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Professional Auditing Standards

and the
Audit Opinion Formulation Process
Successful
Uniformity defense against
allegation

Measure the
Clear
quality of the
definition of
service
responsibilities

Standards
 Generally Accepted Auditing Standards

General Fieldwork Reporting


Standards Standards Standards

• Generally
• Technical • Planning
Accepted
training and • Internal
Accounting
Proficiency Control
Principles
• Independence Consideration
• Inconsistency
• Professional • Evidential
• Disclosure
Care Matter
• Opinion
• International Standards on Auditing (ISAs)
• International Standards on Assurance Engagement
(ISAEs)
• International Standards on Review Engagements
(ISREs)
• International Standards on Related Services (ISRSs)
• Philippine Standards on Auditing (PSAs)
• Philippine Standards on Assurance
Engagement (PSAEs)
• Philippine Standards on Review
Engagements (PSREs)
• Philippine Standards on Related Services
(PSRSs)
A. Financial Statements Audit only

B. Integrated Audit
Phase I Making Client Acceptance and
Continuance Decisions
Phase II Performing Risk Assessment
Phase III Obtaining Evidence about Internal
Control Operating Effectiveness
Phase IV Obtaining Substantive Evidence
about Accounts, Disclosure and
Assertions
Phase V Completing the Audit and Making
Reporting Decisions
A. Accounting Cycle

B. Management Assertions

C. Audit Evidences and audit procedures

D. Documentations
 Audit evidence: Information used by auditor in
arriving at conclusions on which the opinion is
based
 Audit procedures: Procedures designed to obtain
audit evidence to support audit opinion(s)
 Sufficient appropriate audit evidence: Measure of
the quantity and quality of audit evidence
 Audit program
◦ Lists audit procedures to be followed in gathering
evidence
◦ Helps monitor progress and supervising work
• Risk assessment procedures: Provide information
for assessing the risks of material misstatement
in the financial statements
• Used for purposes of planning the audit
• Tests of controls: Designed for evaluating
operating effectiveness of controls
• Substantive procedures: Designed for detecting
material misstatements at assertion level
• Comprising of tests of details and substantive analytical
procedures
 Record of audit procedures performed,
relevant audit evidence obtained, and
conclusions the auditor reached

 Known as working papers or workpapers


 Assisting engagement team in:
◦ Planning and performing audit
◦ Supervising and reviewing audit work
 Retaining a record of matters of continuing
significance to future audits
 Enabling internal or external inspections of
completed audits
 Assisting auditors in understanding work
performed in prior year
 Preconditions for accepting auditing
engagements
◦ Use of an acceptable financial reporting framework
◦ Agreement of management to acknowledge and
understand its responsibilities
 Identifying and assessing risks of material
misstatement
◦ Requires identification of significant accounts,
disclosures, relevant assertions
◦ Auditor establishes a materiality level overall and
for specific accounts and disclosures

 Responding to identified risks


◦ Determining audit procedures required to address
them
 Inherent risk
◦ Susceptibility of an assertion about a class of transaction,
account balance or disclosure to a misstatement that could
be material, either individually or when aggregated with
other misstatements, before consideration of any related
controls

