Week 1: Overview of Audit
Learning Objectives (LO)
After completing this module, the student is expected to:
1. Define what is auditing
2. Enumerate the different types of audits and auditors
3. Understand the advantages of audit and inherent limitations of audit
What is Auditing?
is
ar stu
ed d
vi y re
aC s
o
ou urc
rs e
eH w
er as
o.
co
m
As defined by the Philippine Standards on Auditing (PSA), auditing 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.
Another definition of auditing as defined by the American Accounting Association (AAA), it is a
systematic process of objectively obtaining and evaluating evidence regarding assertions about economic
actions and events to ascertain the degree of correspondence between these assertions and established
criteria and communicating results to interested users.
The above definitions convey the following notions with regards to auditing:



sh
Th

Auditing is a systematic process
An audit involves series of steps and procedures which are carried out in logical order.
Objectively obtaining and evaluating evidence
Objectively obtaining evidence means that the one conducting the audit should exercise an
impartial attitude, meaning to say, free from bias and conflicts of interests.
Evaluating evidence comes in the form of which the gathered information must be corroborated.
Such gathered information may come from the documents of the company, interview with
management and the like, of which calls for the need of validation and verification process.
Regarding assertions about economic actions and events
Assertions are the representations of management that explains the economic actions and
events that happen during the audit period. Accordingly, the role of an auditor is to validate such
assertions or management representations.
To ascertain the degree of correspondence between these assertions and established criteria
In conducting the audit, auditors use standards in order to ascertain the assertions made by the
management.
Established criteria are usually the standards that are being used to validate assertions or
management representations.
So, taking into an instance the audit of financial statements, the auditor will perform audit
procedures in order to ascertain that the financial statements prepared by the management
(this is the assertions) conforms with the Generally Accepted Accounting Principles (GAAP)(this
is the established criteria).
Communicating results to interested users

This study source was downloaded by 100000812118324 from CourseHero.com on 08-25-2021 06:58:14 GMT -05:00
https://www.coursehero.com/file/78040855/Week-1-Overview-of-Audit-ACTG411-Assurance-Principles-Professional-Ethics-Good-Govdocx/
This involves the process of communicating the audit findings to users of financial statements by
way of issuing the what we called, “auditor’s opinion”.
These users can be both internal and external users.
Internal users
These are the users of financial information who are working within the company and use
financial information primarily on planning, controlling and making decision for the betterment
of the company’s operations.
They are the company’s management itself – Senior/top-level management, middle level
management and low-level management.
External users
These are the users of financial information who are outside of an organization and does not
directly run its operations but uses financial information of the company to make decisions
particularly if decisions involve investing or granting credit to the company.
is
ar stu
ed d
vi y re
aC s
o
ou urc
rs e
eH w
er as
o.
co
m
Types of Audits
The following are the types audit that can be conducted:
1.
2.
3.
4.
5.
Financial Audit
Operational Audit
Tax Audit
Compliance Audit
Information System Audit
Financial Audit
-
This is the type of audit that confirms the fairness of all the information reported in a company’s
financial statement.
This is the most common type of audit being conducted by an independent Certified Public
Accountant (CPA).
Operational Audit
-
Th
-
This is a type of audit that involves an evaluation of processes, procedures, and results of the
operations of a business with the intention of improving the current processes and procedures
of the company.
This type of audit may be conducted internally or through hiring an external entity to do the
audit on the company’s behalf.
Tax Audit
-
This is a type of audit that involves examination of the tax returns submitted by an individual or
business entity, with the intention of determining whether income tax payment is valid and
correct and if such payment has been made on the proper period that such tax payments has
been made.
In the Philippine setting, this is the type of audit being conducted by the CPAs working in the
assessment division of Bureau of Internal Revenue (BIR).
sh
-
This study source was downloaded by 100000812118324 from CourseHero.com on 08-25-2021 06:58:14 GMT -05:00
https://www.coursehero.com/file/78040855/Week-1-Overview-of-Audit-ACTG411-Assurance-Principles-Professional-Ethics-Good-Govdocx/
Compliance Audit
-
This is the type of audit that determine whether the company’s current policies and procedures
is in compliance with internal or regulatory standards.
