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Chapter 6. Audit Responsibilities and Objectives. Brian J. State the opinion paragraph of the audit report. . Sejal. What is the objective of conducting an audit of financial statements?. Page 140. AU Section 110 Responsibilities and Functions of the Independent Auditor

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chapter 6
Chapter 6

Audit Responsibilities

and

Objectives

brian j
Brian J

State the opinion paragraph of the audit report.

sejal
Sejal

What is the objective of conducting an audit of financial statements?

slide4

Page 140

AU Section 110

Responsibilities and Functions of the Independent Auditor

Source: SAS No. 1, section 110; SAS No. 78; SAS No. 82.

Issue date, unless otherwise indicated: November, 1972.

.01 The objective of the ordinary audit of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, in all material respects, financial position, results of operations, and its cash flows in conformity with generally accepted accounting principles. The auditor's report is the medium through which he expresses his opinion or, if circumstances require, disclaims an opinion. In either case, he states whether his audit has been made in accordance with generally accepted auditing standards. These standards require him to state whether, in his opinion, the financial statements are presented in conformity with generally accepted accounting principles and to identify those circumstances in which such principles have not been consistently observed in the preparation of the financial statements of the current period in relation to those of the preceding period.

Distinction Between Responsibilities of Auditor and Management

.02 The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. fn 1 Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected

heidi
Heidi

What is the definition of Materiality

bryan y
Bryan Y

What are the first two sentences of the Scope paragraph

denise
Denise

What is the auditor’s responsibility for detecting material misstatements?

slide9

Page 142

AU Section 110

Responsibilities and Functions of the Independent Auditor

Source: SAS No. 1, section 110; SAS No. 78; SAS No. 82.

Issue date, unless otherwise indicated: November, 1972.

.01 The objective of the ordinary audit of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, in all material respects, financial position, results of operations, and its cash flows in conformity with generally accepted accounting principles. The auditor's report is the medium through which he expresses his opinion or, if circumstances require, disclaims an opinion. In either case, he states whether his audit has been made in accordance with generally accepted auditing standards. These standards require him to state whether, in his opinion, the financial statements are presented in conformity with generally accepted accounting principles and to identify those circumstances in which such principles have not been consistently observed in the preparation of the financial statements of the current period in relation to those of the preceding period.

Distinction Between Responsibilities of Auditor and Management

.02 The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. fn 1 Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected

nicole
Nicole

Discuss reasonable assurance.

slide11
Mara

Discuss sampling risk.

brandon
Brandon

Discuss the difference between unintentional errors and fraud.

heber
Heber

Discuss the types of fraud that affect financial statement audits?

slide14

Misappropriation of assetsFraudulent financial reporting

Indirect-effect illegal acts (effect on financial statements)Direct-effect illegal acts

mirnal
Mirnal

Define Professional Skepticism.

slide16

Page 143

AU Section 230

Due Professional Care in the Performance of Work fn *

Source: SAS No. 1, section 230; SAS No. 41; SAS No. 82; SAS No. 99.

Issue date, unless otherwise indicated: November, 1972.

Professional Skepticism 

.07Due professional care requires the auditor to exercise professional skepticism. Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. The auditor uses the knowledge, skill, and ability called for by the profession of public accounting to diligently perform, in good faith and with integrity, the gathering and objective evaluation of evidence.

.08 Gathering and objectively evaluating audit evidence requires the auditor to consider the competency and sufficiency of the evidence. Since evidence is gathered and evaluated throughout the audit, professional skepticism should be exercised throughout the audit process.

.09 The auditor neither assumes that management is dishonest nor assumes unquestioned honesty. In exercising professional skepticism, the auditor should not be satisfied with less than persuasive evidence because of a belief that management is honest.

slide20

We typically audit transactions

differently than account balances

differently than

disclosures

connor
Connor

Describe a Financial Statement cycle.

