EXPLANATION ABOUT THE CHAPTER 4 ENTITILED OVERVIEW OF AUDIT
PROCESS AND PRELIMINARY ACTIVITIES
Audit
Is a systematic process
It means the auditor needs to follow a specific sequence or
procedure in order to attain its objective before he/she
expressed his/her opinion after niya matanggap ang engagement
( Audit Engagement – is an agreement between client and an
independent auditor to perform an audit )
Series of logical steps
Performing procedures para makapag gather ng evidence in
order to have a capability to expressed his/her opinion.
It involves objectively obtaining and evaluating evidence about
assertions ( Assertions are claims that establish whether or not
financial statements are true and fairly presented in the process of
auditing , any representations made by the audit client)
The auditor needs to be objective kasi kung hindi the audit
engagement will be nothing (no sense)
It ascertains the degree of correspondence between assertions and
established criteria
It is the basis if the assertions are followed the criteria
It includes communication of the results to interested users
In order that the audit engagement will be valuable it should or
must be communicate to the interested users or else it will be
futile
Summary:
Audit is a systematic process kasi kailangan niya munang may e follow
series of logical sequence or procedures bago mag expressed ng opinion si
auditor and the second definition will be referring to the independence of an
auditor kasi kailangan niyang maging objective dahil kung hindi mawawalan
ng sense ang audit engagement and the third one is about how the auditor
examine the assertions kung they followed the criteria and lastly magiging
valuable lang ang audit engagement if It is communicate to the intended
users.
TYPES OF AUDIT
Nature of assertions
FS AUDIT – the main objective of the audit is to expressed an
opinion regarding the fairness of the presentations the financial
statement ( performed by external audit)
OPERATIONAL AUDIT – to expressed an opinion regarding the
operating effectiveness and efficiency ( performed by internal
audit
COMPLIANCE AUDIT – to ascertain the degree of compliance of a
particular entity to certain laws and regulations set by some
higher authority ( performed by Government audit
Types of auditor
EXTERNAL AUDIT – types of audit performed by CPA’s in public
practice (firms)
INTERNAL AUDIT – appraisal activity within entity, commonly
performed operational audit --- Audit Committee (independent
body) who are not actively participating in managing the affairs
of the business – implementing arm is the internal audit
GOVERNMENT AUDIT – Commission on Audit
SHAREHOLDER
BOARD OF DIRECTORS - Overall directions of the company
- Set policies and procedures
MANAGEMENT TEAM Implementing arm
a. VP or COO
Managers Internal Audit must be independent to
Supervisors these team
Staff
AUDIT PROCESS
1. Entity Prepares and presents financial statements
It will be the assertions in our FS audit
The financial statements are considered as assertions or
representation mad by the entity, through its management and
those charged with governance as appropriate
Categorize in to three
a. Transactions and events for the period under audit
i. Occurrence
ii. Completeness
iii. Cutoff
iv. Accuracy (Measurements in accounting)
v. Classification
b. Account Balances at the period end
i. Completeness
ii. Existence
iii. Valuation and allocations
c. Presentation and disclosures
i. Occurrence and rights and obligations
ii. Completeness
iii. Accuracy and Valuation
iv. Classification and understandability
2. The auditor performs audit Procedures
Two categories of audit procedures
a. Major Audit Procedures
i. Risk Assessment Procedures (RAP)
- obtain an understanding of the entity and its
environment
- We need to understand the transactions of the
entity in order to easily understand the FS and
assess different risk related to audit
ii. Test of Control (Further Audit Procedure)
- Evaluate the operating effectiveness of controls
- in this type of MAP we will see if the procedures or
controls that entity use in preparing the FS
iii. Substantive Test
- Detect material misstatements at the assertion
level
- Dito ang kailangan mo ng tignan ung mismong FS
nah
- purposed nung RAP & TOS is to easily check the FS
Itself
- Test of details
- Substantive analytical procedures
- Dito pinaka nag rarely and auditor to gather
sufficient evidence
b. Specific of Audit Procedures
i. Inspection of Records or documents
ii. Inspection of tangible assets
iii. Observation
iv. Inquiry
v. Confirmation
vi. Recalculation
vii. Re-performance
viii. Analytical procedures
3. The Auditor gathers audit evidence
4. The auditor expresses an audit opinion
- provides written report contain conclusion or an opinion
a. Unmodified opinion (UNQUALIFIED OPINION) – present
fairly, in all material respect
b. Modified Opinion
i. Qualified and adverse opinion – alam mong may
mali ayaw mong e tama
ii. Qualified and disclaimer opinion – hindi mo alam
kung tama o mali
SUB-PAHSES OF THE AUDIT PROCESS
Investigative Phase – includes the performance of audit procedures and
gathering of audit evidence
Reporting Phase – expression of opinions, preparation of reports,
communication of the results
SEQUENCE OF PERFORMING FS AUDIT
I. Preliminary engagement activities
This phase is about the decision whether or not the engagement
should accepted
The consideration ni auditor dito is kung may integrity ka ba
And syempre if the auditor decide to accept the engagement
then dun we will proceed to the next level
II. Planning an audit of financial Statements
Here we can use the RAP that we tackle previously under the
major audit procedures.
