Auditing and Assurance Principle

CPA’s Professional Responsibility

Presented by: Arlen Mae C. Rayos

Philippine Standard on Auditing (PSA)

 deals with the independent auditor’s overall responsibilities when conducting an audit of
financial statements in accordance with PSAs.

 it sets out the overall objectives of the independent auditor, and explains the nature and scope
of an audit designed to enable the independent auditor to meet those objectives.

Overall Objectives of the Auditor

 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.

 To report on the financial statements, and communicate as required by the PSAs, in

accordance with the auditor’s findings.

 In all cases when reasonable assurance cannot be obtained and a qualified opinion in the
auditor’s report is insufficient in the circumstances for purposes of reporting to the intended
users of the financial statements.

Definition of Terms:

Applicable Financial Reporting Framework - The financial reporting framework adopted by management
and, where appropriate, those charged with governance in the preparation of the financial statements
that is acceptable in view of the nature of the entity and the objective of the financial statements, or
that is required by law or regulation.

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.

i. Sufficiency of audit evidence is the measure of the quantity of audit evidence. The
quantity of the audit evidence needed is affected by the auditor’s assessment of the
risks of material misstatement and also by the quality of such audit evidence.

ii. Appropriateness of audit evidence is the measure of the quality of audit evidence; that
is, its relevance and its reliability in providing support for the conclusions on which the
auditor’s opinion is based.

Audit risk - The risk that the auditor expresses an inappropriate audit opinion when the financial
statements are materially misstated. Audit risk is a function of the risks of material misstatement and
detection risk.
Detection risk - The risk that the procedures performed by the auditor to reduce audit risk to an
acceptably low level will not detect a misstatement that exists and that could be material, either
individually or when aggregated with other misstatements.

Financial statements - A structured representation of historical financial information, including related

notes, intended to communicate an entity’s economic resources or obligations at a point in time or the
changes therein for a period of time in accordance with a financial reporting framework.

Historical financial information - Information expressed in financial terms in relation to a particular

entity, derived primarily from that entity’s accounting system, about economic events occurring in past
time periods or about economic conditions or circumstances at points in time in the past.

Management - The person(s) with executive responsibility for the conduct of the entity’s operations. For
some entities in some jurisdictions, management includes some or all of those charged with governance,
for example, executive members of a governance board, or an owner-manager.

Misstatement - disclosure of a reported financial statement item and the amount, classification,
presentation, or disclosure that is required for the item to be in accordance with the applicable financial
reporting framework. Misstatements can arise from error or fraud.

Premise, (relating to the responsibilities of management and, where appropriate, those charged with
governance, on which an audit is conducted) - That management and, where appropriate, those charged
with governance have acknowledged and understand that they have the following responsibilities that
are fundamental to the conduct of an audit in accordance with PSAs.

Professional judgment - The application of relevant training, knowledge and experience, within the
context provided by auditing, accounting and ethical standards, in making informed decisions about the
courses of action that are appropriate in the circumstances of the audit engagement.

Professional skepticism - An attitude that includes a questioning mind, being alert to conditions which
may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

Others:

 Access Controls – procedures to restrict access to online terminal devices, programs, and data.
 Accounting Estimate – an approximation of the amount of an item in the absence of a precise
means of measurement.
 Accounting System – the series of tasks and records of an entity by which transactions are
processed as a means of maintaining financial records.
 Attendance – the act of being present during all or part of a process being performed by others.
 Component – a division, branch, subsidiary, joint venture, associated company, or other entity
whose financial information is included in financial statement audited by the principal auditor.
 Documentation – the material (working paper) prepared by and for, or obtained, and retained
by the auditor in connection with the performance of the audit.
 Environmental risk – the risk of material misstatement in the financial statements that may be
due to environment matters.
 Error – an unintentional mistake in financial statement.
 Fair Value – the amount at which an asset could be exchanged or a liability could be settled
between knowledgeable and willing parties in an arm’s length transaction.
 Fraud – an intentional act by one or more individuals among management, employees or third
parties which results in a misrepresentation of financial statements.
 Government business enterprise – business which operate within the public sector ordinarily to
meet a political or social interest objective.
 Governance – the role of persons entrusted with the supervision, control, and direction of an
entity.
 IT Environment – policies and procedures that the entity implements and the IT infrastructure
and application software that it uses to support business operations and achieve business
strategies.
 Inquiry – the act of seeking information of knowledgeable persons inside or outside the entity.
 Land Area Network (LAN) – a communication network that services users within a confined
geographical area.
 Material inconsistency – exists when other information contradicts information contained in the
audited financial statements.
 Materiality – information id material if its omission or misstatement could influence the
economic decisions of users taken on the basis of the financial statements.
 Modified auditor’s report – an auditor’s report is modified if either an emphasis of matter
paragraph(s) is added to the report or if the opinion is other than unqualified.
 Planning – developing a general strategy and a detailed approach for the expected nature,
timing and extent of the audit.
 Related party transaction – a transfer of resources or obligations between related parties,
regardless of whether or not a price is charged.
 Segment Information – information in the financial statements regarding distinguishable
components or industry and geographical aspects of an entity.
 Service Organization – an organization that provides services to clients such as one that
executes transactions, maintains related accountability, records transaction, and processes
related data; as a computer information system service.
 Small Entity – an entity where there is concentration of ownership and management in a small
number of individuals, often a single individual; with few sources of income; unsophisticated
record – keeping, and limited internal control, with the potential for management over- ride of
controls.
 Subsequent Events – events that occurs after prior end that provide further evidence of
conditions that existed at period end or that are indicative of conditions that arose subsequent
to period end.
 Tolerable error – the maximum error in the population that the auditor is willing to accept.
 Transaction logs – reports that are designated to create an audit trail for each on-line
transaction.
 Uncertainty – a matter whose outcome depends on future actions or events not under the
direct control of the entity but which may affect the financial statements.
 Walk through test – tracing a few transactions through the accounting system (from
authorization to execution to recording to custodianship; author’s addition).
  Wide area network (WAN) – Communication network that transmits information across an
expanded area such as between plant sites,cities, and nations.
 Working papers- a record of the auditor’s planning, nature, timing and extent of the auditing
procedures performed, and result s of such procedures and the conclusions drawn from the
evidence obtained.
Code of Ethics for Professional Accountants in the Philippines
(Effective January 1, 2004)
OBJECTIVES:
Recognizes that the objectives of the accountancy are to :
 Work to the highest standards of professionalism.
 Attain the highest levels of performance; and
 Generally, meet the public interest requirement of the profession.

