and Disbursement
Cycle
• Audit of acquisitions and purchases
• Audit of payroll transactions
• Audit of inventory balances
• Audit of trade payable balances
• Audit of prepaid expenses and accrued liabilities
Audit of Production Cycle
• Audit of conversion activities
• Audit of inventory balances: work-in process and
finished goods
• Audit of cost of goods sold balance
OVERVIEW OF AUDIT AND ASSURANCE
• Assurance services – it is professional services that enhance
the quality of information, or its context, for decision makers.
Many assurance services involve some form of attestation.
• Attest engagement - an engagement in which the CPAs issue
an examination, a review, or an agreed upon procedures report
on subject matter or an assertion about subject matter that is
the responsibility of another party (e.g., management).
• Assurance Engagements/ Services– means an engagement
in which a practitioner (professional accountant or auditor),
expresses a conclusion that is designed to enhance the degree
of confidence users have about the evaluation of a subject
matter against identified criteria.
5 elements of an assurance
engagement
• a three party relationship involving a practitioner, a
responsibility party and intended party
• subject matter
• suitable criteria
• sufficient appropriate evidence
• written assurance report in the form appropriate to a
reasonable assurance engagement or a limited
assurance engagement
Types of Assurance
• Reasonable assurance
• Limited assurance
• Assignment with no assurance is given
Reasonable assurance
engagements VS limited assurance
engagements
Types of Assurance Engagement
• Audit - an examination designed to provide an opinion, the CPA’s highest level of
assurance that the financial statements follow generally accepted accounting
principles, or another acceptable basis of accounting.
• Review - involves performing limited procedures, such as inquiries and analytical
procedures. In performing a review, the practitioners endeavor to gather sufficient
evidence to drive attestation risk to a moderate level. Accordingly, the resulting
report provides only limited assurance that the information is fairly presented.
• Agreed-upon procedures - An attest engagement in which the CPAs agree to
perform procedures for a specified party and issue a report that is restricted to use
by that party.
• Compilation - the objective of a compilation engagement is for the accountant to
use accounting expertise, as opposed to auditing expertise, to collect, classify and
summarize financial information. This ordinarily entails reducing detailed data to a
manageable and understandable form without a requirement to test the assertions
underlying that information
Difference between among the types
of assurance engagement
Engagement Acceptance
Engagement Acceptance – A practitioner accepts an assurance
engagement only where the practitioner’s preliminary knowledge of
the engagement circumstances indicates that:
1. Relevant ethical requirements, such as independence and professional
competence will be satisfied; and
2. The engagement exhibits all of the following characteristics:
a. The subject matter is appropriate
b. The criteria to be used are suitable and are available to the intended users
c. The practitioner has access to sufficient appropriate evidence to support the
practitioner’s conclusion
d. The practitioner’s conclusion, in the form appropriate to either a reasonable
assurance or a limited assurance engagement, is to be contained in a written report
e. The practitioner is satisfied that there is a rational purpose for the
engagement
AUDIT
Audit – is 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.
AUDIT
• Audit is an independent, objective and expert examination and
evaluation of evidence.
• The auditor obtains and evaluates evidence. The auditor assesses the
reliability and sufficiency of the information contained in the underlying
accounting records and other source data by: a) evaluation of accounting
systems and internal controls; b) carrying out substantive tests.
• The evidence obtained and evaluated by the auditor regards assertions
about economic actions and events. Assertions are representations by
management that are embodied in the financial statements. (PERCV- MO
Presentation, Existence, Rights & obligations, Completeness, Valuation,
Measurement, Occurrence) The basis of evidence gathering objectives,
the thing that the evidence must “prove” is the assertions of
management.
AUDIT
• The auditor ascertains the degree of correspondence between assertions
and established criteria. The audit program tests most assertions by
examining the physical evidence of documents, confirmation, inquiry and
observation. An established criterion is GAAP, PAS and PFRS.
• The goal, or objective, of the audit is communicating the results to
interested users. The audit is conducted with a view of expressing an
informed and credible opinion, in a written report stating that the
statements ‘give a true and fair view’ or ‘present fairly, in all material
respects’ the financial position of the company. The communication of the
auditor's opinion is called "attestation”, or the "attest function".
• 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. (PSA 200)
AUDIT
• The primary objective of an audit is to provide a report by
the auditor of his opinion of the truth and fairness of the
financial statements examined by him. The secondary
objectives are (1) to detect errors and fraud that cause
material misstatements in the accounting records and/or
the financial statements and (2) to provide constructive
advice on the client’s internal control system.
• The audit is designed to provide reasonable assurance that
the financial statements as a whole are free from material
misstatement as required by auditing standards.
General Principles Governing an Audit
of Financial Statements
• An auditor should comply with the Code of Ethics for
Professional Accountants.
• An auditor should conduct an audit in accordance with
Standards on Auditing.
• The scope of an audit – the audit procedures deemed
necessary to achieve the objective of the audit.
