Addthis Arens Chapter06

(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 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

(4)

Steps to Develop Audit

Objectives

(5)

Steps to Develop Audit

Objectives

4. Know general audit objectives for

classes of transactions and accounts.

5. Know specific audit objectives for

(6)

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.

(7)

Management’s Responsibilities

Management is responsible for the financial

statements and for internal control.

The Sarbanes-Oxley Act increases management’s

responsibility for the financial statements.

It requires the CEO and the CFO of public

(8)

Management’s Responsibilities

(9)

Learning Objective 3

Explain the auditor’s

responsibility for discovering

material misstatements.

(10)

Auditor’s Responsibilities



_{Material versus immaterial misstatements}



_{Reasonable assurance}



_{Errors versus fraud}



_{Professional skepticism}



_{Fraud resulting from fraudulent financial}

(11)

Auditor’s Responsibilities for

Discovering Illegal Acts



_{Direct-effect illegal acts}



_{Indirect-effect illegal acts}



_{Evidence accumulation when there is no reason}

(12)

Auditor’s Responsibilities for

Discovering Illegal Acts



_{Evidence accumulation and other actions}

when there is reason to believe direct- or

indirect-effect illegal acts may exist

(13)

Learning Objective 4

Classify transactions and account

balances into financial statement

cycles and identify benefits of a

cycle approach to segmenting

the audit.

(14)

Financial Statements Cycles

Audits are performed by dividing the financial

(15)

Transaction Flow Example

Ledgers,

Trial Balance,

and Financial

Statements

General ledger

and subsidiary

records

General ledger

trial balance

Financial

statements

Acquisition

of goods

and services

Sales

Cash

receipts

Transactions

(16)

Transaction Flow Example

Allocation

Cash

disbursements

Payroll

services and

disbursements

Ledgers,

Trial Balance,

and Financial

Statements

General ledger

and subsidiary

records

(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

(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

Beginning balance

Sales

$ 17,521

$144,328

$137,087

Cash receipts

$ 1,242

Sales returns

_{and allowances}

Charge-off of

uncollectible

accounts

Ending balance

$ 20,197

$ 3,323

(20)

Learning Objective 6

Distinguish among the three

categories of management

assertions about financial

information.

(21)

Management Assertions

1. Assertions about classes of transactions and

events for the period under audit

2. Assertions about account balances at period end

(22)

Management Assertions for

Each Category of Assertions

Assertions About Classes

of Transactions and Events

Assertions About

Account Balances

Assertions About

Presentation and Disclosure

Occurrence

Existence

Occurrence and rights

and obligations

Completeness

Accuracy

Valuation and

allocation

Accuracy and

valuation

Classification

Classification and

(23)

Learning Objective 7

Link the six general

transaction-related audit objectives to

related audit objectives to

management assertions

for classes of transactions.

(24)

Occurrence

Recorded transactions

exist

Completeness

Existing transactions

are recorded

Accuracy

Recorded transactions

are stated at the

General Transactions-related Audit

Objectives

(25)

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.

General Transactions-related Audit

Objectives

(26)

Management Assertions

About Classes of

Transactions and Events

General

Transaction-related Audit

related Audit

Objectives

Specific Sales

Transaction-related Audit Objectives

related Audit Objectives

Occurrence

Recorded sales are for

shipments made to

nonfictitious customers

Completeness

Existing sales

transactions are recorded

Accuracy

Recorded sales are for

the amount of goods

shipped and are correctly

billed and recorded

Hillsburg Hardware Co.

(27)

Accuracy

Posting and

summarization

Sales transactions are

properly included in the

master file and are

correctly summarized

Classification

Sales transactions are

properly classified

Cutoff

Timing

Sales transactions are

recorded on the correct

dates.

General

Transaction-related Audit

related Audit

Objectives

Management Assertions

About Classes of

Transactions and Events

Specific Sales

Transaction-related Audit Objectives

related Audit Objectives

Hillsburg Hardware Co.

(28)

Learning Objective 8

Link the eight general

balance-related audit objectives to

related audit objectives to

management assertions

for account balances.

(29)

Existence

Amounts included exist

Completeness

Existing amounts are

included

Accuracy

Amounts included are

stated at the correct

amounts

General Balance-related

Audit Objectives

(30)

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

(31)

Realizable

value

Assets are included at

estimated realizable value

Rights and

obligations

Assets must be owned

General Balance-related

Audit Objectives

(32)

Management Assertions

About Account Balances

General

Balance-related Audit

related Audit

Objectives

Specific Balance-related Audit

Objectives Applied to Inventory

Existence

All recorded inventory exists

at the balance sheet date

Completeness

Completeness All existing inventory has

been counted and included

in the inventory summary

Hillsburg Hardware Co.

(33)

Management Assertions

About Account Balances

General

Balance-related Audit

related Audit

Objectives

Valuation and

allocation

Accuracy

Inventory quantities on the

client’s 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

Specific Balance-related Audit

Objectives Applied to Inventory

Hillsburg Hardware Co.

(34)

Management Assertions

About Account Balances

General

Balance-related Audit

related Audit

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

Specific Balance-related Audit

Objectives Applied to Inventory

Hillsburg Hardware Co.

(35)

Management Assertions

About Account Balances

General

Balance-related Audit

related Audit

Objectives

Valuation and

allocation

Detail tie-in

Realizable

value

Total of inventory items

agrees with general ledger

Inventories have been written

down where net realizable

value is impaired

Specific Balance-related Audit

Objectives Applied to Inventory

Rights and obligations Rights and

obligations

The company has title to all

inventory items listed

Inventories are not pledged

as collateral

Hillsburg Hardware Co.

(36)

Learning Objective 9

Link the four presentation and

disclosure-related audit objectives

to management assertions for

presentation and disclosure.

(37)

Management

Assertions About

Presentation and

Disclosure

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

All required disclosures related

to notes payable are included in

the financial statement footnotes

General

Presentation-and

and

Disclosure-related Audit

related Audit

Objectives

Hillsburg Hardware Co.

(38)

Management

Assertions About

Presentation and

Disclosure

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

Notes payable are appropriately

classified as to short-term and

long-term obligations and

related financial statement

disclosures are understandable

General

Presentation-and

and

Disclosure-related Audit

related Audit

Objectives

Hillsburg Hardware Co.

(39)

Learning Objective 10

Explain the relationship between

audit objectives and the

accumulation of audit evidence.

(40)

How Audit Objectives Are Met

The auditor must obtain sufficient appropriate

audit evidence to support all management

assertions in the financial statements.

(41)

Four Phases of a Financial

Statement Audit

Phase I Plan and design

_{an audit approach}

Phase II

Perform tests of

controls and

substantive tests

of transactions

Phase III

Perform analytical

procedures and

tests of details

of balances

(42)

End of Chapter 6