AUDITING THEORY

FUNDAMENTALS OF AUDIT AND ASSURANCE ENGAGEMENT

Assurance services – independent professional services in which a practitioner issues a written
communication that expresses a conclusion designed to enhance the degree of confidence of the intended
users other than the responsible party about the outcome of the evaluation or measurement of a subject
matter against criteria
Assurance engagement – an engagement in which a practitioner expresses a conclusion designed to
enhance the degree of confidence of the intended users other than the responsible party about the
outcome of the evaluation or measurement of a subject matter against criteria

External Auditors – Not employees

*Client - FS * Company – Public *Professional - Audit

ELEMENTS OF AN ASSURANCE ENGAGEMENT

1.) SUITABLE CRITERIA
Criteria refer to the standard or benchmark used to evaluate or measure the subject matter of an
assurance engagement, including, where relevant, benchmarks for presentation and disclosure. Without
frame of reference provided by suitable criteria, any conclusion is open to individual interpretation and
misunderstanding. Need to be available to intended users.
ASSURANCE ENGAGEMENT APPLICABLE CRITERIA
Audit of Financial Statements PFRS, PAS, GAAP
Assurance on Internal Control Established Internal Control Framework
Compliance Audits Applicable law, regulation or contract

Five Characteristics of Suitable Criteria:

a. Relevance – relevant criteria contribute to conclusions that assist decision-making by the intended
users
b. Completeness – criteria are sufficiently complete when relevant factors that could affect the
conclusions in the context of the engagement circumstances are not omitted. Complete criteria
include, where relevant, benchmarks for presentation and disclosure.
c. Reliability – reliable criteria allow reasonably consistent evaluation or measurement of the subject
matter when used in similar circumstances by similarly qualified practitioners
d. Neutrality – neutral criteria contribute to conclusions that are free from bias
e. Understandability – understandable criteria contribute to conclusions that are clear,
comprehensive, and not subject to significantly different interpretations

1.1 Two Types of Criteria

1. Established criteria – are those criteria that are embodied in laws or regulations or issued by
authorized or recognized bodies of experts that follow a transparent due process Examples:
2. Specifically developed criteria – those criteria specifically designed for the purpose of the
engagement

2.) APPROPRIATE SUBJECT MATTER

Subject matter refers to the information to be evaluated or measured against the criteria.
Subject matter information means the outcome of the evaluation or measurement of a subject matter.

Atty. Ricki Mae T. Austria, CPA

Requirements for subject matter to be considered appropriate:
 Identifiable
 Capable of consistent evaluation and measurement against suitable criteria
 In the form that can be subjected to procedures for gathering evidence to support that evaluation or
measurement

Subject matter in an audit of financial statements:

 Subject matter includes the financial position, financial performance and cash flows of the entity
 Subject matter information is the set of financial statements
 Responsible party is the client/entity management

2.1) Forms of Subject Matter in Assurance Engagement

Forms of subject matter of an assurance engagement:
1. Financial performance or conditions (for example, historical or prospective financial position,
financial performance and cash flows) for which the subject matter information may be the
recognition, measurement, presentation and disclosure represented in the financial statements
2. Non-financial performance or conditions (for example, performance indicators of an entity) for
which the subject matter information may be key indicators of efficiency and effectiveness
3. Physical characteristics (for example, capacity of a facility) for which the subject matter
information may be a specifications document
4. Systems and processes (for example, entity’s internal control or IT system) for which the subject
matter information may be an assertion about effectiveness
5. Behavior (for example, corporate governance, compliance with regulation, human resource
practices) for which the subject matter information may be a statement of compliance or a statement
of effectiveness

3.) SUFFICIENT APPROPRIATE EVIDENCE

The practitioner shall plan and perform the engagement with an attitude of professional skepticism to obtain
sufficient appropriate evidence that the assertions are free of material misstatements.
 Professional skepticism – an attitude that includes a questioning mind, being alert to conditions
which may indicate possible misstatement due to error or fraud, and a critical assessment of
evidence
 Evidence – refers to the information obtained by the practitioner in arriving at the conclusions on
which the conclusion is based
 Sufficiency – refers to the measure of the quantity of evidence
 Appropriateness – refers to the measure of the quality of evidence, that is, its relevance and its
reliability

 Cost-Benefit Considerations – the matter of difficulty or expense involved is not in itself

a valid basis for omitting an evidence-gathering procedure for which there is no
alternative.
 Materiality – the practitioner must understand and assesses what factors might influence
the decisions of the intended users.
 Assurance Engagement Risk – the risk that the practitioner expresses an inappropriate
conclusion when the subject matter information is materially misstated.

