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Module 1
Module 1
ADAMSON UNIVERSITY
COLLEGE OF BUSINESS ADMINISTRATION
ACCOUNTANCY DEPARTMENT
AUDITING AND ASSURANCE CONCEPTS AND APPLICATION 01
MODULE 1
Auditing Defined
The Philippine Standards on Auditing defines auditing as 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. The phrase used to express the auditor’s opinion is “present fairly, in all material
respects. A similar objective applies to the audit of financial or other information prepared in
accordance with appropriate criteria.1
Another definition of auditing taken from the book Applied Auditing by Ma. Elenita B. Cabrera
and Gilbert Anthony B. Cabrera is that it is a systematic process by which a competent,
independent person objectively obtains and evaluates 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 interested users.2
1
PSA 120 – Framework of Philippine Standards on Auditing September 27, 2007
https://aasc.org.ph/downloads/PSA/publications/PDFs/PSA-120.pdf
2
Applied Auditing 2017 Edition (M.E.Cabrera & G.A.Cabrera)
3
Glossary of Terms (December 2002) [amended by PSA 220 (Rev.)] September 27, 2007
https://aasc.org.ph/downloads/PSA/publications/PDFs/Glossary-of-Terms-December-2002.pdf
Page |2
Objectives of Auditing
The purpose of an audit is to enhance the degree of confidence of intended users in the
financial statements. This is achieved by the expression of an opinion by the auditor on whether
the financial statements are prepared, in all material respects, in accordance with an applicable
financial reporting framework. In the case of most general purpose frameworks, that opinion is
on whether the financial statements are presented fairly, in all material respects, in accordance
with the framework. An audit conducted in accordance with PSAs and relevant ethical
requirements enables the auditor to form that opinion.4
In conducting an audit of financial statements, the overall objectives of the auditor are: 5
(a) To obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, thereby enabling the auditor to
express an opinion on whether the financial statements are prepared, in all material respects,
in accordance with an applicable financial reporting framework; and
(b) To report on the financial statements, and communicate as required by the PSAs, in
accordance with the auditor’s findings.
4
PSA 200 (Revised and Redrafted) Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with International Standards on Auditing January 11, 2010
https://aasc.org.ph/downloads/PSA/publications/PDFs/PSA-200-Revised-and-Redrafted.pdf
5
PSA 200 (Revised and Redrafted) Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with International Standards on Auditing January 11,
2010https://aasc.org.ph/downloads/PSA/publications/PDFs/PSA-200-Revised-and-Redrafted.pdf
Page |3
An attitude of professional skepticism means the auditor makes a critical assessment, with a
questioning mind, of the validity of audit evidence obtained and is alert to audit evidence that
contradicts or brings into question the reliability of documents and responses to inquiries and
other information obtained from management and those charged with governance.7
Audit evidence – Information used by the auditor in arriving at the conclusions on which the
auditor’s opinion is based. Audit evidence includes both information contained in the
accounting records underlying the financial statements and other information. The auditor shall
design and perform audit procedures that are appropriate in the circumstances for the purpose
of obtaining sufficient appropriate audit evidence.8
6
Auditing Theory A guide in understanding PSA 2014 Edition (J.Salosagcol,M.Tiu & R.Hermosilla)
7
Auditing Theory A guide in understanding PSA 2014 Edition (J.Salosagcol,M.Tiu & R.Hermosilla)
8
PSA 500 : AUDIT EVIDENCE https://aasc.org.ph/downloads/PSA/publications/PDFs/PSA-500-Redrafted.pdf
Page |4
A. General Standards
1. The audit is to be performed by a person or persons having adequate technical training and
proficiency as an auditor.
2. In all matters relating to the assignment, an independence in mental attitude is to be
maintained by the auditor or auditors.
3. Due professional care is to be exercised in the performance of the audit and the preparation of the
report.
9
https://www.sciencedirect.com/topics/computer-science/generally-accepted-auditing-
standards#:~:text=Originally%20developed%20and%20issued%20by,auditors%20are%20required%20to%20compl
y.
10
https://www.myaccountingcourse.com/accounting-dictionary/generally-accepted-auditing-
standards#:~:text=Definition%3A%20Generally%20Accepted%20Auditing%20Standards,auditing%20practice%20st
andards%20and%20rules.
11
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B. Standards of Fieldwork
1. The work is to be adequately planned and assistants, if any, are to be properly supervised.
C. Standards of Reporting
1. The report shall state whether the financial statements are presented in accordance with
generally accepted accounting principles (GAAP).
2. The report shall identify those circumstances in which such principles have not been
consistently observed in the current period in relation to the preceding period.
3. Informative disclosures in the financial statements are to be regarded as reasonably
adequate unless otherwise stated in the report.
4. The report shall contain either an expression of opinion regarding the financial statements,
taken as a whole, or an assertion to the effect that an opinion cannot be expressed. When an
overall opinion cannot be expressed, the reasons therefore should be stated. In all cases where
an auditor’s name is associated with financial statements, the report should contain a clear-cut
indication of the character of the auditor’s work, if any, and the degree of responsibility the
auditor is taking.
12
Auditing Theory A guide in understanding PSA 2014 Edition (J.Salosagcol,M.Tiu & R.Hermosilla)
Page |6
3. Which of the following does not describe a condition that creates a demand for auditing?
a. Conflict between an information preparer and a user can result in biased information.
b. Information can have substantial economic consequences for a decision maker.
c. Expertise is often required for information preparation and verification.
d. Users can directly assess the quality of information.
7. Recording, classifying and summarizing economic events in a logical manner for the purpose
of providing financial information for decision making is commonly called:
a. finance
b. auditing
c. accounting
d. economics
9. In determining the primary responsibility of the external auditor for an audit of company’s
financial statements, the auditor owes primary allegiance to:
a. stockholders, creditors and the investing public
b. the management of the audit client because the auditor is hired and paid by management.
c. the Auditing and Assurance Standards Council, because it determines auditing standards and
auditor’s responsibility.
d. the audit committee of the audit client because that committee is responsible for
coordinating and reviewing all audit activities within the company.