1. Edited By: Dr. Elie Menassa 2005 1 - 1 Audit Responsibilities and Objectives Topic 4

2. Edited By: Dr. Elie Menassa 2005 1 - 2 Learning Objective 1 Explain the objective of conducting an audit of financial statements.

3. Edited By: Dr. Elie Menassa 2005 1 - 3 Objective of Conducting an Audit of Financial Statements The primary objective of the audit is to express an opinion on the financial statements.

4. Edited By: Dr. Elie Menassa 2005 1 - 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. Edited By: Dr. Elie Menassa 2005 1 - 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. Edited By: Dr. Elie Menassa 2005 1 - 6 Learning Objective 2 Explain the auditor’s responsibility for discovering material misstatements.

7. Edited By: Dr. Elie Menassa 2005 1 - 7 Auditor’s Responsibilities Material versus immaterial misstatements Reasonable assurance Errors versus fraud Professional skepticism

8. Edited By: Dr. Elie Menassa 2005 1 - 8 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

9. Edited By: Dr. Elie Menassa 2005 1 - 9 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

10. Edited By: Dr. Elie Menassa 2005 1 - 10 Learning Objective 3 Classify transactions and account balances into financial statement cycles and identify benefits of a cycle approach to segmenting the audit.

11. Edited By: Dr. Elie Menassa 2005 1 - 11 Transaction Flow Example TransactionsJournals Ledger, Trial Balance, and Financial Statements Acquisition of goods and services Cash receipts journal Sales journal Cash receipts Acquisitions journal General ledger and subsidiary records General ledger trial balance Financial statements

12. Edited By: Dr. Elie Menassa 2005 1 - 12 Transaction Flow Example TransactionsJournals Ledger, Trial Balance, and Financial Statements Allocation and adjustments Payroll journal Cash disbursements Cash disburse- ments journal Payroll services and disbursements General journal General ledger and subsidiary records General ledger trial balance Financial statements

13. Edited By: Dr. Elie Menassa 2005 1 - 13 Relationships Among Transaction Cycles General cash Capital acquisition and repayment cycle Sales and collection cycle Acquisition and payment cycle Payroll and personnel cycle Inventory and warehousing cycle

14. Edited By: Dr. Elie Menassa 2005 1 - 14 Learning Objective 4 Describe why the auditor obtains a combination of assurance by auditing classes of transactions and ending balances in accounts.

15. Edited By: Dr. Elie Menassa 2005 1 - 15 Balance and Transactions Affecting Balances Example $ 19,454 144,328 $ 20,197 139,020 1,242 3,328 Charge-off of uncollectible debts Cash receipts Sales returns and allowances Sales Accounts Receivable (in thousands) Beginning balance Ending balance

16. Edited By: Dr. Elie Menassa 2005 1 - 16 Learning Objective 5 Distinguish among the five categories of management assertions about financial information.

17. Edited By: Dr. Elie Menassa 2005 1 - 17 Management Assertions 1. Existence or occurrence 2. Completeness 3. Valuation or allocation 4. Rights and obligations 5. Presentation and disclosure

18. Edited By: Dr. Elie Menassa 2005 1 - 18 Learning Objective 6 List the six general transaction- related audit objectives to the five management assertions.

19. Edited By: Dr. Elie Menassa 2005 1 - 19 Transaction-Related Audit Objectives Existence Completeness Accuracy Recorded transactions exist. Existing transactions are recorded. Recorded transactions are stated at the correct amount.

20. Edited By: Dr. Elie Menassa 2005 1 - 20 Transaction-Related Audit Objectives Classification Timing Posting and summarization Transactions are properly classified. Transactions are recorded on the correct dates. Transactions are included in the master files and are correctly summarized.

21. Edited By: Dr. Elie Menassa 2005 1 - 21 Transaction-Related Audit Objectives and Management Assertions Management Assertions General Transaction- Related Audit Objectives Existence or occurrence Completeness Valuation or allocation Rights and obligations Presentation and disclosure Existence Completeness Accuracy, Classification timing, Posting and summarization N/A

22. Edited By: Dr. Elie Menassa 2005 1 - 22 Learning Objective 7 Link the nine general balance- related audit objectives to the five management assertions.

23. Edited By: Dr. Elie Menassa 2005 1 - 23 General Balance-Related Audit Objectives Existence Completeness Accuracy Amounts included exist. Existing amounts are included. Amounts included are stated at the correct amounts.

24. Edited By: Dr. Elie Menassa 2005 1 - 24 General Balance-Related Audit Objectives Classification Cutoff Detail tie-in Amounts are properly classified. Transactions are recorded in the proper period. Account balances agree with master file amounts, and with the general ledger.

25. Edited By: Dr. Elie Menassa 2005 1 - 25 General Balance-Related Audit Objectives Realizable value Rights and obligations Presentation and disclosure Assets are included at estimated realizable value. Assets must be owned. Account balances and disclosures are presented in financial statements.

26. Edited By: Dr. Elie Menassa 2005 1 - 26 Assertions and Balance- Related Audit Objectives Management Assertions General Balance- Related Audit Objectives Existence or occurrence Completeness Valuation or allocation Rights and obligations Presentation and disclosure Existence Completeness Accuracy, Classification, Cutoff, Detail tie-in, Realizable value Rights and obligations Presentation and disclosure

27. Edited By: Dr. Elie Menassa 2005 1 - 27 Learning Objective 8 Explain the relationship between audit objectives and the accumulation of audit evidence.

28. Edited By: Dr. Elie Menassa 2005 1 - 28 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.

29. Edited By: Dr. Elie Menassa 2005 1 - 29 Four Phases of an Audit Phase I Phase II Phase III Phase IV Plan and design an audit approach. Perform tests of controls and substantive tests of transactions. Perform analytical procedures and tests of details of balances. Complete the audit and issue an audit report.

30. Edited By: Dr. Elie Menassa 2005 1 - 30