COLEGIO DE LA PURISIMA CONCEPCION

School of the Archdiocese of Capiz

Roxas City

COLLEGE OF BUSINESS, MANAGEMENT AND ACCOUNTANCY

1st Semester A.Y. 2020-2021

Auditing and Assurance Principles (Pr E 1)

Module 2
Overview of Auditing

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. The fairness of the representations made in the financial
statements is the responsibility of management and those charged with governance.

A more comprehensive definition of auditing is given by the American Accounting Association:

“An audit is a systematic process of objectively obtaining and evaluating evidence regarding assertions about
economic actions and events ascertain the degree of correspondence between these assertions and established criteria
and communicating he results to interested users.”

The word “audit” came from the Latin word “audire”, which means “to hear”. During the early days, whenever the
owner of a business suspects any fraud, an auditor is often hired to listen to the accounts read out by the accountant in
order to check its accuracy.

The term “auditor” is used to refer to the person or persons conducting the audit. It may pertain to the engagement
partner or other members of the engagement team, and, as applicable, the firm.

Accounting and audit differentiated

Financial statements are considered end product of accounting. To ensure that the information contained in these
financial statement is reliable, an audit is performed by an independent practitioner.

Reasons for Audit

1. There may be a conflict of interest between management and the users of financial statements.
2. An audit lends credibility to the financial statements.
3. Information contained in the financial statements can have a significant effect to a decision maker.
4. Voluminous data and complex exchange transactions.
5. Remoteness of information users from information providers.

PSA 200 (Revised ad Redrafted) uses the phrase “present fairly, in all material respects” because the auditor’s
responsibility is only to provide reasonable assurance about whether the financial statements as a whole are fee from
material misstatement, whether due to fraud or error.

An audit is designed to provide reasonable assurance that the financial statements as a whole are free from material
misstatement. It does not guarantee that the financial statements are free from all misstatements because an audit is not
undertaken to provide absolute assurance. The inherent limitations that prevent an audit from obtaining an absolute
assurance affects the auditor’s ability to detect misstatements may arise from:
a. Nature of financial reporting
b. Nature of audit procedures
c. Need for the audit to be conducted within a reasonable period of time at a reasonable cost.

Theoretical Framework of Auditing

1. Auditing function operates on the assumption that the financial statements and financial data are verifiable.
2. Independence when examining financial statements for the purpose of expressing an opinion thereon the auditor acts
exclusively in the capacity of an auditor.
3. There should be no long-term conflict between the auditors and the management although short-term conflict on
regular application of accounting principles and auditing process may occur.
4. In the absence of clear evidence to the contrary, what was held true in the past for the enterprise under examination
will hold true in the future.
5 Effective internal control structures reduce the probability of irregularities and misstatements in the financial
statements.
6. An audit benefits the public.

Course Facilitator: Alberth Justine de la Cruz Balgos, CPA

 COLEGIO DE LA PURISIMA CONCEPCION
School of the Archdiocese of Capiz
Roxas City

Management refers to person(s) with executive responsibility for the conduct of the entity’s operations. On the other
hand, those charged with governance refers to person(s) or organization(s) with responsibility for overseeing the
strategic direction of the entity and obligations related to the accountability of the entity (e.g. members of the board).
Such function includes overseeing financial reporting process.

The responsibilities of management and, where appropriate, those charged with governance, on which audit is
conducted, include:
a. The preparation and presentation of the financial statements in accordance with the applicable financial reporting
framework (e.g. PFRS).
b. The design, implementation and maintenance of internal control relevant to the preparation and presentation of
financial statements that are free from material misstatement, whether due to fraud of error.
c. To provide the auditor with all the information that are relevant to the preparation and presentation of the financial
statements.
d. To provide the auditor with any additional information that the auditor may request from the management and, where
appropriate, those charged with governance.

For the purposes of the PSAs, “applicable financial reporting framework” refers to financial reporting framework
adopted by management and, where appropriate, those charged with governance in the preparation and presentation
of the financial statements that is acceptable view

AUDIT PROCESS

Pre-Engagement Procedures

Audit Planning

Obtaining an Understanding of the

Client and its Environment, including
Internal Control

Assessing the Risks of Material

Misstatement and Designing Further
Audit Procedures

Performing Substantive Procedures

Completing the Audit

Issuing an Auditor's Report

Pre-Engagement Procedures

Preliminary engagement activities are performed to determine whether the auditor is qualified to handle the engagement
and to evaluate whether the client’s financial statements are auditable or not.

At this stage, auditors establish an understanding with their clients as to the nature of services to be provided and the
responsibilities of each party, and such is ordinarily accomplished through the use of an engagement letter.

Audit Planning

Audit planning involves developing an overall audit strategy for performing the audit, which shall be documented in an
audit program. Planning continues throughout the entire audit as the auditor accumulates sufficient appropriate
evidence to support the audit opinion.

Obtaining an Understanding of the Client and its Environment,

Course Facilitator: Alberth Justine de la Cruz Balgos, CPA

 COLEGIO DE LA PURISIMA CONCEPCION
School of the Archdiocese of Capiz
Roxas City

Including Internal Control

The auditor obtains understanding of the client entity and its environment to identify the transactions and events
affecting the financial statements. Risk assessment procedures are performed and include inquiries of management and
others within the entity, analytical procedures, observation and inspection, and other procedures.

The auditor also considers the entity’s internal control because the condition of the entity’s internal control directly
affects the reliability of the financial statements. The stronger the internal control, the more assurance it provides about
the reliability of accounting records and financial information.

