AUDITING

Bakit kaya cinopy ng Philippines ang IAS?

Philippines is one of the early adaptors of International Accounting Standards. Bakit isa siya sa
mga maagang nagadapt? Kasi ang requirement para maging member ka ng International Federation of
Accountants(IFA), you need to fully adapt International Accounting Standards without any reservations.
Pag di mo fully inadapt, word by word, hindi ka nila tatanggapin. Matatagalan ang membership mo.
Kailangan mo magdevelop ng sarili mong criteria. Kailangan mo pang ijustify bakit hindi mo yan iaaccept.
Ang ginawa ng Pilipinas para mabilis ang membership niya sa IFA, cinopy paste na lang. palitan na lang
ang International ng Pilipinas. Main reason: We want to become an early adaptor of the IAS so that we
can be a full pledge member of IFA. If papalitan pa natin yung ibang sections sa accounting standards na
nilabas ng IASB, kailangan natin ng napakaraming dahilan at hindi agad tayo magiging member ng IFA.

Ganun din sa Auditing, may mga standards din tayong gagamitin.

International Standards on Auditing (ISAs) → Philippine Standards on Auditing (PSAs)

External Auditor → Audit Firm → To audit Historical Financial Information (HFIs) → Financial Statements
*Based on history, not on future. Based on documents, based on past events/transactions. Proof based on history:
meaning of asset, liabilities, etc. which are based on past events/transactions.

The inputs in Financial Accounting = Source Documents

*Source documents – these are your vouchers, receipts, forms that you are groing to analyze, record, to classify, and
to state in the Financial Statements.

*Interpretation of results lies on the users of those Financial Statementsbut the main goal of an accountant or
bookkeeper is more on the preparation or the construction of the FS based on what the standards require you to do

The output in Financial Accounting = General Purpose Financial Statements (output)

In Auditing:

The output in Financial Accounting (General Purpose FS) = The input in Auditing
*The output in the Fianancial Accounting will be the input in Auditing

The output now in auditing is called the AUDIT REPORT

*Is it very important and vital that you really know very well your accounting standard when you audit? Yes, how can
you audit if you do not know what are the things you are going to audit. How can you know if it is fairly stated or not,
or reliable or not. The preparation, presentation, valuation as well as diclosure in the Financial Statements are being
embodied in accounting standards.

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Overview of the Audit:

1. Audit Planning (Pre-planning phase and proper planning phase)

In the pre-planning phase → requisites for auditability of a company

In the proper planning phase → audit program and procedures

2. Framework of entity’s internal control

*Internal Control – This pertains to the entity’s policies and procedures effected by those in charge in Governance in
relation to Financial Accounting and Reporting, in relation to compliance with laws and regulations, and in relation
to the effective and efficient utilization of company’s resources.

Sino ba ang gumagawa ng policies sa isang company? Board of Directors- elected by all stockholders with voting
rights. Why elected? Sila magiging representative ng lahat ng stockhohlders in decision making and policy-making.
Policy and procedures effected in company is being implemented by those charge in Governance which are called
Board of Directors.

Bakit kailangan malaman ni Auditor yon? Kailangan malaman kasi paano mo malalaman na yung mga procedure
ssa pagpreprepare ng Finanacial Statements ay reliable ba or hindi. Example sa pagcocompute ng Cash and Cash
Equivalent may mga nilalagay at tinatanggal na items. Ang makikita mo na lang don sa Financial Statement is yung
final figure. Ang trabaho mo bilang External Auditor ay alamin kung yun bang mga nakasama don sa Cash na isinama
ng accountant ay tama, kung yun bang valuation ng cash ay tama. Paano papasok si internal control? Maaring tama
ang balance ng Cash pero baka may mga hindi naisama doon sa perspective ni Financial Accounting na hindi naman
isasama pero may dahilan kung bakit hindi isinama kasi pwedeng maaring dahilan don ay ninakaw ng employee. At
ang pagnanakaw ng employee ng cash ay wala yun sa Financial Accounting. Wala ka ng pakialam kung nageexist o
hindi katulad na lamang ng inventory. Ano ang gagawin ni Auditor? Aalamin kung meron ba talagang inventory;
inventory count.

