Audit Responsibilities and Objectives Chapter 6

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley

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Objective of Conducting an Audit of Financial Statements

The primary objective of the audit is to express an opinion on the financial statements.

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SAS 1 Objectives of an Audit of Financial Statements

1 2 3 4 Present Fairly In all Material Respects Financial Position, Results of Operations, & Cash Flows In Conformity with GAAP
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2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley

Responsibilities
Management is responsible for the financial statements, and for internal control. Auditors issue an opinion on fairness of the financial statements.

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley

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Auditors Responsibilities
Material versus immaterial misstatements Reasonable assurance Errors versus fraud Professional skepticism

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Responsibilities for Discovering Illegal Acts

Illegal acts (SAS 54) = violations of laws or Government regulations other than fraud Direct-effect illegal acts: Directly affect financial statements or account balances Indirect-effect illegal acts: Indirectly affect financial statements
When there is no reason to believe indirecteffect illegal act exists: No reason to search for illegal acts unless normal procedures uncover a reason.
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Responsibilities for Discovering Illegal Acts

When there is reason to believe direct- or indirect -effect illegal acts may exist: (1) consult management 1 level above level of act; (2) consult clients legal counsel; (3) consider accumulating additional evidence to determine if an illegal act occurred. Actions when the auditor knows of an illegal act: (1) Consider effects on financial statements; (2) Consider effects on relationship with client; (3) Communicate with audit committee or equivalent authority; (4) if publicly held, consult legal counsel & report to SEC
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Transaction Flow Example

Transactions Sales Cash receipts Acquisition of goods and services Journals Sales journal Cash receipts journal Acquisitions journal Ledger, Trial Balance, and Financial Statements General ledger and subsidiary records General ledger trial balance Financial statements
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2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley

Transaction Flow Example

Transactions Cash disbursements Payroll services and disbursements Allocation and adjustments Journals Cash disbursements journal Payroll journal General journal Ledger, Trial Balance, and Financial Statements General ledger and subsidiary records General ledger trial balance Financial statements
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Relationships Among Transaction Cycles

General cash Capital acquisition and repayment cycle Sales and collection cycle Inventory and warehousing cycle
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Acquisition and payment cycle

Payroll and personnel cycle

Mgt Assertions versus Audit Objectives

Management Assertions (5) that the Financial Statements are presented correctly  Audit objectives for transactions (6) to assure transactions are recorded properly  Audit objectives for balances (9) to assure dollar balances on the Financial Statements are correct

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Management Assertions
1. Existence or occurrence 2. Completeness 3. Valuation or allocation 4. Rights and obligations 5. Presentation and disclosure

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley

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Transaction-Related Audit Objectives

Existence Completeness Recorded transactions exist. Existing transactions are recorded. Recorded transactions are stated at the correct amount.
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Accuracy

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Transaction-Related Audit Objectives

Classification Timing Posting and summarization Transactions are properly classified. Transactions are recorded on the correct dates. Transactions are included in the master files and are correctly summarized.
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Transaction-Related Audit Objectives and Management Assertions

General TransactionRelated Audit Objectives Existence Completeness Accuracy, Classification timing, Valuation or allocation Posting and summarization Rights and obligations N/A Presentation and disclosure N/A
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Management Assertions Existence or occurrence Completeness

General Balance-Related Audit Objectives

Existence Completeness Amounts included exist. Existing amounts are included. Amounts included are stated at the correct amounts.
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Accuracy

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General Balance-Related Audit Objectives

Classification Cutoff Amounts are properly classified. Transactions are recorded in the proper period. Account balances agree with master file amounts, and with the general ledger.
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Detail tie-in

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General Balance-Related Audit Objectives

Realizable value Rights and obligations Presentation and disclosure Assets are included at estimated realizable value. Assets must be owned. Account balances and disclosures are presented in financial statements.
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Assertions and BalanceRelated Audit Objectives

General BalanceRelated Audit Objectives Existence Completeness Accuracy, Classification, Cutoff, Valuation or allocation Detail tie-in, Realizable value Rights and obligations Rights and obligations Presentation and disclosure Presentation and disclosure
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Management Assertions Existence or occurrence Completeness

Four Phases of an Audit

Plan and design Phase I an audit approach. Perform analytical procedures and Phase III 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.

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2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley