Grace Gural-

Balaguer
Acctg 22 Instructor
Topic Ouline
Philippine Framework for
01 Chapter 1: Auditing:
Integral to the Economy 02 Assurance
Engagements

PSAE 3000:
Revised:Assurance
Engagements Other PSA 120: Framework of
03 than Audits or Reviews
of Historical Financial
04 Philippine Standards on
Auditing
Information General
Principles
Topic Ouline
PSA 200: Revised and Redrafted: Overall Objectives
05 of the Independent Auditor and the Conduct of an
Audit in Accordance with Philippine Standards on
Auditing
Auditing:
Integral to the
Economy
Chapter 1

A Risk-Based Approach to Conducting the

Audit
Learning Objectives
1. Define the objective of external auditing and describe its role in meeting society’s demands for reliable
financial and internal control information.
2. Identify parties involved in preparing and auditing financial statements and briefly describe their roles.
3. List the types of audit service providers and the skills and knowledge needed by professionals entering
the external auditing profession.
4. Identify organizations that affect the external auditing profession and the nature of their effects.
5. Define audit quality and identify drivers of audit quality as specified by the Financial Reporting
Council’s Audit Quality Framework.
6. Identify professional requirements that help to achieve audit quality and minimize auditor exposure to
lawsuits.
7. Describe the process by which audit firms make client acceptance and continuance decisions.
1. Overview of the External Auditing Profession

01
Objectives
Define the objective of external auditing and describe its role in
meeting society’s demands for reliable financial and
internal control information.
Why is Auditing an Integral
to the Economy
● Capital markets depend on reliable information
about organizations.
● Such information provides a basis for making many
types of decisions, including:
- Investing
- Lending
Why is Auditing an Integral
to the Economy
● If the capital markets do not receive reliable
information, investors and others lose confidence in
the system, make poor decisions, and may lose a
great deal of money.
Three Main Types of Audit

● External / Financial Statements (FS)

● Internal
● Internal Revenue Service (IRS)
Three Main Types of Audit

● External / Financial Statements (FS)

● Internal
● Internal Revenue Service (IRS)
FS Auditing Define

Relevant Terms:
Systematic – an act according to a fixed plan or
system.
Evaluate – to assess the significance of something
Evidence – the available body of facts or information
indicating whether a belief or proposition is true or
valid.
FS Auditing Define

Relevant Terms:
Assertion – a statement that you strongly believe is
true.
Economic – pertaining to the production, distribution, ,
and use of income , wealth, and commodities.
Correspondence – a close similarity, connection, or
equivalence.
Criteria – a standard or principle for judging,
evaluating, or selecting something.
FS Auditing Define

A systematic process of objectively obtaining and

evaluating evidences regarding assertions about
economic actions and events to ascertain the degree
of correspondence between assertions and
established criteria; and communicating the results to
interested users.
What Makes External
Auditing Profession
Valuable?
● It helps enhance the reliability of information used
throughout the capital markets through its
professional and ethical judgments about the
information provided by organizations.
● It gives the public confidence in the objectivity and
accuracy of the opinions provided by external
auditors.
External Auditing:
A Special Function
External auditing is a “special function” as described
by Chief Justice Warren Burger in a 1984 Supreme
Court decision:
“By certifying the public reports that collectively depict a corporation’s financial status,
the independent auditor assumes a public responsibility transcending any employment
relationship with the client. The independent public accountant performing this special
function owes ultimate allegiance to the corporation’s creditors and stockholders, as
well as to the investing public. This “public watchdog” function demands . . . complete
fidelity to the public trust.”
External Auditing:
A Special Function
Public – the most important party that auditors serve.
This includes the following:
- Investors
- Lenders
- Workers
- Others who make decisions based on financial
information about an organization.
Types of Audit Opinion

● Unqualified/Clean
● Qualified
● Adverse
● Disclaimer
Types of Audit Opinion

Unqualified/Clean
This is issued when the auditor has no reservations
about the management’s financial statements.
Types of Audit Opinion

Qualified
This is issued when the auditor is not confident about
any specific process or transaction, based on which
they are not in the position to issue unqualified/clean
report.
Types of Audit Opinion

Qualified
Example:
In our opinion, except for the effects of the matter described in the basis
for qualified opinion section, the financial statements:

- Give an accurate and fair view of the company’s affairs as of

December 31, 2022 and its profit for the year ended.

