AUDI 21

Auditing and Assurance

Principles
 Module 1:
Introduction to Assurance
and Auditing Services
Objectives for today's session

To discuss the demand for auditing and assurance services

To provide an overview of the Professional Practice of

Accountancy
To describe the Public Accoutning Profession Environment
Where do you see yourself five

years from now?

Certified Public Accountant (CPA)
 Assurance Non-assurance

Audit of FS Tax Services

Examination of Internal Control Management Consultancy (fraud

Trust Services investigation and IT consultation)

Review of FS or Other Information Compilation services
Risk Advisory Services Agreed-Upon Procedures
Others Others
 AUDI 21
A

Assurance
Independent professional services that improve the quality of

information, or its context, for decision makers.

Services that are designed to enhance the degree of confidence in the

information.
 AUDI 21

Assurance
A

Elements:
three-party relationship (practitioner, responsible party and

intended users)
subject matter (e.g. financial or management reports)
criteria (standards)
evidence (supporting documents)
written report of assurance
 AUDI 21
A

Attestation
An assurance service in which attestor (an independent accountant)
offers assurance about subject matter (e.g., compliance with debt
covenant) that is the responsibility of another party (e.g.
manufacturer)

An independent practitioner engaged to issue a report on subject

matter, or an assertion about a subject matter, that is the
responsibility of another party.
 AUDI 21
A

Attestation Services
Agreed-Upon Procedures Engagement - an attestation services in

which the independent accountant is engaged to report on an item

using procedures the contracting parties agreed to.

Review engagement - an attestation service in which the independent

accountant perform analytical procedures, make inquiries of client

personnel and issues a report taht provides limited (sometimes called

negative) assurance.
 AUDI 21
A

Auditing
A systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain
degree of correspondence between these assertions and established
criteria and communicating the results to interested users.
A systematic process
Means an ordered or structured series of steps

Objectively
Impartial attitude must be maintained and conduct the audit without bias

Obtaining and evaluating evidence about assertions

Test the validity of the assertions/representations by gathering evidence and
performing audit procedures to test these assertions.

Corresponding criteria
Compliance with standards and other frameworks

Communicating Results / Reporting

A timely report is a relevant report
 Employed by the
Individual
business

Involved in
Partner/Staff of Commerce &
Auditing Firms Public Practice decision making
Industry
prepares the
Independent Financial
Statements

PROFESSIONAL ACCOUNTANT

Employed by the
Government

Appointed
Government Academe Professor/Instructor
Involved in
decision making

Civil Service
Eligible
Auditing
 Types of Auditors
External Auditors - FS Audits
Independent auditors who
perform audit of client's
historical FS. (i.e. SGV, individual
audit practitioners)
Forensic Auditors - Forensic Audits
Hired by clients who perform investigations
on fraud, crime embezzlement or
reconstructing incomplete accounting
records. (i.e. CrFA)
Government Auditors - Compliance and
Operational Audits
Independent government body who
audit government offices/agencies (i.e.
COA, BIR, SEC, BSP etc.)
Internal Auditors - Internal and Operational Audits
Hired by the client as a consultant to
check FS, efficiency of operations
and effectiveness of internal
controls.
General Principles governing the audit

of Financial Statement
Code of Professional Ethics (CPE) - Auditors must comply

to CPE in order to retain public confidence and credibility

of auditors.
Philippine Standards on Auditing (PSA) - Basic principles

and essential procedures which Auditors must follow.

Professional Skepticism - Auditor must make critical

assessment with a questioning mind.

Reasons/Sources why there is a need

for an independent FS Audit

Conflict between management and users - Overly optimistic

FS to impress users.
Expertise - Some users are not equipped with basic

knowledge on reading the FS.

Remoteness - Users have no direct access to the financial

records
Financial Consequences - Misleading FS due to fraud or

errors.
Let's Assess Your Learnings!

Answer Exercise 2 of Chapter 2

CPA
Pre-Qualification Requirements
Degree in Bachelor of Science in
Accountancy.

