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 MODULE 1 - AUDITING CONCEPT 
 
Why is independent auditing necessary? 
- To reduce or manage the information risk. 
 
Information risk  
-​Is the risk of increased likelihood that unreliable information 
will be provided to decision makers. 
 
Factors that contribute of information risk: 
1.Remoteness of information users from information providers 
2.Potential bias and motives of information provider 
3.Voluminous data 
4.Complex exchange transactions 
 
Information risk may be reduced by: 
1. Allow users to verify information 
2. User shares information risk with management 
3. Have the financial statements audited 
 
Importance of an Audited Financial Statements:  
 
To: 
Investor and shareholders  
-It  provides  a  trusted  second  opinion  on  the  financial 
statements of an entity useful in making informed decisions. 
 
Accountants and Finance People 
-It  provides  confidence  and  peace  of  mind  that  the  prepared 
financial  statements  were  fairly  presented  as  well  as  assessing  the 
effectiveness of the company's internal control system. 
 
Financial Analyst 
-It  provides  unbiased  and independent examination of information 
on which to base their work. 
 
Other Stakeholders  
● Regulators  (SEC,BIR,CDA  &  others)  -  ​
As  a  regulatory  requirement 
the companies are required to file audited financial statements. 
 
● Creditors,Employees,  General  public  among  others  -  ​ The  outcome 
of  an  independent  audit  may  be  useful  or  relevant  in  making 
informed decisions. 
 
 
 

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Financial Statement Audit 
 
To  understand  financial  statement  auditing,  we  should  consider  both 
the  preparation  of  financial  statements  ​
(accounting)  and  the  performance 
of an audit of those financial statements ​ (auditing)​.  
 
The  professional  accountants  often  assist  in  the  preparation  of  the 
financial  statements,  The  attestation  function  conceptually  begins  with
financial  statements  having  been  prepared  by  management.  The  purpose  of
an  auditor's  audit  of  financial  statements  is  to  provide  assurance  that
financial  statements  which  have  been  prepared  by  management  is  in
accordance  with  the  financial  reporting  framework  (FRF)  -  usually
generally accepted accounting principles as shown in the diagram. ​ (Figure 
1.1) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auditing vs. Accounting 
 
Auditing​is primarily concerned with the verification of financial 
statement information or the recorded accounting information properly reflects 
the economic events that occurred during the accounting periods. 
 
Accounting​on the other hand deals with process of recording, 
classifying,and summarizing economic events in a logical manner for the 
purpose of providing financial information in a form of financial statements 
for decision making. 

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 The relationship of the accounting system and audit process is 
depicted in the diagram.​(
​Figure 1.2)  

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NATURE OF AUDITING,ATTESTATION,ASSURANCE SERVICES 
 
AUDITING 
A  ​
systematic  process  ​
of  objectively  obtaining  and  evaluating  evidence  regarding
selected  ​
assertions  about  economic  action  and  events  to  ascertain  the  ​ degree  of
correspondence  between  those  assertions  and  ​ established  criteria  and  ​
communicating 
the results to interested users​ ”.-AAA​
(American accounting Association)​ . 
Key Elements 
➢ Systematic  process  -  A  structured,logical  and  organized  series  of  steps
and procedures. 
➢ Objectivity​- Freedom from bias 
➢ Obtaining  and  evaluating  evidence  -  ​Allows  the  auditor  to  determine  the
support for assertions or representations. 
➢ Assertions  about  economic  actions  and  events  -  ​ Describes  the  subject
matter  of  an  audit;  representations  by  management  comprising  internal 
control assertions and financial statement assertions. 
➢ Degree  of  Correspondence  -  ​ refers  to  the  closeness  with  which  the 
assertions  can  be  identified  with  established  criteria  .May  be 
quantitative  (Ex.  amount  of  shortage)  or  qualitative  (Ex.  measure  of
fairness of the financial Statement) 
➢ Established  criteria  -  ​ The  standards  against  which  the  assertions  or
representation  are  judged  such  as  applicable  financial  reporting 
framework  (PAS/PFRS).  Criteria  -  Specific  rules  prescribed  by  a
legislative  body,  budgets,  and  other  measures  of  performance  set  by 
management,  or  financial  reporting  standards  by  the  FRSC(Financial
Reporting Standards Council. 
➢ Communicating  results  -  ​The  results  must  be  communicated  to  interested 
parties  through  a  written  report  which  could  either  enhance  or  weaken  the
credibility of the representations made by another party. 
➢ Interested  Users  -  ​
Individuals  who  use  or  rely  on  the  auditor’s  findings 
such  as  stockholders,  management,  creditors,  government  agencies  and  the 
public 

ATTESTATION 
Refers  to  an  ​ expert’s  written  communication  of  a  conclusion  about  the 
reliability  of  someone  else’s  assertions.It  occurs  when  a  practitioner  is engaged to 
issue  a  written  communication  that  expresses  a  conclusion  about  the reliability of a 
written assertion that is the responsibility of another party. 