4.) THREE-PARTY RELATIONSHIP

 Practitioner – CPA in public practice who performs the assurance engagement. It is an
independent third party.

Atty. Ricki Mae T. Austria, CPA

  “Practitioner” is broader than the term “auditor” as used in professional standards, which
relates only to practitioners performing audit or review engagements with respect to
historical financial information.
 A practitioner may be requested to perform assurance engagements on a wide range of
subject matters. Some subject matters may require specialized skills and knowledge
beyond those ordinarily possessed by an individual practitioner.

a) Responsible party – person/s who is responsible for the subject matter or the assertion (subject
matter information) *see page 6 of Ireneo*
b) Intended user/s – person, persons or class of persons for whom the practitioner prepares the
assurance report; they are the users to whom the practitioner usually addresses the report

Responsible party and intended user:

 The responsible party and the intended users may be from different entities or the same entity.
 The practitioner may be engaged by the responsible party or the intended user.
 The responsible party can be one of the intended users, but not the only one.
 Whenever practical, the assurance report is addressed to all the intended users, but in some cases
there may be other intended users. In cases where the CPA may not be able to identify all intended
users, intended users may be limited to major stockholders with significant and common interests.
 In some circumstances, the intended user may be established by law.
 The responsible party may also be one of the intended users.
 The intended user may be established by agreement between the practitioner and responsible party
or those engaging or employing the practitioner.

5.) WRITTEN ASSURANCE REPORT

 Should be in the form appropriate to a reasonable assurance engagement or a limited assurance
engagement.
 The practitioner should provide a written report containing a conclusion that conveys the assurance
obtained about the subject matter information. In addition, the practitioner considers other reporting
responsibilities, including communicating with those charged with governance when it is appropriate
to do so.
5.1) Assurance Report-Levels of Assurance
Levels of assurance provided in the written report:

TYPE OR LEVEL
FORM OF CONCLUSIONS EXAMPLE
OF ASSURANCE
Positive form of expression
Reasonable “In our opinion internal control is effective, in all material
of the practitioner’s
Assurance respects, based on XYZ criteria.”
conclusion
“Based on our work described in this report, nothing has
Negative form of expression
Limited come to our attention that causes us to believe that
of the practitioner’s
Assurance internal control is not effective, in all material respects,
conclusion
based on XYZ criteria.”

Level of Assurance
 Absolute – not attainable
 Reasonable – highest level; reduces assurance engagement risk – which is diff from info risk
(i.e. Audit)
 Limited – higher assurance engagement risk; negative form (i.e. Review of Historical FS)
 None – no assurance at all

Atty. Ricki Mae T. Austria, CPA

Engagements and Level of assurance:

1. Audit: The auditor provides a reasonable (high, but not absolute) level of assurance that the
information subject to audit is free of material misstatement. This is expressed positively in the audit
report as Reasonable Assurance.

2. Reviews: The auditor provides a moderate/limited level of assurance that the information subject to
review is free of material misstatement. This is expressed in the form of negative assurance.

3. Agreed-upon procedures: No assurance is expressed. The auditor simply provides a report of

the factual findings. Users of the report assess for themselves the procedures and findings reported
by the auditor and draw their own conclusions from the auditor's work.

4. Compilation: Although the users of the compiled information derive some benefit from the
accountant's involvement, no assurance is expressed in the report.

