AT-03 (Introduction to Auditing)

• Assurance engagement


  One 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
• Audit


  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 thereof
• Auditing


  • Involves the application of analytical skills, professional judgment and professional skepticism
  • Usually performed by a team of professionals, directed with managerial skills
  • Uses appropriate forms of technology and adheres to a methodology
  • Complies with all relevant technical standards
  • Complies with required standards of professional ethics
• Types of Audit


  • Independent Financial Statements Audit
  • Internal Audit (Operational Audit, Management Audit, Financial Audit)
  • Government (Compliance, Financial Audit, Performance Audit - Economy and efficiency, Effectiveness Audit)
• Objective of 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
• General Principles


  • Audit shall be conducted in accordance with Philippine Standards on Auditing
  • The auditor shall comply with Code of Professional Ethics for Certified Public Accountants
  • The auditor should plan and perform the audit with an attitude of professional skepticism
  • Audit enhances credibility of FS by providing a high, but not absolute, level of assurance
  • Audit says nothing about the viability of an entity or the stewardship function of the management
  • The responsibility for preparing and presenting the financial statements is that of the management of the entity
  • Audit does not relieve the management of its responsibilities
• Absolute Assurance NOT ATTAINABLE due to

  • Use of judgment (obtaining and evaluating evidence)
  • Use of selective testing
  • Inherent limitations of internal control
  • Evidence available to the practitioner is persuasive rather than conclusive
• Financial statement assertions


  Representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur
• Financial statements need to be prepared in accordance with

  • IFRS
  • PFRS
  • Other authoritative basis
• Audit report


  The results the auditor's work is communicated through
• Purpose of audit engagements

  • Enhance the degree of confidence of intended users of the financial statements
  • Provide government agencies, such as BIR with basis for assessments
  • To prove accuracy and reliability of financial statements
  • To obtain reasonable assurance about whether the financial statements are free from material misstatements, due to fraud and error
• Underlying theories behind the necessity for audit services

  • Managers generally have more information about the financial position and operations of the entity compared to other stakeholders
  • In theory, the will and wishes of the shareholders should be operationalized by management but problems exist with respect to goal congruence
• Audit typically does not provide guarantee that financial data are fairly presented
• Audit is not a branch of accounting
• Types of audits


  • Operations audit - Review of an organization's procedures and methods for the purpose of evaluating efficiency and effectiveness of operations, identifying areas for improvement, and making recommendations to improve performance
  • Compliance audit - Review of an organization's procedures to determine whether the organization has adhered to specific procedures, rules or regulations set down by some higher authority
• Internal auditors are employees of the auditee, whereas independent auditors are independent contractors
• Operational Audit


  A subset of internal auditing that reviews an entity's activities for efficiency and effectiveness
• Management audit


  A subset of internal audit that attempts to measure the effectiveness with which an organizational unit is administered
• Responsibilities of the internal audit function

  • Serve as an independent assurance and consulting activity designed to add value and improve the company's operations
  • Assess the company's methods for safeguarding its assets and, as appropriate, verify the existence of the assets
• Operational audit


  Usually performed by internal auditors at the request of top management or the board of directors
• Types of audits


  • Internal audit - An independent appraisal activity established within an entity as a service to the entity
  • Government audit - Goes beyond the usual financial statement audit, to include audits of compliance with laws and regulations, operations of governmental entities, and the proper disbursement and management of public funds
• Operational audit


  Concentrates on seeking out aspects of operations in which waste would be reduced by the introduction of controls
• Internal auditor reporting


  To provide for the greatest degree of independence, an internal auditor should report to the Board of Directors
• Audit committee


  An operating committee of a company's board of directors that is in-charge of overseeing financial reporting and disclosure
• Benefits of internal auditing

  • Society benefits because the internal auditor promotes the efficient and effective use of resources
  • The primary audience for the written report issued by the internal auditor at the completion of an audit should be the management inside or outside the audited area who can take corrective action
• Elements of expanded scope auditing in government

  • Financial and compliance, economy and efficiency, program results
• Economy and efficiency audits determine whether an entity acquires, protects, and uses resources economically and efficiently
• Program results audit


  An audit designed to determine the extent to which the desired results of an activity established by the legislative or other authorizing body are being achieved