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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

Financial statement assertions are assertions by management, explicit or otherwise, that

are embodied in the financial statements and can be categorized as follows: 3
(a) Existence: an asset or a liability exists at a given date;
(b) Rights and obligations: an asset or a liability pertains to the entity at a given date;
(c) Occurrence: a transaction or event took place which pertains to the entity during the period;
(d) Completeness: there are no unrecorded assets, liabilities, transactions or events, or
undisclosed items;

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
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(e) Valuation: an asset or liability is recorded at an appropriate carrying value;

(f) Measurement: a transaction or event is recorded at the proper amount and revenue or
expense is allocated to the proper period; and (g) Presentation and disclosure: an item is
disclosed, classified, and described in accordance with the applicable financial reporting
framework.

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
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General Principles Governing the Audit of Financial Statements6

The procedures required to conduct an audit in accordance with Philippine Standards on
Auditing should be determined by the auditor having regard to the requirements of PSAs,
relevant professional bodies, legislations, regulations, and where appropriate, the terms of
engagement and the reporting requirements:
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 auditors’ 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. The standards also include explanatory and other materials which, rather than being
prescriptive (that is mandatory), is designed to assist auditors in interpreting and applying the
auditing standards.
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.

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
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Generally Accepted Auditing Standards (GAAS) 9

These are the rules that govern auditing practices in the United States. The Auditing
Standards Board, a part of the American Institute of Certified Public Accountants, creates GAAS
to establish auditing practice standards and rules.10
It represents measures of the quality of auditor’s performance. These standards are to be
regarded as minimum standard of performance that auditors should follow.11

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.

2. A sufficient understanding of internal control is to be obtained to plan the audit and to

determine the nature, timing, and extent of tests to be performed.

3. Sufficient competent evidential matter is to be obtained through inspection, observation,

inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial
statements under audit.

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.

Module 1: Sample Quiz 12

1. An audit of financial statements is conducted to determine if the
a. organization is operating efficiently and effectively.
b. Auditee is following specific procedures or rules set down by some higher authority.
c. Overall financial statements are stated in accordance with an identified financial framework.
d. Client’s internal control is functioning as intended.

12
Auditing Theory A guide in understanding PSA 2014 Edition (J.Salosagcol,M.Tiu & R.Hermosilla)
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2. Which of the following is incorrect about responsibility for financial statements?

a. Management is responsible for fair presentation of the financial statements.
b. Auditor is responsible for expressing an opinion on the financial statements.
c. Audit of financial statements does not reduce management’s responsibility.
d. Fair presentation of financial statements is an implicit part of the auditor’s responsibility.

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.

4. The primary purpose of an independent financial statement audit is to

a. provide a basis for assessing management’s performance.
b. comply with government regulatory requirements.
c. assure management that the financial statements are unbiased and free from material error.
d. provide users with an unbiased opinion about the fairness of information reported in the
financial statements.

5. Financial statements need to be prepared in accordance with one, or a combination of:

Philippine Philippine Other authoritative or Philippine
Standards Accounting comprehensive financial Financial
on Auditing Standards reporting framework Reporting
Standards

a. yes yes yes yes

b. no yes yes yes
c. no yes no yes
d. yes no no no

6. The trait that distinguishes auditors from accountants is the:

a. auditor’s ability to interpret accounting standards.

b. auditor’s education beyond the Bachelor’s degree.
c. auditor’s ability to interpret PFRS.
d. auditor’s accumulation and interpretation of evidence related to a company’s financial
statements.
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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

8. Whenever a CPA professional is engaged to perform an audit of financial statements

according to Philippine Standard on Auditing, he is required to comply with those standards in
order to
a. eliminate audit risk.
b. have a measure of the quality of audit performance.
c. to reduce the auditor’s responsibility.
d. eliminate the professional judgement in resolving audit issues.

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.

10. In “auditing” financial accounting data, the primary concern is with:

a. determining whether recorded information properly reflects the economic events that
occurred during the accounting period.
b. determining if fraud has occurred.
c. determining if taxable income has been calculated correctly.
d. analyzing the financial information to be sure that it complies with government
requirements.
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Module 1: Answer Key

1. c
2. d
3. d
4. d
5. b
6. d
7. c
8. b
9. a
10. a