Chapter 1 – The Demand for Auditing and Assurance Services

Economic Demand for Auditing

Many large companies allocate significant resources for annual audits, and this
expenditure prompts questions about its necessity beyond legal mandates. The demand
for auditing extends back centuries, even before legal requirements were established.
The core reason for this demand is accountability, particularly in modern corporations.
Historically, most organizations were small and owner-operated, leading to minimal
accountability to external parties. However, during the industrial revolution, companies
grew larger and needed capital to expand. This led to the development of capital
markets, where they could sell stocks and bonds to the public, transforming into public
companies.
With this shift came a separation of ownership and management. Professional managers
were hired to run daily operations, acting as agents for absentee owners. This
arrangement resulted in information asymmetry, where managers possessed more
information about the company's financial position than owners.
Herein lies the critical demand for auditing. It serves as an objective assessment of a
company's financial health and internal controls. External auditors independently
evaluate financial statements, ensuring accuracy and reliability. Auditing bridges the
information gap, fostering trust between owners and managers, as well as confidence
among investors and creditors in capital markets.
The economic demand for auditing is rooted in the need for accountability and
transparency in modern corporations. Auditing addresses information asymmetry,
providing assurance that financial reporting is accurate and trustworthy, benefiting all
stakeholders.

What are Assurance Services?

The name assurance services is

used to describe the broad range of
information
enhancement services performed
by a certified public accountant
(CPA) that are
designed to enhance the degree
of confidence in the
information. In general,
assurance services consists of two
(2) types: (a) those that increase
the reliability
of information and (b) those that
involve putting information in a
form or context
that facilitates decision making.
A significant portion of the
assurance services provided by
CPAs is referred to as
attestation services. To attest to
information means to provide
assurance as to its
reliability. In an attestation
engagement, CPAs provide a
report on subject matter
or an assertion about that subject
matter. One of the most sought-
after attestation
services is the examination or audit
of historical financial statements.
The name assurance services is used to describe the broad range of information
enhancement services performed by a certified public accountant (CPA) that are
designed to enhance the degree of confidence in the information. In general,
assurance services consists of two (2) types: (a) those that increase the reliability of
information and (b) those that involve putting information in a form or context that
facilitates decision making. A significant portion of the assurance services provided by
CPAs is referred to as attestation services. To attest to information means to provide
assurance as to its reliability. In an attestation engagement, CPAs provide a report on
subject matter or an assertion about that subject matter. One of the most sought-after
attestation services is the examination or audit of historical financial statements.
Philosophy of an Audit
The philosophy of auditing revolves around the central role that auditors play in
ensuring the credibility and reliability of financial information. As the magnitude of
capital involved and the complexity of ownership structures increase, so does the
importance of accountability. Auditors are tasked with verifying whether the reports
prepared by managers adhere to the contractual provisions, thereby reducing the risk of
disseminating false or misleading information. This risk reduction is particularly crucial
in the context of making economic decisions under conditions of uncertainty.
Financial records are vital for businesses, institutions, and individuals, serving purposes
ranging from evaluating financial status and meeting legal requirements to facilitating
credit decisions. These parties require financial information that is not only reliable but
also credible. The audit examination process involves gathering evidence to provide a
high level of assurance that financial statements are free from material misstatements
due to fraud or errors and that they comply with the appropriate accounting framework.
In addition to enhancing the credibility of financial information, auditors play a
fundamental role in strengthening market confidence. In a free-market economy, the
sharing of reliable, transparent, and unbiased financial data is essential. Auditors help
ensure that financial reports accurately reflect an organization's economic reality.
Auditors are often viewed as guardians of the capital markets, expected to possess
technical competence, maintain impartiality, and prioritize the integrity of financial
reporting. Their independence from management is critical, not only in fact but also in
appearance. The independent auditor's opinion, as articulated in the audit report,
provides both internal and external users with valuable input for making informed
decisions regarding an organization's financial position, managerial performance, and
economic vulnerability.
Ultimately, auditors serve as a vital safeguard against the propagation of biased
financial information, helping uncover undisclosed errors, irregularities, or illegal acts
within a business entity. The philosophy of auditing is rooted in the pursuit of accurate,
credible, and transparent financial reporting, which underpins the efficient functioning
of markets and supports informed decision-making by stakeholders.

