1. Audit Responsibilities and Objectives
Chapter 6

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

3. 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.

4. 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.

5. Steps to Develop Audit Objectives4
Know general audit objectives for
classes of transactions and accounts. 5
Know specific audit objectives for
classes of transactions and accounts.

6. 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.

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

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

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

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

11. 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

12. 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

13. 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.

14. 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

15. 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

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

17. 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.

18. 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)

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

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

21. 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.

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

23. 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.

24. 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

25. 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.

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

27. 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.

28. 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.

29. 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

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

31. 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.

32. 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.

33. End of Chapter 6