Overview of the

Audit Process
DE CASTRO, KENNETH MICHAEL A.
INSTRUCTOR, AMV-CoA
What is
Auditing?
And why is it necessary?

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WHAT IS AUDITING?
A systematic process of objectively
obtaining and evaluating 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
intended users.

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WHY IS AUDITING NECESSARY?
The issue of agency problem or the
perceived conflict of interest between two
parties (principal and the agent) that have
potentially different interests.

Hence, there is a need for an independent

third party to check the representations of
the agent to determine whether said
representations are not materially
misstated.

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Overview of the
Audit Process

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OFFER TO PROVIDE AUDIT
SERVICES
An auditor’s initial contact with its
prospective client is often through
its audit committee (in case of
publicly-listed companies) or simply
through its owners (in case of small
and medium-sized business)

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PROHIBITION AGAINST
ENCROACHMENT
However, a CPA in public accounting shall
not attempt to provide a person or entity
with professional service which is currently
provided by another CPA, except:
(a) Request for audit services from a new
client with a previous auditor

The communication between

predecessor and successor auditors is
necessary.

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PROHIBITION AGAINST
ENCROACHMENT
(b) Request for audit services from a
consolidated entity

The auditor should need to extend

audit services to its components if,
according to his judgment, said
extension of services is necessary to
warrant the expression of his opinion.

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PROHIBITION AGAINST
ENCROACHMENT

(c) Request for audit services from a

referral coming from another CPA

The auditor shall not provide

services beyond what was referred
to him/her without notifying the
referring CPA, nor shall he/she
obtain additional engagement from
the referred client.

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CLIENT ACCEPTANCE OR RE-
ACCEPTANCE
Establish policies and procedures on
deciding whether to accept or
continue an engagement, which may
include the following:

(a) Assessment of the CPA’s

independence, both in mind and in
fact & its professional competence to
provide its service to the client (e.g. in
specialized industries)

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CLIENT ACCEPTANCE OR RE-
ACCEPTANCE

(b) Review of prospective or

existing client’s financial
statements

Specifically, the auditor should

watch for significant or unusual
movements.

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CLIENT ACCEPTANCE OR RE-
ACCEPTANCE

(c) Inquiry on third parties such as

its legal counsel, banks, suppliers
and customers

These parties can provide reliable

information about the integrity and
reputation of a new or existing
client.

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THE ROLE OF THE
ENGAGEMENT LETTER
If the prospective client is acceptable,
a written agreement should be reach
with the client through the audit
engagement letter, which has the
following roles:

(a) It minimizes misunderstandings

between the auditor and the
entity engaging his/her services

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THE ROLE OF THE
ENGAGEMENT LETTER

(b) It always alerts the client on the

purpose of the engagement

(c) It helps minimize legal liability

for services neither contracted nor
performed.

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AUDIT PLANNING

(a) Understanding of the client’s

industry, business and accounting
system

(b) Review of prior-year working

papers or the work of the
predecessor auditor

(c) Review of the work of experts

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AUDIT PLANNING

(d) Mapping out the audit

timetable

(e) Determination of the audit

engagement team

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AUDIT PLANNING

(f) Development of audit programs

based on significant cycles,
accounts, or balances

(g) Determination of audit

materiality and tolerable error

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INTERIM AUDIT WORK

(a) Test of controls

Focus on significant controls, a

process or an activity which, if
functioning effectively, will contribute
significantly towards ensuring that the
accounting system produces reliable
information, and the auditor intends
to rely on for purposes of forming an
opinion on the financial statements.
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INTERIM AUDIT WORK

(b) Interim test of balances, especially

for volatile or material accounts

Audit procedures may involve

recomputation of balances and
analytical procedures.

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INTERIM AUDIT WORK

(c) Interim test of compliance, especially

on tax compliance and other regulatory
matters

For example, test of compliance with the

filing and withholding of relevant taxes,
or for specialized industries such as
banks, compliance with the minimum
capital adequacy ratios.

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SUBSTANTIVE TESTING

(a) Extent of year-end substantive

procedures depend on the following
factors:
- Understanding of the client’s business and
performance of preliminary analytical
procedures
- Evaluation of the client’s internal control
- Results of interim substantive procedures

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SUBSTANTIVE TESTING

(b) The more effective the results

are in (a), the lesser extent of
substantive procedures to be
performed.

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COMPLETING THE AUDIT
(a) Review of subsequent events to
determine if said events will bear
impact on the auditor’s opinion on
the financial statements.

(b) Inquiry with client’s legal counsel/s for

potential existence of contingencies
which should be recognized in the
financial statements

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COMPLETING THE AUDIT
(c) Final analytical procedures to
provide an overall review of financial
information during the closing of the
audit.

(d) Issuance of a management

representation letter where the
management acknowledges its primary
responsibility for preparation and fair
presentation of the financial statements.

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ISSUANCE OF THE AUDIT
REPORT
The auditor’s report is the key
deliverable addressing the output of the
audit process.

Stakeholders of an audit client clamor for

a more informative audit report, one
that provides more relevant information
to users based on the audit that was
performed.

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ISSUANCE OF THE AUDIT
REPORT

In January 2015, the International

Auditing and Assurance Standards Board
issued “The New Auditor’s Report:
Greater Transparency into the Financial
Statement Audit” which provided
guidelines on the improved audit report.

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THE NEW AUDITOR’S REPORT

The opinion of the independent auditor

on the client’s financial statements shall
be presented first.

Basis for opinion paragraph shall contain

that the audit was conducted with the
Philippine Standards on Auditing and
with the Code of Ethics for Professional
Accountants.

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THE NEW AUDITOR’S REPORT

Presentation of Key Audit Matters or

matters that, in the auditor’s professional
judgment, were of most significance
during the conduct of the audit.

WHAT are these key audit matters and

HOW was it addressed during the
conduct of the audit?

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THE NEW AUDITOR’S REPORT

Other information relevant to the financial

statements to which the independent
auditor does not express any opinion
thereon.

A description of the responsibilities of (1)

the management on the preparation and fair
presentation of the financial statements,
and (2) the independent auditors on the
conduct of their audit

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THE NEW AUDITOR’S REPORT

Report on other legal and regulatory

requirements

Disclosure on the name of the

engagement partner assigned to the
client.

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ThankYou!
Kenneth Michael A. De Castro
decastro.kenneth@gmail.com