Module 2 An Overview of Auditing PDF

AUDITING - OVERVIEW
1
OUR LADY OF FATIMA UNIVERSITY
QUEZON CITY
PROF. BERNADETTE K. DIMZON 8/20/2020

2
LEARNING OBJECTIVES
 Describe the decision makers’ needs for reliable financial statements and
internal control information
 Discuss how financial statement audit helps meet those need
 Define audit quality and list drivers of audit quality provided in the Financial
Reporting Council’s Audit Quality Framework
 Identify professional conduct requirements that help auditors achieve audit
quality
 Describe and apply frameworks for professional and ethical decision
making
 Describe factors considered by audit firms making client acceptance and
continuance decisions

IMPORTANCE OF CONDUCTING AUDIT
3
QUALITY AND COMPYING WITH PROFESSIONAL
REQUIREMENTS
 Audit quality is an International Issue
 In March 2017, the Public Company Accounting Oversight Board
(PCAOB) announced sanctions against former partner
PricewaterhouseCoopers Auditores Independentes in Brazil for audit
failures and violations of PCAOB rules and standards
 Wander Rodrigues Teles was the lead partner for PWC- Brazil’s audit
work in connection with the audit of Sara Lee’s FYE 2007 through FYE
2011 consolidated financial statements
 US-based Pricewaterhouse Coopers LLP (“PwC-US”) prepared and
issued the audit reports on Sara Lee’s consolidated financial
statements, which were filed with the US Securities and Exchange
Commission

4
REQUIREMENTS
Audit quality is an International Issue
 In 2012, Sara Lee restated its 2012 and 2011 financial results, citing
accounting irregularities in its Brazil operations, including the
overstatement of accounts receivable
 PCAOB found that Teles failed to adequately respond to indications
that one Sara Lee’s subsidiaries may have overstated its accounts
receivable
 When conducting the audit, Teles knew that a material amount of
the subsidiary’s accounts receivable was overdue and disputed by
customers

5
REQUIREMENTS
 He was also aware that the subsidiary was extending the due dates
of overdue receivables. The re-aging of receivables in this manner
could cause overdue receivables to appear current
 The PCAOB found that Teles failed to adequately respond to the
risks with due professional care and professional skepticism, and
failed to obtain sufficient evidence to support the audit conclusions
 To settle disciplinary order, Teles was censured, fined US$ 10,000 and
barred for two years from associating with registered public
accounting firm

6
REQUIREMENTS
 PCAOB Chairman, James R. Doty noted:
 “Audit quality is a global issue. As this order demonstrates, the Board
is committed to investigating and disciplining auditors who present
risks to investors in the US markets, regardless of where the audit is
conducted.”

AN OVERVIEW OF EXTERNAL
AUDITING
7
OUR LADY OF FATIMA UNIVERSITY
QUEZON CITY

DECISION MAKERS’ NEED FOR RELIABLE
8
INFORMATION AND THE ROLE OF A FINANCIAL
STATEMENT AUDIT
 External auditors perform an important task
 Managers within the organization produce financial statements and
design internal control systems
 External auditors perform financial statement audit, provide
independent assurance on the reliability of the financial statements
and as part of the integrated audit provide reasonable assurance
on internal control effectiveness
 Decision makers need information that is transparent and unbiased
– information that does favor one user over another

9
STATEMENT AUDIT
 However, the interests of the various users can conflict
 Current shareholders might want management to use accounting
principles that result in higher levels of reported income while
lending institutions might prefer management to use conservative
approach to valuation and recognition

USERS OF AUDITED FINANCIAL STATEMENTS
10
USER TYPES OF DECISIONS
Management Review performance make operational
decisions and report results to capital markets
Shareholders (Stockholders) Buy or sell stock
Bondholders Buy or sell bonds
Financial Institutions Evaluate loan decisions, considering interest
rates, terms and risk
Taxing authorities Determine taxable income and income tax
due
Regulatory agencies Develop regulations and monitor compliance
Labor unions Make collective bargaining decisions

Court system Asses the financial position of the company
under litigation

11 USERS OF AUDITED FINANCIAL STATEMENTS
USER TYPES OF DECISIONS
Vendors Asses credit risk
Retired employees Protect employees from surprises concerning

pensions and other post-retirement benefits

12
STATEMENT AUDIT
 Why do financial statement users need independent assurance on
reliability of information provided by management?
 Shouldn’t users expect management to provide reliable
information?
 The need for independent assurance arises from several factors:
o POTENTIAL BIAS
o Management might have incentives to bias financial information to
convey a better impression of the financial data than
circumstances would merit

13
STATEMENT AUDIT
o POTENTIAL BIAS
o Example : When management compensation is tied to profitability of
stock price , managers may be tempted to “bend” generally
accepted accounting principles (GAAP) to make organization’s
performance look better
o REMOTENESS
o An organization and the users of its financial information are often
remote from each other, both in terms of geographic distance and the
extent of information available to both parties
o Most users cannot interview management, tour company’s plant or
review financial records, instead they must rely on financial statements
to communicate the results of management’s performance

