RYAN T.
FERNANDEZ, CPA MMBM
Systematic process of objectively obtaining and evaluating 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.
Systematic process of objectively obtaining and evaluating evidence
•regarding
Audit followsassertions about economic actions and events to ascertain
a series of steps.
•the degree
System - setof
ofcorrespondence between those assertions and
things or parts working
established criteria
together to form andwhole.
a unified communicating the results to interested users.
• Process – series of actions or steps
Systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain
theAn
degree of correspondence
audit should between
be conducted without bias. those assertions and
established criteria
Impartial attitude and
must be communicating the results
maintained by the auditor when to interested
evaluating users.
evidence
and forming conclusions.
No influence by any external factors e.g. the company or management’s interest.
Assertions are claims that establish whether or not
financial statements are true and fairly represented in
the process of auditing.
INVENTORIES ARE COMPLETE.
ACCOUNTS RECEIVABLES EXIST.
SALES TRANSACTIONS OCCUR.
THE COMPANY HAS RIGHTS TO THE PPE.
and a lot more!
Systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain
degree of correspondence between those assertions and established criteria and
communicating the results to interested users.
Systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain
the degree of correspcommunicating theESTABLISHED
results to interested users.
ASSERTIONS CRITERIA
SALES TRANSACTIONS OCCUR IFRS AND OTHER GAAP
hence the company should IFRS 15 – REVENUE FROM
recognize revenue CONTRACTS WITH CUSTOMERS
communicating the results to interested users.
CREDITORS
INVESTORS
GOVERNMENT MANAGEMENT
1. Financial Statements Audit – conducted to determine whether the financial
statements are fairly presented in accordance with an identifiable financial
reporting framework.
2. Compliance Audit – review of an organization’s procedures to determine
whether it has adhered to specific procedures, rules or regulations.
3. Operational Audit – study of a specific unit of an organization to measure its
performance.
FS Audit Compliance Audit Operational Audit
Assertions FS are fairly Organization has Organization’s activities
presented. complied with laws, are conducted effectively
regulations or contracts. and efficiently.
Established Financial reporting Laws, regulations or Objectives set by the
Criteria standards or other contracts. Board of Directors.
financial reporting
Framework.
FS Audit Compliance Audit Operational Audit
Content of the An opinion about Reports on the degree of Recommendations or
Auditor’s whether the financial compliance with suggestions on how to
Report statements are fairly applicable laws, improve operations.
presented in regulations and contracts.
conformity with the
established criteria.
Auditors who External auditors Government auditors Internal auditors
generally
perform
1. External Auditors– generally performs FS audit on a contractual basis.
2. Internal Auditors – entity’s own employees who investigate and appraise the
effectiveness and efficiency of operations and internal controls.
3. Government Auditors – government employees whose main concern is to
determine whether persons or entities comply with government laws and
regulations.
Remoteness of information users from information providers
Potential bias and motives of information provider
Voluminous data
Complex exchange transactions
Unreliable information has negative consequences
Phase 1- Risk Assessment: starts from client acceptance and continuance.
Phase 2- Risk Response: obtaining evidence about internal control operating
effectiveness and about accounts, disclosures and assertions.
Phase 3- Reporting: completing the audit and making reporting decisions.
Phase of the Audit Formulation Process Activities Within the Phase
Phase 1 – Risk Assessment • Assess preconditions for an audit.
- Performing Risk Assessment • Develop common understanding of the
- Client Acceptance and Continuance audit engagement with the client.
Decisions • Identify and assess risk of material
misstatement.
• Respond to identify risks of material
misstatement.
Phase of the Audit Formulation Process Activities Within the Phase
Phase II – Risk Response • Select controls to test, if applicable.
- Obtaining evidence about internal control • Perform tests of control, if applicable.
operating effectiveness, if applicable • Consider the results of test of controls, if
- Obtaining substantive evidence about applicable.
accounts, disclosures and assertions. • Perform substantive tests.
Phase of the Audit Formulation Process Activities Within the Phase
Phase III – Reporting • Complete review and communication
- Completing the Audit and Making activities.
Reporting Decisions • Determine the type(s) of opinon(s) to issue.
ABOUT CLASSES OF TRANSACTIONS AND EVENTS (AND RELATED DISCLOSURES) FOR THE PERIOD
Assertions Basic Idea
Occurrence Transactions and events that have been recorded or disclosed have
occurred, and such transactions and events pertain to the entity.
Completeness All transactions and events that should have been recorded have been
recorded, and all related disclosures that should have been included in the
financial statements been included.
Authorization All transactions and events have been properly authorized.