Describe a Significant Class of Transactions ?

page 147

slide22
Class of Transactions

Accounts receivable xxx.xx

Sales xxx.xx

Revenue & Collection Cycle

Accounts receivable xxx.xx

Sales xxx.xx

Cash xxx.xx

Accounts receivable xxx.xx

nick s
Nick S

Name the 5 management assertions that relate to transactions.

slide28
Erin

Name the 4 management assertions that relate to account balances.

erika
Erika

Name the 4 management assertions that relate to disclosures.

slide30

If management assertions represent our objectives, then

for each significant class of transactions

or

for each significant account balance

The auditor must obtain sufficient appropriate evidence to support

Each management assertion

melissa m
Melissa M

Use the assertions to create 3 transaction related audit objectives.

trevor
Trevor

Use the assertions to create 3 account balance related audit objectives.

kevin s
Kevin S

Use the assertions to create 2 disclosure related audit objectives.

materiality and risk

Page 221

Materiality and Risk

the Audit Risk Model

AAR = IR * CR * PDR

Risk of Material Misstatement

RoMM = combines IR * CR

slide37
Jeff

What are the elements of the “Audit Risk Model”?

tavian
Tavian

What is the definition of

Acceptable Audit Risk?

slide39
a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued.
brittany
Brittany

What is the definition of Audit Risk?

Not the definition of acceptable audit risk but audit risk

gavin
Gavin

What is the definition of

Planned Detection Risk?

nicholas m
Nicholas M

Describe the mathematical relationship between the Planned level of Detection Risk and Control Risk.

kevin k
Kevin K

Which Component(s) of Audit Risk do you think the auditor is unable to reduce?

Which Component(s) of Audit Risk do you think the auditor can reduce?

chelsea
Chelsea

Under what conditions are we required to obtain an understanding of the internal controls?

nathan
Nathan

What is the second standard of field work?

2 nd standard of field work
2nd standard of field work

The auditor must obtain a sufficient understanding of the entity and its environment including its internal control structure

to assess the risk of material misstatement of the financial statements whether due to error or fraud,

and to design the nature, timing and extent of further audit procedures

megan
Megan

Why are we always required to obtain an understanding regardless the types of tests we will perform?

joshua
Joshua

Under what conditions are we required to obtain sufficient appropriate audit evidence?

3 rd standard of field work
3rd standard of field work

The auditor must obtain sufficient, appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit

david
David

How do we obtain audit evidence?

erynn with a y
Erynn with a Y

If the assessed level of CR = Low,

does that indicate we believe their internal controls are effective or ineffective….?

If the assessed level of CR = High,

does that indicate we believe their internal controls are effective or ineffective….?

belen
Belen

If the assessed level of CR = Low, what does that tell us about PDR ….?

If assessed level of CR = High, what does that tell us about PDR …. ?

fabiola
Fabiola

If we assess CR = Low, will we need to TEST the effectiveness of the Internal Controls?

melissa o
Melissa O

` If PDR = High, what does that tell us about the assessed level of Control Risk …. ?

If PDR = Low, what does that tell us about the assessed level of Control Risk …. ?

julian
Julian

If PDR = Low,

can we limit the extent of our substantive tests OR

will we need to perform extensive substantive tests

If PDR = High,

limited substantive tests ?

extensive substantive tests ?

danielle
Danielle

In your statistics class, why does a larger sample increase your level of confidence?

How does evidence reduce risk?

slide69
Jay

When the auditor has knowledge of illegal acts that have a direct-effect on the financial statements, to whom must the auditor communicate about the illegal acts?

after discovering an illegal act
After discovering an Illegal Act
  • Inconsequential – minor misappropriation by low level employees
    • Report to management one level above
  • Frauds that could cause material misstatement
  • Illegal acts involving senior management
    • Report to the Board of Directors
after discovering an illegal act1
After discovering an Illegal Act
    • Private Securities Litigation Reform Act 1995
  • When auditors believe an illegal act has a material effect on the financial statements
    • Notify the Board of Directors
    • The Board must notify the SEC within 1 day
    • If the Board doesn’t notify SEC
    • Auditor must notify the SEC