1Audit-an overview.ppt

7/27/2019 1Audit-an overview.ppt

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Introduction to Audit


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Introduction to Financial Statements

Purpose of Financial Statements

Financial statements are a structured representation of thefinancial position (Balance Sheet) and financial performance(Income Statement) of an entity.

The objective of financial statements is to provide informationabout the financial position, financial performance and cashflows of an entity that is useful to a wide range of users inmaking economic decisions.

Financial statements also show the results ofmanagementsstewardship of the resources entrusted to it.


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Introduction to Financial StatementsUser

of Financial Statements

User of the financial statements Interest of the user

Equity investors (existing and potential) They are interested whether buy, hold or sell the shares in hand

and also enable them in payment of dividends.

Loan creditors i.e, existing and potential

holders of debentures and loan stock, and

providers of short-term loans

The amount will be paid when due and for continuation of the

business.

Employees (existing, potential and past) Interested in stability and profitability for employment

opportunities, remuneration and retirement benefits.

Business contacts including customers,

trade creditors, competitors and potential

take-over bidders

Whether the payment of loan will be made in due dates and

enable sustainability of business for future business with the

enterprise.

Government, including tax authorities,government departments and local

authorities

Interested in allocation of resources and also to regulate theactivities of an enterprise and determining tax policies and as a

basis for national income.

Public, including tax payers, ratepayers and

environmental groups

Trends and recent development in the prosperity of the entity

and range of its activities.


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What is Auditing?

It is asystematic process ofobjectively

obtaining and evaluating evidence regarding

assertions about economic actions and events

to ascertain the degree of correspondencebetween these assertions and established

criteriaand communicating the results to

interested users.


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Auditing is a systematic approach

It follows an ordered and structured series of

steps.
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An audit involves obtaining and evaluating

evidence regarding assertions about economic

actions and events

Assertionsare representations made by an

auditee about economic actions and events.

An auditor determines whether these assertions

are valid.


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An audit is conducted objectively

The auditor should conduct the audit without

bias. Impartial attitude must be maintained by

the auditor when evaluating evidence as wellas formulating a report.


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ascertain the degree of

correspondence between these

assertions and established criteria

Established criteria are needed to judge the

validity of the assertions. These criteria are

important because they establish and informthe users of the basis against which the

assertions have been evaluated or measured.


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Auditors communicate the audit

results to various interested users.

The communication of audit findings is the

ultimate objective of any audit. For the audit to

be useful, the results must be communicated tointerested users on a TIMELY BASIS.


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Why do we audit them

In this section we look at the following:

Need for audit

Objective of the audit


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Why do we audit themObjective of Audit

The objective of the audit is to express an opinion onthe financial statements whether or not the financial

statements present fairly.


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Basic Accounting Principles

Over all considerations of preparing and presenting financial

statements

Fair Presentation and Compliance with IFRS. Going Concern

Accrual Basis of Accounting

Consistency of Presentation

Materiality and Aggregation Off setting

Comparative Information


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Areas of Balance Sheet

In this section we will cover the following important areasof the Balance Sheet:

Property, Plant and Equipments

Investments

Loans and Advances

Stock in Trade

Trade Debtors

Cash and Bank Balances

Deferred Liabilities

Long term Loans from Baking Companies Trade Creditors

Taxation

Contingencies and Commitments


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Assurance Engagements

Performed to enhance the credibility of information

about a subject matter by evaluating whether the

subject matter conforms in all material respects with

suitable criteria, thereby improving the likelihood that

the information will meet the needs of an intended user.

Independence is required of an auditor.


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Assurance Services

Audit

- performed to enable the auditor to express anopinion whether the financial statements are prepared,

in all material respects, in accordance with identifiedfinancial reporting framework (e.g. Philippine FinancialReporting Standards)
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Assurance Services

Review

- involves investigations of limited scope than anaudit and are undertaken for the purpose of expressing

LIMITED ASSURANCE that the statements arepresented in accordance with GAAP.
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Other Assurance Services

Examination of future-oriented financialinformation

Effectiveness of internal control

Compliance with statutory, regulatory and

contractual obligations


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Trivia Question

The review of a companys financial statements by aCPA firm:

a. Is substantially less in scope of procedures than an

auditb. Requires detailed analysis of the major accounts

c. Is of similar scope as an audit and adds similar

credibility to the statements

d. Culminates in issuance of a report expressing the

CPAs opinion as to the fairness of the statements


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Non-Assurance Engagements

Engagements that do not provide any assurance

Independence is not required of a CPA performing non-

assurance engagement.


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Non-assurance Services

Related services

- include agreed-upon procedure engagements(AUP) and compilation of financial or other

information.

Other non-assurance engagements

- preparation of income tax returns with noconclusion conveying assurance is expressed andconsulting or advisory engagements.


