OVERVIEW OF

THE AUDITING
PROFESSION
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1.
Nature of Auditing
“ AUDITING
the accumulation and evaluation of evidence
about information to determine and report on the
degree of correspondence between the
information and established criteria.
Auditing should be done by a competent,
independent person.
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INFORMATION AND ESTABLISHED
CRITERIA
▸ Information (verifiable form) vs. Criteria (standards).
▸ Information may be quantifiable (FS) or subjective (effectiveness
of systems).
▸ Criteria is dependent upon what information is audited.
Information Criteria
Financial statements PFRS
Internal control COSO Framework
Corporate governance SEC Rules on CG
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ACCUMULATING AND EVALUATING
EVIDENCE
▸ Evidence is any information used by the auditor to determine
whether the information being audited is stated in accordance with
established criteria.
▸ Forms of evidence:
▸ Transaction data
▸ Communications with outsiders
▸ Observations
▸ Client Testimony
▸ Auditors must obtain sufficient and appropriate audit evidence to
satisfy the purpose of the audit.
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COMPETENT AND INDEPENDENT
PERSON
▸ Competence
▹ Qualified to understand the criteria used
▹ Know the types and amount of evidence to accumulate in order to
reach proper conclusion after examining evidence
▹ Quality Control (PSQC)
▸ Independence
▹ Must no be biased in the accumulation and evaluation of evidence
▹ Even internal auditors (although employed) should be independent.
▹ Must be independent of mind and in appearance
▹ Code of Ethics for Professional Accountants in the Philippines
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REPORTING

▸ The final stage in the auditing process is preparing the audit report,
which communicates the auditor’s findings to users.
▸ Reports differ in nature, but all must inform readers of the degree
of correspondence between the information audited and
established criteria.
▸ Reports also differ in form and can vary from the highly technical
type usually associated with financial statement audits to a simple
oral report in the case of an operational audit of a small
department’s effectiveness.
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THE AUDIT PROCESS

PRE-
ENGAGE- PLANNING
MENT EVIDENCE REPORTIN
ACTIVITIE
ACTIVITIE GATHERING G
S
S
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DISTINCTION BETWEEN
ACCOUNTING AND AUDITING
▸ Accounting is the recording, classifying, and summarizing of
economic events to provide financial information for decision
making.

▸ Auditing focus on determining whether recorded information

properly reflects the economic events that occurred during the
accounting period.

▸ In addition to understanding accounting, auditors must possess

expertise in the accumulation and interpretation of audit evidence.
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ECONOMIC DEMAND FOR AUDITING

▸ Information risk reflects the possibility that the information upon

which a business decision was made was inaccurate.

▸ Auditing of financial information reduces information risk to the

users of financial information.
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INFORMATION RISK

▸ Causes of information risk:

▹ Remoteness of information
▹ Biases and Motives of the Provider
▹ Voluminous Data
▹ Complex Exchange Transactions
▸ How to reduce information risk:
▹ User verifies information – the user may go to the business to verify the
information. This is often costly and impractical.
▹ User shares information risk with management – Management may be held
responsible in a lawsuit if inaccurate information is provided.
▹ Audited financial statements are provided – External auditors are engaged
to provide assurance that the financial statements are reliable.
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2.
Assurance Services
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ASSURANCE SERVICES

▸ An assurance service is an independent professional service that

improves the quality of information for decision makers.

▸ Assurance services can be provided by CPAs or other professionals.

▸ Assurance services by CPAs have been common for years,

especially regarding historical financial statement information.
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ATTESTATION SERVICES

▸ An attestation service is a type of service in which the CPA issues

a report about a subject matter or assertion that is made by another
party.

▸ This is one category of assurance services provided by CPAs.

▸ Primary categories of attestation services include:

▹ Audits of historical financial statements
▹ Audits of internal control over financial reporting
▹ Reviews of historical financial statements
▹ Other attestation that may be applied to a broad range of subjects
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OTHER ASSURANCE SERVICES

▸ Other assurance services do not meet the definition of attestation

services. A written report is not required, and it need not be about
reliability or compliance.

▸ Examples:
▹ Mystery shopping – Perform anonymous shopping to assess sales
personnel dealings with customers and procedures they follow
▹ ISO 9000 certifications – Certify a company’s compliance with ISO
9000 quality control standards, which help ensure company products
are of high quality
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NON-ASSURANCE SERVICES

▸ CPA firms perform numerous other services that generally fall

outside the scope of assurance services.

▸ Independence is not required since no assurance is provided.

