1. Audit Responsibilities and Objectives
Chapter 6

2. Key Topics in Chapter 6 Understand the responsibility of :
Management, for the financial statements and internal controls
The independent auditor:
SAS 1 – auditor’s responsibility in performing the audit
For discovering illegal acts
Understand the four phases of a financial statement audit

3. Key Topics in Chapter 6
Be familiar with the different transaction cycles
Know the management assertions
Know the general transaction-related and general balance-related audit objectives

4. 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.

5. 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.

6. Auditor’s Responsibilities
Material versus immaterial misstatements
Combined uncorrected errors likely to affect
A user’s decision are usually considered material
Errors vs. fraud
Both are a potential source of material misstatement,
however, fraud has further implications.
Reasonable assurance
Not a guarantee
Professional skepticism
The attitude we adopt in all aspects of the engagement

7. Auditor’s Responsibilities for Discovering Illegal Acts
Direct-effect vs. Indirect-effect illegal acts
* Auditors have the same responsibility for detecting
direct-effect illegal acts, as they do fraud.
* Auditors provide no assurance indirect-effect illegal
acts will be detected
Evidence accumulation when there is no reason
to believe indirect-effect illegal act exists
* Inquiries of management and the B.O.D., reading
the B.O.D. minutes.

8. Auditor’s Responsibilities for Discovering Illegal Acts
Actions when the auditor knows of an illegal act
* Consider effects on the financial statements and
disclosures. More evidence may be required.
* Who you gonna tell?
Within the client’s company
Outside the client’s company

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

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

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

12. 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

13. 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.

14. 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.

15. 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

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

17. 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.

18. 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.

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. 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.

21. 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.

22. Announcements First midterm next Wednesday, Feb. 1.
A topic guide that will summarize the main items that could be represented on the midterm will be available on the website within the next 2 days.
Next class: guest professors from PwC will present material from Chapter 6.