 Control risk
◦ Risk that a misstatement that could occur in an assertion
about a class of transaction, account balance or disclosure
and that could be material, either individually or when
aggregated with other misstatements, will not be
prevented, or detected and corrected, on a timely basis by
the organization’s internal control
 Focuses on design effectiveness and
implementation
 High control risk
◦ Weak or ineffective internal controls
◦ Auditor cannot rely on controls to reduce
substantive procedures for account balances
 Low control risk
◦ Effective internal controls
◦ Auditor will test operating effectiveness of
controls to reduce substantive procedures for
account balances
 Purpose of risk assessment procedures
◦ Identify risks of material misstatement
◦ Determine where misstatements in financial
statements may occur
◦ Design appropriate audit strategy
 Controls reliance audit: Includes tests of
controls and substantive procedures
 Substantive audit: Includes substantive
procedures and does not include tests of
controls
 Auditor tests controls to determine whether
controls are operating effectively
◦ At year-end (for opinion on internal control
effectiveness)
◦ Throughout the year (for the financial statement
audit)
 Involves choosing controls that effectively
indicate capability to address the assessed
risk of material misstatement for relevant
assertions
 Includes controls in all five COSO components
 Types of tests of controls
◦ Inquiry
◦ Observation
◦ Inspection of relevant documentation
◦ Reperformance of a control
• If control deficiencies are identified
• Assess them to determine whether preliminary
control risk assessment should be modified
• Record the implications for substantive
procedures
• If no control deficiencies are identified
• Assess whether preliminary control risk
assessment is still appropriate
• Determine extent that controls can provide
evidence on accuracy of account balances
• Determine planned substantive audit procedures
 Determine how much assurance about
reliability of account balances can be
obtained from the effective operation of
controls
 Within any audit, level of assurance will vary
across:
◦ Accounts
◦ Disclosures
◦ Assertions
Performing Substantive Procedures
 Substantive procedure- An audit procedure to
detect material misstaments at the assertion
level.
 The auditor performs substantive procedures
for the relevant assertions of each significant
account and disclosure, regardless of the
assessed level of control risk. These
procedures can include both substantive
analytical procedures and test of details of
account balances.
 Substantive analytical procedures are optional,
whereas test of details will be necessary for
significant account and disclosures.
 In determining appropriate substantive
procedures, the auditor considers (a) the
source of potential misstatement and (b) the
extent and type of potential misstatements.

Some of the processes contain subjectivity


and are considered high risk-for example
determining how much of a receivable
balance will ultimately be uncollectible.
The following processes affect the accounts
receivable balance:
 Revenue
 Cash receipts
 Current Provision for Uncollectible Accounts
 Write-offs
 Adjustments
In this phase, the Auditor:
(a) completes various review and
communication activities.
(b) makes a decision about what type of
opinion should be issued.
(a)Completes various review and
communication activities includes:
 assessing detected misstatements and
identified control deficiencies
 Reviewing the adequacy of financial
statements disclosures
 Performing final analytical review procedures
 Communicating with the audit committee and
management about identified control
deficiencies
 Performing an engagement quality review
(b) makes a decision about what type of opinion
should be issued.
After completing the required review and
communication activities, the auditor then
decides on the appropriate opinion to issue.
The auditor issues an opinion on both the
financial statements and internal control. The
opinions can be issued in one or in two
separate reports. However, if separate reports
are issued, each report must refer to the other.
1. Appropriateness of Audit Evidence
- measure of the quality of audit evidence,
and includes both relevance and reliability of
the evidence.

2. Sufficiency of Audit Evidence


- measure of the quantity of audit
evidence.
all the information used by auditors in
arriving at the conclusions on which the audit
opinion is based.
Nature of Audit Evidence

Audit Evidence:
 Includes both internally generated and
external information
 Includes information that both may support,
or contradicts, management’s assertion
 Is influence by managements action

 Can be developed using outside experts

 Can be obtained through other procedures


the auditor normally performs
Accounting records vs. audit evidence
Example of accounting records:
 Checks

 Records of Electronic Funds transfer

 Invoices

 Contracts

 General Ledgers

 Subsidiary Ledgers

 Journal Entries
Audit
Evidence

Appropriatenes
(Relevant & Sufficiency
Reliable)
Quantity of Evidence
Quality of Evidence that Auditor collects
that Auditor
collects
APPROPRIATENESS- RELEVANCE

1.) Direct Evidence

2.) Indirect Evidence


More Reliable Less Reliable

Directly obtained evidence Indirectly obtained evidence

Evidence derived from a well- Evidence derived from a poorly-


controlled information system controlled system or easily
overridden info. system

Evidence from independent Evidence from within the clients


outside sources organization
Evidence that exists in Verbal evidence
documentary stamps
Original documents Photocopies or facsimiles, or
digitalized data
Outside Information
Knowledge of the Client
Gathered through:
Gathered through:
• Work of the audit team using
• Previous audit work
market data
• Client risk analysis
• Independent analyses by
• Client acceptance analysis
specialists