14
STATEMENT AUDIT
o REMOTENESS
o These factors can tempt management to keep information from
users or bend GAAP so the organization looks better
o COMPLEXITY
o Transactions , information and processing systems are often very
complex, so it can be difficult to determine their proper
presentation
o This factor provides an opportunity for management to mislead
users

15
STATEMENT AUDIT
o CONSEQUENCES
o When financial statement audits help increase the confidence that
users can place on management-prepared information
o Users of audited information need to have confidence on
objectivity and accuracy of the opinions provided by the external
auditors
o External auditors need to be independent when performing
financial statement audit
o Independence, often referred to as the cornerstone of the auditing
profession , requires objectivity and freedom from bias

16
STATEMENT AUDIT
o CONSEQUENCES
o Without independence, audits lack value
o Auditors must not only be independent in fact, but they must act in
a manner that ensures that they are independent in appearance
o Example :
o If an audit partner’s uncle was the CEO at the partner’s client
company, users could reasonably worry about conflict of interest
o It is entirely possible that the audit partner has, in fact, an
independent mental attitude

17
STATEMENT AUDIT
o CONSEQUENCES
o In this scenario: The audit partner would not appear to be
independent
o Further, it complicates matters, management and the audit
committee expect cost-effective audit
o Auditors face many pressures –keeping low fees, making careful
decisions regarding independence and conducting quality attitude

18
WHAT IS A FINANCIAL STATEMENT AUDIT?
o A FINANCIAL STATEMENT AUDIT IS :

o 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
interested users

19
o A FINANCIAL STATEMENT AUDIT IS :

o A systematic process by which 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
o Auditing Theory : Cabrera, Elenita C, 2017

20
o SYSTEMATIC PROCESS
o This implies a structured , logical and organized series of
steps and procedures
o Auditing consists of series of sequential steps that include
information testing system and testing of transactions
and balances

21
o COMPETENT INDEPENDENT PERSON

o The auditor must be qualified to understand the criteria
and the competence to know how and what evidence
to accumulate to reach proper conclusion
o The auditor must also have an independent mental
attitude which involves impartial and objective thinking

22
o OBJECTIVELY OBTAINS AND EVALAUTES EVIDENCE

o This means examining the bases for assertions
(representations) and judiciously evaluating the results
without bias or prejudice either for or against the
individual (or entity) making the representations

23
o ASSERTIONS ABOUT ECONOMIC ACTIONS AND EVENTS

o These are the representations made by the individual
entity
o They comprise the subject matter of auditing
o Assertions include information contained in the financial
statements, internal operating reports and tax returns
o In the audit of financial statements, assertions are the
representations of management as to the fairness of the
financial statements

24
o DEGREE OF CORRESPONDENCE
o This refers to the closeness with which the assertions can
be identified with established criteria
o The expression of correspondence may be quantified,
such that the amount of a shortage in a petty cash fund,
or it maybe qualitative such as the fairness (or
reasonableness) of a financial statements

25
o ESTABLISHED CRITERIA
o These are standards against which the assertions or
representations are judged
o Criteria may be specific rules prescribed by a legislative
body, budgets and other measures of performance by
management, or financial reporting standards
established by the Financial Reporting Standards
Council (FRSC) and other authoritative bodies

26
o COMMUNICATING THE RESULTS

o This is often referred to as attestation
o The final stage in the audit process is the audit report
o The communication of findings to users
o By attesting to the degree of correspondence with
established criteria, the investigator enhances (or
weakens ) the credibility of the representations or claims
that have been made by another party
o The communications of findings is achieved through a
written report

27
o INTENDED USERS
o These are individuals who are (rely on) the auditor’s
findings
o These include stockholders, management, creditors,
government agencies and the public

28
IFAC – DEFINITION OF AUDITING
o Auditing is a structured process that:

o Involves the application of analytical skills, professional
judgement and professional skepticism
o Is usually performed by a team of professionals, directed with
management skills;
o Uses appropriate forms of technology and adheres to
methodology;
o Complies with all relevant technical standards, such as
International Standards on Auditing (ISAs), International
Standards on Quality Control (ISACs), International Financial
Reporting Standards (IFRS) International Public Sector
Accounting Standards (IPSAS) and any applicable
international, national or local equivalents as appropriate;

29
IFAC – DEFINITION OF AUDITING
o Auditing is a structured process that:

o Complies with required standards or professional ethics

30
OVERALL OBJECTIVES OF AUDITING
ISA 200
o The objective of an audit of financial statements is to
enable the auditor to express an opinion whether the
financial statements are prepared, in all material
respects, in accordance with identified financial
reporting framework
o The phrase used to express the auditor’s opinion is
“present fairly, in all material respects”
o A similar objective applies to the audit of financial
statements or other information prepared in
accordance with appropriate criteria

