1. Auditing 81.3550 Responsibilities & Objectives Chapter 5 Responsibilities & Objectives Chapter 5

2. Highlights Audit Objectives – the specifics Management & Auditor Responsibilities Audit Approach Assertions, Objectives Transactions, & Ending Balances The Audit Process Audit Objectives – the specifics Management & Auditor Responsibilities Audit Approach Assertions, Objectives Transactions, & Ending Balances The Audit Process

3. Audit Objectives To express an opinion on the F/S that they present fairly in all material respects in accordance with GAAP Accumulate evidence to enable auditor to express an opinion Need to ensure complete and verifiable evidence incase called upon to the defend quality of audit and/or opinion

4. Management’s Responsibility What exactly are management responsibilities when it comes to the F/S? –Maintaining adequate Internal Controls –Fair representations –Setting/adopting sound accounting policies –F/S preparation including notes Management has the most intimate knowledge of the business, transactions, as well as the ultimate level of control What exactly are management responsibilities when it comes to the F/S? –Maintaining adequate Internal Controls –Fair representations –Setting/adopting sound accounting policies –F/S preparation including notes Management has the most intimate knowledge of the business, transactions, as well as the ultimate level of control

5. Auditor’s Responsibilities Performs audit meeting GAAS and GAAP requirements Including: –Maintaining “professional skepticism” –Using professional judgment –Adequate planning and gathering of evidence Not responsible to uncover fraud but must act on fraud if it is discovered during the audit May include expanding testing to determine if an unintentional error vs. fraudulent behaviour Performs audit meeting GAAS and GAAP requirements Including: –Maintaining “professional skepticism” –Using professional judgment –Adequate planning and gathering of evidence Not responsible to uncover fraud but must act on fraud if it is discovered during the audit May include expanding testing to determine if an unintentional error vs. fraudulent behaviour

6. General Fraud & The Audit FraudFraud – is criminal deception intended to benefit the deceiver most often financially Estimated 75% of Fraud goes undetected when performing the audit need to think about the likelihood of fraud and the type in a particular area GONE Theory – essential ingredients for fraud to occur –G – Greed –O – Opportunity –N – Need (motivation) –E - Exposure FraudFraud – is criminal deception intended to benefit the deceiver most often financially Estimated 75% of Fraud goes undetected when performing the audit need to think about the likelihood of fraud and the type in a particular area GONE Theory – essential ingredients for fraud to occur –G – Greed –O – Opportunity –N – Need (motivation) –E - Exposure

7. Fraud & The Audit Employee Fraud Chances fraud is committed by an employee (in Canada) 4 out of 5 times (Report on Business Magazine) Most common theft of assets Management Fraud – often more difficulty to uncover due to increased level of opportunity, and increased level of sophistication in covering up the fraud Typical frauds involve share price manipulation, related party transactions, expense related and kickbacks Employee Fraud Chances fraud is committed by an employee (in Canada) 4 out of 5 times (Report on Business Magazine) Most common theft of assets Management Fraud – often more difficulty to uncover due to increased level of opportunity, and increased level of sophistication in covering up the fraud Typical frauds involve share price manipulation, related party transactions, expense related and kickbacks

8. Fraud & The Audit Computer Fraud - basically fraud with assistance from a(n) computer(s) often involves using software Examples include: obtaining customer information, theft of credit card numbers, identity theft, redirecting/manipulation of automatic payroll/payments Computer Fraud - basically fraud with assistance from a(n) computer(s) often involves using software Examples include: obtaining customer information, theft of credit card numbers, identity theft, redirecting/manipulation of automatic payroll/payments

9. Illegal Acts Defn: a violation of a domestic of foreign statutory law or government regulation attributable to the entity under audit, or to management or employees acting on the entity's behalf. (Section 5136)

10. Regarding illegal acts, auditors should, in all audits, - read minutes of board meetings - enquire of client’s lawyers - enquire of client management regarding the occurrence of illegal acts AND client policies regarding illegal acts - read minutes of board meetings - enquire of client’s lawyers - enquire of client management regarding the occurrence of illegal acts AND client policies regarding illegal acts

11. Auditor’s Responsibility Other than the min required procedures - not expected to specifically search for illegal acts unless lead to believe that they exist

12. Auditor’s Responsibility If illegal act believed to have occurred need to –determine those involved(normally enquire at a level or so above those suspected) –Consult client’s lawyer –Consider if additional evidence is required to confirm existence –If determined illegal act has occurred consider effect and required disclosure on F/S –Inform audit committee –May need opinion of Firm lawyers as well –In client refused to disclose or remedy situation may need to withdraw from audit If illegal act believed to have occurred need to –determine those involved(normally enquire at a level or so above those suspected) –Consult client’s lawyer –Consider if additional evidence is required to confirm existence –If determined illegal act has occurred consider effect and required disclosure on F/S –Inform audit committee –May need opinion of Firm lawyers as well –In client refused to disclose or remedy situation may need to withdraw from audit

19. Basic Management Assertions 1.existence or occurrence - financial components exist at a given date, transactions have occurred during a given period 2.completeness - all transactions and accounts are presented, nothing has been left out 1.existence or occurrence - financial components exist at a given date, transactions have occurred during a given period 2.completeness - all transactions and accounts are presented, nothing has been left out

20. Basic Management Assertions 3. valuation or allocation - com- ponents of financial statements are included at appropriate amounts 4. rights and obligations - assets are rights of the entity and liabilities are obligations 3. valuation or allocation - com- ponents of financial statements are included at appropriate amounts 4. rights and obligations - assets are rights of the entity and liabilities are obligations

21. Basic Management Assertions 5. rights and obligations - assets are rights of the entity and liabilities are obligations 6. statement presentation and disclosure - components of financial statements are properly combined, separated, described and disclosed 5. rights and obligations - assets are rights of the entity and liabilities are obligations 6. statement presentation and disclosure - components of financial statements are properly combined, separated, described and disclosed

24. Transaction Related Objectives Help provide audit framework Assists in planning and collecting evidence for groups of transactions Two types of transaction objectives –General – applies to all groups of transactions –Specific – tailored to a specific group/class in particular Help provide audit framework Assists in planning and collecting evidence for groups of transactions Two types of transaction objectives –General – applies to all groups of transactions –Specific – tailored to a specific group/class in particular

32. Instead of examining groups/classes (i.e. sales transactions etc.) of transactions now looking at balances (i.e. ending balances on the balance sheet and income statement) Balance Related Objectives