Chap001__Audit Role of CPA_DC

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 The broad range of information enhancement
services that are provided by certified public
accountants (CPAs).
 Two types:
 Increase reliability of information
 Putting information into a form or context that
facilitates decision making.

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AUDITING
A more comprehensive definition of auditing is given by
the American Accounting Association:
"An audit 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 the results to
interested users."

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This definition conveys the following thoughts.
1. Auditing is a systematic process.
Auditing proceeds by means of an ordered and structured series of steps.
This enables the auditor to conduct the audit in a more efficient manner by
ensuring that all potential risks are properly addressed in every step of the
audit process.
2 An audit involves obtaining and evaluating evidence
about assertions regarding economic actions and events.
Assertions are representations made by an entity about economic actions
and events. The auditor's overall objective is to determine whether these
assertions are valid. In order to achieve this objective, the auditor obtains
and evaluates relevant evidence that will either corroborate or refute the
assertions.

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3. An audit is conducted objectively.
The audit should be conducted without bias. Objectivity requires the auditor
to make an impartial assessment of all the relevant circumstances in forming
a conclusion. Auditors should not allow bias or conflict of interest to override
professional judgment.. Objectivity is essential because the auditor's
conclusion can influence the decisions of parties relying on the report.
4. Auditors ascertain the degree of correspondence
between assertions and established criteria.
Established criteria are needed to judge the validity of the assertions. These
criteria are important because they establish and inform the users of the
basis against which the assertions have been evaluated or measured.
5. Auditors communicate the audit results to various
interested users.
The communication of audit findings is the ultimate objective of any audit.
For the audit to be useful, the results must be communicated to interested
users in a timely manner.

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TYPES OF AUDITS

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 Assurance Services
 Attestation Services
 Example: Audits of Financial Statements, Examinations
of Internal Control
 Other Assurance Services
 Example: Review of processes
 NonAssurance Services
 Tax Services
 Management Consulting Services
 Other

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 To attest to information means to provide
assurance as to its reliability
 Attest engagement:
A practitioner is engaged to issue or does issue an
examination, a review, or an agreed-upon
procedures report on subject matter or an assertion
about subject matter that is the responsibility of
another party (e.g. management)

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Management
Subject
Matter
Suitable
Criteria
The CPA
Gathers
Evidence
Subject
Matter*
The Attest
Report
Issues
Report
*May be management’s assertion about the subject matter.

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 Standards established or developed by groups
of experts.
 Example: Internal control audit – standards
established by a committee of experts on
internal control
 Example: Financial statement audit – standards
are GAAP. For a financial statement audit
suitable criteria are referred to as the
“applicable financial reporting framework.”

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*Applicable financial reporting framework
Management
Prepares
Financial
Statements
Criteria
(e.g., GAAP)
The
Auditors
Gathers
Evidence
Financial
Statements
The Auditors’
Report
Issues
Report

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 Auditors gather evidence and provide a high
level of assurance that the financial statements
follow GAAP, or some other appropriate basis
of accounting
 Audit involves searching and verifying
accounting records and examining other
documents
 Evidence necessary to issue an audit report that
states auditors’ opinion

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Evidence focuses on whether financial statements are
presented in accordance with GAAP; examples:
 Statement of Financial Position contains all liabilities
 Statement of Income
 Sales really occurred
 Sales have been recorded at appropriate amounts
 Recorded costs and expenses are applicable to period
 All expenses have been recognized
 Financial statement amounts
 Accurate, properly classified and summarized
 Notes are informative and complete

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 Audits lend credibility to information by reducing
information risk, the risk that information is
materially misstated
 Financial statement misstatements arise due to--
 Accidental errors
 Lack of knowledge of accounting principles
 Unintentional bias
 Deliberate falsification
 Audits do not directly address business risk, the risk
that a company will not be able to meet its financial
obligations due to economic conditions or poor
management decisions

