By: DAVE RITZ J.

PERIA, CPA
 Auditing is a systematic process
by which a competent,
independent person objectively
obtains and evaluates evidence
Financial Statements regarding
(including footnotes)
assertions about economic actions
and events to ascertain the degree
of correspondence between the GAAP
assertions and established criteria
and communicating the results to
interested Auditor's Report/
Persons who rely on users. Other Reports
the financial reports
•Creditors
•Investors
 Financial Statement Audit
- conducted to determine whether the FS of an
entity is presented in accordance with an
identified financial framework
 Operational Audit
- is a study of an organization’s unit to assess
entity’s performance, identify areas of
improvement and make recommendations to
improve performance
 Compliance Audit
- involves a review of an organization’s
procedures to determine its compliance
to specific procedures, rules or
regulations
 CPA Firms/External Auditors
-independent contractors
-are the ones who generally perform FS audit
 Internal Auditors
- they usually perform operational audit
- Entity’s own employees who investigate and
appraise the effectiveness and efficiency of
operations and internal controls
 Government Auditors
-conduct compliance audit like
 COA Auditors
 BIR Examiners
 to enable the auditor to express an opinion
whether the financial statements are
prepared, in all material respects, in
accordance with an applicable financial
reporting framework.
Financial Statement Assertions
 • EXISTENCE or AUDIT
OCCURRENCE PROCEDURE
• RIGHTS and
Financial S
OBLIGATIONS
Statements • COMPLETENESS
• VALAUATION and
ALLOCATION AUDIT
• PRESENTATION EVIDENCE
and DISCLOSURE

AUDIT
OPINION
 Management is responsible in the fair
presentation of FS
 In representing that the financial
statements are in accordance with
applicable financial reporting framework,
management IMPLICITLY or EXPLICITLY
makes assertions regarding the recognition,
measurement, presentation and disclosure
of the FS elements and related disclosures
1. Assertions about CLASSES OF
TRANSACTIONS AND EVENTS for the
period under audit
2. Assertions about ACCOUNT BALANCES at
the period end
3. Assertions about PRESENTATION
AND DISCLOSURE
 Completeness – all transactions and events
that should have been recorded have been
recorded
 Occurrence – transactions and events that
have been recorded have occurred ad pertain
to the entity
 Cut-off – transactions and events have
been recorded in the correct accounting
period
 Accuracy – amounts and other data relating to
recorded transactions and events have been
recorded appropriately
 Classification – transactions and events have
been recorded in the proper accounts
 Completeness – all assets, liabilities and equity
interests that should have been recorded have
been recorded
 Existence – assets, liabilities and equity
interests exist
 Rights and Obligations – the entity holds or
controls the rights to assets, and liabilities are the
obligations of the entity
 Valuation and allocation – assets, liabilities and
equity interests are included in the financial
statements at appropriate amounts and any
resulting valuation or allocation adjustments
are appropriately recorded
 Occurrence and rights and obligations – disclosed
events, transactions, and other matters have
occurred and pertain to the entity
 Completeness – all disclosures that should
have been included in the financial statements
have been included
 Classification and understandability – financial
information is appropriately presented and
described, and disclosures are clearly
expressed
 Accuracy and Valuation – financial and other
information are disclosed fairly and at appropriate
amounts
 The auditor should select audit procedures
that enables the auditor to gather
sufficient appropriate evidence about a
particular assertion
 Inspection - involves examining records, documents or
tangible assets
 Observation – consists of looking at a process or
procedure being performed by others
 Inquiry – consists of seeking information from
knowledgeable persons inside or outside the entity
 Confirmation- consists of the response to an inquiry to
corroborate information contained in the accounting
records
 Computation – consists of checking the arithmetical
accuracy of source documents and accounting records
or performing independent calculations
 Analytical Procedures - consist of the analysis of
significant ratios and trends including the resulting
investigation of fluctuations and relationships that are
inconsistent with other relevant information or deviate
from predicted amounts
 refers to the information obtained by the
auditor in arriving at the conclusions on
which the audit opinion is based.
 comprises source documents and
accounting records underlying the FS and
corroborating information from other
sources
 it will either prove or disprove the validity
of management assertions
 Management is responsible for
preparation and presentation of financial
statements
 With oversight from those charged
with governance.
 Audit does not relieve management or
those charged with governance of their
responsibilities
 The auditor’s responsibility is to form and
express an opinion on the financial
statements.
 The auditor should comply with the Code
of Professional Ethics
 The auditor should conduct an audit in
accordance with Philippine Standards on
Auditing
 The auditor should adopt the attitude
of professional skepticism
 Professional skepticism is an auditor’s
tendency not to believe management’s
assertions without sufficient corroboration.
 An audit conducted in accordance with
PSA is designed to provide only reasonable
assurance that the financial statement taken
as a whole are free from material
misstatements
 The use of testing.
 The inherent limitations of internal control
(for example, the possibility of
management override or collusion).
 The fact that most audit evidence
is persuasive rather than
conclusive.
 Use of judgment
 AUDITOR’S RESPONSIBILITY
TO CONSIDER FRAUD, ERROR
AND NONCOMPLIANCE

Philippine Standards on
Auditing 240 and 250
ERROR refers to unintentional misstatement in financial
statements, including the omission of an amount or a
disclosure.

