FUNDAMENTALS

OF
ASSURANCE
SERVICES
INTENDED USERS
USER OF FINANCIAL STATEMENTS EXAMPLES OF ECONOMIC DECISIONS
INVESTORS WHETHER TO BUY, HOLD, OR SELL SAHRES OF A
COMPANY
CREDITORS WHETHER TO APPROVE LOANS APPLIED FOR BY A
DEBTOR OR BORROWER
GOVERNMENT WHETHER TO AMEND OR RETAIN THE TAXATION
RULES AND REGULATIONS CURRENTLY IN FORCE
CUSTOMERS WHETHER TO CONTINUE DOING BUSINESS WITH THE
COMPANY, OR TO FIND ANOTHER SUPPLIER
EMPLOYEES WHETHER TO DEMAND A SALARY INCREASE,;
WHETHER TO STAY WITH THE COMPANY, OR TO GO
LOOKING FOR ANOTHER JOB
CPA
CPA
CPA
CPA
CPA
CPA
CPA
CPA
CPA
CPA
CPA
CHAPTER 2: AUDIT OF FINANCIAL STATEMENTS

AUDITING is a systematic process of objectively

obtaining and evaluating evidence regarding
assertions about economic events to ascertain
the degree of correspondence between these
assertions and established criteria and
communicating the results to interested users.
ACCOUNTING VS AUDITING
ACCOUNTING
▪ The process of recording, classifying and summarizing economic
events in logical manner for the purpose of providing financial
information (ie., financial statements) for decision making.

AUDITING
❑Concerned with the determination whether the recorded accounting
information for the entity properly reflects the economic events that
occurred during the accounting period.
AUDITING begins where
ACCOUNTING ends.
TYPES OF AUDIT
❑FINANCIAL STATEMENT AUDIT

This is an audit conducted to determine whether the financial

statements of an entity are fairly presented in accordance with an
identified financial reporting framework.

EXAMPLE:
An audit conducted on the historical fs of ABC Company as of
and for the year ended December 31,2016.
❑OPERATIONAL AUDITS

-is a study of a specific unit of an organization for the purpose of

measuring its performance. The main objective of this type of audit is
to assess entity's performance, identify areas for improvements and
make recommendations to improve performance. This type of audit is
also known as performance audit or management audit.
EXAMPLE:
Evaluation of a computerized accounting system for efficiency
and effectiveness, and identifying areas for consideration and providing
recommendations for improvement.
❑COMPLIANCE AUDITS

-Involves a review of an organization's procedures to determine

whether the organization has adhered to specific procedures, rules or
regulations. The performance of compliance audit is dependent upon
the existence of verifiable data and recognized criteria established by
an authoritative body. A common example of this type of audit is the
examination conducted by BIR examiners to determine whether
entities comply with tax rules and regulations.
 TYPE OF AUDIT ACCORDING TO NATURE OF DATA OR ASSERTION
BEING AUDITED
TYPE ASSERTIONS CRITERIA REPORT
FS AUDIT FS ARE FAIRLY PRESENTED IDENTIFIED FINANCIAL AUDIT ON THE FAIRNESS
REPORTING FRAMEWORK OF FS. INTERESTED USERS
INCLUDE INVESTORS,
CREDITORS, ETC.
OPERATIONAL AUDIT OPERATIONAL OR MANAGEMENT REPORT ON EFFICIENCY
PERFORMANCE DATA OBJECTIVES AMD EFFECTIVeNESS,
INCLUDING
CONSTRUCTIVE
SUGGESTIONS.
INTERESTED USERS
INCLUDE MANAGEMENT
AND BODs.
COMPLIANCE AUDIT COMPLIANCE WITH LAWS, RULES AND DEGREE OF COMPLIANCE
APPLICABLE LAWS AND REGULATIONS, OR REPORT. INTERESTED
REGULATIONS AND MANAGEMENT POLICY USERS INCLUDE
MANAGEMENT POLICY MANAGEMENT AND THE
BODs.
TYPES OF AUDITORS
External auditors

These are independent 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
Internal auditors 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.
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.
THE OBJECTIVE OF FS AUDIT
The objective of an audit of financial statements is the expression of an
opinion on the fairness of such financial statements. The auditor's
report is the medium through which he expresses his opinion or, if
circumstances require, disclaims an opinion. In either case, he states
whether his examination has been made in accordance with Philippine
Standards on Auditing or PSAS (this is discussed in succeeding
chapters).
SCOPE OF FS AUDIT
The auditor normally determines the scope of an audit in accordance
with the requirements of legislation, regulations or relevant
professional bodies.
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management is responsible for preparing and presenting the
financial statements in accordance with the financial reporting
framework.
The auditor's responsibility is to form and express an opinion on these
financial statements based on his audit.
 Inherent Limitations that Affect the Auditor’s
Ability to Detect Material Misstatements
1. The use of testing / Sampling risk
2. Error in application of judgment /Non-sampling risk
3. Reliance on management's representation
4. Inherent limitations of the client's accounting and internal control
systems.
5. Nature of evidence
Need of an Independent FS Audit
1. Conflict of Interest between Management and Users of FS
In a sense, financial statements, may be viewed as the report by
management as to how the entity performed under their direction and
supervision. Managers are frequently placed in positions where they
can benefit by providing outside parties with overly optimistic or even
false financial information. Outside parties, however, want unbiased,
realistic financial statements. Recognizing this inherent conflict of
interest, users of financial statements have become skeptical of
unaudited financial statements.
2. Expertise
The complexity of accounting and auditing requires expertise in
verifying the quality of the financial information. Since most of the
users of financial information are not equipped with the necessary
skills and competence to determine whether the financial statements
are reliable, a qualified person is hired by users to verify the reliability
of the financial statements on their behalf.
3. Remoteness
Users of financial information are usually prevented from directly
assessing the reliability of the information. Most of the users do not
have access to the entity's records to personally verify the quality of
the financial information. Consequently, an independent auditor is
needed to assist them in verifying the reliability of the financial
information.
4. Financial consequences
Misleading financial information could have substantial economic
consequences for a decision maker. It is therefore important that
financial statements be audited first before they are used for making
important decisions.
REFERENCES:
IRENEO, JOSE, IRENEO SHIRLEY & JAMES, GEORGE R. AUDIT AND
ASSURANCE PRINCIPLE (2018).
ESCALA & BERCASIO. AUDITING AND ASSURANCE SERVICES (2021).
SALOGSACOL, TIU & HERMOSILLA. AUDITING THEORY (2018).
FORNARAM, CHRISTIAN JOHN. LECTURE.