Audit Responsibilities and Objectives

Audit Audit ResponsibilitiesResponsibilitiesand Objectivesand Objectives

Chapter 6Chapter 6

Key Topics in Chapter 6Key Topics in Chapter 6

Understand the responsibility of :Understand the responsibility of : Management, for the financial statements and internal Management, for the financial statements and internal

controlscontrols The independent auditor:The independent auditor:

SAS 1 – auditor’s responsibility in performing the auditSAS 1 – auditor’s responsibility in performing the audit For discovering illegal actsFor discovering illegal acts

Understand the four phases of a financial Understand the four phases of a financial statement auditstatement audit

Key Topics in Chapter 6Key Topics in Chapter 6

Be familiar with the different transaction Be familiar with the different transaction cyclescycles

Know the management assertionsKnow the management assertions Know the general Know the general transactiontransaction-related and -related and

general general balancebalance-related audit objectives-related audit objectives

Objective of Conducting an Audit Objective of Conducting an Audit of Financial Statementsof Financial Statements

The objective of the ordinary audit of financialThe objective of the ordinary audit of financialstatements is the expression of an opinion ofstatements is the expression of an opinion ofthe fairness with which they present fairly, inthe fairness with which they present fairly, inall respects, financial position, result ofall respects, financial position, result ofoperations, and its cash flows inoperations, and its cash flows inconformity with GAAP.conformity with GAAP.

Management’s ResponsibilitiesManagement’s Responsibilities

Management is responsible for the financialManagement is responsible for the financialstatements and for internal control.statements and for internal control.

The Sarbanes–Oxley Act increases management’sThe Sarbanes–Oxley Act increases management’sresponsibility for the financial statements.responsibility for the financial statements.

It requires the CEO and the CFO of publicIt requires the CEO and the CFO of publiccompanies to certify the quarterly and annualcompanies to certify the quarterly and annualfinancial statements submitted to the SEC.financial statements submitted to the SEC.

Auditor’s ResponsibilitiesAuditor’s Responsibilities

Material versus immaterial misstatementsMaterial versus immaterial misstatementsCombined uncorrected errors likely to affectCombined uncorrected errors likely to affectA user’s decision are usually considered materialA user’s decision are usually considered material

Errors vs. fraudErrors vs. fraudBoth are a potential source of material misstatement,Both are a potential source of material misstatement,however, fraud has further implications.however, fraud has further implications.

Reasonable assuranceReasonable assuranceNot a guaranteeNot a guarantee

Professional skepticismProfessional skepticismThe attitude we adopt in all aspects of the engagementThe attitude we adopt in all aspects of the engagement

Auditor’s Responsibilities for Auditor’s Responsibilities for Discovering Illegal ActsDiscovering Illegal Acts

Direct-effect vs. Indirect-effect illegal actsDirect-effect vs. Indirect-effect illegal acts * * Auditors have the same responsibility for detectingAuditors have the same responsibility for detecting direct-effect illegal acts, as they do fraud.direct-effect illegal acts, as they do fraud.

* A* Auditors provide no assurance indirect-effect illegaluditors provide no assurance indirect-effect illegal acts will be detectedacts will be detected

Evidence accumulation when there is no reasonEvidence accumulation when there is no reasonto believe indirect-effect illegal act existsto believe indirect-effect illegal act exists * Inquiries of management and the B.O.D., reading * Inquiries of management and the B.O.D., reading the B.O.D. minutes.the B.O.D. minutes.

Auditor’s Responsibilities for Auditor’s Responsibilities for Discovering Illegal ActsDiscovering Illegal Acts

Actions when the auditor knows of an illegal actActions when the auditor knows of an illegal act* Consider effects on the financial statements and * Consider effects on the financial statements and disclosures. More evidence may be required.disclosures. More evidence may be required.* Who you gonna tell? * Who you gonna tell?

Within the client’s companyWithin the client’s companyOutside the client’s companyOutside the client’s company

Financial Statements CyclesFinancial Statements Cycles

Audits are performed by dividing the financialAudits are performed by dividing the financialstatements into smaller segments or components.statements into smaller segments or components.

