AUDIT AND ASSURANCE PRINCIPLES
Auditing Theory (AT) is a subject wherein those
things that are being bond by a CPA in an actual
practice is being exemplified. This is different
from Financial Accounting because what being
done there are recording, valuing, presenting and
disclosing financial information.
FINANCIAL
AUDITING
ACCOUNTING
AND
EXTERNAL
FINANCIAL ACCOUNTING
financial statements
or
the
General
Purpose
Financial
Statements (GPFS)
MAIN OBJECTIVE
to
produce
or
generate GPFS
INPUT(S)
source
documents
(e.g. vouchers, official
receipts, etc.)
STANDARDS
IASs → PASs → based
on GAAP [1]
OUTPUT
From the historical cost, from the events that
happened in the past, such information is being
collected to construct a financial statement. It
does not mean, that in FA, when a financial
statement is made, it is automatically reliable.
Although the characteristics of financial
information is to become reliable and relevant.
Therefore, to assure that the information
provided by the accountant are relevant and
reliable, an external auditor is needed.
The content of the financial statements and the
claims implied in the financial statements are the
things that will be audited. Implicitly, when the
financial accountant prepared the financial
statements, he also provided claims through the
financial statements he made.
EXAMPLE: a financial accountant made the
inventories, in which he stated at P10 million. He
implicitly claimed there that the company has
inventories worth P10 million. To prove such
claim, the auditor will conduct a procedure to
determine if the information provided by the
accountant are reliable.
The main job of the auditor is to lend his
credibility in the financial statement.
EXTERNAL AUDITING
OUTPUT
audit report
MAIN OBJECTIVE
to verify that the
information provided
by the accountant are
relevant and reliable
INPUT(S)
output of the financial
accounting, which is
the GPFS. i.e. the
input in auditing is the
output of the financial
accounting.
STANDARDS
International
Standards on Auditing
(ISA)s → International
Standards on Auditing
(ISA)s [2]
In AT, procedures are tackled while in Auditing
Problem (AP), recomputation of accounts are
tackled. When a company loans or invests in a
bank, the latter asks not just for financial
statements but for audited financial statements.
It is because the auditor who audited such
financial statements already lends credibility to
the financial statements.
*“Lends credibility” refers to when an auditor
audits financial statements, it is like he is using his
professional credibility to provide credibility to the
financial statements.
In FA, the books being used are the International
Accounting Standards (IAS), which when adapted
by Philippines it became Philippine Accounting
Standards (PAS). It is because Philippines is one of
the countries that are early adapters of the IAS
and also one of the early members of the
International Federations of Accountants (IFAC).
The requirement for countries to be a member of
the IFAC is to adapt ALL the IAS without
modification because if otherwise, there would
be a need to file for justifications of the
modifications made in the standards which would
take a lot of time.
[1]
In Auditing, GAAP remains vital because the
financial statements to be audited are based on
it. In order to assess the financial statements
whether the information provided are proper,
the reason why the financial accountant made
those must be understood or known by the
auditor.
[2]
However, the procedures to conduct an audit
of historical financial information must be based
on ISAs or PSAs.
Generally, there are two types of auditor:
1.
Internal auditor- he is an employee of the
company in which its financial statements
are being audited by himself. The company
engages him to audit the policies whether if
it is being implemented properly or not.
- has bias because the company itself
hired him. His main objective is to is to
check if the policies of the company are
updated or not for the company to
improve to cope up with the changing
situations.
2.
External auditor-the main objective of this
subject is to become an external auditor. He
is not an employee of the company that is
being audited but of auditing firms in usual.
- His primary goal is to audit the
historical financial information (HFI)[3]
of different companies. He can have
several clients to audit that is why this
is under the category of public practice.
[3]
it not being called as audit of financial
statements
because
“financial
statement” is a general thing. For
example, Statement of Financial Position
and Audit of Financial Position. It means
that the entirety of the FS is audited. But
when referred as “audit of historical
financial information”, the components
of the financial position, cash flow or
comprehensive income are only being
audited.
It is HFI because the accounts and amounts are
stated based on historical cost therefore the
contents that will be audited are the historical
costs. The costs are referred as historical costs
because the amounts are based on past
transactions.
OVERVIEW OF THE AUDIT (FIVE MAJOR
COMPONENTS)
1. AUDIT PLANNING (pre planning phase or
proper planning phase) – this topic involves
the necessary skills and the technical
qualifications to determine the readiness on
taking the audit.
a. pre planning phase – requisites for
auditability the company. In this phase,
whether or not the company is
auditable will be known because there
are some clients that are not auditable.
b. proper planning phase – audit program
and procedures. This involves creating
programs, formulating strategies on
conducting the entire audit procedures.
2. FRAMEWORK OF ENTITY’S INTERNAL
CONTROL – this determines the status of the
internal control of the company. Internal
control involves policies and procedures that
are being implemented by the management in
charge of the governance, i.e. these are the
policies approved by the Board of Directors
that are being implemented in the company
that will be audited.
– If the internal control is unknown, the
auditor would not be able to determine
if the amounts provided by the
accountant is reliable or not.
EXAMPLE: the accountant determines which
inventories are included and not included. He
did not assure that the amount of the
inventories, which is P10 million, is reliable or
not. Then the auditor will check the amount
provided through conducting procedures.
First the internal control of the inventory will
be checked to determine if there is a lapse in
the internal control, in which the amount
provided by the accountant and the amount
determined by the author did not match.
Internal control involves policies. Therefore,
the question is what are the company’s
policies in maintaining the inventory. Was it
FIFO or Weighted Average? Are there CCTVs
installed in the warehouse?
3. ASSESSMENT OF INTERNAL CONTROL – this
involves assessment of internal control
whether the policies are being operated
effectively. It includes control risk
assessment whether high or low (attributes
or characteristics).
– The risk has something to do with
uncertainty, doubt. Control risks are the
risks which imply that the policies of the
company cannot detect error in the
financial statement. As the doubt or risk
increases, the tendency that the
policies of the company are not
effective also increases.
Increasing risks = policies are not effective
Decreasing risks = policies are effective
EXAMPLE: the assessment of the auditor is
that the company has a high control risk, is
there a high chance that the its financial
statements are wrong or not reliable? YES.
Therefore, the auditor will conduct several
tests to ensure that the financial statements
of the company are reliable.
The higher the risk, the more there would be
tests to conduct. If the risks are low, there
would be lesser tests to conduct. This is
because the assurance that the FS are
reliable and /or the policies are effective are
inversely proportional with the risks.
↑ risks ↓ policy effectiveness ↓ reliability of FS
↓ risks ↑ policy effectiveness ↓ reliability of FS
4. SUSTANTIVE TESTING – this is the actual
auditor’s procedure pertaining to the
monetary values in the financial statements.
This amount of substantive testing to be
conducted by the auditor is based on the
assessment of the internal control.
↑ risks ↑ procedures to conduct
↓ risks ↓ procedures to conduct
5. AUDIT REPORT