AUDITING & ASSURANCE

PRINCIPLES
SAN MATEO MUNICIPAL COLLEGE
COLLEGE OF BUSINESS AND ACCOUNTANCY

By:
NILO N. IGLESIAS, CPA, MBA, REA
 The
The Audit Process
Accepting an Engagement
 Introduction

⚫ An audit of financial statements generally begins

with the financial statements prepared by the entity’s
management.

⚫ Without these statements, there would be no audit to

perform.

⚫ A general approach to auditing financial statements

would require consideration of financial statement
assertions, audit procedures, and audit evidence.
 General Approach When Auditing
Financial Statement

• Financial Statement Assertions:

a. Existence or Occurrence
b. Rights & Obligations
c. Completeness
d. Valuation and Allocation
e) Presentation and Disclosure
• Audit Procedures
• Audit Evidence
• Audit Opinion regarding the financial
statements
 Financial Statement Assertions

▪ Management is responsible for the fair

presentation of financial statements that reflect
the nature and operations of the entity.

▪ In representing that the financial statements is

in accordance with the applicable financial
reporting framework, management implicitly or
explicitly makes assertions regarding the
recognition, measurement, presentation and
disclosure of the various elements of financial
statements and related disclosures.
 Financial Statement Assertions
▪ These assertions may fall into the following categories:
Assertions about classes of transactions and events for the
period under audit:
✓ Occurrence- have been recorded and had occurred and pertain
to the entity
✓ Completeness – all transactions and events that should have
been recorded have been recorded.
✓ Accuracy – amounts and other data relating to recorded
transactions and events have been recorded appropriately.
✓ Cutoff – transactions and events have been recorded in the
correct accounting period.
✓ Classification – transaction and events have been recorded in
the proper accounts.
 Financial Statement Assertions
▪ These assertions may fall into the following categories:
Assertions about account balances at the period end:
✓ Existence- assets, liabilities and equity interest exist.
✓ Rights & Obligations – the entity holds or controls the rights to
assets and liabilities are the obligations of the entity.
✓ Completeness – all assets, liabilities and equity interests that
should have been recorded have been recorded.
✓ Valuation and allocation – assets, liabilities, and equity interest
are included in the financial statements at appropriate amounts
and any resulting valuation or allocation adjustments are
appropriately recorded.
 Financial Statement Assertions
▪ These assertions may fall into the following categories:
Assertions about presentation and disclosure
✓ 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.
 Audit Procedures
▪ The auditor should use assertions for classes of transactions,
account balances, and presentation and disclosures in sufficient
detail to form a basis for the assessment risks of material
misstatement and the design and performance of further audit
procedures.
▪ The auditor uses assertions is assessing risks by considering
the different types of potential misstatements that may occur,
and thereby designing audit procedures that are responsive to
the assessed risks.
▪ Selection of appropriate procedures to satisfy a particular
assertion is affected by several factors including the auditor’s
assessment of materiality and risk.
▪ Regardless of the procedures selected, there is only one basic
criterion, “ The procedures selected should enable the auditor to
gather sufficient appropriate evidence about a particular
assertion.”
 Audit Procedures
▪ Some of the audit procedures used by the auditor to
gather sufficient appropriate evidence include:

✓ Inspection- involves examining records, documents, or

tangible assets.
✓ Observation – consists of looking at a process 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.
 Audit Procedures
▪ Some of the audit procedures used by the auditor
to gather sufficient appropriate evidence include:

✓ Computation - consists of checking the arithmetical

accuracy of source documents and accounting
records or performing independent calculations.
✓ Analytical Procedures – consists of analysis of the
significant ratios and trends including the resulting
investigation of fluctuations and relationships that are
inconsistent with other relevant information or deviate
from predicted amounts.
 Evidence

▪ Audit procedures are the means used by the auditor to obtain

sufficient appropriate evidence.
▪ Audit evidence refers to the information obtained by the auditor
in arriving at the conclusions on which the audit opinion is
based.
▪ Audit evidence will comprise source documents and accounting
records.
▪ This evidence about the financial statements will either prove or
disprove the validity of the management assertions.
▪ At the conclusion of the audit, the auditor shall carefully
evaluate the audit evidence obtained in order to come up with
appropriate opinion.
Overview of the Audit Process

1. Accepting
an
Engagement

6. Issuing a 2. Audit
Report Planning

3. Considering
5. Completing
Internal
the Audit
Control

4. Performing
Substantive
Test
 Overview of the Audit Process

1) Accepting an Engagement
▪ The first step in the audit process is to decide of
whether to accept or reject an audit engagement.
▪ This process would require evaluation of the
auditor’s qualification as well as the auditability of
the prospective client’s financial statements.
▪ A preliminary understanding of the client’s business
and the background investigation of the prospective
client are usually performed at this stage.
 Overview of the Audit Process

1) Accepting an Engagement
▪ The procedures performed at this stage of the audit are
referred to in PSA 300 as “Preliminary Planning
Activities”. These procedures involves:
✓ Performing procedures regarding the continuance of
the client relationship and the specific audit
engagement.
✓ Evaluating compliance with ethical requirements,
including independence.
✓ Establishing
an understanding of the terms of
engagement.
 Overview of the Audit Process

2) Audit Planning
▪ In planning an audit, the auditors obtains more detailed
knowledge about the client’s business and industry in
order to understand the transactions and events
affecting the financial statements.
▪ Identify the potential problems that might be
encountered during the audit.
▪ A preliminary assessment of risk and materially should
also be made to be able to develop and overall audit
strategy and detailed approach for the expected
conduct and scope of the examination.
 Overview of the Audit Process