FRAUD refers an intentional act by one or more

individuals among management, those charged with
governance, employees, involving the use of deception to
obtain an unjust or illegal advantage.

NONCOMPLIANCE refers to acts of omission or

commission by the entity being audited, either intentional
or unintentional, which are contrary to the prevailing
laws or regulations.
1. FRAUDULENT FINANCIAL
REPORTING or MANAGEMENT FRAUD

2. MISAPPROPRIATION OF ASSETS
or EMPLOYEE FRAUD
FRAUDULENT FINANCIAL REPORTING or
MANAGEMENT FRAUD
- involves intentional misstatements or
omissions of amounts or disclosures in the
financial statements to deceive financial
statement users.
This may involve:
a. Manipulation, falsification or alteration of
records or documents
b. Misrepresentation in or intentional omission
of the effects of transactions from records or
documents
c. Recording of transactions without substance
d. Intentional misapplication of accounting
policies
MISAPPROPRIATION OF ASSETS or
EMPLOYEE FRAUD

 Involves theft of an entity’s assets

committed by the entity’s employees. This
may include:
a. Embezzling of Receipts
b. Stealing entity’s assets cash, marketable
securities and inventory
c. Lapping of accounts receivable

-this type of fraud accompanied by false or

misleading records or documents in order to
conceal the fact that the assets are missing
 Involves MOTIVATION to commit it and
PERCEIVED OPPORTUNITY to do so.
When planning and performing audit procedures
and in evaluating and reporting the results
thereof, the auditor should recognize that
fraud, error and noncompliance with laws and
regulations may materially affect the financial
statements.
 MANAGEMENT- It is the responsibility of the
management to establish appropriate controls to
prevent and detect fraud, error and
noncompliance.

 THOSE CHARGED WITH GOVERNANCE- It is the

responsibility of those charged with governance to
oversee management to ensure that appropriate
controls are in place.
The auditor’s responsibility is to design
the audit to obtain reasonable
assurance that the financial statements
are free from MATERIAL misstatements,
whether caused by error, fraud or
noncompliance.
 Over reliance on client representations.
 Lack of awareness or failure to recognize
that an observed condition may indicate a
material fraud.
 Lack of experience.
 Personal relationships with clients.
CONDUCTING
AN AUDIT OF
FINANCIAL
STATEMENTS
 ISSUE
REPORT

COMPLETING
THE
AUDIT

SUBSTANTIVE
PROCEDURES

INTERNAL
CONTROL
CONSIDERATION

AUDIT
PLANNING

PRE-ENGAGEMENT
PROCEDURES
1. Evaluate compliance with ethical
requirements (PSA 220)

2. Evaluate continuance of relationship with

existing clients (PSA 220)

3. Establish the terms of the engagement

(PSA 210)
 Client selection and
retention
 Communication
between predecessor
and successor auditors
 Engagement letters
 Staff assignment
 Time budget
 In making decisions whether to accept
or reject an audit engagement, the
firm should consider:
1. Its competence
2. Its independence
3. Its ability to serve the client properly
4. The integrity of the prospective
client’s management
 This serves as the written contract
between the auditor and the client. This
sets forth:
a. Objective of the audit of FS
b. Management responsibility
c. Scope of the audit
d. Forms or any reports or other
communication that the auditor expects
to issue
e. Limitations of the audit
f. Responsibility of the client to allow the
auditor have unrestricted access to
whatever information in connection with
the audit
In addition, the auditor may also
include the following items:
a. Billing arrangements
b. Expectations of receiving
management representation
letter
c. Other arrangement like
(involvement of an expert, internal
auditors and other client personnel?
d. Request for the client to confirm
the terms of the engagment
 Helps ensure that appropriate attention
is devoted to important areas of the
audit
 Helps identify potential problems
 Assists in proper assignment and
coordination of audit work
 Helps ensure that the audit is
conducted effectively and efficiently
 Understand the entity and its environment
including the entity’s internal control
 Develop an overall audit strategy and
detailed approach (Risk, Materiality
and Analytical Procedures)
 Audit Planning Documentation.
1. Industry, regulatory and other external factors,
including the applicable financial reporting
framework
2. Nature of the entity, including the selection
and application of accounting policies
3. Objectives and strategies and the related
business risks
4. Measurement and review of the entity’s
performance
5. Internal control
 Phase 1: Understand and Document
 Understandthe Client’s Internal Control
 Document the Internal Control understanding
 Internal Control questionnaire
 Narrative
 Accounting and Control System Flowcharts
 Phase 2: Assess Control Risk (Preliminary)
 Phase 3: Testing and Reassessment
 Perform Test of Controls Audit Procedures
 Re-Assess Control Risk
More Efficient More Effective
Substantive Testing