Performing RAP with identifying on what is the appropriate
Farther audit procedure to be performed
III. Study and evaluation of internal control
Information is more reliable when the control are effective
Then kapag effective ang Control that means we can conclude na
reliable ang FS that will be generating from it
IV. Evidence-Gathering (Substantive Testing
FS itself to audit
Kaya ka nag plano kung gaano karami, gaanno ka extensive ung
substantive testing na gagawin mo
The focus would be the items on the phase of the FS
V. Completing the audit)
We call it wrapping up procedure kasi ung mga items na hindi
na consider ni auditor sa preliminary phases ditto niya e
coconsider that’s why it says completing the audit
Review Phase kasi the conclusion reached is reviewed
Formation the overall opinion
VI. Issuance of the audit report
How to make report kung ano bang content if unmodified opinion
ba or modified opinion para ma communicate mo na ung report
VII. Post – audit responsibilities
This stage is about how an auditor know where areas should
he/she improve his/her skills in auditing FS in which she/he can
make expressed opinion efficiency
THE REAL REPORT
PRELIMINARY ENGAGEMENT ACTIVITIES
=MAJOR AUDIT PROCEDURES=
In this chapter shows and focused on the overview of audit process
and explain about the first step in the sequence of performing FS audit
which preliminary engagement activities.
So what is the preliminary engagement activities
This phase is about the decision of an auditor whether to accept
or reject an engagement
The auditor firm’s should consider the ff.:
1) Its competence
2) Its independence
3) Its ability to serve the client properly, and ;
4) The integrity of the prospective client’s management
To adequately address the above items, the auditor is expected to
perform the following:
i. Obtain a preliminary knowledge of the client’s business and
industry to determine whether the auditor has the degree of
competence required by the engagement
This means an auditor should understand the client’s
business operation and industry in order to know if the
auditor can performed and capable in make FS audit
effectively and accurately
ii. Consider whether there are any threats to the firm’s
independence and objectivity, and if so, whether adequate
safeguards can be established
it means the audit firm must evaluate any situations or
relationships that might compromise the auditor ability to
remain unbiased and impartial. Once identified, the firm
needs to determine if adequate safeguards can be put in
place to protect its independence.
Independence of Mind = the auditor's ability to make
decisions and judgments without being influenced by
external factors, relationships, or biases.
Independence in appearance= the auditor is perceived by
others, including stakeholders, clients, and the public. It
means that even if an auditor is independent in mind, they
must also be perceived as such. This involves avoiding
situations that could lead others to question the auditor's
objectivity or impartiality.
iii. Evaluate the firm’s ability to serve the prospective client.
Before accepting engagement the firm consider its
resources in evaluating whether the firm has the ability to
serve the prospective client properly
iv. Evaluate Auditability
The auditor gath
v. Investigate the integrity of the prospective client’s management
vi. Agree on the terms of the engagement and prepare an
engagement
=ACCEPTANCE OF AN ENGAGEMENT=