Therefore hindi reliable yung figure na nilagay ni accountant unless inaudit mo. Kaya nga hinihingi ng mga companies
and investors kapag magiinvest ay AUDITED Financial statements. THE REPORT BEING MADE BY THE AUDITOR
LENDS CREDIBILITY TO THE FINANCIAL STATEMENTS.

*ang framework ng internal control ay nakabase sa pagaaralan sa Governance. Sa kabila yung framework dito yung
assessment of Internal Control.

3. Assessment of Internal Control – control risk management whether high or low (attributes or
characteristics)

High control risk – internal control is not implemented effectively. Policies not reliable

Low control risk – internal control is implemented effectively. Policies reliable

4. Substantive Testing – actual auditor’s procedure pertaining to the monetary values in the financial
statements.
*Ginagawa lang after audit planning, after assessment of Internal control.

*you will actually compute (in auditing problems)

*If policies are not reliable, do recomputation.

5. Audit report

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GENERALLY ACCEPTED AUDITING STANDARDS (GAAS)

The main objective of the auditor is to lend credibility on the financial information of the auditee (client).

What will be the process or the main procedure that the auditor will do?

Accumulate audit evidences that are sufficient and appropriate in the circumstances. In doing so, the auditor will
make use of standards. These standards are called International Standards on Auditing or, when adopted in the
Philippines, this is now called the Philippine Standards on Auditing. The Philippine Standards on Auditing will be the
bible of the auditor in order to conduct the audit in accordance with Generally Accepted Auditing Standards (GAAS).

Note: GAAS are NOT part of the auditing standards. GAAS are PRINCIPLES. These are the benchmarks, the cornerstones by which
the auditing standards are anchored. Like International Accounting Standards or like International Financial Reporting Standards,
these accounting standards are based on Generally Accepted Accounting Principles (GAAP). In comparison, GAAS are the
benchmark used to develop auditing standards.

Is GAAS generally accepted worldwide?

Yes. Even if there is an auditing standard that is being used by the United States different from the rest of the world,
there will be a similarity or there is only one generally accepted auditing standard because, even in accounting, those
countries outside the United States uses the UK GAAP, kasi diba mayroon din tinatawag na US GAAP.

Pagdating sa Auditing ganon din. Mayroon silang tinatawag na American Institute of Certified Public Accountants
(AICPA) Auditing Standards at mayroon din namang, outside the US, na gumagamit ng International Auditing
Standards. So magkaiba ba yon? There will be two auditing standards: one that is being used by the US and one that
is being used by non-US Countries. REGARDLESS OF US COUNTRIES OR NOT, THERE IS ONLY ONE GAAS. Unlike
GAAP, there is UK GAAP and there is US GAAP.

Non-US Countries:

Generally Accepted Auditing Standards (GAAS)

Auditing: International Auditing Standards → Philippine Auditing Standards

International Auditing and Assurance Standards Board

International Federation of Accountants = more than 173 member countries

US Countries:

AICPA - non-issuer ”private companies” = AICPA Auditing Standards → under GAAS

PCAOB - issuer “public companies” = PCAOB Auditing Standards → under GAAS

Explanation:

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In US, they have classifications of companies, even in the Philippines it’s either private companies or public companies.
Pag sinabi mong private companies sa kanila, tineterm din nila ito as non-issuers, meaning to say the stocks of the
corporation is not traded in the local stock market. Yung tinatawag naman nil ana public companies. these are
companies from which the stocks are traded or issued, that’s why most of the time they call it issuers. They are issued
in the local stock exchange.

