What is Auditing and What to Expect in Auditing Theory? - Ep1 - YouTube

In this video i'm going to tell you what auditing is and what to expect as a student

in the subject auditing theory and we're starting right now!

What's up bro my name is Ron from "The CPA Recipe and I'm a Certified Public

Accountant. If this is your first time in this

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you've come to the right place so start now by hitting the like button,

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notification icon so you won't miss anything. Now as I've said earlier in

this video i'm going to tell you what auditing is

and what you should expect in the study of this course

and this is gonna be "Ledgern..." wait for it...

...Dary!

So bro, before I tell you what auditing is and what you should expect in studying it,

we have to clear some points first.

Firstly bro, you have probably encountered the word "Audit" before

And if you think of it as about finding errors and/ or fraud,

well, it's not so dump that mindset right away.

Secondly, bro. The word audit often usually comes after two descriptive

words. You have probably encountered the words external audit

and internal audit. In auditing theory bro, we are in fact

specifically talking about external audit.

So now probably you got curious as to what is the difference between

external and internal audit. Don't worry! I will discuss that in detail in a

separate video but for now, just remember that in auditing theory we are

specifically referring to external audit. "So bro, what then is

external audit?" For you to appreciate it better, let's discuss first the objectives

of financial accounting and reporting or more specifically the

objectives of general purpose financial statements

Now, if you may recall in your financial accounting and reporting course,

the management prepares general purpose financial statements

which comprise of the statement of financial position, statement of comprehensive income

statement of changes in owner's equity, statement of cash flows and notes to the

financial statements based on financial reporting standards.

These standards, bro, in the Philippines these are the

Philippine Financial Reporting Standards or PFRS (IFRS-adapted)

Philippine Accounting Standards or PAS (IAS adapted) and Philippine Interpretations

or P.I. but it doesn't sound nice so let's just call it

as Philippine Interpretations. Now, bro. The objective of this financial

reporting is to provide financial information about the reporting entity,

meaning, the one prepared these financial statements

that is going to be useful to existing and potential

investors, lenders and other creditors to help them

make various decisions. For example, let's say when you were still studying,

You have P5,000 daily school allowance.

So when you graduated and you were reviewed for the CPA Exam,

You've got lots of savings already.

You've got an impressive sum of P1 million

"Wow! Loan me some!"

Now, because you want to grow your savings,

you thought about investing in stocks.

And because you're a BS Accountancy degree holder, you're knowledgeable in this regard.

So what you did is, you downloaded the

financial statements from the website of San Michelle Corporation

and then you computed for relevant financial ratios

using the mythic calculator used by Luca Pacioli himself, that you bought from Shopee (e.g., like Ebay).

In this case bro, you're one of those that we call "Users of the Financial Statements" because you need information

in order to make informed decision which in this scenario is about

buying the stocks of San Michelle Corporation which in essence

makes you a potential investor. Now, of course there are other users of

financial statements. Although of course their motivations

and information needs may vary. For instance, the government is

interested about the accuracy of financial information

that are used in computing taxes as well as the completeness of disclosures

required by certain regulations. Another example is a bank or lending institution

and probably they are interested to know if an

entity who's applying for a loan has the capacity to pay obligations

in the future so they can decide whether to extend credit or not.

There are also the entity's customers and suppliers which perhaps

are interested about the entity's ability to continue

supplying their needs and etc. There are many more users.

So now, since in our previous example in which case you are the lead character,

and you are a potential investor...

so you want to know if is it worth it

on your part to buy stocks of San Michelle Corporation, so you computed for earnings per share

and price to earnings ratio using the financial statements

of San Michelle Corporation and Luca Pacioli's mythic calculator.

Let's assume that the net income of San Michelle Corporation for 2018

is 50 million pesos and the number of outstanding shares

is 1 million and the current price of the shares of San Michelle in the market

is 25 pesos each. Now, based on your computations bro

It's HUGE

...the potential earnings I mean...

if you buy stocks of San Michelle Corporation. For every outstanding shares bro there is 50 Pesos

worth of net income and you can get the chance to

earn such earnings by paying only 25 pesos each. Meaning, the price to

earnings ratio is 50 percent. In relation to goods in the supermarket this is like

now on sale at 50 percent off. It's so promising an investment according to your

calculations. And because of this,

What you did is, you invested all of your savings to San Michelle.

You used up all your savings to buy stocks

because you saw the big future...

of San Michelle Corporation.

However, later on it was revealed

the sales of San Michelle Corporation was overstated.

It failed to comply with a financial reporting standard

regarding revenue recognition and because of this

market value of the stocks plummeted and

your investment bro worth one million pesos, shrinked into a hundred thousand. Ouch! That's goin' to hurt.

So now bro. What do you think could have prevented this

from happening? Here comes the role of audit. In simple words, the role of an auditor,

to reiterate, an external auditor, is to express a professional opinion on financial

statements but if they are prepared in accordance with applicable

financial reporting framework in all material aspects so that you and

other users of the financial information contained in the financial statements

can make well-informed economic decisions.

But bro you said earlier, it's not the auditor's jobs to look for faults, right?

Yes, that's right!

Because the responsibility of an external auditor is to express his

professional opinion regarding the fairness of the preparation of the

financial statements and not to specifically look for errors or fraud in

the financial statements and this opinion can be found

in what we call the Audit

Report which can be an unqualified opinion, qualified opinion

adverse opinion etc. To explain further, according to the definition of auditing

by American Accounting Association, auditing is a systematic process of

objectively obtaining and evaluating 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.

Based on this definition, therefore, an audit has the following characteristics:

An audit is a systematic process meaning it follows a specific

methodology or step-by-step procedures and these audit procedures are guided by

standards which is called the Philippine Standards on Auditing or

PSA and Philippine Auditing Practice Statements or

PAPS. P-A-P-S. And your study of auditing theory will revolve around these standards.

Secondly, auditing is an objective process

meaning, free from bias.

Because of this,

an auditor should be independent

from the organization being audited, meaning bro,

the auditor is not included in the organizational structure

of the entity under audit.

This is the reason why

it is called an "external" audit. Because the audit is

performed by a party that is external to the entity

that is being audited. Next, an audit involves the obtaining and evaluation

of evidence. These evidences

will be used by the auditor

as his basis in formulating the opinion to be expressed

regarding the fairness of the presentation of the financial statements.

Next, the auditor evaluates the correspondence of the assertions which

are contained in the financial statements

by comparing them with criteria. What are these criteria?

These are the financial reporting standards in the Philippines which were mentioned earlier.

The PFRS, PAS and Philippine Interpretations.

Lastly, the results of the evaluation made by the auditor is communicated to

the intended users via the auditor's report. These intended users

are the parties who will use the information contained in

the financial statements. As mentioned earlier an auditor gives an opinion, so to be more specific this opinion is

whether the financial statements audited are prepared in accordance

with the financial reporting standards or not.

Lastly, what should you expect in studying auditing theory?

In auditing theory, the standards on the audit of financial statements will be discussed,

which are the Philippine Standards on

Auditing or PSA, Philippine Auditing Practice Statements

or PAPS, as well as the PSQC among others and

this is precisely the reason why this subject is called

auditing theory because in this course, the theory behind the

performance of an audit will be discussed which will include the general standards

of the audit, the standards of fieldwork and the

standards of reporting. And that's it for this video if you like

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or feedback, feel free to comment down below and i'll

get back to you as soon as i can see you in the next episode for ledgern...

wait for it...

...dary!

you