Reminders:

1. Clear your surroundings

2. Stay away from distractions

3. Even if your camera is off, try being

presentable and stay away from the bed 

4. Participate and listen attentively

 ACCTG 109 –
AUDITING AND ASSURANCE
PRINCIPLES
BACHELOR OF SCIENCE IN ACCOUNTANCY
3RD YEAR 1ST SEMESTER SY 2021-2022
DESIREE D. CEMEFRANIA, CPA
 Auditing - Definition

This definition describes financial statements audit

only, a more comprehensive definition is given by the
PSA 200
American Accounting Association:
 WHAT IS AUDIT?
Auditing is a systematic process of objectively
obtaining and evaluating evidence regarding
assertions about economic actions and events to
ascertain the degree of correspondence between
the assertions and established criteria and
communicating the results to interested users.

By: American Accounting Association

Definition of Terms:

Assertions – representation made by the entity

about economic actions and events.

Objectivity – requires the auditor to make

impartial assessment of all the relevant
circumstances in forming a conclusion.

Established Criteria – needed to judge the validity

of the assertions.
 EXTERNAL AUDIT in the Philippines
External audit is the process of independent evaluation of the company’s
financial statements by a qualified independent third party, the external
auditor.

BIR (BUREAU OF INTERNAL SEC (SECURITIES AND EXCHANGE COMMMISSION)

REVENUE)
Individual and corporations
exceeding Php 3M annual
sales are mandated to file
an annual audited financial
statements.

Sec. 232 of NIRC – Keeping of Books RA No. 11232 – Act for the Revised Corporation Code, Feb. 20,
of Accounts 2019, Section 177
The Philippine Regulatory Commission (PRC) is the government agency
responsible for regulating the accounting profession in the country and the
Board of Accountancy (BOA) is responsible for the licensure examination as
well as for CPAs to observe the rules implemented in the Philippine
Accountancy Law of 2004 (RA 9298).

The auditor is appointed by the Board of Directors (BOD) of the corporation

and the Securities and Exchange Commission (SEC) requires external
auditors to be rotated every five years.

Notably, not all CPAs are allowed to sign on the financial statements. Such must be
accredited by the Board of Accountancy as well as the Bureau of Internal Revenue
as Tax practitioner. Requirements for Continuing Professional Education (CPE) is
also mandated before renewing for accreditation.
 Top Accounting and Auditing Firms
(In the Philippines)
Philippine Firm International Firm Facts (Local Firm)
1. SyCip Gorres Velayo & Ernst & Young (EY)  Largest multidisciplinary
professional services firm in the
Co. (SGV & Co.) Philippines
 Established in 1946
2. Navarro Amper & Co. Deloitte Touche Tohmatsu
(Deloitte Philippines) Ltd.)
3. Isla Lipana & Co. PWC (Pricewaterhouse  Founded in 1922 being the
oldest firm
Cooper)
4. R.G. Manabat & Co. KPMG  Fastest growing KPMG

5. Punongbayan & Araullo Grant Thornton International  Established in 1988

Ltd.
Roxas Cruz Tagle & Co. BDO Global  Fastest growing firm in the
Philippines

Source: Philpad.com Jan 13,2021

 BIG 4 ACCOUNTING FIRM
(In the World)
International Firm Philippine Firm Revenue Facts (International Firm)
Deloitte Touche 2. Navarro Amper  312K professionals and 150
countries
Tohmatsu Ltd.) & Co. (Deloitte $32.4B
Philippines)
PWC (Pricewaterhouse 3. Isla Lipana & Co. $32.09B  276K professionals and 157
countries
Cooper)

Ernst & Young (EY) 1. SyCip Gorres $25.83B  230K professionals around the
world and 150 countries
Velayo & Co. (SGV
& Co.)
KPMG 4. R.G. Manabat & $ 23.42B  Swiss firm with 207K
professionals and 157 countries
Co.

Note: #5 is Grant Thornton and #6 is BDO Global

Source: https://big4accountingfirms.org Sept 2021

 TYPES OF AUDIT
1. Financial Statement Audits is conducted to determine whether the financial statements of
an entity are fairly presented in accordance with the applicable financial reporting framework.

2. Compliance Audit involves the review of an organization’s procedures to determine whether

the organization has adhered to the specific procedures, rules or regulations. The criteria are
established by an authoritative body.

Example: BIR examination audit, BSP compliance audit

3. Operational Audit study of a specific unit of an organization for the purpose of measuring its
performance. The main purpose is to:
• Assess the entity’s performance
• Identify areas for improvement
• Make recommendations to improve performance

Operational Audit is also known as Performance Audit or Management Audit.

