Overview of audit process

• Auditing


  A systematic process by which a competent, independent person objectively obtains and evaluates 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
• The purpose of this Philippine Standard on Auditing (PSA) is to establish standards and provide guidance on the objective and general principles governing an audit of financial statements.
• Objective of an audit of financial statements


  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
• An audit of financial statements is an assurance engagement, as defined in the Philippine Framework for Assurance Engagements.
• The auditor should comply with relevant ethical requirements relating to audit engagements.
• The auditor should conduct an audit in accordance with Philippine Standards on Auditing.
• The auditor may also conduct the audit in accordance with both ISAs and PSAs.
• Scope of an audit

  The audit procedures deemed necessary in the circumstances to achieve the objective of the audit
• The auditor should not represent compliance with Philippine Standards on Auditing unless the auditor has complied fully with all of the Philippine Standards on Auditing relevant to the audit.
• 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 and responses to inquiries and other information obtained from management and those charged with governance
• Reasonable assurance


  The auditor obtains that the financial statements taken as a whole are free from material misstatement, whether due to fraud or error
• An auditor cannot obtain absolute assurance because there are inherent limitations in an audit that affect the auditor's ability to detect material misstatements.
• Audit risk


  The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated
• The auditor should plan and perform the audit to reduce audit risk to an acceptably low level that is consistent with the objective of an audit.
• The responsibility for the preparation and presentation of the financial statements in accordance with the applicable financial reporting framework is that of the management of the entity, with oversight from those charged with governance.
• Audit risk


  Inappropriate audit opinion when the financial statements are materially misstated
• Audit objective


  Reduce audit risk to an acceptably low level
• Reducing audit risk


  1. Designing and performing audit procedures to obtain sufficient appropriate audit evidence

  2. Drawing reasonable conclusions to base an audit opinion
• Reasonable assurance


  Auditor has reduced audit risk to an acceptably low level
• Responsibility for financial statements

  • Management of the entity is responsible for preparation and presentation
  • Auditor is responsible for forming and expressing an opinion
• Determining acceptability of financial reporting framework

  1. Auditor considers when accepting audit engagement

  2. Auditor determines if framework is acceptable based on nature of entity and objective of financial statements
• Expressing an opinion on financial statements

  1. Auditor refers to PSA 700 for standards and guidance

  2. Auditor refers to PSA 701 for modified audit opinions
• Management


  Those responsible for preparation and presentation of financial statements
• Auditor refers to PSA 800 when expressing opinion on


  1. Complete set of financial statements prepared in accordance with another comprehensive basis of accounting

  2. Component of a complete set of general purpose or special purpose financial statements

  3. Compliance with contractual agreements

  4. Summarized financial statements
• Phase I: Pre-engagement and Audit Planning Activities


  1. Preliminary arrangements with client

  2. Obtaining understanding of client's industry, business, accounting systems, and internal control

  3. Assessing audit risk

  4. Assessing control risk

  5. Developing overall audit plan and program

  
• Phase II: Gathering and Evaluating Audit Evidence


  1. Performing tests of controls

  2. Performing substantive tests of transactions and balances
• Tests of controls


  Procedures to determine if controls are working effectively
• Substantive tests


  Procedures to detect material misstatements in account balances
• Types of substantive test procedures

  • Tests of balances
  • Analytical review procedures
• Substantive tests aim to substantiate management's assertions about financial statement elements
• Audit objectives for substantive tests


  • Existence or occurrence and validity
  • Completeness and accuracy
  • Rights and obligations
  • Proper valuation or allocation
  • Proper statement presentation and disclosure
• Phase III: Issuing the Audit Report


  1. Preparing the audit report

  2. Expressing an audit opinion
• Audit report


  Describes auditor's responsibility, nature of examination, audit findings, and opinion on financial statements