In US it depends on what kind of company. Kung ang iauaudit mo ay non-issuer or private companies sa US ang
gagamitin mong auditing standard don ay yung nilabas ng AICPA. Kapag naman ang iauaudit mo sa US ay public
company, hindi mo gagamitin yung AICPA Auditing standards. Ang gagamitin mo ay yung inissue ng Public Company
Accounting Oversight Board (PCAOB). So, AICPA for non-issuers or private companies and PCAOB for issuers or
public companies. PCAOB developed own auditing standards. You cannot use the one that AICPA developed. But,
whether PCAOB or AICPA, ang nasa taas nila parehas ay ang GAAS. GAAS is the basis of the auditing standards of
PCAOB and AICPA.

How about yung mga Non-US Countries like the Philippines? In the Philippines, we are using the standards developed
by the International Auditing and Assurance Standards Body (IAASB)

International Auditing Standards is crafted by the International Auditing and Assurance Standards Body (IAASB). The
IAASB is under International Federation of Accountants (IFA) which have more than 173 member countries and one
of these countries is the Philippines.

Sa US Countries, it’s either the standards developed by the AICPA or PCAOB.

In Summary: whether US countries or not, they have a common denominator which is the GAAS. Unlike
in accounting, there is US GAAP, there is UK GAAP.
In the Philippines, the implementation of Philippine Accounting standards is under the Philippine Financial Reporting
Standards Council (PFRSC). In PFRSC, there is a sector which is the Financial Reporting Standards Council (FRSC) for
the implementation of accounting standards. While in the implementation of Auditing Standards, there is the
Philippine Auditing and Assurance Standards Board (PAASB)

THERE IS ONLY ONE GENERALLY ACCEPTED AUDITING STANDARDS (GAAS) USED FOR THE DEVELOPMENT OF
INTERNATIONAL AUDITING STANDARDS, AICPA AUDITING STANDARDS AND PCAOB AUDITING STANDARDS!

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What?Auditing is the examination

of Historical Financial Information. It
is so called examination because the
auditor will accumulate evidences on
the things that happened in the past.
The information on the financial
statements are basically based on
estimates of the transactions or the
substance of the transactions, which
is based on past events. Kapag ang
ineexamine mo na ay Projected
Financial Information, hindi na yan
auditing, other assurance services
na iyon. It could be agreed upon
procedure, it could be projection, or
it could be forecasting.

Who conducts the audit? In the

Philippines, technically, it is the
CPAs. We are talking about external auditing. Only Certified Public Accountants (CPA) can lend
credibility to the financial statements by expressing an opinion on such financial statements. CPAs
are the only ones allowed to audit financial statements because it is the requirement of the regulation, the
requirement of the country.

When do we conduct the audit of Historical Financial Information? It depends not on the auditor,
but on the auditee. Year-end audit = tatapusin muna yung year which is either fiscal year or calendar year.
Submission of Audited Financial Statements for the prior year before April 15 (deadline of BIR). Interim
audit = no need to wait until the end of the year.

Why? Auditors conduct audit to lend credibility by expressing an opinion. Before you can give an opinion,
there are series of steps you need to undergo.

How? By application of GAAS which are embodied in different auditing standards.

Quality pertain to appropriateness

of the audit work. Appropriateness
talks about the relevance and
reliability of the audit work.

General Standards – qualitative

characteristics, attributes, attitudes
or code of ethics (that a CPA should
possess, in case of audit) for an
auditor to conduct an audit or to give
a reliable and credible opinion on
financial statements.

Standards of Field Work –

environment of the audit. After
obtaining the relevant qualifications
to conduct an audit, you are now
going to engage in the work of audit.

Included here is: the planning, the

assessment of internal control, and accumulating audit evidences.

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Standards of Reporting – how you are going to document the things that you have gathered in the field.
Ano ang mga isusulat at paano ba sumulat ng tamang audit report.

General Standards:

CPD - Continuous Professional

Development. Continuous learning.

Independence – you are not

associated with the client directly or
indirectly. No interest protected, no
bias, no pecuniary/monetary
interest.

