AUDIT - AN

OVERVIEW
PREPARED BY: REBECA PABLO, CPA, MBA
Topics
1. What is Audit?
2. Other definitions of Audit
3. Types of Audit
4. Types of Auditors
5. The Independent Financial statement Audit
6. Factors affecting the auditor's ability to detect material misstatements
7. General principles governing the audit of financial statements
8. Need for an independent financial statement audit
9. Theoretical framework of Auditing
10. Sample Board Exam Questions
Audit
PSA 200 defines auditing by stating the objective of a
financial statement audit, that is, to enable the auditor to
express an opinion whether the financial statements are
prepared, in all material respects, in accordance with an
identified financial reporting framework.
 Other definitions of Audit
1. Auditing is a systematic process
-by means of an ordered and structured series of steps
2. An audit Involves obtaining and evaluating evidence about assertions regarding economic actions and
events.
-Assertions are representations made by an auditee about economic actions and events. Auditors objective is
to determine whether these assertions are valid.
3. An audit is conducted objectively
-Auditor should conduct the audit without bias
 Other definitions of Audit
4. Auditors ascertain the degree of correspondence between assertions and established criteria
-Established criteria are needed to judge the validity of the assertions. It serves as a basis of the users against
which the assertions have been evaluated or measured. Example: presentation of FS (assertions) by
comparing with an identified financial reporting framework (criteria)

5. Auditors communicate the audit results to various interested users

-Communication of audit findings is the ultimate objective of any audit and should be communicated on a
timely basis.
 Types of Audit
1. Financial Statement Audit
-To determine whether the financial statements of an entity are fairly presented in accordance with an
identified financial reporting framework.
2. Compliance Audit
-Review of an organization’s procedures to determine whether the organization adhered to specific
procedures, rules or regulations. Example: BIR Examiners
3. Operational Audit
-A study of specific unit of an organization for the purpose of measuring its performance. Main objective is to
assess entity’s performance, identify areas for improvements and make recommendations to improve
performance. Also known as performance audit or management audit.
 Types of Auditors
1. External Auditors
-An independent CPAs who offer their professional services on a contractual basis. Those who generally
perform financial statement audits.
2. Internal Auditors
-Entity’s own employees who investigate the effectiveness and efficiency of operations and internal controls.
Usually perform operational audit.
3. Government auditors
-Government employees who determine whether person or entities comply with government laws and
regulations. Government auditors usually conduct compliance audits.
 Types of Auditors
1. External Auditors
-An independent CPAs who offer their professional services on a contractual basis. Those who generally
perform financial statement audits.
2. Internal Auditors
-Entity’s own employees who investigate the effectiveness and efficiency of operations and internal controls.
Usually perform operational audit.
3. Government auditors
-Government employees who determine whether person or entities comply with government laws and
regulations. Government auditors usually conduct compliance audits.
The Independent Financial statement Audit
-The objective of an audit of financial statements is to enable the auditor to express an opinion whether the
financial statements are prepared, in all material respects, in accordance with an identified financial reporting
framework or acceptable financial reporting standards.
Responsibility for the financial statements
- Management is responsible for preparing and presenting the financial statements in accordance with the
financial reporting framework.
Auditors responsibility
- to form and express an opinion on these financial statements based in his audit.
 Factors affecting the auditors ability to
detect material misstatements
1. The use of testing / Sampling risk
-For practical reason, auditors do not examine all evidence available. Many audit conclusions are made by
examining only sample of evidence.
2. Error in application of judgement
-work undertaken by the auditor to form an opinion is permeated by judgement. Human weaknesses can
cause auditors to commit mistakes.
3. Reliance on management’s representation
-Management prepares financial statement, if the management lacks integrity, management may provide the
auditor with false representations causing the auditor to rely on unreliable evidence.
 Factors affecting the auditor's ability to
detect material misstatements
4. Inherent limitations of the client’s accounting and internal control systems
-In some instances, audit procedures may not be effective in detecting misstatements resulting from collusion
among employees or management’s circumvention if internal control
5. Nature of evidence
-Audit Evidence is generally persuasive rather than conclusive in nature. Evidence obtained by the auditor
does not consist of hard facts but rather gradually accumulated during the course of audit which was taken
together to persuade the auditor about the fairness of financial statements.
 General principles governing the audit of
financial statements
1. Code of Professional Ethics
-Auditors should comply with this promulgated by the BOA
2. Philippine Standards on Auditing
-It contains the basic principles and essential procedures which the auditor should follow. Designed to assist
auditors in interpreting and applying the auditing standards.
3. Professional Skepticism
-An attitude that means the auditor makes a critical assessment, with a questioning mind, of the validity of
audit evidence that contradicts or bring into questions the reliability for documents. An attitude recognizing
that circumstances may exist which may cause the financial statement to be materially misstated.
 Need for an independent financial
statement audit
1. Conflict of interest between management and users of financial statements
-Managers are frequently placed in a positions where they can benefit but users of financial statement want
unbiased and realistic FS.
2. Expertise
-The complexity of accounting and auditing requires expertise in verifying the quality of the financial
information.
3. Remoteness
-Most of the users do not have access to the entity's records to personally verify the reliability of FS.
Therefore, an independent auditor is needed to assist them in verifying reliability of financial information.
 Theoretical framework of Auditing
1. Audit function operates on the assumption that all financial data are verifiable.
-all balances should have supporting documents to prove their validity
2. The auditor should always maintain independence with respect to the financial statements under audit
-Independence is essential for ensuring the credibility of the auditor’s report
3. There should be no long-term conflict between the auditor and the client management.
4. Effective internal control system reduces the possibility of errors and fraud affecting the financial statements.
5. Consistent application of generally accepted accounting principles (GAAP) or Philippine Financial Reporting
Standards (PFRS) results in fair presentation of financial statements.
6. What was held true in the past will continue to hold true in the future in the absence of known conditions to
the contrary.
7. An audit benefits the public.
 Sample Board Exam Questions
1. Broadly defined, the subject matter of any audit consists of:

