AUDIT -
AN OVERVIEW
ASSERTIONS MADE BY THE AUDITEE
TYPES OF AUDIT
- the financial statements are fairly
presented
Financial Statement ESTABLISHED CRITERIA
Audit - Financial Reporting Framework such as
the Philippine Financial Reporting
Standards
- It is conducted to determine CONTENT OF THE AUDITOR’S REPORT
whether the financial
statements of an entity are - An opinion about whether financial
statements are fairly presented in
presented in accordance
conformity with the applicable financial
with the applicable financial reporting framework
reporting framework
ASSERTIONS MADE BY THE AUDITEE
TYPES OF AUDIT
- That the organization has complied with laws,
regulations or contracts
Compliance Audit ESTABLISHED CRITERIA
- Laws, regulations and contracts
- It involves a review whether an
organization’s has adhered to CONTENT OF THE AUDITOR’S REPORT
specific procedures, rules or
- Reports on the degree of compliance with the
regulations.
applicable laws, regulations and contracts
- The performance of a
compliance audit is dependent EXAMPLE:
upon the existence of:
1. Verifiable data - The examination conducted by Bureau of
2. Recognized criteria Internal Revenue personnel to determine
whether entities comply with tax rules and
regulations
ASSERTIONS MADE BY THE AUDITEE
TYPES OF AUDIT - That the organization’s activities are conducted
effectively and efficiently
Operational Audit ESTABLISHED CRITERIA
- A study of a specific unit of an - Objectives set by the board of directors
organization for the purpose of
measuring its performance CONTENT OF THE AUDITOR’S REPORT
- Also known as performance
audit or management audit - Recommendations or suggestions on how to
improve operations
Main objective: To assess entity’s NOTE: The criteria for evaluating the effectiveness
performance, identify areas for and efficiency of operations are not clearly
improvements and make established. Thus, the criteria used for operating
recommendations to improve audits would typically vary depending on the
performance. organization’s standards and objectives
Different types of audit possess the same
general characteristics, they involve:
1. Systematic examination and evaluation of evidence which are
undertaken to ascertain whether assertions comply with
established criteria
2. Communication of the results of the examination, usually in a
written report, to the party by whom, or on whose behalf, the
auditor was appointed.
TYPES OF AUDITORS
01 External Auditors or Independent Auditors
- Independent CPAs who offer their
professional services to different clients on
a contractual basis
TYPES OF AUDITORS
02 Internal Auditors - entity’s own employees
who investigate and appraise the effectiveness
and efficiency of operations and internal
controls
Main function: To assist the members of the
organization in the effective discharge of
their responsibilities. Internal auditors usually
perform operational audits
TYPES OF AUDITORS
03 Government Auditors
- Government employees whose main concern
is to determine whether persons or entities
comply with government laws and
regulations.
- They usually conduct compliance audits
Objective:
To enable
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RESPONSIBILITY FOR THE FINANCIAL
STATEMENTS
Management - responsible for preparing and
presenting the financial statements in accordance with
the applicable financial reporting framework
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management of its responsibilities. Hence, it is
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management's responsibility to adopt and implement
adequate accounting and internal control systems that
will help ensure the preparation of reliable financial
statements.
Assurance provided by the auditor
- The auditor's opinion on the financial
statements is not a guarantee that the financial
statements are dependable.
- An audit conducted in accordance with the
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The Independent PSAs is designed to provide only reasonable
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arise from:
1. nature of the procedures performed
2. nature of the financial reporting framework used
3. nature of evidence obtained by the auditor.
There are practical and inherent limitations
Inherent limitations of an audit
of the auditor’s ability to obtain evidence,
that affect the auditor's ability to example:
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detect material misstatements.
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There are practical and inherent limitations
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judgment.
- Errors in the application of judgment may cause
auditors to commit mistakes in the application
of audit procedures or evaluation of evidence
obtained.
The application of the applicable financial reporting
framework such as the PFRS involves application of
significant judgment and estimates on the part of the
Inherent limitations of an audit
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that affect the auditor's ability to
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detect material misstatements. Many financial statement items involve subjective
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depend on unreliable evidence.
Nature of evidence Audit evidence obtained by the
auditor does not consist of "hard facts" which prove or
disprove the accuracy of the financial statements.
Inherent limitations of an audit
Instead, it comprises pieces of information and
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Owing to the inherent limitations of an audit, there is
unavoidable risk that even an audit conducted in
accordance with the PSAs may not be able to detect
material misstatement in the financial statements.
Accordingly, the subsequent discovery of a material
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General Requirements when Auditing
Financial Statements
The procedures required to conduct an audit in accordance
with PSAs should be determined by the Auditor having
regard to the requirements of PSAs, relevant professional
bodies, legislations, regulations, and where appropriate,
the terms of the engagement and the reporting
requirements.
PSA provides the following guidance with
auditing financial statements:
1. The auditor should comply with the relevant
ethical requirements, including those pertaining to
independence, relating to financial statements
audit engagements.
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.
PSA provides the following guidance with
auditing financial statements:
2. The auditor should conduct an audit m accordance with the
Philippine Standards on Auditing (PSAs).
The standard includes:
1. basic principles and essential procedures which the auditor should follow
2. explanatory and other materials that are designed to assist auditors in interpreting and
applying the auditing standards.
Note: The auditor should not represent compliance to PSA in the auditor’s report unless the
auditor has complied with all the PSAs relevant to the audit.
