AUDITING THEORY
Fundamentals of Auditing and Assurance Services
Professional Accountant
He or she is an individual who holds a valid
certificate issued by the Board of Accountancy
(i.e., Certified Public Accountant), whether he/she
be in public practice, industry, commerce, the
public sector or education.
Scope of Practice of Professional
Accountants
Practice of Public Accountancy
This shall constitute in a person, be it in
his/her individual capacity, or as a partner or a staff
member in an accounting or auditing firm, holding
out himself/herself as one skilled in the knowledge,
science and practice of accounting, and as a
qualified person to render professional services as
a certified public accountant.
Practice in Commerce and Industry
This shall constitute in a person involved in
decision making requiring professional knowledge
in the science of accounting, or when such
employment of position requires that the holder
thereof must be a certified public accountant.
Practice in Education or Academe
This shall constitute in a person in an
educational institution which involve teaching of
accounting, auditing, management advisory
services, finance, business law, taxation and other
technically related subjects.
Practice in the Government
This shall constitute in a person who holds,
or is appointed to, a position in the accounting
professional group in government or in a
government-owned and/or controlled corporation,
including those performing proprietary functions,
where decision making requires professional
knowledge in the science of accounting, or where
a civil service eligibility as a certified public
accountant is a prerequisite.
***
Certified Public Accountant
He or she is a person who, after obtaining
the required education passes an extensive
examination and is licensed by the country to
practice as a professional accountant.
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Regulatory Government Agencies
Professional Regulation Commission (PRC)
PRC administers, implements and
enforces the regulatory policies of the National
Government with respect to the regulation and
licensing of various professions under its
jurisdiction including the maintenance of
professional standards and ethics and the
enforcement of the rules and regulations relative
thereto.
Professional Regulatory Board of Accountancy
(BOA)
This board, consisting of a chairman and
six members, is the agency that is empowered to
administer the Accountancy Law. As a licensing
agency of the government, the board is the only
body that may issue and revoke CPA certificates
and grant licenses to practice.
Securities and Exchange Commission (SEC)
This is the government agency that
regulates the registration and operations of
corporations, partnerships and other forms of
associations in the Philippines.
Commission on Audit (COA)
This is the agency that audits or determines
whether government units handle their funds
according to existing laws and whether their
programs are being conducted efficiently and
economically.
Bureau of Internal Revenue (BIR)
The BIR is responsible for enforcement of
the tax laws, rules and regulations.
Professional Organization
Philippine Institute of Certified Public
Accountants (PICPA)
PICPA is the accredited national
professional organization of CPAs. It serves all
members in the different sectors of the accounting
profession. Year-round professional development
programs and regular fellowship and sport
activities are sponsored by the association for its
members.

