Accounting and Assurance Principles Notes Introduction to Assurance and Auditing Services

Sir Perlas Need for Assurance

INTRODUCTION Why do you need assurance?

This course is designed to expose students both the  Potential bias in providing information.
demand for and the supply of the profession's flagship 1. Concept of Principal Agency
service, which is FINANCIAL STATEMENT AUDITS, and Theory / Stewardship Theory
to the nature of the value-added assurance services 2. Business, lumawak, invest ng
which information demand in the information age. The resources must have return, owner
purpose of this subject is to integrate the objectives, appoints managers that are
classifications, techniques, and procedures in auditing entrusted to take care of the
which are specified in Philippine Standards on Auditing resources
(PSA) and other regulatory law and standards, in a 3. There is a potential bias bc the
logical manner to assist students in understanding audit management may tend to present
decision making, evidence accumulation and audit inaccurate information to make the
reporting in today’s complex and changing business results favorable to the
environment with emphasis on external auditing/public management – baka pwede
accounting practice as performed by independent magaroon ng bonus yung
Certified Public Accountants. The course covers also the management
Philippine Accountancy Act of 2004, the Code of Ethics  Sellers
for Professional Accountants, internal controls, and  Management
other services and reports.  Inside information
 Compensation of management
We are not focused only in the evidence accumulation;
 Stock options held by management –
we are also focused on in EVIDENCE ANALYSIS AND
potential na mag falsify ng documents
EVALUATION.

External Audits is our main FOCUS. Financial Audit  Remoteness between a user and the
process. organization or trading partner.
1. Owner nag entrust ng resources,
P.O.V of an External Auditor
hindi na sya active kasi nga
Auditing pinaubaya sa management,
2. Example: Parent – subsidiary
Why study Auditing and Assurance Principles?
relationship, yung parent nasa
1. Career on Audit – Knowledge on principles and ibang bansa tas yung subsidiaries
concepts on Audit andito sa PH, so iientrust ng parent
2. Part of the Board Exam – 50% Theory Principles, kay subsidiary yung paghandle ng
50% Application organization
3. Understand the concept of FS Audit, POV of  Global society
Management.  Lack of personal interaction
 Nasa client side, in-aaudit na side,  Can’t physically inspect goods
 Auditor firm and accountant na inaaudit  Can’t interview management
 Maapreciate mo yung work ng Auditor in  Can’t inspect facility
the POV of Client and magets why eto  Can’t review books and records
ganyan yung hinihingi ng Auditors  Complexity of the transactions,
 Nagiging busy ang Auditors during Jan - information or processing systems.
April, kasi April 15 nagpapasa ng ITR sa BIR, 1. PFRS 16 – Leases, maraming
isa yun sa attachments sa BIR provisions na nakakalito
4. Day to day decision making – double checking 2. PFRS 9 –
data 3. Acctng standards are nagiging
5. Discussion of Code of Ethics, expectations, complex kaya may need na
values and skills to be honed by an Auditor ASSURANCE,

ACCOUNTING VS. AUDITING TAYO NAG EENSURE THAT THE REPORTS ARE CREDIBLE
TO USED BY THE OWNERS, CREDITORS, to minimize
Accounting – process of identifying, classifying,
Fraudulent reports
summarizing to produce financial statements. End
point: Financial Statements What is an Assurance Service?

The most important to learn: ADJUSTING ENTRIES when  Assurance services (or assurance engagements)
it comes to Auditing are three-party contracts in which assurers
(such as a CPA) reports on the quality of
Auditing – Starting point: Financial Statements from the
information.
Clients, this where we analyze fs
4. We help the users to use the FS in their
End point: Audit Reports decision making, if not properly audited
 ang mga FS, mali ang basis and figures, 2. Subject matter
magkaka domino effect. And affect the  Subject matters have different
resources of the company as well. We characteristic (e.g, qualitative vs.
ensure the credibility of the quantitative, objective vs. subjective,
information. historical vs. prospective, and relates to
 Assurance engagements performed by CPAs are a point in time or covers a period) which
intended to enhance the credibility of may affect the precision with which the
information about a subject matter by subject matter can be evaluated or
evaluating whether the subjected matter measured against criteria and the
conforms in all material respects with suitable persuasiveness of available evidence.
criteria.  Operations Audit – Operation ng
5. Assurance services are not limited company and performance company ang
to CPAs may mga assurance SUBJECT MATTER natin, yun iaaudit atin
 Difference between subject matter
Scope of Assurance Service
information – specific point to check the
Assurance is a broad concept. subject matter information
 If FS Audit ang subject matter, ang
Assurance services cover: subject matter information is to evaluate
 A wider spectrum of services. the recognition measurement principles
 A more diverse group of users. under PFRS, to check disclosure.
 Greater potential users.  Check key performance indicator
3. Evidence (Sufficient Appropriate Evidence)
Value of Assurance

