AUDITING

 is a “systematic process” because an audit

involves a logical series of steps that lead to
the rendering of an opinion on the fairness
of financial statement.
Financial Statement
 Refers to a structure representation of financial
information, which ordinarily includes
accompanying notes, derived from accounting
records and intended to communicate an entity’s
economic resources or obligations at a point in
time or the changes therein for a period of time in
accordance with a financial reporting framework
 Can refer to a complete set of financial statements,
but it can also refer to a single financial statement
Complete set of Financial
Statement under PFRS includes
1. Statement of financial position
2. Statement of comprehensive income
3. Statement of changes in equity
4. Cash flow statement
5. Notes, comprising a summary of significant
accounting policies and other explanatory notes.

 FS are complex documents and consequently, the

process of auditing financial statement requires a
systematic and rational approach
 The audit process begins with a set of assertions
about financial results and position. These
assertion provides the framework for specifying
the objectives of the audit
 The auditor then performs procedures that will
attain the defined objectives by gathering
sufficient, appropriate evidence as a basis in
forming an opinion about the fairness of the FS
Overall Objective of the
Independent Auditor
To achieve the overall objective of the independent
auditor in conducting the FS, the auditor should be able:
a. To obtain reasonable assurance about whether the
financial statements as a whole are free from material
misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether
the FS are prepared, in all material respects, in
accordance with an applicable financial reporting
framework; and
b. To report on the FS and communicate as required by
the PSAs, in accordance with the auditor’s findings.
In all cases, when reasonable assurance cannot be
obtained and a qualified opinion the auditor’s
report is insufficient in the circumstances for
purpose of reporting to intended users of the FS,
the PSAs required that the auditor disclaim an
opinion or withdraw from the engagement, where
withdrawal is legally permitted.
Preparation of Financial
Statements
 An audit by an independent auditor is:

 Premised on the fact that the financial statements

subject to audit are those of the entity

 Prepared and presented by the management of the

entity with oversight from those charged with
governance
Preparation of Financial
Statements
 With the auditor engaged for the purposes of forming
and expressing an opinion on them

 The audit of the financial statements does not relieve

management and those charged with governance of
their responsibilities
 The auditor is also entitled to expect that the
management and those charged with governance will
make available to the auditor all information the
auditor requires for the purpose of audit
PSA
 Acknowledge and understand their responsibility for
preparing and presenting the financial statements in
accordance with the applicable financial reporting
framework
 Acknowledge and understand their responsibility for
designing, implementing and maintaining internal
control relevant to the preparation and presentation of
financial statement that are free from material
misstatement, whether due to fraud or error
 Will provide complete information to the auditor
Responsibilities of Management
and Those Charged with
Governance
 For the preparation and presentation of the financial statements
in accordance with the applicable financial reporting framework;
this includes the design, implementation and maintenance of
internal control relevant to the preparation and presentation of
FS that are free from material misstatement, whether due to
fraud or error, and
 To provide the auditor with:
 All information, such as records and documentation, and other
matter that are relevant to the preparation and presentation of the
FS
 Any additional information that the auditor may request from
management and, where appropriate, those charged with
governance; and
 Unrestricted access to those within the entity from whom the
auditor determines it necessary to obtain audit evidence
Those charged with governance are
responsible for:
 The identification of the applicable financial reporting
framework, in the context of any relevant laws or
regulation
 The preparation and presentation of the financial
statements in accordance with that framework
 The preparation and presentation of the financial
statements in accordance with that framework
 The preparation of the FS requires management to the
exercise judgment in making accounting estimates that are
reasonable in circumstances, as well as to select and apply
appropriate accounting policies. This judgment are made in
the context of the applicable financial reporting framework
By: Arjay M. Madrinan
1. Auditor Independence
- the concept of independence refers both
to the state of mind of the auditor and independence in
appearance.
2. Professional Skepticism
Professional skepticism includes being alert to, e.g,:
 Audit evidence that contradicts other audit evidence
obtained.
 Information that brings into question the reliability of
documents and responses to inquires to be used as
audit evidence.
 Conditions that may indicate possible fraud.
 Circumstances that suggest the need for audit
procedures in addition to those required by the PSA’s.
Maintaining professional skepticism
throughout the audit is necessary if the
auditor is, for example, to reduce the risks of:
 Overlooking unusual circumstances
 Over-generalizing when drawing conclusions from
audit observations
 Using inappropriate assumptions in determining the
nature, timing, and extent of the audit procedures and
evaluating the results thereof
3. Conduct and Scope of an
Audit in Accordance with
PSAs
Conduct of an Audit
the auditor shall comply with each requirement of
a PSA unless, in the circumstances of the audit:
- the entire PSA is not relevant; or
- the requirement is not relevant because it
is conditional and the condition does not
exist
Scope of an Audit
- refers to the audit procedures that, in the
auditor’s judgment and based on the PSAs, are
deemed appropriate in the circumstances to achieve
the objective of an audit.
The second portion of the Auditor’s
Responsibility paragraph describes an
audit as follows:
An audit involves performing procedures to obtain
audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on
the auditor’s judgment, including the assessment of the
risks of material misstatement of the financial
statements, whether due to fraud or error.
 An audit involves performing
procedures to obtain audit evidence
about the amounts and disclosure in
the financial statements. The
procedure selected depend on the
auditor’s judgment, including the
assessment of the risk of material
misstatement of the financial
statements, whether due to fraud or
error.
Audit evidence
- is all the information used by the auditor in arriving at
the conclusion on which the audit opinion is based, and
includes the information contained in the accounting
records underlying the financial statements and other
information.
- Auditors are not expected to address all information
that may exist. It is cumulative in nature.
Management assertion
auditors gather audit evidence regarding the assertions of
management. In representing that the financial statements
are presented fairly, in all material respects, in accordance
with the applicable financial reporting frame work.
Based on these assertions the auditor shall assess the risk of
material misstatement and determine the design and
performance of test of controls and substantive.

