AUDITING & ASSURANCE

PRINCIPLES
SAN MATEO MUNICIPAL COLLEGE
COLLEGE OF BUSINESS AND ACCOUNTACY

By:
NILO N. IGLESIAS, CPA, MBA, REA
Audit – An Overview
Learning Objectives:

After completing this module, you should be able to:

• Define auditing and appraise the key phrases in the definition
• Distinguish the types of audits
• Discuss the management responsibility for the financial
statement
• Discuss the assurance provided by the auditor
• Explain the general principles governing the audit of financial
statements
• Discuss the theoretical framework of auditing
• Explain the need for an independent financial statement audit.
 Introduction
 Dependable financial information is essential to our society
 We often rely upon information provided by others in making
economic decisions
 The need of various users for more reliable financial information
has created a demand for an independent audit of financial
statements.
 The primary function of the independent audit is to lend credibility to
the financial statement prepared by an entity
 The auditor’s opinion enhances the value and usefulness of the
financial statements
 By attaching a report to the financial statements, the auditor
provides increased assurance to users that the financial statements
are reliable.
Definition of Auditing

The Philippine Standards on Auditing (PSA) defines

auditing by stating the objective of financial statement
audit, express an opinion whether the financial
statements are prepared, in all material respects, in
accordance with the identified financial reporting
framework.

Comments:

The definition confines only to the examination of

financial statements. Although audit work today also
deals with operational and compliance auditing.
Definition of Auditing by American Accounting Association

“An Audit is 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”
Definition of Auditing by American Accounting Association

“An Audit is 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”
Auditing is a systematic process
Auditing proceeds by means of an ordered and structured series of steps
An audit involves obtaining and evaluating evidence about
assertions regarding economic actions and events
• Assertions are representation made by an auditee about economic
actions and events
• The auditor’s objective is to determine whether these assertions are
valid
• To satisfy this objective, the auditor performs audit procedures and
gathers evidence that corroborates or refutes the assertions.
An audit is conducted objectively
• The auditor should conduct the audit without bias.
• Impartial attitude must be maintained by the auditor when evaluating
evidence and formulating his conclusion.
Auditors ascertain the degree of correspondence between
assertions and established criteria
• Established criteria are needed to judge the validity of the assertions.
• Established and inform the users of the basis against which the
assertions have been evaluated or measured.
• The auditor determines the degree by which the assertions conform to
the established criteria that is fair presentation of financial statements
(Assertions) by comparing the statements with an identified financial
reporting framework (Criteria).
Auditors communicate the audit results to various interested users
• The communication of the audit findings is the ultimate objective of
any audit.
• For the audit to be useful, the results must be communicated to
interested users on a timely basis.
Types of Audits
• Financial Statement Audit
Conducted to determine whether the financial statements of an entity are fairly
presented in accordance with an identified financial reporting framework.

• Compliance Audit
Involves the review of an organization’s procedures to determine whether the
organization has adhered to specific procedures, rules and regulations.
Dependent upon the existence of verifiable data and recognized criteria
established by an authoritative body.

