Audit Responsibilities and Objectives

Chapter 6

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Learning Objective 1
Explain the objective of conducting an audit of financial statements and an audit of internal controls.

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Objective of Conducting an Audit of Financial Statements

The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with applicable financial accounting framework.

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Steps to Develop Audit Objectives

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Learning Objective 2
Distinguish managements responsibility for the financial statements and internal control from the auditors responsibility for verifying the financial statements and effectiveness of internal control.

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Managements Responsibilities
Financial statements and internal controls. Sarbanes-Oxley increases managements responsibility for the financial statements. CEO and CFO must certify quarterly and annual financial statements submitted to the SEC.
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Managements Responsibilities

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Managements Responsibilities
The Sarbanes-Oxley Act provides for criminal penalties for anyone who knowingly falsely certifies the statements.

2012 Pearson Education, Auditing 14/e, Arens/Elder/Beasley

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Learning Objective 3
Explain the auditors responsibility for discovering material misstatements.

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Objectives of the Auditor

Obtain reasonable assurance Opine Financial statements Free from material misstatements

Financial statements
Financial statements

Applicable reporting framework

Communicate per audit standards
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Report

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Auditors Responsibilities

Material misstatements
Professional Skepticism Fraudulent reporting vs. theft of assets
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Reasonable Assurance

Errors vs. Fraud

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Auditors Responsibilities for Discovering Illegal Acts

Type Direct-Effect Responsibility Same for errors and fraud

Indirect-Effect

No Assurance

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Auditors Responsibilities for Discovering Illegal Acts

Auditor suspects Inquire of management Consult clients counsel or specialist Consider accumulating evidence Auditor knows Consider effects on financial statements Consider effect on relationship with management Communicate with audit committee or equivalent
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Learning Objective 4
Classify transactions and account balances into financial statement cycles and identify benefits of a cycle approach to segmenting the audit.

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Financial Statements Cycles

Audits are performed by dividing the financial statements into smaller segments or components.

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Transaction Flow Example

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Relationships Among Transaction Cycles

General cash Capital acquisition and repayment cycle Sales and collection cycle Inventory and warehousing cycle
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Acquisition and payment cycle

Payroll and personnel cycle

Learning Objective 5
Describe why the auditor obtains a combination of assurance by auditing classes of transactions and ending balances in accounts, including presentation and disclosure.

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Balance and Transactions Affecting Balances Example

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Learning Objective 6
Distinguish among the three categories of management assertions about financial information.

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Management Assertions
1. Assertions about classes of transactions and events for the period under audit 2. Assertions about account balances at period end

3. Assertions about presentation and disclosure

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Management Assertions for Each Category of Assertions

Transactions and Events Account Balances Presentation and Disclosure

Occurrence Completeness

Existence Completeness

Occurrence and rights and obligations Completeness

Accuracy
Classification Cutoff

Valuation and allocation

Accuracy and valuation Classification and understandability

Rights and obligations

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PCAOB Assertions
Existence or Occurrence Completeness
Valuation or allocation Rights and obligations Presentation and disclosure
Similar to U.S. GAAS as the first four assertions are applicable to balances and transactions. Presentation is treated as a single assertion
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Learning Objective 7
Link the six general transaction-related audit objectives to management assertions for classes of transactions.

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General Transaction-related Audit Objectives

Occurrence
Recorded transactions exist Existing transactions are recorded Recorded transactions are stated at the correct amounts
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Completeness

Accuracy

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General Transaction-related Audit Objectives

Posting and summarization Classification

Transactions are included in the master files and are correctly summarized.
Transactions are properly classified. Transactions are recorded on the correct dates.
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Timing

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Hillsburg Hardware Co.

(Applied to Sales Transactions)

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Learning Objective 8
Link the eight general balance-related audit objectives to management assertions for account balances.

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General Balance-related Audit Objectives

Existence
Completeness Amounts included exist Existing amounts are included Amounts included are stated at the correct amounts
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Accuracy

2012 Pearson Education, Auditing 14/e, Arens/Elder/Beasley

General Balance-related Audit Objectives

Classification Cutoff Amounts are properly classified Transactions are recorded in the proper period

Detail tie-in

Account balances agree with master file amounts, and with the general ledger
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General Balance-related Audit Objectives

Realizable value Rights and obligations Assets are included at estimated realizable value Assets must be owned

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Hillsburg Hardware Co.

(Applied to Inventory)

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Learning Objective 9
Link the four presentation- and disclosurerelated audit objectives to management assertions for presentation and disclosure.

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Hillsburg Hardware Co.

(Applied to Notes Payable)

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Learning Objective 10
Explain the relationship between audit objectives and the accumulation of audit evidence.

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How Audit Objectives Are Met

The auditor must obtain sufficient appropriate audit evidence to support all management assertions in the financial statements. An audit process has four specific phases

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Four Phases of a Financial Statement Audit

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End of Chapter 6

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