Copyright © 2014 Pearson Education Chapter 6 Audit Responsibilities and Objectives

Copyright © 2014 Pearson Education

Chapter 6

Audit Responsibilities and Objectives

Chapter 6

Audit Responsibilities and Objectives

Copyright © 2014 Pearson Education6-2

Explain the objective of conducting an audit of financial statements and an audit of internal controls.

Distinguish management’s responsibility for the financial statements and internal control from the auditor’s responsibility for verifying the financial statements and effectiveness if internal control.


Explain the auditor’s responsibility for discovering material misstatements due to fraud or error, and the need to maintain professional skepticism when conducting the audit.

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


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

Distinguish among the three categories of management assertions about financial information.

List the six general transaction-related audit objectives to management assertions for classes of transactions.


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

Link the four presentation and disclosure-related audit objectives to management assertions for presentation and disclosure.

Explain the relationship between audit objectives and the accumulation of audit evidence.


Explain the objective of conducting an audit of financial statements and an audit of internal

controls.

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The purpose of an audit is to provide financialstatement users with an opinion by the auditoron whether the financial statements are presented fairly, in all material respects, inaccordance with applicable financial accounting framework.



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.

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Financial statements and internal controls.

Sarbanes-Oxley increases management’sresponsibility for the financial statements.

CEO and CFO must certify quarterly and annualfinancial statements submitted to the SEC.



The Sarbanes-Oxley Act provides for criminalpenalties for anyone who knowingly falselycertifies the statements.


Explain the auditor’s responsibility for discovering material misstatements due to

fraud or error, and the need to maintain professional skepticism when conducting the

audit.

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Obtain reasonable assurance

Opine

Report

Financial statements

Free from material

misstatements


Applicable reporting framework


Communicate per audit standards


Material misstatements

Reasonable Assurance

Professional Skepticism

Errors vs. Fraud

Fraudulent reporting

vs. theft of assets


Type Responsibility

Direct-Effect Same for errors and

fraud

Indirect-Effect No Assurance


Auditor suspects Inquire of managementConsult client’s counsel or specialistConsider accumulating evidence

Auditor knowsConsider effects on financial statementsConsider effect on relationship with managementCommunicate with audit committee or equivalent


Classify transactions and account balances into financial statement cycles and identify benefits

of a cycle approach to segmenting the audit.

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



Generalcash

Capital acquisitionand repayment cycle

Sales andcollection

cycle

Acquisitionand payment

cycle

Payroll andpersonnel

cycle

Inventory andwarehousing

cycle


Describe why the auditor obtains a combination of assurance by auditing classes

of transactions and ending balances in accounts, including presentation and

disclosure.

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Distinguish among the three categories of management assertions about financial

information.

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1. Assertions about classes of transactions andevents for the period under audit

2. Assertions about account balances at period end

3. Assertions about presentation and disclosure


OccurrenceTransactions and Events

Account Balances

Presentation and Disclosure

Existence Occurrence and rightsand obligations

Completeness

Accuracy

Classification

Cutoff

Completeness Completeness

Valuation andallocation

Accuracy andvaluation

Classification andunderstandability

Rights andobligations


Existence or Occurrence

Completeness

Valuation orallocation

Rights and obligations

Presentation and disclosure

Similar to AICPA auditing standards as the first three assertions are applicable to balances and transactions. Presentation is treated as a single assertion.


Link the six general transaction-related audit objectives to management assertions for classes

of transactions.

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Occurrence

Completeness

Accuracy

Recorded transactionsexist

Existing transactionsare recorded

Recorded transactionsare stated at thecorrect amounts


Posting andsummarization

Classification

Timing

Transactions are includedin the master files andare correctly summarized.

Transactions are properlyclassified.

Transactions are recordedon the correct dates.


(Applied to Sales Transactions)


Link the eight general balance-related audit objectives to management assertions for

account balances.

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Existence

Completeness

Accuracy

Amounts included exist

Existing amounts areincluded

Amounts included arestated at the correctamounts


Classification

Cutoff

Detail tie-in

Amounts are properlyclassified

Transactions are recordedin the proper period

Account balances agreewith master file amounts,and with the general ledger


Realizablevalue

Rights andobligations

Assets are included atestimated realizable value

Assets must be owned


Hillsburg Hardware Co. ..

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(Applied to Inventory)


Link the four presentation- and disclosure-related audit objectives to management

assertions for presentation and disclosure.

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(Applied to Notes Payable)


Explain the relationship between audit objectives and the accumulation of audit

evidence.

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The auditor must obtain sufficient appropriateaudit evidence to support all managementassertions in the financial statements.

An audit process has four specific phases




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Copyright © 2014 Pearson Education Chapter 6 Audit Responsibilities and Objectives