This type of audit is most commonly conducted in regulated industries.
Information Systems Audit
-
This is a type of audit that involves a review of the controls over software development, data
processing, and access to computer systems.
The type of audit is intended in order to determine any issues that could impair the ability of
information technology (IT) systems to provide accurate information to users, as well as to
ensure that unauthorized users do not have access to the data and such data are well protected
from such unauthorized users.
is
ar stu
ed d
vi y re
aC s
o
ou urc
rs e
eH w
er as
o.
co
m
Advantages of Audit
Audits are usually conducted in order to assess the fairness and reliability of the information being
provided. Thus, audit primarily gives the following advantages:
1. It safeguards the financial interest of persons who are not associated with the management of
the entity, whether they are partners or shareholders.
2. It acts as a moral check on the employees from committing defalcations or embezzlement.
3. Audited statements of account are helpful in setting liability for taxes, negotiating loans and for
determining the purchase consideration for a business.
4. This are also use for settling trade disputes or higher wages or bonuses well as claims in respect
of damage suffered by property, by fire or some other calamity.
5. An audit can also help in the detection of wastage and losses to show the different ways by
which these might be checked, especially those that occur due to the absence of inadequacy of
internal checks or internal control measures.
6. Audit ascertains whether the necessary books of accounts and allied records have been properly
kept and helps the client in making good deficiencies or inadequacies in this respect.
7. As an appraisal function, audit reviews the existence and operations of various controls in the
organizations and reports weakness, inadequacy, etc., in them.
8. Government may require audited and certificated statement before it gives assistance or issues a
license for a particular trade.
Th
Moreover, through outlining the advantages of performing an audit on a specific perspective of
stakeholders, the following are its advantages taking on the viewpoint of a businessman and an investor.
sh
Businessman’s point of view
1. Detection of errors and
frauds
2. Loan from banks
3. Builds reputation
4. Proper valuation of
assets
5. Government
Investor’s point of view
1. Protects interest
2. Moral check
3. Proper valuation
investments
4. Good security
of
Other Advantages
1. Evaluate financial status
2. Boosting of shares
3. Settlements of claims
4. Evidence in court
5. Settlement of accounts
6. Facilitates taxation
This study source was downloaded by 100000812118324 from CourseHero.com on 08-25-2021 06:58:14 GMT -05:00
https://www.coursehero.com/file/78040855/Week-1-Overview-of-Audit-ACTG411-Assurance-Principles-Professional-Ethics-Good-Govdocx/
acceptance
6. Update accounts
7. Suggestions
improvement
8. Useful for agency
for
Inherent Limitations of Audit
Though audits provide reliance on the information being provided to users of such information, there are
still inherent limitations that should be noted.
Generally speaking, the following are the inherent limitations of audit:
sh
Th
is
ar stu
ed d
vi y re
aC s
o
ou urc
rs e
eH w
er as
o.
co
m
1. Non-detection of errors and/or frauds:
- Auditor may not be able to detect certain frauds which are committed with intentions.
2. Dependence on explanation by others:
- Though exercised by skepticism, auditor has to depend on the explanation and
information given by the responsible personnel of the company.
3. Dependence on opinions of others
- Auditor has to rely on the views or opinions given by different experts such as Lawyers,
Engineers, Architects, Appraisers and other professionals, since an auditor is not an
expert in all the fields.
4. Conflict with others
- Auditor may have differences of opinion with the accountants, management, engineers,
etc. in such case a personal judgement may be employed, of which may differ from
person to person.
5. Effect of inflation and other economic related issues
- Financial statements may not disclose true picture even after audit due to inflationary
trends and other economic related issues.
