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PSA 120 and Audit Definition Summary

The document defines an audit and outlines the framework for auditing and related services in the Philippines. It discusses the objectives of an audit is to enable the auditor to express an opinion on whether financial statements are prepared in accordance with the applicable financial reporting framework. The framework distinguishes between audits, reviews, agreed-upon procedures, and compilations. Audits are designed to provide high assurance that financial information is free from material misstatement, while reviews provide moderate assurance. Agreed-upon procedures and compilations do not express any level of assurance.

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Abraham Chin
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8K views

PSA 120 and Audit Definition Summary

The document defines an audit and outlines the framework for auditing and related services in the Philippines. It discusses the objectives of an audit is to enable the auditor to express an opinion on whether financial statements are prepared in accordance with the applicable financial reporting framework. The framework distinguishes between audits, reviews, agreed-upon procedures, and compilations. Audits are designed to provide high assurance that financial information is free from material misstatement, while reviews provide moderate assurance. Agreed-upon procedures and compilations do not express any level of assurance.

Uploaded by

Abraham Chin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Auditing Definition

- To enable the auditor to express an opinion on whether the financial statements are prepared in accordance with
the applicable financial reporting framework.

PSA 120: Framework of Philippine Standards on Auditing


Introduction

The Auditing Standards and Practices Council

- Has been authorized to issue Philippine Standards on Auditing (PSAs).


- Purpose is to describe the framework within which PSAs are issued in relation to the services which may be
performed by auditors.

Term “auditor”

- Used throughout the PSAs when describing both auditing and related services which may be performed
- Such reference is not intended to imply that a person performing related services need be the auditor of the
entity's financial statements.

Financial Reporting Framework

 FS are ordinarily prepared and presented annually


 For common information needs.
 Users rely on the financial statements as major source of information because no power to obtain additional
information to meet their specific information needs.

Thus, financial statements need to be prepared in accordance with one, or a combination of:

 GAAP
 IAS (Accounting)
 Other authoritative and comprehensive financial reporting framework

Framework for Auditing and Related Services

Distinguishes audits from

 Related services
o Comprise reviews, agreed-upon procedures and compilations.

Audits and reviews

- Are designed to enable the auditor to provide high and moderate levels of assurance respectively, such terms
being used to indicate their comparative ranking.

Engagements to undertake

 Agreed-upon procedures and compilations


- Not intended to enable the auditor to express assurance.
Framework does not apply to other services

 Taxation, consultancy, and financial and accounting advice.

Levels of Assurance

Assurance

- Refers to the auditor's satisfaction as to the reliability of an assertion


 Auditor assesses the evidence collected as a result of procedures conducted and expresses a conclusion.
 The degree of satisfaction achieved the level of assurance
o Is determined by the procedures performed and their results.

A) In an audit engagement,
a. high, but not absolute, level of assurance
b. Info is free of material misstatement.
c. This is expressed positively as reasonable assurance.

B) In a review engagement
a. Moderate level of assurance
b. Info is free of material misstatement.
c. Expressed in the form of negative assurance.

C) For agreed-upon procedures


a. Provides a report of the factual findings, no assurance is expressed.
b. Users draw their own conclusions from the auditor's work.

D) In a compilation engagement
a. users derive some benefit from the accountant's involvement
b. Identification of information compiled
c. no assurance is expressed in the report

Objective of an audit of financial statements

- 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.

In forming the audit opinion

 Obtain sufficient appropriate audit evidence


o To be able to draw conclusions on which to base that opinion.
 Enhances the credibility of financial statements by
o Providing a high, but not absolute, level of assurance.
Absolute assurance

- is not attainable as a result of such factors


o Judgment and the use of testing
o the inherent limitations of any accounting
o internal control systems
o Evidence available persuasive than conclusive, in nature.

Related Services
Reviews

A) Objective
o is to enable an auditor2 to state if the basis of procedures that do not provide
 Required evidence
 Anything that causes to believe that the financial statements are not prepared, in
accordance with the framework.

o A similar one applies to the review of financial or other information


 Prepared in accordance with appropriate criteria.

B) Comprises inquiry and analytical procedures


a. Designed to review the reliability of an assertion that is the responsibility of 1 and use of another
party

C) Involves the application of audit skills and techniques and the gathering of evidence

D) does not involve an assessment of


a. Accounting and internal control systems,
b. Tests of records and of responses

E) Makes the achievement of this objective less likely than audit engagement
a. The level of assurance is correspondingly less than that given in an audit report.

Agreed-upon Procedures

 Engaged to carry out those procedures of an audit nature to which they have agreed and to report on
factual findings.
 The report recipients must form their own conclusions.
 Report is restricted to those parties that have agreed to the procedures to be performed
o Since others, unaware of the reasons and may misinterpret the results.

Compilations

 Accountant is engaged to use accounting expertise to collect, classify and summarize financial information.
 Reducing detailed data to a manageable and understandable form
 The procedures employed are not designed and do not enable to express any assurance on the financial
information.
 Users derive some benefit as a result of the accountant's involvement because
o Service has been performed with due professional skill and care.
Auditor Association with Financial Information

Associated with financial information when

 He attaches a report to that information OR


 Consents to the use of his name in a professional connection.

If not associated in this manner

 Third parties can assume no responsibility of the auditor.

If the auditor learns entity is inappropriately using name in association

 He would require management to cease doing


 Informing any known third party users of the information of the inappropriate use
 May also be necessary to take other action, for example, to seek legal advice.

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