31
o The overall objective of an audit is to obtain reasonable

assurance about whether the financial statements are
free from material misstatement and to report on the
financial statements based on the auditor’s findings
o To accomplish these objectives, the auditor
✓ Complies with relevant ethical and professional conduct
requirements
✓ Conducts the audit in accordance with professional
auditing standards

32
o Exercises professional judgment, professional skepticism

and critical thinking
o Obtains sufficient appropriate evidence, via structured
process on which to base the auditor’s opinion
o The structured process use by auditors to accomplish
their objectives as the audit opinion formulation process

33
AUDIT OPINION FORMULATION PROCESS
I. Making client
acceptance and II. Performing Risk
Continuance Assessment
Decisions
IV. Obtaining
III. Obtaining evidence substantive
about Internal Control, evidence about
Operating accounts,
Effectiveness disclosures and
assertions

34
Audit Profession,
Audit Quality
and Need for PROFESSIONAL
Quality LIABILITIES
Judgmnents and
Ethical Decisions

35
o PHASE 1
o Addresses client acceptance and continuance decisions
o Auditors are not required to perform audits for any
organization that askes: auditors choose whether to perform
each individual audit
o Audit firms have procedures to help them ensure that they
are not associated with clients where management integrity is
in question or where a company might otherwise present the
audit firm with unnecessarily high risk (such as client financial
failure or regulatory action against the client)

36
o PHASE 2
o The auditor performs risk assessment procedures
thoroughly understand the client’s business (or update
prior knowledge in the case of a continuing client), its
industry, its competition and its management and
governance processes ( including internal controls ) to
determine the likelihood that financial accounts might
be in error

37
o PHASE 3
o These assessments also include the risk of fraud
o The auditor obtains evidence about internal control and
operating effectiveness through testing of internal
controls

38
o PHASE 4
o The auditor obtains substantive evidence about
accounts , disclosures and assertions
o The information gathered in Phase I through III greatly
influences the amount of testing performed in Phase IV
o Finally, Phase V the auditor will complete the audit and
make a decision about what type of audit report to
issue

39
o PHASE 4
o When the auditor has no objections about
management’s financial statements or internal controls,
the auditor issue an unqualified audit report

40
WHY INDEPENDENT AUDITING IS NECESSARY?
o Without wide public acceptance, professions cannot

exists and independent auditing is no exception
o Over the years, society ahs perceived a need for audits
of publicly held companies which ahs developed as a
result of separation of ownership and management
o Auditing services are used extensively by government
and other non-profit organizations
o As society becomes more complex, there is an
increased likelihood that unreliable information will be
provided to decision makers

41
o This is referred to as “Information Risk”

o REMOTENESS OF INFORMATION USERS FROM
INFORMATION PROVIDERS
o Decision makers , almost always , do not get first hand
knowledge of the business enterprise with which they do
business for the reasons that in many cases:
✓ Owners are divorced from management
✓ Directors are not involved in day-to-day operations or
decisions

42
o REMOTENESS OF INFORMATION USERS FROM

INFORMATION PROVIDERS
✓ Business maybe dispersed among numerous geographic
locations and complex corporate structure

43
o POTENTIAL BIAS AND MOTIVES OF INFORMATION

PROVIDER
o A conflict of interest may be assumed to exist between
management and owners regarding financial
statements
o Management usually desires to present the results of its
stewardship in the most favorable light
o Information may possibly be biased in favor of the
provider when his goals are inconsistent with the
decision maker

44
o POTENTIAL BIAS AND MOTIVES OF INFORMATION

PROVIDER
o This could be attributed to either an international
emphasis designed to influence users in a certain
manner or maybe an honest optimism about future
events

45
o VOLUMINOUS DATA
o As business grow, possibly millions of exchange
transactions are processed daily via manual or
sophisticated computerized systems
o This increases therefore the likelihood that improperly
recorded information may be included or buried in the
records

46
o COMPLEX EXCHANGE TRANSACTIONS

o New and changing business relationships may lead to
innovative accounting and reporting problems
o Some transactions are so complex and hence more
difficult to record properly
o Transactions not quantifiable will require increase
disclosures

47
HOW INFORMATION RISK MAY BE REDUCED?
o To reduce information risk or the risk that information

upon which a business decision is made is inaccurate,
managements of businesses and the users of their
financial statements may adopt any or all of the
following approaches:

48
o ALLOW USERS TO VERIFY INFORMATION

o The users may go to the business establishment to
examine records and obtain information about the
reliability of the statement
o Although impractical because of costs, this is usually
adopted by BIR examiners or a business intending to
purchase another business
o It is common for a purchaser to use special audit team
to independently verify and evaluate key information of
the prospective business . This is known as “due diligence
audit”
49
o USER SHARES INFORMATION RISK WITH MANAGEMENT

o It is important to emphasize the fact that management
has the primary responsibility of providing reliable
information to users
o If users rely on inaccurate financial statements and as a
consequence incurs financial loss, a lawsuit may be
brought against management to recover part of such
loss