• Certain inherent limitations in an audit affect the
auditor’s ability to detect material misstatements.
• Management is responsible for the financial statements,
accounting and internal control
Economic Demand for Auditing
• Complexity – company’s transactions can be voluminous
and complicated, so users of financial information need
the expertise of professional accountants.
• Remoteness – it’s uneconomical for the users of financial
statements to employ professional accountants to do that
job.
• Consequences – financial decisions can involve large
amounts of money and massive efforts. Good
information, obtained through accounting experts, is
beneficial for that type of decisions.
Types of Audit
• Financial statement audit – examine financial
statements, determine if they give a true and fair view or
fairly present the financial statements. It is to determine
whether the overall financial statements are stated in
accordance with GAAP.
• Operational audit – review of the operating procedures
of an organization for the purpose of evaluating and
improving its efficiency and effectiveness.
• Compliance audit – to determine whether the procedures
and regulations prescribed by management are complied
with.
Types of Audit
• External Audit – commonly performed by an
independent person or firms and result in an auditor’s
opinion which is included in the audit report.
• Internal Audit – performed by an employee within the
company or entity. Its purpose is to ensure compliance
with laws and regulations and to help maintain accurate
and timely financial reporting and data collection. Its
report will serve as a managerial tool to make
improvements to processes and internal controls.
Difference between Internal and
External Auditors
Role of Audit and Auditor in Modern
Society
• Auditors are charged with the responsibility of expressing
an opinion regarding the fairness and truth of financial
statements.
• The role of the auditor is to scrutinize the financial data
of a company and ensure that there is accuracy and
regulatory compliance.
• The role of the auditor is to reduce the information risk
by providing truthful and fair financial information.
• The work of an auditor is to reinforce trust, strengthening
accountability and confidence in financial reporting.
5 Characteristics of an Auditor
• Have the required experience
• Ability to make independent decision
• Auditors have the ability to understand different
business needs
• Dependable
• Effective
Responsibilities of an Auditor to
Detect Misstatement
• The objective of audit is to determine whether the
financial statements are free of material misstatement,
regardless of whether that misstatement is intentional
or not; in other words, fraud examiner’s priority is
proving the nature and extent of a particular fraud, but
an auditor’s focus is detecting material misstatements.
• Auditors have a responsibility to plan and perform the
audit to obtain reasonable assurance about whether the
financial statements are free of material misstatements
Responsibility of an Auditor for the
Compliance to Laws and Regulations
• The auditor’s responsibility for identifying client noncompliance with laws
and regulations.
• The auditor should obtain an understanding of the legal and regulatory
framework applicable to the entity and how the organization complies with
that framework.
• When the violations are considered intentional and material, the auditors
should communicate the matter to those charged with governance as soon
as practicable.
• If the auditors suspect that management or those charged with governance
are involved in noncompliance, they should communicate the matter to the
next higher level of authority in the organization. When no higher authority
exists that is uninvolved, or if the auditors believe that the communication
may not be acted upon or do not know whom to report to, they should
consider the need to obtain legal advice.
Responsibility of an Auditor for Audit
Reports
• The end product of an audit is a report expressing the
auditor’s opinion on the client’s financial statements.
AICPA Attestation Standards on the Conduct of
Audit (10 standards according to Generally
Accepted Auditing Standards)
General Standards
1. The auditor must have adequate technical training and
proficiency to perform the audit.
2. The auditor must maintain independence in mental
attitude in all matters relating to the audit.
3. The auditor must exercise due professional care in the
performance of the audit and the preparation of the
report.
AICPA Attestation Standards on the Conduct of
Audit (10 standards according to Generally
Accepted Auditing Standards)
Standards of Fieldwork
4. The auditor must adequately plan the work and must
properly supervise any assistants
5. The auditor must obtain a sufficient understanding of the
entity and its environment, including its internal control, to
assess the risk of material misstatement of the financial
statements whether due to error or fraud, and to design the
nature, timing and extent of further audit procedures.
6. The auditor must obtain sufficient appropriate audit evidence
by performing audit procedures to afford a reasonable basis for
an opinion regarding the financial statements under audit
AICPA Attestation Standards on the Conduct of
Audit (10 standards according to Generally
Accepted Auditing Standards)
Standard of Reporting
7. The auditor must state in the auditor’s report whether the financial statements
are presented in accordance with generally accepted accounting principles.
8. The auditor must identify in the auditor’s report those circumstances in which
such principles have not been consistently observed in the current period in
relation to the preceding period.
9. When the auditor determines that informative disclosures are not reasonably
adequate, the auditor must so state in the auditor’s report.
10. The auditor must either express an opinion regarding the financial
statements, taken as a whole, or state that an opinion cannot be expressed, in
the auditor’s report. When the auditor cannot express an overall opinion, the
auditor should state the reasons therefor in the auditor’s report. In all cases
where an auditor’s name is associated with financial statements, the auditor
should clearly indicate the character of the auditor’s work, if any, and the degree
of responsibility the auditor is taking, in the auditor’s report.