A. Financial Statements
B. Economic data
C. Assertions
D. Operating Data
 Sample Board Exam Questions
2. The criteria for evaluating quantitative information vary. For example, in the case of an
independent audit of financial statement by CPA firms, the criteria are usually the:

A. Philippine Standards on Auditing

B. Philippine Financial Reporting Standards
C. National Internal Revenue Code
D. Regulations of the Securities and Exchange Commission
 Sample Board Exam Questions
3. An Audit that involves obtaining and evaluating evidence about the efficiency and
effectiveness of an entity’s operating activities in relation to specified objective is a(n):

A. External Audit
B. Compliance Audit
C. Operational Audit
D. Financial Statement Audit
 Sample Board Exam Questions
4. In financial statement audits, the audit process should be conducted in accordance with

A. The audit program

B. Philippine Standards on Auditing
C. Philippine Accounting Standards
D. Philippine Financial Reporting Standards
 Sample Board Exam Questions
5. Which of the following types of audit uses laws and regulations as its criteria?

A. Operational Audit
B. Financial Statement Audit
C. Compliance Audit
D. Performance Audit
 Sample Board Exam Questions
6. Which of the following types of auditing is performed most commonly by CPA’s on a
contractual basis?

A. Internal auditing
B. Income tax auditing
C. Government auditing
D. External auditing
 Sample Board Exam Questions
7. Independent auditing can best be described as a

A. professional activity that measures and communicates financial accounting data

B. subset of accounting
C. professional activity that attest to the fair presentation of financial statements
D. regulatory activity that prevents the issuance of improper financial information
 Sample Board Exam Questions
8. The overall objective of internal auditing is to

A. attest to the efficiency with which resources are employed

B. ascertain that controls are costs justified
C. provides assurance that financial data have been accurately recorded
D. assist members of the organization in the effective discharge of their responsibilities
 Sample Board Exam Questions
9. Which of the following has the primary responsibility for the fairness of the client
representations made in the financial statements.

A. Client’s management
B. Audit committee
C. Independent Auditor
D. Board of Accountancy
 Sample Board Exam Questions
10. The level of assurance provided by a professional accountant on an audit report is:

A. low
B. reasonable
C. moderate
D. none
 Sample Board Exam Questions
11. Which of the following is not one of the limitations of an audit?

A. The use of testing

B. Limitations imposed by client
C. Human Error
D. Nature of evidence that the auditors obtained
 Sample Board Exam Questions
12. The need for an independent audits of financial statements can be attributed to all of the
following conditions except:

A. remoteness
B. consequence
C. complexity of subject matter
D. validity
 Sample Board Exam Questions
13. Which of the following is one of the limitations of an audit?

A. Nature of evidence obtained

B. Inadequacy of the accounting records
C. Confidentiality of information
D. scope limitations imposed by the entity
 Sample Board Exam Questions
14. According to PSA 200, the audit procedures deemed necessary in the circumstances to
achieve the objective of the audit are referred to as the

A. Scope of the Audit

B. Audit techniques
C. Substantive tests
D. Test of Controls
 Sample Board Exam Questions
15. The primary reason for an audit by an external audit firm is

A. To satisfy governmental regulatory requirements

B. To guarantee that there are no misstatements in the financial statements
C. To provide increased assurance to users as to the fairness of the financial statements
D. To ensure that any fraud will be discovered