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AUDIT RESPONSIBILITIES AND OBJECTIVES SECTION 4. Overall Audit Objective. According to the reporting standard and the handbook An audit is conducted in accordance with GAAS Express an opinion The essence of auditing is gathering evidence Why does the auditor gather evidence?.

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audit responsibilities and objectives section 4



overall audit objective
Overall Audit Objective
  • According to the reporting standard and the handbook
    • An audit is conducted in accordance with GAAS
    • Express an opinion
  • The essence of auditing is gathering evidence
  • Why does the auditor gather evidence?
management s responsibility for financial reporting
Management’s Responsibility for Financial Reporting
  • Managers are responsible for providing F/S to owners, creditors, and others
  • Managers normally have a special interest
  • Managers may acknowledge their responsibility by including a statement in the annual report
McDonald’s Corporation Management Report

Management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements and Financial Comments appearing in this annual report. The financial statements were prepared in accordance with generally accepted accounting principles and included certain amounts based on management’s judgment and best estimates. Other financial information presented in the annual report is consistent with the financial statements.

The Company maintains a system of internal control over financial reporting including safeguarding assets against unauthorized acquisition, use or disposition, which is designed to provide reasonable assurance to the Company's management and Board of Directors regarding preparation of reliable published financial statements and such asset safeguarding. The system includes a documented organizational structure and appropriate division of responsibilities; established policies and procedures which are communicated throughout the Company; careful selection, training, and development of our people; and utilization of an internal audit program Policies and procedures prescribe that the Company and all employees are to maintain the highest ethical standards and that business practices throughout the world are to be conducted in a manner which is above reproach.

There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can only provide reasonable assurance with respect to financial statement preparation and safeguarding of assets. Furthermore, the effectiveness of an internal control system can change with the circumstances. The Company believes that at December 31, 200X, it maintained an effective system of internal control over financial reporting and safeguarding of assets against unauthorized acquisition, use or disposition.

The consolidated financial statements have been audited by independent auditors, Ernst & Young LLP, who were given unrestricted access to all financial records and related data. The audit report of Ernst & Young LLP is presented below.

The Board of Directors, operating through its Audit Committee composed entirely of outside Directors, provides oversight to the financial reporting process. Ernst & Young LLP has independent access to the Audit Committee and periodically meets with the Committee to discuss accounting, auditing, and financial reporting matters.


Oak Brook, Illinois

January 25, 200X

auditor s responsibility
Auditor’s Responsibility
  • Affected by the fact that an audit is designed to provide reasonable assurance
  • Why not absolute assurance?
  • Assumption of management’s good faith

Detecting errors and irregularities

    • Design audits to provide assurance of detecting material misstatements due to errors and irregularities
  • Defalcations
  • Management fraud
factors that affect detection of errors and irregularities
Factors That Affect Detection of Errors and Irregularities
  • Materiality
    • An audit performed in accordance with GAAS may detect errors or irregularities that are not material
    • Generally the smaller the errors or irregularities

Level of Employee Involved

    • Employees may perpetrate defalcations that involve minor thefts
    • Lower levels of management generally commit defalcations that are immaterial
    • Senior managers – typically material

Senior management are frequently in the position to override controls

  • Ultramares
  • McKesson Robbins Drug Company
  • Equity Funding

Management Characteristics

    • A single manager dominating operating and financing decisions
    • Unduly aggressive management attitude towards financial reporting
    • High turnover in management
    • Management's undue emphasis on meeting projections
    • Management's poor reputation

Skillfulness of Concealment

    • Alteration of accounting records and supporting documentation
  • Relationship to Internal Control
    • The quality of internal and the way an error or irregularity occurred
    • When a client lacks internal controls
illegal acts
Illegal Acts
  • Violation of laws or government regulations
    • Direct effect
    • Indirect effect
  • Auditors have the same responsibility for detecting illegal acts that have a material effect on the financial statements as for detecting material errors and irregularities

If the auditor suspects no illegal acts

    • Required evidence
      • Inquire of management
      • Reading of the minutes
      • Inquiry of clients lawyers

If the auditor suspects an illegal act

    • Direct effect illegal acts and indirect-effect illegal acts
      • Inquire of management
      • Clients lawyers
      • Additional evidence

Known illegal acts

    • Effects on F/S
    • Disclosure
    • Relationship with management
    • Lawyers
financial statement cycles

Investing and


Acquisition and



Purchase of Goods and Services

Sales and



Payroll and




Production and


Financial Statement Cycles
  • Managers group activities into categories

All of an entity’s activities of concern may be viewed as transactions

  • A class of transactions groups transaction of similar activities
    • Processed in a similar manner
    • Same internal controls
  • A transaction cycle is all of the classes of transactions for a group of related activities