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Period Developments Audit Objective Nature of Audit
Ancient - 1850 Audits of city states,
individuals & ventures
Detection of fraud Detailed; No reliance on
controls
1850-1905 Industrial revolution
resulted in the need for
corporate audits
Detection of fraud &
clerical errors
Some testing; No reliance
on controls
1905-1940 Development of stock
markets - increased
emphasis on earnings
Determination of
fairness; detection of
fraud & errors
Increased emphasis on
testing; Slight reliance on
controls
1940-1975 Development of auditing
standards
Determination of
fairness
Substantial reliance on
controls
1975-1985 Criticism by Congress;
Increased self-regulation
Determination of
fairness
Internal control
determines scope of
audit
1985-1995 Increased demands for
reporting on compliance &
internal control
Determination of
fairness
Risk assessment
determines audit scope;
must assess risk of fraud
1995-Present Panel on Audit
Effectiveness; Sarbanes-
Oxley Act of 2002
Determination of
fairness
Business risk approach
to audits

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 2000—The Panel on Audit Effectiveness
made a variety of suggestions to improve
audits.
 2001—Enron Bankruptcy
 2002—WorldCom Fraud
 2002—Sarbanes-Oxley Act
 2003—Public Company Accounting
Oversight Board began operations

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 Audit of the financial statements of an entity
 Covers the statement of financial position and
related statements of income, retained earnings and
cash flows
 Goal is to determine if prepared in conformity with
GAAP
 Performed by CPAs
 Users include management, investors, bankers,
creditors, financial analysts, government agencies

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 Compliance Audits
 Example: Audit of income tax return
 Operational Audits
 Example: Effectiveness of operations of receiving
department of a manufacturing company
 Integrated Audits
 Example: Assurance on both the financial
statements and effectiveness of internal control
over financial reporting

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TYPES OF AUDITS
Auditors can be classified according their affiliation with
entity being examined.
 External Auditors or Independent Auditors.
These are independent Certified Public Accountants (CPAs) who offer their professional
services to different clients on a contractual basis. External auditors are the ones who
generally perform financial statement audits.
 Internal Auditors
These are entity's own employees who investigate and appraise the effectiveness and
efficiency of operations and internal controls. The main function of internal auditors is to
assist the members of the organization in the effective discharge of their responsibilities.
Internal auditors usually perform operational audits, compliance audits, address internal
control and report to the audit committee of the board of directors and to the president.
The Institute of Internal Auditors is the international organization of internal auditors.
 Government Auditors
These are government employees whose main concern is to determine whether persons or
entities comply with government laws and regulations. Government auditors usually conduct
compliance audits.

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THE INDEPENDENT
FINANCIAL STATEMENT AUDIT
Objective: to enable the auditor to express an opinion whether the
financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting framework.
 Responsibility for the financial statements:
Management
• 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 results.
• An audit of statements does not relieve management of its responsibilities.
• Hence, it is management's responsibility to adopt and implement adequate
accounting and internal control systems that will help ensure the preparation of
reliable financial statements.

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THE INDEPENDENT
FINANCIAL STATEMENT AUDIT
 Assurance provided by the auditor
• The auditor's opinion on the financial statements is not a guarantee that the
financial statements are dependable.
• An audit conducted in accordance with the Philippine Standards on Auditing
(PSAs) is designed to provide only reasonable assurance (not absolute
assurance) that the financial statements taken as a whole are free from material
misstatements.
• This is because there are inherent limitations of an audit that affect the auditor's
ability to detect material misstatements.
• Limitations may arise from:
a. Nature of the procedures performed
b. Nature of financial reporting framework used
c. Nature of evidence obtained by the auditor
c.1 Use of testing or sample risk
c.2 Error in the application of judgment or non-sampling risk

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• Audit evidence obtained by the auditor does not consist of "hard facts" which prove
or disprove the accuracy of the financial statements. Instead, it comprises pieces of
information and impressions which are gradually accumulated during the course of an
audit and which, when taken together, persuade the auditor about the fairness of the
financial statements. Thus, audit evidence is generally persuasive rather than
conclusive in nature.
• Owing to the inherent limitations of an audit, there is unavoidable risk that even an
audit conducted in accordance with the PSAs may not be able to detect material
misstatement in the financial statements.
• Accordingly, the subsequent discovery of a material misstatement of the financial
statements does not in itself indicate a failure to conduct the audit in accordance with
the PSAs.
• In addition, the auditor's opinion on the financial statements deals with whether the
financial statements are prepared in accordance with the applicable financial
reporting framework.
• The opinion of the auditor 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.