Licensure Exam Certified

Apply and take the exam given by
PRC - Board of Accountancy Public
Legal and Regulatory Requirement
Accountant
Take the Oath, Apply for a license and
registration
 Life long
Integrity
Learning
Core Values
(LORICE) Objectivity Competence

Enable the CPAs to retain their

unique character and value as Relevance to
Commitment to

Global
Excellence
they embrace the changing Marketplace
dynamics of the global economy.
 Synthesizing

Communication
Intelligence to

Skills Insights
Core
Leadership

Integration and
Competencies
(CLASIC)
Collaboration
Skills

Critical-

Combination of human skills knowledge

Anticipating
Thinking and

and Serving
Problem-
and technology to deliver valued outputs
Evolving Needs Solving Skills
Regulatory and Professional Org
Regulatory Agencies

Professional Regulation Commissions (PRC)

Professional Regulatory Board of Accountancy (BOA)

Securities and Exchange Commissions (SEC)

Commission on Audit (COA)

Bureau of Internal Revenue (BIR)

 Regulatory and Professional Org

Professional Organizations

Philippine Institute of CPAs (PICPA)

Sectoral Organizations:
Association of CPAs in Public Practice (ACPAPP)
Association of CPAs in Education (ACPAE)
Association of CPAs in Commerce and Industry (ACPACI)
Government Association of CPAs (GACPA)
 Regulatory and Professional Org

Standard-Setting Bodies

International Federation of Accountants (IFAC)

International Accounting Standards Board (IASB)

Financial Reporting Standards Council (FRSC)

International Auditing Practices Committee (IAPC)

Auditing and Assurance Standard Council (AASC)

 Assignment:

Answer Multiple Choice Questions of

Chapter 2 and 3
 AUDI 21
Auditing and Assurance

Principles
Recap...
Certified Public Accountant (CPA)
to become CPA, one must meet certain education requirements, pass the

CPA licensure examination and meet other legal and regulatory

requirements
Competent individuals (Core Competencies) and possess values (Core Values)
Can practice its profession in public, commerce/industry, academe, and

government (scope of practice)

provide assurance and non assurance services
can become an external auditor, internal auditor, government auditor, and

forensic auditor who does financial audit, internal/operational audit,

compliance audit, and forensic audit, respectively.

Recap...
An assurance service is an independent professional service to improve

the quality of information for decision makers. An attestation service is

a form of assurance service in which the CPA firm issues a written

conclusion about an assertion made by a third party. Audit services are

a form of attestation service, in which the auditor expresses a written

conclusion about the degree of correspondence between information

and established criteria.

Objectives for today's session

Continue discussing the Public Accounting Profession

Environment
Discuss the Management of a Public Accounting Practice
Describe Professional Ethics
 Let's discuss Case 4 of Chapter 3
Michael Diaz, owner of Diaz Company, applied for a bank loan and was

informed by the banker that audited financial statements of the business had to

be submitted before the bank could consider the loan application. Michael then

retained Arnold Benamer, CPA, to perform an audit. Michael informed Arnold

that audited financial statements were required by the bank and that the audit

must be completed within three weeks. Michael also promised to pay Arnold a

fixed fee plus a bonus if the bank approved the loan. Arnold agreed and

accepted the engagement.

 The first step taken by Arnold was to hire two accounting students to

conduct the audit. He spent several hours telling them exactly what to do.

Arnold told the students not to spend time reviewing controls but instead

to concentrate on proving the mathematical accuracy of the ledger

accounts and summarizing the data in the accounting records that

support Diaz Company's financial statements. The students followed

Arnold's instructions and after two weeks gave Arnold the financial
statements, which did not include any notes. Arnold reviewed the

statements and prepared an unqualified audit report. The report,

however, did not refer to Financial Reporting Standards.

