C H A P T E R 1

Auditing

A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions
and events to ascertain the degree of correspondence between these assertions and established criteria and
communicating the results to interested users.

Audit

 systematic process
 objective
 obtaining and evaluating evidence regarding assertions about economic actions and events
 ascertain the degree of correspondence
 between these assertions and established
 criteria
 Communicating the results to interested users.

Types of Audits

1. Financial statement audit - to determine if FS are presented fairly in accordance with accounting standards.

2. Compliance Audit -to determine if an organization has adhered to specific procedures, rules or regulations.

3. Operational/Internal audit - to assess entity's performance, identify areas for improvement and make
recommendations to improve performance.

Although these may differ, they have some similarities: systematic examination and required written report

Types of Auditors

 External auditors - independent CPAS who offer professional services specifically FS audit

 Internal auditors - entities own employees who investigate and appraise the effectiveness and efficiency of
operations and internal controls, specifically through operations audit

 Government auditors - gov't employees whose function is to determine if persons or entities comply with
gov't laws and regulations
Comparison of different types of Audit

Financial Audit Compliance Audit Operational Audit

Assertions made by the That the financial That the organization has That the organization's
auditors statements are fairly complied with laws, activities are conducted
presented regulations or contracts. effectively and efficiently

Established criteria Financial reporting Laws, regulations and Objectives set by the
standards or other contracts board of directors
financial contracts
reporting framework

Content of the auditor's An opinion about whether Reports on the degree of Recommendations or
report the financial statements compliance with suggestions on how to
are fairly presented in applicable laws, improve operations
conformity with an regulations and contracts
identified reporting
framework

Auditors who generally External auditor Government auditors Internal auditors

perform

Independent FS Audit

To enable the auditor to express an opinion whether the FS are prepared, in all material respects, in accordance with
an identified financial reporting framework or acceptable financial reporting standards.

Responsibility for the FS

 Embodied in the Statement of Management Responsibility

 Management is responsible for preparing and presenting the FS. They are responsible for its reliability.

 It is management's responsibility to adopt internal control procedures and prepare reliable financial
statements.

Assurance provided by Auditor

 Audit opinion is not a guarantee that the FS are dependable.

 PSAS states that an audit is designed to provide only reasonable assurance (not absolute assurance) that the
financial statements taken as a whole are free from material misstatements.

Audit limitations

 Use of testing/sampling risk

 Error in application of judgment/ non sampling risk
 Reliance on management's representation
 Inherent limitations of the client's accounting and internal control systems
 Nature of evidence
General principles governing the audit of financial statements

 The auditor should comply with the Code of Professional Ethics for CPAS

 The auditor should conduct an audit in accordance with PSAS

 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.

Need for an independent FS audit

 Conflict of interest
 Expertise
 Remoteness
 Financial consequences

Theoretical framework of auditing

 Audit function operates on the assumption that all financial data are verifiable

 The auditor should always maintain independence with respect to the FS under audit.

 There should be no long-term conflict between the auditor and client management

Theoretical framework of auditing

 Effective internal control system reduces the possibility of errors and fraud affecting the FS

 Consistent application of GAAP or PFRS results in fair presentation of FS

 What was held true in the past will continue to hold true in the future in the absence of known conditions to
the contrary

 An audit benefits the public

C H A P T E R 1 2

Four types of services:

1. Audit of Financial Statements - enables the auditor to express an opinion on statements.

2. Review of Financial Statements - a review engagement is conducted to provide limited assurance that there are
no material modifications that should be made to the financial statements for them to be in conformity with the
financial reporting framework.

a. Level of Assurance - the auditor does not provide the same level of assurance as provided on audit
engagement because of the limited procedures performed when reviewing the financial statements.

b. Procedures to be performed - the auditor usually do not perform many procedures.

c. Reporting Responsibility - the reports should contain a clear written expression of negative assurance.
 - the auditor should review and assess the conclusion dawn from the evidence
obtained as the basis for assurance.

*The Unmodified Review Report - it is issued based on the evidence obtained by the auditor that there are no
material modifications made to the financial statements in conformity with Philippine Financial Reporting Standard

*Modification of the Review Report

a. Material Misstatements

b. Scope and Limitation

3. Compilation of Financial Statements

The entities turn to professional accountants to assist them in the preparation and presentation of their financial
statements.

The objective of a compilation engagement is for the accountant to use accounting expertise, as opposed to auditing
expertise, to collect, classify and summarize financial information.

a. Level of Assurance - The procedures employed in a compilation engagement are not designed and do not
enable the accountant to express any assurance on the financial information.

b. Procedures to be performed – The accountant should read the compiled information and consider
whether it appears to be appropriate in form and free from obvious material misstatements.