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Related services

Agreed-upon procedures (AUP)

- the CPA is engaged to carry out thoseprocedures to which he and the client entity and any

appropriate third parties have agreed and to report onfactual findings.

Compilation

- the CPA is engaged to collect, classify andsummarize information.


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Agreed-upon Procedures


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Agreed-upon Procedures


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Compilation


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Trivia Question

Which of the following engagements is covered by theFramework for Assurance Engagements?

a. Consulting engagements

b. Preparation of tax returnsc. Independent financial statements audit

d. Agreed-upon procedures engagement


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Standards Related to ServicesProvided by CPAs

A. Quality Control* Phil. Standards on Quality Control (PSQC1) Quality Control for Firms that Perform Audits and Review ofHistorical Information and Other Assurance and Related Services

Engagements- establishes the basic principles and essential

procedures and provides guidance regarding a firmsresponsibilities for its system of quality control for

audits and reviews historical information and otherassurance and related services engagements


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Quality Control System

A set of policies and procedures designed toprovide reasonable assurance that the publicaccounting firm complies with professionalstandards and regulatory and legal requirements.

Checklist: Leadership responsibilities for quality within the firm

Ethical requirements

Acceptance and continuance of client relationships andspecific arrangements

Human resources

Engagement performance

monitoring


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B. Assurance Engagements*Phil. Framework for Assurance Engagements

- defines and describes the elements andobjectives of an assurance engagements

- although the framework serves as a basis for thestandards, it DOES NOT itself establish standards or

provide procedural requirements for the performance ofassurance engagements.


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Phil. Framework for

Assurance Engagements

Phil. Standards on Auditing (PSAs) Phil. Standards on Review Engagements (PSREs)

Phil. Standards on Assurance Engagements(PSAEs)

Practice Statements are also issued to:

Provide interpretative guidance and practicalassistance to professional accountants inimplementing standards

Promote good practice

PAPSs, PREPSs and PAEPSs


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C. Related Services*Phil. Standards on Related Services (PSRSs) PSRSPs)

- defines and describes the elements andobjectives of an assurance engagements

- although the framework serves as a basis for thestandards, it DOES NOT itself establish standards or

provide procedural requirements for the performance of

assurance engagements.D. Ethics

*Code of Ethics for Professional Accountants inthe Philippines


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Assurance vs. Consulting services

ASSURANCE CONSULTING

Parties to the contract Three two

Purpose To lend credibility to

the subject matter

provided by

management in the

eyes of the intendedusers.

To be used by the

client in improving the

matter subjected to

consultancy.


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Trivia Question:

Who has the primary responsibility for the fairness ofthe representations made in the financial statements?

a. clients management

b. Audit committeec. Independent auditor

d. Board of accountancy


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Elements of an Assurance Engagement A three-party relationship

a. practitioner

b. responsible party

c. intended user

An appropriate subject matter

Suitable criteria

Criteria standards or benchmarks used to evaluate ormeasure the subject matter of an assurance engagement.

a. relevance

b. reliability

c. neutrality

d. understandability

e. completeness


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Elements of an Assurance Engagement The outcome of the evaluation or measurement of a subject matter is the

information that results from applying the criteria to the subject matter. For

example: The recognition, measurement, presentation and disclosure

represented in the financial statements (outcome) result from applying a

financial reporting framework for recognition, measurement, presentation and

disclosure, such as Philippine Financial Reporting Standards, (criteria) to an

entitys financial position, financial performance and cash flows (subject

matter).


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Elements of an Assurance Engagement Sufficient appropriate evidence

a. sufficientthe measure of QUANTITY of evidenceobtained

b. appropriate evidencemeasure of the QUALITY ofevidence obtained

Reliabil ity of evidence is inf luenced by its source and its nature. Sourcesof evidence:

a. evidence from external sources

b. evidence generated internally

c. evidence obtained directly from practitionerd. evidence in the form of documents

The practitioner should document matters that are important (auditoruses professional judgement) in providing evidence to support theconclusion expressed in the report and in providing that the assuranceengagement was performed in accordance with applicable standards.


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Elements of an Assurance Engagement Written assurance report

- contains a conclusion conveying the assuranceobtained about the subject matter

- it should include:a. title

b. addressee

c. description of the engagementd. identification of subject matter

e. statement to identify the responsible party anddescribe the practitioners responsibility

f. identification of the parties to whom the report is

restrictedg. purpose when restricted

h. identification of the standards under which theengagement was conducted

i. report date

j. name of the firm of the practitioner

k. place of issue of the report


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Trivia Question

Assurance engagements should exhibit the followingelements except:

a. Subject matter

b. Suitable criteriac. An engagement process

d. Appropriate professional fees


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Assertion-based engagements Engagements where the evaluation or measurement of the subject

matter is performed by the responsible party and the subject matterinformation is in the form of an assertion by the responsible party

that is made available to the intended users.

