NOTES TO AUDITING THEORY

AUDIT – AN OVERVIEW - The communication of audit findings is the ultimate

objective of any audit.
Auditing defined and objective:
Philippine Accounting Standards (PSA): to enable the auditor to
express an opinion on whether the financial statements are prepared, Types of Audits
in all material respects, in accordance with the applicable financial
reporting framework. FINANCIAL COMPLIANCE OPERATIONAL
AUDIT AUDIT AUDIT
Audit confines the examination of the financial statements. Definition / Determine Involves a Study of specific
Content of whether the review of an unit of an
American Accounting Association (AAA): “an audit is a systematic the financial organization’s organization for the
process of objectively obtaining and evaluating evidence auditor’s statements of procedure to purpose of
regarding assertions about economic decisions and events to report an entity are determine measuring its
ascertain the degree of correspondence between these fairly presented whether the performance.
assertions and established criteria and communicating the in accordance organization Assess entity’s
results to the intended users.” with the has adhered to performance,
applicable specific identify areas for
1. Auditing is a systematic process financial procedures, improvements, and
- Ordered and structured series of steps reporting rules, or make
2. An audit involves obtaining and evaluating evidence about framework. regulations. recommendations
assertions regarding economic decisions and events
- Assertions are representation made by an entity about Assertions The FS are The The organization’s
economic actions and events fairly presented. organization activities are
- Auditor’s overall objective is to determine whether these has compiled conducted
with laws and effectively and
assertions are valid
regulations or efficiently.
- Will either corroborate or refute the assertions. contracts.
3. An audit is conducted objectively. Established PFRS Laws, Objectives set by
- Conducted without bias criteria regulations and the BOD.
- Requires to make an impartial assessment of all relevant contracts.
circumstances
- Auditor’s conclusion can influence the decisions of parties
NOTE: All audits possess the same general characteristics:
4. Auditors ascertain the degree if correspondence between
systematic examination and evaluation and communication the
assertions and established criteria
results.
- Established criteria are needed to judge the validity of the
assertions Practical and inherent limitation on obtaining evidence:
5. Auditors communicate the audit results to various interested
 The use of testing or sampling risk.
users.
 Error in the application of judgment or non-sampling risk.
 NOTES TO AUDITING THEORY

 There is an avoidable risk that even an audit conducted in General requirements when Auditing financial statements
accordance with PSAs may not be able to detect material
1. Comply with ethical requirements.
misstatement in the financial statements.
2. Conduct an audit in accordance with the PSA.
 The opinion of the auditor is not an assurance as to the future
3. Apply professional judgment in planning and performing an
viability of the entity nor the efficiency or effectiveness
audit.
Nature of financial reporting 4. Obtain sufficient appropriate audit evidence to reduce the audit
risk to an acceptable low level.
- The application of applicable financial reporting framework 5. Plan and perform the audit with an attitude of professional
involves application of significant judgment and estimates skepticism (questioning mind).
- Many items involve subjective decisions that are subject to
an inherent variability which cannot be eliminated by Need for an independent financial statement audit
performing audit procedures,
1. Conflict of interest between management and users of FS
Nature of evidence 2. Expertise
3. Remoteness
- It comprises pieces of information and impressions which 4. Financial consequences
are gradually accumulated during the course of an audit an
- General persuasive rather than conclusive

Role of management and independent auditor Theoretical framework of Auditing

1. Audit function operates on the assumptions that all financial
Management Independent auditor date is verifiable.
2. The auditor should always maintain independence with
respect to the FS under audit.
Prepares FS 3. There should be no long-term conflict between the auditor and
the client management.
4. Effective internal control system reduces the possibility if
material misstatements of FS.
Unaudited FS Evaluates FS 5. Consistent application of the applicable financial framework
such as the PFRS results in fair presentation of FS.
6. What was held true in the past will continue to hold true in the
Audited FS Audit report on FS future in the absence of known to the contrary.
7. An audit benefits the public.

Users of the financial statements

 NOTES TO AUDITING THEORY

ASSURANCE ENGAGEMENTS AND RELATED SERVICES controls and information

substantive provided
tests by mgt.
TYPES OF SERVICES (ARCA) Required Sufficient to Sufficient to Sufficient Sufficient
knowledge assess the identify to apply to compile
1. Audit of the entity risk of areas in the the AUP the FS
2. Review material FS where
3. Compilation misstatemen material
4. Agreed-upon procedures ts misstatemen
ts are likely
Nature of Audit Review AUP Compilatio to occur
service n Independenc Required Required Not Not
Objective To express To enable To carry To assist e required required
and opinion the CPA to out audit the client in requirement
on the fair report procedure the Standards PSA PSRE PSRS PSRS
representatio whether s agreed preparation
n of the FS. anything has on with of the FS.
come to his the client ASSURANCE ENGAGEMENTS
attention that and any
 PSAE 3000 states that assurance engagements are intended
would appropriat
to enhance the credibility of information about a subject matter
indicate that e third
the FS are parties by evaluating whether the subject matter the subject matter
not identified conforms in all material respects with suitable criteria.
presented in the
fairly. report.
Level of High or Moderate or None None Types:
assurance reasonable limited
Report Positive Negative Descriptio Identificatio  Reasonable assurance engagement (audit engagement)
n of n of  Limited assurance engagement
procedure financial
Elements:
performed info
and compiled  Three
factual and a clear
findings statement
that no
assurance
provided.
Basic Risk Inquiry and As agreed Assemble
procedures assessment, analytical FS based
test of on the
NOTES TO AUDITING THEORY