AAP

• Dependable financial information is essential to our society. We often rely upon information provided by others in making economic decisions. The need of various users for more reliable financial information has created a demand for an independent audit of financial statements.
• Auditing


  The primary function of an independent audit is 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.
• Auditing (defined by Philippine Standards on Auditing)


  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 (defined by American Accounting Association)


  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.
• Types of Audits


  • Financial statement audit
  • Compliance audit
  • Operational audit
• Types of Auditors


  • External auditors
  • Internal auditors
  • Government auditors
• Independent Financial Statement Audit

  • Management is responsible for preparing and presenting the financial statements
  • Auditor's responsibility is to form and express an opinion on the financial statements
  • Audit provides only reasonable assurance, not absolute assurance, due to inherent limitations
• Management prepares financial statements


  Independent auditor audits the financial statements
• Although the auditor performs procedures to detect material misstatements when auditing financial statements, such procedures may not be effective in detecting misstatements resulting from collusion among employees or management's circumvention of internal control
• Audit evidence


  Comprises pieces of information and impressions which are gradually accumulated during the course of an audit and which, when taken together, persuade the auditor about the fairness of the financial statements. It is generally persuasive rather than conclusive in nature
• 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
• Guidelines when auditing financial statements

  • The auditor should comply with the "Code of Professional Ethics for Certified Public Accountants" promulgated by the Board of Accountancy (BOA)
  • The auditor should conduct an audit in accordance with Philippine Standards on Auditing
  • 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
• 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 bring into questions the reliability of documents or management representations
• The auditor neither assumes that the management is honest nor assumes unquestioned honesty. Thus, representations from management are not a substitute for obtaining sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion
• Reasons for the need for an independent audit of financial statements

  • Conflict of interest between management and users of financial statements
  • Expertise required to verify the quality of the financial information
  • Remoteness of users from directly assessing the reliability of the information
  • Financial consequences of misleading financial information
• Theoretical framework of Auditing

  • Audit function operates on the assumption that all financial data are verifiable
  • The auditor should always maintain independence with respect to the financial statements under audit
  • There should be no long-term conflict between the auditor and the client management
  • Effective internal control system reduces the possibility of errors and fraud affecting the financial statements
  • Consistent application of generally accepted accounting principles (GAAP) or Philippine Financial Reporting Standards (PFRS) results in fair presentation of financial statements
  • What was held true in the past will continue to hold true in the future in the absence of known conditions to the contrary
  • An audit benefits the public
• When analysing markets, a range of assumptions are made about the rationality of economic agents involved in the transactions
• The Wealth of Nations was written

  1776
• Rational


  (in classical economic theory) economic agents are able to consider the outcome of their choices and recognise the net benefits of each one
• Rational agents will select the choice which presents the highest benefits
• Producers act rationally by


  Selling goods/services in a way that maximises their profits
• Workers act rationally by


  Balancing welfare at work with consideration of both pay and benefits
• Governments act rationally by


  Placing the interests of the people they serve first in order to maximise their welfare
• Groups assumed to act rationally


  • Consumers
  • Producers
  • Workers
  • Governments
• Rationality in classical economic theory is a flawed assumption as people usually don't act rationally
• A firm increases advertising

  Demand curve shifts right
• Demand curve shifting right

  Increases the equilibrium price and quantity
• Marginal utility


  The additional utility (satisfaction) gained from the consumption of an additional product
• If you add up marginal utility for each unit you get total utility
• The readers of the financial statements must possess the necessary expertise to be able to understand the financial statements
• Users usually lack the necessary expertise to verify the reliability of the financial information
• As experts, auditors are expected to detect all material misstatements in the financial statements
• Upon completion of a financial statement audit, the auditor has

  Reasonable assurance that all material errors and irregularities have been detected
• The auditor commonly examines a sample, rather than the entire population of transactions
• Accounting presentations contain complex estimates which involve uncertainty
• Fraudulently prepared financial statements are often difficult to detect
• Auditors believe that reasonable assurance is sufficient in the vast majority of cases
• The objective of the ordinary examination by the independent auditor is the expression of an opinion on

  The fairness of the financial statements
• Auditors accumulate evidence to

  Enable them to reach conclusions about the fairness of the financial statements and issue an appropriate audit report
• The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to management