Fundamentals of Auditing and Assurance Services
Sectoral Professional Organizations
1. Association of CPAs in Public Practice
(ACPAPP)
2. Association of CPAs in Education (ACPAE)
3. Association of CPAs in Commerce and
Industry (ACPACI)
4. Government Association of CPAs
(GACPA)
Standard Setting Bodies
International Federation of Accountants (IFAC)
IFAC has as its mission the development
and enhancement of the profession to enable it to
provide services of consistently high quality in the
public interest. It is a non-profit, non-governmental,
non-political international organization of
accountancy bodies.
International Accounting Standards Board
(IASB)
The Board is committed to developing, in
the public interest, a single set of high quality,
global accounting standards that require
transparent and comparable information in general
purpose financial statements.
Financial Reporting Standards Council (FRSC)
As the successor of Accounting Standards
Council (ASC), FRSC’s main function is to
establish generally accepted accounting principles
(GAAP) in the Philippines.
International Auditing Practices Committee
(IAPC)
The IAPC is a standing committee of the
Council of IFAC and is responsible for the
development and issuance on behalf of the
Council, standards and statements on a variety of
audit and attests functions in order to improve the
degree of uniformity of auditing practices and
related services throughout the world.
Auditing and Assurance Standards Council
(AASC)
The AASC is the body authorized to
establish and promulgate generally accepted
auditing standards (GAAS) in the Philippines.
Philippine Standards Issued by AASC
Philippine Standards on Auditing (PSAs)
These standards are applicable to the audit
of historical financial information.
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AUDITING THEORY
Philippine Standards on Review Engagements
(PSREs)
These standards are applicable to the
review of historical financial information.
Philippine Standards on Assurance
Engagements (PSAEs)
These standards are applicable to
assurance engagements dealing with subject
matters other than historical financial information.
Philippine Standards on Related Services
(PSRSs)
These standards are applicable to related
services such as compilation engagements,
engagements to apply agreed-upon procedures to
information and other related services
engagements as specified by the AASC.
***
Philippine Standards on Quality Control
(PSQC)
These standards are to be applied for all
services falling under the AASCs engagement
standards.
Philippine Auditing Practice Statements
(PAPSs)
These provide interpretative guidance and
practical assistance to professional accountants in
implementing Philippine Standards and promote
good practice.
AASC Bulletins and AASC Alerts
These refer to a regular publication issued
by the AASC to provide guidance to auditors in the
application of PSAs. These are not part of PSAs
and do not change the requirements of relevant
PSAs.
Philippine Framework for Assurance
Engagements
This Framework defines and describes the
elements and objectives of an assurance
engagement, and identifies engagements to which
PSAs, PSREs and PSAEs apply. It does not of
itself establish standards or provide procedural
requirements for the performance of assurance
engagements.

Fundamentals of Auditing and Assurance Services
Types of Services of Professional
Accountants in Public Service
Assurance Services or Engagements
These refer to engagements in which a
practitioner expresses a conclusion designed to
enhance the degree of confidence that intended
users can have about the evaluation or
measurement of a subject matter that is the
responsibility of a party, other than the intended
users or the practitioners, against criteria.
Non-Assurance Services or Engagements
These refer to those that do not result in a
practitioner’s expression of a conclusion that
provides a level of assurance, whether negative
assurance or other form of assurance.
***
Assertion-Based Engagements
One party measures or evaluates the
subject matter against suitable criteria and makes
an assertion. Another party provides assurance on
the reliability of the assertion.
Direct Reporting Engagements
One party measures or evaluates the
subject matter against suitable criteria. The same
party reports directly on the subject matter.
Types of Assurance Engagements
Reasonable Assurance Engagement
It is an engagement that aims to reduce the
assurance engagement risk to an acceptably low
level in the circumstances of the engagement as
the basis for a positive form of expression in the
practitioner’s conclusion. “In our opinion, the
accompanying financial statements present fairly,
in all material respects, (or give a true and fair view
of) the financial position, financial performance and
cash flows of the company for the year ended in
accordance with IFRSs.”
Limited Assurance Engagement
It is one that aims to reduce the assurance
engagement risk to a level that is acceptable in the
circumstance of the engagement but where that
risk is greater than for a reasonable assurance
engagement as a basis for a negative form of
expression of the practitioner’s conclusion. “In our
opinion, nothing has come to our attention that
causes us to believe that the accompanying
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AUDITING THEORY
financial statements are not presented fairly, in all
material respects, in accordance with PAS.”
Other Assurance Services
These are assurance services performed
by professional accountants not falling under either
reasonable or limited assurance engagement
classification (e.g., annual environmental audit,
compliance with trading policies and procedures,
ISO 9000 certifications, assurance services on
information technology, etc.)
Specific Examples of Assurance
Engagements
Independent Financial Statements Audit
Engagement
It is an assurance engagement to provide a
high (reasonable) level of assurance that the
financial statements are free of material
misstatement.
Review of Financial Statements
It involves limited investigation of much
narrower scope than an audit and undertaken for
the purpose of providing limited (negative)
assurance that the statements are presented in
accordance with identified financial reporting
standards.
Other Review Engagements
Financial institutions may require debtors
to engage CPAs to provide assurance about the
debtors’ compliance with certain covenant
provisions stated in the loan agreement. Other
examples are review of investment performance
statistics for organizations such as mutual funds
and computer software review.
***
Elements of an Assurance Engagement
1. A three-party relationship
2. An appropriate subject matter
3. Suitable criteria
4. Sufficient appropriate evidence
5. A written assurance report
A Three-Party Relationship
Assurance engagements always involve
three separate parties namely, the practitioner,
responsible party and intended user. The last two
will often but not necessarily be from separate

