THEORY ON AUDITING AND ATTESTATION SERVICES

Fundamentals of Auditing and Assurance Services

Learning Objectives:

a. Describe the role of auditing in meeting society’s demands for reliable financial information.
b. Discuss the nature, objective, and elements of assurance engagements.
c. Identify and differentiate the types of assurance engagements.
d. Discuss the nature, philosophy, and objectives of auditing
e. Identify and differentiate the types of audits.

Economic Demand for Auditing

• Why do many of the largest spend millions of pesos each year for their annual audit? Is it worth asking
why an entity would decide to spend on much money on an audit? Is it because these audits are
required by law?
• A capital market allows a public company to sell small pieces of ownership or to borrow money in the
form of thousands of small loans so that vast amounts of capital can be raised from a wide variety of
investors and creditors.
• A public company is a company that sells its stocks or bonds to the public giving the public a valid
interest in the proper use of the company’s resources.
• The growth of the modern corporation led to diverse group of owners who are not directly involved in
running of business and the use of professional managers hired by owners to run the corporation
daily. In this setting, the managers serve as agents for the owners and fulfill a stewardship function
by managing the corporation’s assets.

What are Assurance Services?

• It is used to describe broad range of information enhancement services performed by a CPA that are
designed to enhance the degree of confidence in the information.
• Two types: (a) those that increase reliability of information and (b) those that involve putting
information in a form or context that facilitates decision-making.

Philosophy of an Audit

• As the amount of capital involved and the number of potential owners increase, the potential impact
of accountability also increases.
• The auditor’s role is to determine whether the reports prepared by the manager conform to the
contract provisions. Thus, auditor’s verification of the financial information adds credibility to the
report and reduces information risk (risk of false or misleading information).
• In a financial statement audit, the auditors undertake to gather evidence to obtain high level of
assurance that financial statements are free of material misstatements due to fraud or errors, and
that they are presented in accordance with appropriate accounting framework.

Importance of Audited Financial Statements

• Audited report is an accepted means by which business corporations report their operating results
and financial position.
• The word “audited”, when applied to financial statements, means that the balance sheet and the
statement of income, retained earnings, and cash flows are accompanied by an audit report prepared
by independent public accountants, expressing their professional opinion as to the fairness of the
company’s financial statements.
• Unaudited financial statements may have been honestly, but carelessly, prepared. Liabilities may
have been overlooked and omitted from the balance sheet. Assets may have been overstated as a
result of arithmetical errors or due to lack of knowledge of financial accounting and reporting
standards. Net income may have been exaggerated because expenses were capitalized or because
sales transactions were recorded in advance of delivery dates.
• Audits provide users with assurance that the financial statements are presented in accordance with
the financial accounting principles and reporting standards.

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Users of Audited Financial Statements

Users Types of Decisions

Management Review performance, make operational decisions. Report results to capital markets
Stockholders Buy or sell stocks
Bondholders Buy or sell bonds
Financial Evaluate loan decisions, considering interest rates, terms, and risks
institutions
Taxing Determine the taxable income and tax due
authorities
Regulatory Develop regulations and monitor compliance
agencies
Labor Unions Make collective bargaining decisions
Court system Assess the financial position of a company in litigation
Vendors Assess credit risk
Retired Protect employees from surprises concerning pensions and other post-retirement
employees benefits

Who is a Professional Accountant?

A professional accountant is an individual who holds a valid certificate issued by the Board of Accountancy,
whether he or she be in public practice, industry, commerce, the public sector, or education. This professional
accountant may belong to any of the following sectors:

• Professional Accountant in Public Practice – auditing, tax, or consulting

• Professional Accountant in Business – employed or engaged in an executive or non-executive
capacity in the following sub-sectors:
o Commerce and industry
o Education
o Government

Scope of Practice (Philippine Accountancy Act of 2004 (RA. 9298) Article 1, Section 4, paragraphs a to d)

a. Practice of Public Accountancy – accounting or auditing firm with skills, knowledge, science, and
practice of accounting, and as a qualified person to render professional services as a CPA.
b. Practice in Commerce and Industry – person involved in decision making requiring professional
knowledge in the science of accounting, or when such employment or position requires that the
holder thereof must be a certified public accountant.
c. Practice in Education/Academe – person in an educational institution which involves teaching of
accounting, auditing, management advisory services, finance, business law, taxation, and other
technically related subjects.
d. Practice in the Government – person who holds a position in the accounting professional group in
government or government-owned and/or controlled corporation.

Assurance Services

• These services are independent professional services that improve the quality of information, or its
context, for decision makers.
• It focuses on the following:
o Decision-making – good decisions require quality information from a broad set of assurance
services (can be financial or non-financial).
o Improving the quality of information – increasing confidence in the information’s reliability
and relevance
o Independence – objectivity of the application of professional judgement and due care by the
provider.

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Attest Services

• Attest services occur when a practitioner is engaged to issue a report on subject matter, or an
assertion about subject matter, which is the responsibility of another party.
• Auditors have a reputation for independence and objectivity. As a result, various parties frequently
request that auditors attest to information beyond historical information.
• The subject matter of attest services can take in many forms, including prospective information,
analyses, systems, and processes, and even the specific actions of specified parties.

