AUDITING DEFINED

• The Philippine Standards on Auditing (PSA)

defines auditing by stating the objective of a
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 DEFINED BY 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.”
1. Auditing is a systematic process. Auditing proceeds by means of an ordered and
structured series of steps.
2. An audit involves obtaining and evaluating evidence about assertions regarding
economic actions and events. Assertions are representations made by an auditee about
economic actions and events. The auditor’s objective is to determine whether these
assertions are valid. To satisfy this objective, the auditor performs audit procedures and
gathers evidence that corroborates or refutes the assertions.
3. An audit is conducted objectively. The auditor should conduct the audit without bias.
Impartial attitude must be maintained by the auditor when evaluating evidence and
formulating his conclusion.
4. Auditors ascertain the degree of correspondence between assertions and established
criteria. Established criteria are needed to judge the validity of the assertions. These
criteria are important because they establish and inform the users of the basis against
which the assertions have been evaluated or measured.
5. Auditors communicate the audit results to various interested users. The
communication of audit findings is the ultimate objective of any audit. For the audit to be
useful, the results must be communicated to interested users on a timely basis.
 TYPES OF AUDIT

• 1. Financial Statement Audit. This is the audit conducted to determine

whether the financial statements of an entity are fairly presented in
accordance with an identified financial reporting framework.
• 2. Compliance Audit. 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.
• 3. Operational Audit. An operational audit is 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.
 FINANCIAL AUDIT

• Assertions made by the auditee. That the financial

statements are fairly presented.
• Established criteria. Financial reporting standards or
other financial reporting framework.
• Content of the auditor’s report. An opinion about
whether the financial statements are fairly presented in
conformity with an identified financial reporting
framework.
• Auditors who generally perform. External Auditors
 COMPLIANCE AUDIT

• Assertions made by the auditee. That the organization

has complied with laws, regulations or contracts.
• Established criteria. Laws, regulations and contracts.
• Content of the auditor’s report. Reports on the degree
of compliance with applicable laws, regulations and
contracts.
• Auditors who generally perform. Government Auditors
 OPERATIONAL AUDIT
• Assertions made by the auditee. That the
organization’s activities are conducted effectively and
efficiently.
• Established criteria. Objectives set by the board of
directors.
• Content of the auditor’s report. Recommendations or
suggestions on how to improve operations.
• Auditors who generally perform. Internal Auditors
 TYPES OF AUDITOR
• 1. EXTERNAL AUDITORS. These are independent CPAs who offer their
professional services to diffent clients on a contractual basis. External
auditors are 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. The main function of internal auditors
is to assist members of the organization in the effective discharge of
their responsibilities. Internal auditors usually perform operational
audits.
• 3. GOVERNMENT AUDITORS. These are government employees
whose main concern is to determine whether persons or entities comply
with government laws and regulations. Government auditors usually
conduct compliance audits.
 THE INDEPENDENT FINANCIAL STATEMENT 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.
 RESPONSIBILITY FOR THE FINANCIAL STATEMENTS

• The MANAGEMENT is responsible for preparing and

presenting the financial statements in accordance with
the financial reporting framework.
• The auditor’s responsibility is to form and express an
opinion on these financial statements based on his audit.
An audit of financial statements does not relieve
management of its responsibilities. Hence, it is
management responsibility to adopt and implement
adequate accounting and internal control system that
will held ensure, among others, the preparation of
reliable financial statements.
 ASSURANCE PROVIDED BY THE AUDITOR

• The auditor’s opinion on the financial statements is not a

guarantee that the financial statements are dependable.
An audit conducted in accordance with Philippine
Standards on Auditing (PSAs) is designed to provide only
REASONABLE ASSURANCE (not absolute assurance)
that the financial statements taken as a whole are free
from material misstatements.
 INHERENT LIMITATIONS TO DETECT MATERIAL MISSTATEMENTS

• 1. The use of testing/Sampling risk. For practical reasons, auditors do not

examine all evidence available. Many audit conclusions are made by
examining only sample of evidence. Whenever a sample is taken, there is
always a possibility that the auditor’s conclusion, based on the sample, may
be different from the conclusion that would have been reached if the auditor
examines the entire population.
• 2. Error in application of judgment/Non-sampling risk. The work
undertaken by the auditor to form an opinion is permeated by judgment.
• 3. Reliance on Management’s representation. Some evidence supporting
the financial statements must be obtained by oral or written representations
from management. If the management lacks integrity, management may
provide the auditor with false representations causing the auditor to rely on
unreliable evidence.
 INHERENT LIMITATIONS TO DETECT MATERIAL MISSTATEMENTS

