Audit Responsibilities

and Objectives

Chapter 6

2010 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6-1

 Learning Objective 1
Explain the objective of
conducting an audit of
financial statements and
an audit of internal controls.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6-2

 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.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6-3

 Steps to Develop Audit
Objectives

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6-4

 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, accounts and
disclosures.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6-5

 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.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6-6

 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.
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6-7
 Managements Responsibilities

The Sarbanes-Oxley Act provides for criminal

penalties for anyone who knowingly falsely
certifies the statements.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6-8

 Learning Objective 3
Explain the auditors
responsibility for discovering
material misstatements.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6-9

 Auditors Responsibilities

Material versus immaterial misstatements

Reasonable assurance

Errors versus fraud

Professional skepticism

Fraud resulting from fraudulent financial

reporting versus misappropriation of assets

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 10

 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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 11

 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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 12

 Learning Objective 4
Classify transactions and account
balances into financial statement
cycles and identify benefits of a
cycle approach to segmenting
the audit.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 13

 Financial Statements Cycles

Audits are performed by dividing the financial

statements into smaller segments or components.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 14

 Transaction Flow Example
Ledgers,
Transactions Journals Trial Balance,
and Financial
Sales Statements
Sales
journal
General ledger
and subsidiary
records
Cash Cash receipts
receipts journal
General ledger
trial balance
Acquisition
Acquisitions Financial
of goods
journal statements
and services
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 15
 Transaction Flow Example
Ledgers,
Transactions Journals Trial Balance,
Cash and Financial
Cash Statements
disbursements
disbursements
journal General ledger
and subsidiary
records
Payroll
Payroll
services and
journal
disbursements General ledger
trial balance
Allocation
General Financial
and
journal statements
adjustments
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 16
 Relationships Among
Transaction Cycles
General
cash

Capital acquisition
and repayment cycle

Sales and Acquisition Payroll and

collection and payment personnel
cycle cycle cycle

Inventory and
warehousing
cycle
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 17
 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.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 18

 Balance and Transactions
Affecting Balances Example
Accounts Receivable (in thousands)
Beginning balance $ 17,521

Sales $144,328 $137,087 Cash receipts

Sales returns
$ 1,242 and allowances

Charge-off of
$ 3,323 uncollectible
accounts

Ending balance $ 20,197

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 19
 Learning Objective 6
Distinguish among the three
categories of management
assertions about financial
information.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 20

 Management Assertions

1. Assertions about classes of transactions and

events for the period under audit

2. Assertions about account balances at period end

3. Assertions about presentation and disclosure

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 21

 Management Assertions for
Each Category of Assertions
Assertions About Classes Assertions About Assertions About
of Transactions and Events Account Balances Presentation and Disclosure
Occurrence Existence Occurrence and rights
and obligations
Completeness Completeness Completeness
Accuracy Valuation and Accuracy and
allocation valuation
Classification Classification and
understandability
Cutoff
Rights and
obligations
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 22
 Learning Objective 7
Link the six general transaction-
related audit objectives to
management assertions
for classes of transactions.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 23

 General Transactions-related Audit
Objectives

Recorded transactions
Occurrence
exist

Existing transactions
Completeness
are recorded

Recorded transactions
Accuracy are stated at the
correct amounts
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 24
 General Transactions-related Audit
Objectives

Transactions are included

Posting and
in the master files and
summarization
are correctly summarized.

Transactions are properly

Classification
classified.

Transactions are recorded

Timing
on the correct dates.
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 25
 Hillsburg Hardware Co.
(Applied to Sales Transactions)

Management Assertions General Transaction- Specific Sales Transaction-

About Classes of related Audit related Audit Objectives
Transactions and Events 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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 26

 Hillsburg Hardware Co.
(Applied to Sales Transactions)

Management Assertions General Transaction- Specific Sales Transaction-

About Classes of related Audit related Audit Objectives
Transactions and Events Objectives

Accuracy Posting and Sales transactions are

summarization 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.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 27

 Learning Objective 8
Link the eight general balance-
related audit objectives to
management assertions
for account balances.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 28

 General Balance-related
Audit Objectives
Existence Amounts included exist

Existing amounts are

Completeness
included

Amounts included are

Accuracy stated at the correct
amounts

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 29

 General Balance-related
Audit Objectives
Amounts are properly
Classification
classified

Transactions are recorded

Cutoff
in the proper period

Account balances agree

Detail tie-in with master file amounts,
and with the general ledger

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 30

 General Balance-related
Audit Objectives
Realizable Assets are included at
value estimated realizable value

Rights and
Assets must be owned
obligations

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 31

 Hillsburg Hardware Co.
(Applied to Inventory)

Management Assertions General Balance- Specific Balance-related Audit

About Account Balances related Audit Objectives Applied to Inventory
Objectives
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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 32

 Hillsburg Hardware Co.
(Applied to Inventory)

Management Assertions General Balance- Specific Balance-related Audit

About Account Balances related Audit Objectives Applied to Inventory
Objectives
Valuation and Accuracy Inventory quantities on the
allocation 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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 33

 Hillsburg Hardware Co.
(Applied to Inventory)

Management Assertions General Balance- Specific Balance-related Audit

About Account Balances related Audit Objectives Applied to Inventory
Objectives
Valuation and Classification Inventory items are properly
allocation classified as to raw
materials, work in process,
and finished goods
Cutoff Purchase cutoff at year end
is proper
Sales cutoff at year end is
proper

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 34

 Hillsburg Hardware Co.
(Applied to Inventory)

Management Assertions General Balance- Specific Balance-related Audit

About Account Balances related Audit Objectives Applied to Inventory
Objectives
Valuation and Detail tie-in Total of inventory items
allocation agrees with general ledger
Realizable Inventories have been written
value down where net realizable
value is impaired
Rights and obligations Rights and The company has title to all
obligations inventory items listed
Inventories are not pledged
as collateral

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 35

 Learning Objective 9
Link the four presentation and
disclosure-related audit objectives
to management assertions for
presentation and disclosure.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 36

 Hillsburg Hardware Co.
(Applied to Notes Payable)

Management General Specific Presentation and

Assertions About Presentation- Disclosure-related Audit Objectives
Presentation and and Disclosure- Applied to Notes Payable
Disclosure related Audit
Objectives
Occurrence Occurrence Notes payable as described in the
and rights and and rights and footnotes exist and are
obligations obligations obligations of the company
Completeness Completeness All required disclosures related
to notes payable are included in
the financial statement footnotes

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 37

 Hillsburg Hardware Co.
(Applied to Notes Payable)

Management General Specific Presentation and

Assertions About Presentation- Disclosure-related Audit Objectives
Presentation and and Disclosure- Applied to Notes Payable
Disclosure related Audit
Objectives
Valuation and Valuation and Footnote disclosures related to
allocation allocation notes payable are accurate.
Classification Classification Notes payable are appropriately
and and classified as to short-term and
understandability understandability long-term obligations and
related financial statement
disclosures are understandable

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 38

 Learning Objective 10
Explain the relationship between
audit objectives and the
accumulation of audit evidence.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 39

 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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 40

 Four Phases of a Financial
Statement Audit
Perform analytical
Plan and design procedures and
Phase I an audit approach Phase III tests of details
of balances

Perform tests of
Complete the
controls and
Phase II substantive tests Phase IV audit and issue
an audit report
of transactions

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 41

 End of Chapter 6

2010 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 42