Audit Responsibilities and Objectives

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Audit Responsibilitiesand Objectives

• Chapter 6

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Learning Objective 1
Explain the objective of conducting an audit
of financial statements.
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Objective of Conducting an Audit of Financial
Statements
The primary objective of the audit is to express
an opinion on the financial statements.
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Steps to DevelopAudit Objectives
Understand objectives and responsibilities for
the audit.
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Divide financial statements into cycles.
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Know management assertions about accounts.
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Steps to DevelopAudit Objectives
Know general audit objectives for classes of
transactions and accounts.
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Know specific audit objectives for classes of
transactions and accounts.
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Learning Objective 2
Distinguish managements responsibilities for
preparing financial statements from the auditors
responsibilities for verifying those financial
statements.
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Responsibilities
Management is responsible for the financial
statements, and for internal control.
Auditors issue an opinion on fairness of the
financial statements.
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Learning Objective 3
Explain the auditors responsibility for
discovering material misstatements.
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Auditors Responsibilities
Material versus immaterial misstatements
Reasonable assurance
Errors versus fraud
Professional skepticism
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Responsibilities for Discovering Illegal Acts
Direct-effect illegal acts
Indirect-effect illegal acts
Evidence accumulation when there is no reason to
believe indirect-effect illegal act exists
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Responsibilities for Discovering Illegal Acts
Evidence accumulation and other actions when
there is reason to believe direct-
or indirect-effect illegal acts may exist
Actions when the auditor knows of an illegal act
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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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Transaction Flow Example
Transactions
Journals
Ledger, Trial Balance, and Financial Statements
Sales
Sales journal
General ledger and subsidiary records
Cash receipts journal
Cash receipts
General ledger trial balance
Acquisition of goods and services
Acquisitions journal
Financial statements
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Transaction Flow Example
Transactions
Journals
Ledger, Trial Balance, and Financial Statements
Cash disbursements
Cash disburse- ments journal
General ledger and subsidiary records
Payroll journal
Payroll services and disbursements
General ledger trial balance
Allocation and adjustments
General journal
Financial statements
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Relationships Among Transaction Cycles
General cash
Capital acquisition and repayment cycle
Sales and collection cycle
Acquisition and payment cycle
Payroll and personnel cycle
Inventory and warehousing cycle
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Learning Objective 5
Describe why the auditor obtains a combination of
assurance by auditing classes of transactions and
ending balances in accounts.
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Balance and Transactions Affecting Balances
Example
Accounts Receivable (in thousands)
19,454 144,328 20,197
139,020 1,242 3,328
Beginning balance
Cash receipts
Sales
Sales returns and allowances
Charge-off of uncollectible debts
Ending balance
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Learning Objective 6
Distinguish among the five categories
of management assertions about financial
information.
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Management Assertions
1. Existence or occurrence
2. Completeness
3. Valuation or allocation
4. Rights and obligations
5. Presentation and disclosure
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Learning Objective 7
List the six general transaction- related audit
objectives to the five management assertions.
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Transaction-RelatedAudit Objectives
Existence
Recorded transactions exist.
Completeness
Existing transactions are recorded.
Accuracy
Recorded transactions are stated at the correct
amount.
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Transaction-RelatedAudit Objectives
Classification
Transactions are properly classified.
Timing
Transactions are recorded on the correct dates.
Posting and summarization
Transactions are included in the master files
and are correctly summarized.
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Transaction-Related Audit Objectivesand
Management Assertions
Management Assertions
General Transaction- Related Audit Objectives
Existence or occurrence
Existence
Completeness
Completeness
Valuation or allocation
Accuracy, Classification timing, Posting and
summarization
Rights and obligations
N/A
Presentation and disclosure
N/A
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Learning Objective 8
Link the nine general balance- related audit
objectives to the five management assertions.
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General Balance-RelatedAudit Objectives
Existence
Amounts included exist.
Completeness
Existing amounts are included.
Accuracy
Amounts included are stated at the correct
amounts.
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General Balance-RelatedAudit Objectives
Classification
Amounts are properly classified.
Cutoff
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-RelatedAudit Objectives
Realizable value
Assets are included at estimated realizable value.
Rights and obligations
Assets must be owned.
Presentation and disclosure
Account balances and disclosures are presented in
financial statements.
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Assertions and Balance-Related Audit Objectives
Management Assertions
General Balance- Related Audit Objectives
Existence or occurrence
Existence
Completeness
Completeness
Valuation or allocation
Accuracy, Classification, Cutoff, Detail tie-in,
Realizable value
Rights and obligations
Rights and obligations
Presentation and disclosure
Presentation and disclosure
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Learning Objective 9
Explain the relationship between audit
objectives and the accumulation of audit evidence.
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How Audit ObjectivesAre Met
Auditors plan the combination of objectives and
evidence by following an audit process.
An audit process is a methodology for organizing
an audit.
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Four Phases of an Audit
Phase I
Phase III
Plan and design an audit approach.
Perform analytical procedures and tests of
details of balances.
Phase II
Phase IV
Perform tests of controls and substantive
tests of transactions.
Complete the audit and issue an audit report.
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End of Chapter 6
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