COLLEGE OF BUSINESS AND ACCOUNTANCY

Topic:
 Introduction to Audit Services and Financial Statement Audit
Learning Outcomes:
At the end of this module, the student should be able to:

 Enumerate and explain the fundamental principles of auditing services

 Distinguish the different types of audit
 Comprehend thee definition, objective and elements of financial statement audit
Core Values Integration:
As a CPA who will provide a reasonable assurance that the FS is fairly presented in all material respect,
competence is a must. Competency is defined as ‘the ability to do something successfully and efficiently’.
Competency can be at a corporate level and at an individual level. A lack of corporate competency can cause
health and safety problems within the work environment and can also lead to poor quality of work and tainted
reputation.

Introduction:
Dependable financial information is essential to our society. We often rely upon information
provided by others in making economic decisions. The need of various users for more reliable
financial information has created a demand for independent audit of financial statements.
Body
Definition of Audit
As defined by the American Accounting Association, an audit is a systematic process of objectively
obtaining 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 thereof.
Types of Audit
 As to Nature of Assertion/data
1. Financial Statement Audit
- Most common type of audit rendered by CPAs.
- A type of audit pertaining to gathering of evidence on the assertions embodied
in the FS are fairly presented in accordance with generally accepted
accounting principles or another comprehensive and authoritative financial
reporting framework.
- The results of this type are for the use of external users.
2. Operational Audit
- A type of audit involving a systematic review of the organization’s activities
in relation to specified objectives for the purpose of assessing the
performance, identifying opportunities for improvement, and developing
recommendations for improvement or further action.
- Also known as Management Audit or Performance Audit
3. Compliance Audit
- A type of audit involving the review of organizations procedures to determine
whether the organization has adhered to specific procedures and rules set
down by some higher authority.
Type of Auditor
1. External Auditors
- These are independent CPAs who offer their professional services to different
clients on a contractual basis. External auditors are the one who generally
perform financial statement audit.
2. Internal Auditors
- They are entity’s own employees who investigate and appraise the
effectiveness and efficiency of operations and internal controls. The main
function of internal auditors is to assist the members of the organization in
the effective discharge of their responsibilities. Internal auditors usually
perform operational audit.
3. Government Auditors
- These are government employees whose main concern is to determine
whether persons or entities comply with government laws and regulations.
Government auditors usually conduct compliance audit.
Objective of Financial Statement Audit

 To enable the auditor to express an opinion whether the financial statements are prepared,
in all material respects, in accordance with the generally accepted accounting principles or
other identified financial reporting framework.
Based on PSA (Philippine Standards on Auditing) 200, in conducting an audit of financial statements,
the overall objectives of the auditor are:
 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 FS are prepared, in all material respects, in accordance
with the generally accepted accounting principles or other identified financial reporting
framework.
 To report on the FS and communicate as required by the PSAs, in accordance with the
auditor’s findings.
General Principles of an FS Audit
1. The auditor should comply with relevant ethical requirements (Code of Ethics).
2. The auditor should conduct an audit in accordance with PSA.
3. The auditor should plan and perform the audit with an attitude of professional skepticism.
4. All throughout the audit engagement, the auditor should exercise professional judgement.
5. The auditor should obtain Sufficient Appropriate Audit evidence.
Theoretical Framework of FS Audit
1. All financial data are verifiable.
2. The auditor should always maintain independence with respect to the financial statements
under audit.
3. There should be no long-term conflict between the auditor and the client management.
4. Effective internal control system reduces conflict reduces the possibility of errors and fraud
affecting the financial statements.
5. Consistent applications of generally accepted accounting principles (GAAP) or Philippine
Financial Reporting Standards (PFRS) results in fair presentation of FS.
6. What was held true in the past will continue to hold true in the future in the absence of known
conditions to the contrary.
7. Audit benefits the public.
Assurance Provided by the auditor

 The auditor’s opinion on the FS is not a guarantee that the FS are dependable. An audit
conducted in accordance with the PSA is designed to provide only reasonable assurance that
the FS taken as a whole are free from material misstatements. These limitations result from
such factors as:

a. The use of testing

b. Error in application of judgement
c. Reliance on management’s representation
d. Inherent limitations on the client’s accounting and internal control systems.
e. Nature of evidence

Due to above limitations, all financial statement audit engagements are exposed to audit risk.
For assurance engagements, this is termed as assurance engagement risk.
- It is the risk that the auditor gives an inappropriate audit opinion when the
FS are materially misstated.
Business Risk – is a risk in which, in any event or activity that will prevent the entity in
meeting its business objectives such as wealth and profit maximization.
Information risk – a risk that the information prepared and presented by the entity contain
misstatement.
Factors contributing to information risk are:

• Voluminous data
• Complexity of transactions
• Remoteness of information
• Conflict of interest between the provider and user of information
Additional Conditions creating the need for FS Audit
 Conflict of interest between the responsible party and the intended users of FS.
 Expertise
 Remoteness of users.
 Financial consequence
Value of FS Audit

1. Audit reduces information risk that may lead to lower cost of capital.
2. Audit may be used to deter inefficiency and fraud.
3. Audit may be used to enhance systems of internal controls.

Summary
Reliable information is essential to the very existence and survival of the society. Each person, in one
way or another and on daily basis, make economic decisions. The decision-makers relies on
information provided by others. Clearly, wrong or misleading information or input will result in a
less effective decisions. That is why independent audit came into the picture. Through audit report,
CPAs can tell decision makers that the information they are relying on constitutes a fair picture of
what is “really happening.”
References

Escala and Bercasio (2021). Auditing and Assurance Services: Theory and Principles. 2021 Ed. Escala
Publishing House