Fundamentals of Auditing and Assurance Services
organizations (e.g., responsible party – accounting
department, intended user – board of directors).
Components of the Three-Party Relationship
Practitioner
He or she is the person who provides the
assurance to the intended users about a subject
matter that is the responsibility of another party.
Responsible Party
He or she (sometimes they) is the person
who in a direct-reporting engagement, is
responsible for the subject matter (the matter
represented by the financial statements); or in an
assertion-based engagement, is responsible for
the subject matter information (assertion or the
specific contents of the financial statements itself),
and may be responsible for the subject matter.
Intended Users
They are the person, persons or class of
person for whom the practitioner prepares the
assurance report. The responsible party can be
one of the intended users, but not the only one.
***
An Appropriate Subject Matter
It is the matter presented for consideration
in the engagement.
Forms of Appropriate Subject Matter
Financial Performance or Conditions
Examples: historical or prospective
financial position, financial performance and cash
flows.
Non-Financial Performance or Conditions
Example: operating efficiency of the
production division of an entity
Physical Characteristics
Example: capacity of a facility
Systems and Processes
Examples: an entity’s internal control or IT
system
Behavior
Examples: corporate governance,
compliance with regulation, human resource
practices
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AUDITING THEORY
***
Criteria for Appropriateness of Subject Matter
Suitable Criteria
An appropriate subject matter is:
1. Identifiable and capable of consistent
evaluation or measurement against
identified criteria; and
2. Such that the information can be subjected
to procedures for gathering sufficient
appropriate evidence to support a
reasonable assurance or limited assurance
conclusion, as appropriate.
Characteristics of Suitable Criteria
Relevance
Relevant criteria contribute to conclusions
that assist decision-making by the intended users.
Completeness
Criteria are sufficiently complete when
relevant factors that could affect the conclusions in
the context of the engagement circumstances are
not omitted.
Reliability
Reliable criteria allow reasonably
consistent evaluation or measurement of the
subject matter including, where relevant,
presentation and disclosure, when used in similar
circumstances by similarly qualified practitioners.
Neutrality
Neutral criteria contribute to conclusions
that are free from bias.
Understandability
Understandable criteria contribute to
conclusions that are clear; comprehensive, and not
subject to significantly different interpretations.
***
Ways of How Criteria Are Made Available to
Intended Users
1. Publicly
2. Through inclusion in a clear manner in the
presentation of the subject matter
information
3. Through inclusion in a clear manner in the
assurance report