Nature, Scope and Objective of Assurance Engagement

According to the Philippine Framework for Assurance Engagements, an assurance engagement is
conducted:
a. To provide a high level of assurance that the subject matter conforms in all material respects with
identified suitable criteria; or
b. To provide a moderate level of assurance that the subject matter is plausible in the circumstances

Types of Assurance Engagements and their Objectives:

1. Reasonable assurance engagements
 engagements that provide high, but not absolute, level of assurance
 Also called high-level engagements
 The objective of a reasonable assurance engagement is a reduction in assurance
engagement risk to an acceptably low level as the basis for a positive form of expression of
the practitioner’s conclusion.
2. Limited assurance engagements
 engagements that provide only a “moderate” or “limited” level of assurance
 The objective of a limited assurance engagement is a reduction in assurance engagement
risk to an acceptable level as the basis for a negative form of expression of the practitioner’s
conclusion. Thus, the risk in limited assurance engagement is greater than for a reasonable
assurance engagement.

Other Assurance Services

 CPA risk advisory
 Business performance measurement services
 Health care performance measurement services
 Elder Care Plus
 Risk Assessment Services
 CPA Web Trust Service
 Information Systems Reliability

Non-Assurance Engagement
1. Related services, such as:
a) Agreed-upon procedures engagements, and
b) Compilations of financial or other information engagements
1. Tax services (as the preparation of tax returns where no conclusion conveying assurance is
expressed)
2. Consulting (or advisory) engagements, such as management and tax consulting

Atty. Ricki Mae T. Austria, CPA

ASSURANCE SERVICES VS. CONSULTING SERVICES:

POINTS OF
ASSURANCE SERVICES CONSULTING SERVICES
DISTINCTION

To improve quality or context of To recommend uses for information

Primary Purpose
information by enhancing its credibility for better outcomes

Number Of Parties 3 parties 2 parties: the CPA and the client

Decision makers and information, they

Focus Outcomes
used for optimum decisions

Intended to improve decision maker’s Designed to improve client’s

Output’s Objective condition only indirectly through the use condition directly through findings,
of high-quality information conclusions and recommendations

Competing May exist between management and

No competing interests
Interests users of financial statements

Form Of
Communication Written report Either written or oral communication
With The Client

COMPARATIVE EXAMPLES OF ASSURANCE AND NON-ASSURANCE SERVICES:

CATEGORIES OF SERVICES / ENGAGEMENTS

Assurance Services
Non-Assurance Services
Audit Review Other assurance
1. Agreed-upon procedures
2. Compilation of financial or other
information
1. Examination of 3. Preparation of tax returns when
1. Audit of FS 1. Review of FS no conclusion is expressed
prospective FS
4. Consulting or advisory services:
- Tax consulting
- Management consulting
- Other advisory services
2. Audit of internal 2. Review of
2. CPA risk
control over interim financial
advisory
financial reporting information

Atty. Ricki Mae T. Austria, CPA

DISTINCTIONS BETWEEN TYPICAL ASSURANCE AND NON-ASSURANCE SERVICES:
NON-ASSURANCE SERVICES
ASSURANCE SERVICES
(RELATED SERVICES)
Agreed-
Audit Review upon Compilation
procedures
Limited to:
Evidence 1. Inquiry; and
gathering
2. Analytical procedures
procedures Risk assessment,
(The auditor obtains an Reading of the FS
Tests of controls
understanding of the entity As agreed for obvious
and Substantive
and its environment, including misstatements
tests
internal control, but no
evaluation of internal control
is conducted.)

Reasonable
Level of
assurance
assurance No
(High, but not Moderate (limited) assurance No assurance
provided by assurance
the CPA absolute,
assurance)

Audit Report
containing Review Report containing Factual Compilation Report
Report
positive negative assurance on findings of which identify
provided
assurance on assertion procedures information compiled
assertion

Skills used
by the Audit skills Audit skills Audit skills Accounting skills
auditor

PRONOUNCEMENTS ON ASSURANCE ENGAGEMENTS:

AASC ENGAGEMENT RELATED PRACTICE
APPLICATIONS
STANDARDS STATEMENTS

a. Philippine Standards on Philippine Auditing Practice

FS audit engagements
Auditing (PSAs) Statements (PAPSs)

b. Philippine Standards on Philippine Review Engagement

Review engagements
Review Engagements (PSREs) Practice Statements (PREPSs)

c. Philippine Standards on Other assurance engagements Philippine Assurance

Assurance Engagements dealing with subject matters other Engagement Practice
(PSAEs) than historical financial information Statements (PAEPSs)

d. Philippine Standards on Philippine Related Services

Related services
Related Services (PSRSs) Practice Statements (PRSPSs)

Atty. Ricki Mae T. Austria, CPA

 INTRODUCTION TO AUDITING
Auditing is “a 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 the interested users.”

