CHAPTER 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
• Dependable financial information is essential to our society. We often rely upon information provided by others in making economic decisions
• Primary function of an independent audit

  To lend credibility to the financial statements prepared by an entity
• The auditor's opinion enhances the value and usefulness of the financial statements
• By attaching a report to the financial statements, the auditor provides increased assurance to users that the financial statements are reliable
• Objective of a financial statement audit


  To enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework
• Auditing proceeds by means of an ordered and structured series of steps
• Assertions


  Representations made by an audience about economic actions and events
• The auditor's objective is to determine whether these assertions are valid
• Established criteria


  Needed to judge the validity of the assertions, e.g. financial reporting framework when auditing financial statements
• The communication of audit findings is the ultimate objective of any audit
• Types of audits


  • Financial statement audit
  • Compliance audit
  • Operational audit
• 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
• Compliance audit


  Involves a review of an organization's procedures to determine whether the organization has adhered to specific procedures, rules or regulations
• Operational audit


  A study of a specific unit of an organization for the purpose of measuring its performance, identifying areas for improvements and making recommendations to improve performance
• All audits involve systematic examination and evaluation of evidence to ascertain whether assertions comply with established criteria, and communication of the results in a written report
• Types of auditors


  • External auditors
  • Internal auditors
  • Government auditors
• External auditors


  Independent CPAs who offer their professional services to different clients on a contractual basis, generally perform financial statement audits
• Internal auditors


  Entity's own employees who investigate and appraise the effectiveness and efficiency of operations and internal controls, usually perform operational audits
• Government auditors


  Government employees whose main concern is to determine whether persons or entities comply with government laws and regulations, usually conduct compliance audits
• The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework
• Management's responsibility


  Preparing and presenting the financial statements in accordance with the financial reporting framework
• Auditor's responsibility


  To form and express an opinion on the financial statements based on the audit
• An audit conducted in accordance with Philippine Standards on Auditing is designed to provide only reasonable assurance (not absolute assurance) that the financial statements taken as a whole are free from material misstatements
• Inherent limitations affecting the auditor's ability to detect material misstatements

  • 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
• The auditor should comply with the Code of Professional Ethics for Certified Public Accountants promulgated by the Board of Accountancy
• The auditor should conduct an audit in accordance with Philippine Standards on Auditing
• Professional skepticism


  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 brings into question the reliability of documents or management representations
• Reasons for the need of an independent financial statement audit


  • Conflict of interest between management and users of financial statements
  • Expertise
  • Remoteness
  • Financial consequences
• Theoretical framework of Auditing

  • All financial data are verifiable
  • Auditor should maintain independence
  • No long-term conflict between auditor and client management
  • Effective internal control system reduces errors and fraud
  • Consistent application of GAAP/PFRS results in fair presentation
  • Past experience and knowledge can be used for future audits
  • Audit benefits the public