 The assurance function gives investors,

creditors and users of information confidence in
the accuracy of data.
 The value of assurance, then, is in the
confidence it generates in users of the
information.
 Interests in Audited FS, kasi eto basis ng
maraming USERS, Creditors (Payment of  Sufficiency and Appropriateness – dapat
Loans), Managers (Performance), Investors, lagi toh magkasama in auditing.
Government (Taxes), Employee (Job a) Evidence is more reliable when it is obtained
Security) from independent sources outside the entity. (if
coming sa customers mismo nag confirm na eto
yung A/R nila sa company)
b) Evidence that is generated internally is more
Elements of Assurance Service
reliable when the related controls are effective.
1. Three-party relationship (Like complete yung mga purchase orders,
i. Practitioner purchase invoices)
 The term “practitioner” is broader than c) Evidence obtained directly by the practitioner
the term “auditor”. (for example, observation of the application of a
 Experts may also be engaged by control) is more reliable than evidence obtained
practitioners to perform assurance indirectly or by inference (for example, inquiry
services about the application of control).
 On a contractual basis, as appointed d) Evidence provided by original documents is
ii. Responsible Party (Management) more reliable than evidence provided by
 the person (or persons) responsible for photocopies or facsimiles.
the subject matter or the subject matter
Attitude of Professional Skepticism (“I trust you but I
information.
need to verify”)
 The responsible party may or may not be
the party who engages the practitioner  Involves questioning mind
(the engaging party).  Critical assessment of evidence
 Nakikipag-contract  Unbiased and being objective in making
iii. Intended Users (BIR) professional judgments.
 The persons or class of persons for  We neither assume whether the client is
whom the practitioner prepares the honest or dishonest.
assurance report. 4. Suitable criteria (Established and specifically
 Intended users may be identified may be developed)
identified by agreement between the Characteristics of a suitable criteria:
practitioner and the responsible party, or I. Relevance
by law. II. Completeness
III. Reliability
IV. Neutrality
 V. Understandability - Negative Assurance – the way statements are
5. Written report constructed are in a negative way
- “Nothing has come to our attention” – Negative
Assurance Report
Construction of sentence
 The practitioner provides a written report - Fewer procedures are performed
containing conclusion that conveys the 3. AGREEN-UPON PROCEDURES – 0 or non-
assurance obtained about the subject assurance engagement
matter information. - Rely sa binibigay ng client
 A practitioner normally can express two
PRIMARY DISTINCTION BETWEEN ASSURANCE AND
levels of assurance in an assurance service:
NON-ASSURANCE ENGAGEMENT?
1. a reasonable (but not absolute)
level, and - Concept of independence
2. a limited level of assurance - Auditing – certain level of independence, kasi
theres a line between practitioner and client
IF WALA ISA SA ELEMENTS = NOT AN ASSURANCE
- Like bookkeeping, records ng client issumarrize
SERVICE
mo lang
- No independence kasi basis mo yung record ni
client

TYPES OF ASSURANCE ACCORDING TO STRUCTURE

1. Assertion-based Engagement i.e. Attestation

(such as an audit opinion)
- Assertions means implicit or explicit claims and
representations made by the management
responsible for the preparation of financial
statements regarding the appropriateness of
the various elements of financial statements
and disclosures.
- Ex. Recognition and measurement, presentation
Levels of Assurance Provided and disclosures, ano yung mga pino provide
sayo ng client to support the papers the client
Three Levels: has
(1) Reasonable assurance (such as an audit opinion), - Subject matter information and report is being
Highest level of assurance that we can provide, positive made available to the users
assurance
2. Direct-reporting Engagements
(2) Limited/Negative assurance (such as in reviewed - Hindi engaged yung management, the auditor
financial statements) directly performs the service,
(3) No assurance (such as a compilation of financial - PCAOB Audit (establish and maintain high
statements) 0 level assurance, edi there’s no assurance, quality auditing and related professional
di sya type of assurance engagement practice standards for audits of public
companies and other issuers)
- Bookkeeping, ikaw mismo nag acctng - Reports only are being made available to the
users
- Pwedeng oral reports