Two processes of auditing:

a. Investigative process – involves the systematic gathering and evaluation of evidence as a basis
for determining whether assertions made by responsible person correspond with the established
criteria
b. Reporting process – involves communicating the audit opinion to interested users

IMPORTANT CONCEPTS
1. Systematic process – auditing involves structured/logical series of sequential steps or procedures
known as the Audit Process
2. Objectively obtaining and evaluating evidence – auditing involves gathering and evaluating sufficient
appropriate audit evidence that will support the auditor’s opinion
 Objectivity refers to the combination of impartiality, intellectual honesty and freedom from
conflicts of interest.
 Audit evidence is the information obtained by the auditor in arriving at the conclusions on which
the audit opinion is based.
3. Assertions about economic actions and events – assertions are the subject matter of auditing
 In the context of audit of financial statements, assertions are representations of management,
explicit or otherwise, that are embodied in the financial statements. Assertions include the
accounts, balances/amounts and disclosures appearing on the face of the financial statements
(and in the notes to financial statements) and which the management claims to be free of
misstatements.
 Audit evidence gathered and evaluated by the auditor may support or contradict the assertions
of management.
4. Established criteria – the standards or benchmarks that are needed to judge the validity of the
assertions on the financial statements
 In the context of audit of financial statements, the established criteria are the applicable financial
reporting framework (for example, the PFRS).
5. Ascertain the degree of correspondence between assertions and established criteria – The
auditor’s objective is to determine whether the assertions conform with established criteria, that is,
whether the financial statements are prepared, in all material respects, in accordance with the
applicable financial reporting framework (such as the PFRS).
6. Communicating the results to the interested users – The ultimate objective of audit is the
communication of audit findings/opinion on the fairness of the financial statements to interested users.
 Communicating results is achieved through issuance of a written audit report which contains the
audit opinion (or disclaimer of opinion).
 Interested users are the wide variety of financial statements users who rely on the auditor’s
opinion such as the stockholders, creditors, potential investors and creditors, management,
government agencies, and the public (in general).

ELEMENTS FS AUDIT ASSURANCE ENGAGEMENT

1.) Suitable Criteria
 Applicable financial reporting framework / GAAP in the Philippines (PFRS) and Other Authoritative
Body
2) Assurance Report-Levels of Assurance
 Independent auditor’s report contains the audit conclusion/opinion
 Unmodified (unqualified) opinion—The opinion expressed when the FSs are prepared, in all
material respects, in accordance with the applicable FRF.
 Modified opinion—The three types of are:
o Qualified opinion – the auditor is satisfied that the FSs are presented fairly, except for a
specific aspect of them.

Atty. Ricki Mae T. Austria, CPA

 o Adverse opinion – the auditor does not believe the FSs are fairly presented.
o Disclaimer of opinion – the auditor does not know if the FSs are presented fairly.
3.) Sufficient Appropriate Evidence
 Auditor obtains sufficient appropriate audit evidence as a basis for audit conclusion/opinion
4.) Subject Matter
 Assertions/Financial statements of the client company confident and forceful statement of fact or
belief
5.) Three Party Relationship
a. Practitioner – CPA in public practice who performs the assurance engagement
b. Responsible party – person/s who is responsible for the subject matter or the assertion (subject
matter information)
c. c. Intended user/s – person, persons or class of persons for whom the practitioner prepares the
assurance report;
they are the users to whom the practitioner usually addresses the report

NEED FOR AN INDEPENDENT FINANCIAL AUDIT

1. Potential conflict of interest between users and preparers of the financial information
2. Complexity of subject matter requires expertise
3. Remoteness of users
4. Consequence for decision making

ELEMENTS OF THEORETICAL FRAMEWORK OF AUDITING:

1. Financial data and statements to be audited are verifiable
2. The auditor should always maintain independence with respect to the client whose financial
statements are subject to audit
3. There should be no long-term conflict between the auditor and the client management.
4. Effective internal control system reduces the possibility of errors and fraud affecting the financial
statements
5. Consistent application of GAAP results in fair presentation of FS
6. What was held true in the past will continue to hold true in the future in the absence of known
conditions to the contrary
7. An audit benefits the public.