Importance of Audited Financial Statements

Audited financial statements are vital because they provide credibility and reliability to a
company's financial reporting. These statements are accompanied by independent audit
reports from external accountants, offering their professional assessment of the
statements' fairness. Audits become necessary due to the potential for managers to
manipulate reports to their advantage, which can erode trust between owners and
managers. Audited statements bridge this trust gap by providing impartial and unbiased
evaluations. Unaudited statements can contain errors, be biased, or even deliberately
falsified, posing risks to investors and creditors. Audits ensure adherence to financial
reporting standards, offering assurance to stakeholders that the financial information is
accurate and trustworthy, promoting informed decision-making.

The Assurance Analogy And The Philippine Standards On Auditing

(PSAS)

THE ASSURANCE ANALOGY

AND THE PHILIPPINE
STANDARDS
ON AUDITING (PSAs)
Auditing serves a crucial role in providing reasonable assurance of detecting material
misstatements in financial statements and noncompliance with significant laws. While it
doesn't guarantee finding indirect law violations, auditors remain vigilant. In the
Philippines, the Professional Regulatory Board of Accountancy monitors and enhances
professional and ethical standards, including adopting international auditing and
accounting standards as Philippine Standards on Auditing (PSAs) in accordance with
RA 9298.
Harmonizing auditing and accounting standards globally would benefit international
financial markets. Auditing is in demand because it helps monitor contractual
relationships between entities and stakeholders, and certified public accountants are
trusted to provide this service due to their competence, independence, objectivity, and
public interest focus. Their involvement adds credibility to financial information
reported by management to external parties, contributing to trust and reliability in
financial reporting.
 Chapter 2 – Professional Practice of Accountancy: An Overview

ACCOUNTANC Y AS A PROFESSION
1. Systematic Theory
2. Professional Authority
3. Community Sanction
4. Regulations Code
5. A Culture

WHO IS A PROFESSIONAL ACCOUNTANT?

• A professional accountant is an individual who holds a valid certificate issued by
Board of Accountancy (i.e., Certified Public Accountant), whether he/she be in public
practice, industry, commerce, the public sector or education. This professional
accountant may belong to any of the following sectors:
1. Professional Accountant in Public Practice
2. Professional Accountant in Business
a) Commerce and Industry
b) Education
c) Government

SCOPE OF PRACTICE
The Philippines Accountancy Act of 2004 (RA 9298) Article 1, Section 4, spell out the
scope of the practice of accountancy as follows:
a) Practice of Accountancy
b) Practice in Commerce and Industry
c) Practice in Education/Academe
d) Practice in the Government
ASSURANCE, ATTEST, and AUDITING SERVICES
Assurance Services
- are defined professional services that improve the quality of information, or
its context for decision makers.

1. Decision Making – can be financial or non financial

2. Quality of Information increasing confidence, clarifying format and
background
3. Independence – objectivity of the application of the professional judgment and
due care by the provider.

Attest Services
- Attest services occur when a practitioner is engaged to issue a report on
subject matter, or an assertion about subject matter, that is the responsibility of
another party
- The subject matter of attest services can take many forms, including
prospective information, analysis, systems and processes, and even specific actions of
specified parties.

Audit Services
- Auditing is a systematic process of objectivity obtaining and evaluating
evidence regarding assertions about economic actions and events to ascertain the
degree of correspondence between those assertions and established criteria and
communicating the results to interest users.
- includes “objectivity in obtaining and evaluating evidence”
- the auditor must “search for audit evidence and objectively evaluate the
relevance and validity of the evidence he or she finds.
TYPES OF AUDITOR
External Auditor
- Their primary responsibility the performance of audits of the published
historical financial statement of all publicly traded- companies, most other
reasonably large companies and many smaller companies and noncommercial
organizations.
- Widespread use of audited financial statements
- Can perform operational auditing as well as compliance auditing as
part of management consultancy services.

Internal Auditors
- CPA firms that are hired by the entity as consultants or employees of
individual companies who perform independent appraisal activity within the
organization
- concerned with all kinds of financial and other data generated for both
internal and external users
- internal auditors is also engaged in evaluating the efficiency of resource
utilization, the effectiveness with which entity objectives are attained.