- Have adequately been prepared following the Philippines Generally

Accepted Accounting Principles (GAAP)/IFRSs, and

- Have been prepared under the requirements of the Companies Act

2020
Types of Audit Opinion

Adverse
This is issued when the auditor has reservations about
the effectiveness of the client’s internal controls.
Types of Audit Opinion

Adverse
Example:
In our opinion, because of the lacking of the information mentioned in the
basis for the Adverse Opinion paragraph, the financial statements do not
present the information required by the Companies Act 2020 as required
and also do not give a true and fair view in line of the Philippines GAAP or
IFRS that state of affairs of the company as on December 31, 2018 and its
profit/loss and cash flow for the year ended on that date.
Auditing Requirements

• Highest level of technical competence

• Freedom from bias
• Concern for the integrity of the financial reporting
process

* In essence, auditors should view themselves as

guardians of the capital markets..
Users of Audited Financial
Statements
Users of Audited Financial Statements
User Types of Decisions

Management Review of performance, make operational decisions, report results to capital

markets
Stockholders Buy or sell stocks

Bondholders Buy or sell bonds

Financial Institutions Evaluate loan decisions, considering interest rates, terms and risk

Taxing Authorities Determine taxable income and tax due

Regulatory Agencies Develop regulations and monitor compliance

Labor Unions Make collective bargaining decisions

Court System Assess the financial position of a company in litigation

Vendors Assess credit risk

Retired Employees Protect employees from surprises concerning pensions and other post-retirement
benefits
The Need for Unbiased Reporting
and Independent Assurance
• Potential bias
• Remoteness
• Complexity
• Consequences
Overall Objectives in Conducting an
Audit
To obtain reasonable assurance about whether the
financial statements are free from significant
deficiencies and to report on the financial statements
based on the auditor’s findings. In completing these
objectives, the auditor:
• Complies with relevant ethical requirements
• Plans and performs an audit with professional
skepticism
Overall Objectives in Conducting an
Audit
• Exercise professional judgement
• Obtains sufficient appropriate evidence on which to
base the auditor’s opinion
• Conducts the audit in accordance with professional
auditing standards
The Audit Opinion
Formulation Process
Exhibit 1.1
02
Objectives
Identify parties involved in preparing and auditing financial
statements and briefly describe their roles.
Parties Involved in Preparing and
Auditing Financial Statements
Exhibit 1.2
Parties Involved in Preparing and
Auditing Financial Statements
Responsibilities of the Management:
• Preparing and presenting financial statements in
accordance with the applicable financial reporting
framework;
• Designing, implementing, and maintaining internal
control; and
• Providing the auditors with information relevant to
the financial statements and internal controls
Parties Involved in Preparing and
Auditing Financial Statements
Responsibilities of the Internal Audit Function:
Provides management and the audit committee with
assurance on internal controls and reports.
Parties Involved in Preparing and
Auditing Financial Statements
Responsibilities of the Audit Committee:
• A subcommittee of the organization’s board of
directors.
• Oversees both management and the internal
auditors.
• Hire external auditor.
Parties Involved in Preparing and
Auditing Financial Statements
Responsibilities of the External Auditor:
• Obtain reasonable assurance about whether
management’s statements are materially accurate.
• Provide a publicly available report.
03
Objectives
List the types of audit service providers and the skills and
knowledge needed by professionals entering the external
auditing profession.
Providers of External Auditing
Services
• Sole-practitioner firms
• Local and regional firms
• Large multinational professional services firms as
The Big 4 (KPMG, Deloitte, PricewaterhouseCoopers
(PWC), and EY)
Organizational Hierarchy of Audit
Firms
Partners/
Responsible for the overall conduct of each audit
Owners

