Arens Chapter06

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 of financial statements with which
they present fairly, in
all respects, financial position, result of
operations, and its cash flows in
conformity with GAAP.

Auditors General Responsibilities
-Auditor’s responsibility is to accumulate evidence
in order to reach conclusions about whether the
financial statements are fairly presented and to
determine the effectiveness of internal control,
after which he issue the appropriate report.
- if facts indicates that the statements were not

fairly presented , the auditor will probably have to
demonstrate to the court that the audit was
conducted in proper manner and the auditor
reached reasonable conclusions.
-
Distinguish management’s
responsibility for the financial
statements and internal control
from the auditor’s responsibility
for verifying the financial
statements and effectiveness
of internal control.

Management’s Responsibilities
1. Adopting accounting policies and
standards.
2. Maintaining adequate internal

control
3. Making fair presentations in the

financial statements.
Management is responsible for the financial

statements and for internal control.
The Sarbanes-Oxley Act increases management’s

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.
The Sarbanes-Oxley Act provides for criminal

penalties for anyone who knowingly falsely
certifies the statements.

Explain the auditor’s
responsibility for discovering
material misstatements.

Auditor’s 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

Material Vs Immaterial Misstatements
-Misstatements considered material if the

combined uncorrected errors and fraud in
the financial statements would likely have
changed or influenced the decisions of a
reasonable person using the statements.
-it would be extremely costly for auditors

to have responsibility for finding all
immaterial errors and fraud.
Reasonable assurance
-It is a measure of the level of certainty that the
auditor has obtained at the completion of the
audit.
-Auditing standards indicate reasonable
assurance is a high but not absolute level of
assurance that the financial statements are free
of material misstatements.
-Auditors can’t reach to absolute assurance
because audit evidence results from testing
samples and accounting presentations contain
complex estimates.
Errors versus fraud
-Error is an unintentional misstatement in the
financial statements
-Fraud is an intentional misstatements in the
financial statements
-Both of them can be material or immaterial
-Auditors must distinguish between errors and
fraud

Professional skepticism
-It is an attitude that includes a questioning
mind and a critical assessment of audit
evidence.
-Auditors should not assume that management

is dishonest , but the possibility of dishonesty
must be considered and they should not
assume that management is unquestionably
honest.

Auditor’s 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

Auditor’s 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

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

Financial Statements Cycles
Audits are performed by dividing the financial

statements into smaller segments or components.

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
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
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
Describe why the auditor obtains
a combination of assurance by
auditing classes of transactions
and ending balances in accounts,
including presentation and
disclosure.

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

Distinguish among the three
categories of management
assertions about financial
information.

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

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
Link the six general transaction-
related audit objectives to
management assertions
for classes of transactions.

General Transactions-related Audit
Objectives
Recorded transactions
Occurrence
exist
Existing transactions
Completeness
are recorded
Recorded transactions
Accuracy are stated at the
correct amounts
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.
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

(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.

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

General Balance-related
Audit Objectives
Existence Amounts included exist
Existing amounts are

Completeness
included
Amounts included are

Accuracy stated at the correct
amounts

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

Audit Objectives
Realizable Assets are included at
value estimated realizable value
Rights and
Assets must be owned
obligations

(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


Objectives
Valuation and Accuracy Inventory quantities on the
allocation client’s 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


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


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

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

(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

(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

Explain the relationship between
audit objectives and the
accumulation of audit evidence.

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

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

End of Chapter 6
©2010 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 6 - 46

Arens Chapter06

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Arens Chapter06

Caricato da

Copyright:

Formati disponibili

Audit Responsibilities

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

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

The objective of the ordinary audit of financial

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

- if facts indicates that the statements were not

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

2. Maintaining adequate internal

3. Making fair presentations in the

Management is responsible for the financial

The Sarbanes-Oxley Act increases management’s

It requires the CEO and the CFO of public

The Sarbanes-Oxley Act provides for criminal

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

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

 Material versus immaterial misstatements

 Errors versus fraud

 Fraud resulting from fraudulent financial

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

-Misstatements considered material if the

-it would be extremely costly for auditors

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

-Auditors should not assume that management

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

 Indirect-effect illegal acts

 Evidence accumulation when there is no reason

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 15

 Actions when the auditor knows of an illegal act

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 16

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 17

Audits are performed by dividing the financial

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

Sales and Acquisition Payroll and

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 22

Sales $144,328 $137,087 Cash receipts

Ending balance $ 20,197

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 6 - 24

1. Assertions about classes of transactions and

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 - 25

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

Transactions are included

Transactions are properly

Transactions are recorded

Management Assertions General Transaction- Specific Sales Transaction-

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

Management Assertions General Transaction- Specific Sales Transaction-

Accuracy Posting and Sales transactions are

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

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

Existing amounts are

Amounts included are

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

Transactions are recorded

Account balances agree

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

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

Management Assertions General Balance- Specific Balance-related Audit

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

Management Assertions General Balance- Specific Balance-related Audit

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

Management Assertions General Balance- Specific Balance-related Audit