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June 3, 2020

Intro. to Auditing

Module Chapters:

Chapter 1 Introduction to Auditing

Page 1 of 6
 Auditing Theory

TOPIC 1 | Basic Concepts

Definition Features of an audit (SOACC)

1. Systematic process
2. Objective gathering and evaluation of evidence
3. Addresses assertions
4. Comparison of assertions to criteria
5. Communication of results to users

Audit Process

2 major processes

1. Investigation - gather evidence about assertions Thru: Providing

opinion contained
2. Reporting - communicate results to users
in an Audit Report
Investigation Independent auditor examines reliability of assertions

But, engagements not requiring independence

Independence issues (e.g., compilation or FS prep.) may be accepted

1. Auditor is not independent - reject the audit engagement

2. Audit has been accepted but auditor is found not to be independent
- withdraw from the engagement, or
- disclaim an opinion, if withdrawal is not possible

Threats to independence

1. Reduce the threat to an acceptable level

2. Eliminate the threat - if reduction is not acceptable

Example (simplified)

A and B are part of the audit team assigned to Billie Company, but B is
found to have a direct investment in Billie Company. Thus, B is not
independent.

To accept the audit, or continue if already accepted:

1. B must be removed from the team.
2. B must dispose of his investment in Billie Company.
3. Reject the audit engagement, as deemed appropriate.

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 Auditing Theory

Assertions Claims or assertions being examined

Ex: The Notes to the FSs states that “the
In audit of financial statements:
inventories are measured at the lower of
cost and net realizable value”.
1. Explicit - clearly stated This is an explicit valuation assertion.
2. Implicit - not expressly stated
Ex: When management presents
P100,000 Sales in the SCI,
Groups of assertions management claims,
even without an express statement to
About classes of transactions COCAC that effect, that these sales were
recorded in their proper period (cutoff
1. Completeness
2. Occurence
3. Classification - proper account title
4. Accuracy - proper amount
5. Cutoff - proper period

About balances at end of period VaCER

1. Valuation and allocation

2. Completeness
3. Existence
4. Rights and obligation

Note: Occurrence is to transactions while existence is to balance.

Income statement Balance sheet
deals with TRANSACTIONS deals with BALANCES
Examples

 Occurrence of Purchases (trans.), Existence of Inventory (bal.)

 Occurrence of Sales (trans.), Existence of Receivable (bal.)

About presentation and disclosure COCA

1. Completeness
2. Occurrence and rights and obligations
3. Classification and understandability
4. Accuracy and valuation

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 Auditing Theory

Audit of external financial statements The Philippine Standards on Auditing (PSAs)

are not a set of rules or procedures.
The most common type of audit They serve as minimum guide to the auditor.

1. Management prepares FSs in accordance with PFRS

2. Auditor examines and evaluates fairness of FSs in accordance with
PFRS:
 Using PSAs - minimum guide in conducting audit
 Applying professional judgment

TOPIC 2 | Parties to Audit

Audit as an assurance engagement In external audit, this refers to
the assertions in the FSs
Parties in an assurance engagement RIP

1. Responsible party - responsible for the subject matter

2. Intended users - for whom the report is prepared
3. Practitioner - professional accountant To be called practitioner -
must be in Public Practice
Parties in audit

1. Client management - the responsible party

2. Addressee - the intended users
3. Auditor - the practitioner

Management
1. Prepares FSs in accordance with PFRS
2. Responsible for fair preparation and presentation
3. Responsibility is exclusive and cannot be shared with the auditor
4. Responsibility is not reduced even if the FSs have been audited

Illustration (simplified)

The auditor’s opinion is that the FSs are presented fairly based on
PFRSs. It was found out that the FSs contain material
misrepresentations.

1. Management - responsible for the misrepresentations

2. Auditor - responsible for the incorrect opinion

Addressee Users of the audit report and the audited FSs

There could be various users, but the
1. Independent of management audit report is addressed to them as
2. The BOD, or shareholders, or both they have major interests in the report
3. May also include potential investors, suppliers, bankers, etc.

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 Auditing Theory

Management as user

1. Management’s main source of information for decision making is

internal information and not the FSs.
The purpose of 3-party relationships
2. Management may also use the FSs. in audit is defeated when the report
3. Management may also be: has no other users besides
 One of the intended users, but management
 Shall not be the only intended user
PICPO (as required by the COE)
Auditor The practitioner Professional behavior
Integrity
1. Preferrably hired by the: Confidentiality
 Audit Committee of BOD, or Professional competence & due care
 Shareholders Objectivity
2. Must be independent
3. Must observe all the other ethical requirements
4. Must follow the minimum guide (PSAs)

Provides opinion
For example, since an audit involves
Bases of opinion per PSA 700 CRIES gathering or evidence, the auditor is
prevented from providing an opinion
1. Compliance with PSAs if sufficient and appropriate evidence
2. Responsibility as an auditor has not been obtained.
3. Independence Evidence is a main basis for opinion.
4. Ethical requirements compliance
5. Sufficient appropriate evidence

TOPIC 3 | Objective of audit

Purposes Auditor’s opinion - makes audit report valuable

Objectives of audit of FSs

1. Enhance users’ confidence on the FSs

2. Improve reliability of FSs
3. Improve quality of FSs
4. Improve context and usefulness of information
Because of inherent limitations, like
Not objectives of audit fatigue, an audit is not designed to
detect all material misstatements.
1. Attest to accuracy of FSs For this reason:
2. Attest to the effectiveness of management 1. High level of assurance is provided
3. Assure future viability of the entity 2. Absolute assurance cannot be
provided

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 Auditing Theory
Demand for audit
Reasons why audit, as a service, exist VOCA see Chapter 1 for notes

1. Volume of transactions
2. Objectivity issues of management
3. Complexity of transactions
4. Access to information (lack thereof)

TOPIC 4 | Inherent limitations

Reasonable assurance

The opinion provided by the auditor lends reasonable assurance that the
financial statements are fairly presented.

Fairly presented - in all material respects, the FSs are in accordance

with PFRSs

Reasonable assurance
1. The level of assurance provided in audit
2. A high level of assurance
3. Not absolute
4. A positive form of assurance

Inherent limitations of audit

There is an unavoidable risk that material misstatements in the FSs

may remain undetected even if an audit has been properly conducted.

Reasons TECHNO see Chapter 1 for discussion

1. Testing or sampling procedures used

2. Error in judgment
3. Collusion by employees
4. Human limitations (e.g., fatigue)
5. Nature of evidence
6. Override by management
Complementary

Review Chapter 1 discussion notes for more details and illustration and answer its
Assessment Quiz 1 hour after studying this material and the online Module.

Summary Quizzers (downloadable) per subject will be released before the end of June in
preparation for the 1st Pre-board examinations.

Let’s learn together!

Editor’s notes:
1. The notes in this material are presented in “Quick Facts” approach to provide an overall view of the topic.
2. Details about some items are presented in Chapter 1 in our online Module.

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