Comparison about different types of audit

CHAPTER 1: AUDIT – An Overview Financial Compliance Operational Audit

Audit Audit
Assertions Financial That the That the
 Primary function of an independent audit is to lend credibility. made by Statements organization organization’s
 Auditor’s opinion enhances the value and usefulness of financial the auditee are fairly has complied activities are
statements. presented. with laws, conducted
regulations or effectively and
contracts. efficiently.
Established Financial Laws, Objectives set by
DEFINITION
criteria reporting regulation and the board.
1. Auditing is a systematic process. standards or contracts.
2. Involves obtaining and evaluating evidence about assertions. other financial
reporting
3. Audit is conducted objectively.
framework
4. Ascertain the degree of correspondence between assertions and
Content of An opinion Reports on Recommendations
established criteria.
the about whether the degree of or suggestions on
5. Communicate results to users. auditor’s the financial compliance how to improve
 Assertions are representations made by an auditee about economic report statements are with operations.
actions and events. fairly applicable
 Established criteria are needed to judge the validity of the assertions. presented in laws,
conformity regulations
TYPES OF AUDIT with an and contracts.
1. Financial Statement Audit – financial statement. identified
2. Compliance Audit – rules or regulations. financial
reporting
3. Operational Audit – measuring its performance.
framework
 Criteria used in operational audit to evaluate the effectiveness and
Auditors External Government Internal Auditors
efficiency of operations are not clearly established and are usually given who Auditors Auditors
by BOD. generally
KINDS OF AUDIT perform

1. External Audit
2. Internal Audit  Management is responsible for preparing and presenting the financial
statements. Auditor’s responsibility is to form and express an opinion
TYPES OF AUDITOR on these financial statements based on his audit.
 Audit provides only reasonable assurance not absolute assurance.
1. External Auditors – perform financial statement audits.
2. Internal Auditors – perform operational audit.
3. Government Auditors – conduct compliance audit.
FACTORS OF LIMITATIONS 6. What was held true in the past will continue to hold true in the
future in the absence of known conditions to the contrary –
1. Sampling risk
experience and knowledge from past audits can be used to
2. Error in application of judgement
determine procedures to be performed.
3. Reliance on management’s representation
7. Audit benefits the public.
4. Inherent limitations of client’s internal control systems
5. Nature of evidence
 Nature of evidence is generally persuasive rather than conclusive in
nature.

GENERAL PRINCIPLES GOVERNING AUDIT OF FINANCIAL STATEMENTS

1. Comply with Code of Professional Ethics for CPAs.

2. Conduct audit in accordance with Philippine Standards on
Auditing.
3. Perform audit with professional skepticism.

WHY IS THERE A NEED FOR AN INDEPENDENT AUDIT?

1. Conflict of interest between management and users of financial

statements.
2. Expertise – needed in the complexity of accounting and auditing.
3. Remoteness – users are prevented from directly assessing the
reliability of information and independent auditor is needed to
verify the reliability of information.
4. Financial Consequences – financial statements should be audited
first before they are used for making important decisions.

THEORETICAL FRAMEWORK OF AUDITING

1. Audit function operated on the assumption that all financial data

are verifiable – if no evidence exists, no audit to perform.
2. Auditor should always maintain independence.
3. Should be no long term conflict between the auditor and client
management.
4. Effective internal control system reduces the possibility of errors and
fraud affecting financial statements.
5. Consistent application of GAAP or PFRS results in fair presentation of
financial statements.
CHAPTER 13: The Code of Professional Ethics & The
Accountancy Act of 2004
 The interest of the public must always be of paramount concern.
 Standards of ethical conduct: demonstrates objectivity and concern for
public interest.
 Code of Ethics for Professional Accountants in the Philippines is based
on International Federation of Accountants Code of Ethics for
Professional Accountants.
 Part A establishes fundamental principles and provides conceptual
framework. Part B and Part C describe how it applies in certain
situations.
PART A – General Application
FUNDAMENTAL PRINCIPLES:
a. Integrity – not merely honesty but fair dealing and truthfulness.
b. Objectivity – obliged to be fair, intellectually honest and free of
conflicts of interest.
c. Professional Competence and Due Care – accept only when
accountant can reasonably expect to discharge professional
competence. Due care is the responsibility to perform in accordance
with standards.
a. Attainment of professional competence through formal
education etc.
b. Maintenance of professional competence by being aware
of all developments affecting profession.
d. Confidentiality
a. Except when – permitted by client, required by law,
professional duty or right to disclose confidential
information.
e. Professional Behavior – refrain from any conduct that brings
discredit to profession.
THREATS TO COMPLIANCE
1. Self-interest – other interest might influence accountant’s
judgement or behavior. Occurs when auditor has a beneficial
interest in client’s performance.
2. Self-review – occur when auditor has to review work that they
previously performed. Such as, if external auditor prepared the
financial statements and audited them. There is a risk that the
auditor would not identify any wrongs in their own work.
3. Advocacy Threat – accountant might promote a client’s position
that objectivity is compromised.
4. Familiarity Threat – too sympathetic because of close relationship.
5. Intimidation Threat – deterred from acting objectively because of
actual or perceived pressures.
Safeguards – actions or other measures that may eliminate therats or
reduce them to an acceptable level.
1. Safeguards created by profession, legislation, or regulation – such
as educational, training and experience requirements, CPD,
governance regulations, etc.
2. Safeguards in work environment – policies and procedures.
a. Engagement Specific Safeguards – involving additional CPA
to review work done, etc.
b. Safeguards within client’s systems and procedures –
client’s implemented internal procedures.
PART B – Professional Accountants in Public Practice
PROFESSIONAL APPOINTMENT
 Client Acceptance - consider whether acceptance would create any
threats to compliance with the fundamental principles.
o Safeguards may include obtaining knowledge of client, etc.
 Engagement Acceptance – should agree to provide only those services
he is competent to perform.
o Acquire understanding of the nature of the business, possessing
experience with relevant regulatory or reporting requirements,
etc.
 Changes in Professional Appointment – should determine whether  Contingent Fees
there are any reasons, professional or other, for not accepting the  Referral Fee of Commission - maybe paid to an existing accountant
engagement. who can’t perform needed service for referring an existing client to
o Discussing client’s affair fully and freely with existing accountant another professional accountant or maybe paid by an accountant to
and asking him to provide known information that the proposed obtain a client whose needs of services cannot be satisfied by the
accountant should be aware of. existing accountant.
o Should not pay or receive referral fee unless he has established
CONFLICT OF INTEREST
safeguards.
Examples are:
MARKETING PROFESSIONAL SERVICES
 When accountant competes directly with a client or has a joint venture
 Marketing Professional Services can impose threats if services are
with a major competitor of a client.
marketed in a way that is inconsistent with that principle.
 When accountant that performs services for clients whose interests are
 Accountant should not bring profession into disrepute.
in conflict.
 Generally, any form of advertisement is allowed.
o Notify client and all known relevant parties that there interests
are in conflict and obtaining their consent to act, use of separate
engagement teams, etc.

SECOND OPINIONS

Examples are:

 The second opinion of the accountant may not be based on the same
set of facts that were made available to the existing accountant.
o Seek client permission to contract existing accountant, if not
granted permission, accountant should consider if it is
appropriate to provide second opinion.

FEES AND OTHER TYPES OF REMUNERATION

 Professional fees should be a fair reflection of the value of the

professional services performed, considering:
o Skill involved and knowledge required
o Level of training and experience
o Time occupied
o Degree of responsibility

If fee is quoted lower than another is not in itself unethical. But may
impose a threat that it may be difficult to perform engagement in
accordance with standards for that price.