OVERVIEW OF AUDITING

LEARNING OBJECTIVES

Explain the Differentiate

Describe the nature
Trace the evolution objective and between
and limitations of
of auditing. purpose of accounting and
an audit.
auditing. auditing.

Cite the theoretical

Identify the types Describe the Identify the general
framework of
of audit and financial statement principles of an
auditing and key
auditors. audit process. audit.
audit concepts.

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EVOLUTION OF AUDITING

Medieval
Ancient
and 17th – 19th Industrial Early 20th World War Auditing
Greece and
Renaissance Centuries Revolution Century II up to 80’s Today
Rome
Periods

• Audit Body • Auditing by • Commissioners • “Shareholder • American audits • More audit • Risk-based audit
manors for Auditing the audits” vs. British audits sampling, less approach
• Auditor of the Public Account • Independent • Audit detailed checking • Internal control
Exchequer in • Comptroller and auditor’s report objectives • Study /evaluation framework
England Auditor General • Audit sampling • Audit of internal (COSO)
• Auditors of the • Exchequer and techniques control
Imprest under Audit • Wording of • Systems-based
Queen Elizabeth I Department opinion auditing
• Audit risk

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 • an assurance engagement aimed
to provide high level of assurance
that subject matter has met
appropriate criteria in all material
WHAT IS AN respects
▪ Subject matter – statements of
AUDIT? financial condition, financial
performance and cash flows
▪ Criteria – PFRS for recognition,
measurement, presentation
and disclosure

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 • to ascertain fairness, integrity,
authenticity and reliability of
client’s financial statements
WHY IS AN • to enhance degree of confidence
of intended users in financial
AUDIT statements through expression of
an opinion by auditor on whether
PERFORMED? financial statements are prepared,
in all material respects, in
accordance with applicable
financial reporting framework

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THE ROLE OF
AUDITING

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AUDITING DEFINED

“… 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
to interested users.”
- American Accounting Association

Encompasses two processes investigative reporting

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ANOTHER
DEFINITION
• Structured process involving application
of analytical skill, professional judgment
and professional skepticism; using
appropriate forms of technology and
adhering to a methodology; in
compliance with relevant technical
standards and required standards of
professional ethics
- International Federation of Accountants

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 • An independent discipline that
relies on results of accounting and
other financial information
• Supports notion of accountability,
stewardship, and agency
NATURE OF • Independent verification of
AUDITING accounting information to
determine adherence to
accounting principles and evaluate
accuracy and reliability of financial
statements

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 • Undertaken to enhance users’ degree of
confidence in financial statements but not
to guarantee accuracy of assertions in
financial statements
• Absolute assurance cannot be provided
LIMITATIONS due to
1. Use of testing (sampling risk)
OF AN 2. Error in application of judgment
(non-sampling risk)
AUDIT 3. Reliance on management’s
representations
4. Inherent limitations of internal
control
5. Generally persuasive nature of
evidence

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 • Objective
• To enable the auditor to
express an opinion on the
fairness with which the
OBJECTIVE financial statements present, in
all material respects, the
AND financial position, results of
operations, and cash flows in
PURPOSE accordance with an identified
financial reporting framework
OF AUDITING • Purpose
• To enhance the degree of
confidence of intended users in
the financial statements

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 • To obtain reasonable assurance
about whether the financial
statements as a whole are free from
OVERALL material misstatement, whether due
to fraud or error, thereby enabling
OBJECTIVES OF the auditor to express an opinion on
INDEPENDENT whether the financial statements are
prepared, in all material respects, in
AUDITOR accordance with an applicable FRF
• To report on the financial
(PSA 200) statements, and communicate as
required by the PSAs, in accordance
with the auditor’s findings

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ACCOUNTING VS. AUDITING
Accounting
Recording of transactions and
preparation of financial statements
Accountant must have thorough
knowledge of accounting principles,
rules, and standards.
Auditing
Determining whether recorded accounting
information fairly reflects economic events
that occurred
Auditor must have expertise in accumulation
and interpretation of audit evidence, in
addition to knowledge of accounting rules.
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 • According to type of auditor
performing the engagement
• External audit
• Internal audit
TYPES OF • Government audit
AUDIT • According to subject matter/nature
of data or assertion being audited
• Financial statement audit
• Operational audit
• Compliance audit

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 • External or independent auditor
(practitioner)
• engaged by another entity to
perform examination of
entity’s financial statements
TYPES OF and to express an opinion on
its fair presentation in
AUDITORS accordance with identified FRF
• responsible also to the public
who rely on auditor’s opinion
regarding the financial
statements

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 • Internal auditor
• employed by entity and performs
independent appraisal activity
within the organization for review
of accounting and other
operational matters as basis for
TYPES OF constructive service to
management
AUDITORS • determines adherence to
prescribed procedures and assists
management achieve operational
efficiency and effectiveness by
identifying existing deficiencies
and recommending corrective
measures

