AUDIT
RESPONSIBILITIES
AND OBJECTIVES
SECTION 4
Overall Audit Objective
• According to the reporting standard and the handbook
• An audit is conducted in accordance with GAAS
• Express an opinion
• The essence of auditing is gathering evidence
• Why does the auditor gather evidence?
Management’s Responsibility for
Financial Reporting
• Managers are responsible for providing F/S to owners,
creditors, and others
• Managers normally have a special interest
• Managers may acknowledge their responsibility by
including a statement in the annual report
McDonald’s Corporation Management Report
Management is responsible for the preparation, integrity and fair presentation of the consolidated financial
statements and Financial Comments appearing in this annual report. The financial statements were prepared in
accordance with generally accepted accounting principles and included certain amounts based on management’s
judgment and best estimates. Other financial information presented in the annual report is consistent with the
financial statements.
The Company maintains a system of internal control over financial reporting including safeguarding
assets against unauthorized acquisition, use or disposition, which is designed to provide reasonable assurance to
the Company's management and Board of Directors regarding preparation of reliable published financial
statements and such asset safeguarding. The system includes a documented organizational structure and
appropriate division of responsibilities; established policies and procedures which are communicated throughout
the Company; careful selection, training, and development of our people; and utilization of an internal audit
program Policies and procedures prescribe that the Company and all employees are to maintain the highest
ethical standards and that business practices throughout the world are to be conducted in a manner which is
above reproach.
There are inherent limitations in the effectiveness of any system of internal control, including the
possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective
internal control system can only provide reasonable assurance with respect to financial statement preparation
and safeguarding of assets. Furthermore, the effectiveness of an internal control system can change with the
circumstances. The Company believes that at December 31, 200X, it maintained an effective system of internal
control over financial reporting and safeguarding of assets against unauthorized acquisition, use or disposition.
The consolidated financial statements have been audited by independent auditors, Ernst & Young LLP,
who were given unrestricted access to all financial records and related data. The audit report of Ernst & Young
LLP is presented below.
The Board of Directors, operating through its Audit Committee composed entirely of outside Directors,
provides oversight to the financial reporting process. Ernst & Young LLP has independent access to the Audit
Committee and periodically meets with the Committee to discuss accounting, auditing, and financial reporting
matters.
McDONALD”S CORPORATION
Oak Brook, Illinois
January 25, 200X
Auditor’s Responsibility
• Affected by the fact that an audit is designed to
provide reasonable assurance
• Why not absolute assurance?
• Assumption of management’s good faith
• Detecting errors and irregularities
• Design audits to provide assurance of detecting
material misstatements due to errors and
irregularities
• Defalcations
• Management fraud
Factors That Affect Detection of
Errors and Irregularities
• Materiality
• An audit performed in accordance with GAAS may detect
errors or irregularities that are not material
• Generally the smaller the errors or irregularities
• Level of Employee Involved
• Employees may perpetrate defalcations that
involve minor thefts
• Lower levels of management generally commit
defalcations that are immaterial
• Senior managers – typically material
• Senior management are frequently in the position
to override controls
• Ultramares
• McKesson Robbins Drug Company
• Equity Funding
• Management Characteristics
• A single manager dominating operating and financing
decisions
• Unduly aggressive management attitude towards financial
reporting
• High turnover in management
• Management's undue emphasis on meeting projections
• Management's poor reputation
• Skillfulness of Concealment
• Alteration of accounting records and supporting
documentation
• Relationship to Internal Control
• The quality of internal and the way an error or
irregularity occurred
• When a client lacks internal controls
Illegal Acts
• Violation of laws or government regulations
• Direct effect
• Indirect effect
• Auditors have the same responsibility for detecting illegal acts
that have a material effect on the financial statements as for
detecting material errors and irregularities
• If the auditor suspects no illegal acts
• Required evidence
• Inquire of management
• Reading of the minutes
• Inquiry of clients lawyers
• If the auditor suspects an illegal act
• Direct effect illegal acts and indirect-effect illegal acts
• Inquire of management
• Clients lawyers
• Additional evidence
• Known illegal acts
• Effects on F/S
• Disclosure
• Relationship with management
• Lawyers
Financial Statement Cycles
• Managers group activities into categories
Investing and
Finance
Cash
Sales and
Collections
Purchase of
Goods and
Services
Acquisition and
Payments
Sales
Production
Production and
Warehousing
Salaries
Payroll and
Personnel
• All of an entity’s activities of concern may be viewed
as transactions
• A class of transactions groups transaction of similar
activities
• Processed in a similar manner
• Same internal controls
• A transaction cycle is all of the classes of transactions for a
group of related activities
• The nature of double-entry bookkeeping
• By auditing credits to sales an auditor also audits
debits to accounts receivable
• Examining related transactions and accounts together
makes the audit more efficient
Management Financial Statement
Assertions
• When auditors attest, they express an opinion about
the reliability of managements assertions
• Auditing standards place the management claims or
assertions into seven broad categories:
•
•
•
•
•
•
•
Existence
Occurrence
Completeness
Valuation
Measurement
Ownership
Presentation and disclosure
•
•
Current assets:
• Cash and cash equivalents (Note 1)
Note 1
•
•
$7,650,000
The Company’s policy is to invest cash in excess of operating requirements,
arising primarily from the proceeds of the subordinated debt offering, in
income producing investments. Temporary cash investments of $4,325,000 at
January 1, 200X, include money market and commercial paper amounts
stated at cost, which approximates market.