STuebssttinangtoivfeCToensttrinolgs

Interim Year-end
 Audit risk (AR) is the
risk (likelihood) that the
auditor may unknowingly fail to modify the
opinion on financial statements that are
materially misstated (e.g., an unqualified
opinion on misstated financial statements.)
 The AUDIT RISK MODEL decomposes overall
audit risk into three components: inherent risk
(IR), control risk (CR), and detection risk (DR):
AR = IR x CR x DR
 Internal Controls
Accounting
Events, Information Financial
Transactions System Statements
Substantive
Procedures

INHERENT RISK
The likelihood that, CONTROL RISK DETECTION RISK AUDIT RISK
in the absence of The likelihood that an error The likelihood that The likelihood that
internal controls, or fraud will not get caught by the an error or fraud an error or fraud will occur,
an error or fraud client’s internal controls. will not be caught and not get caught
will enter the accounting by the auditor’s by either the internal controls
information system procedures. or auditor’s procedures.
 Using the information obtained in audit
planning and consideration of internal
control, the auditor performs test to
determine whether the entity’s FS are fairly
presented in accordance with financial
reporting standards
 These would involve EXAMINATION of
DOCUMENTS and EVIDENCE supporting the
amounts and disclosure in the FS
AR = IR x CR x DR
 Detection Risk and the Nature,
Timing, and Extent of Audit
Procedures
Lower Detection Risk Higher Detection Risk

Nature More effective tests. Less effective tests.

Timing Testing performed at Testing can be performed at
year-end. Interim.

Extent More tests. Fewer tests.

“Audit evidence” is all the information used by
the auditor in arriving at the conclusions on
which the audit opinion is based.
1. Source documents and accounting records
underlying the financial statements.
2. Other corroborating information
 Sufficiency is the measure of the quantity
of audit evidence.
 Appropriateness is the measure of
the quality of audit evidence.
The following factors should be considered
when evaluating the sufficiency of
evidence:
 Competence of Audit Evidence
 Materiality of the amount involved
 Risk of misstatement in the account
Appropriate evidence
 Must be relevant to a particular
assertion; and
 Must be reliable
 Relevance
• Testing what you want to test (e.g., direction of
testing)
 Reliability
• Independence of source
• Condition of internal control
• How the evidence was obtained
 Review of subsequent events
and contingencies
 Assessing going concern assumption
 Performing overall analytical
review procedures
 Obtaining a written representations from
the management
 Forming a conclusions about the
financial statements.
 This conclusion in the form of an opinion
is communicated to various interested
users through an AUDIT REPORT
Auditor’s Report on Financial Statements
 Emphasis of Matter &
Modifications to the Other Matter
Unmodified Report Opinion
Paragraphs
 The auditor must form judgment as to the ff.:
 Consistency and appropriateness of selected and applied
accounting policies;
 Reasonableness of accounting estimates;
 Relevance, reliability, comparability and
understandability of information presented in the
financial statements including accounting policies; and
 Provision of sufficient disclosures to enable users to
understand the effects of material transactions and
events conveyed in the financial statements.
 Fair Presentation Compliance

Are F/S prepared in

accordance with an
applicable
framework?

MO Do F/S
Are F/S
“presented comply with
fairly”? fromeworkl
 Report issues to
mngt and those
charged with
Yes governance Yes