50
o HAVE THE FINANCIAL STATEMENTS AUDITED

o To obtain reliable information, the user can have an
independent audit performed
o The audited information is then used in the decision
making process on the assumption that it is reasonably
complete, accurate and unbiased
o As an expert in the application of financial reporting
standards, the independent auditor further enhances
the quality of financial reporting

51
GENERAL TYPES OF AUDIT

52
INDEPENDENT FINANCIAL STATEMENTS AUDIT
o NATURE
o Independent audit consists of methodical review and
objective examination of financial statements prepared
by an enterprise (auditee) to determine if such
statements have been prepared in conformity with
financial reporting practices that are appropriate for the
auditee

53
o NATURE
o The financial statements are the product and property
of the auditee and the independent auditor merely
audits and expresses an opinion on them
o The expression of an opinion by the independent auditor
is known as the “attest function”
o The audit attestation is communicated to the officers of
the auditee as well as to other external recipients
(government, financial institutions, investors and the
general public) in the form of a written audit report
which accompanies the financial statement
54
o NATURE
o Without a report from the independent auditor, a
company’s financial statement would have little
meaning or reliability because the company would be
reporting on itself
o If audit reports are not properly prepared , monetary
losses can result both to the audited entity and to those
who rely on the financial statements
o The role of the independent auditor is well established in
the business and financial community

55
o OVERALL OBJECTIVES OF THE AUDITOR

o PSA (ISA) 200 “OVERALL OBJECTIVES OF THE
INDEPENDENT AUDITOR AND CONDUCT OF THE AUDIT IN
ACCORDANCE WITH PHILIPPINE STANDARDS OF
AUDITING”

56

o Establishes the independent auditor’s overall
responsibilities when conducting an audit of financial
statements in accordance with PSAs, it sets out the
overall objectives of the independent auditor and
explains the nature and scope of an audit designed to
enable the independent auditor to meet those
objectives

57

o It also explains the scope, authority and structure of the
PSAs and includes requirements establishing the general
responsibilities of the independent auditor applicable in
all audits, including the obligation to comply with PSAs
o In conducting the audit of financial statements, the
overall objectives of the auditor are:
✓ To obtain reasonable assurance about whether the
financial statements as a whole are free from material
misstatement whether due to fraud or error,

58

o In conducting the audit of financial statements, the
overall objectives of the auditor are:
✓ thereby enabling the auditor to express an opinion on
whether the financial statements are prepared, in all
material respects, in accordance with an applicable
financial reporting framework; and

59

o In conducting the audit of financial statements, the overall
objectives of the auditor are:
✓ To report on the financial statements, and communicate as
required by the PSAs, in accordance with the auditor’s
findings
✓ In all cases when reasonable assurance cannot be obtained
and a qualified opinion in the auditor’s report is insufficient in
the circumstances for purposes of reporting to the intended
users of the financial statements, the PSAs require that the
auditor disclaim an opinion or withdraw from the
engagement, where withdrawal is legally permitted
60
SCOPE OF INDEPENDENT AUDIT
o The term “scope of an audit” refers to the audit

procedures deemed necessary in the circumstances to
achieve the objective of the audit
o The procedures required to conduct and audit in
accordance with PSAs should be determined by the
auditor having regard to the requirements of PSAs,
relevant professional bodies, legislation, regulations and
where appropriate , the terms of the audit engagement
and reporting requirements

61
o Since the primary objective of an independent audit is

to express an opinion on the company’s financial
statement, the auditor will conduct a critical and
systematic examination of the statements and the
related documents, records, procedures and control
o Audit evidences may be gathered to enable the auditor
substantiate the representations in the financial
statements
o Internal controls will be evaluated for effectiveness since
they affect the reliability of the financial records

62
o By inquiry, observation, confirmation and inspection, the

auditor can test the existence and validity of assets,
liabilities, overall reasonableness of other account
balances in the financial statements
o When sufficient and competent audit evidences have
been gathered , the auditor can then formulate an
opinion on the fairness with which the financial
statements have been prepared

63
o The auditor then formulates the audit report containing

the scope of his examination and the opinion he has
expressed on the financial statements for submission to
client , who in turn furnishes copies of the report to
various interested parties

64 ADVANTAGES AND PRACTICAL BENEFITS OF
INDEPENDENT AUDIT
o TO THE AUDITEE OF CLIENT
o Independent audit makes the financial statements more
credible and reliable
o Management is the beneficiary of constructive
suggestions in improving business operations
o Commission of fraud by management and employee is
minimized
o Audited financial statements provide more credible
basis for the preparation of tax returns

INDEPENDENT AUDIT
o TO THE AUDITEE OF CLIENT
o Better and sound management decisions may be made
if financial records and reports are accurately
maintained and provided