The accountant is not ordinarily required to

a. Make any inquiries of management to assess the reliability and completeness of the information
provided;

b. Assess internal controls;

c. Verify any matters; or

d. Verify any explanations.

c. Reporting Responsibility - The accountant's compilation report should identify the financial statements
compiled and should clearly indicate that no assurance is provided on the financial statements.

d. Modification of the compilation report

 Material Misstatements
 Scope Limitation
4. Agreed-upon Procedures Engagement

This type of engagement may be accepted provided

 The client takes full responsibility for the adequacy of the procedures to be performed; and

 The distribution of the report is limited only to those parties who have agreed about the procedures
to be performed.

The objective of an agreed-upon procedures engagement is for the auditor to carry out procedures of an
audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report
on factual findings.

a. Level of Assurance - As the auditor simply provides a report of the factual findings of agreed-upon
procedures, no assurance is expressed.

b. Restrictions on the distribution of report - The report is restricted to those parties that have agreed to
the procedures to be performed since others, unaware of the reasons for the procedures, may
misinterpret the results.

c. Terms of the Engagement – The auditor should ensure with representatives of the entity and,
ordinarily, other specified parties who will receive copies of the report of factual findings, that there is a
clear understanding regarding the agreed procedures and the condition of the engagement.

d. Procedures and Evidence - The auditor should carry out the procedures agreed upon and use the
evidence obtained as the basis for the report of factual findings. These are the audit procedures but
usually applied only to specific accounts or elements of a financial statement. These procedures may
include:

 Inquiry and analysis

 Re computation comparison and other clerical accuracy checks
 Observation Inspection
 Obtaining confirmations

e. Reporting Responsibility - The report on an agreed-upon procedures engagement needs to describe

the purpose and procedures of the agreed-upon engagement in sufficient detail to enable the reader
to understand the nature and the extent of the work performed.

ASSURANCE ENGAGEMENTS

PSAE 3000 states that assurance engagements are intended to enhance the credibility of information about
a subject matter by evaluating whether the subject matter conforms in all material respects with suitable criteria.

TYPES OF ASSURANCE ENGAGEMENTS

 Reasonable assurance engagement - the practitioner gathers sufficient appropriate evidence to conclude
that the subject matter conforms in all material respects with identified suitable criteria, and gives a report
in the form of a positive assurance. The financial statements have been prepared in accordance with
applicable legislation and accounting standards.
 Limited assurance engagements - the practitioner gathers sufficient appropriate evidence to conclude that
the subject matter is plausible in the circumstances, and gives a report in the form of a negative assurance.

Nothing has come to our attention that causes us to believe that the financial statements are not
prepared in accordance with applicable legislation and accounting standards.

Any engagement that fulfills the following criteria is an assurance engagement:

 A three party relationship

 An appropriate subject matter;
 Suitable criteria,
 Sufficient appropriate evidence, and
 A written assurance report.

 THREE PARTY RELATIONSHIP - Assurance parties engagements involve three separate

 Professional Accountant
 Party Responsible
 Intended users
 SUBJECT MATTER - The subject matter of an assurance engagement may take many forms such as:
 Data
 Systems and processes
 Behavior
 Physical characteristics
 Assertions-based engagements
If the measurement of subject matter is given by the responsible party, it takes the form of
assertions if it is disclosed to the intended users and then the practitioner is asked to affirm such assertions
of the responsible party. Such assurance engagement is attestation engagement. Another name for
attestation engagement is assertion-based engagement as practitioner express his opinion about the
assertions fairness.

 Direct reporting engagements

If the practitioner performs the measurement of subject matter himself OR obtains the
representation from the responsible party who has conducted the measurement of subject matter where
such evaluation was not disclosed to intended users by the responsible party then measurement of subject
matter will be provided by the practitioner in his assurance report to intended users. Such engagements are
called direct reporting engagements.

 CRITERIA - Criteria are the standards or benchmark used to evaluate or measure the subject matter of an
assurance engagement. Suitable criteria are required for reasonably consistent evaluation or
measurement of a subject matter within the context of professional judgment.

Suitable criteria exhibit the following characteristics:

1. Relevance
2. Completeness
3. Reliability
4. Neutrality
5. Understandability
  EVIDENCE - The practitioner plans and performs an assurance engagement with an attitude of professional
skepticism to obtain sufficient appropriate evidence about whether the subject matter information is free
of material misstatement.

 ASSURANCE REPORT - The practitioner provides a written report containing a conclusion that conveys the
assurance obtained about the subject matter information. The professional accountant's conclusion
provides either high or moderate level of assurance about the subject matter. In addition, the practitioner
considers other reporting responsibilities, including communicating with those charged with governance
when it is appropriate to do so.

 Agreed upon procedures

 Compilation of financial or other information
 Preparation of tax returns when no conclusion is expressed and tax consulting
 Management consulting, and
 Other advisory services

 REPORTS ON PROSPECTIVE FINANCIAL INFORMATION - means financial information based on assumptions

about events that may occur in the future and possible actions of the entity.

Two general stages of prospective financial information

1. forecasts (best-estimate assumptions)
2. projections (hypothetical assumptions)