The document defines auditing and outlines its objectives. It provides definitions of auditing from Philippine Standards and a textbook. The objectives of an audit are to enable the auditor to express an opinion on whether financial statements are prepared according to the applicable framework. This enhances intended users' confidence. The document also discusses financial statement assertions, the general principles of auditing, and Generally Accepted Auditing Standards. It covers the general standards, fieldwork standards, and reporting standards that govern auditing practices.
The document defines auditing and outlines its objectives. It provides definitions of auditing from Philippine Standards and a textbook. The objectives of an audit are to enable the auditor to express an opinion on whether financial statements are prepared according to the applicable framework. This enhances intended users' confidence. The document also discusses financial statement assertions, the general principles of auditing, and Generally Accepted Auditing Standards. It covers the general standards, fieldwork standards, and reporting standards that govern auditing practices.
The document defines auditing and outlines its objectives. It provides definitions of auditing from Philippine Standards and a textbook. The objectives of an audit are to enable the auditor to express an opinion on whether financial statements are prepared according to the applicable framework. This enhances intended users' confidence. The document also discusses financial statement assertions, the general principles of auditing, and Generally Accepted Auditing Standards. It covers the general standards, fieldwork standards, and reporting standards that govern auditing practices.
The document defines auditing and outlines its objectives. It provides definitions of auditing from Philippine Standards and a textbook. The objectives of an audit are to enable the auditor to express an opinion on whether financial statements are prepared according to the applicable framework. This enhances intended users' confidence. The document also discusses financial statement assertions, the general principles of auditing, and Generally Accepted Auditing Standards. It covers the general standards, fieldwork standards, and reporting standards that govern auditing practices.
ADAMSON UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION ACCOUNTANCY DEPARTMENT AUDITING AND ASSURANCE CONCEPTS AND APPLICATION 01 MODULE 1
Auditing Defined The Philippine Standards on Auditing defines auditing as the objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. The phrase used to express the auditor’s opinion is “present fairly, in all material respects. A similar objective applies to the audit of financial or other information prepared in accordance with appropriate criteria.1
Another definition of auditing taken from the book Applied Auditing by Ma. Elenita B. Cabrera and Gilbert Anthony B. Cabrera is that it is a systematic process by which a competent, independent person objectively obtains and evaluates evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.2
Financial statement assertions are assertions by management, explicit or otherwise, that
are embodied in the financial statements and can be categorized as follows: 3 (a) Existence: an asset or a liability exists at a given date; (b) Rights and obligations: an asset or a liability pertains to the entity at a given date; (c) Occurrence: a transaction or event took place which pertains to the entity during the period; (d) Completeness: there are no unrecorded assets, liabilities, transactions or events, or undisclosed items;
1 PSA 120 – Framework of Philippine Standards on Auditing September 27, 2007 https://aasc.org.ph/downloads/PSA/publications/PDFs/PSA-120.pdf 2 Applied Auditing 2017 Edition (M.E.Cabrera & G.A.Cabrera) 3 Glossary of Terms (December 2002) [amended by PSA 220 (Rev.)] September 27, 2007 https://aasc.org.ph/downloads/PSA/publications/PDFs/Glossary-of-Terms-December-2002.pdf Page |2
(e) Valuation: an asset or liability is recorded at an appropriate carrying value;
(f) Measurement: a transaction or event is recorded at the proper amount and revenue or expense is allocated to the proper period; and (g) Presentation and disclosure: an item is disclosed, classified, and described in accordance with the applicable financial reporting framework.
Objectives of Auditing The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. In the case of most general purpose frameworks, that opinion is on whether the financial statements are presented fairly, in all material respects, in accordance with the framework. An audit conducted in accordance with PSAs and relevant ethical requirements enables the auditor to form that opinion.4
In conducting an audit of financial statements, the overall objectives of the auditor are: 5
(a) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and (b) To report on the financial statements, and communicate as required by the PSAs, in accordance with the auditor’s findings.
4 PSA 200 (Revised and Redrafted) Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing January 11, 2010 https://aasc.org.ph/downloads/PSA/publications/PDFs/PSA-200-Revised-and-Redrafted.pdf
5 PSA 200 (Revised and Redrafted) Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing January 11, 2010https://aasc.org.ph/downloads/PSA/publications/PDFs/PSA-200-Revised-and-Redrafted.pdf Page |3
General Principles Governing the Audit of Financial Statements6
The procedures required to conduct an audit in accordance with Philippine Standards on Auditing should be determined by the auditor having regard to the requirements of PSAs, relevant professional bodies, legislations, regulations, and where appropriate, the terms of engagement and the reporting requirements: 1. The auditor should comply with the “Code of Professional Ethics for Certified Public Accountants” promulgated by the Board of Accountancy (BOA). In order to retain public confidence in the credibility of the auditors’ work, auditors must adhere to standards of ethical conduct that embody and demonstrate integrity, objectivity and concern for the public rather than self-interest. 2. The auditor should conduct an audit in accordance with Philippine Standards on Auditing. These standards contain the basic principles and essential procedures which the auditor should follow. The standards also include explanatory and other materials which, rather than being prescriptive (that is mandatory), is designed to assist auditors in interpreting and applying the auditing standards. 3. The auditor should plan and perform the audit with an attitude of professional skepticism recognizing that circumstances may exist which may cause the financial statements to be materially misstated.