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 • Government auditor (examiner)
• employed by government agencies
that perform independent
examination into how agencies
handle their financial
TYPES OF responsibilities of administering
government funds, achieving
AUDITORS purposes and ensuring that
programs and activities are
conducted in efficient and
economic manner
• Commission on Audit
• Bureau of Internal Revenue

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TYPES OF AUDIT BY NATURE OF DATA OR
ASSERTION AUDITED

Type Assertions/Data Criteria

Financial Financial statements are fairly Applicable financial
statement audit presented reporting framework

Operational or performance Management

Operational audit
data objectives

Compliance with applicable Law, regulation or

Compliance audit
law, regulation, policy management policy

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FINANCIAL STATEMENT AUDITING
Notes to FS

Assertions about Statement of

economic actions Cash Flows
and events
Statement of
Income
Statement
of Financial
Position

Objective Obtains and Other

outsider evaluates evidence communication

Knowledge of client’s Ascertains degree Audit

business, observation of of correspondence report
Independent physical assets, inquiry
Auditor of manager,
confirmation from
outsiders, inspection of
documents

FRF

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 Perform Tests of
Controls and Reassess
Control Risk

Phase 2
Phase 1

Obtain understanding Perform

Plan the audit of internal control and substantive tests
assess control risk

Complete the
Issue Audit Report
audit

Phase 3

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 1. Compliance with relevant ethical
requirements, including those
GENERAL relating to independence
PRINCIPLES 2. Conduct of audit in accordance with
PSAs, including applicable PAPSs
GOVERNING 3. Exercise of professional judgment in
planning and performing the audit
AUDIT OF 4. Obtaining sufficient appropriate
FINANCIAL evidence

STATEMENTS 5. Planning and performing the audit

with attitude of professional
skepticism

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 Integrity

Objectivity
FUNDAMENTAL
Professional Competence and Due
ETHICAL Care
PRINCIPLES
Confidentiality

Professional Behavior

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 • For audit and review engagements,
FUNDAMENTAL the Code also provides conceptual
framework approach for
ETHICAL Independence, comprising of
PRINCIPLES • Independence of mind
• Independence in appearance

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 1. Verifiability of financial data
2. Auditor independence with respect
to financial statements under audit
3. Absence of long-term conflict
between auditor and management
THEORETICAL 4. Reliable financial statements under
effective internal control system
FRAMEWORK 5. Fair presentation of financial
OF AUDITING statements based on consistent
compliance with applicable FRF
6. Continuing validity of past knowledge
and experience, in absence of
contrary conditions
7. Public benefit of audit

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 Reasonable assurance

Materiality

Audit risk
KEY AUDIT
CONCEPTS Audit evidence

Professional judgment

Professional skepticism

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FURTHER READINGS
1. Introduction to Assurance and
Financial Statement Auditing
https://slideplayer.com/slide/4711029/

2. Overview of Auditing
https://hahuzone.com/overview-
auditing

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SELF-TEST QUESTIONS
1. In your own words, explain briefly the following
key phrases in the definition of auditing:
a. systematic process
b. assertions about economic actions and events
c. degree of correspondence between these
assertions and established criteria
2. Compare and contrast accounting and auditing.
3. Why is an audit performed?
4. Cite one limitation of an audit. Give an example
to support your answer.
5. Discuss the concept of professional skepticism.

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 For each of the following descriptions, indicate which type

LEARNING ACTIVITY 1
of audit best characterizes the nature of the audit being
conducted. Also indicate which type of auditor is likely to
perform the audit. Briefly explain your answers.
1. Evaluate a company’s Information and Communication
Technology Department in terms of the effective and
efficient use of corporate resources.
2. Determine the fair presentation of an entity’s
financial statements.
3. Audit the tax return of a real estate development
company.
4. Evaluate the policies and procedures of the Food and
Drug Administration in terms of bringing new drugs to
market.
5. Examine the financial records of a division of a
corporation to determine if any accounting
irregularities have occurred.
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LEARNING ACTIVITY 2
Fast forward 2022. You are in a reunion of high school classmates. There is much food and the drinks flow
freely. Many of your classmates joined the sciences and engineering fields; some have become doctors;
others are lawyers and still others are entrepreneurs. You alone joined the accountancy profession.
How would you reply under each of the following independent scenarios?
1. Lani, one of your teammates in spelling competitions, is now a high school teacher. She says,
“Audits? Its’ not surprising that you became an accountant … auditor … whatever. With all your
talents in mathematics…”
2. Annie, your classmate since grade school and who is now a doctor commented on your line of work
as follows: “I don’t know anything about how an auditor performs his or her work. It seems that
there is no scientific approach to the audit process”. She continued, “All I know is that you auditors
are on the lookout for fraud … other auditors prepare income tax returns for us professionals.”
3. Basil is now a lawyer. He was the class salutatorian, with a very competitive nature. He remarked,
“My friend, as class valedictorian, you should have joined a more useful profession. Look at me… I
serve the public. Look at you … audits? Bah! They are not productive. An audit has nothing to do
with the GNP or the public interest. Rather than create value, auditors like you simply check on
what someone else has done”.

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Professional
accountants
Stewards of transparency and trust

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