ASSERTIONresponsible partys conclusion about the subject

matter based on identified suitable criteria

Example:In our opinion, the responsible partys assertion that the

internal control is effective, in all material respects, based on XYZ

criteria, is fairly stated..

Or : In our opinion, internal control is effective, in all materialrespects, based on XYZ criteria.


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Direct Reporting engagements Engagements where the practitioner either directly performs the

evaluation or measurement of the subject matter or obtainrepresentation from the responsible party that has performed the

evaluation or measurement that is not available to the intended

users. The subject matter information is made available to the

intended users in the assurance report.

Example:In our opinion, internal control is effective, in allmaterial respects, based on XYZ criteria.


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Trivia Question

The level of assurance provided by a professionalaccountant on an audit report is:

a. low

b. reasonablec. moderate

d. absolute assurance


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Assurance Provided by the Practitioner

Reasonable assurance engagement

- an engagement performed to reduce assurance

engagement risk to an acceptably low level to be able to

express a positive form of conclusion.- The practitioner uses extensive evidence to

support his conclusion.

- high but not absolute assurance
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Assurance Provided by the Practitioner

Limited assurance engagement

- an engagement performed to reduce assurance

engagement risk to a level acceptable for a specific

engagement to be able to express a negative form ofconclusion.

-practitioner uses only a significant amount if

evidence as a basis for his conclusion.
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Remember these..Engagement Level of Assurance Form of Conclusion

Audit High, but notabsolute assurance

Positive

Review Limited Negative

Agreed-uponprocedures

No assurance Findings

Compilation No assurance Identification ofinformation complied


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Reports on Non-assurance Engagements A practitioner reporting on an engagement that is not an assurance

engagement within the scope of this Framework, clearly distinguishes

that report from an assurance report. So as not to confuse users, a

report that is not an assurance report avoids, for example:

Implying compliance with this Framework, PSAs, PSREs or

PSAEs.

Inappropriately using the words assurance, audit orreview.

Including a statement that could reasonably be mistaken for a

conclusion designed to enhance the degree of confidence of intended users

about the outcome of the evaluation or measurement of a subject matter

against criteria.

Exception: The practitioner and the responsible party may agree to apply

the principles of this Framework to an engagement when there are no

intended users other than the responsible party but where all other

requirements of the PSAs, PSREs or PSAEs are met. In such cases, the

practitioners report includes a statement restricting the use of the report to

the responsible party.


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Important Considerations

Ethical considerations- a practitioner should comply with the

requirements of the Code of Ethics for ProfessionalAccountants(to be thoroughly discussed in the next

chapters to follow) Engagement Acceptance

- a practitioner should accept an engagement onlyif the subject matter is the responsibility of another

party.- acknowledgement by the responsible party in

written form is secured to form part of thedocumentation


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Engagement Acceptance (cont.)- a practitioner should accept an engagement only

if the subject matter is identifiable and in a form thatcan be subjected to evidence gathering procedures andthe practitioner is not aware of any reason for believingthat a conclusion about the subject matter based onsuitable criteria cannot be established

Planning

- a practitioner should plan and conduct theassurance engagement in an effective manner to meetthe objective of the engagement

- the practitioner should plan and conduct anassurance service engagement with an attitude of

professional skepticism


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Planning

- a practitioner should obtain knowledge of theengagement sufficient to identify and understand theevents, transactions, and practices that may have asignificant effect on the subject matter and engagement

- a practitioner should assess whether the criteriaare suitable to evaluate the subject matter

- a practitioner should consider materiality andengagement risk when planning and conducting an

assurance engagement in order to reduce the risk ofexpressing an inappropriate conclusion that the subjectmatter conforms in all material respects with suitablecriteria


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Engagement risk It is the risk that the practitioner will express an

inappropriate conclusion that the subject matterconforms in all material respects with suitablecriteria.

(i)Inherent risk: the susceptibility of the subject matter

information to a material misstatement, assuming that there are norelated controls; and

(ii) Control risk: the risk that a material misstatement that

could occur will not be prevented, or detected and corrected, on a

timely basis by related internal controls. When control risk isrelevant to the subject matter, some control risk will always exist

because of the inherent limitations of the design and operation of

internal control; and

(iii) Detection risk: the risk that the practitioner will not

detect a material misstatement that exists.


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Other factors: Reducing assurance engagement risk to zero is very

rarely attainable or cost beneficial as a result of factors:

The use of selective testing.

The inherent limitations of internal control.

The fact that much of the evidence available to thepractitioner is persuasive rather than conclusive.

The use of judgment in gathering and evaluating evidence

and forming conclusions based on that evidence.

In some cases, the characteristics of the subject matterwhen evaluated or measured against the identified criteria.


