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 purpose of an audit is to provide financial
statement users with an opinion by the auditor
on whether the financial statements are
presented fairly, in all material respects, in
accordance with applicable financial accounting
framework.

4. Steps to Develop Audit Objectives

5. 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.

6. Management’s Responsibilities
Financial statements and internal controls.
Sarbanes-Oxley increases management’s
responsibility for the financial statements.
CEO and CFO must certify quarterly and annual
financial statements submitted to the SEC.

7. Management’s Responsibilities

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. Objectives of the Auditor
Obtain
reasonable
assurance
Financial
statements
Free from
material
misstatements
Opine
Financial
statements
Applicable
reporting
framework
Obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatements.
Express an opinion whether the financial statements are prepared in all material respects in accordance
with an applicable financial reporting framework.
Report on the financial statements, and communicate as required by auditing standards, in accordance with
the auditor’s findings.
Report
Financial
statements
Communicate
per audit
standards

11. Auditor’s Responsibilities
Material
misstatements
Reasonable
Assurance
Ask students why auditors can only provide reasonable instead of absolute assurance on the financial statements.
Professional
Skepticism
Errors vs. Fraud
Fraudulent
reporting
vs.
theft of assets

12. Auditor’s Responsibilities for Discovering Illegal Acts
Type
Responsibility
Direct-Effect
Same for
errors and
fraud
Regarding indirect-effect illegal acts, auditing standards state that the auditor lacks legal expertise and the frequent indirect relationship between illegal acts and the financial statements makes it impractical for auditors to assume responsibility for discovering those illegal acts.
Indirect-Effect
No Assurance

13. Auditor’s Responsibilities for Discovering Illegal Acts
Auditor suspects
Inquire of management
Consult client’s counsel or specialist
Consider accumulating evidence
Auditor knows
Consider effects on financial
statements
Consider effect on relationship
with management
Communicate with audit
committee or equivalent
Several actions are necessary to determine whether the suspected illegal act actually exists:
Inquire of management at a level above those likely to be involved in the potential illegal act
Consult with the clients legal counsel or other specialist who is knowledgeable about the potential illegal act
Consider accumulating additional evidence to determine whether there actually is an illegal act

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

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

16. Transaction Flow Example

17. 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

18. Learning Objective 5
Describe why the auditor obtains a combination of assurance by auditing classes of transactions and ending balances in accounts, including presentation and disclosure.

19. Balance and Transactions Affecting Balances Example
If the auditor could be completely sure that each of the four classes of transactions is correctly stated, the auditor could also be sure that the ending balance is correctly stated.
Several audit objectives must be met before the auditor can conclude that the transactions are properly recorded. These are called transaction related objectives.
Several objective must be met for each account balance. These are called balance-related objectives.
A third category of audit objectives relates to presentation and disclosure of information in the financial statements.

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

21. Management Assertions
Assertions about classes of transactions and
events for the period under audit
2. Assertions about account balances at period end
The definition of auditing in chapter 1 states that auditing is a comparison of information to established criteria (assertions established according to accounting standards). Auditors must therefore understand the assertions to do adequate audits.
3. Assertions about presentation and disclosure

22. Management Assertions for Each Category of Assertions
Transactions and Events
Account Balances
Presentation and Disclosure
Occurrence
Existence
Occurrence and rights
and obligations
Completeness
Completeness
Completeness
Accuracy
Valuation and
allocation
Accuracy and
valuation
Classification
The occurrence assertion concerns whether the recorded transactions included in the financial statements actually occurred during the period.
Completeness addresses whether all transactions that should be included in the financial statements are in fact included.
The accuracy assertion addresses whether transactions have been recorded at correct amounts.
The classification assertion addresses whether transactions are recorded in the appropriate accounts.
The cutoff assertion addresses whether transactions are recorded in the proper accounting period.
Classification and
understandability
Cutoff
Rights and
obligations

23. PCAOB Assertions Existence or Occurrence Completeness Valuation or
allocation
Rights and obligations
Presentation and
disclosure
Similar to U.S. GAAS as the first four assertions are applicable to
balances and transactions. Presentation is treated as a single assertion

24. Learning Objective 7
Link the six general transaction-related audit objectives to management assertions for classes of transactions.

25. General Transaction-related Audit Objectives
Occurrence
Recorded transactions
exist
Completeness
Existing transactions
are recorded
Recorded transactions
are stated at the
correct amounts
Accuracy

26. General Transaction-related Audit Objectives
Transactions are included
in the master files and
are correctly summarized.
Posting and
summarization
Classification
Transactions are properly
classified.
Timing
Transactions are recorded
on the correct dates.

27. (Applied to Sales Transactions)
Hillsburg Hardware Co.
(Applied to Sales Transactions)

28. Learning Objective 8
Link the eight general balance-related audit objectives to management assertions for account balances.

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

30. 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

31. General Balance-related Audit Objectives
Realizable
value
Assets are included at
estimated realizable value
Rights and
obligations
Assets must be owned

32. (Applied to Inventory)
Hillsburg Hardware Co.
(Applied to Inventory)

33. Learning Objective 9
Link the four presentation- and disclosure-related audit objectives to management assertions for presentation and disclosure.

34. (Applied to Notes Payable)
Hillsburg Hardware Co.
(Applied to Notes Payable)

35. Learning Objective 10
Explain the relationship between audit objectives and the accumulation of audit evidence.

36. How Audit Objectives Are Met
The auditor must obtain sufficient appropriate
audit evidence to support all management
assertions in the financial statements.
An audit process has four specific phases

37. Four Phases of a Financial Statement Audit
Phase 1 includes obtaining an understanding of the entity and its environment, an understanding of internal control and assessing control risk, and assessing the risk of material misstatement.

38. End of Chapter 6