Audit
Responsibilities
and Objectives
Chapter 6
Key Topics in Chapter 6

Understand the responsibility of :
 Management,
for the financial statements and internal
controls
 The independent auditor:



SAS 1 – auditor’s responsibility in performing the audit
For discovering illegal acts
Understand the four phases of a financial
statement audit
Key Topics in Chapter 6
Be familiar with the different transaction
cycles
 Know the management assertions
 Know the general transaction-related and
general balance-related audit objectives

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.
Management’s Responsibilities
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.
Auditor’s Responsibilities
Material versus immaterial misstatements
Combined uncorrected errors likely to affect
A user’s decision are usually considered material
Errors vs. fraud
Both are a potential source of material misstatement,
however, fraud has further implications.
Reasonable assurance
Not a guarantee
Professional skepticism
The attitude we adopt in all aspects of the engagement
Auditor’s Responsibilities for
Discovering Illegal Acts
Direct-effect vs. Indirect-effect illegal acts
* Auditors have the same responsibility for detecting
direct-effect illegal acts, as they do fraud.
* Auditors provide no assurance indirect-effect illegal
acts will be detected
Evidence accumulation when there is no reason
to believe indirect-effect illegal act exists
* Inquiries of management and the B.O.D., reading
the B.O.D. minutes.
Auditor’s Responsibilities for
Discovering Illegal Acts
Actions when the auditor knows of an illegal act
* Consider effects on the financial statements and
disclosures. More evidence may be required.
* Who you gonna tell?
Within the client’s company
Outside the client’s company
Financial Statements Cycles
Audits are performed by dividing the financial
statements into smaller segments or components.
Relationships Among Transaction
Cycles
General
cash
Capital acquisition
and repayment cycle
Sales and
collection
cycle
Acquisition
and payment
cycle
Inventory and
warehousing
cycle
Payroll and
personnel
cycle
Management Assertions
1. Existence or occurrence
2. Completeness
3. Valuation or allocation
4. Rights and obligations
5. Presentation and disclosure
Transaction-Related Audit
Objectives and Management
Assertions
General TransactionManagement Assertions
Existence or occurrence
Completeness
Related Audit Objectives
Existence
Completeness
Valuation or allocation
Accuracy
Classification
Timing
Posting and summarization
Rights and obligations
N/A
Presentation and disclosure N/A
Transaction-Related Audit
Objectives and Management
Assertions
Existence
Recorded transactions
exist.
Completeness
Existing transactions are
recorded.
Accuracy
Recorded transactions
are stated at the
correct amounts.
Transaction-Related Audit
Objectives and Management
Assertions
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.
Assertions and Balance-Related
Audit Objectives
Management Assertions
Existence or occurrence
Completeness
General Balance
Related Audit Objectives
Existence
Completeness
Valuation or allocation
Accuracy
Classification
Cut-off, Detail tie-in
Realizable value
Rights and obligations
Rights and obligations
Presentation and disclosure Presentation and disclosure
General Balance-Related
Audit Objectives
Existence
Amounts included exist.
Completeness
Existing amounts are
included.
Accuracy
Amounts included are
stated at the correct
amounts.
General Balance-Related
Audit Objectives
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
Realizable
value
Assets are included at
estimated realizable value.
Rights and
obligations
Assets must be owned.
Presentation
and
disclosure
Account balances and
disclosures are presented
in financial statements.
Balance and Transactions
Affecting Balances Example
Accounts Receivable (in thousands)
Beginning balance $ 17,521
Sales
Ending balance
$144,328
$ 20,197
$137,087 Cash receipts
$
Sales returns
1,242 and allowances
$
Charge-off of
3,323 uncollectible
accounts
How Audit Objectives Are Met
The auditor must obtain sufficient competent
audit evidence to support all management
assertions in the financial statements.
An audit process is a methodology
for organizing an audit.
Four Phases of a Financial
Statement Audit
Phase I
Plan and design
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.
Complete the
Phase IV audit and issue
an audit report.
Announcements
First midterm next Wednesday, Feb. 1.
 A topic guide that will summarize the
main items that could be represented on
the midterm will be available on the
website within the next 2 days.
 Next class: guest professors from PwC
will present material from Chapter 6.