▸ Examples:
▹ Accounting and bookkeeping services
▹ Tax services
▹ Management consulting services
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Non-
Assurance
Assurance
Services
Services
Attestation Services
• Audits (PSA) • Bookkeeping
• Reviews (PSRE) services
• Tax services
• Agreed upon
procedures (PSRS)
• Management
consulting services
Other Assurance
Services (PSAE)
PSQC, Code of Ethics
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3.
Types of Audits and
Auditors
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TYPES OF AUDITS

▸ Operational audit—Evaluates the efficiency and effectiveness of

any part of an organization’s operating procedures and methods.

▸ Compliance audit—Determines whether the auditee is following

specific procedures, rules, or regulations set by some higher
authority.

▸ Financial statement audit—Determines whether the financial

statements are stated in accordance with PFRS.
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TYPES OF AUDITS
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TYPES OF AUDITORS

▸ CPA firms

▸ Government auditors

▸ Internal auditors
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4.
The CPA Profession
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ACTIVITIES OF CPA FIRMS

▸ CPA firms provide audit services as well as other attestation and

assurance services.

▸ CPA firms also provide accounting and bookkeeping services, tax

services, and management consulting and risk advisory services.

▸ CPA firms vary in nature and range of services, which affects the
structure of the firms.
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ORGANIZATIONAL HIERARCHY OF
TYPICAL CPA FIRM
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QUALITY CONTROL

▸ For a CPA firm, quality control includes the methods used to ensure
that the firm meets its professional responsibilities to clients.

▸ Elements of Quality Control: Each firm should document quality

control policies and procedures. The quality control system should
address the six elements detailed in Table 2-3.
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5.
Professional Ethics
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WHAT IS ETHICS?

▸ Ethics can be defined broadly as a set of moral principles or values.

Ethical behavior is necessary for a society to function in an orderly
manner.

▸ The need for ethics in society is sufficiently important that many

commonly held values are incorporated into laws.

▸ There are two primary reasons why people act unethically:

• The person’s ethical standards differ from general society’s
• The person chooses to act selfishly
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CODE OF PROFESSIONAL CONDUCT

▸ The Code consists of principles and rules, in addition to

interpretations.
▸ Only members in public practice can audit financial statements,
which is addressed in Part 1.
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CODE OF PROFESSIONAL CONDUCT

▸ The Code establishes a conceptual framework for all professional

accountants to ensure compliance with the five fundamental principles of
ethics.
• Integrity - straightforward and honest in all professional and business relationships
• Objectivity - should not allow bias, conflict of interest or undue influence of others
• Professional Competence and Due Care - maintain professional knowledge and skill at
the level required
• Confidentiality - should not disclose any such information to third parties without proper
and specific authority
• Professional Behavior – should comply with the relevant laws and regulations and
should avoid any action that discredits the profession
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THREATS TO COMPLIANCE

▸ Compliance with the fundamental principles may potentially be threatened

by a broad range of circumstances. Many threats fall into the following
categories:
• Self-interest threats - may occur as a result of the financial or other interests of a
professional accountant or of an immediate or close family member
• Self-review threats - may occur when a previous judgment needs to be re-evaluated by
the professional accountant responsible for that judgment
• Advocacy threats - may occur when a professional accountant promotes a position or
opinion to the point that subsequent objectivity may be compromised
• Familiarity threats - which may occur when, because of a close relationship, a
professional accountant becomes too sympathetic to the interests of others
• Intimidation threats - may occur when a professional accountant may be deterred from
acting objectively by threats, actual or perceived
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SAFEGUARDS TO THREATS

▸ Safeguards that may eliminate or reduce such threats to an

acceptable level fall into two broad categories:
• Safeguards created by the profession, legislation or regulation
• Safeguards in the work environment
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TEST YOUR KNOWLEDGE

Which of the following best describes why an independent auditor
is asked to express an opinion on the fair presentation of financial
statements?
A. It is difficult to prepare financial statements that fairly present a company’s financial
position, operations, and cash flows without the expertise of an independent auditor.
B. It is management’s responsibility to seek available independent aid in the appraisal
of the financial information shown in its financial statements.
C. The opinion of an independent party is needed because a company may not be
objective with respect to its own financial statements.
D. It is a customary courtesy that all stockholders of a company receive an independent
report on management’s stewardship of the affairs of the business.
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TEST YOUR KNOWLEDGE

Which of the following professional services is an attestation
engagement?
A. A consulting service engagement to provide computer-processing advice to
a client.
B. An engagement to report on compliance with statutory requirements.
C. An income tax engagement to prepare income tax returns.
D. The preparation of financial statements from a client’s financial records.
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THANKS!
Any questions?