What is the main difference of

independence in fact/mind and
independence in appearance?

Independence in fact/mind – the

auditor has a DIRECT INTEREST
over the entity. 50%, in the example,
already have significance influence.

Independence in appearance –
INDIRECT INTEREST over the
entity. How it appears to another
person. Independence is impaired
by appearance

Example:

Supposing there are two auditors. Auditor A audits Company X and Auditor B audits Company Y. Auditor
A has 50% share in X Company. Auditor B has 1% share/ownership to Y Company. Are they allowed to
audit the companies they are being involved with? Auditor A cannot audit. Auditor B cannot audit. Both
cannot audit. They violated the General Standard no. 2. Auditor A violated Independence in fact/mind.
Auditor B violated Independence in appearance.
*You should possess both independence

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Due Professional Care - pertains to

Due diligence with no diligence.

What kind of diligence is being

required?

Diligence of a good father of a family.

You must practice professional due
diligence with no negligence.

*In the practice of due diligence, you

must have an attitude of professional
skepticism.

Professional Skepticism - Attitude

of questioning of mind. Attitude
unique to auditors. You are
perceiving the company either
honest nor dishonest. You are being
fair. Lagi kang nagiisip na pag
pinakita sayo ung FS nila ay kailangan mo makakita ng evidence. Professional Skepticism is an attitude
that is unique to auditors.

GENERAL STANDARDS (TIP): Characteristics or qualities of an auditor before conducting the actual audit.

1. Technical proficiency and Training

2. Independence
3. Professional care

Standards of Field Work:

Standard of Fieldwork No. 1 –

Planning (Start of actual
accumulation of evidential matters
of the auditor)

In planning, there is pre-planning

phase which includes the
attainment of certain qualities of an
auditor and the requisites of an
audit, and there is proper planning
phase

Overview of the requisites of an

audit:

1. The company to be audited

should be auditable. There
must be a related framework that
the entity is using; financial reporting framework. If there is no reference of how the auditor will
audit the financial information, useless.

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2. Check management integrity.

3. The auditing firm has the ability and capability to audit the company.

Planning is a pivotal phase of audit. Pivotal Phase – it cannot be omitted; it should always be prioritized.
Through planning, malalaman natin yung audit procedures and audit programs. Audit program is the result of audit
planning. In the audit program, there is the audit strategies that is needed. It will serve as the skeleton of the entire
audit procedure.

The Philippines permits audit firms

only in two types of organization:

1. Partnership
2. Sole Proprietorship
*Bawal magtayo ng auditing firms ang
mga corporation because intendedly
auditing firms serve the public and in
serving the public, the main purpose is
not to accumulate too much profit.
Unlike corporation, they have more
owners. The more owners, the more
interest/profit they need in order to
increase their respective wealth.

These are organization forms with

high personal liability because,
compared to corporation, the
partnership and sole proprietorship
has an outmost regard in terms of
liability. In corporation (separate
and distinct to owners), in case of
dissolution/liquidation, hindi na
maeextend sa personal asstets ng
mga stockholders yung pagbabayad
ng liabilities.

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Owners (Partners and Sole

proprietors) are really in-charge or
direct with regards to the function
in a CPA firm. Unlike in
corporations, stockholders are just
voting representatives that will
manage the corporation, which is,
somehow, madedefeat kung bakit
nagtayo ng auditing firm.

Staff assistant or junior auditor –

pinapadala sa field.

Senior or in charge auditor –

kasama sa team na pupunta sa
client. Siya yung leader doon.
Note: Ang tanging pumipirma lang ng audit report is the partner or the engagement partner. The sole responsibility
for the audit report is the signature or the one who signs the audit report; it’s the partner.

The framework of the internal

control pertains to the structure of
your client’s system particularly on
its accounting information system.
You need to know if your client’s
policies and procedures are
operating effectively.
Example: There is CCTV camera, but
does it work?