INDEPENDENT AUDIT
o TO CREDITORS, PROSPECTIVE INVESTORS, EMPLOYEES
o Financial institutions have more credible basis in
deciding whether financial assistance will be extended
to auditee
o Suppliers and other creditors will have reliable basis in
making decisions related to extension of credits
o Potential and current investors will have more credible
basis in evaluating managerial efficiency

INDEPENDENT AUDIT
o TO CREDITORS, PROSPECTIVE INVESTORS, EMPLOYEES
o Employees will have a better and credible basis in
requesting for fringe benefits and wage adjustments
o In the event of sale , purchase or merger of a business,
both buyer and seller will have more confident basis for
aiming at a decision as to the terms and conditions of
the arrangement

INDEPENDENT AUDIT
o TO GOVERNMENT AGENCIES AND LEGAL COMMUNITY
o BIR has more assurance concerning accuracy and
dependability of tax returns if they have been based on
audited financial statements
o Government institutions like GSIS, SSS, DBP will have
better basis in extending financial assistance to business
enterprises
o Audited statements provide the legal community an
independent basis for administering estates and trust,
setting action in bankruptcy and insolvency etc.

69
INDEPENDENT FINANCIAL AUDIT PROCESS
INDEPENDENT FINANCIAL STATEMENT : AUDIT PROCESS
1. Pre-engagement Obtain engagement Assign to audit partner,
Activities : Investigate letter manager and staff to
new and existing engagement
clients
2. Planning Activities : Obtain preliminary Assign to audit partner,

Obtain knowledge of the understanding of internal manager and staff to the
client’s business control engagement
Design a preliminary
account balance audit
program (considering
knowledge of internal
control)

70
3. Internal Control Risk Modify the audit program
Assessment Activities: to final form (if necessary
a. Gather evidence and in light new knowledge of
evaluate the client’s internal control)
internal control structure
b. Document the assessed
level of control risk
4. Account Balance Audit Decide whether evidence

Activities : Gather is sufficient. If not, obtain
evidence about the more unless cost is
account balance peso prohibitive
amounts and related Evaluate the evidence
footnote disclosures and make audit decisions.
Prepare audit working Document the decisions
papers in the working papers
71
5. Reporting Activities Decide on the
Appropriate Audit Report
(i.e. Unqualified,
Disclaimer, Qualified and
Adverse)

72
GENERAL PRINCIPLES OF AN AUDIT
o ETHICAL REQUIREMENTS
o The auditor should comply with the “Revised Code of
Ethics for Professional Accountants in the Philippines”
promulgated by the Board of Accountancy and
approved by the Professional Regulation Commission
o Independence, Integrity, Objectivity, Professional
competence and due care, confidentiality, professional
behavior and technical standards

73
o The auditor should conduct an audit in accordance with
Philippine Standards of Auditing
o These contain basic principles and essential procedures
together with related guidance in the form of
explanatory and other material
o Thea auditor should plan and perform the audit with an
attitude of professional skepticism recognizing the
circumstances may exist which cause the financial
statements to be materially misstated

74
o Example: The auditor would ordinarily expect to find
evidence to support management representations and
not assume they are necessarily correct

75
o REASONABLE ASSURANCE
o An audit in accordance with PSAs is designed to provide
reasonable assurance that the financial statements
takes as a whole are free from material misstatement
o Reasonable assurance is a concept relating to the
accumulation of the audit evidence necessary for the
auditor to conclude that there is nor material
misstatements in the financial statements taken as a
whole
o Reasonable assurance relates to the whole audit
process
76
o However, there are inherent limitations in an audit that
affect the auditor’s ability to detect material
misstatements . These limitations result from factors such
as :
o The use of testing
o The inherent limitations of any accounting and internal
control systems (example : the possibility of collusion)

77
o The fact that most audit evidence is persuasive rather than
conclusive
o The work undertaken by the auditor to form an opinion is
permeated by judgment , in particular regarding:
✓ The gathering of audit evidence, example: in deciding the
nature, timing and extent of audit procedures
✓ The drawing of conclusions based on the audit evidence
gathered, example: assessing the reasonableness of the
estimates made by management in preparing the financial
statements

78
o Other Limitations
o May effect the persuasiveness of evidence available to
draw conclusions on particular financial statement
assertions (example: transactions between related
parties)
o In these cases, certain PSAs identify the specific
procedures which will, because the nature of the
particular assertions provide sufficient appropriate audit
evidence in the absence of :

79
o Unusual circumstances which increase the risk of
material misstatements beyond that which would
ordinarily be expected; or
o Any indication that a material misstatement has
occurred

80
o RESPONSIBILTIY FOR THE FINANCIAL STATEMENT
o The auditor is responsible for forming and expressing an
opinion on the financial statements, the responsibility for
preparing and presenting the financial statements is that
of the management of the entity
o The audit of financial statements does not relieve
management of this responsibilities

