ASSURANCE PRINCIPLES,

PROFESSIONAL ETHICS AND

GOOD GOVERNANCE
Chapter 1: AUDIT OVERVIEW
Objectives

 Describe assurance services ;

 Distinguish audit services from other assurance and non-
assurance services provided by CPAs;
 Define Audit
 Distinguish Audit from Accounting
 Explain the importance of auditing in reducing information
risk;
 differentiate the three main types of audits
 identify the primary types of auditors;
 WHAT DO AUDITORS DO?

CPA
Non-
Assurance Assurance

Tax service
Management
Consulting
Assurance services

 The broad range of information enhancement

services that are provided by certified public
accountants (CPAs) that are designed to enhance
the degree of confidence in the information.
 Two types:
 Increase reliability of information (Attestation)
 Putting information into a form or context that
facilitates decision making. (Other attestation)
 Attestation

 To attest to information means to provide assurance

as to its reliability
 Attest engagement:
A practitioner is engaged to issue or does issue an
examination, a review, or an agreed-upon procedures
report on subject matter or an assertion about subject
matter that is the responsibility of another party (e.g.
management)
 The Attest Function

Management The CPA

Subject Suitable Gathers

Matter Criteria Evidence

Issues
Report

Subject The Attest

Matter* Report
*May be management’s assertion about the subject matter.

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 Suitable criteria
 Standards established or developed by groups of experts.
 Example: Internal control audit – standards established by a
committee of experts on internal control
 Example: Financial statement audit – standards are GAAP.
For a financial statement audit suitable criteria are referred
to as the “applicable financial reporting framework.”

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 3 FORMS OF ATTESTATION
 Examination (AUDIT)
 Provides highest form of assurance
 The CPA selects from all available evidence a combination that limits
to a low level risk of undetected misstatement and provides
reasonable assurance that the subject matter or assertion on subject
matter is correct
 Review
 substantially less in scope of procedures than an examination audit
 A review provides limited assurance regarding an organization’s
financial statements.
 typically includes analytical procedures applied to financial statements
and inquires to the company’s personnel.
 TYPES OF ATTESTATION
 Agreed-upon procedures
 specified parties agree on the specific procedures to be performed
 Agreed-upon procedures engagements result in a report that
describes the procedures performed and related findings
TYPES OF ATTESTATION
 AUDITING DEFINITION

Body Definition
Philippine Standards “enables the auditor to express an opinion
on Auditing whether the financial statements are prepared in
all material respects, in accordance with identified
financial reporting framework”

American Accounting “is a systematic process of objectively obtaining

Association 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 to interest users”
 AUDITING DEFINITION

 “is a ❶systematic process of

 ❷objectively obtaining and evaluating evidence
regarding assertions about economic actions
and events
 to ascertain the ❸degree of correspondence
between these assertions and established
criteria and
 ❹communicating the results to interest users”
 Audit of Financial Statements

Management The
Auditors
Prepares Criteria Gathers
Financial (e.g., GAAP) Evidence
Statements

Issues
Report

Financial The Auditors’

Statements Report
*Applicable financial reporting framework
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 Financial Statement Audit

 Auditors gather evidence and provide a high level

of assurance that the financial statements follow
GAAP, or some other appropriate basis of
accounting
 Audit involves searching and verifying accounting
records and examining other documents
 Evidence necessary to issue an audit report that
states auditors’ opinion

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 Audit Evidence
Evidence focuses on whether financial statements are
presented in accordance with GAAP; examples:
 Balance sheet contains all liabilities
 Income statement
 Sales really occurred
 Sales have been recorded at appropriate amounts
 Recorded costs and expenses are applicable to period
 All expenses have been recognized
 Financial statement amounts
 Accurate, properly classified and summarized
 Notes are informative and complete

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 AUDITING vs ACCOUNTING

ACCOUNTING AUDITING
Definition Is the act of collecting, recording, Is the act of examination of
analyzing and interpretation of books of accounts and evidential
financial transaction documents so as to prove the
true and fair view of profitability
and financial position
Commenceme Begins when financial transactions Begins when work of
nt of work take place Accounting ends
Scope of work Preparation of financial statement Review the prepared FS
Who perform? Bookkeeper or Accountant (CPA) Must be CPA
Output Financial Statement Audit Opinion on the fairness of
FS
Role of Audit in reducing information
risk
 Audits lend credibility to information by reducing
information risk, the risk that information is materially
misstated
 Financial statement misstatements arise due to--
 Accidental errors
 Lack of knowledge of accounting principles
 Unintentional bias
 Deliberate falsification
 Audits do not directly address business risk, the risk that
a company will not be able to meet its financial
obligations due to economic conditions or poor
management decisions
TYPES OF AUDIT
 Financial Audits
 Audit of the financial statements of an entity
 Covers the balance sheet and related statements of
income, retained earnings and cash flows
 Goal is to determine if prepared in conformity with GAAP
 Performed by CPAs
 Users include management, investors, bankers, creditors,
financial analysts, government agencies

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 Other Types of Audits

 Compliance Audits
 Dependent upon the existence of verifiable
data and of recognized criteria or standards
such as established laws and regulations or
organizations policies and procedures
 Example: BIR audit of income tax return

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 Other Types of Audits

 Operational Audits
 Study of specific unit of an organization for the purpose of
measuring its performance.
 Performance is measured based on its effectiveness and
efficiency
 Effectiveness – success in meeting its goals and responsibilities
 Efficiency – success in using to its best advantage the resource
available to the department/ organization
 Example: Effectiveness of operations of receiving
department of a manufacturing company

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 Other Types of Audits

 Integrated Audits
 Required by Sarbanes-Oxley Act in which the auditors
are required to provide opinion on:
 Reliability of Company’s financial statement
 Internal control effectiveness

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 Other Types of Auditors

 Internal Auditors
Government/ State Auditors
 Tax Auditors

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 Internal Auditors

 Employed by a company as an employee

 They often
 perform operational and compliance audits
 address internal control
 report to the audit committee of the board of directors and to
the president
 The Institute of Internal Auditors is the international
organization of internal auditors.

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 Government Accountability Office Auditors

 Headed by the Audit Commissioner

 Responsibility of supporting Congress
 Perform
 Compliance, operational and financial audits of
government agencies
 Examinations of corporations holding government
contracts to verify contract payments have been proper

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 Tax Auditors

 Responsible for enforcement of tax laws of various

sorts (e.g., state and federal income taxes, property
taxes, sales taxes)
 Internal revenue agents generally perform
compliance audits of income tax returns

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