5 - 1 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Audit Responsibilities and Objectives Chapter 5

5 - 2 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 1 Explain the objective of conducting an audit of financial statements.

5 - 3 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Objective of Conducting an Audit of Financial Statements The primary objective of the audit is to express an opinion on the financial statements.

5 - 4 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Steps to Develop Audit Objectives Understand objectives and responsibilities for the audit. 12 Divide financial statements into cycles. 3 Know management assertions about accounts.

5 - 5 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Steps to Develop Audit Objectives Know general audit objectives for classes of transactions and accounts. 4 5 Know specific audit objectives for classes of transactions and accounts.

5 - 6 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 2 Distinguish management’s responsibilities for preparing financial statements from the auditor’s responsibilities for verifying those financial statements.

5 - 7 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Responsibilities Management is responsible for the financial statements, and for internal control. Auditors issue an opinion on fairness of the financial statements.

5 - 8 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 3 Explain the auditor’s responsibility for discovering material misstatements.

5 - 9 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Auditor’s Responsibilities Material versus immaterial misstatements Reasonable assurance Errors versus fraud Professional skepticism

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 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

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 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

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 4 Classify transactions and account balances into financial statement cycles and identify benefits of a cycle approach to segmenting the audit.

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Transaction Flow Example Transactions Acquisition of goods and services Sales Cash receipts Journals Cash receipts journal Sales journal Acquisitions journal Ledger, Trial Balance, and Financial Statements General ledger and subsidiary records General ledger trial balance Financial statements

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Transaction Flow Example Transactions Allocation and adjustments Cash disbursements Payroll services and disbursements Journals Payroll journal Cash disburse- ments journal General journal Ledger, Trial Balance, and Financial Statements General ledger and subsidiary records General ledger trial balance Financial statements

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Relationships Among Transaction Cycles General cash Acquisition and payment cycle Payroll and personnel cycle Capital acquisition and repayment cycle Sales and collection cycle Inventory and warehousing cycle

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 5 Describe why the auditor obtains a combination of assurance by auditing classes of transactions and ending balances in accounts.

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Balance and Transactions Affecting Balances Example $ 18, ,328 $ 20, ,393 1,242 3,323 Charge-off of uncollectible debts Cash receipts Sales returns and allowances Sales Accounts Receivable (in thousands) Beginning balance Ending balance

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 6 Distinguish among the five categories of management assertions about financial information.

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Management Assertions 1. Existence or occurrence 2. Completeness 3. Valuation or allocation 4. Rights and obligations 5. Presentation and disclosure

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 7 Link the six general transaction- related audit objectives to the five management assertions.

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Transaction-Related Audit Objectives Existence Recorded transactions exist. Completeness Existing transactions are recorded. Accuracy Recorded transactions are stated at the correct amount.

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 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.

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Transaction-Related Audit Objectives and Management Assertions Management Assertions General Transaction- Related Audit Objectives Existence or occurrenceExistence Completeness Valuation or allocation Accuracy, Classification timing, Posting and summarization Rights and obligationsN/APresentation and disclosureN/A

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 8 Link the nine general balance- related audit objectives to the five management assertions.

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley General Balance-Related Audit Objectives Existence Amounts included exist. Completeness Existing amounts are included. Accuracy Amounts included are stated at the correct amounts.

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 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.

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 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.

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Assertions and Balance-Related Audit Objectives Management Assertions General Balance- Related Audit Objectives Existence or occurrenceExistence Completeness Valuation or allocation Accuracy, Classification, Cutoff, Detail tie-in, Realizable value Rights and obligations Presentation and disclosure

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 9 Explain the relationship between audit objectives and the accumulation of audit evidence.

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley How Audit Objectives Are Met Auditors plan the combination of objectives and evidence by following an audit process. An audit process is a methodology for organizing an audit.

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Four Phases of an Audit Phase I Plan and design an audit approach. Phase II Perform tests of controls and substantive tests of transactions. Phase III Perform analytical procedures and tests of details of balances. Phase IV Complete the audit and issue an audit report.

©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley End of Chapter 5