Broadly speaking assertions include: presentation and

disclosure, existence and occurrence, completeness and
valuation and allocation.
AUDIT MATERIALITY
 There should be stronger grounds to sustain the
auditor’s opinion with respect to those items, which
are relatively more important, and in which
possibilities of material error are greater than those
items of lesser importance or in which the possibility
of material error is remote.
MATERIALITY
 Information is material if its omission or misstatement
could influence the economic decisions of users taken
on the basis of the financial statements. Materiality
depends on the size of the item or error judged in the
particular circumstances of its omission or
misstatement. Thus, materiality provides a threshold
or cutoff point rather than being a primary qualitative
characteristic which information must have if it is to
be useful.
 The assessment of what is material is a matter of
professional judgment of the auditor.
 The auditors opinion deals with the financial
statements as a whole and therefore the auditor is not
responsible for the detection of misstatements that are
not material to the financial statements as a whole.
 The concept of materiality is applied by the auditor
both in planning and performing the audit, and in
evaluating the effect of identified misstatements on
the audit and of uncorrected misstatements, if any, on
the financial statements.
 Audit risk is the POSSIBILITY or
LIKELIHOOD that the financial statements
contain material misstatements that the
auditor may not be able to detect in the conduct
of financial statement audit leading to expression of
an appropriate audit opinion. Audit risk may be
assessed either in :
Quantitative terms
Non-quantitative terms
 The risk of material misstatement refers to the
likelihood that the financial statements are
materially misstated prior to audit. It has two
components:
Inherent risk
Control risk
 Inherent risk is the susceptibility of an
assertion to a misstatement that could be material,
individually or when aggregated with other
misstatements assuming that there were no related
internal controls.
 Control risk is the likelihood that a misstatement
could occur in an assertion and that could be material,
individually or when aggregated with other
misstatements, will not be prevented or detected and
corrected on a timely basis by the entity’s internal
control.
 Detection risk is a function of the effectiveness
of an audit procedure and of its application by the
auditor.
 The auditor can reduce detection risk by
performing more substantive testing.

Increased audit
evidence

Lower
detection risk
Professional Judgments
 Professional judgment in auditing may be described as
the application of relevant knowledge and experience,
within the context provided by auditing, accounting
and ethical standard, in reaching decisions about the
courses of action that are appropriate in the
circumstances of the audit engagement. Informed
decisions throughout the audit cannot be made
without the application of relevant knowledge and
experience to the facts and circumstances, in
particular regarding decisions about;
 Materiality and Audit Risk
 The nature, timing and extent of audit procedures
used to gather audit evidence
 Evaluating whether sufficient appropriate audit
evidence has been obtained, and whether more
needs to be done to achieve the objectives of the
PSA’s and thereby, the overall objectives of the
auditor
 The evaluation of management’s judgments in
applying the entity’s applicable financial reporting
framework
 The evaluation of management’s judgments in
applying the entity’s applicable financial reporting
framework
 The drawing of conclusions based on the audit
evidence obtained, for example, assessing the
reasonableness of the estimates made by
management in preparing the financial statements
Phases of Audit Process
1. Pre-engagement
2. Audit planning
3. Study and evaluation of internal controls
4. Substantive testing
5. Completing the audit
6. Issuance of audit report
7. Post audit responsibility