81
o REQUIREMENTS FOR AN EFFECTIVE FINANCIAL STATEMENTS
AUDIT
o In order that an audit will be completed within the
framework certain attributes are required of the auditor :
✓ The auditor must have a thorough understanding of the
entity being audited and the industry of which it is a part
✓ Complex transactions must be thoroughly understood if
the auditor is to detect material errors and ensure
adequate disclosure of the financial statements

82
AUDIT
✓ The auditor must have a comprehensive knowledge of
Financial Reporting Standards (FRS) in order to audit
effectively
✓ The body of FRS is the standard by which fairness of financial
presentation is judged by the auditor
✓ Therefore, the auditor who is to formulate rationally an
opinion on the financial statements must be able to
recognize material departures from FRS, including error in
recording transactions and events , as well as inadequate
disclosures
83
AUDIT
✓ The auditor must have a solid grasp of the concepts of
internal control and competence in reviewing and
evaluating the client’s underlying system of internal
control
✓ The more effective the control system is in achieving its
goals, the more confidence that auditor can place in it
to prevent and detect material errors both intentional
and unintentional

84
AUDIT
✓ This in turn leads to reduce need for examination of
transactions and balances
✓ In addition to understanding the company, FRS and
internal control, the auditor must also be knowledgeable
in the area of evidence gathering and evaluation
✓ In conducting the examination, the auditor has the
opportunity of choosing among alternative forms of
evidence and alternative means of gathering evidence

85
AUDIT
✓ The auditor must be able to exercise sound judgment
based upon an understanding of the characteristics of
audit evidence

86
INTERNAL AUDIT
o NATURE
o Internal auditing is an independent objective assurance
and consulting activity designed to add value and
improve the organization’s operations
o It helps an organization accomplish its objectives by
bringing a systematic, disciplined approach to evaluate
and improve the effectiveness of risk management,
control and government processes

87
INTERNAL AUDIT
o OBJECTIVE AND SCOPE
✓ The objective of internal auditing is to assist all members
of management in the effective discharge of their
responsibilities by furnishing them with analyses,
appraisals, recommendations and pertinent comments
concerning the activities reviewed
✓ The internal auditor is concerned with any phase of
business activity where he or she can be service to
management

88
INTERNAL AUDIT
✓ This involves going beyond the accounting and financial
records obtain a full understanding of the operations
under review
✓ The attainment of the overall objective involves such
activities as:
➢ Reviewing and appraising the soundness, adequacy
and application of accounting , financial and other
operational controls and promoting effective control at
reasonable cost

89
INTERNAL AUDIT
activities as:
➢ Ascertaining the extent of compliance with established
policies, plans and procedures
➢ Ascertaining the extent to which company assets are
accounted for and safeguarded from losses of all kinds
➢ Ascertaining the reliability of management data
developed within the organization

90
INTERNAL AUDIT
activities as:
➢ Appraising the quality of performance in carrying out
assigned responsibilities
➢ Recommending operating improvements

91
INTERNAL AUDIT
o RESPONSIBILITY AND AUTHORITY
✓ The responsibilities of internal auditing in the organization
should be clearly established by management policy
✓ The related authority should provide the internal auditor
full access to all the organization’s records, properties
and personnel relevant to the subject under review
✓ The internal auditor should be free to review and
appraise policies , plans, procedures and records

92
INTERNAL AUDIT
✓ The internal auditor’s responsibilities should be:
o To inform and advise management and to discharge
this responsibility in a manner that is consistent with the
Code of Ethics of the Internal Auditors
o To coordinate activities with others so as to best achieve
audit objectives and the objectives of the organization

93
INTERNAL AUDIT
o In performing his functions, an internal auditor has no
direct responsibility nor authority over any of the
activities under review
o The internal audit review and appraisal does not in any
way relieve other persons in the organization of the
responsibilities assigned to them

94
INDEPENDENCE
o Is essential to the effectiveness of internal auditing
o Obtain primarily through organizational status and objectivity
o The organizational status of the internal auditing function and
the support accorded to it by management are major
determinants of its range and value
o The head of the internal auditing function, therefore should
be responsible to an officer whose authority is sufficient to
assure both a broad range of audit coverage and the
adequate consideration of an effective action on the audit
findings and recommendations

95
INDEPENDENCE
o Objectivity is essential to the audit function
o An internal auditor should not develop and install
procedures , prepare records, or engage in any other
activity which he or she would normally review and
appraise and which could reasonably be construed to
compromise his or her independence
o Internal audit objectivity need not be adversely
affected however, by the auditor’s determination and
recommendation of the standards of control to be
applied in the development of systems and procedures
under review

96
INTERNAL AUDITING APPROACH AND TECHNIQUES
o OPERATIONAL AUDIT
o Future oriented, independent and systematic evaluation
performed by the internal auditor for management of
the operational activities by top, middle and lower level
management for the purpose of improving
organizational profitability and increasing the
attainment of the other organizational objectives

