Audit Responsibilities and Objectives Chapter 6

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

Objective of Conducting an Audit of Financial Statements The primary objective of the audit is to express an opinion of the fairness of the presentation in the financial statements.

Steps to Develop Audit Objectives Understand objectives and responsibilities for the audit. 1 2 Divide financial statements into cycles. 3 Know management assertions about accounts.

Steps to Develop Audit Objectives 4 Know general audit objectives for classes of transactions and accounts. 5 Know specific audit objectives for classes of transactions and accounts.

Distinguish management’s responsibilities for preparing Learning Objective 2 Distinguish management’s responsibilities for preparing financial statements from the auditor’s responsibilities for verifying those financial statements.

Responsibilities Management is responsible for the financial statements and for internal control. The Sarbanes-Oxley Act increases management’s responsibility for the financial statements.

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

responsibility for discovering material misstatements. Learning Objective 3 Explain the auditor’s responsibility for discovering material misstatements.

Auditor’s Responsibilities – Material versus immaterial misstatements – Reasonable assurance – Errors versus fraud – Professional skepticism – Fraud resulting from fraudulent financial reporting versus misappropriation of assets

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

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

Classify transactions and account balances into financial statement Learning Objective 4 Classify transactions and account balances into financial statement cycles and identify benefits of a cycle approach to segmenting the audit.

Transaction Flow Example Transactions Acquisition of goods and services Sales Cash receipts Journals Cash receipts journal Sales Acquisitions Ledger, Trial Balance, and Financial Statements General ledger and subsidiary records General ledger trial balance Financial statements

Transaction Flow Example Transactions Journals Ledger, Trial Balance, and Financial Statements Cash disbursements Cash disburse- ments journal General ledger and subsidiary records Payroll services and disbursements Payroll journal General ledger trial balance Allocation and adjustments General journal Financial statements

Relationships Among Transaction Cycles General cash Capital acquisition and repayment cycle Sales and collection cycle Acquisition and payment Payroll and personnel Inventory and warehousing

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

Balance and Transactions Affecting Balances Example Beginning balance Sales $ 18,827 $144,328 $138,393 Cash receipts $ 1,242 Sales returns and allowances Charge-off of uncollectible accounts Ending balance $ 20,197 $ 3,323 Accounts Receivable (in thousands)

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

Management Assertions 1. Existence or occurrence 2. Completeness 3. Valuation or allocation 4. Rights and obligations 5. Presentation and disclosure

Link the six general transaction- related audit objectives to the Learning Objective 7 Link the six general transaction- related audit objectives to the five management assertions.

Transaction-Related Audit Objectives Existence Recorded transactions exist. Completeness Existing transactions are recorded. Accuracy Recorded transactions are stated at the correct amounts.

Transaction-Related Audit 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.

Transaction-Related Audit Objectives and Management Assertions General Transaction- Related Audit Objectives Existence or occurrence Completeness Valuation or allocation Existence Accuracy Classification Timing Posting and summarization Rights and obligations Presentation and disclosure N/A

Link the nine general balance- related audit objectives to the Learning Objective 8 Link the nine general balance- related audit objectives to the five management assertions.

General Balance-Related Audit Objectives Existence Amounts included exist. Completeness Existing amounts are included. Accuracy Amounts included are stated at the correct amounts.

General Balance-Related Audit 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.

General Balance-Related Audit 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.

Assertions and Balance-Related Audit Objectives Management Assertions General Balance- Related Audit Objectives Existence or occurrence Completeness Valuation or allocation Existence Accuracy Classification Cut-off, Detail tie-in Realizable value Rights and obligations Presentation and disclosure

Explain the relationship between audit objectives Learning Objective 9 Explain the relationship between audit objectives and the accumulation of audit evidence.

How Audit Objectives Are Met The auditor must obtain sufficient competent audit evidence to support all management assertions in the financial statements. An audit process is a methodology for organizing an audit.

Four Phases of an Audit Phase I Plan and design an audit approach. Phase III Perform analytical procedures and tests of details of balances. Phase II Perform tests of controls and substantive tests of transactions. Phase IV Complete the audit and issue an audit report.

End of Chapter 6