IMPORTANCE OF AUDIT OPINION/AUDIT REPORT

 It lends credibility to the FS.
 It provides increased assurance (reasonable assurance) to users as to the fairness of the FS.

AN FS AUDIT IS:
 NOT a certification or guarantee as to accuracy or fairness of the FS.
 NOT an assurance as to future viability of the entity.
 NOT an assurance as to efficiency or effectiveness of the client’s business operations.
 NOT attestation as to the financial strength of an entity, the wisdom of its management decisions, or
the risk of doing business with it.

OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR:

1. To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error.
 Reasonable assurance means high, but not absolute, level of assurance
 Reasonable assurance is the basis for the auditor’s opinion. Reasonable assurance is achieved
when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk to an
acceptably low level.
2. To report on the financial statements and to communicate such report in accordance with the
auditor’s findings.

Atty. Ricki Mae T. Austria, CPA

Auditor’s opinion and reasonable assurance:
 The auditor's opinion, as expressed in the auditor’s report, enhances the credibility of the financial
statements by providing a reasonable assurance that the financial statements are fairly presented or
free from material misstatement.
Audit opinion is based on whether reasonable assurance is obtained:
1. When reasonable assurance is obtained: Auditor shall express an unqualified opinion
2. When reasonable assurance cannot be obtained: The auditor is required to:
a) Express a qualified opinion in the auditor’s report
b) If qualified opinion is insufficient in the circumstances:
 Disclaim an opinion or
 Withdraw from the engagement, where withdrawal is legally permitted

END PRODUCTS OF AUDIT ENGAGEMENT:

a) Independent auditor’s report – the primary product of audit engagement
b) Certain other communication and reports – other communication and reporting responsibilities to
users, management, those charged with governance, or parties outside the entity, in relation to
matters arising from the audit (as may be required by the PSAs or by applicable laws or regulations)
Examples:

 Communication with those charged with governance

 Auditor’s responsibilities relating to fraud in an audit of financial statements

MANAGEMENT RESPONSIBILITY FOR THE FINANCIAL STATEMENTS:

1. Responsibility for the preparation and presentation of the financial statements in accordance with the
applicable financial reporting framework which includes:
a) Identification of applicable financial reporting framework, in the context of any relevant laws or
regulations
b) Preparing the financial statements in accordance with that framework
c) Adequate description of that framework in the financial statements
d) Making reasonable accounting estimates
e) Selecting and applying appropriate accounting policies

2. Responsibility for designing, implementing and maintaining internal control that is relevant or necessary
to enable the preparation of financial statements that are free from material misstatement, whether due
to fraud or error, and

3. Responsibility to provide the auditor with:

a) All information (such as records, documentation and other matters) that are relevant to the
preparation and presentation of the financial statements
b) Any additional information that the auditor may request from management for the purpose of the
audit; and
c) Unrestricted access to persons within the entity from whom the auditor determines it necessary to
obtain audit evidence.

Atty. Ricki Mae T. Austria, CPA

BASIC DISTINCTION BETWEEN AUDITING AND ACCOUNTING:
Auditing involves verification of FS and its fairness Accounting precedes auditing because without FS
of presentation while accounting involves there could be no FS audit.
preparation and presentation of FS
Auditing begins. Accounting ends.
The end product of the audit process is an auditor’s The end product of the accounting process is a set
report. of FS.
An auditor must be proficient/expert in accounting
(since the auditor will use GAAP in evaluating the
An accountant need not be proficient in auditing.
fairness of the FS) as well as in auditing (specifically
in accumulation and interpretation of audit evidence)
a) Philippine Framework for Assurance
Engagements, and b) Framework of Philippine Framework for Preparation of FS
Standards on Auditing
Governed by GAAS Governed by GAAP/PFRS
Bodies of knowledge - GAAS Bodies of knowledge - GAAP

