Introduction to Auditing 1.

Responsible party
Definition of auditing (Management)
Auditing is a systematic process of
objectively obtaining and evaluating
regarding selected assertions about
economic actions and events to ascertain
the degree of correspondence between
those assertions and established criteria 2. Practitioner (Auditor)
and communication the results to interested
users.

Audit - an assurance service

-Maraming assurance service (FS, Kinds of Risk
Operations, and Government Audit) pero 1. Risk of Material Misstatement -
magfofocus tayo sa FS) Audit Risk = Inherent Risk * Control
-FS audit means FS as a whole (Balance Risk * Detection Risk
Sheet, Income S., Equity, Cashflow and
notes), tinetest natin if fairly presented ba. Inherent risk
-pabebe risk
-di napipigilan
Key Elements -always there
1. Systematic process - audits are -source: human error, processing
structured activities error
2. Objectivity - freedom from bias -assumption: NO INTERNAL
3. Obtaining and evaluation evidence CONTROL
- Auditor must gather evidence that
the client’s processes are working Control Risk
correctly, financial data are recorded -internal control (w/ presence of
and presented correctly. internal control)
- Audit Records (inside) -q: napipigilan ba?
-Other corroborating evidence -
competitiors Combined Risk Assessment (CRA)
4. Assertions abt economic actions and CRA = IR * CR
events - describe the subject matter -uncontrollable risk
of the audit. -FS risk
-”Management Representation” - FS -Independent risk
to be audited
-Assertions is a positive statement
abt an action, event, condition, or
performance over a specified period
of time.