Government Auditors
COA Auditors
Government auditors from COA determine whether the government agencies and other
entities that use public funds:
1. Present their financial statements fairly in accordance with Financial
Reporting Standards and applicable laws and regulations,
2. Conduct the programs with economy and efficiency,
3. Desired results are achieved.
BIR Examiners
- A form of compliance auditing
- BIT audits or examinations are designed to determine whether the taxpayers have
complied with the tax laws
- must have considerable tax knowledge and auditing skills to conduct an effective
audit

Regulatory Auditors
- auditors include SEC, Bangko Sentral ng Pilipinas, Cooperative Commission, Office
of Insurance Commission and other government agency examiners who check on the
solvency and compliance of the various institutions and business firms with appropriate
laws and regulations.

Forensic Auditors
- Forensic auditors are employed by corporations, government agencies public
accounting firms, and specialized consulting and investigative services firms.
- specially trained in detecting, investigating and deterring fraud and white-collar
crime

TYPES OF OTHER AUDIT SERVICES

Internal Audit
- An independent, objective assurance and consulting activity designed to add
value and improve an organization’s operations
- Includes systematic, disciplined approach to evaluate and improve the
effectiveness risk management, control, and government processes
- Its objective is to assist all members of management in the effective discharge of
their responsibilities by furnishing them with analyses, appraisals,
recommendations and pertinent comments concerning the activities reviewed.

Compliance Auditing
- The examination, audit and settlement in accordance with law and regulation.
- Determines the extent to which rules, policies, laws, covenants, or government
regulations are followed by the entity being audited.
 Operational Audit
- A future-oriented, independent and systematic evaluation performed by the
internal auditor for management of the operational activities
- involves a systematic review of part or all of an organization’s activities
whether resources are being used effectively and efficiently.
- referred as performance audit or management audit.
- provides assurance, assess performance, identify areas for improvement and
develop recommendations.

Forensic Audits
- Its purpose is to detect a deter fraudulent activities
- may be conducted in business or employee fraud, various
other type of criminal investigations where money or assets are involved, and
matrimonial disputes involving division of assets.

OTHER NON-ASSURANCE SERVICES

• Agreed-Upon Procedures
• Tax Preparation and Planning Services
• Management Advisory Services
• Compilation, Accounting and Data Processing System Services
 Chapter 3 – The Public Accounting Professional Environment

CERTIFIED PUBLIC ACCOUNTANT

A certified Public Accountant (CPA) is a person who, after obtaining the required
education, passes an extensive examination and is licensed by the government to
practice as a professional accountant.

REQUIREMENTS TO ENTER THE ACCOUNTANCY PROFESSION

Degree Holder Of Bachelor Of Science In Accountancy (Bsa)
BSA program provide a foundation of professional knowledge, professional skills, and
professional values, ethics and attitudes that enable them to continue to learn and adapt
to change throughout their professional lives.

CPA Licensure Examination

• Qualification of Applicants for the licensure examination
Any person applying for examination shall establish the following requisites to the
satisfaction of the Board that he/she:
(a) is a Filipino citizen;
(b) is of good moral character;
(c) is a holder of the degree of Bachelor of Science in Accountancy conferred by a
school, college, academy or institute duly recognized and/or accredited by the CHED
or other authorized government offices; and
(d) has not been convicted of any criminal offense involving moral turpitude.

Other Legal And Regulatory Requirements

I. Oath
All successful candidates in the examination shall be required to take an oath of
profession before any member of the Board or before any government official
authorized by the Commission or any person authorized by law to administer oaths
upon presentation of proof of his/her qualification, prior to entering upon the practice
of the profession.
II. Issuance of Certificates of Registration and Professional Identification Card
A certificate of registration shall be issued to examinees who pass the licensure
examination subject to payment of fees prescribed by the Commission. The Certificate
of Registration shall bear the signature of the chairperson of the Commission and the
chairman and members of the Board, stamped with the official seal of the Commission
and of the Board, indicating that the person named therein is entitled to the practice of
the profession with all the privileges appurtenant thereto. The said certificate shall
remain in full force and effect until withdrawn, suspended or revoked in accordance
with this Act. A Professional Identification Card bearing the registration number, date
of issuance, expiry date, duly signed by the chairperson of the Commission, shall
likewise be issued to every registrant renewable every three (3) years.