GENERAL TYPES OF AUDIT:

1. According to objectives or nature of assertion
a) Financial statement audit – an audit conducted to determine whether the financial statements of
an entity are fairly presented in accordance with an identified financial reporting framework (or
PFRS)
b) Compliance audit: a review of an entity’s degree of compliance with applicable laws and
rules/regulations or contracts; usually performed by government auditors
Examples: Examination conducted by:
i) BIR examiners: compliance of taxpayers with tax law, rules or regulations
ii) BSP examiners: compliance of banks with banking laws, rules or regulations
iii) COA auditors: compliance of government transactions/expenditures with the requirements of
applicable laws, rules or regulations

c) Operational audit involves a systematic review and evaluation of the specific operating units (or
procedures, methods or activities) of an organization in relation to specified objectives for the
purpose of measuring/assessing its performance in terms of efficiency and effectiveness of
operations, identifying opportunities for improvement and making recommendations to improve
performance (such as introduction of controls to reduce waste).
 Also called performance audit or management audit
 Example: Evaluation of a company’s computerized accounting system
 Usually performed by internal auditors
 Efficiency relates to use of its resources, while effectiveness relates to accomplishing
objectives.

Internal auditor's responsibilities in operational audits:

In operational audits, the company's management is responsible for setting operating standards. The
internal auditor's responsibilities are to determine that:
a) Management has established such standards.
b) The standards are being met.
c) Deviations from established standards are being identified and corrected.
d) Corrective action has been taken.

Objective of operational auditing:

a) To assess performance in terms of efficiency and effectiveness of operations
1) Effectiveness – To verify fulfillments of plans and sound business requirements

Atty. Ricki Mae T. Austria, CPA

 2) Efficiency – To determine whether the entity is managing or utilizing its resources
economically and efficiently
b) To identify areas for improvement
c) To develop recommendations to improve performance (example of such as introduction of controls
to reduce waste)

Operational audit includes:

 Program or effectiveness audit: an audit to determine whether the entity has been effective in
achieving the desired results or benefits of the program or activity
 Economy audit: an audit to determine whether company objectives or goals are met at a cost
commensurate with the task
 Efficiency audit: whether company objectives or goals are met at the least or minimal Cost
General Types of Audit According to types of auditor or their affiliation with the entity being
examined:
a) External / Independent audit: performed by practitioners or independent CPAs who offer their
professional services for a fee to various clients on a contractual basis
 Independent or external auditors are not employees of the client
 External audit complements internal audit
b) Internal audit: audit performed by entity’s own employees known as internal auditors; internal
auditors investigate and apprise the effectiveness and efficiency of operations and internal controls
of the firm
Internal auditing is defined as "an independent, objective assurance and consulting activity designed to
add value and improve an organization's operations. It helps an organization accomplish its objectives by
bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management,
control, and governance processes."
Internal auditing includes the audit of:

 Financial and operating information;

 Compliance with policies, plans, procedures, laws, regulations, and contracts;
 The means of safeguarding assets and verifying their existence;
 The economy and efficiency with which resources are employed; and
 Operations or programs to ascertain whether results are consistent with established objectives and
goals and whether they are being carried out as prescribed.

 Internal auditors assist in the prevention of fraud by examining and evaluating the system of internal
control.
 Internal auditors are required to review the means employed by the company to safeguard its assets
from various types of losses such as those resulting from fire, theft, unscrupulous or illegal activities,
and exposure to the elements.

I.) Internal auditing: An independent appraisal function or control or activity established within an entity to
examine and evaluate its activities or other controls as a service to the entity. It is an independent,
objective assurance and consulting activity designed to add value and improve an organization’s
operations. It helps an organization to accomplish its objectives by bringing a systematic disciplined
approach to evaluate and improve the effectiveness of risk management, control, and governance
processes.