97
o MANAGEMENT AUDIT
o Future oriented , independent and systematic
evaluation of the activities of all levels of management
performed by the internal auditor for the purposes of
improving organizational profitability and increasing the
attainment of other organizational objectives

98
o FINANCIAL AUDIT
o An internal financial audit is historically oriented,
independent evaluation performed by the internal
auditor for the purpose of ensuring the fairness,
accuracy and reliability of financial data

99
GOVERNMENT AUDIT
o NATURE AND SCOPE
✓ Involves the determination of whether the government
funds are being handled properly and in compliance
with existing laws and whether the programs are being
conducted efficiently and economically
✓ Accounting for and controlling government receipts
and expenditures have resulted in the need for a
staggering number of government clerks, accountants
and auditors

100
GOVERNMENT AUDIT
o NATURE AND SCOPE
✓ Recognizing the need for independence , government
has developed internal audit staffs (Commission on
Audit) which report to the highest practicable official
within their governmental bodies

101
GOVERNMENT AUDIT
o SCOPE OF GOVERNMENT AUDITING
➢ FINANCIAL AND COMPLIANCE AUDIT
➢ Determines whether financial operations are properly
conducted , the financial reports of an audited entity
are presented fairly, and the entity has complied with
applicable laws and regulations

102
GOVERNMENT AUDIT
➢ FINANCIAL AND COMPLIANCE AUDIT
➢ Determines whether financial operations are properly
conducted , the financial reports of an audited entity
are presented fairly, and the entity has complied with

103
GOVERNMENT AUDIT
➢ ECONOMY AND EFFICIENCY AUDIT
➢ Determines whether the entity is managing and utilizing
its resources (such as personnel, property and space)
economically and efficiently
➢ The causes of inefficiencies or uneconomical practices
and whether the entity has complied with laws and
regulations concerning matters of economy and
efficiency

104
GOVERNMENT AUDIT
➢ PROGRAM RESULTS
➢ Determines if the desired results and benefits are being
achieved, if the objectives established by the legislative
or other authorizing body are being met and if the
agency has considered alternatives which might yield
results at a lower cost

105
GOVERNMENT AUDIT
➢ In the primer of the Government Accounting and Auditing in the
Philippines issued by PICPA Committee on Government Accounting
and Auditing Standards in 1984, the State Audit has been classified
into three main divisions:
✓ Compliance Audit which is the examination , audit and settlement
in accordance with law and regulation
✓ Financial Audit is the audit of the accounting and financial system
and controls to ensure reliability of recorded financial data. The
objective of this audit is the expression of an opinion on the fairness
with which the financial condition and results of operation are
presented

106
GOVERNMENT AUDIT
✓ Performance Audit is an objective examination of the
financial and operational performance of an organization
program, activity or function and is oriented towards
opportunities for greater economy, efficiency and
effectiveness
✓ Performance audit may take in the form of :
o Management Audit (Economy and Efficiency Audit which is
the appraisal of management performance from at least cost
point of view and the analysis of relationship between
benefits attained and cost incurred, and

107
GOVERNMENT AUDIT
✓ Program Results Audit (Effectiveness Audit) which is the
evaluation of program results vis-à-vis management
goals and objectives
✓ A comprehensive audit consists of a proper balance
among compliance audit, financial audit and
performance audit
✓ It includes the test of financial transactions, accounts
and reports, ensuring that laws, rules and regulations as
well as prescribed policies and procedures are properly
adhered to (Financial and Compliance Audit)

108
GOVERNMENT AUDIT
✓ The determination of economical and efficient use of
management resources through avoidance of wastage
and attaining objectives at lower costs (economy and
efficiency audit) and seeing to it that the programs ,
projects and activities are effectively carried out
through attained goals and objectives (effectiveness
audit)

109
COMMISION ON AUDIT
✓ Commission on Audit –COA (formerly the General
Auditing Office) is the highest and final authority in state
auditing which was created under Sec 1, Art. XII-D of the
Philippine Constitution whose jurisdiction and
responsibility is defined by the law of the land
✓ As the highest audit office of the Republic of the
Philippines , COA yields the final authority in the audit of
government and its instrumentalities

110
SPECIAL AUDITS
✓ Audit of financial statements prepared on other
comprehensive basis of accounting
✓ Audits of specified elements, accounts or items in the
financial statements
✓ Audits of information accompanying the basic financial
statements (PSA 720)
✓ Compliance with contractual agreements
✓ Summarized financial statements
✓ PSA 800, 805 and 810 establish standards and provide
guidance in connection with special purpose audit
engagements

111
TYPES OF AUDITORS
✓ Public Accounting Firm
o CPA firms have as their primary responsibility the
performance of audits of the published historical
financial statements of all publicly traded companies
most other reasonably large companies and many
smaller companies and noncommercial organizations
o The widespread use of audited financial statements is
common to use the terms CPA firms , independent
auditor or auditor, synonymous term