Concept of Reasonable Assurance

 Assurance Engagement Risk concept – this is

the risk that practitioner will be able to produce
a misstated report, that the practitioner will
produce an inaccurate, falsified information
o That the assurance engagement
activities will not be achieved
o We cannot eliminate assurance
LEVEL OF ASSURANCE PROVIDED engagement risk
o May portion sa report na inaccurate
1. HIGH – Reasonable, Positive Assurance
o Kaya as practitioner we can only
- Positive yung opinion nung Assurance
provide reasonable, NOT ABSOLUTE
- Express an opinion for financial statements
assurance
- Mas maraming procedures yung ginagawa sya
kasi need maging low level yung audit assurance
 Reasonable Assurance vs. Absolute Assurance
- Theres no such thing absolute assurance, only
2. MODERATE – Limited, Negative Assurance
reasonable. Why? Because of the third bullet,
limitations on assurance engagement.
  Limitations of Assurance Engagements 2. Management Consulting Services – provide
 Use of selective testing – use of sampling, advice and technical assistance (2 party
another topic to be covered after midterms relationship = Intended user + practitioner)
o We do not test 100%, theres a - Fraud Investigations
certain timeframe and budget, sa - Information Technology Consulting
time and resources. Time involved. - Others
o Mauubos oras kapag ittest ng 100% 3. Other Non-Assurance services
 Inherent limitations of internal control - Bookkeeping
o Cash is susceptible to theft - Others
o Fraud na hindi nacover – inherent
Auditing Defined
limitation na yun
 Much of the evidence available is Auditing is a systematic process of objectively obtaining
persuasive rather than conclusive and evaluating evidence regarding assertions about
o Conclusive – every evidences na economic actions and events to ascertain the degree of
ibibigay, yun nay un, it will alrdy correspondence between those assertions and
support the claims of the client, pero established, criteria and communicating the results to
hindi naman lagi ganon kaya dapat interested users.
PERSUASIVE kasi you have to
- Present yung 5 elements of Assurance services
compare pa, necessary procedures if
usable baa ng object na yun, YOU
HAVE TO VERIFY THE EVIDENCES
 Use of judgment
o Useful life – judgement, ineestimate
lang gano katagal mag llast yung
asset
 Characteristics of subject matter (in some
cases)

THE RELATIONSHIP BETWEEN AUDITING, ATTESTATION

AND ASSURANCE SERVICES

1. A systematic process – following a series of

steps

Audit is a part of Attestation-Based Engagement and

Attestation is part of the big family of Assurance
Engagement

2. Objectively obtaining
- Provide decisions based on the given facts, not
based on emotions, not based on undue
influence
- Cannot present an opinion without any
evidences supporting the opinion
- Highest level of audit opinion kapag may
enough evidence ka

TYPES OF AUDIT

1. FINANCIAL STATEMENT AUDITS

3 NON-ASSURANCE SERVICES This refers to the gathering of evidence on the

assertions embodied in the financial statements of an
1. Tax services – ensure the preparation of ITR, tax entity and using the evidence to determine whether the
services assertions adhere to Philippine financial reporting
framework or another comprehensive and authoritative
financial reporting framework.
 - Subject Matter: Financial Statement with existing laws and whether the government
- Suitable criteria: PFRS programs of a particular agency are being conducted
- Most frequently performed type of audit efficiently and economically.
- Primarily done by: External Auditors
TYPES OF AUDITORS
 Auditor offers assurances about management's
 External auditors – can perform: FS Audit,
financial statement assertions
Compliance Audit and Operational Audit,
 Performed by professional accountants (i.e., Forensic Audit
independent Certified Public Accountants)  Internal auditors – Operational Audit
 Government auditors – FS Audit and
2. COMPLIANCE AUDIT
Compliance Audit
This type of audit is used to determine whether a  Forensic auditors – Compliance Audit
person or entity has adhered to provisions of a contract, - goal: Detect Fraud
laws and regulations.

Results of compliance audits are generally reported to a

specific user within the organization.

- Subject matter: determine whether a person or

entity has adhered to provisions of a contract
- Suitable criteria: a contract, laws and
regulations.
- Primarily done by: Government Auditors and
External Auditors

3. OPERATIONAL AUDIT

Involve “a systematic review of an organization's

activities in relation to specified objectives for the
purposes of assessing performance (the efficiency, Objectives of Independent Auditor in the audit of
effectiveness and economy of operations), identifying Financial Statements
opportunities for improvement, and developing  To obtain reasonable assurance about whether
recommendations for improvement or further action”. the financial statements as a whole are free
- Subject matter: Operations of the company from material (materiality) misstatement,
- Suitable criteria: Company manual and policy, whether due to fraud or error
and how can we improve the operations  To express an opinion on whether the financial
- Primarily done by: statements are prepared, in all material
respects, in accordance with an applicable
4. INTERNAL AUDITS financial reporting framework