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Materiality relevant when the practitioner determines the nature,

timing and extent of evidence-gathering procedures,

and when assessing whether the subject matter

information is free of misstatement

Professional Skepticism

- An attitude of professional skepticism means the

practitioner makes a critical assessment, with a questioning mind,

of the validity of evidence obtained and is alert to evidence that

contradicts or brings into question the reliability or documents or

representations by the responsible party.


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Subsequent events

- a practitioner should consider the effect ofsubsequent events up to the date of the practitionersreport.

Using the work of an expert

- the practitioner and the expert, on a combinedbasis, possess adequate knowledge and proficiencypertaining to the subject matter

- things to consider by the practitioner:

a. professional competence of the expertsb. reasonableness of assumptions used, methods and data

c. reasonableness and significance of the experts findingsin relation to the objective of the engagement and the conclusionon the subject matter


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Trivia Question

An assurance engagement should involve three separate parties. Which ofthe following statements concerning these parties is incorrect?

a. The responsible party and intended users may be from different

entities or the same entity.

b. The term practitioner as used in the Framework for Assurance

Engagements is broader than the term auditor as used in PSAs andPSREs.

c. In an assertion based engagement, the responsible party is responsible

for the subject matter information (the assertion) and may be

responsible for the subject matter

d. An entitys senior management (the responsible party) may engage a

practitioner to perform an assurance engagement on a particular

aspect of the entitys activities that is the immediate responsibility of

a lower level of management (the intended user)


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Trivia Question

In an assurance engagement, the person or class of person forwhom the professional accountant prepares the report for a

specific use or purpose is the

a.Intended user

b.Responsible party

c.Management

d.client


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Trivia Question

What type of assurance engagement is involved when thepractitioner expresses a positive form of conclusion?

a.Limited assurance engagement

b.Positive assurance engagement

c.Reasonable assurance engagement

d.Absolute assurance engagement


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Trivia Question

In assertion-based assurance engagements, the evaluation ormeasurement of the subject matter against criteria is performed

by the

a.Intended users

b.Responsible party

c.Practitioner

d.AASC


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Trivia Question

Which of the following standards are to be applied, asappropriate, in the audit of historical financial information?

a.PSREs

b.PSAEs

c.PSRSs

d.PSAs


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Trivia Question

Which of the following standards are to be applied tocompilation engagements, engagements to apply agreed-upon

procedures to information and other related services

engagements as specified by the AASC?

a.PSRSsb.PSAs

c.PSAEs

d.PSREs


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Trivia Question

These statements are issued by the AASC to provideinterpretative guidance and practical assistance to auditors in

the implementation of PSAs and to promote good practice

a.PREPSs

b.PAPSs

c.PAEPs

d.PRSPSs


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Trivia Question

What assurance is provided by the auditor in an agreed-uponprocedures engagement?

a.Reasonable

b.Absolute

c.Moderate

d.No assurance


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Trivia Question

Which of the following least likely indicate an objective of anassurance engagement?

a.It is intended to enhance the credibility of information about a

subject matter

b.It is intended to prevent the issuance of materially misleadinginformation

c.It is intended for a professional accountant to express a conclusion

that provides the intended users with a level of assurance about the

subject matter.

d.It is intended to provide a level of assurance to be issued by a

professional accountant about the information of being in

conformity, in all material respects, with suitable criteria.


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Trivia Question

Which of the following statements are correct?

I. The subject matter of an assurance engagement may take

any forms.

II. Internal control may be the subject matter of an assuranceengagement.

a. I only

b. II onlyc. Both I and II

d. Neither I nor II


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Trivia Question

Which of the following statements is false?a. Evidence is more persuasive when items of evidence from

different sources or of different nature are consistent.

b. In case of evidence from different sources that are consistent,

the practitioner may obtain cumulative degree of confidence thatis higher than from items of evidence considered individually

c. When evidence obtained from one source is inconsistent with

that obtained from another, the practitioner refrains the

gathering of further evidence.

d. It is generally more difficult to provide assurance on subject

matter covering a period of time than on subject matter covering

a point in time.


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Trivia Question

Which of the following statements is true?a. The extent of documentation is not within the discretion of the

practitioner.

b. It is neither necessary nor practical to document every matter the

practitioner considers.c. It is necessary but not practical to document every matter the

practitioner considers.

d. Documentation includes a record of the practitioners reasoning

on all matters considered by the practitioner.


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Trivia Question

The following should be included in the practitioners reportexcept one:

a. Identification of the parties to whom the report is restricted

b. A statement to identify the responsible party and described the

practitioners responsibilitiesc. Report date

d. Name of the firm or the practitioner


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Trivia Question

Which of the following statements is true?a. A practitioner should assume that the responsible party is

dishonest.

b. The practitioner should assume that the responsible party has

unquestioned honestyc. Both A and B

d. Neither A nor B


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Any QuestionsThank You

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