Introduction

to Auditing

Robert Rubin, CPA

BULSU Professor
Agenda

• Essential Characteristics of an audit

• Types of Audit
• Objectives of FS Audit
• Types of Opinion
• Assertions
• Audit Procedures
• Sequence in Performing FS Audit
What is
Auditing
Essential characteristics of an audit

Audit is a systematic process

It involves objectively obtaining and evaluating evidence about assertions

It ascertains the degree of correspondence between assertions and established

criteria

It includes communication of the results to interested users

Types of Audit

Nature of Assertions and Data

• Financial Statement Audit
• Operational Audit
• Compliance Audit

As to types of Auditor
• External Audit
• Internal Audit
• Government Audit
Comparison of the Different Types of Audit
Particulars Financial Statement Operational Audit Compliance Audit
Audit
Assertions Financial Statements are Operations are conducted Activities complied with
fairly presented efficiently and effectively applicable laws, rules,
regulations, contract or
management policy
Suitable criteria GAAP or any other Objective set by the Applicable contracts,
identified financial Board of Directors rules, regulations, laws or
reporting framework management policy
Report An opinion whether the Report on efficiency and Degree of compliance
financial statements are effectiveness. This will with applicable laws,
fairly presented in also include rules, regulations, or
conformity with an recommendations to management policy
identified financial improve operations.
reporting framework
Generally performed by External auditors Internal auditors Government Auditors
 PSA 120 dictates that the objective of
an audit of financial statements is to:

Objective
of Financial
Statement Enable the auditor to express an
Audit opinion whether the financial
statements are prepared, whether the
financial statements are prepared, in all
material respects, in accordance with
generally accepted accounting
principles or other identified financial
reporting framework.
 PSA 200 (Revised and Redrafted) further
supported the above objective by stating
that “in conducting an audit of financial
Objective statements, the overall objectives of the
auditor are :
of Financial • To obtain reasonable assurance about whether the
financial statements as a whole are free from material
Statement misstatements, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether
the financial statements are prepared , in all material
Audit respects, in accordance with an applicable financial
reporting framework; and
• To report on the financial statements and
communicate as required by the PSAs in accordance
with the auditor’s findings.”
 EXPRESSION OF AN OPINION

FINANCIAL STATEMENT ARE TAKEN AS A WHOLE

Objective of REASONABLE ASSURANCE

Financial
Statement IN ALL MATERIAL RESPECTS

Audit PRESENCE OF CRITERIA

COMMUNICATION OF THE RESULTS

 Three Party relationship

Basic Appropriate Subject Matter

Elements Suitable Criteria

of FS Audit Sufficient Appropriate Evidence

Written Assurance Report or Conclusion

Three-Party Relationship
Auditor (represents the Management and those Users of FS (represent the
practitioner) charged with governance intended users
(represents the responsible
party)
➢ Formation and expression ➢ Preparation and > Use the audit report which
of an opinion on the presentation of the contains expressed by the
financial statements financial statement in auditor
➢ Compliance with ethical accordance with the
requirements (e.g applicable financial
independence and reporting framework.
competence) ➢ Prevention and detection
➢ Determining the scope of of fraud and error
audit in accordance with ➢ Adoption of
PSAs and other applicable implementation adequate
regulations of professional accounting and internal
bodies control systems
Appropriate
Subject matter
Adequate supporting records and
documents should be available
 PFRS /IFRS

Suitable GAAP
Criteria
Other applicable financial
reporting framework
 Concepts discussed in assurance
engagements apply to audit
engagements. Terms are revised to
specifically relate to audit
Sufficient engagements (e.g. assurance
Appropriate
Evidence engagement risk is the changed to
audit risk)
 Contains the conclusion or
opinion conveying the
Written assurance obtained about the
financial statements
Assurance
Report or Auditor considers other
reporting responsibilities,
Conclusion including communicating with
those charged with governance
 Unmodified /Unqualified – Present
fairly, in all material respect