ls an independent appraisal function established within Responsibilities of Management and Those Charged
an organization to examine and evaluate its activities as with Governance
a service to the organization.  Preparation and presentation of the financial
Internal auditors are not independent in the same sense statements in accordance with the applicable
as external auditors (because internal auditors are financial reporting framework.
employees of the organizations whose activities they  Design, implementation and maintenance of
appraise). internal control relevant to the preparation and
presentation of financial statements.
- Almost similar to operational audit  Provide the auditor with all information, such as
- In independence, the external auditor has a records and documentation; other information
higher independence than internal auditor. needed by the auditor in connection with the
- Why? Because of the Employer-Employee audit of financial statements; and
relationship. Internal auditors are part of the  Unrestricted access to those within the entity
organization. They are employees of the from whom the auditor determines necessary
organization. If they make radical decisions, or to obtain sufficient appropriate evidence
contradicting to intention of the management.
Their position in the company might get
jeopardize.
- There are objectivity problems.

5. GOVERNMENT AUDITS ( under Compliance

Audit)

Involves the determination of whether government

funds are being handled properly and in compliance
  Premise of audit—Management has
responsibility for preparing financial statements
and providing auditor with all needed
information.
 Personal responsibilities of auditor—
Competence, follow ethical requirements,
maintain professional skepticism.
 Auditor actions in audit—Provide procedures to
obtain reasonable assurance about whether
financial statements are free from material
misstatements.
 Reporting results of an audit—Written report
Limitations of Audit with an opinion, or a statement that an opinion
1. The nature of financial reporting – client may cannot be obtained.
have an erroneous financial statement DIAGRAM OF AUDIT – AUDIT PROCESS
2. The nature of audit procedures
3. Nature of audit evidence available – persuasive
rather than conclusive
4. Timeliness of financial reporting

DEMAND FOR AUDIT

 Business Risk Concept

 Management side
 Risk that the management will have a
problem in going concern, risk that the
management will not survive the --------------------------------------------------------------------------
business and will bankrupt and will not
CHAPTER 2: INTRODUCTION TO FS AUDIT AND PRE –
continue
PLANNING PHASE
 Information Risk Concept
- The risk that the information the client has Responsibilities of Management and Those Charged
given is INACCURATE with Governance
- Mali nagagamit na data
 Preparation and presentation of the financial
 Remoteness of Information
statements in accordance with the applicable
 Biases and Motives of the Provider
financial reporting framework.
(pwedeng ibahin ng client para kunware
mameet yung motive)  Design, implementation and maintenance of
 Voluminous Data internal control relevant to the preparation and
 Complex Exchange Transactions presentation of financial statements.

Basic Concepts underlying a Financial Statement Audit

How to reduce the information risk?  Auditor Independence

- 2 types of Independence
1. Allow users to verify the information - Independence in Mind – state of mind
2. Allow users to be shared the information risk, na hindi papa-apekto sa any influence,
management is responsible in giving reliable you can practice professional
information judgement, you can provide conclusion
3. Have the financial statements AUDITED wihout compromising integrity, theres
no conflict of interest
PRINCIPAL-AGENT RELATIONSHIP
- Independence in Appearance – avoid
facts and circumstances that may
impair your objectivity. Ex. Kinuha kang
guest ng president kahit auditor ka, you
will have to decline.
 Professional Skepticism
- We trust but we need to verify
- An auditor should be alert about...
o audit evidence that contradicts other
audit evidence obtained
SUMMARY o Ex. Bank statement magkaiba sa laman
ng passbook ng company, we ask
Principles Underlying an Audit clients, perform bank recon
o information that brings into question
 Purpose of audit—Provide an opinion.
the reliability of documents and
 responses to inquiries to be used as
audit evidence
o ex. No sign sa mga reports
o conditions that may indicate possible
fraud
 Conduct and Scope on an Audit
- The auditor shall comply with all PSAs
relevant to the audit.
- lf compliance with PSA cannot be achieved,
the auditors hall modify his opinion or
withdraw from the engagement.
- Scope of an audit refers to the audit
procedures that, in the auditor's judgment
and based on the PSAs, are deemed
appropriate to achieve the objectives of the
audit.
- THREE GENERAL PRINCIPLES OF AUDIT
1. Compliance with Code of Ethics
(Independence)
2. Compliance with PSAs (Scope of an Audit)
3. Plan and form an audit with the plan of
professional skepticism
 Audit Evidence
- Audit evidence is all the information
obtained and used by the auditor in arriving
at the conclusions on which the audit
opinion is based.
- the auditor should obtain sufficient
appropriate audit evidence
 Management Assertions
- Auditor shall gather audit evidence
regarding the assertions (i.e.,
representations) of management in their
financial statements.
- Broadly speaking, assertions include:
presentation and disclosure, existence and
occurrence, rights and obligations,
completeness and valuation and allocation
 Audit Materiality
 Audit Risk
 Professional Judgement
 Inherent Limitations of an Audit