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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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2012 Prentice Hall Business Publishing,Auditing 14/e,Arens/Elder/Beasley 6 - 2
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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Learning Objective 2
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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Managements Responsibilities
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Managements Responsibilities
The Sarbanes-Oxley Act provides for criminalpenalties for anyone who knowingly falsely
certifies the statements.
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Learning Objective 3
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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Learning Objective 4
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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Learning Objective 5
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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Learning Objective 6
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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Learning Objective 7
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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Learning Objective 8
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
General Balance-relatedAudit Objectives
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Realizablevalue
Assets are included atestimated realizable value
Rights andobligations
Assets must be owned
General Balance-relatedAudit Objectives
ill b d C
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(Applied to Inventory)
Hillsburg Hardware Co.
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2012 Prentice Hall Business Publishing,Auditing 14/e,Arens/Elder/Beasley 6 - 33
Learning Objective 9
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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2012 Prentice Hall Business Publishing,Auditing 14/e,Arens/Elder/Beasley 6 - 35
Learning Objective 10
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