Fundamentals of Auditing and Assurance Services
4. By general understanding (e.g., criterion for
measuring time in hours and minutes)
Audit Evidence
It is all the information used by the auditor
in arriving at the conclusions on which the audit
opinion is based and includes the information
contained in the accounting records underlying the
financial statements and other information.
Sufficient Appropriate Evidence
The practitioner plans and performs an
assurance engagement with an attitude of
professional skepticism to obtain sufficient
appropriate evidence about whether the subject
matter information is free of material misstatement.
Professional Skepticism
An attitude of professional skepticism
means the practitioner makes a critical
assessment, with a questioning mind, of the
validity of evidence obtained and is alert to
evidence that contradicts or brings into question
the reliability of documents or representations by
the responsible party.
Sufficiency of Evidence
Sufficiency is the measure of the quantity
of evidence.
Appropriateness of Evidence
Appropriateness is the measure of the
quality of evidence; that is, its relevance and
reliability.
Relationship between the Quantity of Evidence
Needed and the Risk of the Subject Matter
Information Being Materially Misstated
The greater the risk, the more evidence is
likely to be required (direct relationship).
Relationship between the Quantity of Evidence
Needed and the Quality of Such Evidence
The higher the quality of audit evidence,
the less may be required. However, merely
obtaining more evidence may not compensate for
its poor quality (interrelated).
Generalizations about the Reliability of
Evidence
1. Evidence is more reliable when it is
obtained from independent sources outside
the entity.
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AUDITING THEORY
2. Evidence that is generated internally is
more reliable when the related controls are
effective.
3. Evidence obtained directly by the
practitioner (e.g., observation) is more
reliable than evidence obtained indirectly or
by inference (e.g., inquiry).
4. Evidence is more reliable when it exists in
documentary form (e.g., written record vs.
oral representation).
5. Evidence provided by original documents is
more reliable than evidence provided by
photocopies or facsimiles.
Corroboration of Evidence
The practitioner ordinarily obtains more
assurance from consistent evidence obtained from
different sources or of a different nature that from
items of evidence considered individually. In
addition, obtaining evidence from different sources
or of a different nature may indicate that an
individual item of evidence is not reliable.
Materiality
It is the threshold above which missing or
incorrect information in the financial statements is
considered to have an impact on the decision
making of users.
Relationship between the Quantity of Evidence
Needed and Materiality
The higher the materiality level, the lower
the audit risk and vice versa (inverse relationship).
Relationship between the Quantity of Evidence
Collected Assurance Engagement Risk
It is the risk that the practitioner expresses
an inappropriate conclusion when the subject
matter information is materially misstated. The
lesser evidence collected, the higher the
assurance engagement risk and vice versa.
Written Assurance Report
The practitioner provides a written report
containing a conclusion that conveys the
assurance obtained about the subject matter
information.
Specific Examples of Non-Assurance
Engagements
Agreed-upon Procedures Services
It is a type of engagement in which the
party engaging the professional accountant or the
intended user determines the procedures to be

Fundamentals of Auditing and Assurance Services
performed and the professional accountant
provides a report of factual findings as a result of
undertaking those procedures.
Compilation of Financial or Other Information
Its objective is for the CPA to use
accounting expertise, as opposed to auditing
expertise, to collect, classify and summarize
financial information (preparation of financial
statements).
Tax Services
A CPA is considered qualified to prepare
corporate and individual tax returns for both audit
and non-audit clients.
Management Consulting / Advisory Services
It refers to the work done by professional
accountants which focuses on advising companies
on the best ways to manage and operate their
business.
Accounting and Data Processing or
Information Technology System Services
Services under these items include doing
manual or automated bookkeeping, journalizing
and posting adjusting entries or preparing (or
compiling) financial statements. Also, other
businesses have begun to see “outsourcing: as an
alternative for information system, tax, stock and
transfer agency and internal auditing.
Reports on Non-Assurance Engagements
Reports on these types of engagements
must be clearly distinguished from reports on
assurance engagements. So as not to confuse the
users, a report that is not an assurance report
avoids the following:
1. Implying compliance with the Framework,
PSAs, PSREs and PSAEs;
2. Inappropriately using the words
“assurance”, “audit” or review”; and
3. Including a statement that could
reasonably be mistaken for a conclusion
designed to enhance the degree of
confidence of intended users about the
outcome of the evaluation or measurement
of a subject matter against criteria.
Summary of Reports Provided by Different
Types of Engagements
1. Audit – Positive assurance on assertion(s)
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AUDITING THEORY
2. Review – Negative assurance on
assertion(s)
3. Agreed-Upon Procedures – Factual
findings on procedures
4. Compilation – Identification of information
compiled
Conversion of an Assurance Engagement to a
Non-Assurance Engagement
Having accepted an assurance
engagement, a practitioner may not change that
engagement to a non-assurance engagement, or
from a reasonable assurance engagement to a
limited assurance engagement without reasonable
justification which may be any of the following but
not limited to:
1. A change in circumstances that affects the
intended users’ requirements; or
2. A misunderstanding concerning the nature
of the engagement.
If such a change is made, the practitioner
does not disregard evidence that was obtained
prior to the change.
Challenges Faced by the Public Accounting
Profession
1. Accounting in highly complex business
environment or increasingly complex
transaction and organizational standard.
2. Computer systems are complex.
3. Many companies are global.
4. There is time pressure to get the audit done
and to report more quickly than ever
before.
5. There is a need to generate audit fees
sufficient to both attract new people to the
profession and retain managers and
partners, who often operate under having
stress to fulfill this most important
obligation.
Expectation Gap
It is the gap between what auditors attempt
to do in an audit and the user’s expectations of the
audit.
Auditing
It is a systematic process by which a
competent, independent person objectively
obtains and evaluates evidence regarding
assertions about economic actions and events to
ascertain the degree of correspondence between

