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2012 Prentice Hall Business Publishing,Auditing 14/e,Arens/Elder/Beasley 6 - 1

Audit Responsibilities

and Objectives

Chapter 6


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Learning Objective 1

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

internal controls.


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Steps to Develop Audit

Objectives


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Distinguish managements responsibility forthe financial statements and internal

control from the auditors responsibility forverifying the financial statements andeffectiveness of internal control.


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Managements Responsibilities

Financial statements and internal controls.

Sarbanes-Oxley increases managementsresponsibility for the financial statements.

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


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The Sarbanes-Oxley Act provides for criminalpenalties for anyone who knowingly falsely

certifies the statements.


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Explain the auditors responsibility fordiscovering material misstatements.


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Objectives of the Auditor

Obtainreasonableassurance

Free frommaterial

misstatements

Financialstatements

OpineApplicablereportingframework

Financialstatements

ReportCommunicate

per auditstandards

Financialstatements


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ProfessionalSkepticism

Materialmisstatements

Errors vs. Fraud

ReasonableAssurance

Auditors Responsibilities

Fraudulentreporting

vs.theft of assets


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Auditors Responsibilities forDiscovering Illegal Acts

Direct-Effect

Same for

errors andfraud

Indirect-Effect No Assurance

Type Responsibility


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Auditors Responsibilities forDiscovering Illegal Acts

Auditor suspectsInquire of managementConsult clients counsel or specialist

Consider accumulating evidence

Auditor knowsConsider effects on financial

statementsConsider effect on relationship

with managementCommunicate with audit

committee or equivalent


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Classify transactions and account balancesinto financial statement cycles and identify

benefits of a cycle approach tosegmenting the audit.


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Financial Statements Cycles

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


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Transaction Flow Example


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Relationships AmongTransaction Cycles

Generalcash

Capital acquisitionand repayment cycle

Sales andcollection

cycle

Acquisitionand payment

cycle

Payroll andpersonnel

cycle

Inventory andwarehousing

cycle


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Describe why the auditor obtains acombination of assurance by auditing

classes of transactions and endingbalances in accounts, includingpresentation and disclosure.


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Balance and TransactionsAffecting Balances Example


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Distinguish among the three categories ofmanagement assertions about financial

information.


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Management Assertions

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


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Management Assertions forEach Category of Assertions

Transactions and Events Account Balances Presentation and Disclosure

Occurrence Existence Occurrence and rightsand obligations

Completeness Completeness Completeness

Accuracy Valuation andallocation

Accuracy andvaluation

Classification Classification and

understandability

Cutoff

Rights andobligations


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PCAOB Assertions

Existence or Occurrence

Completeness

Rights and obligations

Presentation and

disclosure

Valuation orallocation

Similar to U.S. GAAS as the first four assertions are applicable tobalances and transactions. Presentation is treated as a single assertion


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Link the six general transaction-related auditobjectives to management assertions for

classes of transactions.


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ClassificationTransactions are properlyclassified.

TimingTransactions are recordedon the correct dates.

Posting andsummarization

Transactions are includedin the master files and

are correctly summarized.

General Transaction-relatedAudit Objectives


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Hillsburg Hardware Co.(Applied to Sales Transactions)


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Link the eight general balance-related auditobjectives to management assertions for

account balances.


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Existence Amounts included exist

CompletenessExisting amounts areincluded

AccuracyAmounts included arestated at the correctamounts

General Balance-relatedAudit Objectives


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ClassificationAmounts are properlyclassified

CutoffTransactions are recordedin the proper period

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



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Realizablevalue

Assets are included atestimated realizable value

Rights andobligations

Assets must be owned


ill b d C


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(Applied to Inventory)

Hillsburg Hardware Co.


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

assertions for presentation and disclosure.

Hill b H d C


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(Applied to Notes Payable)

Hillsburg Hardware Co.


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Explain the relationship between auditobjectives and the accumulation of audit

evidence.


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How Audit Objectives Are Met

The auditor must obtain sufficient appropriateaudit evidence to support all management

assertions in the financial statements.

An audit process has four specific phases


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Four Phases of a FinancialStatement Audit


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2012 Prentice Hall Business Publishing Auditing 14/e Arens/Elder/Beasley 6 38

End of Chapter 6

arens14e_ch06_ppt

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