Audit Responsibilities
and Objectives
Topic 4
Edited By: Dr. Elie Menassa 2005
1-1
Learning Objective 1
Explain the objective of
conducting an audit of
financial statements.
Edited By: Dr. Elie Menassa 2005
1-2
Objective of Conducting an
Audit of Financial Statements
The primary objective of the audit
is to express an opinion on the
financial statements.
Edited By: Dr. Elie Menassa 2005
1-3
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.
Edited By: Dr. Elie Menassa 2005
1-4
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 and accounts.
Edited By: Dr. Elie Menassa 2005
1-5
Learning Objective 2
Explain the auditor’s
responsibility for discovering
material misstatements.
Edited By: Dr. Elie Menassa 2005
1-6
Auditor’s Responsibilities
Material versus immaterial misstatements
Reasonable assurance
Errors versus fraud
Professional skepticism
Edited By: Dr. Elie Menassa 2005
1-7
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
Edited By: Dr. Elie Menassa 2005
1-8
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
Edited By: Dr. Elie Menassa 2005
1-9
Learning Objective 3
Classify transactions and account
balances into financial statement
cycles and identify benefits of a cycle
approach to segmenting the audit.
Edited By: Dr. Elie Menassa 2005
1 - 10
Transaction Flow Example
Transactions
Journals
Sales
Sales
journal
Cash
receipts
Cash receipts
journal
Acquisition
of goods
and services
Acquisitions
journal
Edited By: Dr. Elie Menassa 2005
Ledger, Trial Balance, and
Financial Statements
General ledger
and subsidiary
records
General ledger
trial balance
Financial
statements
1 - 11
Transaction Flow Example
Transactions
Journals
Cash
disbursements
Cash disbursements journal
Payroll
services and
disbursements
Payroll
journal
Allocation and
adjustments
General
journal
Edited By: Dr. Elie Menassa 2005
Ledger, Trial Balance, and
Financial Statements
General ledger
and subsidiary
records
General ledger
trial balance
Financial
statements
1 - 12
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
Edited By: Dr. Elie Menassa 2005
1 - 13
Learning Objective 4
Describe why the auditor obtains
a combination of assurance by
auditing classes of transactions
and ending balances in accounts.
Edited By: Dr. Elie Menassa 2005
1 - 14
Balance and Transactions
Affecting Balances Example
Accounts Receivable (in thousands)
Beginning balance $ 19,454
Sales
Ending balance
Edited By: Dr. Elie Menassa 2005
144,328
$ 20,197
139,020
Cash
receipts
1,242
Sales returns
and allowances
3,328
Charge-off of
uncollectible
debts
1 - 15
Learning Objective 5
Distinguish among
the five categories of
management assertions
about financial information.
Edited By: Dr. Elie Menassa 2005
1 - 16
Management Assertions
1. Existence or occurrence
2. Completeness
3. Valuation or allocation
4. Rights and obligations
5. Presentation and disclosure
Edited By: Dr. Elie Menassa 2005
1 - 17
Learning Objective 6
List the six general transactionrelated audit objectives to the
five management assertions.
Edited By: Dr. Elie Menassa 2005
1 - 18
Transaction-Related
Audit Objectives
Existence
Recorded
transactions exist.
Completeness
Existing transactions
are recorded.
Accuracy
Recorded transactions
are stated at the
correct amount.
Edited By: Dr. Elie Menassa 2005
1 - 19
Transaction-Related
Audit Objectives
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.
Edited By: Dr. Elie Menassa 2005
1 - 20
Transaction-Related Audit Objectives
and Management Assertions
Management
Assertions
Existence or occurrence
Completeness
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
Edited By: Dr. Elie Menassa 2005
1 - 21
Learning Objective 7
Link the nine general balancerelated audit objectives to the
five management assertions.
Edited By: Dr. Elie Menassa 2005
1 - 22
General Balance-Related
Audit Objectives
Existence
Amounts
included exist.
Completeness
Existing amounts
are included.
Accuracy
Amounts included
are stated at the
correct amounts.
Edited By: Dr. Elie Menassa 2005
1 - 23
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.
Edited By: Dr. Elie Menassa 2005
1 - 24
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.
Edited By: Dr. Elie Menassa 2005
1 - 25
Assertions and BalanceRelated Audit Objectives
Management
Assertions
Existence or occurrence
Completeness
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
Edited By: Dr. Elie Menassa 2005
1 - 26
Learning Objective 8
Explain the relationship
between audit objectives
and the accumulation
of audit evidence.
Edited By: Dr. Elie Menassa 2005
1 - 27
How Audit Objectives
Are Met
Auditors plan the combination
of objectives and evidence by
following an audit process.
An audit process is a methodology
for organizing an audit.
Edited By: Dr. Elie Menassa 2005
1 - 28
Four Phases of an Audit
Plan and design
Phase I
an audit approach.
Phase II
Perform tests of
controls and
substantive tests
of transactions.
Edited By: Dr. Elie Menassa 2005
Perform analytical
procedures and
Phase III
tests of details
of balances.
Phase IV
Complete the
audit and issue
an audit report.
1 - 29
Edited By: Dr. Elie Menassa 2005
1 - 30