Accuracy Amount and other data relating to recorded transactions and events have
been recorded appropriately, and related disclosures have been
appropriately measured and described.
Cutoff Transactions and events have been recorded in the current accounting
period.
ABOUT CLASSES OF TRANSACTIONS AND EVENTS (AND RELATED DISCLOSURES) FOR THE PERIOD
Assertions Basic Idea
Classification Transactions and events have been recorded in the proper accounts.
Preparation Transactions and events are appropriately aggregated or disaggregated and
clearly described and related disclosures are relevant and understandable
in the context of the requirements of the applicable financial reporting
framework.
Identify which assertion(s) are being violated in the following
scenario:
1. ABC Company recorded a sale transaction that was eventually
cancelled the following day by the buyer due to the defective
products sold.
2. A company delivered the goods in January 3, 2025, prepared the
related invoice in January 2, 2025 but recorded in the books as
sales revenue in December 31, 2024.
3. The newly-hired accounting staff, Marc, recorded the depreciation
expense as P10,000 instead of P100,000.
4. Marc also forgot to accrue salaries expense in December 2024.
5. He also approved a representation and entertainment expense
worth P50,000 but he forgot that the expense should have been
approved by his supervisor, Mikah.
ABOUT CLASSES ACCOUNT BALANCES (AND RELATED DISCLOSURES) AT THE PERIOD END
Assertions Basic Idea
Existence Assets, liabilities and equity interests exist.
Rights and obligations The entity holds or controls the right to assets, and liabilities are the
obligations of the entity.
Completeness All assets, liabilities, and equity interest that should have been
recorded have been recorded, and all related disclosures that
should have been included in the financial statements have been
included.
ABOUT CLASSES ACCOUNT BALANCES (AND RELATED DISCLOSURES) AT THE PERIOD END
Assertions Basic Idea
Accuracy, valuation, and Assets, liabilities, and equity interests have been included in the
allocation financial statements at appropriate amounts, and any resulting
valuation or allocation adjustments have been appropriately
recorded, and related disclosures have been appropriately
measured and described.
Classification Assets, liabilities and equity interests have been recorded in the
proper accounts.
Presentations Assets, liabilities, and equity interests are appropriately aggregated
or disaggregated and clearly described, and related disclosures
are relevant and understandable in the context of the requirements
of the applicable financial reporting framework.
Identify which assertion(s) are being violated in the following scenario:
1. To portray a good financial position, Clovel Inc. reported P10M worth of
inventories which are fictitious.
2. Saira Inc. is in liquidation phase (no longer a going concern business).
To deceive the creditors that its assets are no longer sufficient to pay-off
its debts, Saira recorded contingent obligations of an affiliate company.
3. Grazle Corp. recorded yearend inventories at cost even if 20% of these
are already obsolete and are no longer saleable.
4. Kurth Nathaniel Inc. holds a debt instrument that has passed the
business model test and cash flow characteristics test. This is recorded
as FA-FVTPL in the balance sheet even if the company did not adapt the
fair value option.
5. Ryzza forgot to include Earning Per Share in the face of Income
Statement or in the notes to FS. Stockholders complain on this lack of
information.
TERMS OF ENGAGEMENT
MANAGEMENT AUDITOR
Obtains evidence
Implements internal controls
Conducts transactions Tests management assertions
against criteria (IFRS)
Accumulates transactions into
account balance Determines overall fairness of
financial statements
Prepares financial statements
Issues audit report to accompany
financial statements
Issue financial statements to users
MATERIALITY The auditor’s assessments of materiality and
AUDIT RISK audit risk influence the nature, timing and extent
EVIDENCE of the audit evidence to be gathered.
MATERIALITY
refers to the amount by which a set of financial statements could be misstated
without affecting the judgment of reasonable person.
Magnitude of an omission or misstatement of accounting information that, in the
light of surrounding circumstances make it probable that the judgement of a
reasonable person relying on that information would have been changed or
influenced by the omission or misstatement.
AUDIT RISK
Risk that the auditor mistakenly expresses a clean audit opinion when the financial
statements are materially misstated.
What does reasonable assurance means?
How can the auditor control the level of audit risk?
AUDIT EVIDENCE REGARDING MANAGEMENT ASSERTIONS
Consists of underlying accounting data and any additional information available to
the auditor, whether originating from the client or externally.
What are the two general characteristics of an audit evidence?
For an evidence to be appropriate, it should be ____ and _______.
Compliance with Ethical Requirements
Reasonable Assurance
Responsibility for the Financial Statements
Skills and Knowledge Needed in FS Audit
Parties Involved in Preparing and Auditing Financial Statements
The Business Entity as the Primary Context of Auditing
Relating the Audit Process Components to the Business Model