Assessing the Risks of Material Misstatement and

Designing Further Audit Procedures

The assessment of the risks of material misstatements is made to enable the auditor to design the nature, timing, and
extent of further audit procedures and develop a detailed approach for the expected conduct and scope of the
examination.

Tests of Control are sometimes performed to determine whether key controls are properly designed and operating
effectively.

Performing Substantive Procedures

Substantive procedures (substantive tests) are used to “substantiate” account balances. Substantive procedures restrict
detection risk, the risk that procedures will incorrectly lead to a conclusion that a material misstatement does not exist I
an account balance when in fact such a misstatement does not exist.

While tests of control provide evidence as to whether controls are operating effectively, substantive procedures provide
evidence as to whether actual account balances are proper.

The auditor’s reliance on substantive procedures to achieve an audit objective may be derived from (1) substantive
analytical procedures and/or (2) tests of details of account balances, transactions, and disclosures.

Test of details of transactions are tests performed to determine whether the accounting transactions have been properly
authorized, correctly recorded and summarized in the journals, and correctly posted to subsidiary ledgers and the
general ledger.

Tests of details of balances are tests applied directly to the details of balances in general ledger accounts.
Tests of disclosures are procedures to evaluate whether the overall presentation of the financial statements, including
the related disclosures, is in accordance with the applicable financial reporting framework.

Analytical procedures consist of evaluation of financial information made by a study of plausible relationships among
both financial and non-financial data.

Auditors are required to perform substantive procedures in every audit while tests of control may be omitted under
certain circumstances.

Completing the Audit

Auditors perform a series of procedures near the end of the audit. These procedures include identifying subsequent
events that may affect the financial statements, recognizing matters such as litigation, claims and assessment, obtaining
written management representation and performing wrap-up procedures. Analytical procedures are performed again to
assist the auditor in assessing conclusions reached and for evaluating overall financial statement presentation.

Financial decisions are made as to the veracity of the financial statements and as to the appropriateness of the auditor’s
report.

Issuing an Audit Report

The auditor’s report is the medium through which the auditor expresses his opinion or disclaims his opinion. The
auditor’s opinion enhances the credibility of financial statements by providing a high, but not absolute, level of
assurance.

Course Facilitator: Alberth Justine de la Cruz Balgos, CPA

 COLEGIO DE LA PURISIMA CONCEPCION
School of the Archdiocese of Capiz
Roxas City

An unmodified auditor’s report is issued by CPAs when their examinations and the results thereof are satisfactory.
However, a modified opinion must be expressed under certain circumstances. Either a qualified or adverse opinion is
issued when there are material misstatements in the financial statements. Conversely, the auditor may express a
qualified opinion, or disclaim an opinion when there is inability to obtain sufficient appropriate audit evidence.

Types of Auditors

1. CPA Firms (Independent auditor) – have as their primary responsibility the performance of audits of the published
historical financial statements of all publicly traded companies, most other reasonably large companies and many
smaller companies and non-commercial organizations.

2. Internal Auditors – employees of individual companies who perform independent appraisal activity within the
organization such as review accounting, financial and other operations as a basis for service to management.

3. Government Auditors – auditors of the government agencies such as Commission on Audit (COA) and Bureau of
Internal Revenue (BIR).

Commission on Audit (COA)

The Commission on Audit (COA) is the Supreme State Audit Institution of the Philippines. The COA has the power,
authority, and duty to examine, audit and settle all accounts pertaining to the revenue and receipts of, and expenditures
or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions,
agencies, or instrumentalities, including government owned or controlled corporations with original charters, and on a
post-audit basis (a) constitutional bodies, commission and offices that have been granted fiscal autonomy under the
Constitution of the Philippines (b) autonomous state colleges and universities; (c) other government owned or
controlled corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or equity,
directly or indirectly, from or through the Government, which are required by law or granting institution to submit to
such audit as a condition subsidy or equity.

Types of Audit According to Assertion/Data

1. Financial Statements Audit (Independent or External Audit) – involves the examination of financial statements to
determine whether they are stated in accordance with identified financial reporting framework.
2. Operational Audits (Management or Performance Audit) – involves the examination of all parts or part of an
organization for the purpose of determining the effectiveness and/or efficiency of its operations.

Operational – implies focus on operations

Management – implies that the information obtained in the audit process is useful to management in decision making
Performance – implies an evaluation of the performance of persons or units in executing the entity’s objectives.

3. Compliance Audit – performed to determine whether the auditee is following specific procedures or rules set down
by some higher authority.

Types of Audit According to Types of Auditor

1. External Independent Financial Statements Audit – methodical review and objective examination of financial
statements prepared in conformity with financial reporting practices that are appropriate for the auditee.

2. Internal Audit – an independent appraisal activity within an organization for the review of operations as a service to
management. It covers operational auditing, management auditing, and financial auditing.

3. Government Audit – involves the determination of whether government funds are being handled properly and in
compliance with the existing laws and whether the programs are being conducted efficiently and economically.

a. Financial and Compliance Audit – determines whether financial operations are properly conducted, the financial
reports of an audited entity are presented fairly, and the entity has complied with applicable laws and regulations.
b. Economy and Efficiency Audit – determines whether the entity is managing and utilizing its resources economically
and efficiently.
c. Program Results Audit – determines if results and benefits are being achieved.

Course Facilitator: Alberth Justine de la Cruz Balgos, CPA

 COLEGIO DE LA PURISIMA CONCEPCION
School of the Archdiocese of Capiz
Roxas City

References:
Chen, Harvey S. (2018) Auditing Theory vol. 1
Iloilo City, Philippines.

…End of topic…

Course Facilitator: Alberth Justine de la Cruz Balgos, CPA