Audit Services

• It is a systematic process of objectivity obtaining and evaluating evidence regarding assertions about
economic actions and events to ascertain the degree of correspondence between those assertions
and established criteria and communicating the results to interested users.
• Systematic process implies that there should be a well-planned and thorough approach for
conducting an audit.

Relationship among Assurance, Auditing, and Attest Services

• Assurance Services
o Attestation Services
▪ Audits of FS
▪ Examination of Internal Control
▪ Trust Services
▪ Reviews of FS or other information
▪ Agreed-upon procedures engagements
o Other Assurance Services
• Non-Assurance Services
o Tax services
o Management Consulting Services (fraud investigation and IT consulting)
o Other non-assurance services such as compilation, accounting, and data processing system
services

Types of Auditors

a. External auditors – CPA firms have as their primary responsibility the performance of audits of the
published historical financial statements of all publicly traded companies. CPAs can perform
operational auditing as well as compliance auditing as part of their management consultancy
services.
b. Internal auditors – accountants hired by an entity as consultants or employees of individual
companies who perform independent appraisal activity within the organization such as review of
accounting, financial, and other operations as a basis of service to management.
c. Government auditors – auditors who perform a significant number of audits to several government
agencies.
a. COA auditors – auditors from the Commission on Audit (COA). Functions are the same as
those of a CPA firm, but emphasis is also given to compliance. They also have to evaluate the
operational efficiency and effectiveness of various government programs as the
expenditures and receipts of government agencies are defined by law.
b. BIR examiners – auditors who determine whether the taxpayers have complied with the tax
laws. An auditor involved in these areas must have considerable tax knowledge and auditing
skills to conduct an effective audit.
c. Regulatory auditors – from SEC, BSP, Cooperative Commission, Office of Insurance
Commissions, and other government agency examiners
d. Forensic auditors – employed by corporations, government agencies, public accounting firms, and
specialized consulting and investigative services firm who are specially trained in detecting,
investigating, and deterring fraud, and white-collar crimes. Example is probing money-laundering
activities.

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Types of Other Audit Services

Internal Auditing
Nature It is an independent, objective assurance, and consulting activity designed
to add value and improve an organization’s operations.

It helps an organization accomplish its objectives by bringing a systematic,

disciplined approach to evaluate and improve the effectiveness of risk
management, control, and government processes.
Objective and Scope This is to assist all members of management in the effective discharge of
their responsibilities, by furnishing them with analyses, appraisals,
recommendations, and pertinent comments concerning the activities
reviewed.
Objectives:
▪ Reviewing and appraising the soundness, adequacy, and
application of accounting, financial, and other operational controls,
and promoting effective control at reasonable cost.
▪ Ascertaining the extent of compliance with established policies,
plans, and procedures.
▪ Ascertaining the extent to which company assets are accounted
for and safeguarded from losses of all kinds.
▪ Ascertaining the reliability of management data developed within
the organization.
▪ Appraising the quality of performance in carrying out assigned
responsibilities.
▪ Recommending operating improvements.

Compliance Auditing
Nature It is an examination, audit, and settlement in accordance with law and
regulations.
Objective and Scope It determines the extent to which rules, policies, laws, covenants, or
government regulations are followed by the entity being audited.

Example is an audit of tax returns of individuals and companies by the BIR

for compliance with the tax laws.

Operational Auditing
Nature It is a future-oriented, independent, and systematic evaluation performed
by the internal auditor for management of the operational activities
controlled by top, middle, and lower-level management for the purpose of
improving organizational profitability and increasing attainment of the
other organizational objectives.
Objective and Scope It involves a systematic review of part of all of an organization’s activities to
evaluate whether resources are being used effectively and efficiently.

Sometimes, this audit is referred to as a performance audit or management

audit.

This has increased in importance over the years, and this trend will likely
continue.

An example of an operational audit is when an entity auditors assess the

efficiency and effectiveness of its use of information technology resources.

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THEORY ON AUDITING AND ATTESTATION SERVICES
Forensic Auditing
Nature, Objective, and Scope It is to detect a deter fraudulent activities.

This has increased in importance over the years, and this trend will
continue.

An example is an audit of business or employee fraud, various other types

of criminal investigations where money or other assets are involved, and
matrimonial disputes involving division of assets.

Types of Other Attest Services

▪ Attesting the nature and quantity of inventory stored in an entity’s warehouse so that the entity can
obtain a bank loan with the inventory as collateral.
▪ Assertions related to sustainability-claimed reductions in carbon emission or appropriate handling of
hazardous waste.

Other Non-Assurance Services

▪ Agreed-Upon Procedure – the party engaging the professional accountant, or the intended user
determines the procedures, and the professional accountant provides a report of factual findings
because of undertaking those procedures.
▪ Tax Preparation and Planning Services – accounting firms have tax professionals that assist clients in
preparing and filing tax returns, providing advice on tax and estate planning, and representing clients
on tax issues before the BIR or tax courts.
▪ Management Advisory Services – involve providing advice and assistance concerning an entity’s
organization, human resources, finances, operations, IT systems, or other activities.
▪ Compilation, Accounting, and Data Processing system Services – bookkeeping, payroll processing,
and preparing financial statements. When a public accounting firm prepares the financial statements
of companies, the services are known as compilations. Another example is engaging a business in an
outsourcing activity to perform bookkeeping and other accounting services.

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