112
TYPES OF AUDITORS
✓ Public Accounting Firm
o CPA firms can perform operational audit, compliance
audit as part of their management consultancy services

113
TYPES OF AUDITORS
✓ Internal Auditors
o Internal auditors could be CPA firms hired by the entity
as consultants or employees of individual companies
who perform independent appraisal activity within the
organization such as review of accounting, financial and
other operations as a basis for service to management
o They provide management with valuable information for
making decisions concerning effective operation of its
business

114
TYPES OF AUDITORS
✓ Internal Auditors
o The internal auditor is involved in all kinds of financial
and other data generated for both internal and external
users
o They perform evaluating the efficiency of resource
utilization (operational auditing), the effectiveness with
which entity objectives are attained (management or
performance audit) and compliance with policies and
regulations (compliance audit)

115
TYPES OF AUDITORS
✓ Government Auditors
o Several government agencies perform significant
number of audits : Commission on Audit (COA) and the
Bureau of Internal Revenue (BIR examiners)
• COA AUDITORS
• Government auditors from COA determine whether the
government agencies and other entities that use public
funds : 1. Present their financial statements fairly in
accordance with Financial Reporting Standards and

116
TYPES OF AUDITORS
❖ COA AUDITORS
• Conduct the programs with economy and efficiency
• Desired results are achieved
• Increasing COA audit efforts is devoted to evaluating
operational efficiency and effectiveness of various
government programs

117
TYPES OF AUDITORS
❖ BIR EXAMINERS
• BIR audits affect individuals as well as all types of
businesses
• A form of compliance auditing , BIR audits and perform
examinations which are designed to determine whether
the taxpayers have complied with the tax laws
• Audit is solely regarded as compliance audits

118
AUDIITNG AND ACCOUTNING DISTIGUISED
❖ ACCOUNTING is the process of recording, classifying and

summarizing economic events in a logical manner for
the purpose of providing financial information for
decision making
❖ AUDITING is concerned with the determination of
whether the recorded accounting information for the
entity properly reflects the economic events that
occurred during the accounting period
❖ An auditor must possess not only an understanding of
the accounting rules but also expertise in the
accumulation and interpretation of audit evidence

119
AUDIITNG AND ACCOUTNING DISTIGUISED
❖ AUDITING
o This skill is the major characteristic that distinguishes
auditor from accountants

120
AN OVERVIEW OF EXTERNAL AUDITING
❖ Reference :
❖ Cabrera Elenita B., Auditing Theory, 2017 Edition
❖ Dear students: I am motivating everyone to read,
study, understand and comprehend all the learning
content of this lecture for all of these will help you
and understand Auditing and the role of an
Independent Practitioner or Professional Accountant
in all aspects of life. It is very important to gain
mastery of the course
Professor : Bernadette Kho Dimzon 8/20/2020

Module 2 An Overview of Auditing PDF

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Module 2 An Overview of Auditing PDF

Загружено:

Авторское право:

Доступные форматы

AUDITING - OVERVIEW

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

Labor unions Make collective bargaining decisions

PROF. BERNADETTE K. DIMZON 8/20/2020

Retired employees Protect employees from surprises concerning

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

o A FINANCIAL STATEMENT AUDIT IS :

PROF. BERNADETTE K. DIMZON 8/20/2020

o A FINANCIAL STATEMENT AUDIT IS :

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

o COMPETENT INDEPENDENT PERSON

PROF. BERNADETTE K. DIMZON 8/20/2020

o OBJECTIVELY OBTAINS AND EVALAUTES EVIDENCE

PROF. BERNADETTE K. DIMZON 8/20/2020

o ASSERTIONS ABOUT ECONOMIC ACTIONS AND EVENTS

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

o COMMUNICATING THE RESULTS

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

o Auditing is a structured process that:

PROF. BERNADETTE K. DIMZON 8/20/2020

o Auditing is a structured process that:

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

o The overall objective of an audit is to obtain reasonable

PROF. BERNADETTE K. DIMZON 8/20/2020

o Exercises professional judgment, professional skepticism

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020

o Without wide public acceptance, professions cannot

PROF. BERNADETTE K. DIMZON 8/20/2020

o This is referred to as “Information Risk”

PROF. BERNADETTE K. DIMZON 8/20/2020

o REMOTENESS OF INFORMATION USERS FROM

PROF. BERNADETTE K. DIMZON 8/20/2020

o POTENTIAL BIAS AND MOTIVES OF INFORMATION

PROF. BERNADETTE K. DIMZON 8/20/2020

o POTENTIAL BIAS AND MOTIVES OF INFORMATION

PROF. BERNADETTE K. DIMZON 8/20/2020

PROF. BERNADETTE K. DIMZON 8/20/2020