2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 1

Audit Responsibilities
and Objectives
Chapter 6
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 2
Learning Objective 1
Explain the objective of
conducting an audit of
financial statements and
an audit of internal controls.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 3
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.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 4
Steps to Develop Audit
Objectives
1. Understand objectives and
responsibilities for the audit.
2. Divide financial statements into cycles.
3. Know management assertions about
accounts.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 5
Steps to Develop Audit
Objectives
4. Know general audit objectives for
classes of transactions and accounts.
5. Know specific audit objectives for
classes of transactions and accounts.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 6
Learning Objective 2
Distinguish managements
responsibility for the financial
statements and internal control
from the auditors responsibility
for verifying the financial
statements and effectiveness
of internal control.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 7
Managements
Responsibilities
Management is responsible for the financial
statements and for internal control.
The Sarbanes-Oxley Act increases managements
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.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 8
Managements
Responsibilities
The Sarbanes-Oxley Act provides for criminal
penalties for anyone who knowingly falsely
certifies the statements.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 9
Learning Objective 3
Explain the auditors
responsibility for discovering
material misstatements.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 10
Auditors Responsibilities
Material versus immaterial misstatements
Reasonable assurance
Errors versus fraud
Professional skepticism
Fraud resulting from fraudulent financial
reporting versus misappropriation of assets
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 11
Auditors Responsibilities for
Discovering Illegal Acts
Direct-effect illegal acts
Indirect-effect illegal acts
Evidence accumulation when there is no reason
to believe indirect-effect illegal act exists
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 12
Auditors Responsibilities for
Discovering Illegal Acts
Evidence accumulation and other actions
when there is reason to believe direct- or
indirect-effect illegal acts may exist
Actions when the auditor knows of an illegal act
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 13
Learning Objective 4
Classify transactions and account
balances into financial statement
cycles and identify benefits of a
cycle approach to segmenting
the audit.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 14
Financial Statements Cycles
Audits are performed by dividing the financial
statements into smaller segments or components.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 15
Transaction Flow Example
Ledgers,
Trial Balance,
and Financial
Statements
General ledger
and subsidiary
records
General ledger
trial balance
Financial
statements
Acquisition
of goods
and services
Sales
Cash
receipts
Transactions
Cash receipts
journal
Sales
journal
Acquisitions
journal
Journals
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 16
Transaction Flow Example
Allocation
and
adjustments
Cash
disbursements
Payroll
services and
disbursements
Ledgers,
Trial Balance,
and Financial
Statements
General ledger
and subsidiary
records
General ledger
trial balance
Financial
statements
Transactions
Payroll
journal
Cash
disbursements
journal
General
journal
Journals
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 17
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
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 18
Learning Objective 5
Describe why the auditor obtains
a combination of assurance by
auditing classes of transactions
and ending balances in accounts,
including presentation and
disclosure.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 19
Balance and Transactions
Affecting Balances Example
Beginning balance
Sales
$ 17,521
$144,328 $137,087
Cash receipts
$ 1,242
Sales returns
and allowances
Charge-off of
uncollectible
accounts
Ending balance $ 20,197
$ 3,323
Accounts Receivable (in thousands)
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 20
Learning Objective 6
Distinguish among the three
categories of management
assertions about financial
information.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 21
Management Assertions
1. Assertions about classes of transactions and
events for the period under audit
2. Assertions about account balances a period end
3. Assertions about presentation and disclosure
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 22
Management Assertions for
Each Category of Assertions
Assertions About Classes
of Transactions and Events
Assertions About
Account Balances
Assertions About
Presentation and Disclosure
Occurrence Existence Occurrence and rights
and obligations
Completeness Completeness Completeness
Accuracy Valuation and
allocation
Accuracy and
valuation
Classification Classification and
understandability
Cutoff
Rights and
obligations
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 23
Learning Objective 7
Link the six general transaction-
related audit objectives to
management assertions
for classes of transaction.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 24
Occurrence
Recorded transactions
exist
Completeness
Existing transactions
are recorded
Accuracy
Recorded transactions
are stated at the
correct amounts
General Transactions-related
Audit Objectives
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 25
Classification
Transactions are properly
classified.
Timing
Transactions are recorded
on the correct dates.
Posting and
summarization
Transactions are included
in the master files and
are correctly summarized.
General Transactions-related
Audit Objectives
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 26
Management Assertions and
Transaction-related Audit Objectives
Management Assertions
About Classes of
Transactions and Events
General Transaction-
related Audit
Objectives
Specific Sales Transaction-
related Audit Objectives
Occurrence Occurrence Recorded sales are for
shipments made to
nonfictitious customers
Completeness Completeness Existing sales
transactions are recorded
Accuracy Accuracy Recorded sales are for
the amount of goods
shipped and are correctly
billed and recorded
Hillsburg Hardware Company:
As Applied to Sales Transactions
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 27
Management Assertions and
Transaction-related Audit Objectives
Accuracy Posting and
summarization
Sales transactions are
properly included in the
master file and are
correctly summarized
Classification Classification Sales transactions are
properly classified
Cutoff Timing Sales transactions are
recorded on the correct
dates.
Management Assertions
About Classes of
Transactions and Events
General Transaction-
related Audit
Objectives
Specific Sales Transaction-
related Audit Objectives
Hillsburg Hardware Company:
As Applied to Sales Transactions
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 28
Learning Objective 8
Link the eight general balance-
related audit objectives to
management assertions
for account balances.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 29
Existence Amounts included exist
Completeness
Existing amounts are
included
Accuracy
Amounts included are
stated at the correct
amounts
General Balance-related
Audit Objectives
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 30
Classification
Amounts are properly
classified
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-related
Audit Objectives
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 31
Realizable
value
Assets are included at
estimated realizable value
Rights and
obligations
Assets must be owned
General Balance-related
Audit Objectives
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 32
Management Assertions and
Transaction-related Audit Objectives
Management Assertions
About Account Balances
General Balance-
related Audit
Objectives
Specific Balance-related Audit
Objectives Applied to Inventory
Existence Existence All recorded inventory exists
at the balance sheet date
Completeness Completeness All existing inventory has
been counted and included
in the inventory summary
Hillsburg Hardware Company:
As Applied to Inventory
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 33
Management Assertions and
Transaction-related Audit Objectives
Management Assertions
About Account Balances
General Balance-
related Audit
Objectives
Valuation and
allocation
Accuracy
Inventory quantities on the
clients perpetual records
agree with items physically
on hand
Prices used to value
inventories are materially
correct
Extensions of price times
quantity are correct and
details are correctly added
Hillsburg Hardware Company:
As Applied to Inventory
Specific Balance-related Audit
Objectives Applied to Inventory
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 34
Management Assertions and
Transaction-related Audit Objectives
Management Assertions
About Account Balances
General Balance-
related Audit
Objectives
Valuation and
allocation
Classification