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General Requirements when
Auditing Financial Statements
1. The auditor should comply with the relevant ethical requirements, including
those pertaining to independence, relating to financial statements audit
engagements.
In order to retain public confidence in the credibility of the auditors' work,
auditors must adhere to standards of ethical conduct that embody and
demonstrate integrity, objectivity, and concern for the public rather than self-
interest.
2. The auditor should conduct an audit in accordance with the Philippine
Standards on Auditing (PSAs).
3. The auditor should apply professional judgment in planning and performing
the audit.
4. The auditor should obtain sufficient appropriate audit evidence to reduce
the audit risk to an acceptably low level.
5. The auditor should plan and perform the audit with an attitude of
professional skepticism recognizing that circumstances may exist which may
cause the financial statements to be materially misstated.

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NEED FOR AN INDEPENDENT
FINANCIAL STATEMENT AUDIT
1. Conflict of interest between management
and users of financial statements.
2. Expertise
3. Remoteness
4. Financial consequences

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THEORITICAL FRAMEWORK OF
AUDITING
1. The audit function operates on the assumption that all financial
data are verifiable.
All balances reported in the financial statements must have supporting documents
or evidence to prove their validity. If no evidence exists in relation to the financial
statements on which an auditor is to express an opinion, then there can be no audit
2. The auditor should always maintain independence with respect
to the financial statements under audit.
Independence is essential for ensuring the credibility of the auditor's report. The
report of the auditor will be of little or no value to the of the financial statements if
the readers are aware that the auditor is not independent with respect to the client.
3. There should be no long-term conflict between the auditor and
the client management.
Short-term conflicts may exist regarding the application of auditing procedures and
accounting principles, but in the end, both the auditor and the management must
be interested in the fair presentation of the financial statements.

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THEORITICAL FRAMEWORK OF
AUDITING
4. Effective internal control system reduces the possibility of
material misstatements of the financial statements.
The condition of the entity's internal control system directly affects the reliability of
the financial statements. The stronger the internal control is, the more assurance it
provides about the reliability of the accounting data and financial statements.
5. Consistent application of the applicable financial reporting
framework such as the PFRS results in fair presentation of final
statements .
Auditors often use different criteria to evaluate the validity of an assertion. In the
case of a financial statement audit, the criteria are usually the financial reporting
frameworks which could be the PFRS, PFRS for Small and Medium-sized Entities,
or PFRS for Small Entities.

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THEORITICAL FRAMEWORK OF
AUDITING
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.
Experience and knowledge accumulated from auditing a client in prior years can be
used to determine the appropriate audit procedures that need to be performed.
7. An audit benefits the public.
Financial statements are ordinarily prepared and presented in order to meet the
common information needs of a wide range of users. These users who rely on the
financial statements as their major source of information are the primary beneficiary
of the financial statement audit.

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 Attestation and Assurance
 Tax
 Consulting
 Accounting
 Personal Financial Planning
 Litigation support
 Fraud Investigation
 Personal Financial Planning

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Partners
Managers
Seniors
Staff

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 Partner—Overall responsibility is to assure that
that audit is performed in accordance with
professional standards.
 Manager—Supervise overall engagement.
 Seniors—”In charge” auditor on a daily basis.
 Staff—Work under the immediate supervision
of the senior.

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 Professional Developments
 Stay current on developments within the profession
 Seasonal fluctuations
 Busy season from December through April
 Relationships with clients
 Need to maintain independence