Relationships Among Transaction Relationships Among Transaction CyclesCycles

GeneralGeneralcashcash

Capital acquisitionCapital acquisitionand repayment cycleand repayment cycle

Sales andSales andcollectioncollection

cyclecycle

AcquisitionAcquisitionand paymentand payment

cyclecycle

Payroll andPayroll andpersonnelpersonnel

cyclecycle

Inventory andInventory andwarehousingwarehousing

cyclecycle

Management AssertionsManagement Assertions

1. Existence or occurrence1. Existence or occurrence

2. Completeness2. Completeness

3. Valuation or allocation3. Valuation or allocation

4. Rights and obligations4. Rights and obligations

5. Presentation and disclosure5. Presentation and disclosure

Transaction-Related Audit Transaction-Related Audit Objectives and Management Objectives and Management AssertionsAssertions

Management AssertionsManagement AssertionsGeneral Transaction-General Transaction-

Related Audit ObjectivesRelated Audit Objectives

Existence or occurrenceExistence or occurrence

CompletenessCompleteness

Valuation or allocationValuation or allocation

ExistenceExistence


AccuracyAccuracyClassificationClassificationTimingTimingPosting and summarizationPosting and summarization

Rights and obligationsRights and obligations

Presentation and disclosurePresentation and disclosure

N/AN/A

N/AN/A

ExistenceExistence Recorded transactionsRecorded transactionsexist.exist.

CompletenessCompleteness Existing transactions areExisting transactions arerecorded.recorded.

AccuracyAccuracyRecorded transactionsRecorded transactionsare stated at theare stated at thecorrect amounts.correct amounts.


ClassificationClassification Transactions are properlyTransactions are properlyclassified.classified.

TimingTiming Transactions are recordedTransactions are recordedon the correct dates.on the correct dates.

Posting andPosting andsummarizationsummarization

Transactions are includedTransactions are includedin the master files andin the master files andare correctly summarized.are correctly summarized.


Assertions and Balance-Related Assertions and Balance-Related Audit ObjectivesAudit Objectives

Management AssertionsManagement AssertionsGeneral BalanceGeneral Balance

Related Audit ObjectivesRelated Audit Objectives

Existence or occurrenceExistence or occurrence


Valuation or allocationValuation or allocation

ExistenceExistence


AccuracyAccuracyClassificationClassificationCut-off, Detail tie-inCut-off, Detail tie-inRealizable valueRealizable value





ExistenceExistence Amounts included exist.Amounts included exist.

CompletenessCompleteness Existing amounts areExisting amounts areincluded.included.

AccuracyAccuracyAmounts included areAmounts included arestated at the correctstated at the correctamounts.amounts.

General Balance-RelatedGeneral Balance-RelatedAudit ObjectivesAudit Objectives

ClassificationClassification Amounts are properlyAmounts are properlyclassified.classified.

CutoffCutoff Transactions are recordedTransactions are recordedin the proper period.in the proper period.

Detail tie-inDetail tie-inAccount balances agreeAccount balances agreewith master file amounts,with master file amounts,and with the general ledger.and with the general ledger.


RealizableRealizablevaluevalue

Assets are included atAssets are included atestimated realizable value.estimated realizable value.

Rights andRights andobligationsobligations Assets must be owned.Assets must be owned.

PresentationPresentationandanddisclosuredisclosure

Account balances andAccount balances anddisclosures are presenteddisclosures are presentedin financial statements.in financial statements.


Balance and Transactions Balance and Transactions Affecting Balances ExampleAffecting Balances Example

Beginning balanceBeginning balance

Sales

$ 17,521$ 17,521

$144,328$144,328 $137,087$137,087 Cash receipts

$ 1,242$ 1,242Sales returnsand allowances

Charge-off ofCharge-off ofuncollectibleuncollectibleaccountsaccounts

Ending balanceEnding balance $ 20,197$ 20,197

$ 3,323$ 3,323

Accounts Receivable (in thousands)Accounts Receivable (in thousands)

How Audit Objectives Are MetHow Audit Objectives Are Met

The auditor must obtain sufficient competentThe auditor must obtain sufficient competentaudit evidence to support all managementaudit evidence to support all managementassertions in the financial statements.assertions in the financial statements.

An audit process is a methodologyAn audit process is a methodologyfor organizing an audit.for organizing an audit.

Four Phases of a Financial Four Phases of a Financial Statement AuditStatement Audit

Phase IPhase IPlan and designPlan and designan audit approach.an audit approach.

Phase IIPhase II

Perform tests ofPerform tests ofcontrols andcontrols andsubstantive testssubstantive testsof transactions.of transactions.

Phase IIIPhase III

Perform analyticalPerform analyticalprocedures andprocedures andtests of detailstests of detailsof balances.of balances.

Phase IVPhase IVComplete theComplete theaudit and issueaudit and issuean audit report.an audit report.

AnnouncementsAnnouncements

First midterm next Wednesday, Feb. 1.First midterm next Wednesday, Feb. 1. A topic guide that will summarize the A topic guide that will summarize the

main items that could be represented on main items that could be represented on the midterm will be available on the the midterm will be available on the website within the next 2 days.website within the next 2 days.

Next class: guest professors from PwC Next class: guest professors from PwC will present material from Chapter 6.will present material from Chapter 6.

Documents

Audit Responsibilities and Objectives