Audit Responsibilities

and Objectives
Chapter 6

2010 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Learning Objective 1
Explain the objective of
conducting an audit of
financial statements and
an audit of internal controls.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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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.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Steps to Develop Audit

Objectives

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Steps to Develop Audit

Objectives
4. Know general audit objectives for
classes of transactions and accounts.
5. Know specific audit objectives for
classes of transactions, accounts and
disclosures.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Learning Objective 2
Distinguish managements
responsibility for the financial
statements and internal control
from the auditors responsibility
for verifying the financial
statements and effectiveness
of internal control.
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Managements Responsibilities
Management is responsible for the financial
statements and for internal control.
The Sarbanes-Oxley 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.
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Managements Responsibilities
The Sarbanes-Oxley Act provides for criminal
penalties for anyone who knowingly falsely
certifies the statements.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Learning Objective 3
Explain the auditors
responsibility for discovering
material misstatements.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Auditors Responsibilities
Material versus immaterial misstatements
Reasonable assurance
Errors versus fraud
Professional skepticism
Fraud resulting from fraudulent financial
reporting versus misappropriation of assets
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Auditors 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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Auditors 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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Financial Statements Cycles

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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Transaction Flow Example

Transactions

Journals

Sales

Sales
journal

Cash
receipts

Cash receipts
journal

Acquisition
of goods
and services

Acquisitions
journal

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

Ledgers,
Trial Balance,
and Financial
Statements
General ledger
and subsidiary
records
General ledger
trial balance
Financial
statements
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Transaction Flow Example

Transactions
Cash
disbursements

Journals
Cash
disbursements
journal

Payroll
services and
disbursements

Payroll
journal

Allocation
and
adjustments

General
journal

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

Ledgers,
Trial Balance,
and Financial
Statements
General ledger
and subsidiary
records
General ledger
trial balance
Financial
statements
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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
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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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.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Balance and Transactions

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

Ending balance

$144,328

$137,087 Cash receipts

Sales returns
and allowances

1,242

Charge-off of
3,323 uncollectible
accounts

$ 20,197

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Management Assertions
1. Assertions about classes of transactions and
events for the period under audit
2. Assertions about account balances at period end
3. Assertions about presentation and disclosure

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Management Assertions for

Each Category of Assertions
Assertions About Classes
of Transactions and Events

Assertions About Assertions About

Account Balances Presentation and Disclosure

Occurrence

Existence

Occurrence and rights

and obligations

Completeness

Completeness

Completeness

Accuracy

Valuation and
allocation

Accuracy and
valuation

Classification

Classification and
understandability

Cutoff
Rights and
obligations
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Learning Objective 7
Link the six general transactionrelated audit objectives to
management assertions
for classes of transactions.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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General Transactions-related Audit

Objectives
Occurrence

Recorded transactions
exist

Completeness

Existing transactions
are recorded

Accuracy

Recorded transactions
are stated at the
correct amounts

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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General Transactions-related Audit

Objectives
Posting and
summarization

Transactions are included

in the master files and
are correctly summarized.

Classification

Transactions are properly

classified.

Timing

Transactions are recorded

on the correct dates.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Hillsburg Hardware Co.

(Applied to Sales Transactions)

Management Assertions
About Classes of
Transactions and Events

General Transactionrelated Audit

Objectives

Specific Sales Transactionrelated Audit Objectives

Occurrence

Occurrence

Recorded sales are for

shipments made to
nonfictitious customers

Completeness

Completeness

Existing sales
transactions are recorded

Accuracy

Accuracy

Recorded sales are for

the amount of goods
shipped and are correctly
billed and recorded

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Hillsburg Hardware Co.

(Applied to Sales Transactions)

Management Assertions
About Classes of
Transactions and Events

General Transactionrelated Audit

Objectives

Specific Sales Transactionrelated Audit Objectives

Accuracy

Posting and
summarization

Sales transactions are

properly included in the
master file and are
correctly summarized

Classification

Classification

Sales transactions are

properly classified

Cutoff

Timing

Sales transactions are

recorded on the correct
dates.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Learning Objective 8
Link the eight general balancerelated audit objectives to
management assertions
for account balances.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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General Balance-related
Audit Objectives
Existence

Amounts included exist

Completeness

Existing amounts are

included

Accuracy

Amounts included are

stated at the correct
amounts

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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General Balance-related
Audit Objectives
Realizable
value

Assets are included at

estimated realizable value

Rights and
obligations

Assets must be owned

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Hillsburg Hardware Co.

(Applied to Inventory)

Management Assertions
About Account Balances

General Balance- Specific Balance-related Audit

related Audit
Objectives Applied to Inventory
Objectives

Existence

Existence

All recorded inventory exists

at the balance sheet date

Completeness

Completeness

All existing inventory has

been counted and included
in the inventory summary

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Hillsburg Hardware Co.

(Applied to Inventory)

Management Assertions
About Account Balances

General Balance- Specific Balance-related Audit

related Audit
Objectives Applied to Inventory
Objectives

Valuation and
allocation

Accuracy

Inventory quantities on the

clients perpetual records
agree with items physically
on hand
Prices used to value
inventories are materially
correct
Extensions of price times
quantity are correct and
details are correctly added

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Hillsburg Hardware Co.

(Applied to Inventory)

Management Assertions
About Account Balances

General Balance- Specific Balance-related Audit

related Audit
Objectives Applied to Inventory
Objectives

Valuation and
allocation

Classification

Cutoff

Inventory items are properly

classified as to raw
materials, work in process,
and finished goods
Purchase cutoff at year end
is proper
Sales cutoff at year end is
proper

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Hillsburg Hardware Co.

(Applied to Inventory)

Management Assertions
About Account Balances

General Balance- Specific Balance-related Audit

related Audit
Objectives Applied to Inventory
Objectives

Valuation and
allocation

Detail tie-in
Realizable
value

Rights and obligations Rights and

obligations

Total of inventory items

agrees with general ledger
Inventories have been written
down where net realizable
value is impaired
The company has title to all
inventory items listed
Inventories are not pledged
as collateral

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Hillsburg Hardware Co.

(Applied to Notes Payable)

Management
Assertions About
Presentation and
Disclosure

General
Presentationand Disclosurerelated Audit
Objectives

Specific Presentation and

Disclosure-related Audit Objectives
Applied to Notes Payable

Occurrence
and rights and
obligations

Occurrence
and rights and
obligations

Notes payable as described in the

footnotes exist and are
obligations of the company

Completeness

Completeness

All required disclosures related

to notes payable are included in
the financial statement footnotes

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Hillsburg Hardware Co.

(Applied to Notes Payable)

Management
Assertions About
Presentation and
Disclosure

General
Presentationand Disclosurerelated Audit
Objectives

Specific Presentation and

Disclosure-related Audit Objectives
Applied to Notes Payable

Valuation and
allocation

Valuation and
allocation

Footnote disclosures related to

notes payable are accurate.

Classification
Classification
Notes payable are appropriately
and
and
classified as to short-term and
understandability understandability long-term obligations and
related financial statement
disclosures are understandable

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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Four Phases of a Financial

Statement Audit
Phase I

Plan and design

an audit approach

Perform analytical
procedures and
Phase III
tests of details
of balances

Phase II

Perform tests of
controls and
substantive tests
of transactions

Complete the
Phase IV audit and issue
an audit report

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

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End of Chapter 6

2010 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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