3) Considering the Internal Control

▪ The auditor should consider the entity’s internal control because the
condition of the entity’s internal control directly affects the reliability of
the financial statements.
▪ The stronger the internal control, the more assurance it provides about
the reliability of the accounting data and financial statements.
▪ Consideration of internal control involves obtaining understanding of
the entity’s control systems and assessing the level of control risk, that
is, the risk that the client’s internal control may not prevent or detect
material misstatements in the financial statements.
▪ If the auditor want to assess control risk at less than high level,
sufficient appropriate evidence must be obtained to prove that the
internal control is functioning effectively and that it can be relied upon.
▪ This evidence can be obtained by performing tests of controls.
 Overview of the Audit Process

4) Performing Substantive Tests

▪ Using the information obtained in audit planning and consideration of
internal control, the auditor perform substantive test to determine
whether the entity’s financial statements are presented fairly in
accordance with financial reposting standards.
▪ These procedures would involve examination of the documents and
evidence supporting the amounts and disclosures in the financial
statements.
▪ The extent of substantive test is highly dependent on the results of the
auditor’s consideration of the internal control.
▪ If based on the evaluation of internal control, the auditor has obtained
evidence that the internal control is functioning effectively, the scope of
the auditor’s substantive test can be reduced.
▪ On the other hand, if the results of test of control is weak, the auditor
will have to compensate for this weakness by performing more
extensive substantive procedures.
 Overview of the Audit Process

5) Completing the Audit

▪ The auditor must have sufficient appropriate evidence in
order to reach a conclusion on the fairness of the
financial statements.
▪ After the auditor has completed testing the account
balances, the auditors performs additional audit
procedures to complete the audit and become satisfied
that the evidence gathered is consistent with the
auditor’s report.
▪ These procedures include review of the subsequent
events and contingencies, assessing the going concern
assumption, performing overall analytical review
procedures and obtaining written representation from
the client’s management.
 Overview of the Audit Process

6) Issuing a Report
▪ Based on audit evidence gathered and
evaluated, the auditor forms a conclusion
about the financial statements.

▪ Thisconclusion, in the form of an

opinion, is communicated to various
interested users through an audit report.
 Considerations in Accepting Engagements
❑ An important element of an auditing firm’s quality control policies and
procedures is a system for deciding whether to accept or reject an audit
engagement.
❑ In making this decision, the audit firm should consider the following:
✓ Competence
Has necessary skills and competence to handle the engagement.
✓ Independence
Consider whether there are any threats to the team’s independence and
objectivity.
✓ Ability to serve the client properly
Auditor’s abilities, capabilities, competence and time to perform the audit
engagement in accordance with professional standards.
✓ Integrity of management
Conduct a background investigation of the prospective client in order to
minimize likelihood of association with clients whose management lacks
integrity.
 Task Involving Integrity Investigation of
Management
❑ Making inquiries of appropriate parties in the business community such as
prospective client’s banker, legal counsel, or underwriter to obtain information
about the reputation of the client.
❑ Communication with the predecessor auditor in not only a matter of courtesy
to the previous auditor. This communication allows the incoming auditor to
obtain information about the client that will be useful in determining whether
the engagement will be accepted. This include questions regarding:
✓ Reason for the change of auditors.
✓ Any disagreement between the predecessor auditor and the client.
✓ Any facts that might have a bearing on the integrity of the prospective
client’s management.
 Retention of Existing Client

❑The auditor’s evaluation of the clients is not a one-

time consideration.
❑Clients should be evaluated at least once a year or
upon occurrence of major events such as changes
in management, directors, ownership, nature of
client’s business or other changes that may affect
the scope of the examination.
❑Conditions which would have caused an auditing
firm to reject a prospective client may also result or
lead to a decision of terminating an audit
engagement.
 Engagement Letter

After accepting the audit engagement, an engagement letter should be

prepared. This serves as the written contract between the auditor and the
client. This letter sets forth:
1. Objective of the audit of financial statements.
2. The management’s responsibility for the fair presentation of the financial
statements.
3. The scope of the audit.
4. The forms or any reports or other communication that the auditor expects
to issue.
5. The fact that because of the limitation s of the audit, there is an
unavoidable risk that that material misstatement may remain uncovered.
6. The responsibility of the client to allow the auditor to have unrestricted
access to whatever records, documentations and other information
requested in connection with the audit.
 Engagement Letter
In addition, the auditor may also include the
following items in the engagement letter:

1. Billing arrangements.
2. Expectations of receiving management
representation letter.
3. Arrangement concerning the involvement
of other experts and auditors.
4. Request for the client to confirm the terms
of the engagement.
 Recurring Audits
The auditor does not normally send new engagement letter
every year. However, the following factors may cause the
auditor to send a new engagement letter.
• Any indication of the client misunderstands the objective and
scope of the audit.
• Any revised or special terms of engagement.
• Recent change of senior management, board of directors or
ownership.
• Significant change in the nature or size of the client’s
business.
• Legal requirements and other government agencies’
pronouncements.
 Audits of Components (Subsidiaries or Branch)
When the auditor of a parent is also the auditor of the
subsidiaries, the auditor should consider the following factors
whether to send a separate letter to the component.
• Who appoints the auditor of the component.
• Whether separate audit report is to be issued.
• Legal requirements.
• The extent of any work performed by other auditor.
• Degree of ownerships by parent.
• Degree of independence of the component’s management.
 Next …….
Questions/
Reactions… AUDIT
……
PLANNING
 THANK YOU…….
Auditing &
Assurance-
KEEP SAFE
Principles
AND
BE HEALTHY!!!