III. Indication of Certificate of Registration, Identification Card and Professional Tax

Receipt. –
The certified public accountant shall be required to indicate his/her certificate of
registration number, and date of issuance, the duration of validity, including the
Professional Tax Receipt number on the documents he/she signs, uses or issues in
connection with the practice of his/her profession. Education and development for
acquiring and maintaining the capabilities of professional accountants can include:
a. Advanced professional education pursued at academic institutions or through the
programs
of professional bodies;
b. On-the-job-training and experience programs;
c. Off-the-job-training; and
d. Continuing professional development (CPD) courses and activities.
CORE VALUES AND COMPETENCY REQUIREMENTS FOR CPAs IN
PUBLIC PRACTICE

Core Values
• Integrity
• Competence
• Lifelong Learning
• Objectivity
• Commitment to Excellence
• Relevance in the Global Marketplace

Core Competencies
• Communications Skills
• Leadership Skills
• Critical-Thinking and Problem-Solving Skills
• Anticipating and Serving Evolving Needs
• Synthesizing Intelligence to Insight
• Integration and Collaboration
REGULATORY AND PROFESSIONAKL ORGANIZATIONS THAT INFUENCE THE
PROFESSION
A. Regulatory Government Agencies

Regulatory Government Agencies

Professional Regulatory Board of Accountancy (BOA)
Securities and Exchange Commission (SEC)
Commission on Audit (COA)
Bureau of Internal Revenue (BIR)

B. Professional Organizations

Philippine Institute of Certified Public Accountants (PICPA)

Sectoral Organizations
1. Association of CPAs in Public Practice (ACPAPP)
2. Association of CPAs in Education (ACPAE)
3. Association of CPAs in Commerce and Industry (ACPACI)
4. Government Association of CPAs (GACPA)

C. Standard-Setting Bodies

International Federation of Accountants (IFAC)

International Accounting Standards Board (IASB)
Financial Reporting Standard Council
International Auditing Practices Committee (IAPC)
Auditing and Assurance Standards Council (AASC)
CPA’S LEGAL LIABILITY
Lawsuit against auditors typically involve alleged misstatements that the auditors did
not detect in the financial statements. These misstatements are usually:
1. an improper or inadequate disclosure, or
2. an inappropriate valuation.
Other typical lawsuits brought by clients against CPA firms involve claims that the
auditor
(1) Did not discover an employee defalcation (theft of assets0 as a results of negligence
in the conduct of the audit
(2) Did not complete the audit on the agreed on date
(3) Inappropriate withdrawal from an audit

LEGAL CONCEPTS RELATED TO AUDITORS LIABILITY

Concepts basic to an understanding of auditors’ liability include:
a. Due professional care
b. Sources of responsibility
c. Degree of wrongdoing
d. Lack of privileged communication
e. Liability for acts of others

LIMITATION ON AUDITOR’S RESPONSIBILITY

Philippine Standard on Auditing (PSA) 240 states that:
“If circumstances indicate the possible existence of fraud or errors, the auditor should
consider the potential effect on the financial information. If the auditor believes that
suspected fraud or error could have a material effect on the financial statements, he
should perform such modified and additional procedures as he determines appropriate
to confirm or dispel such suspicion.”AUDITOR’S DEFENSES AGAINST CLIENT SUITS
1. Lack of duty to perform the service
2. The audit was performed using reasonable care or the lack of reasonable care did not
cause damages
3. Absence of causal connection
4. In cases in which a tort is involved, auditors in some jurisdiction can claim
contributory negligence
5. The statute of limitations on the action has expired.

AUDITOR’S DEFENSES AGAINST THIRD-PARTY LAWSUITS

1. Nonnegligent Performance
2. Lack of duty defense can also be used. This defense contends lack of privity of
contract.
3. Absence of Causal Connection
4. The statute of limitations on the action has expired.

SOCIETY’S EXPECTATIONS AND AUDITOR’S RESPONSIBILITY

It is important to remember that while auditors have important responsibilities,
management is primarily responsible for maintaining effective internal control and for
ensuring the fairness of the company’s financial statements. The auditor’s responsibility
to provide reasonable assurance with respect to errors, fraud and illegal acts clearly
shapes the auditor’s environment and the work he or she perform