Fundamentals of Auditing and Assurance Services
those assertions and established criteria and
communicating the results to intended users.
Key Words and Phrases in the Definition of
Auditing
Systematic Process
This implies a structured, logical and
organized series of steps and procedures.
Competent, Independent Person
The auditor must be qualified to understand
the criteria used and the competence to know how
and what evidence to accumulate to reach the
proper conclusion.
Objectively Obtains and Evaluates Evidence
This means examining the bases for the
assertions (representations) and judiciously
evaluating the result without bias or prejudice
either for or against the individual (or entity)
making the representations.
Assertions about Economic Actions and
Events
These are the representations made by the
individual or entity.
Degree of Correspondence
This refers to the closeness with which the
assertions can be identified with established
criteria.
Established Criteria
These are the standards against which the
assertions or representations are judged.
Communicating the Results
This is often referred to as attestation. The
final stage in the audit process is the audit report –
the communication of the findings to users.
Interested Users
These are individuals who use (rely on) the
auditor’s findings (e.g., stockholders,
management, creditors, governmental agencies
and the public).
***
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AUDITING THEORY
Information Risk
The likelihood that unreliable information
will be provided to decision makers. It is the reason
why independent auditing is necessary.
Factors that Contribute to Information Risk
1. Remoteness of information users from
information providers
2. Potential bias and motives of information
provider
3. Voluminous data
4. Complex exchange transactions
Ways of Reducing Information Risk
1. Allow users to verify information.
2. User shares information risk with
management.
3. Have the financial statements audited.
General Types of Audit
Independent Financial Statements Audit
It consists of methodological review and
objective examination of financial statements
prepared by an enterprise (auditee) to determine if
such statements have been prepared in conformity
with financial reporting practices that are
appropriate for the auditee.
Internal Audit
It is an independent, objective assurance
and consulting activity designed to add value and
improve an organization’s operations. It helps an
organization accomplish its objectives by brining a
systematic, disciplined approach to evaluate and
improve the effectiveness of risk management,
control and government processes.
Government Audit
It involves the determination of whether
government funds are being handled properly and
in compliance with existing laws and whether the
programs are being conducted efficiently and
economically.
Types of Auditors
Independent or External Auditor
He or she is a certified public accountant
(CPA) who examines the financial records and
business transactions of a company with which he
is not affiliated.