The nature of double-entry bookkeeping

  • By auditing credits to sales an auditor also audits debits to accounts receivable
  • Examining related transactions and accounts together makes the audit more efficient
management financial statement assertions
Management Financial Statement Assertions
  • When auditors attest, they express an opinion about the reliability of managements assertions
  • Auditing standards place the management claims or assertions into seven broad categories:
    • Existence
    • Occurrence
    • Completeness
    • Valuation
    • Measurement
    • Ownership
    • Presentation and disclosure

Current assets:

    • Cash and cash equivalents (Note 1) $7,650,000
  • Note 1
    • The Company’s policy is to invest cash in excess of operating requirements, arising primarily from the proceeds of the subordinated debt offering, in income producing investments. Temporary cash investments of $4,325,000 at January 1, 200X, include money market and commercial paper amounts stated at cost, which approximates market.
  • By stating cash and cash equivalents at $7,650,000 management asserts:
    • $7,650,00 represents only cash and cash equivalents.
    • The company has no other cash.
    • The entity owns the cash.
    • $7,650,000 is the value.
    • The note to the financial statements


    • For balance sheet accounts
  • Occurrence
    • For income statement accounts


    • F/S include all transaction and accounts that they should
    • Also relates to individual accounts
    • Cutoff
      • Related to existence, occurrence, and completeness


    • Balance sheet accounts
    • Also deals with allocation
  • Measurement
    • Income statement accounts


    • Balance sheet accounts
    • Also deals with rights and obligation
      • All accounts
  • Presentation and disclosure
    • Properly classified, described and disclosed

Using Assertions to Determine Audit Procedures

    • Audit procedures are the methods used to gather audit evidence
    • Most of the audit work consists of obtaining and evaluating evidence regarding F/F assertions
    • Basically identify audit objectives or goals for each F/S assertion and then identify audit procedures to fulfill that objective

Financial Statement Assertions for Sales

    • Occurrence – sales actually made
    • Completeness – all sales transactions recorded
    • Rights and obligations – sales recorded represent only sales transactions
    • Measurement – sales are correctly billed
    • Presentation – in accordance with GAAP
an overview of the audit process
An Overview of the Audit Process
  • Planning the audit
    • Understanding the client
    • Understand the client’s system of internal control
Gathering and evaluating evidence
    • Tests of controls
      • Good controls
      • Poor controls
    • Tests of transactions and balances

Issuing a report

    • Based on the accumulated evidence

Problem 1: (5-22)

  • The following are specific balance-related audit objectives applied to the audit of accounts receivable ( a through g), management assertions (1 through 4). The list referred to in the specific balance-related audit objectives is the list of accounts receivable from each customer at the balance sheet date.
  • There are no unrecorded receivables.
  • Receivables have not been sold or discounted.
  • Uncollectible accounts have been provided for.
  • Receivables that have become uncollectible have been written off.
  • All accounts on the list are expected to be collected within one year.
  • All accounts on the list arose from the normal course of business and are not due from related parties.
  • Sales cut-off at year end is proper.
  • Existence or Occurrence. 2. Completeness. 3. Measurement or Valuation. 4. Allocation.
  • REQUIRED: For each specific balance-related audit objective, identify the appropriate management assertion.

Problem 2: (5-23)

  • The following are specific transaction-related audit objectives applied to the audit of cash disbursements ( a through f), management assertions (1 through 7), and general transaction-related audit objectives (8 through 13).
  • Recorded cash disbursement transactions are for the amount of goods or services received and are correctly recorded.
  • Cash disbursement transactions are properly included in the accounts payable master file and are correctly summarized.
  • Recorded cash disbursements are for goods and services actually received.
  • Cash disbursements are for goods and properly classified.
  • Existing cash disbursement transactions are properly classified.
  • Cash disbursement transactions are recorded on the correct dates.


  • Existence or Occurrence
  • Completeness
  • Measurement or Valuation
  • Allocation


  • Occurrence
  • Completeness
  • Accuracy
  • Classification
  • Posting and summarization
  • Timing
  • Required:
  • Explain the differences among management assertions, general transaction-related audit objectives, and specific transaction-related audit objectives and their relationship to one another.
  • For each specific transaction-related audit objective, identify the appropriate management assertion.
  • For each specific transaction-related audit objective, identify the appropriate general transaction-related audit objective.

Problem 3: (5-24)

  • The following are two specific balance-related audit objectives in the audit of accounts payable. The list referred to in the objectives is the aged accounts payable trial balance produced using the supplier master file. The total of the list equals the accounts payable balance on the general ledger.
  • All accounts payable included on the list represent amounts due to valid vendors.
  • There are no unrecorded accounts payable.
  • Required:
  • Explain the difference between these two specific balance-related audit objectives.
  • For the audit of accounts payable, which of these two specific balance-related audit objectives would usually be more important? Explain.