AUDIT AND ASSURANCE : SPECIALIZED INDUSTRIES-LECTURE 01

BY: PROF NOVELYN HISO-AN

Audit - is a systematic process of objectively obtaining and evaluating evidence regarding

assertions about economic actions and events to ascertain the degree of correspondence
between the assertions and established criteria and communicating the results to interested
users.

Definition of Terms:

1. Assertions – representation made by the entity about economic actions and events
2. Objectivity – requires the auditor to make impartial assessment of all the relevant
circumstances in forming a conclusion.
3. Established Criteria – needed to judge the validity of the assertions

A. TYPES OF AUDIT
1. Financial Statement Audits is conducted to determine whether the financial statements of an
entity are fairly presented in accordance with the applicable financial reporting framework.

2. Compliance Audit involves the review of an organization’s procedures to determine whether

the organization has adhered to the specific procedures, rules or regulations. The criteria are
established by an authoritative body

3. Operational Audit study of a specific unit of an organization for the purpose of measuring its
performance. The main purpose is to:

a. Assess the entity’s performance

b. Identify areas for improvement

c. Make recommendations to improve performance

Operational Audit is also known as Performance Audit or Management Audit. The criteria for
this type of audit are not clearly established. The criteria are based on the organization’s
standards and objectives
B. TYPES OF AUDITORS
1. External Auditors/Independent Auditors - These are Certified Public Accountants who
offer their professional services to clients on a contractual basis. They generally
perform the Financial Statements Audit.
2. Internal Auditors - Internal Auditors are the entity’s own employees who investigate
and appraise the effectiveness and efficiency of the operations and internal controls.
They usually perform Operational Audit.
3. Government Auditors - These are government employees whose main objective is to
determine whether persons or entities comply with government laws and regulations.
They usually perform Compliance Audit.

C. INDEPENDENT FINANCIAL STATEMENT AUDIT

The objective of an audit of financial statements is to enable the auditor to express an opinion
whether the financial statements are prepared, in all material respects, in accordance with an
identified financial reporting framework.

 Responsibility of the Financial Statement

The management is responsible for preparing and presenting the financial statements in
accordance with the applicable financial reporting framework.

The auditor’s responsibility is to form and express an opinion on these financial statements
based on the audit result. An audit of financial statement does not relieve the management of
its responsibilities

 Assurance Provided by the Auditor

The assurance provided by the auditor is not a guarantee that the financial statements are
dependable. An audit conducted in accordance with PSAs provides a reasonable assurance that
the financial statements are free from material misstatements. Inherent limitations are existent
that could affect the auditor’s ability to detect material misstatements.
D. GENERAL REQUIREMENTS WHEN AUDITING FINANCIAL STATEMENTS
PSA 200 – Overall objectives of the Independent Auditor and the Conduct of an Audit in
accordance with the Philippine Standards on Auditing. The objective of audit is to enhance the
degree of confidence of the intended users in the financial statements.

1. The auditor should comply with the ethical requirements relating to an audit of financial
statements, as stated in the Code of Ethics for CPAs (Part A and B) in order to retain public
confidence in the credibility of the auditors’ work.

a. Integrity
b. Objectivity
c. Professional Competence and Due Care
d. Confidentiality
e. Professional Behavior

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

Professional Skepticism - is an attitude that includes a questioning mind, being alert to

conditions that may indicate possible misstatement due to error or fraud, and a critical
assessment of audit evidence.

3. The auditor shall exercise professional judgement in planning and performing an audit of
financial statements.

Professional Judgment - the application of relevant training, knowledge and experience, within
the context provided by auditing, accounting and ethical standards, in making informed
decisions about the courses of action that are appropriate in the circumstances of the audit
engagement.

4. To obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit
evidence to reduce the risk to an acceptably low level and thereby enable the auditor to draw
reasonable conclusions on which to base the auditor’s opinion.

Audit evidence is needed to support the opinion expressed in the auditor’s report. Sufficiency
and appropriateness of the audit evidence is a matter of professional judgement.

5. The auditor should conduct an audit with Philippine Standards on Auditing (PSAs).
G. WHY IS THERE A NEED FOR INDEPENDENT FINANCIAL STATEMENTS AUDIT?
1. Conflict of Interest between management and the users of financial statement

Management are oftentimes placed in a position where they can benefit from overly optimistic
financial results, outside parties however want unbiased, realistic financial statements. Because
of this conflict, users have become skeptical of unaudited financial statements.