The criteria for this type of audit are not clearly established. The criteria are based on the
organization’s standards and objectives.
 Financial Statement Compliance Audit Operational Audit
Audit
Assertions The FS are fairly The organization has The organization’s
presented complied with the activities are
laws, regulations or conducted efficiently
contracts and effectively

Established Criteria Financial Reporting Laws, regulations and Objectives set by the
Framework contracts Board of Directors

Content of the report Opinion on the fair Reports on the Recommendations

presentation of the FS degree of on the improvements
in accordance with compliance with the of the operations
financial reporting applicable laws,
framework regulations and
contracts
 GENERAL CHARACTERISTICS OF
AUDIT
There are different kinds of audit, but all of them possess the following:

1. Systematic examination and evaluation of evidence undertaken to

ascertain whether assertions comply with the established criteria.

2. Communication of the results of the examination, in a written report,

to the party by whom, or whose behalf, the auditor was appointed.
 TYPES OF AUDITORS
1. External Auditors/ Independent Auditors

These are Certified Public Accountants who offer their professional services to clients
on a contractual basis. They generally perform the Financial Statements Audit.

2. Internal Auditors

Internal Auditors are the entity’s own employees who investigate and appraise the
effectiveness and efficiency of the operations and internal controls. They usually
perform Operational Audit.

3. Government Auditors

These are government employees whose main objective is to determine whether

persons or entities comply with government laws and regulations. They usually perform
Compliance Audit.
 Nature of Audit
1. 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

2. Responsibility of the Financial Statements

The management is responsible for preparing and presenting the financial statements in accordance
with the applicable financial reporting framework.

The auditor’s responsibility is to form and express an opinion on these financial statements based on the
audit result. An audit of financial statement does not relieve the management of its responsibilities.

3. Assurance Provided by the Auditor

The assurance provided by the auditor is not a guarantee that the financial statements are
dependable. An audit conducted in accordance with PSAs provides a reasonable assurance that the
financial statements are free from material misstatements. Inherent limitations are existent that could
affect the auditor’s ability to detect material misstatements.
 Nature of Audit
4. Nature of the Procedure

Practical and inherent limitations on the auditor’s ability to obtain evidence

 The use of testing or sampling risk.

Due to cost constraint (and time constraint), auditors do not examine all evidence available. Many
audit conclusions are made by examining sample of evidence only. When using a sample there is a
possibility that the conclusions drawn from the sample may be different from the conclusion that would
have been reached if the auditor examines the entire population.

 Error in the application of judgement or non-sampling risk

Even if the auditor examines all evidences, there is no absolute assurance that material misstatements
will be detected, because the work undertaken by the auditor to form an opinion is permeated by
judgement. There is a possibility of error in judgement that may cause mistakes in the application of
audit procedures.
 Nature of Audit
5. Nature of Financial Reporting

Application of PFRS involves estimation and judgement by the management. Most financial
statement items involve subjective decisions that are subject to inherent variability that cannot be
eliminated by performing audit procedures.

6. Nature of Evidence

The audit is evidence is generally persuasive rather than conclusive in nature. This is because audit
evidence comprises pieces of information and impressions that are gradually accumulated during
the course of audit, and when taken together persuade the auditor about the fairness of the
financial statements.

There is what we call inherent limitation; an unavoidable risk that even an audit conducted in
accordance with PSAs may not be able to detect material misstatements in the financial
statements. Subsequent discovery of the material misstatement in the financial statements does
not itself indicate a failure to conduct the audit in accordance with PSAs.

The auditor’s opinion is not an assurance as to the future viability of the entity nor the efficiency or
effectiveness with which management has conducted the affairs of the entity
General Requirements when
auditing financial statements:
PSA 200 – Overall objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with the Philippine Standards on Auditing

The objective of audit is to enhance the degree of confidence of the intended users in the
financial statements.

1. The auditor should comply with the ethical requirements relating to an audit of financial
statements, as stated in the code of ethics for CPAs (Part A and B) in order to retain public
confidence in the credibility of the auditors’ work.

 Integrity
 Objectivity
 Professional Competence and Due Care
 Confidentiality
 Professional Behavior
General Requirements when
auditing financial statements:
2. The auditor shall plan and perform an audit with professional skepticism recognizing that
circumstances may exist that cause the financial statements to be materially misstated.

Professional Skepticism is an attitude that includes a questioning mind, being alert to

conditions that may indicate possible misstatement due to error or fraud, and a critical
assessment of audit evidence.

3. The auditor shall exercise professional judgement in planning and performing an audit of
financial statements.

Professional Judgment – the application of relevant training, knowledge and experience,

within the context provided by auditing, accounting and ethical standards, in making
informed decisions about the courses of action that are appropriate in the circumstances of
the audit engagement.

Informed decisions throughout the audit cannot be made without the application of
professional judgement to the facts and circumstances.
General Requirements when
auditing financial statements:
4. To obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit
evidence to reduce the risk to an acceptably low level and thereby enable the auditor to
draw reasonable conclusions on which to base the auditor’s opinion.

Audit evidence is needed to support the opinion expressed in the auditor’s report. Sufficiency
and appropriateness of the audit evidence is a matter of professional judgement.