An attitude of professional skepticism means the auditor makes a critical assessment, with a questioning mind, of the validity of audit evidence obtained and is alert to audit evidence that contradicts or brings into question the reliability of documents and responses to inquiries and other information obtained from management and those charged with governance.7 Audit evidence – Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information. The auditor shall design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence.8
6 Auditing Theory A guide in understanding PSA 2014 Edition (J.Salosagcol,M.Tiu & R.Hermosilla) 7 Auditing Theory A guide in understanding PSA 2014 Edition (J.Salosagcol,M.Tiu & R.Hermosilla)
These are the rules that govern auditing practices in the United States. The Auditing Standards Board, a part of the American Institute of Certified Public Accountants, creates GAAS to establish auditing practice standards and rules.10 It represents measures of the quality of auditor’s performance. These standards are to be regarded as minimum standard of performance that auditors should follow.11
A. General Standards 1. The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor. 2. In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors. 3. Due professional care is to be exercised in the performance of the audit and the preparation of the report.
B. Standards of Fieldwork 1. The work is to be adequately planned and assistants, if any, are to be properly supervised.
2. A sufficient understanding of internal control is to be obtained to plan the audit and to
determine the nature, timing, and extent of tests to be performed.
3. Sufficient competent evidential matter is to be obtained through inspection, observation,
inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.
C. Standards of Reporting 1. The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles (GAAP). 2. The report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period. 3. Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report. 4. The report shall contain either an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons therefore should be stated. In all cases where an auditor’s name is associated with financial statements, the report should contain a clear-cut indication of the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking.
Module 1: Sample Quiz 12
1. An audit of financial statements is conducted to determine if the a. organization is operating efficiently and effectively. b. Auditee is following specific procedures or rules set down by some higher authority. c. Overall financial statements are stated in accordance with an identified financial framework. d. Client’s internal control is functioning as intended.
12 Auditing Theory A guide in understanding PSA 2014 Edition (J.Salosagcol,M.Tiu & R.Hermosilla) Page |6
2. Which of the following is incorrect about responsibility for financial statements?
a. Management is responsible for fair presentation of the financial statements. b. Auditor is responsible for expressing an opinion on the financial statements. c. Audit of financial statements does not reduce management’s responsibility. d. Fair presentation of financial statements is an implicit part of the auditor’s responsibility.
3. Which of the following does not describe a condition that creates a demand for auditing? a. Conflict between an information preparer and a user can result in biased information. b. Information can have substantial economic consequences for a decision maker. c. Expertise is often required for information preparation and verification. d. Users can directly assess the quality of information.
4. The primary purpose of an independent financial statement audit is to
a. provide a basis for assessing management’s performance. b. comply with government regulatory requirements. c. assure management that the financial statements are unbiased and free from material error. d. provide users with an unbiased opinion about the fairness of information reported in the financial statements.
5. Financial statements need to be prepared in accordance with one, or a combination of:
Philippine Philippine Other authoritative or Philippine Standards Accounting comprehensive financial Financial on Auditing Standards reporting framework Reporting Standards
a. yes yes yes yes
b. no yes yes yes c. no yes no yes d. yes no no no
6. The trait that distinguishes auditors from accountants is the:
a. auditor’s ability to interpret accounting standards.
b. auditor’s education beyond the Bachelor’s degree. c. auditor’s ability to interpret PFRS. d. auditor’s accumulation and interpretation of evidence related to a company’s financial statements. Page |7
7. Recording, classifying and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called: a. finance b. auditing c. accounting d. economics
8. Whenever a CPA professional is engaged to perform an audit of financial statements
according to Philippine Standard on Auditing, he is required to comply with those standards in order to a. eliminate audit risk. b. have a measure of the quality of audit performance. c. to reduce the auditor’s responsibility. d. eliminate the professional judgement in resolving audit issues.
9. In determining the primary responsibility of the external auditor for an audit of company’s financial statements, the auditor owes primary allegiance to: a. stockholders, creditors and the investing public b. the management of the audit client because the auditor is hired and paid by management. c. the Auditing and Assurance Standards Council, because it determines auditing standards and auditor’s responsibility. d. the audit committee of the audit client because that committee is responsible for coordinating and reviewing all audit activities within the company.
10. In “auditing” financial accounting data, the primary concern is with:
a. determining whether recorded information properly reflects the economic events that occurred during the accounting period. b. determining if fraud has occurred. c. determining if taxable income has been calculated correctly. d. analyzing the financial information to be sure that it complies with government requirements. Page |8
Module 1: Answer Key
1. c 2. d 3. d 4. d 5. b 6. d 7. c 8. b 9. a 10. a