2. Expertise

Most users of financial information are not equipped with the skills and competence to
determine whether the financial statements are reliable, a qualified person is hired by users to
verify the reliability of the financial statements on their behalf.

3. Remoteness

Users of financial statements are usually prevented from directly assessing the reliability of the
information. They do not have direct access to the entity’s records to personally verify the
quality of the financial information. Therefore, an independent auditor is needed to assist them
in verifying the reliability of the financial information.

4. Financial consequences

Misleading financial information could have substantial economic consequences for a decision
maker. Therefore, it is important that financial statements must be audited first before they are
used for making important decisions.

SPECIALIZED INDUSTRY: Auditing Banking and other Financial Institutions

The Philippines' banks are classified into three types:
a. Universal and commercial banking
b. Rural cooperative banking
c. Thrift banking.

 Nature and Background of Specialized Industry

The banking and finance sector is primarily responsible for mobilizing domestic savings and
converting these funds into directly productive investments. Financing the needs of firms which
desire to raise productive capacity by purchasing additional capital equipment, acquiring or
leasing idle property, building and expanding factories, and increasing inventory are responsible
for sustaining economic growth in the long term, alongside the creation of new jobs.

The financial system is composed of two general groups namely: banks and non-bank financial
institutions.

Banking institutions include universal banks, commercial banks, thrift or savings banks and the
rural and cooperative banks. These institutions are allowed to collect savings and time deposits
to fund loans and also perform the function of providing credit and payment services. Large
banks, particularly the universal and commercial banks, can engage in other intermediation
activities such as investment banking and may offer other forms of portfolio investment
instruments and insurance products.

Non-bank financial institutions on the other hand, are composed of insurance companies,
pension fund institutions, investment banks, financing companies, pawnshops and mutual fund
institutions. These institutions are not allowed to collect deposits but may encourage the
general public to invest household savings in various financial instruments. Premium payments
for term insurance policies, regular contributions to pension funds, investment into mutual
funds or purchases of shares of stock in financing companies and pawnshops are some of the
ways by which non-bank financial institutions can source funds to finance lending and or
investment operations.

Recent Issuances (refer to attachment)

Audit Considerations (refer to attachment)

Key Audit Considerations (refer to attachment)

Key Risk Indicators (refer to attachment)

Reporting on the Financial Statements (see Philippine Auditing Practice Statement 1006 AUDITS OF THE
FINANCIAL STATEMENTS OF BANKS for more details)

In expressing an opinion on the bank’s financial statements, the auditor:

● Adheres to any specific formats and terminology specified by the law, the regulatory
authorities, professional bodies and industry practice
● Determines whether adjustments have been made to the accounts of foreign branches
and subsidiaries that are included in the consolidated financial statements of the bank to
bring them into conformity with generally accepted accounting principles in the
Philippines. This is particularly relevant in the case of banks with foreign branches and
subsidiaries because most countries' local regulations prescribe specialized accounting
principles applicable primarily to banks. This may lead to a greater divergence in the
 accounting principles followed by branches and subsidiaries, than is the case in respect
of other commercial entities.

The financial statements of banks are prepared in the context of the legal and regulatory
requirements and accounting policies are influenced by such regulations. The BSP regulatory
accounting principles (RAP) for banks may differ materially from generally accepted accounting
principles (GAAP). When the bank is required to prepare a single set of financial statements that
comply with both frameworks (i.e., RAP and GAAP), the auditor may express a totally
unqualified opinion only if the financial statements have been prepared in accordance with
both frameworks.

If the financial statements are in accordance with only one of the frameworks, the auditor
expresses an unqualified opinion in respect of compliance with that framework and a qualified
or adverse opinion in respect of compliance with the other framework. When the bank is
required to comply with RAP instead of GAAP, the auditor considers the need to refer to this
fact in an emphasis of the matter paragraph.

By assessing key risks, it is evident that there are challenges on all sides. Banks are under attack,
being subject to enforcement actions, fines, penalties, and expensive remediation action.
Regulators and politicians are under pressure from the public, and sometimes each other, to
deal more firmly with the banking sector, the banks, and bankers involved in breaches of
regulations, criminal law, public trust, and confidence. Auditors have perhaps been too
accommodating in allowing bank management and directors to somehow “manage” the audit
relationship to their advantage, and in order to mitigate their reputation and regulatory risk.