Module 3

Introduction to Auditing

Reference: Chapter Two of Audit and Assurance Principle

 Learning Outcomes

After studying this module, the students are expected to:

▪ Define auditing.
▪ Enumerate and explain the different types of audit
engagements.
▪ Define the objective and scope of a financial
statement audit.
▪ Describe the limitations of an audit
 Auditing Defined

Auditing is a systematic process of objectively

obtaining and evaluating 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.
 Key Phrases in the Definition of Audits
a systematic process An audit follows a logical sequence of procedures.
Objectivity means a combination of impartiality, intellectual honesty and a
freedom from conflicts of interest. An audit requires the gathering and
objectively obtaining
evaluation of evidence, which may come in the form of oral representations,
and evaluating evidence
written documents, electronic media, etc. A CPA cannot express an opinion
without supporting evidence to back up the opinion.
Assertions are representations of management, explicit or otherwise, that
assertions about
are embodied in financial statement components, records, or systems. The
economic actions and
CPA’s job is to obtain and evaluate evidence, which may support, or
events
contradict, the assertions of management.

degree of
Auditors use standards or benchmarks (criteria) for purposes of expressing an
correspondence
opinion on the assertions of management. In the case of audits of financial
between these
statements, the established criteria are generally accepted accounting
assertions and
principles.
established
criteria

After the audit has been completed, a CPA prepares a report which contains,
communicating the
in writing, the opinion (or disclaimer of opinion) of the CPA. In financial
results to interested
statement audits, the opinion is on the fairness of the presentation of
users
financial statements for the period under audit.
 FINANCIAL STATEMENT AUDIT

• Auditor offers assurances about

management’s financial statement
assertions

• Performed by professional accountants

(i.e., independent Certified Public Accountants)
 The Special Role of
Financial Statement Audits

• Reliability of financial information.

• CPA’s provide independent evaluations and
reports.
• CPA career is one of the most important and
most highly regarded public functions.
 TYPES of AUDITS

▪ Financial statements audits

▪ Compliance audits
▪ Operational audits
▪ Forensic audits

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 Financial Statement Audits

• This refers to the gathering of evidence on the

assertions embodied in the financial
statements of an entity and using the
evidence to determine whether the assertions
adhere to Philippine financial reporting
framework or another comprehensive and
authoritative financial reporting framework.
 Operational Audits

• Involve “a systematic review of an

organization’s activities in relation to
specified objectives for the purposes of
assessing performance (the efficiency,
effectiveness and economy of operations),
identifying opportunities for improvement,
and developing recommendations for
improvement or further action”.
 Compliance Audits

• This type of audit is used to determine

whether a person or entity has adhered to
provisions of a contract, laws and
regulations.

• Results of compliance audits are generally

reported to a specific user within the
organization.
 Internal Audits

• Is an independent appraisal function

established within an organization to
examine and evaluate its activities as a
service to the organization.

• Internal auditors are not independent in the

same sense as external auditors (because
internal auditors are employees of the
organizations whose activities they appraise).
 Government Audits

• Involves the determination of whether

government funds are being handled
properly and in compliance with existing laws
and whether the government programs of a
particular agency are being conducted
efficiently and economically.
 TYPES of AUDITORS

▪ External auditors
▪ Internal auditors
▪ Government auditors
▪ Forensic auditors

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TYPES of AUDITS

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Poll Question #1
Objectives of Independent Auditor
in the audit of Financial Statements

• To obtain reasonable assurance about whether the

financial statements as a whole are free from
material misstatement, whether due to fraud or
error

• To express an opinion on whether the financial

statements are prepared, in all material respects, in
accordance with an applicable financial reporting
framework
Responsibilities of Management and
Those Charged With Governance

• Preparation and presentation of the financial

statements in accordance with the applicable financial
reporting framework.

• Design, implementation and maintenance of internal

control relevant to the preparation and presentation
of financial statements
Responsibilities of Management and
Those Charged With Governance. . .cont’d

• Provide the auditor with all information, such as

records and documentation; other information
needed by the auditor in connection with the audit of
financial statements; and

• Unrestricted access to those within the entity from

whom the auditor determines necessary to obtain
sufficient appropriate evidence
Responsibilities of Management and
Those Charged With Governance. . .cont’d
 Limitations of Audit

The nature of financial reporting

The nature of audit procedures

Nature of audit evidence available

Timeliness of financial reporting

 Demand for Audit

• Business Risk Concept

• Information Risk Concept

➢Remoteness of Information
➢Biases and Motives of the Provider
➢Voluminous Data
➢Complex Exchange Transactions
How to reduce the information risk?
Demand for Audit
Summary
 Learning Outcomes

After studying this module, the students are expected to:

▪ Define auditing.
▪ Enumerate and explain the different types of audit
engagements.
▪ Define the objective and scope of a financial
statement audit.
▪ Describe the limitations of an audit
What’s next?