ASSURANCE SERVICES 
Are  designed  to  enhance  the  degree  of  confidence  of  ​
the  intended  users  ​
other
than  ​
the  responsible  party  ​
about  the  outcome  of the evaluation or measurement of a 
subject matter against criteria​ . 
 

 
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TYPES OF AUDIT 
 
While  the  focus  of  this  text  is  non  financial  statements  audit,  other  types  of
evidence-gathering  methods  of  auditing  are  also  employed  by  an  audit practitioner in 
the following areas. 
 
1. Compliance  audit  -  conducted  to  determine  compliance  with 
criteria,standards,or  rules  set  by  an  authoritative  body.  It  involves 
testing  and  reporting  on  conformity  with  laws  and  regulations  relating  to
a specific entity or activity. 
2. Management  audit  -  an  examination  and  evaluation  of  the  activities  of 
management;also referred to as effectiveness or performances. 
3. Performance  audit  -  analyzes  an  organization’s  structure,  internal
systems,  work  flow  and  managerial  performance  to  determine  the  efficiency, 
effectiveness and economy of these items. 
4. Comprehensive  audit  -  usually  includes  the  components  of  compliance,
performances and financial statements audit. 
5. Operational  audit  -  performed  to  determine  the  extent  to  which  some 
aspects  of  an  organization's  operating  activities  is  functioning 
effectively, efficiently and economically. 
6. Internal  audit  -  internal  auditing  is  an  independent,  objective  assurance
and  consulting  activity  designed  to  add  value  and  improve  an 
organization's  operations.  It  helps  an  organization  accomplish  its
objective  by  bringing  a  systematic,  disciplined  approach  to  evaluate  and 
improve  the  effectiveness  of  risk  management,  control  and  governance
process. 
7. Environmental  audit  -  covers  environmental  matters  which  may  have  an
impact on the financial statements. 
8. Forensic  audit  -  refers  to  the  examination  of  evidence  regarding  an 
assertion  to  determine  its  correspondence  to  established  criteria  carried
out  in  a  manner  suitable  to  the  court.An  example  would be a forensic audit 
of  sales  records  to  determine  the  quantum  of  rent  owing  under  a  lease 
agreement,  which  is  the  subject  of  ligation.  Forensic  auditing  is  the 
specialist  area  of  financial  auditing  that  focuses  on  unearthing  the truth 
and/or  providing  evidence  in  legal/financial  disputes  and/or 
irregularities  (including  fraud),  as  well  as  providing  preventative  advice 
on  the  subject.  So  forensic  auditing  is  an  area  of expertise rather than a 
profession.  
 
 

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TYPES OF AUDITORS 
 
   ​
The  auditing  activities  described  above  are  performed by four types of auditors: 
independent(external)  auditors,internal  auditors,  government  auditors,  and  forensic
auditors. 
 
1. External  (independent  auditors  -  public  accountants,  both  individuals  or  firms, 
who  perform  audit  tax,consulting  and  other  types  of  services  for  external
clients. 
2. Internal  auditors  -  perform  services  for  a  single  organization  for  which  they 
are  employed  on  a  full-time  basis,  typically  reporting  to  the  board  of 
directors  who  are  the  primary  users  of  their  work,  internal  auditors  may  be 
certified as Certified Internal Auditor by the institute of internal auditors. 
3. Government  auditors  -  are  full  time  employees  of  government  tasked to determine 
compliance  with  laws,  statutes,  policies  and  procedures.  Examples  are  those 
with the Commission on Audit (COA) and the Bureau of Internal Revenue (BIR). 
4. Forensic  auditors  -  financial  auditing  specialists  who  focus  on  unearthing  the
truth  and/or  providing  evidence  in  legal/financial  disputes  and/or
irregularities  (including  fraud),as  well  as  providing  preventative  advice  on
the subject. 
 
 
   
 
 
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