1. Audit Responsibilities and Objectives
Chapter 6

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

3. Objective of Conducting an Audit of Financial Statements
The objective of the ordinary audit of financial
statements is the expression of an opinion of
the fairness with which they present fairly, in
all respects, financial position, result of
operations, and its cash flows in
conformity with GAAP.

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 Objectives
Know general audit objectives for
classes of transactions and accounts. 4 5
Know specific audit objectives for
classes of transactions and accounts.

6. Learning Objective 2
Distinguish management’s
responsibility for the financial
statements and internal control
from the auditor’s responsibility
for verifying the financial
statements and effectiveness
of internal control.

7. Management’s Responsibilities
Management is responsible for the financial
statements and for internal control.
The Sarbanes–Oxley Act increases management’s
responsibility for the financial statements.
It requires the CEO and the CFO of public
companies to certify the quarterly and annual
financial statements submitted to the SEC.

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

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

14. Financial Statements Cycles
Audits are performed by dividing the financial
statements into smaller segments or components.

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

16. Transaction Flow Example
Ledgers,
Trial Balance,
and Financial
Statements
General ledger
and subsidiary
records
trial balance
Financial
statements
Transactions
Payroll
journal
Cash
disbursements
General
Journals
Cash
disbursements
Payroll
services and
disbursements
Allocation
and
adjustments

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

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

19. Balance and Transactions Affecting Balances Example
Beginning balance
Sales
$ 17,521
$144,328
$137,087
Cash receipts
$ 1,242
Sales returns
and allowances
Charge-off of
uncollectible
accounts
Ending balance
$ 20,197
$ 3,323
Accounts Receivable (in thousands)

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

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

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

23. 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

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

25. Transaction-Related Audit Objectives and Management Assertions
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.

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

27. 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

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

29. 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.

30. 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.

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

32. 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.

33. Four Phases of a Financial Statement 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.

34. End of Chapter 6