Ethical Requirements Relating to an
Audit of Financial Statements
• Auditor should comply with the relevant ethical requirements
relating to audit engagements.
• The auditor should conduct an audit in accordance with
Philippine Standard on Auditing (PSA).
• The auditor should plan and perform an audit with an attitude of
professional skepticism recognizing that circumstances may exist
that cause the financial statements to be materially misstated.
Professional skepticism – attitude that includes a questioning
mind and a critical assessment of audit evidence. An attitude
that includes a questioning mind, being alert to conditions
that may indicate possible misstatements due to fraud or error,
and a critical assessment of audit evidence.
Ethical Requirements Relating to an
Audit of Financial Statements
• Auditor must be independence in mind and in appearance.
Independence in appearance is the avoidance of
circumstances that would cause a reasonable and informed
third party, having knowledge of all relevant information,
including safeguards applied, to reasonably conclude that
the integrity, objectivity, or professional skepticism of a firm
or a member of the attest engagement team has been
compromised. Independence of mind is the state of mind
that permits the performance of an attest service without
being affected by influences that compromise professional
judgment, thereby allowing an individual to act with integrity
and exercise objectivity and professional skepticism
Principles Underlying an Audit Conducted in
Accordance with Generally Accepted Auditing
Standards
Principles Underlying an Audit Conducted in
Accordance with Generally Accepted Auditing
Standards
TRANSACTION CYCLES
Transaction Cycle - refers to the policies and the
sequence of procedures for processing a particular type
of transaction.

Types of Transaction Cycle

1. Revenue and Collection Cycle
2. Expenditure and Disbursement Cycle
3. Payroll Cycle
4. Financing and Investing Cycle
Types of Transaction Cycle
• Revenue and Collection Cycle – consist of activities relating to
the exchange of goods and services with customers and the
collection of revenue in cash. It involves the receiving of customer
orders, approving credit for a sale, determining whether goods are
available for shipment, shipping the goods, billing the customers,
collecting cash and recognizing effect of this process on other
related accounts.
• Expenditure and Disbursement Cycle - including processes,
procedures, and policies for initiating purchases of inventory,
other assets, and services; placing purchase orders, inspecting
goods upon receipt, and preparing receiving reports; recording
liabilities to vendors; authorizing payment; and making and
recording cash disbursements.
Types of Transaction Cycle
• Conversion Cycle - including processes, procedures, and policies for
storing materials, placing materials into production, assigning production
costs to inventories, and accounting for the cost of goods sold.
• Payroll Cycle - including processes, procedures, and policies for hiring,
terminating, and determining pay rates; timekeeping; computing gross
payroll, payroll taxes, and amounts withheld from gross pay; maintaining
payroll records; and preparing and distributing paychecks.
• Financing Cycle - including processes, procedures, and policies for
authorizing, executing, and recording transactions involving bank loans,
leases, bonds payable, and capital stock.
• Investing Cycle—including processes, procedures, and policies for
authorizing, executing, and recording transactions involving investments
in fixed assets and securities.
AUDIT PROCESS
Audit Process - may be viewed as including the following
six stages:
(a)Plan the audit;
(b)Obtain an understanding of the client and its
environment, including internal control;
(c) Assess the risks of misstatement and design further
audit procedures;
(d)Perform further audit procedures;
(e)Complete the audit; and
(f) Form an opinion and issue the audit report.
Planning the Audit
Audit planning involves developing an overall audit
strategy for the conduct, organization and staffing of the
audit. The nature, timing and extent of planning vary by
characteristics of the company being audited and the
auditors’ experience with the company.
1. Establishing an Understanding with the Client.
2. Develop an overall audit strategy and audit plan
Obtaining an Understanding of the
Client and its Environment
The required understanding of the client is used by the
auditors to help plan the audit and to assess the risks of
material misstatement at the financial statement and
relevant assertion levels.
1. Risk assessment procedure
2. Source of information
3. Determining materiality
Assessing Risk of Material Misstatement
and Designing Further Audit Procedures
Audit risk – refers to the possibility that the auditors may unknowingly
fail to appropriately modify their opinion on financial statements that
are materially misstated. At the overall financial statement level, audit
risk is the chance that a material misstatement exists in the FS and the
auditors do not detect it with their audit procedures.
1. Assessing Risks of Material Misstatement.
2. Addressing the risks of material misstatement due to fraud

Audit Trail – consists of source documents, journal entries and ledger

entries. An audit trail also exists within a computer-based accounting
system, although it may have a substantially different form.
Substantiation of Account Balance
The central purpose of the auditors’ risk assessment
process, including their assessment of control risk, it is to
determine the nature, timing, and extent of the audit work
necessary to substantiate the account.
1. Existence of Assets
2. Rights to the assets
3. Establishing completeness
4. Cutoff
5. Valuation
6. Financial statement presentation and disclosure