Fundamentals of Auditing and Assurance Services
Internal Auditor
He or she could be from a CPA firm hired
by the entity as consultant or employee of an
individual company who perform independent
appraisal activity within the organization such as
review of accounting, financial and other
operations as a basis for service to management.
Government Auditor
He or she maintains and examines records
of government agencies and of private businesses
or individuals performing activities subject to
government regulations or taxation.
***
Objective and Scope of Independent Audit
Since the objective of an independent audit
is to express an opinion on the company’s financial
statement, the auditor will conduct a critical and
systematic examination of the statements and of
the related documents, records, procedures and
control.
Types of Assurance
Reasonable Assurance
It is the level of confidence that the financial
statements are not materially misstated that an
auditor, exercising professional skill and care, is
expected to attain from an audit (also known as
high level of assurance).
Limited Assurance
It is the level of assurance obtained where
engagement risk is reduced to a level that is
acceptable in the circumstances of the
engagement, but where that risk is greater than for
a reasonable assurance engagement.
Absolute Assurance
It means that there is absolutely no
misstatement in the financial statement and thus
financial statements are absolutely reliable and
relevant for the user of financial statements.
***
Inherent Limitations in an Audit Hindering the
Achievement of Absolute Assurance
1. The use of testing
2. Inherent limitations of any accounting and
internal control system (e.g., possibility of
collusion)
3. The fact that most audit evidence is
persuasive rather than conclusive
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AUDITING THEORY
4. The use of judgment in some aspects of the
auditor’s work
Persuasive Evidence
It is evidence that has the power to
influence or persuade someone to believe in its
truth (e.g., evidence gathered through sampling).
Conclusive Evidence
It is a solid evidence after which no further
proof or inquiry is required & evidence in itself is
complete (e.g., evidence gathered if the whole
population is tested).
Responsibility for the Financial Statement
While the auditor is responsible for forming
and expressing an opinion on the financial
statements, the responsibility of preparing and
presenting the financial statements is that of the
management of the entity.
Objective and Scope of Internal Auditing
The objective of internal auditing is to assist
all members of management in the effective
discharge of their responsibilities, by furnishing
them with analyses, appraisals, recommendations,
and pertinent comments concerning the activities
reviewed.
Independence Required for Internal Auditors
Internal auditors are required to be
independent so that they would be able to render
impartial and unbiased judgment in the conduct of
their engagement.
Internal Auditing Approaches and Techniques
Operational Auditing
This is a future-oriented, independent and
systematic evaluation performed by the internal
auditor for management of the operational
activities controlled by top-, middle-, and lower-
level management for the purpose of improving
organizational profitability and increasing the
attainment of the other organizational objectives.
Management Auditing
It is an assessment of methods and policies
of an organization’s management in the
administration and the use of resources, tactical
and strategic planning, and employee and
organizational improvement.
 AUDITING THEORY
Fundamentals of Auditing and Assurance Services

Financial Auditing
It refers to a historically oriented,
independent evaluation performed by the internal
auditor for the purpose of ensuring the fairness,
accuracy and reliability of the financial data.

Divisions of State or Government Auditing

Compliance Audit
It is the examination, audit and settlement
in accordance with law and regulation.

Financial Audit
It is the audit of the accounting and financial
system and controls to ensure reliability of
recorded financial data.

Performance Audit
It is an objective examination of the
financial and operational performance of an
organization, programme, activity or function and
is oriented towards opportunities for greater
economy, efficiency and effectiveness.
***

Other Types of Audit Classified as Limited

Assurance Engagements
1. Audits of financial statements prepared on
another comprehensive basis, cash or tax
basis of accounting
2. Audits of specified elements, accounts or
items in a financial statement
3. Audits of information accompanying the
basic financial statements (client-prepared
or auditor-submitted documents)
4. Compliance with contractual agreements
5. Summarized financial statements

Auditing and Accounting Distinguished

Accounting is the process of recording,
classifying and summarizing economic events in a
logical manner for the purpose of providing
financial information for decision making. On the
other hand, auditing is concerned with the
determination of whether the recorded accounting
information for the entity properly reflects the
economic events that occurred during the
accounting period.

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