Qualified – Except for

Types of
Opinion Adverse – Do not present fairly, in
all material respect

Disclaimer of opinion – Do not

express a conclusion
 Qualified or Disclaimer of Opinion –
limitation on the scope of the auditor’s
Issuance of work

Modified Qualified or Adverse Opinion –

Opinion disagreement with management regarding
the acceptability of the accounting policies
selected, the method of their application
or the adequacy of financial statement
disclosures
 Use of selective testing

Reasonable Inherent limitations of internal control

Assurance Audit evidence is persuasive rather than

conclusive
– Inherent
Work undertaken by the auditor to form
limitations opinion is permeated by judgement

Nature / Characteristics of an assertions

 • Any event or activity that will prevent
the entity in the meeting its business
objectives such as wealth and profit
maximization. If an entity is exposed
to a very significant business risk,
Business risk such risk may ultimately lead the
entity to fail. This is the primary
reason why decisions to be made
must be carefully evaluated and
should be founded on suitable basis.
 • Risk that the information prepared
and presented by the entity
contains misstatement.
Information
• Mathematical complement of
risk reliability level. This means that as
information risk increases (from 5%
to 10%), reliability level decreases
(from 95% to 90%)
 Voluminous data
Factors
Contributing Complexity of transactions
to
Information Remoteness of information

risk Conflicts of interest between the

provide and users of information
Ways of Reducing Information Risk

1 2 3
Verify the Have the financial Share information
information statements be risk with the
audited management
Demand for FS Audit – Additional Conditions

Conflict of Interest – between the responsible party and the intended users of
the financial statements

Expertise – Complexity of accounting and auditing requires expertise

Remoteness of users – Users of information frequently are prevented from

directly assessing the quality of information

Financial Consequence – Misleading financial information could have

substantial economic consequences for a decision maker.
 Audit reduces information
risk that may lead to
lower cost of capital
Value of FS
Audit Audit may be used to
deter inefficiency and
fraud.
General
Principles of an
FS Audit
• Comply with relevant ethical
requirement (Code of Ethics).
• Conduct an audit in accordance
with Philippine Standards of
Auditing.
• Plan and perform the audit with
an attitude of professional
skepticism.
• Exercise professional judgment.
• Obtain sufficient appropriate
evidence
 • Efforts has been made to formally create a
conceptual structure for auditing financial
statements. The Conceptual structure would
include conditions that should exist whenever
Theoretical FS Audit is conducted to have a favorable
Framework result.

of FS Audit
 The following are some of the assumptions,
postulates or concepts included in the conceptual
structure:
➢All financial data are verifiable through
existence of supporting documents and records
Theoretical ➢ Auditor should always maintain independence
with respect to the financial statements under
Framework audit
of FS Audit ➢No long term conflict between the auditor and
the clients management
➢Audit benefits the public
➢Effective internal control systems reduces the
possibility of errors and fraud.
Audit Process :
A General
Approach
 Entity prepares and presents the
financial statements

The auditor performs audit

General procedures

Overview The auditor gathers audit evidence

The auditor expresses an audit

opinion
Entity Prepares and Presents FS

• The financial statements are considered as assertions or representation

made by the entity, through its management and those charged with
governance, as appropriate.
 Entity Prepares and Presents FS

Assetions about classes

Assertions about Assertions about
of Transacitons and
Account balances at Presentation and
events for the period
the period end disclosure
under audit
 Occurrence

Assertions Completeness
about Cutoff
classes of
Transactions Accuracy

Classification
 Completeness
Assertions
about Existence
ACCOUNT Rights and Obligations
BALANCES
Valuation and Allocation
 Occurrence and Rights and
Obligation
Assertions
about Completeness
PRESENTATION
and Accuracy and Valuation
DISCLOSURES
Classification and
Understandability
 Entity prepares and presents the
financial statements