Cumulative
Audit
Evidence

Quality of Internal Control


Accounting System
Gathered through:
Gathered through:
• Evaluation of the design of
• Direct tests of account
internal controls
balances and transactions
• Evaluation of the operation of
• Analytical analysis
control
 Existence and occurrence
 Completeness
 Rights and Obligations
 Valuation and allocation
 Presentation and Disclosure
 Panel A. Testing for Existence-Vouching

Source document GL/Subsidiary Ledger

 Panel B. Testing for Completeness-Tracing

Source document GL/Subsidiary Ledger


1. Understand the client and its industry.
2. Assess the risk of material misstatement by
assertion for each significant component of the
client’s FS.
3. Determine the most persuasive evidence to address
assertions and the most economical approach to
gather the evidence.
4. Assess adequacy of evidence and issue a report.
 Tests of Controls
 Substantive Procedures
Category Purpose Audit Procedures

Tests of Controls Evaluate operating Inspection of


Effectiveness of Document
controls
Observation

Reperformance

Inquiry

Substantive Determine whether Inspection of


Procedures material misstatement document
exist
Inspection of Assets
External Confirmation
Recalculation
Analytical Procedres
Scanning
Inquiry
Audit Program:
 specifies the audit objectives, the procedures
that should be followed in gathering,
documenting, and evaluating audit conclusion.

 the auditor makes decisions on the best


combination of procedures to use in gathering
evidence to evaluate assertions for each client.
Audit documentation:
 written record that forms the basis for the auditor’s
conclusions.

 provides support for the auditor’s representations,


whether those representations are contained in the
auditor’s report or otherwise

 “Working Papers or Workpapers “


 A. Audit Planning and Risk Analysis

 B. Audit Work Performed

 C. Identification of Significant Issues and


Conclusions
 Audit documentation should be completed and
assembled within 60 days following the audit
report release date.

 After that date, the auditor must not delete or


discard audit documentation before the end of
required retention period of 7 years.
 The planning process lays the foundation for the
audit and should be carefully documented.
 Documentation serves an important planning
function for the audit
 It also serves as evidence that the auditors took
their responsibilities seriously in evaluating
potential problems or special circumstances
involved in, or related to , the audit.
 Audit Program specifies procedures to be performed in
gathering evidence and is used to record the successful
completion of each audit step.
 It is the single most important piece of document in an
audit engagement and provides an effective means for :
• Organizing and distributing audit work.
• Monitoring the audit process and progress
• Recording the audit work performed and those responsible
for performing the work
• Reviewing the completeness and persuasiveness of
procedures performed.
 Documents with legal significance – lease
agreement , bond covenant agreements,
significant portions of the board of directors’
minutes, government correspondence regarding
client investigation and loan agreement
 The auditor’s reasoning process in
assembling and analyzing evidence is
important and should be documented via
auditor- generated memos.
A. Heading – name of audit client, explanatory title
, and balance sheet date.
B. Initials or electronic signature of the auditor
performing the audit test and the date the test was
completed.
C. Initials or electronic signature of the manager or
partner who reviewed the documentation and the
date the review was completed.
D. A description of the tests performed and the
findings
E. Tick marks and legend indicating the nature of
the work performed by the auditor
 F. An assessment of whether the tests indicate the possibility
of material misstatement in an account.
 G. An index to identify the location of relevant evidence.
 H. A cross reference to related documentation, when
applicable.
 I. A Section that identifies all significant audit and or
accounting issues that arose during the audit and how they
are resolved
 J. A comprehensive and clear memorandum that delineates
the auditor’s analysis regarding the consistency of audit
evidence and the conclusions reached regarding the fairness
of the financial presentation.
 These accounts include estimated warranty
liabilities, allowance for doubtful accounts or loan
reserves, pension costs and liabilities, evaluations
of fixed assets, and analysis of goodwill for
possible impairment.
1. Auditors must understand the process used by
management in developing estimates.

The understanding should include an


understanding of:
a. Controls over the process

b. The reliability of underlying data in developing


estimate
c. Use of outside experts

d. How management reviews the result of the


estimates for reasonableness.
 2. Once the auditor understands the process,
there are two approaches that the auditor can
use:
A. Test the process used
B. Develop independent estimates and compare
those with that developed by management.

*The choice between these two approaches will


depend on the magnitude and complexity of the
account balance.