5. The auditor should conduct an audit with Philippine Standards on Auditing (PSAs).

Philippine Standards in Auditing issued by the Auditing and Assurance Council (AASC), and
according to PSA 200, are to be applied in assurance engagements other than audits or
reviews of historical financial information. PSAs contain the basic principles and essential
procedures which the auditor should follow. It contains explanatory and other materials that
are designed to assist auditors in interpreting and applying auditing standards.

In the auditor’s report, the auditor represent compliance with PSA.

General Requirements when
auditing financial statements:
WHY IS THERE A NEED FOR INDEPENDENT
FINACIAL STATEMENTS AUDIT?
1. Conflict of Interest between management and the users of financial statement.

Management are often times placed in a position where they can benefit from overly
optimistic financial result, outside parties however want unbiased, realistic financial
statements. Because of this conflict, users have become skeptical of unaudited financial
statements.

2. Expertise

Most users of financial information are not equipped with the 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.
WHY IS THERE A NEED FOR INDEPENDENT
FINACIAL STATEMENTS AUDIT?
3. Remoteness

Users of financial statements are usually prevented from directly assessing the
reliability of the information. They do not have direct access to the entity’s records
to personally verify the quality of the financial information. Therefore, an
independent auditor is needed to assist them in verifying the reliability of the
financial information.

4. Financial consequences

Misleading financial information could have substantial economic consequences

for a decision maker. Therefore, it is important that financial statements must be
audited first before they are used for making important decisions.
 THEORETICAL FRAMEWORK OF
AUDIT
Theoretical framework of Auditing is a selected postulates, assumptions or ideas that
support many auditing concepts and standards.

1. Audit function operates on the assumption that all financial data are verifiable.

Verifiability of the balances is embodied in the supporting documents or evidence

to prove their validity. If no evidence exists, there can be no audit to perform.

2. The auditor should always maintain independence with respect to the financial
statements under audit

The report of the auditor will be of no or little value if the readers are aware that the
auditor is not independent with respect to the client.
 THEORETICAL FRAMEWORK OF
AUDIT
3. There should be no long term conflict between the auditor and the client
management

Both parties must be interested in the fair presentation of the financial statements.

4. Effective internal control system reduces the possibility of material misstatements

of the financial statements.

The condition of the entity’s internal control directly affects the reliability of the
financial statements. The stronger the internal control, the more assurance is
provided about the reliability of the data.
 THEORETICAL FRAMEWORK OF
AUDIT
5. Consistent application of the applicable financial reporting framework such as the
PFRS results in fair presentation of financial statements

It is assumed that fair presentation is achieved when the applicable financial

reporting framework is applied. Any deviation from the specific requirements would
render the financial statements materially misstated.

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.

Knowledge accumulated in a client from prior audit years can be determine the
audit procedures to be performed.

7. An audit benefits the public.

Question!
1. An audit ascertaining the degree of correspondence between assertions and established
criteria. In case of audit of financial statements, which is not a valid criteria?

a. Philippine Standards on Auditing

b. Philippine Financial Reporting Standards
c. PFRS for Small Entities
d. PFRS for SMEs

2. An audit of financial statements is conducted to determine if the

a. Organization is operating efficiently and effectively

b. Client is following specific procedures or rules set down by the higher authority
c. Overall financial statements are stated in accordance with applicable financial reporting
framework
d. Client’s internal control is functioning as intended
Question!
3. An audit that is designed to designed to provide reasonable assurance of detecting
violations of a specific provisions of contract or grant agreement would be called

a. Performance Audit
b. Management Audit
c. Operational Audit
d. Compliance Audit

4. An auditor communicates the result of his work through

a. Engagement letter
b. Audit report
c. Management letter
d. Financial Statements
Question!
5. The NOT objective of an OPERATIONAL AUDIT is

a. Determine as to the fairness of the financial statement External Audit

b. Evaluate the feasibility of attaining the entity’s operational objectives
c. Make recommendation as to the entity’s performance improvement Performance Audit
d. Report on the entity’s relative success in attaining profit maximization Management Audit

6. An auditor communicates the result of his work through

a. Engagement letter
b. Audit report
c. Management letter
d. Financial Statements
Question!
7. Certain fundamental beliefs called "postulates" underlie auditing theory. Which of the
following is not a postulate of auditing?

a. No long-term conflict exists between the auditor and the management of the enterprise
under audit.
b. Economic assertions can be verified.
c. The auditor acts exclusively as an auditor.
d. An audit has a benefit only to the owners.

8. As used in auditing, which of the following statements best describes "assertions"?

a. Assertions are the representations of management as to the reliability of the information

system.
b. Assertions are the auditor's findings to be communicated in the audit report.
c. Assertions are the representations of management as to the fairness of the financial
statements.
d. Assertions are found only in the footnotes to the financial statements.
See you next meeting!