The framework/structure is there,

but to really know if this is operating
or not, you need to assess the
internal control. That’s why you
need to know what are the vitals or
the elements of an ideal internal control and after that, you should know how to assess with respect to
audit.
Note: kapag inaasses ni auditor ang internal control, hindi siya magbibigay ng opinion whether the internal control
should be changed or not. The auditor will ONLY ASSESS the level of risk of the internal control that will affect the
financial statements.

Example: TV. You know the parts of a television, which is the framework or the elements. The parts are complete,
but can you already say that the TV is working just by knowing that the framework or the parts of the TV? Not yet
until you test it. Just line an audit, when the auditor saw that the framework or the elements are complete, he will

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not immediately conclude that the internal control is reliable/ effective. He will, first, assess if the internal control is
effectively operating or not.

SUBSTANTIVE TESTING
Internal Control Nature Timing Extent Control Risk
Effective Less Extensive Interim Lesser Low
Ineffective/weak Purely Substantive Testing Year-end More High
Explanation:
If the internal control is effectively operating as intended, less audit procedures. As to timing, interim. As to extent,
less evidences.

If not working effectively, more procedures, and as to timing, year-end, madami gagawin. As to extent, more
evidences.

*There is always evidences. It just depends kung marami o kaunti.

Usually, Inspection, observation,

inquiries it does not involve
examining the figures of the
financial statement. You are not yet
recomputing amounts. You are just
testing the policies. Policies don’t
have amount; just qualitative. The
quantitative part is in Confirmation,
which is one of the substantive
testing. Substantive testing
procedure involves the
computation of monetary values.
Substantive test = other audit
procedure. Substantive testing is
the process of obtaining evidences
through quantitative measures. If
policies effective, support with few quantitative information through substantive testing. If policies are
ineffective, support with more quantitative measures.

The audit evidences should be sufficient and appropriate.

Sufficiency – pertains to quantity. (how much evidences are we going to have? It depends on the
assessment of internal control)

Appropriateness – pertains to the quality of evidences. Quality refers to the relevance and reliability of
audit evidences.

• Relevant - If the audit evidence is:

→ Complete
→ Neutral
→ Free from error

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*Tanggalin mo na lahat ng qualitative characteristics, wag lang ang relevance because relevance always pertains to
the decision making of the users. An information is relevant If it could influence the decision of the users. In accounting
and auditing, there is always decision-making.

Accounting records – journals, books of accounts, source documents from the company etc.

Other Information – other than accounting records like minutes of meeting, contracts, share of stocks,
evidences of shareholdings.

CORROBORATIVE – it is not sufficient that you will just have one evidence. It should be supported by other
audit evidences.

EVIDENCES IS MORE ON PERSUASIVENESS RATHER THAN CONCLUSIVENESS! NOT ONE, TIME BIG TIME!

Persuasive – little by little you convince yourself, little by little you gather evidences until such time the
audit evidences are sufficient and appropriate.

• 1st bullet: Evidences internally

could be subjected to different
threats. Example: 10 million
Accounts receivable in FS
supported by internal documents
vs. 9 million Accounts receivable in
confirmation with customers.
Confirmation with customers
(external/outside) is more reliable.
Example: Cash per book vs per
bank. In proof of cash, unahin mo
yung per bank. The more external,
the more reliable.
• 3rd bullet: mas reliable ang
evidences na ikaw mismo ang
nakakuha kaysa nagtanong ka lang.
• 4th bullet: Mas okay ang evidence na nakasulat, like minutes of meeting, kaysa yung nakarecord
lang. Mas maigi yung documentary form. Hahanap ka ng documents na may pirma ng proper
signatories.
• 5th bullet: pagfacsimiles or photocopies pwedeng dayain yung prima.
Note: Of all of these five generalizations, you must always be guided by the cost-benefit principle. If the cost of
obtaining audit evidences will be greater than the benefit that it could give you, then, do not push through
accumulating audit evidences.