6. Corrupt practices may influence the auditors
- The management may use corrupt practices to influence the auditors in order to get a
favorable report about the current status of the company, i.e., bribery.
7. No assurance
- Auditor cannot give any assurance about future profitability and prospects of the
company.
8. Inherent limitations of the financial statements
- Financial statements do not reflect current market values of the assets and liabilities.
Estimations are based on personal judgement of the owners of which are being used as
basis for a company policy.
9. Detailed checking is not possible
- Auditor cannot check each and every transaction due to large volume of daily
transactions. Consequently, auditors opt to use sampling techniques of which has also its
own limitations.
Specifically, inherent limitations of audit are the following:
This study source was downloaded by 100000812118324 from CourseHero.com on 08-25-2021 06:58:14 GMT -05:00
https://www.coursehero.com/file/78040855/Week-1-Overview-of-Audit-ACTG411-Assurance-Principles-Professional-Ethics-Good-Govdocx/
1. The work of an auditor involves exercise of judgment.
Examples:
i. Deciding the extent of audit procedures and in assessing the reasonableness of the
judgment and estimates made by the management in preparing the financial statements.
ii. Reasonable conclusions of an auditor about the results of the audit being conducted is being
drawn from the evidence available to the auditor.
Because of this, the audit evidence obtained by an auditor is generally persuasive in nature
rather than conclusive in nature. Because of these factors, the auditor expresses an opinion
based only on the audit evidences that has been obtained. Therefore, absolute certainty in
auditing is rarely attainable.
There is also likelihood that some material misstatements of the financial information
resulting from fraud or error, if either exists, may not be detected.
is
ar stu
ed d
vi y re
aC s
o
ou urc
rs e
eH w
er as
o.
co
m
2. The entire audit process is generally dependent upon the existence of an effective system of
internal control.
Further, this gives an impression that there is always some risk associated in an internal control
system failing to operate as designed.
Thus, internal control system also suffers from certain inherent limitations. Any system of
internal control may be ineffective against fraud if there are collusion among employees or fraud
committed by management.
Certain levels of management may be in a position to override controls.
Example:
1. Managers directing subordinates to record transactions incorrectly or to conceal them, or by
suppressing information relating to transactions. Such inherent limitations of internal
controls system also contribute to inherent limitations of an audit.
Types of Auditors
The following are the types of auditors:
Th
1. Independent/External Auditors
2. Internal Auditors
3. Government Auditors
Independent/External Auditors
-
This type of auditor is a professional audit services provider who performs an independent
examination of financial statement and express opinion if such financial report is free from any
material misstatements.
Independent auditors are usually Certified Public Accountants (CPAs) who are either individual
practitioners or members of public accounting firms who render professional auditing services to
clients.
sh
-
Internal Auditors
This study source was downloaded by 100000812118324 from CourseHero.com on 08-25-2021 06:58:14 GMT -05:00
https://www.coursehero.com/file/78040855/Week-1-Overview-of-Audit-ACTG411-Assurance-Principles-Professional-Ethics-Good-Govdocx/
-
This is a type of auditor who are employees of the organization where they conduct an audit.
This type of auditors is involved in an independent evaluation of evidence, called internal auditing,
within an organization as a service to the organization.
The objective of internal auditing is to assist the management of the organization in the effective
discharge of its responsibilities and helps maintain sound internal control system.
Government Auditors
This is a type of auditor who are working with various government agencies.
In the Philippines, the most common agencies that performs audit are those working in the
Commission of Audit (COA) which conducts audit on the disbursements and other transactions of
government officials.
sh
Th
is
ar stu
ed d
vi y re
aC s
o
ou urc
rs e
eH w
er as
o.
co
m
-
This study source was downloaded by 100000812118324 from CourseHero.com on 08-25-2021 06:58:14 GMT -05:00
https://www.coursehero.com/file/78040855/Week-1-Overview-of-Audit-ACTG411-Assurance-Principles-Professional-Ethics-Good-Govdocx/
Powered by TCPDF (www.tcpdf.org)