Audit

Responsibilities
and Objectives
Chapter 6

Key Topics in Chapter 6

Understand the responsibility of :

Management, for the financial statements and internal

controls
The independent auditor:

SAS 1 auditors responsibility in performing the audit

For discovering illegal acts

Understand the four phases of a financial

statement audit

Key Topics in Chapter 6

Be familiar with the different transaction

cycles
Know the management assertions
Know the general transaction-related and
general balance-related audit objectives

Objective of Conducting an Audit

of Financial Statements
The objective of the ordinary audit of financial
statements is the expression of an opinion of
the fairness with which they present fairly, in
all respects, financial position, result of
operations, and its cash flows in
conformity with GAAP.

Managements Responsibilities
Management is responsible for the financial
statements and for internal control.
The SarbanesOxley Act increases managements
responsibility for the financial statements.
It requires the CEO and the CFO of public
companies to certify the quarterly and annual
financial statements submitted to the SEC.

Auditors Responsibilities
Material versus immaterial misstatements
Combined uncorrected errors likely to affect
A users decision are usually considered material

Errors vs. fraud

Both are a potential source of material misstatement,
however, fraud has further implications.

Reasonable assurance
Not a guarantee

Professional skepticism
The attitude we adopt in all aspects of the engagement

Auditors Responsibilities for

Discovering Illegal Acts
Direct-effect vs. Indirect-effect illegal acts
* Auditors have the same responsibility for detecting
direct-effect illegal acts, as they do fraud.
* Auditors provide no assurance indirect-effect illegal
acts will be detected

Evidence accumulation when there is no reason

to believe indirect-effect illegal act exists
* Inquiries of management and the B.O.D., reading
the B.O.D. minutes.

Auditors Responsibilities for

Discovering Illegal Acts
Actions when the auditor knows of an illegal act
* Consider effects on the financial statements and
disclosures. More evidence may be required.
* Who you gonna tell?
Within the clients company
Outside the clients company

Financial Statements Cycles

Audits are performed by dividing the financial

statements into smaller segments or components.

Relationships Among Transaction

Cycles
General
cash

Capital acquisition
and repayment cycle
Sales and
collection
cycle

Acquisition
and payment
cycle
Inventory and
warehousing
cycle

Payroll and
personnel
cycle

Management Assertions
1. Existence or occurrence
2. Completeness
3. Valuation or allocation
4. Rights and obligations
5. Presentation and disclosure

Transaction-Related Audit
Objectives and Management
Assertions
General TransactionManagement Assertions
Existence or occurrence
Completeness

Related Audit Objectives

Existence
Completeness

Valuation or allocation

Accuracy
Classification
Timing
Posting and summarization

Rights and obligations

N/A
Presentation and disclosure N/A

Transaction-Related Audit
Objectives and Management
Assertions
Existence

Recorded transactions
exist.

Completeness

Existing transactions are

recorded.

Accuracy

Recorded transactions
are stated at the
correct amounts.

Transaction-Related Audit
Objectives and Management
Assertions
Classification

Transactions are properly

classified.

Timing

Transactions are recorded

on the correct dates.

Posting and
summarization

Transactions are included

in the master files and
are correctly summarized.

Assertions and Balance-Related

Audit Objectives
Management Assertions
Existence or occurrence
Completeness
Valuation or allocation

General Balance
Related Audit Objectives
Existence
Completeness
Accuracy
Classification
Cut-off, Detail tie-in
Realizable value

Rights and obligations

Rights and obligations
Presentation and disclosure Presentation and disclosure

General Balance-Related
Audit Objectives
Existence

Amounts included exist.

Completeness

Existing amounts are

included.

Accuracy

Amounts included are

stated at the correct
amounts.

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.

General Balance-Related
Audit Objectives
Realizable
value

Assets are included at

estimated realizable value.

Rights and
obligations

Assets must be owned.

Presentation
and
disclosure

Account balances and

disclosures are presented
in financial statements.

Balance and Transactions

Affecting Balances Example
Accounts Receivable (in thousands)
Beginning balance $ 17,521
Sales

Ending balance

$144,328

$ 20,197

$137,087 Cash receipts

$

Sales returns
1,242
and allowances

Charge-off of
3,323 uncollectible
accounts

How Audit Objectives Are Met

The auditor must obtain sufficient competent
audit evidence to support all management
assertions in the financial statements.
An audit process is a methodology
for organizing an audit.

Four Phases of a Financial

Statement Audit
Phase I

Plan and design

an audit approach.

Perform tests of
controls and
Phase II
substantive tests
of transactions.

Perform analytical
procedures and
Phase III
tests of details
of balances.

Complete the
Phase IV audit and issue
an audit report.

Announcements
First midterm next Wednesday, Feb. 1.
A topic guide that will summarize the
main items that could be represented on
the midterm will be available on the
website within the next 2 days.
Next class: guest professors from PwC
will present material from Chapter 6.