Cutoff
Inventory items are properly
classified as to raw
materials, work in process,
and finished goods
Purchase cutoff at year end
is proper
Sales cutoff at year end is
proper
Hillsburg Hardware Company:
As Applied to Inventory
Specific Balance-related Audit
Objectives Applied to Inventory
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 35
Management Assertions and
Transaction-related Audit Objectives
Management Assertions
About Account Balances
General Balance-
related Audit
Objectives
Valuation and
allocation
Detail tie-in

Realizable
value
Total of inventory items
agrees with general ledger
Inventories have been written
down where net realizable
value is impaired
Hillsburg Hardware Company:
As Applied to Inventory
Specific Balance-related Audit
Objectives Applied to Inventory
Rights and obligations Rights and
obligations
The company has title to all
inventory items listed
Inventories are not pledged
as collateral
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 36
Learning Objective 9
Link the four presentation and
disclosure-related audit objectives
to management assertions for
presentation and disclosure.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 37
Management Assertions and Presentation
and Disclosure-related Audit Objectives
Hillsburg Hardware Company:
As Applied to Notes Payable
Management
Assertions About
Presentation and
Disclosure
Specific Presentation and
Disclosure-related Audit Objectives
Applied to Notes Payable
Occurrence
and rights and
obligations
Occurrence
and rights and
obligations
Notes payable as described in the
footnotes exist and are
obligations of the company
Completeness Completeness All required disclosures related
to notes payable are included in
the financial statement footnotes
General
Presentation-
and Disclosure-
related Audit
Objectives
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 38
Management Assertions and Presentation
and Disclosure-related Audit Objectives
Hillsburg Hardware Company:
As Applied to Notes Payable
Management
Assertions About
Presentation and
Disclosure
Specific Presentation and
Disclosure-related Audit Objectives
Applied to Notes Payable
Valuation and
allocation
Valuation and
allocation
Footnote disclosures related to
notes payable are accurate.
Classification
and
understandability
Classification
and
understandability
Notes payable are appropriately
classified as to short-term and
long-term obligations and
related financial statement
disclosures are understandable
General
Presentation-
and Disclosure-
related Audit
Objectives
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 39
Learning Objective 10
Explain the relationship between
audit objectives and the
accumulation of audit evidence.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 40
How Audit Objectives Are Met
The auditor must obtain sufficient appropriate
audit evidence to support all management
assertions in the financial statements.
An audit process has four specific phases
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 41
Four Phases of a Financial
Statement Audit
Phase I
Plan and design
an audit approach
Phase II
Perform tests of
controls and
substantive tests
of transactions
Phase III
Perform analytical
procedures and
tests of details
of balances
Phase IV
Complete the
audit and issue
an audit report
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 42
End of Chapter 6