Audit Responsibilities and ObjectivesChapter 6

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Learning Objective 1Explain 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 StatementsThe 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 2Distinguish 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 ResponsibilitiesFinancial 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.2012 Pearson Education, Auditing 14/e, Arens/Elder/Beasley 6-6

Managements Responsibilities

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

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

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Objectives of the AuditorObtain reasonable assurance Opine Financial statements Free from material misstatements

Financial statementsFinancial statements

Applicable reporting frameworkCommunicate per audit standards6 - 10

Report

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Auditors Responsibilities

Material misstatementsProfessional Skepticism Fraudulent reporting vs. theft of assets2012 Pearson Education, Auditing 14/e, Arens/Elder/Beasley

Reasonable Assurance

Errors vs. Fraud

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Auditors Responsibilities for Discovering Illegal ActsType Direct-Effect Responsibility Same for errors and fraud

Indirect-Effect

No Assurance

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Auditors Responsibilities for Discovering Illegal ActsAuditor 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 equivalent2012 Pearson Education, Auditing 14/e, Arens/Elder/Beasley 6 - 13

Learning Objective 4Classify 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 CyclesAudits 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 CyclesGeneral cash Capital acquisition and repayment cycle Sales and collection cycle Inventory and warehousing cycle2012 Pearson Education, Auditing 14/e, Arens/Elder/Beasley 6 - 17

Acquisition and payment cycle

Payroll and personnel cycle

Learning Objective 5Describe 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 6Distinguish among the three categories of management assertions about financial information.

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Management Assertions1. 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 AssertionsTransactions and Events Account Balances Presentation and Disclosure

Occurrence Completeness

Existence Completeness

Occurrence and rights and obligations Completeness

AccuracyClassification Cutoff

Valuation and allocation

Accuracy and valuation Classification and understandability

Rights and obligations2012 Pearson Education, Auditing 14/e, Arens/Elder/Beasley 6 - 22

PCAOB AssertionsExistence or Occurrence CompletenessValuation or allocation Rights and obligations Presentation and disclosureSimilar to U.S. GAAS as the first four assertions are applicable to balances and transactions. Presentation is treated as a single assertion2012 Pearson Education, Auditing 14/e, Arens/Elder/Beasley 6 - 23

Learning Objective 7Link the six general transaction-related audit objectives to management assertions for classes of transactions.

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General Transaction-related Audit ObjectivesOccurrenceRecorded transactions exist Existing transactions are recorded Recorded transactions are stated at the correct amounts6 - 25

Completeness

Accuracy

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General Transaction-related Audit ObjectivesPosting 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.6 - 26

Timing

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Hillsburg Hardware Co.(Applied to Sales Transactions)

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

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General Balance-related Audit ObjectivesExistenceCompleteness Amounts included exist Existing amounts are included Amounts included are stated at the correct amounts6 - 29

Accuracy

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

General Balance-related Audit ObjectivesClassification 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 ledger6 - 30

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General Balance-related Audit ObjectivesRealizable 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 9Link 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 10Explain the relationship between audit objectives and the accumulation of audit evidence.

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How Audit Objectives Are MetThe 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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