1. Definition
The American Accounting Association (AAA) defines Auditing as a systematic process by which a
competent, independent person objectively obtains and evaluates evidence regarding assertions about
economic actions and events to ascertain the degree of correspondence between those assertions and
established criteria and communicating the results to interested users.
The objective of auditing is to ascertain the integrity and authenticity of management’s financial
statements to obtain a basis for the expression of an opinion on the fairness of its presentation in
accordance with generally accepted accounting principles (GAAP).
The Framework of the Philippine Standards on Auditing, PSA 120, states that the objective of
auditing is to enable the auditor to express an opinion whether the financial statements are prepared in all
material respects in accordance with an applicable financial reporting framework.
The auditor should conduct an audit in accordance with Philippine Standards on Auditing.
The auditor should plan and perform the audit with an attitude of professional skepticism recognizing
that circumstances may exist which cause the financial statements to be materially misstated.
The major steps in financial statement audits are similar to the sequence followed in a high-level
assurance engagement; generally divided into three phases: the pre-engagement and audit planning
activities; gathering and evaluating evidence; completing the audit and issuing the audit report.
In accepting the engagement, certain points must be cleared with the client such as period
covered and purpose of the audit. The auditor also notes preliminary considerations among which
are the studies of the client’s business, the industry environment, evaluation of internal control,
investigating the accounting system, and clearance for testing entries and confirming receivables.
b) Phase II: Gathering and evaluating audit evidence, interim audit phase, final audit phase
The actual audit work covers the gathering and evaluating of evidence in the performance of
compliance and substantive tests.
Evidence may be gathered through inquiries, inspection and observation or transaction walk-
through of the organization’s specific policies and procedures, all of which must be described or
fully documented.
Compliance tests are tests of controls aimed to determine proper execution, recording and
custodianship in the basic transaction cycles: the revenue and collection cycle, expenditure cycle
and financing and investing cycle.
Substantive tests involve the tests of transactions, test of details of balances and analytical
procedures. Substantive tests aim to confirm and substantiate existence or occurrence,
completeness, valuation, rights and obligations, and presentation and disclosure of items in the
financial statements.
In the final phase of the audit, the practitioner summarizes the results of his audit findings,
identifies subsequent events, completes the audit; and issues the audit report expressing the
opinion corresponding to his conclusion.