The auditor performs audit

General procedures

Overview The auditor gathers audit evidence

The auditor expresses an audit

opinion
 • Risk Assessment Procedures(RAP)
Enable the auditor to obtain an
MAJOR Audit understanding of the entity and its environment,
Procedures including its internal control, to assess the risks of
material misstatement at the financial statement
and assertion levels.
 • Test of Controls (TOC)
MAJOR Audit Evaluate the operating effectiveness of
Procedures controls in preventing, or detecting and correcting
material misstatements at the assertion level.
 • Substantive Test (ST)
Detect material misstatements at the assertion
MAJOR Audit level.
➢Test of Details (of classes of transactions,
Procedures account balances and disclosures
➢Substantive Analytical Procedures
 • Inspection of Records or Documents
- Consist of examining records or documents whether internal
or external, in paper form, electronic form , or other media.

• Inspection of Tangible Assets

- Consist of physical examination of the asset such as cash,
inventories, investment securities and other fixed assets.
SPECIFIC
• Observation
Audit - Consist of looking at the process or procedures being
performed by others
Procedures • Inquiry
- Consist of seeking information of knowledgeable persons,
both financial and non-financial, throughout the entity or
outside the entity.
 • Recalcuation
- consist of checking the mathematical accuracy of
documents or records.Common recalculation
techniques includes footing and cross-footing.
• Reperformance
SPECIFIC - Involves the auditor’s independent execution of
Audit procedures or controls that were originally
performed as part of the entity’s internal control
Procedures • Analytical Procedure
- Consist of evelauations of financial information
made by a study of plausible relationships among
both financial and non-financial data.
 Entity prepares and presents the
financial statements

The auditor performs audit

General procedures

Overview The auditor gathers audit evidence

The auditor expresses an audit

opinion
 • Unmodified opinion
• Modified
Auditor ➢Qualified and Adverse- Auditor concludes that,
based on the audit evidence obtained, the
Expresses an financial statements as a whole are not free from
material misstatement
Audit ➢ Qualified and Disclaimer of opinion – Auditor is
Opinion unable to obtain sufficient appropriate audit
evidence to conclude that the financial
statement as a whole are free from material
misstatement
Audit Process :
More Detailed
Approach
 Preliminary engagement activities

Planning an audit of financial statements

Sequence Study and evaluation of internal control
in Evidence-gathering(Substantive Testinf)
Performing Completing the audit
FS Audit Issuance of the audit report

Post-audit responsibilities
 Preliminary engagement activities
Sequence in > This phase will require a decision from the
auditor whether or not to accept a new client or
Performing continue relationship with an existing pone. This
process would require evaluation not only od the
FS Audits auditor’s qualification, but also the integrity and
auditability of the client’s financial statements.
 Planning an audit of financial statements
Sequence in > Audit planning involves the development of an
overall audit strategy, audit plan and audit
Performing program. The auditor usually obtained more
detailed knowledge about the client’s business and
FS Audits industry on order to understand the transactions
and events affecting the financial statements.
Sequence in Study and evaluation of internal control

Performing > Since entity’s internal control directly affects the

reliability of the financial statements, it is
FS Audits appropriate to study and evaluate theses controls.
 Evidence-gathering(ST)
➢Using the information obtained in audit planning
and consideration of internal controls, the
auditor performs substantive test to determine
Sequence in whether entity’s financial statement are
presented fairly in accordance with financial
Performing reporting standards. Substantive procedures
could either be analytical procedures ot test of
FS Audits details of transactions and balances.
➢This phase will always be performed by the
auditor.
 • Completing the Audit
Sequence in > wrapping up procedures are performed;
Performing conclusions reach are reviewed; and an overall
opinion is formed during this phase.
FS Audits
 Issuance of the audit report
Sequence in ➢In this stage, auditor prepares and issues audit
report which describes the scope of the audit
Performing and states the auditor’s conclusion regarding the
FS Audits fairness of the financial statements.
 Post-audit responsibilities
Sequence in ➢After completion of the audit engagement,
auditor performs procedures that will enable
Performing him/her identify areas for improvement in the
FS Audits current and future engagements.
Questions
& feedback

52
Assessment
Test