 AUDITOR's LEGAL

LIABILITY
To...
Client
Third Parties

For...
Undetected improper or inadequate disclosure
Undetected inappropriate valuation
Legal Concepts Related to Auditor's Liability

Due professional care / prudent person

concept
Sources of Responsibility (common law or

statutory law)
Degree of Wrongdoing (ordinary negligence,

gross negligence or constructive fraud, and

fraud)
 AUDITOR's DEFENSE

AGAINST CLIENT SUITS

Lack of duty to perform the service
Audit was performed using reasonable care
Absence of causal connection
Client owns actions contributed to the loss
Statute of limitation on the action has expired
AUDITOR's DEFENSE AGAINST

THIRD PARTY LAWSUIT

Nonnegligent performance (conducted based on standards)
Lack of privity of contract (not liable to ordinary negligence)
Absence of causal connection
Statute of limitation on the action has expired
It is important to remember that while auditors have important

responsibilities, management is primarily responsible for

maintaining effective internal control and for ensuring the

fairness of the company's financial statements.

The auditor's responsibility to provide reasonable assurance

with respect to errors, fraud

and illegal acts clearly shapes the

auditor's environment and the work the he or she performs.

 Challenges

CPAs are called to make Professional Judgments

Increasingly complex accounting transactions
Some people still think that Auditors attest material fraud
Complexity of computer system
Globalization as companies expand their operations outside the country
Time pressure in completing audit tasks
Retain clients as most of the business (usually SMEs) cannot offer high

retainer's fee.
 Credibility Crisis

To address the said crisis...

CPA can do public practice once they are also accredited by BOA
CPA can sign the AFS once they are accredited by both BOA and BIR,

depending on the type of Corporation it may also require accreditation with

SEC
CPAs are all bound to comply with the Revised Code of Ethics for

Professional Accountants
BOA conduct Quality Assurance Review (QAR) for those CPA who will renew

their accreditation
Management of Public

Accounting Practice

Public Accounting Firm

Organization

please refer to page 67 of your book

Philippine System of
Quality Management
(PSQM)

 PSQM
Replaces Philippine System of Quality Control (PSQC)
Firms are required to have systems of quality management designed and

implemented by December 15, 2022

Components (MERGER IA):
Monitoring and remediation process
Ethical Requirements that are relevant
Risk assessment process
Governance and leadership
Engagement performance
Resources
Information and communication
Acceptance and continuance of client relationships
 PSQM
Objectives:
- provide reasonable assurance that firms Fulfill responsibilities in accordance

with professional standards

- issued engagement report is appropriate
Knowledge Check
A system of principles or rules
 A set of moral principles or

values that govern the actions

and decisions of an individual

or group.
Give one category of ethics
 Professional Ethics
Ethical behavior by professionals is necessary to maintain public confidence in

the profession, and in the services provided by members of that profession.

The ethical requirements for CPAs are similar to the ethical requirements of other

professions. The major difference between other professional groups and CPAs is

independence.

Independence in fact exists when the auditor is actually able to maintain an

unbiased attitude throughout the audit, whereas independence in appearance is

dependent on others’ interpretation of this independence and hence their faith in

the auditor.
The public interest is defined as the community’s collective well-being. CPAs

handle ethical conflicts best by acting with integrity, objectivity, and due

professional care and by having a genuine interest in serving the public.

An ethical dilemma is a situation that a person faces in which a decision must be

made about the appropriate behavior.

Ethical responsibility for acts of non-CPAs under a CPA’s supervision falls under

the latter’s jurisdiction. A CPA shall not permit others to carry out on his behalf,

either with or without compensation, acts which, if carried out by the CPA, would

place him in violation of the Code of Ethics.

Scenario:

Shaina works as a manager in the Manila office of an international CPA firm. His

father has just taken a position as a purchasing agent for one of the CPA firm's

Manila clients. Has Shaina's independence been impaired with respect to this

audit client? Has the CPA firm's independence been impaired if Ben does not work

on the audit?
 Assignment:

Answer Multiple Choice Questions of

Chapter 4 and 5
Thank you
and Stay
Safe!