CHAPTER 3: OVERVIEW OF AUDITING Philippine Standards on Auditing

- pronouncements on GAAS issued by AASC – applied in

Philosophy of Audit
independent examination of entity’s FS conducted for
Audit Examination – establishing reliability or unreliability of
purpose of expressing opinion
the financial statements and supporting records
Auditing – form of attestation; expert’s communication about General Types of Audit
reliability of someone’s assertion
A. Independent Financial Statements Audit
Attestation – written communication that express conclusion
Nature
about reliability of written assertion made by RP
- methodical review and objective examination of FS
Auditing Defined prepared by RP to determine if such are made in compliance
American Accounting Association with FRF
Auditing is a: - attest function communicated with clients and third party
a) Systematic process – series of steps; information testing - without this company FS would have little reliability since
system & testing of transactions and balances company would be reporting on itself
b) competent, independent person – qualified to understand
Objectives
the criteria used; impartial and objective thinking
a) obtain reasonable assurance whether FS are free from
c) objectively obtains and evaluates evidence – evaluating
material misstatements, whether due to fraud or error –
results without bias or prejudice
enabling auditor to express opinion on its compliance with
d) assertions about economic actions and events – SM of
FRF
auditing; information contained in reports
b) report and communicate FS in accordance of auditor’s
e) degree of correspondence – closeness of assertions and
findings
established criteria
* when reasonable assurance cannot be obtained, and
f) established criteria – standards which assertions are judged
qualified opinion is insufficient; disclaim opinion or withdraw
g) communicating results – attestation; audit report;
from engagement
enhances or weakens credibility of assertion
h) intended users – rely on auditor’s report Scope – audit procedures to achieve objective
a) conduct critical and systematic examination of statements
IFAC Education Committee
and documents
Auditing is a structured process that:
b) gather audit evidence
a) involves application of analytical skills, professional
c) evaluate internal controls for effectiveness
judgment, professional skepticism;
d) examine validity of assets and liabilities
b) performed by team of professionals directed with
e) formulate opinion on fairness
managerial skills
f) prepare audit report
c) uses apt forms of technology and adheres methodology
g) communicate with parties
d) complies with all relevant technical standards
e) complies with required standards or professional ethics General Principles of Audit
Ethical Requirements
Objective
- fundamental ethical principles + technical standards
PSA 120: Framework of PSA
- plan and perform with professional skepticism
- enable auditor to express opinion whether FS are prepared
materially in accordance with identified financial reporting Reasonable Assurance
framework - accumulation of audit evidence to conclude that FS are free
- “present fairly, in all material aspects” from material misstatement
Inherent Limitations that affects auditor to detect
Why Independent Auditing Necessary?
misstatements
Information Risk – unreliable information will be provided to
a) use of testing
decision maker; factors that contributes to Info risk:
b) inherent limitations of any accounting and internal control
1. Remoteness of information users to providers
system
2. Potential bias and motives of info provider
c) audit evidence is persuasive rather than conclusive
3. Voluminous data
4. Complex exchange transactions Responsibility for the FS
- management prepares and presents FS which will be
How it could be reduced?
audited
1. Allow users to verify information – due diligence audit
2. User shares info risk with management
3. Have FS audited
Requirements for an Effective FS Audit improving profitability and attainment of objectives
1. Thorough understanding of the entity to be audited 3. Financial Audit – historically oriented, independent
2. Comprehensive knowledge of FRS – recognize material evaluation; ensuring fairness, accuracy, and reliability of
departures financial data
3. Solid grasp of concepts of internal control and competence
C. Government Audit
– reduced need for examination of transaction and balances
Nature
4. Knowledgeable in area of evidence gathering and
- proper handling of gov’t funds
evaluation
- compliance with existing laws
B. Internal Audit - programs being conducted efficiently
Nature
Scope
- independent, objective assurance and consulting activity to
a) Financial and Compliance Audit – financial operations are
add value and improve organization’s operations
properly conducted; reports are presented fairly; entity
- improve effectiveness of risk management control and
complied with laws
process
b) Economy and Efficiency Audit – managing and utilizing
Objective resources efficiently; entity complied with laws
- assist all members of management in effective discharge of c) Program Results – desired results and benefits achieved;
responsibility through analyses, appraisals, and objectives established with legislative; agency considered
recommendation alternatives that might yield lower cost

Scope State Audit Divisions

a) reviewing controls and promote effective control at (Primer on Government Accounting and Auditing in PH)
reasonable cost 1. Compliance Audit – examination, audit, and settlement in
b) ascertaining extent of compliance with established policies accordance to law and regulation
c) ascertaining extent to which assets are accounted and 2. Financial Audit – accounting and financial system and
safeguards from losses controls to ensure reliability of recorded data; expression of
d) ascertaining reliability of management data developed opinion on fairness of financial condition and operation
within entity results
e) appraising quality of performance in carrying out 3. Performance Audit – objective examination of financial and
responsibilities operational performance; opportunities for greater economy,
f) recommending operating improvements efficiency, and effectiveness
a) Management Audit (Economy and Efficiency) –
Responsibility and Authority
appraisal of mgt performance and cost benefit analysis
- inform and advise management and to discharge
b) Program Results Audit (Effectiveness) – evaluation
responsibility consistent with Code of Ethics
of program results vis-à-vis mgt goals and objectives
- coordinate activities with others to achieve audit and
organization’s objectives Comprehensive Audit – proper balance among compliance,
* Internal auditor has no direct responsibility nor authority to financial and performance audit; test of financial
activities reviewed transactions, accounts and reports ensuring laws are properly
* Internal auditor must have full access of organizational info adhered

Independence Commission on Audit – highest and final authority in state

- essential to effectiveness of internal auditing auditing
- may be obtained from
D. Special Audits – audits that fall within the auditing
a) Organizational Status – assurance of broad range of
standards but not audits of historical FS
coverage and adequate consideration
a) audits of FS prepared on other comprehensive basis
b) Objectivity – not developing procedures or engaging in
b) audits of specified elements, accounts, or items
activity that compromise independence
c) audits of info accompanying basic FS
Internal Auditing Approach and Techniques d) compliance with contractual agreements
1. Operational Audit – future-oriented, independent, e) summarized FS
systematic evaluation; management of operational activities
Types of Auditors
controlled by management; improving profitability and
1. Public Accounting Firm – performance of audits of
attainment of objectives
published historical FS of all publicly traded companies –
2. Management Audit - future-oriented, independent,
operational and compliance auditing
systematic evaluation; activities of all levels of management;
2. Internal Auditors – hired by entity as consultants or
employees of individual companies who perform
independent appraisal; provide mgt valuable info in making
decisions
- independent of line functions; directly reports to audit
committee

3. Government Auditors – COA and BIR

I. COA (Compliance Audit)
a) presents FS fairly in accordance with FRF and laws
b) conduct programs with economy and sufficiency
c) desired results achieved

II. BIR (Compliance Audit) – determine whether taxpayers

complied with tax laws

III. Regulatory Auditors – SEC, BSP, CC, OIC; solvency and

compliance of institutions with laws and regulations

Accounting vs. Auditing

Accounting – recording, classifying, summarizing economic

events in logical manner

Auditing – determination whether accounting information

properly reflects economic events occurred

Financial Reporting Standards – link between accounting and

auditing