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Standards of Reporting:

The GAAP is the benchmark or the

criteria that the auditor will use in
order to express an opinion.
From the evidences gathered from the
fieldwork, the auditor will now compare
it to the accounting standards, whether
the financial statement will conform
with what is prescribe for each
accounting standards for each account.

Is it explicitly or implicitly stated in

the audit report?

It must be explicitly stated. In the

audit report, the auditor should state
whether the financial statement is in
conformance with GAAP or not.

This standard of reporting pertains

to the consistency of the application
of accounting principles from year to
year. The audit report should
contain an explicit statement if and
only if the financial statement or
certain accounting principles and
standards has not been prepared or
has not been consistently applied
from one year to another year. If the
accounting principles are all
consistently applied from year to
year, then, therefore, there is no
need to expressly/explicitly state in
the audit report that situation.

For example, there is a change in an accounting standard. Year 1 the classification or the accounting
treatment for this account is to be presented, for example, in the income statement. For year 2, you will
compare that account or the amount of that account to the prior year which is Year 1. Now, if there are
certain changes in the accounting standard, let us say that in year 2 that this account should not be
presented anymore in the income statement. It should, now, be presented as part f the comprehensive
income. Meaning to say, part of shareholders equity. If that is the case, therefore there is an inconsistent
application of accounting standards. In that sense, it should be reflected in the auditor’s report that a
certain accounting standard has not been consistently applied because of some changes in accounting
regulation or in accounting standards.

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GENERAL RULE: KAPAG WALA KA NAKITANG INCONSISTENCY IN THE APPLICATION OF THE

ACCOUNTING STANDARDS, WALA KANG SASABIHIN; IMPLICITLY STATED.

DISCLOSURES ARE ALSO IMPLICIT.

No need to express in the audit
report that the company have
properly disclosed all the needed
disclosures with respect to the
financial statement being audited.
When the company prepares
financial statement, it is automatic
or incumbent for the company to
attach notes to financial statement.
No need to say that the financial
statement has attachment or
disinformative disclosure UNLESS
(otherwise stated in the report),
may nakita kang hindi inattach o
may nakita kang dapat idisclose pero hindi dinisclose pero kung kumpleto no need to say that they have
complete disclosure. Ang sasabihin mo na lang don that “you have audited the financial statements of the
company”.

Expression of opinion is the most

important element of the audit
report.

Big questions na binabantayan

nung gagamit or magrerely sa audit
report:

Is the financial statement in

accordance with the GAAP?

Is the accounting statement

presents fairly all the amounts
contained in the balance sheet,
income statement and statement of
cash flows?

Kapag sinabi mong “fairly stated”, ibig sabihin in accordance with GAAP yung financial statement na
pinrepare ni management

Note: you will ONLY express an opinion on the basis of the evidences you have gathered pertaining to the
financial reports of the entity.

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Unmodified / Unqualified Opinion –

Standard report. Most common report. The
company’s financial statement is presented
FAIRLY. “FAIRLY STATED” – wala kang
nakitang information na magsasabi na ang
financial statement ay hindi reliable. It
gives the TRUE and FAIR view of the
transactions pertaining to the company.
Pinakamagandang report to. Ang
palatandaan dito ay nakalagay sa audit
report sa audit opinion sa pinakaunang
paragraph “that the financial statement of
XYZ Company are stated fairly in all
material respect and in accordance with the Generally Accepted Accounting Principles”.

Pano naman kapag hindi reliable? May degree of reliability

There are certain portions of the balance sheet which is misstated. Maaring hindi in accordance with
accounting standards, may mali or may kailangan baguhin. Then, issue a modified opinion. It depends on
the effect of that misstatement.

Modified Opinion – there are some exceptions in the financial statement that will make you believe that
the financial statement might not be presented in all material respect in accordance with the GAAP.

• Qualified Opinion
• Adverse Opinion
• Disclaimer of Opinion

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