Three party relationship

 Detection Risk
-auditor’s risk na mali yung audit
opinion na maireport
-gano kalaki ang chance na mali ang
opinion ni auditor
Key elements
5. Degree of correspondence between
those assertions and established
criteria
- conformity with some specified
criteria
-suitable criteria
FS: PFRS - vlaution
6. Communication the results
-communicating to the interested
users
-also known as Audit Opinion
-Audit opinion is a written
communication of conclusions
reached
-Unqualified audit report: most audits
result in audit reports that do not
contain any reservation about the
fairness of the organization’s
presentation of its financial
statements.
-Qualified audit report - may prob sa
FS
Three party RS
3. Interested Users (can be internal or
external)
Types of Audit Reports
1. Qualified opinion
-no material misstatement or FS is
fairly presented
-possible na may immaterial
misstatement
2. Qualified opinion
-material misstatement but not
pervasive
-pervasive means di kumakalat nasa
single transaction/disclosure lang
(account, disclosure,
scope/limitation)
a. An account/class of
transaction
b. Scope limitation
3. Adverse opinion
-mat misstatement and pervasive
a. accounts/classes of
transaction
-ex: ending bal of cash -
affected balance sheet
4. Disclaimer of opinion
-no opinion at all
a. Material scope limitation
and pervasive
-scope limitation either
walang enough evidence or
di ka pinayagan ni
management or walang
evidence at all
Audit adds value if the auditor (PSA):
a. Has expertise in both obtaining and
evaluating evidence regarding the
FS and the economic assertions
embodied in the Fs.
-in short, may expertise si auditor
b. Is independent of management and
the third-parties, and can thus
provide an objective opinion on the
fairness of FS
--in short, independence is a must.
-independence is not absolute
(100%)
 -standards require reasonable level
of independence (in mind and
appearance)
Overall objectives of the auditor
In conducting an audit of FS, the overall
objectives of the auditor are:
a. To obtain reasonable assurance
whether the FS as a whole are free
from material misstatement, whether
due to fraud or error, thereby
enabling the auditor to express an
opinion on whether the FS are
prepared, in all material respects, in
accordance with an applicable
financial reporting framework.
-in short, obtain reasonable
assurance in accordance w/
applicable financial reporting
framework
b. To report on the FS and
communicate as required by the
PSAs, in accordance with the
auditor’s findings.
The financial reporting framework
adopted by management and, where
appropriate, those charged with
governance in the preparation and
presentation of the FS that is
acceptable in view of the nature of
the entity and the objective of the
FS, or that is required by law or
regulation.
Scope of an independent audit
Scope of the audit
-audit procedures deemed
necessary in the circumstances to
achieve the objective of the audit.
The procedures required in conduct
an audit in accordance with PSAs
should be determined by the auditor
having regard to the requirements of
PSAa, relevant professional bodies,
legislation, regulations and where
appropriate, the terms of the audit
engagement and reporting
requirements
-The auditor should conduct an audit
in accordance w/ Philippine
Standards on Auditing (PSA is not
a standard but a guideline)
-Auditor should plan and perform the
audit with an attitude of
professional skepticism
(questioning in mind) recognizing the
circumstances may exists which
may cause the FS to be materially
misstated.
Why FS are audited
1. Remoteness of information
users from information
providers
2. Potential bias and motives of
information providers
3. Voluminous data
4. Complex exchange
transactions
5. Consequences
Planning an Audit of FS
-Detailed approach - audit program based
on NTE (nature, timing and extent)
Ex: nature - cash - ieexamine kung may
cash ba talag (existence)
Timing - tuwing kailan (year end/interim)
Extent - cut off?
Benefits / Requirements
1. Adequate planning of the audit work
accomplished among others the
following:
2. Extent of planning will vary
according to
3. Planning is not a discrete phase of
an audit
Planning Activities - PSA 300
1. Overall audit strategy - procedures
2. Extent of planning
Highest level: Partner In Charge (PIC)
PIC
Management
Auditor
Senior
Staff (lowest)
3. Overall audit strategy and the audit
plan should be updated and
changed as necessary during the
course of the audit.
4. Auditor should plan the NTE (nature,
timing, extent) of the direction and
supervision of engagement team
members and review of their work.
5. Auditor should document the
overall audit strategy and the audit
plan, including any significant
changes made during the audit
engagements.
-proper documentation
-”if it is not properly documented, it is
not done”
Audit Program
-set of audit procedures specifically
designed for each audit.
-Analytical:
Planning - required
Substantive - not required / options
Completion - required
-”Plausible RS” - performing analytical
procedures on unexpected/unsual
fluctuations
-Routine - mababa yung Inherent Risk
-Non-routine - mataas ang IR
-Estimates - mataas ang IR
-Control Risks: Materiality and Audit Risk -
Inverse RS
—mataas na mat lev - mababang evidence
—mababa na mat lev - mataas na evidence
-program which includes both substantive
tests and tests of controls will enable the
auditor to express an opinion on the FS
taken as a whole
-auditor should develop and document an
audit program setting out the NTE of
planned audit procedures required to
implement the overall audit plan.
-audit program serves as a set of
instructions to assistants involved in the
audit and as a means to control and record
the proper execution of the work.
-audit program may also contain the audit
objectives in which hours are budgeted for
the various audit areas or procedures
4. A means of controlling the time
spent on audit.
5. Evidence of the consideration of
control risk in designing the
proposed audit procedures.

On initial engagement, audit program Steps in the Audit Planning

typically will develop in three stages: 1. Obtaining an understanding of the
1. The broad phases of the program entity and its environment
can be outlined at the time of the
engagement.
2. Other details of the program can be
identified after the review of internal
control structure and accounting
procedures has begun.
3. Procedures on specific phases of
the audit can be further challenged
and revised as the work progresses.

“The overall audit plan and the audit

a. Performing analytical
program should be revised as necessary
procedures
during the course of the audit. Planning is
continuous throughout the engagement
because of changes in conditions or
unexpected results of audit procedures. The
reasons for significant changes would be
recorded.”

An audit program that is properly prepared

and used provides:
1. Evidence of proper planning of the
work and allows a review of the
proposed scope of the audit. The
program gives the partner, manager,
and other members of the audit b. Consideration of fraud in
team an opportunity to review the audit planning
proposed scope of the audit before
the work performed, when there is
still time to modify the proposed
audit procedures.
2. Guidance to less experienced staff
members.
3. Evidence of work performed
 Materiality

c. Risk Assessment Tasks

2. Identifying and assessing the risks of

material misstatements through
understanding the entity and its
environment Assertions / Representation made by the
management

a. Account balance assertions

-Statement of Financial Position

Measuring Audit Risk

b. Transaction assertions - Significant
Classes of Transactions (SCOTs)
-Income Statement Accounts