Yes Yes
Issue
Standard audit Standard audit
resolved
opinion opinion

Modified audit No Make changes to

opinion the auditor’s report
 Materiality
 Conclude whether:
 Materiality remains appropriate
 Uncorrected misstatements (individual or aggregate) could
result in a material misstatement
 Audit Evidence
 Has sufficient appropriate audit evidence been obtained?
 Are the accounting estimates reasonable
 Did the analytical procedures performed corroborate
conclusions formed during the audit?
 Accounting Policies
 Are the policies adequately disclosed?
 Are the policies consistent with the financial
reporting framework, and appropriate in the
circumstances?
 Financial Statements Disclosure
 Fair Presentation Frameworks
 Compliance Frameworks
 Most common type of audit report
 Issued when the auditor concludes, based on audit
evidence obtained, that the financial statements
are presented fairly, in all material respects in
accordance with the applicable financial reporting
framework
 Acceptable framework includes:
 International Financial Reporting Standard for Small and
Medium-sized entities
 International Financial Reporting Standards
 International Public Sector Accounting Standards
1. Title – should clearly indicate that it is the report of an
independent auditor
2. Addressee – the parties for whom the report is
prepared, i.e. shareholders, board of directors or a
third party requesting the audit
3. Introductory paragraph – should contain the ff.:
 Name of the entity whose financial statements
have been audited
 Statement that the financial statements have been
audited
 Title of each financial statement audited including
date and period covered
 Reference to the summary of significant accounting
policies and explanatory notes
4. Management’s responsibility – should describe the
ff. management’s responsibility:
 Preparation and fair presentation of the financial statements
in accordance with applicable financial reporting framework;
 Design, implementation and maintenance of internal control
5. Auditor’s responsibility – should state the ff.:
 Responsibility of the auditor to express an opinion
 The audit was conducted in accordance with Philippine
Standards on Auditing (PSAs)
 General description of an audit
 That the audit evidence obtained is sufficient and appropriate
6. Auditor’s opinion – should state that the financial
statements are presented fairly in all material
respects in accordance with applicable financial
reporting framework
7. Other reporting responsibilities
8. Auditor’s signature – signed in the name of the
audit firm and/or the personal name of the auditor
9. Date of the report – dated as of completion of all
essential audit procedures (last day of fieldwork)
10. Auditor’s address – where the auditor maintains his
office
Arises from either of the ff.:
 Failure to conduct the audit in accordance
with PSA; and
 Failure to prepare the financial statements in
accordance with the applicable financial
reporting framework
 Material Misstatements
 May arise from:
 Inappropriate accounting policy selected;
 Misapplication of selected accounting policy; or
 Inappropriate or inadequate disclosure

 If there is a material misstatement the auditor should:

 Insist that the client revise the financial statements; or
 Issue either a qualified or adverse opinion should the management
refuse to correct the misstatement
 Scope Limitation
 May arise when:
 The auditor is unable to perform necessary audit procedures; or
 The auditor is unable to obtain sufficient appropriate evidence
about an assertion

 May be imposed by:

 Client
 Circumstances beyond the control of the entity
 Circumstances relating to the nature or timing of the auditor’s
work
 Management
CHAPTER CONTENT:

Guidance on how to express an

appropriately modified opinion on
financial statements when necessary.
 FS are not free from material statement
 The auditor is unable to obtain
sufficient appropriate evidence
 Pervasive – effects on the financial
statements that in the auditors
judgment:
i. Are not confined to specific
elements, accounts or items of the
FS
ii. If so confined, represent or could
represent substantial proportion
of the FS
iii. In relation to disclosures, are
fundamental to user’s understanding
of the FS
i. A difference between the amount,
classification, presentation, or disclosure
of a reported FS item and the amount ,
classification, presentation or disclosure
that is required for the item to be in
accordance with the applicable financial
reporting framework.
ii. Can arise from fraud or error
i. Misstatements that the auditor
has accumulated during the
audit and that have not been
corrected.
i. A qualified opinion
ii. An adverse opinion
iii. A disclaimer of opinion
 FS are not free from material statement
 The auditor is unable to obtain
sufficient appropriate evidence
1st
 Obtained sufficient appropriate audit evidence
 Misstatements, individually or in aggregate are
material
 Misstatements are not pervasive to FS

2nd
 Unable to obtain sufficient appropriate
evidence
 Possible effects on the FS of undetected
misstatements, if any could be material but not
pervasive
 Obtained sufficient appropriate audit
evidence
 Concludes that there is misstatements,
individually or in aggregate
 Misstatements are both material and
pervasive to FS
 unable to obtain sufficient appropriate
evidence on which to base the opinion
 the possible effects on the FS of
undetected misstatements, if any, could
be both material and pervasive
 MODIFICATION TO THE OPINION

Material Misstatements Scope Limitations

Material Material Material Material

but not and but not and
Pervasive Pervasive Pervasive Pervasive

Qualified Opinion Adverse Opinion Disclaimer Of Opinion

Qualified
Opinion
Except for the effects (or the possible
effects) of the matter described in
the basis for Qualified Opinion
paragraph….
In our opinion, because of the
significance of the matter discussed
in the Basis for Adverse Opinion
Paragraph… the FS do not present
fairly…
Because of the significance of the
matter describes in the Basis for
Disclaimer of Opinion paragraph, we
have not been able to obtain
sufficient appropriate audit evidence
to provide a basis for an audit
opinion. Accordingly, we do not
express and opinion on the FS.
 Significant
Uncertainties

Going
Concern Adequately Unmodified
disclosed in opinion with
Early Application the notes to emphasis of
Of New Accounting financial matter
Standards statements paragraph

Major
Catastrophe
_END_