PSA provides the following guidance with
auditing financial statements:
3. The auditor should apply professional judgment in planning
and performing the audit.
Professional judgment is essential to the proper conduct of the audit. This is because
compliance with the relevant ethical requirements and the PSAs and the informed
decisions required throughout the audit cannot be made without the application of
professional judgment to the facts and circumstances.
PSA provides the following guidance with
auditing financial statements:
4. The auditor should obtain sufficient appropriate audit
evidence to reduce the audit risk to an acceptably low level.
Audit evidence is needed to support the opinion expressed in the auditor's report.
This evidence should be both sufficient and appropriate. Whether the audit
evidence obtained is sufficient and appropriate to reduce the audit risk to an
acceptable level is a matter of professional judgment
PSA provides the following guidance with
auditing financial statements:
5. 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 bring into questions the reliability of documents or management
representations.
Need for an independent financial
statement audit
The need for an independent audit of financial statements stems from the following
interrelated sources:
1. Conflict of interest between management and users of financial statements.
- In a sense, financial statements may be viewed as the report by management as to
how the entity performed under their direction and supervision.
- Managers are frequently placed in positions where they can benefit by providing
outside parties with overly optimistic or even false financial information.
- Outside parties, however, want unbiased, realistic financial statements.
Recognizing this inherent conflict of interest, users of financial statements have
become skeptical of unaudited financial statements.
Need for an independent financial
statement audit
The need for an independent audit of financial statements stems from the following
interrelated sources:
2. Expertise
The complexity of accounting and auditing requires expertise in verifying the quality
of the financial information. Since most of the users of financial information are not
equipped with the necessary skills and competence to determine whether the
financial statements are reliable, a qualified person is hired by users to verify the
reliability of the financial statements on their behalf.
Need for an independent financial
statement audit
The need for an independent audit of financial statements stems from the following
interrelated sources:
3. Remoteness
Users of financial information are usually prevented from directly assessing the
reliability of the information. Most of the users do not have access to the entity's
records to personally verify the quality of the financial information. Consequently,
an independent auditor is needed to assist them in verifying the reliability of the
financial information
Need for an independent financial
statement audit
The need for an independent audit of financial statements stems from the following
interrelated sources:
4. Financial consequences
Misleading financial information could have substantial economic consequences for
a decision maker. It is therefore important that financial statements be audited first
before they are used for making important decisions.
Theoretical Framework of Auditing
• The audit function operates within a theoretical framework. Below are selected
postulates, assumptions or ideas that support many auditing concepts and
Standards.
1. Audit function operates on the assumption that all financial data are verifiable.
All balances reported in the financial statements must have supporting documents
or evidence to prove their validity. If no evidence exists relation to the financial
statements on which an auditor is to express an opinion, then there can be no audit
to perform.
Theoretical Framework of Auditing
• The audit function operates within a theoretical framework. Below are selected
postulates, assumptions or ideas that support many auditing concepts and
Standards.
2. The auditor should always maintain independence with respect to the financial
statements under audit.
Independence is essential for ensuring the credibility of the auditor's report. The
report of the auditor will be of little or no value to the readers of the financial
statements if the readers are aware that the auditor is not independent with respect
to the client.
Theoretical Framework of Auditing
• The audit function operates within a theoretical framework. Below are selected
postulates, assumptions or ideas that support many auditing concepts and
Standards.
1
3. There should be on long-term conflict between the auditor and the client
management
Short-term conflicts may exist regarding the application of auditing procedures and
accounting principles, but in the end, both the auditor and the management must be
interested in the fair presentation of the financial statements.
Theoretical Framework of Auditing
• The audit function operates within a theoretical framework. Below are selected
postulates, assumptions or ideas that support many auditing concepts and
Standards.
1
4. Effective internal control system reduces the possibility of material
misstatements of financial statements.
The condition of the entity's internal control system directly affects the reliability of
the financial statements. The stronger the internal control is, the more assurance it
provides about the reliability of the accounting data and financial statements.
Theoretical Framework of Auditing
• The audit function operates within a theoretical framework. Below are selected
postulates, assumptions or ideas that support many auditing concepts and Standards.
5. Consistent application of the applicable financial framework such as the PFRS results
in fair presentation of financial statement
Auditors often use different criteria to evaluate the validity of an assertion. In the case of
a financial statement audit, the criteria are usually the financial reporting frameworks
which could be the PFRS, PFRS for Small and Medium-sized Entities, or PFRS for Small
Entities. It is assumed that fair presentation is achieved when the applicable financial
reporting framework is applied.
Hence, any deviation from the specific requirements of the framework would render the
financial statements materially misstated.
Theoretical Framework of Auditing
The audit function operates within a theoretical framework. Below are selected
postulates, assumptions or ideas that support many auditing concepts and Standards.
6. What are held true in the past will continue to hold true in the future in the absence of
known conditions to the contrary
Experience and knowledge accumulated from auditing a client in prior years can be used
to determine the appropriate audit procedures that need to be performed.
Theoretical Framework of Auditing
The audit function operates within a theoretical framework. Below are selected
postulates, assumptions or ideas that support many auditing concepts and Standards.
7. As audit benefits the public.
Financial statements are ordinarily prepared and presented in order to meet the
common information needs of a wide range of users. These users who rely on the
financial statements as their major source of information are the primary beneficiary of
the financial statement audit.
