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I.

Review of Overview of Auditing

1. Definition

The American Accounting Association (AAA) defines Auditing as a systematic process by which a
competent, independent person objectively obtains and evaluates evidence regarding assertions about
economic actions and events to ascertain the degree of correspondence between those assertions and
established criteria and communicating the results to interested users.

The International Federation of Accountancy (IFAC) defines Auditing as a structured process


involving the application of analytical skill, professional judgment and professional skepticism; using
appropriate forms of technology and adhering to a methodology; in compliance with relevant technical
standards and required standards of professional ethics.

2. Objective and General Principles of Auditing

The objective of auditing is to ascertain the integrity and authenticity of management’s financial
statements to obtain a basis for the expression of an opinion on the fairness of its presentation in
accordance with generally accepted accounting principles (GAAP).

The Framework of the Philippine Standards on Auditing, PSA 120, states that the objective of
auditing is 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.

General Principles of an Audit (PSA 200)


The auditor should comply with the “Code of Professional Ethics for Certified Public Accountants”
promulgated by the Board of Accountancy and approved by the Philippine Professional Regulation
Commission. Ethical principles governing the auditor’s professional responsibilities are:

a) Independence – the auditor is independent of management.


b) Integrity – the auditor is honest and not corrupt. He is straightforward in performing his work.
c) Objectivity – the auditor obtains the evidence needed to form an opinion and his opinion is based
on the evidence alone. He is not subjective in forming his opinion.
d) Professional Competence and Due Care – the auditor has attained certain professional
qualification, has acquired the requisite skill and has attained the experience necessary for the
audit and perform his work with planning and due diligence.
e) Confidentiality – the auditor neither discloses the information obtained during the course of his
audit without permission of his client (except when required in a court of law) nor uses the
information himself.
f) Professional Behavior – the auditor should not only act in a professional manner but should also
appear to be a professional. He should maintain his professional knowledge and skill at a level
required to ensure that a client or employer receives the benefit of competent professional
service based on up-to-date developments in auditing practice and relevant legislation.
g) Technical Standards – the audit should be performed by following certain standards, international
or national.

The auditor should conduct an audit in accordance with Philippine Standards on Auditing.

The auditor should plan and perform the audit with an attitude of professional skepticism recognizing
that circumstances may exist which cause the financial statements to be materially misstated.

3. The Audit Process

The Risk-Based Audit Process


Although specific audit procedures vary from one engagement to the next, the following stages are
involved in every engagement.
Phase I. Risk Assessment
This phase involves the following activities:
A. Performance of preliminary engagement activities to decide whether to accept/continue an
audit engagement.
B. Planning the audit to develop an overall audit strategy and audit plan.
C. Performance of risk assessment procedures to identify/assess risk of material misstatement
through understanding the entity.

Phase II. Risk Response


This phase covers the following activities:
A. Designing overall responses and further audit procedures to develop appropriate responses to
the assessed risk of material misstatement.
B. Implementing responses to assessed risk of material misstatement to reduce audit risk to an
acceptably low level.

Phase III. Reporting


This phase involves the following activities:
A. Evaluating the audit evidence obtained to determine what additional audit work (if any) is
required.
B. Forming an opinion based on audit findings and preparing the auditor’s report.

4. Major Steps in the Systematic Process of Financial Statement Audit

The major steps in financial statement audits are similar to the sequence followed in a high-level
assurance engagement; generally divided into three phases: the pre-engagement and audit planning
activities; gathering and evaluating evidence; completing the audit and issuing the audit report.

a) Phase I: Pre-engagement and audit planning activities

In accepting the engagement, certain points must be cleared with the client such as period
covered and purpose of the audit. The auditor also notes preliminary considerations among which
are the studies of the client’s business, the industry environment, evaluation of internal control,
investigating the accounting system, and clearance for testing entries and confirming receivables.

b) Phase II: Gathering and evaluating audit evidence, interim audit phase, final audit phase

The actual audit work covers the gathering and evaluating of evidence in the performance of
compliance and substantive tests.

Evidence may be gathered through inquiries, inspection and observation or transaction walk-
through of the organization’s specific policies and procedures, all of which must be described or
fully documented.

Compliance tests are tests of controls aimed to determine proper execution, recording and
custodianship in the basic transaction cycles: the revenue and collection cycle, expenditure cycle
and financing and investing cycle.

Substantive tests involve the tests of transactions, test of details of balances and analytical
procedures. Substantive tests aim to confirm and substantiate existence or occurrence,
completeness, valuation, rights and obligations, and presentation and disclosure of items in the
financial statements.

c) Issuing the audit report

In the final phase of the audit, the practitioner summarizes the results of his audit findings,
identifies subsequent events, completes the audit; and issues the audit report expressing the
opinion corresponding to his conclusion.