ACC8 – Auditing and Assurance Principles | AUDIT - An Overview CHAPTER 1

Sir Noelito M. Sales |1st Semester | 3rd Year

CHAPTER 1 TYPES OF AUDITS

The need of various users for more reliable financial FINANCIAL STATEMENT AUDIT
information has created a demand for an independent audit
of FS.
● Determines whether the FS are fairly presented in
The primary function of an independent audit is to lend accordance with applicable frameworks.
credibility to the FS prepared by an entity. The auditor’s ● Uses Financial Reporting Frameworks as established
opinion enhances the value and usefulness of the FS. criteria
● The report should contain an opinion about whether
Philippine Standards on Auditing defines auditing by stating the FS are fairly presented.
its objective–
“To enable the auditor to express an opinion on COMPLIANCE AUDIT
whether the FS are prepared, in all material respects, in
accordance with the applicable financial reporting
● Involves a review of an organization’s procedures to
framework.”
determine whether the organization has adhered to
specific procedures, rules, or regulations.
American Accounting Association
● It is dependent upon the existence of verifiable data
“An audit is a systematic process of objectively
and recognized criteria established by an
obtaining and evaluating evidence regarding assertions about
authoritative body
economic actions and events to ascertain the degree of
● Uses laws, regulations, and contracts as established
correspondence between these assertions and established
criteria
criteria and communicating the results to intended users.”
● The report should contain the degree of compliance
● It is a systematic process
● It involves obtaining and evaluating evidence about OPERATIONAL AUDIT
assertions
- ASSERTIONS : representations made by an entity
● “Performance Audit” or “Management Audit”
about economic actions and events. The auditor’s
● Studies a specific unit of an organization for the
objective is to determine whether these assertions
purpose of measuring its performance.
are valid.
● Assesses the entity's performance, identifies areas
● It is conducted objectively
for improvements and makes recommendations to
- It requires the auditor to make an impartial
improve performance.
assessment of all the relevant circumstances in
● Uses objectives set by the Board as established
forming a conclusion.
criteria
● It ascertains the degree of correspondence between
● The report should contain recommendations or
assertions and established criteria
suggestions on how to improve operations.
- ESTABLISHED CRITERIA : establish and inform the
users of the basis against which the assertions have
General Characteristics of the Types of Audit :
been evaluated or measured.
1. Systematic examination and evaluation of evidence
● Results are communicated to various interested
2. Communication of results
users
ACC8 – Auditing and Assurance Principles | AUDIT - An Overview CHAPTER 1
Sir Noelito M. Sales |1st Semester | 3rd Year

TYPES OF AUDITORS
Nature of the Procedures

EXTERNAL/INDEPENDENT AUDITORS The use of testing or sampling risk

- Due to cost constraints, auditors do not examine all
● Independent CPAs who offer professional services to evidence available.
different clients on a contractual basis - Whenever a sample is taken, there is always a
● Generally perform FS audits possibility that the auditor’s conclusion may be
different from the conclusion that would have been
if the auditor examines the population.
INTERNAL AUDITORS
Error in the application of judgment or non-sampling risk
● Entity’s own employees who investigate and - Even if all evidence has been examined, there is no
appraise the effectiveness and efficiency of absolute assurance because the work undertaken by
operations the auditor to form an opinion is permeated by
● Assists the organization members in the effective judgment.
discharge of their responsibilities
● Generally perform operational audits Nature of Financial Reporting

GOVERNMENT AUDITORS “The application of the applicable financial reporting

framework involves application of significant judgment and
● Determine whether persons or entities comply with estimates on the part of management. Many FS items involve
government laws and regulations. subjective decisions that are subject to an inherent variability
● Generally perform compliance audits which cannot be eliminated.”

Nature of Evidence
INDEPENDENT FS AUDIT

Audit evidence obtained does not consist of “hard facts”, but

● To enable the auditor to express an opinion whether
rather, pieces of information gradually accumulated during
the FS are prepared, in all material aspects.
the course of the audit which persuades the auditor about
the fairness of FS.
RESPONSIBILITY FOR THE FS - “Audit evidence is generally persuasive rather than
conclusive in nature.”
● Management is responsible for preparing and
There is unavoidable risk that even an audit conducted in
presenting the financial statements.
accordance with the PSAs may not be able to detect material
● The auditor’s responsibility is to form and express an
misstatement in the FS.
opinion on these FS based on audit results.
- “Subsequent discovery of material misstatement
does not in itself indicate a failure to conduct the
ASSURANCE PROVIDED BY THE AUDITOR audit in accordance with the PSAs.”

● An audit can only provide reasonable assurance The auditor’s opinion is not an assurance as to the future
because of inherent limitations that affect the viability of the entity nor the efficiency/effectiveness with
auditor’s ability to detect material misstatements. which management has conducted the affairs of the entity.
ACC8 – Auditing and Assurance Principles | AUDIT - An Overview CHAPTER 1
Sir Noelito M. Sales |1st Semester | 3rd Year

NEED FOR INDEPENDENT FS AUDIT

1. Conflict of Interest between management and FS

users
- Management wants overly optimistic ;
outside parties want realistic.
2. Expertise
- A qualified person is hired by users to verify
the reliability of the FS.
3. Remoteness
- Users of financial information are usually
prevented from directly assessing its
reliability. Hence, they ask an independent
auditor for aid.
4. Financial Consequences
- Misleading financial information could have
substantial economic consequences for a
decision maker.

THEORETICAL FRAMEWORK OF AUDITING

GENERAL REQUIREMENTS WHEN AUDITING FS 1. Assumption that all financial data are verifiable
- All balances must have supporting
1. The auditor should comply with relevant ethical documents or evidence
requirements (e.g. independence, integrity, 2. Always maintain independence
objectivity, concern for the public) 3. No long-term conflict between the auditor and client
2. The auditor should conduct an audit in accordance - Short-term conflicts may exist, but in the
with the Philippine Standards on Auditing end, both the auditor and management
- “These standards contain basic principles must be interested in fair presentation
and essential procedures. No compliance 4. Effective internal control system reduces possibility
should be reported unless the auditor has of material misstatements
complied with all PSAs relevant to the 5. Consistent application of frameworks results in fair
audit.” presentation of FS
3. The auditor should apply professional judgment in 6. What was held true in the past will continue to hold
planning and performing the audit true in the future in the absence of known
4. The auditor should obtain sufficient appropriate conditions to the contrary.
audit evidence to reduce audit risk to an acceptably - Experience and knowledge accumulated
low level from auditing a client in prior years can be
5. The auditor should plan and perform the audit with used to determine the appropriate audit
an attitude of professional skepticism procedures that need to be performed.
7. An audit benefits the public