OVERVIEW OF AUDITING

financial financial information helps

information ● make important economic decisions such as:
○ to buy, hold, or sell investments
■ considering the repercussions such as if there is profit, gain or loss,
sustainability of investment, and risk
○ to provide or to settle credit
■ considering credit rating to avoid losses
○ to vote or to influence management decisions over the entity
■ considering ownership interest such as if you are an investor with high
voting interest as it can affect decision making

auditing audit
● provides assurance

auditing
1. a systematic process
2. done objectively
○ without bias
○ ensure independence with the client
3. involves obtaining and evaluating evidence regarding assertions about economic actions
and events
○ evaluating – based on professional judgement
○ opinion – based on evidence
■ sufficient (quantity) and appropriate (quality)
○ assertions – representations made by the management
■ ex. financial statements is representations made by the management for
users
4. ascertains the degree of correspondence between those assertions and an established
criteria
○ degree of likeness or closeness of what you see and what should have been done
by the client
○ criteria – the basis of the client
■ ex. FS are prepared using the PFRS, then use the PFRS
■ if reporting or practice standard
5. results are communicated to the users
○ by expressing opinion (if presented fairly in all material respects)
○ communicate – enhance or weaken financial report
■ qualified or modified opinion
○ users – investors, suppliers, or bank (public)
types of three types of audit
audit
financial
statement
as to “To determine whether the financial statements are presented
audit /
objective fairly, in all material respects, in accordance with an identified
independent
financial reporting framework.”
audit
● presented fairly = fair presentation
○ fs is prepared in accordance with an
acceptable financial reporting framework
○ completeness and adequacy of disclosures
● in all materials respects
○ can affect the decision making of investors in
all significant matters
● external (financial statement side)

as to “Our financial statements are fairly presented in accordance

assertions with PFRS”
by ● evaluate evidence and verify the info in FS
responsible
party

as to who Independent CPAs who offer their professional services to

performs clients on a per-fee basis.
the audit

as to the established criteria: philippine financial reporting standards

criteria (pfrs)
used

as to the express an opinion on whether the financial statements are

content of presented fairly, in all material respects (in all areas that can
the report significantly affect the decision-making of the users), in
provided accordance with PFRS
● opinion if presented fairly or not

operational
audit
as to “To assess entity’s performance, identify areas for
objective improvements, and make recommendations to improve
performance.”
● internal (ex. policies and processes inside the
company)

as to “Our activities are conducted efficiently and effectively”

assertions ● use of resources; reduce inefficiencies
by
responsible
party

as to who “Internal auditors who are employed with the entity that
performs investigate and appraise the efficiency and effectiveness of its
the audit operations through its activities and processes”
● internal auditors
○ employees of entity
● have departmental independence
○ report to board of directors, specifically the
audit committee not the management since
the auditors audit the management

as to the non-established criteria: depends on the entity being audited

criteria used

as to the provide recommendations on how to rectify issues noted and

content of how to improve operations, in general
the report ● recommendation on improvement of operations
provided

compliance
audit
as to objective “To assess whether the entity has adhered to specific
procedures, rules, or regulations.”
● assess if company follows rules and regulations

as to assertions “Our activities are compliant with applicable laws and

by responsible regulations”
party

as to who “Compliance auditors whose main concern is to determine

performs the the entity’s compliance with laws and regulations”
audit ● compliance auditors
○ BIR – tax laws
○ COA – government agency

as to the established criteria: laws and regulations

criteria used

as to the Report the degree of entity’s compliance with laws and

content of the regulations
report provided ● benchmark – laws and regulations

SUMMARY:
fs operational compliance

objective presented fairly pfrs improve entity adherence to laws

performance

assertions fairly presented pfrs effectively and compliant with laws

efficiently

who performs independent cpas internal auditors compliance auditors

criteria pfrs non-established laws and regulations

criteria

content opinion recommendation degree of compliance

independent independent audit helps (LEP)

financial 1. lend credibility to the financial statements
statement ○ whether fs are prepared in accordance with reporting standards
audit 2. enhance the value and usefulness of the financial statements
3. provide assurance as to the reliability of the financial statements

responsible for the ● management

preparation and ○ auditors only verify
fair presentation of
the financial
statements

level of assurance
is being provided
absolute ● not what audits prepare since no one is perfect
by the auditor in
assurance
this type of audit
reasonable ● audits prepare
assurance ● high, but not absolute level of assurance
○ can still be dependable

reasons why an (SNRIE)

auditor cannot 1. sampling risk
provide absolute ○ use of sampling is not representative of the entire
assurance (5) population
■ QUES: Can we reduce the sampling risk?
● YES. By increasing the sample size;
examining more samples.
■ QUES: Can we eliminate sampling risk?
● YES. By examining the whole
population.
■ because of the time and resource constraints,
examining the whole population still depends on
the practitioner’s professional judgment
2. non-sampling risk
○ use of professional judgement has possibility of human
error
■ QUES: Can we reduce non-sampling risk?
● YES. Through training, CPD, education,
incentives, work-life integration,
wellness, etc.
■ QUES: Can we eliminate non-sampling risk?
● NO. Only reduce.
3. reliance on management assertions or representations
○ based only on management which could be incorrect
○ fraud not responsibility to detect but only if detected
4. inherent limitations of the policy and procedures of the company
○ does not seek to eliminate but only reduce errors,
breakdowns, and inefficiencies
■ even machines
5. evidence obtained: persuasive rather than conclusive evidence
○ conclusive – examine 100% of items
■ no room for errors but audit cannot do this since
lack of time
○ persuasive – auditor is satisfied that he/she has obtained
sufficient and appropriate evidence to provide a basis for
his/her opinion, then he/she can stop looking for more
evidence
■ through professional judgement
○ best thing that these effective policies and procedures can
do is to detect it and take actions on a TIMELY
MANNER

independent financial statement audit is needed for:

1. concept of agency problem
○ conflict of interest usually between management and stockholders
■ management – short term
■ stockholder – long term
○ auditors protect the stockholders or general public from what the management
wants to do
■ ensures that the public will rely on dependable information
■ auditors mediates
2. reliance of the users of the financial statements on the auditor’s expertise to verify the
reliability of the financial statements
3. remoteness of users of financial statements of the entity
○ auditors have access to the books and records of the company (as part of their
audit procedures)
○ auditors bridge the gap
4. potential adverse consequences of making decisions from unreliable financial information

general general principles governing a financial statements audit

principles (EAP)
1. comply with ethical and professional requirements
○ ethical – principles (code of ethics)
○ professional competence – specialized skill sets needed for specialized industries,
such as requirement ni BSP (knowledgeable of audit of banks and financial
institutions)

2. audit in accordance with Philippine Standards on Auditing (PSAs)

reporting practice

IASC (original) → IAS → PAS (ph adopt) ISAs → PSAs

Philippine standards on auditing
● governs what auditors must do

IASB (practice) → IFRS → PFRS ISREs → PSREs

Philippine standards on review engagements

IFRC: Interpretations ISAEs → PSAEs

Philippine standards on assurance
engagements