• Operational Audit
Study of a specific unit of an organization for the purpose of measuring its
performance.
The main objective is to assess the entity’s performance, identify areas for
improvements and make recommendations to improve performance.
Types of Auditors
• External Auditor
Independent CPAs who offer their professional services to different clients on a
contractual basis.
External auditors are the ones who generally perform financial statement
audits.
• Internal Auditors
Are entity’s own employees who investigate and appraise the effectiveness
and efficiency of operations and internal controls.
The main function of internal auditors is to assist the members of the
organization in the effective discharge of the responsibilities.
Internal auditors usually perform operational audits.
• Government Auditors
Government employees whose main concern is to determine whether persons
or entities comply with the government laws and regulations.
Government auditors usually conduct compliance audits.
Objective and Scope of Financial Audit
Objective:
• The objective of an audit of financial statement is the
expression of an opinion on the fairness of such
statements.
• The auditor’s report is the medium through which he
expresses his opinion or if circumstances require,
disclaims an opinion.
• In either case, he states whether his examination has
been made in accordance with PAS and whether the
financial statements are presented in conformity with
generally accepted accounting principles.
Objective and Scope of Financial Audit
Scope:
• The auditor normally determines the scope of the audit in
accordance with the requirement of legislation, regulations
or relevant professional bodies.
• In the observance of the PAS, the auditor must exercise his
judgement in determining which audit procedures are
necessary in the circumstances to afford a reasonable
basis for his opinion.
• The audit should be organized to cover adequately all
aspects of the entity as far as they are relevant to the
financial statement being audited.
Responsibility for the Financial Statements
• The management is responsible for preparing and
presenting the financial statements in accordance with the
financial reporting framework.
• The auditor’s responsibility is to form and express an
opinion on these financial statements based on his audit.
• An audit of the financial statement does not relieve
management of its responsibilities.
• Hence, it is management’s responsibility to adopt and
implement adequate accounting and internal control
systems that will help ensure, among others, the
preparation of reliable financial statements.
Assurance provided by the Auditor
• The auditor’s opinion on the financial statements is not a
guarantee that the financial statements are dependable.
• An audit conducted in accordance with Philippine
Standards on Auditing (PSAs) is designed to provide
only reasonable assurance and not absolute assurance
that the financial statement taken as a whole are free
from material misstatements.
• In every audit, there are always inherent limitations that
effect the auditor’s ability to detect material
misstatements.
Inherent limitations that affect the auditor’s ability to detect
material misstatements
The use of testing/Sampling Risk
For practical reasons, auditors do not examine all evidence
available. Many audit conclusions are made by examining only sample
of evidence.
Error in application of judgment/Non-sampling risk
The work undertaken by the auditor to form an opinion is permeated
by judgment. Human weakness can cause auditors to commit mistakes
in the application of audit procedures and evaluation of evidence.
Reliance on management’s representation
Some evidence supporting the financial statements must be
obtained by obtaining oral or written representation from management
which may lacks integrity.
Inherent limitations that affect the auditor’s ability to
detect material misstatements
Inherent limitations of the client’s accounting and
internal control systems
Although the auditors performs procedures to detect
material misstatements when auditing, such procedures may
not be effective detecting misstatement resulting from
collusion among employees and management.
Nature of evidence
Evidence obtained by the auditor does not consist of
“hard facts” which prove or disprove the accuracy of the
financial statements.
General principles governing the audit of financial
statements
• The auditor should comply with the “Code of
Professional Ethics for CPA promulgated by the
Board of Accountancy.
• The auditor should conduct an audit in accordance
with Philippine Standards on Auditing.
• The auditor should plan and perform the audit with an
attitude of professional skepticism recognizing that
circumstances may exist which may cause the
financial statements to be materially misstated.
Need for an independent financial statement audit
Conflict of interest between management and users of financial
statement
• Financial statements may be viewed as the report of management as
to how the entity performed under their direction.
• Outside parties, however, want unbiased and realistic financial
statements.
• Recognizing this inherent conflict of interest, users of financial
statements have become skeptical of unaudited financial statements.
Remoteness
• Users of financial information are usually prevented from directly
assessing the reliability of the information.
• An independent auditor is needed to assist them in verifying the
reliability of financial information.
Need for an independent financial statement audit
Expertise
• The complexity of accounting and auditing requires expertise in
verifying the quality of the financial information.
• Since most of the users of financial information are not equipped
with the necessary skills and competence to determine whether the
financial statements are reliable, a qualified person is hired by users
to verify the reliability of the financial statements on their behalf.
Financial Consequences
• Misleading financial information could have substantial economic
consequences for decision maker.
• It is therefore important that financial statement be audited first
before they are used for making important decisions.
Theoretical framework of Auditing (Postulates, Assumptions or Ideas)
Audit function operates on the assumption that all financial data are
verifiable
All balances reported in the financial statements must have supporting
documents or evidence to prove their validity.
The auditor should always maintain independence with respect to the
financial statement under audit
Independence is essential for ensuring the credibility of the auditor’s
report.
There should be no long-term conflict between the auditor and the
client management
Short-term conflicts may exist regarding the application of auditing
procedures and accounting principles, but in the end, both the auditor and
the management must be interested in the fair presentation of the financial
statements.
Theoretical framework of Auditing (Postulates, Assumptions or
Ideas)
Effective internal control system reduces the possibility of
errors and fraud affecting the financial statements
The condition of the entity’s internal control system directly
affect the reliability of the financial statements. The stronger the
internal control is, the more assurance it provides about the reliability
of accounting data and financial statements.
Consistent application Philippine Financial Reporting
Standards (PFRS) results in fair presentation of financial
statements
There are different criteria to verify the validity of assertion.
However, in case of an independent audit of financial statements,
the criteria are usually the PFRS.
Theoretical framework of Auditing (Postulates, Assumptions
or Ideas)
What was held true in the past will continue to hold true in
the future in the absence of known conditions to the contrary
Experience and knowledge accumulated from auditing a
client in prior years can be used to determine the appropriate
audit procedures that need to be performed.
An audit benefits the public
Financial statements are ordinarily prepared and presented in
order to meet the common information needs of a wide range of
users. These users who rely on the financial statements as their
major source of information are the primary beneficiary of the
financial statement audit.
 Module 1 Learning Activities

1)Topic discussion and clarification during a synchronous meetings.

2)Asynchronous Learning.
This is an individual activity:
 Explain the Professional Skepticism attitude of a CPA.
 Discuss the objective and scope of financial audit.
Deadline: Send your work in our canvas.instructure (Assignment Tab) on or
before September 8, 2021, at 7:00 PM.
 Module 1 – Assessment/Evaluation

I. Synchronous Test with a time limit.

A test link will be provided through our canvas.instructure. (Quiz Tab) on

September 10, 2021, at designated time.

II. Asynchronous Learning:

Using our canvas.instructure. (Discussion Forum Tab). Submit your

reflection paper regarding the topics in Module 1.

Deadline: September 9, 2021, at 7:00 PM

Module 1 – Learning Resources

Book/E-Book/Article:
• Audit Assurance Principles

by: Ireneo,Ireneo and James, 2018

• Auditing Theory

by: Salosagcol, Tiu and Hermosilla, 2018

• Auditing: A Risk-Based Approach
by: Cabarles, Ocampo and Valdez, 2017
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