• 4.Inherent limitations of the client’s accounting and internal

control systems. Although the auditor performs procedures to detect
material misstatements when auditing financial statements, such
procedures may not be effective in detecting misstatements resulting
from collusion among employees or management’s circumvention of
internal control.
• 5. Nature of Evidence. Evidence obtained by the auditor does not
consist of “hard facts” which prove or disprove the accuracy of the
financial statements. Instead, it comprises pieces of information and
impressions which are gradually accumulated during the course of an
audit and which, when taken together, persuade the auditor about the
fairness of the financial statements. Thus, audit evidence is generally
persuasive rather than conclusive in nature.
•
 GENERAL PRINCIPLES GOVERNING THE AUDIT OF
FINANCIAL STATEMENTS

• 1. The auditor should comply with the “Code of Professional Ethics for
Certified Public Accountants” promulgated by the Board of Accountancy
(BOA). In order to retain public confidence in the credibility of the auditor’s
work, auditors must adhere to standards of ethical conduct that embody
and demonstrate integrity, objectivity, and concern for the public rather
than self-interest.
• 2. The auditor should conduct an audit in accordance with Philippine
Standards on Auditing. These standards contain the basic principles and
essential procedures which the auditor should follow.
• 3. The auditor should plan and perform the audit with an attitude of
professional skepticism recognizing that circumstances may exist which
may cause the financial statements to be materially misstated.
 NEED FOR AN INDEPENDENT FINANCIAL STATEMENT AUDIT
• 1. Conflict of interest between management and users of
financial statements. Management reports financial statements
about the performance of the entity. Managers may be overly
optimistic as to even provide outside parties with false financial
information. Outside parties want unbiased realistic financial
statements.
• 2. Expertise. The complexity of accounting and auditing requires
expertise in verifying the quality of the financial information. Since
most of the users of financial information are not equipped with
the necessary skills and competence to determine whether the
financial statements are reliable, a qualified person is hired by
users to verify the reliability of the financial statements on their
behalf.
 NEED FOR AN INDEPENDENT FINANCIAL STATEMENT AUDIT

• 3. Remoteness. Users of financial information are

usually prevented from directly assessing the reliability
of the information. Most of the users do not have access
to the entity’s records to personally verify the quality of
the financial information.
• 4. Financial Consequences. Misleading financial
information could have substantial economic
consequences for a decision maker. It is therefore
important that financial statements be audited first
before they are used for making important decisions.
THEORETICAL FRAMEWORK OF AUDITING
• 1. Audit function operates on the assumption that all financial data are
verifiable. All balances reported in the financial statements must have
supporting documents or evidence to prove their validity. If no evidence exists
in relation to the financial statements on which the auditor is to express an
opinion, then there can be no audit to perform.
• 2. The auditor should always maintain independence with respect to the
financial statements under audit. Independence is essential for ensuring the
credibility of the auditor’s report. The report of the auditor will be of little or no
value to the readers of the financial statements is the readers are aware that the
auditor is not independent with respect to the client.
• 3. There should be no long-term conflict between the auditor and the client
management. Short term conflicts may exist regarding the application of
auditing procedures and accounting principles, but in the end, both the auditor
and the management must be interested in the fair presentation of the financial
statements.
 THEORETICAL FRAMEWORK OF AUDITING
• 4. Effective internal control system reduces the possibility of
errors and fraud affecting the financial statements. The
condition of the entity’s internal control system directly affects
the reliability of the financial statements. The stronger the
internal control is, the more assurance it provides about the
reliability of the accounting data and financial statements.
• 5. Consistent application of generally accepted accounting
principles (GAAP) or Philippine Financial Reporting Standards
(PFRS) results in fair presentation of financial statements. We
often use different criteria to verify the validity of an assertion. In
the case of an independent audit of financial statements, the
criteria are usually the PFRS.
 THEORETICAL FRAMEWORK OF AUDITING
• 6. What was held true in the past will continue to hold
true in the future in the absence of known conditions to
the contrary. Experience and knowledge accumulated from
auditing a client in prior years can be used to determine the
appropriate audit procedures that need to be performed.
• 7. An audit benefits the public. Financial statements are
ordinarily prepared and presented in order to meet the
common information needs of a wide range of users. These
users who rely on the financial statements as their major
source of information are the primary beneficiary of the
financial statement audit.