Audit responsibilities and objectives
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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 – auditor’s responsibility in performing the audit For discovering illegal acts

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Audit responsibilities and objectives

Audit Responsibilitiesand Objectives

Chapter 6


Key topics in chapter 6

Key Topics in Chapter 6

  • Understand the responsibility of :

    • Management, for the financial statements and internal controls

    • The independent auditor:

      • SAS 1 – auditor’s responsibility in performing the audit

      • For discovering illegal acts

  • Understand the four phases of a financial statement audit


Key topics in chapter 61

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

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.


Management s responsibilities

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

companies to certify the quarterly and annual

financial statements submitted to the SEC.


Auditor s responsibilities

Auditor’s Responsibilities

  • Material versus immaterial misstatements

    • Combined uncorrected errors likely to affect

    • A user’s 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


  • Auditor s responsibilities for discovering illegal acts

    Auditor’s 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.


    Auditor s responsibilities for discovering illegal acts1

    Auditor’s 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 client’s company

    Outside the client’s company


    Financial statements cycles

    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

    Payroll and

    personnel

    cycle

    Inventory and

    warehousing

    cycle

    Relationships Among Transaction Cycles


    Management assertions

    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

    Management Assertions

    General Transaction-

    Related Audit Objectives

    Existence or occurrence

    Existence

    Completeness

    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


    Transaction related audit objectives and management assertions1

    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


    Transaction related audit objectives and management assertions2

    Timing

    Transactions are recorded

    on the correct dates.

    Posting and

    summarization

    Transactions are included

    in the master files and

    are correctly summarized.

    Transaction-Related Audit Objectives and Management Assertions

    Classification

    Transactions are properly

    classified.


    Assertions and balance related audit objectives

    Management Assertions

    General Balance

    Related Audit Objectives

    Existence or occurrence

    Existence

    Completeness

    Completeness

    Valuation or allocation

    Accuracy

    Classification

    Cut-off, Detail tie-in

    Realizable value

    Rights and obligations

    Rights and obligations

    Presentation and disclosure

    Presentation and disclosure

    Assertions and Balance-Related Audit Objectives


    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-RelatedAudit Objectives


    General balance related audit objectives1

    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-RelatedAudit Objectives

    Classification

    Amounts are properly

    classified.


    General balance related audit objectives2

    Rights and

    obligations

    Assets must be owned.

    Presentation

    and

    disclosure

    Account balances and

    disclosures are presented

    in financial statements.

    General Balance-RelatedAudit Objectives

    Realizable

    value

    Assets are included at

    estimated realizable value.


    Balance and transactions affecting balances example

    Accounts Receivable (in thousands)

    Beginning balance

    $ 17,521

    Sales

    $144,328

    $137,087

    Cash receipts

    $ 1,242

    Sales returns

    and allowances

    $ 3,323

    Charge-off of

    uncollectible

    accounts

    Ending balance

    $ 20,197

    Balance and Transactions Affecting Balances Example


    How audit objectives are met

    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.

    Phase III

    Perform analytical

    procedures and

    tests of details

    of balances.

    Phase II

    Perform tests of

    controls and

    substantive tests

    of transactions.

    Phase IV

    Complete the

    audit and issue

    an audit report.

    Four Phases of a Financial Statement Audit


    Announcements

    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.


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