Managers Review the audit work performed by seniors and staff personnel

• Oversee the day-to-day activities on a specific audit

Seniors • Oversee entry level personnel

Entry-level
Perform many of the basic auditing procedures
Personnel
Skills and Knowledge Needed to
Enter the External AuditProfession
• Considerable technical knowledge and expertise
• Well-developed skills in leadership, teamwork,
communication, decision-making, and general
professionalism
• Strong ethical foundation
04
Objectives
Identify organizations that affect the external auditing
profession and the nature of their effects.
Organizations Affecting the
External Auditing profession
• Congress
• Public Company Accounting Oversight Board
(PCAOB)
• Securities and Exchange Commission (SEC)
• American Institute of Certified Public Accountants
(AICPA)
• State Board of Accountancy
• The Court System
Organizations Affecting the
External Auditing profession
• Center of Audit Quality (CAQ)
• International Auditing and Assurance Standards Board (IAASB)
• Committee of Sponsoring Organizations (COSO)
• Accounting Standard Setters
- Generally Accepted Accounting Principles (GAAP)
- International Accounting Standards
05
Objectives
Define audit quality and identify drivers of audit quality as
specified by the Financial Reporting Council’s Audit Quality
Framework.
Audit Quality

Quality audit is one performed “in accordance with generally

accepted auditing standards (GAAS) to provide reasonable
assurance that the audited financial statements and related
disclosures are:
1. Presented in accordance with GAAP
2. Not significantly deficient whether due to errors or fraud

Note: This is a definition published by Government Accountability

Office (GAO) (2003)
Audit Quality

The Financial Reporting Council (FSC) states 5 primary drivers of

audit quality, including the following:
1. Audit firm culture
2. Skills and personal qualities of audit partners and staff
3. Effectiveness of the audit process
4. Reliability and usefulness of audit reporting
5. Factors outside the control of auditors that affect audit quality
Audit Quality
Exhibit 1.3
06
Objectives
Identify professional requirements that help to achieve audit
quality and minimize auditor exposure to lawsuits.
Achieving Audit Quality and
Minimizing Lawsuits
• Maintaining auditor independence
• Participating in review programs
• Issuing engagement letters
• Evaluating the audit firm’s limitations
• Maintaining quality audit documentation
Achieving Audit Quality and
Minimizing Lawsuits
Impairment of Auditors Independence Principles (by SEC)
• Creates a mutual or conflicting interest between the accountant
and the audit client
• Places the accountant in the position of auditing his or her own
work
• Results in the accountant acting as management or an employee
of the audit client
• Places the accountant in a position of being an advocate for the
audit client
Achieving Audit Quality and
Minimizing Lawsuits
7 Categories of Threats to Independence (by AICPA)
1. Self-review threat
2. Advocacy threat
3. Adverse interest threat
4. Familiarity threat
5. Undue influence threat
6. Financial self-interest threat
7. Management participation threat
Achieving Audit Quality and
Minimizing Lawsuits
Safeguards to Avoid Independence Problem (by AICPA)
1. Safeguards created by the profession or regulation
2. Safeguards created by the audit client
3. Safeguards created by the audit firm
3 Types of Review Programs

1. External Inspections/Peer Reviews

2. Engagement Quality Reviews
3. Interoffice Reviews
Engagement Letters

• This states the scope of the work to be done on the audit so that
there should be no doubt in the mind of the client, external auditor,
or the court system as to the expectations agreed to by the
external auditor and the client.
• This includes the audit fee, the description of the timing of the
external auditor’s work, and a description of documentation that
the client is expected to provide to the external auditor.
• In writing this, extra care should be taken.
07
Objectives
Describe the process by which audit firms make client
acceptance and continuance decisions.
Client Acceptance and
Continuance Decision
Client Acceptance Decision – The process by which a new client is
evaluated by the audit firm and individual engagement partner prior
to being accepted into the audit firm’s portfolio of clients.
Client Continuance Decision – The process by which existing clients
for which the audit firm provided services in the preceding period are
evaluated by the audit firm and the individual engagement partner
at the completion of the audit to determine whether the audit firm
should continue to provide services again in the next period.
Client Acceptance and
Continuance Decision
Exhibit 1.4
Client Acceptance and
Continuance Decision
General Preconditions to Accept Audit Engagement
• Management’s use of an acceptable financial reporting
framework
• The agreement of management that it acknowledges and
understands its responsibilities
Client Acceptance and
Continuance Decision
Client Acceptance and Continuance-Related Risks
• Client entity characteristics
• Independent risk factors
• Third party/due diligence risk factors
• Quantitative risk factors
• Qualitative risk factors
Client Acceptance and
Continuance Decision
• Entity organizational or governance risks
• Financial reporting risks
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