II.) Overall objective of internal auditing: to assist the members of the organization, particularly
management and board of directors, in the effective discharge of their responsibilities; in short, to provide
assistance to management or board of directors (it serves the needs of management).
a) Government auditing: audit performed by government employees whose main concern is to
determine whether persons or entities comply with government laws, rules and regulations
Atty. Ricki Mae T. Austria, CPA
  A governmental audit is typically designed to determine whether the auditee has complied with
applicable laws and regulations.
Scope of government audit: may extend beyond FS audit to include:
 FS audit
 Performance audit (includes (a) program results (effectiveness) audit and (b) economy and
efficiency audit)
 Compliance audit
The types of audits conducted by the Commission on Audit (COA) are financial audit and performance
audit. Performance audits include economy, efficiency, and program audits. Included in the scope of
financial and performance audits is determining whether the entity has complied with applicable laws and
regulations.
Government auditors are required to prepare a written report on the entity's internal control and
assessment of control risk made as part of a financial statement audit. The auditor's report should
include the following:
1. The scope of the auditor's work in obtaining an understanding of the entity's internal control and in
his/her assessment of control risk.
2. The entity's significant controls including those that are established to ensure compliance with laws and
regulations that have a material impact on the financial
statements.
3. The conditions, including the identification of material weaknesses, identified as a result of the auditor's
work.

GENERAL TYPES OF AUDITORS

1. Independent auditors or external auditors – are CPA firms and individual practitioners who perform
audit services on contractual basis for more than one client
 Independent auditor – because the auditor is independent with respect to the client whose FS are
being audited; External auditor – the auditor is an outsider (not an employee of the client)
 Practitioners perform operational audits and compliance audits as part of consultancy services
2. Internal auditors – they are employed by the entity thus they are not independent. However, to operate
effectively, an internal auditor must be independent of the line functions of the entity. Internal auditors
perform operational and compliance audits.
3. Government auditors – employed in government agencies
 BIR examiners perform compliance audits
 BSP examiners perform compliance and operational audits
 COA auditors perform compliance and operational audits

Atty. Ricki Mae T. Austria, CPA

DISTINCTION: TYPES OF AUDIT ACCORDING TO OBJECTIVES OR NATURE OF ASSERTION/DATA

POINT OF
FS AUDIT COMPLIANCE AUDIT OPERATIONAL AUDIT
DISTINCTION

To assess entity’s
To enable the auditor to express
Primary To determine degree of performance (in terms of
an opinion on the fairness of the
objective compliance efficiency and
FS
effectiveness)

Assertion that the

Assertion that the
Assertion that the FS are organization’s
organization has
Subject matter presented in accordance with activities/operations are
complied with laws,
(Assertion) identified financial reporting conducted effectively and
regulations and specific
framework (GAAP) efficiently in relation to
procedures
specified objectives

Applicable laws,
GAAP – Identified financial
Established regulations and specific Objectives (as set by the
reporting framework (as by
criteria procedures (as set by board of directors)
standard setting bodies)
authoritative bodies)

Sufficient Audit findings whether the FS are

appropriate in accordance with Identified Findings on degree of Findings on assessment of
evidence / financial reporting framework compliance performance / operations
outcome (GAAP)

Auditor’s report containing an Reports on the degree

Communication opinion whether the FS are fairly of compliance with Recommendations or
of results to presented in accordance with applicable laws, suggestions on how to
intended users identified financial reporting regulations or specific improve operations
framework (GAAP) procedures

Authoritative bodies
Different groups for different
Users of audit that sets down the
purposes; wide variety of users Management of the entity
report regulations, rules and
(both internal and external users)
procedures

Type of auditor
Independent / External Auditors
performing the Government Auditors Internal Auditors
– Practitioners
audit

Atty. Ricki Mae T. Austria, CPA

ORGANIZATIONAL STRUCTURE OF A LISTED COMPANY

The following are some of the audit committee's functions:

 Select the external auditors.

 Review the external auditor's overall audit plan.
 Evaluate the results of external and internal audits.
 Review the internal auditing work schedule, budget, etc.
 Meet regularly with the internal auditing director.
 The above functions should increase public confidence on the fair presentation of the company's
financial statements.

Atty. Ricki Mae T. Austria, CPA