Rodriguez, Zyra Denelle M.

A-331 AAPRINCIPLES

AUDITS OF HISTORICAL FINANCIAL INFORMATION

1. What is Auditing?

Auditing can be traced back in history from the beginning of large-scale

production during the Industrial Revolution where institutions developed systems to

check and countercheck the accounts. According to Spicer and Pegler as cited by

Chawla (2012), Auditing is defined as the examination of the auditor on the books,

accounts, and vouchers of the business where the auditor would check if; the

balance sheet shows the true position of the business as to the affairs of the

business; the profit and loss statements show the correct figures for the period;

stating a conclusion of his satisfaction or on what aspect the auditor is not satisfied.

The audit must be performed by a competent and independent person who

evaluates and gathers evidence objectively to arrive at a conclusion. The audit will

follow a series of steps to test the assertions, which are the declarations of the party

regarding the fairness of the statements, without bias. The auditor will judge if the

assertions are made according to the criteria and communicate a conclusion as to

the level of confidence through a written report. The auditor will gather evidences

and understand the internal control to test the validity of the assertions.

The scope of an audit refers to all the processes and procedures done by the

auditor in accordance to the standards in order to achieve a proper and objective

evaluation and to reach an opinion. Auditing services are needed in the present

times as business and society becomes more complex that there is a need to check
Rodriguez, Zyra Denelle M. A-331 AAPRINCIPLES

the reliability of the information presented to the intended users and decision makers

(Cabrera, M. & Cabrera, G., 2020).

2. Differentiate the following:

2.1 Assurance Engagements

Is defined as the agreement where the auditor is hired by the

engaging party to give a conclusion regarding the reliability of the

assertion made by the party after collection of the evidence that is

intended for the users. The practitioner will evaluate, investigate, and

check if the responsible party’s subject matter is prepared according to the

standards or the criteria (Auditing Standards and Practices Council, 2004).

2.2 Assurance Services

These are services provided by the practitioner in an assurance

engagement to give confidence to the subject matter wherein the

engaging party gives trust to the expertise, performance, and the

reputation of the service provider or practitioner. The practitioner can offer

a wide range of service depending on the size or nature of the subject

matter for the assurance needs of the responsible party and the decision

makers by enhancing the degree of confidence of the subject matter

information (American Institute of Certified Public Accountants, 2013).

2.3 Attestation Services

Rodriguez, Zyra Denelle M. A-331 AAPRINCIPLES

This is a type of assurance service where a Certified Public

Accountant will express an assurance about reliability of the subject

matter information. The most common attestation service is the financial

audit or the audit of the historical financial information (Shelton, 2017).

The CPA is engaged to issue a report regarding an assertion to the

subject matter prepared by the responsible party. The attestation services

can take in several forms where the CPA will examine in accordance to

the criteria (Messier et.al, 2008).

2.4 Audit Engagements

This refers to the agreement of the auditor and the engaging party

wherein the auditor will perform a set of auditing services for the party’s

financial records. The time, nature, process, price, and scope of the

auditing procedure including the responsibilities of the auditor and the

engaging party will be written in an engagement letter signed by both

parties (Bragg, 2019).

2.5 Financial Statements Audit

An audit service where the auditor will provide a high level of

assurance regarding the financial statement information of the engaging

party after obtaining the evidences that the statements are prepared in

accordance to the suitable criteria without error and misstatements

(Cabrera, M. & Cabrera, G., 2020).

Rodriguez, Zyra Denelle M. A-331 AAPRINCIPLES

The information audited by the independent auditor is prepared by

the engaging party. The information then is audited by the CPA giving a

conclusion as to its reliability but the engaging party must remember that

the CPA’s conclusion or opinion does not establish an assurance

regarding the capability to continue operations in the future and regarding

the effectiveness of the management of the party.

In short, there are two services offered by Accountants in public practice;

Assurance and Non-Assurance Services. When the accountant and engaging party

enters in an agreement in which the accountant gives assurance to the subject

matter information/subject matter prepared by the engaging party they engage in an

Assurance Engagement. One type of Assurance Service is an Attestation Service

where the accountant will issue a report on the assertion made by the engaging

party. A type of Attestation Service is the Audit Services in which auditors gather

evidence and gives a high level of assurance to the credibility of the financial

information. When the auditor and the engaging party enters into a contract for the

audit services of the auditor, then they engage in an Audit Engagement. The most

common type of Auditing Engagement is Financial Statement Audit.

3. Why do we perform Financial Statements Audit? What is its importance

and for whom do we perform such?

Rodriguez, Zyra Denelle M. A-331 AAPRINCIPLES

According to the American Institute of Certified Public Accountants (n.d.),

performing financial statements audit gives assurance to the intended users that

there are no misstatements and fraud in the financial information presented to them.

