THE RISK-BASED AUDIT
PROCESS
Auditing: A Risk-Based Approach Part 1 Theory
By: Leomar R. Cabarles, Reynaldo R. Ocampo and Rommel M. Valdez
IN ACCORDANCE WITH PHILIPPINE
STANDARD ON AUDITING
• The auditor shall perform a quality audit. In doing so, the auditor should conduct the audit with
professional judgement and maintain professional skepticism through the planning and
performance of the audit.
• Identify and assess Risk of Material Misstatements (RMM), whether due to fraud or error, based
on an understanding of the entity, its environment and internal control
• Obtain sufficient appropriate audit evidence about whether material misstatements exists by
designing and implementing appropriate risks responses
• Formulate an opinion on the financial statements based on the audit evidence obtained.
PHASE 1 – RISK ASSESSMENT
• In this phase, the auditor decides whether to accept an audit engagement, if the client is
acceptable, the auditor documents the terms of audit in an engagement letter
• To effectively and efficiently perform an audit, the auditor plans the audit.
• Audit planning involves obtaining and understanding of the entity, its environment and its
internal control that serves as a frame of reference on:
• 1. how the audit is conducted
• 2. professional judgment and professional skepticism are exercised
• 3. materiality is determined, and
• 4. Risks of Material Misstatement (ROMM) are assessed both at financial statement and
assertion levels.
PHASE 2 – RISK RESPONSE
• The assessed ROMM serves as a basis for the auditor’s response to obtain sufficient, appropriate
audit evidence. The auditor’s two responses include overall response to address risks ROMM at
FS level and further audit procedures at assertion level.
• PHASE 3 – CONCLUSION AND REPORTING
• The auditor evaluates the results of the audit from the audit evidence obtained and
• a) Form an opinion on the FS, and
• b) Express clearly that opinion through a written report
THE FF. ARE THE AUDITOR’S OPINIONS
DEPENDING ON THE OUTCOME OF THE AUDIT
• 1. Unmodified (Unqualified or Clean) Opinion – the opinion expressed when the FS are
prepared in all material respects, in accordance with the Accounting Financial Reporting
• 2. Modified Opinion
• A) Qualified opinion – the auditor is satisfied that the FS are presented fairly, except for a
specific aspect
• B) Adverse opinion – the auditor believes that there is a material misstatement on the FS
• C) Disclaimer of opinion – there is scope limitation in the conduct of the audit, hence the auditor
cannot express an opinion
• Professional Judgment - the ability of the auditor to exercise professional judgment is the
hallmark of auditing. It is the application of relevant training, knowledge and experience that
enables the auditor for proper interpretation of:
• A) relevant ethical requirements
• B) PSAs, C) Informed decisions
PROFESSIONAL JUDGMENT IS NECESSARY IN
DECISIONS SUCH AS:
• Materiality and audit risk
• Nature, timing and extent of audit procedures
• Evaluating whether sufficient, appropriate audit evidence has been obtained
• Evaluating management’s judgments in applying the AFRF
• Drawing of conclusions (example: assessing reasonableness of management estimate
PROFESSIONAL SKEPTICISM
• It is the state of mind which is ready for the situation that grabs out the errors or questions the
financial events and other events while conducting an assurance engagement.
• It is basically a skill just like professional judgment which makes the auditor alert for any
particular situation.
• An attitude that includes: questioning mind, be alert to conditions which may indicate possible
misstatement due to error or fraud and critical assessment of audit evidence
MAINTAINING PROFESSIONAL SKEPTICISM
REDUCES THE RISK OF:
• 1. overlooking unusual circumstances
• 2. over generalizing when drawing conclusions
• 3. using inappropriate assumptions in performing procedures and evaluating results
• The auditor may accept documents as genuine unless there is a reason to the contrary.
• The auditor cannot be expected to disregard past experience on honesty and integrity of client
while the auditor still maintain professional skepticism
AUDIT EVIDENCE AND DOCUMENTATION
• All throughout the audit process, the auditor gathers and accumulate audit evidence and
documentation that support the opinion.
• AUDIT QUALITY – means that the audit is performed in accordance with relevant ethical,
professional, legal, and regulatory requirements
• Relevant ethical requirements include the ff. Fundamental Principles of:
• Integrity, Objectivity, Professional Competence and Due Care, Confidentiality and Professional
Behavior.
PROFESSIONAL COMPETENCE
• The capability to perform the duties of one’s profession generally, or to perform a particular
professional task, with skill of an acceptable quality (competence in accounting and auditing)
• Due care – prudence, extra careful not to commit mistakes in doing the audit
• Confidentiality – keeping information gathered from the audit confidential, unless otherwise
ordered by the court
PROFESSIONAL BEHAVIOR
• Imposes an obligation on professional accountants to comply with relevant laws and regulations
and avoid any action that may bring discredit to the profession.
• In addition, the Code of Ethics also requires professional accountants to be independent both of
mind and in appearance, when performing audits
AUDIT IN ACCORDANCE WITH PSA
• The auditor shall comply with all PSAs relevant to the audit. The auditor shall not compliance
with PSAs in the auditor’s report unless the auditor has complied with the requirements of PSA
and all other PSAs relevant to the audit.
If an objective in a relevant PSA cannot be achieved the auditor shall evaluate whether this
prevents the auditor from achieving the overall objective of the auditor and theregy requires the
auditor, in accordance with the PSAs, to modify the auditor’s opinion or withdraw from the
engagement. Failure to achieve an objective represents a significant matter requiring
documentation.
INTEGRITY
• The quality of being honest and having strong moral principles, moral uprightness.
• Objectivity – means impartiality. The concept of truth independent from individual subjectivity.
Judgment without bias