FUNDAMENTAL PRINCIPLES
 In order to achieve the objectives of the accountancy profession, the professional accountant is
enjoined to observe a number or these fundamental principles:

 Integrity and objectivity

 Professional competence and due care

 Confidentiality

 Professional behavior

 Technical standards

Applicable Provisions of the Code

The Code is divided into three parts:

1. Applicable to all Professional Accountants

2. Applicable to Professional Accountants in Public Practice

3. Applicable to Employed Professional Accountants

Auditor’s Legal Liability

Consideration of Laws and Regulations in an Audit of Financial Statements
 The auditor should recognize that noncompliance by the entity with laws and regulations may
materially affect the financial statements.

 Noncompliance refers to acts of omission or commission by the entity being audited, either
intentional or unintentional, which are contrary to the prevailing laws.

 An audit cannot be expected to detect noncompliance with all laws and regulation.
 When noncompliance is detected, the implications on the integrity of management or
employees and the effect on other aspects of the audits should be considered.

Management’s Responsibility for Compliance with Laws and Regulation

 Policies and procedures that assist management in the prevention and detection of
noncompliance include:

a. Monitoring legal requirements and ensuring that operating procedures meet the requirements.

b. Instituting and operating appropriate systems of internal control.

c. Maintaining a register of significant laws the entity must comply within its particular industry.

d. Maintaining a record of complaints;

e. Engaging legal advisors to assist in monitoring legal requirements

f. Assigning appropriate responsibilities to an internal auditor or an audit committee.

Legal Concepts Related to Auditor’s Liability

 The auditor’s legal liability arises primarily from his failure to exercise due professional care in
the performance of an audit and in the preparation of the audit report.

 The auditor is expected to exercise the due case that a prudent person and others in the
profession would perform under similar circumstances.

 The auditor has legal responsibilities to users of financial statements who relied on the opinion
he expressed thereon.

 The auditor’s legal liability depends upon the degree of omission or commission attribute to
him.

 Ordinary negligence implies absence of reasonable care expected under the circumstances.

 The Auditor shall not disclose any confidential information without the specific consents of the
client.

 The partners in a public accounting firm are jointly liable for civil actions against a partner.

Legal Liability of the Independent Auditor to Client:

 A CPA who fails to exercise due professional care in the performance of an audit and in the
preparation of an audit report has a legal liability to the client.

 An honest error does not constitute negligence but if an undetected fraud is so widespread and
of such magnitude that the financial statements are rendered materially misstated, then the
auditor is deemed guilty of negligence.

 If the auditor is found guilty, client may recover any loses including the audit fees because of the
breach of contract.
 Legal Liability of the Independent Auditor to Third Parties:

 The auditor has legal liability to all foreseeable users of financial statements for losses caused by
their reliance on the opinion he expressed thereon.

 Creditors, investors, banks, and legally liable for the opinion he expressed when there is no basis
for an opinion.

 Failure to detect a widespread fraud constitutes negligence.

Responsibility in Tax Practice

 A CPA tax practitioner has the primary responsibility to ensure that his clients pay the right kind
and the proper amount of tax.

 The tax practitioner provided the service is rendered with professional competence and is
consistent with the law, without impairing his integrity and objectivity.

 The professional accountant should advise the client/employer that the tax returns are properly
prepared on the basis of information received but the responsibility for the contents of the tax
returns rests primarily with the client/employer.

Minimizing Exposure to Legal Liability

 A professional accountant in the public practice of accounting should establish quality control
policies and procedures to minimize his exposure to legal liability.

 He should thoroughly investigate the integrity of a prospective client, the conduct of its
business, and integrity of its management and void accepting clients with doubtful management
integrity in industries with a high risk of litigation.

 The professional accountant should exercise extreme care in the audit of clients in financial
difficulties and conduct the audit with the appropriate professional skepticism.