The auditors act as second set of eyes that will identify those not presented

intentionally or not intentionally in the proper manner. Ensuring that all information

presented is “true” and “fair” with response to the affairs and position of the company

(PwC, n.d.).

Since the responsibility of preparing the information is given to the

management, it may act against the intended users so there is need for an authority

to check the manipulation of the management. Managers may also hire auditors to

prove to the users that there were no manipulations made in the information.

Unaudited information given to the users may lead to more problems since its

credibility is in question. Audits of the financial statement will provide assurance to

the users that the information is presented in accordance to the standards (Cabrera,

M. & Cabrera, G., 2020).

4. Who can perform a financial statements audit?

Financial Statement Audits must be performed by external auditors having no

connection to the engaging party. The external auditors will only give assurance, not

absolute assurance, and won’t prepare the information but may give

recommendations (Garcia, 2019). The auditor has two jobs, to make sure that the
Rodriguez, Zyra Denelle M. A-331 AAPRINCIPLES

information is presented according to the standards and to give an assurance

regarding the accuracy of the financial statements (Hill, 2013).

External Auditors must have a degree in Accountancy and passed the

Certified Public Accountant Licensure Examination. The auditors can perform

services to a company for 5 years after that they cannot give their services to the

same company for a 2 year cooling-off period. Independent auditors are those that

meets the requirements of the Code of Ethics for Professional Accountants in the

Philippines and the SRC 68. Prior to the engagement, the auditor must present a

Certificate of Accreditation by the Board of Accountancy and other proofs required

by the Securities and Exchange Commission (Securities and Exchange

Commission, n.d.).
Rodriguez, Zyra Denelle M. A-331 AAPRINCIPLES

References

Messier Jr., W.F. et.al (2008). Auditing and Assurance Services a Systematic

Approach. (6th ed.). McGraw-Hill/Irwin.

https://drive.google.com/drive/folders/1Y8djC7DV-

KLO7ZyH3GdGGKVFnhvWHjWq

Chawla, S. (2012). Auditing.

https://sol.du.ac.in/solsite/Courses/UG/StudyMaterial/02/Part2/ITA/English/SM-

1.pdf

Cabrera, M.E.B. & Cabrera, G.A.B. (2020). Principles of Auditing and Assurance

Services (2020-2021 ed.). GIC Enterprise & Co., Inc.

Auditing Standards and Practices Council (2004) Philippine Framework for Assurance

Services. https://aasc.org.ph/downloads/PSA/publications/PDFs/Philippine-

Framework-for-Assurance-Engagements.pdf

American Institute of Certified Public Accountants (2013). Assurance Services: A White

Paper for Providers and Users of Business Information.

https://www.aicpa.org/interestareas/frc/assuranceadvisoryservices/downloadable

documents/asec_wp_providers_users_bi.pdf.

Shelton, H. (2017). Attestation Services: The Tools That May Help You Avoid an Audit.

https://www.americanexpress.com/en-us/business/trends-and-

insights/articles/attestation-services-the-tools-that-may-help-you-avoid-an-

audit/#:~:text=Attestation%20services%20are%20when%20a,level%20called

%20a%20financial%20audit.
Rodriguez, Zyra Denelle M. A-331 AAPRINCIPLES

Bragg, S. (2019). Audit Engagements.

https://www.accountingtools.com/articles/2017/9/4/audit-engagement#:~:text=An

%20audit%20engagement%20is%20an,that%20the%20auditor%20will

%20perform.

PwC (n.d.). Understanding the Financial Statement Audit.

https://www.pwc.com/gx/en/services/audit-assurance/publications/understanding-

financial-audit.html#:~:text=To%20a%20publicly%20traded%20company%2C

%20the%20financial%20statement%20audit%20offers%20credibility.&text=The

%20fundamental%20purpose%20of%20the,company's%20financial

%20performance%20and%20position.

American Institute of Certified Public Accountants (n.d.). Do I Want or Need a Financial

Statement Audit?

https://www.aicpa.org/InterestAreas/NotForProfit/Resources/GovernanceManage

ment/DownloadableDocuments/not-for-profit-do-i-need-an-audit.pdf

Garcia, M. (2019). Roles and Responsibilities of External Audit Firms.

https://smallbusiness.chron.com/roles-responsibilities-external-audit-firms-

73924.html

Hill, R. (2013). External Audits of Financial Statements.

https://study.com/academy/lesson/external-audits-of-financial-

statements.html#:~:text='An%20external%20audit%20is%20an,employee%20of

%20the%20company%20itself.&text=The%20second%20job%20that

%20an,statements%20and%20in%20audit%20reports.
Rodriguez, Zyra Denelle M. A-331 AAPRINCIPLES

Securities and Exchange Commission (n.d.). Securities Regulation Code.

https://www.sec.gov.ph/wp-

content/uploads/2019/12/2005Rule_68asAmended.pdf