By stating cash and cash equivalents at $7,650,000 management asserts:
1.
$7,650,00 represents only cash and cash equivalents.
2.
The company has no other cash.
3.
The entity owns the cash.
4.
$7,650,000 is the value.
5.
The note to the financial statements
• Existence
• For balance sheet accounts
• Occurrence
• For income statement accounts
• Completeness
• F/S include all transaction and accounts that they should
• Also relates to individual accounts
• Cutoff
• Related to existence, occurrence, and completeness
• Valuation
• Balance sheet accounts
• Also deals with allocation
• Measurement
• Income statement accounts
• Ownership
• Balance sheet accounts
• Also deals with rights and obligation
• All accounts
• Presentation and disclosure
• Properly classified, described and disclosed
• Using Assertions to Determine Audit Procedures
• Audit procedures are the methods used to gather
audit evidence
• Most of the audit work consists of obtaining and
evaluating evidence regarding F/F assertions
• Basically identify audit objectives or goals for each
F/S assertion and then identify audit procedures to
fulfill that objective
• Financial Statement Assertions for Sales
• Occurrence – sales actually made
• Completeness – all sales transactions recorded
• Rights and obligations – sales recorded represent
only sales transactions
• Measurement – sales are correctly billed
• Presentation – in accordance with GAAP
Assertions
Typical Misstatements
Misstatements That May
Occur in Sales
Occurrence
Transactions that did not occur
are recorded
A fictitious sale is recorded
in the account of a regular
customer
Completeness
Transactions that occurred are
not recorded
A sale is not recorded for
goods sold and shipped to
customers
Rights and Obligations
Transactions are recorded when
title has not passed
A sale is recorded for
consigned goods
Measurement
Transactions are improperly
measured
Incorrect unit prices are
used in preparing sales
invoices
Presentation
Transactions are misclassified
Sales may be recorded as
wholesale sales when they
should be recorded as retail
sales
An Overview of the Audit Process
• Planning the audit
• Understanding the client
• Understand the client’s system of internal control
• Gathering and evaluating evidence
• Tests of controls
• Good controls
• Poor controls
• Tests of transactions and balances
• Issuing a report
• Based on the accumulated evidence
Problem 1: (5-22)
The following are specific balance-related audit objectives applied to the audit of accounts
receivable ( a through g), management assertions (1 through 4). The list referred to in the
specific balance-related audit objectives is the list of accounts receivable from each customer
at the balance sheet date.
SPECIFIC BALANCE –RELATED AUDIT OBJECTIVE
a.
There are no unrecorded receivables.
b.
Receivables have not been sold or discounted.
c.
Uncollectible accounts have been provided for.
d.
Receivables that have become uncollectible have been written off.
e.
All accounts on the list are expected to be collected within one year.
f.
All accounts on the list arose from the normal course of business and are not due from related
parties.
g.
Sales cut-off at year end is proper.
MANAGEMENT ASSERTION
1.
Existence or Occurrence. 2. Completeness. 3. Measurement or Valuation. 4. Allocation.
REQUIRED: For each specific balance-related audit objective, identify the appropriate
management assertion.
Problem 2: (5-23)
The following are specific transaction-related audit objectives applied to the
audit of cash disbursements ( a through f), management assertions (1
through 7), and general transaction-related audit objectives (8 through 13).
SPECIFIC AUDIT OBJECTIVE
a.
Recorded cash disbursement transactions are for the amount of goods or
services received and are correctly recorded.
b.
Cash disbursement transactions are properly included in the accounts
payable master file and are correctly summarized.
c.
Recorded cash disbursements are for goods and services actually received.
d.
Cash disbursements are for goods and properly classified.
e.
Existing cash disbursement transactions are properly classified.
f.
Cash disbursement transactions are recorded on the correct dates.
MANAGEMENT ASSERTION
1.
Existence or Occurrence
2.
Completeness
3.
Measurement or Valuation
4.
Allocation
GENERAL TRANSACTION-RELATED AUDIT OBJECTIVE
5.
Occurrence
6.
Completeness
7.
Accuracy
8.
Classification
9.
Posting and summarization
10. Timing
Required:
a)
Explain the differences among management assertions, general transactionrelated audit objectives, and specific transaction-related audit objectives and
their relationship to one another.
b) For each specific transaction-related audit objective, identify the appropriate
management assertion.
c)
For each specific transaction-related audit objective, identify the appropriate
general transaction-related audit objective.
Problem 3: (5-24)
The following are two specific balance-related audit objectives in the audit of
accounts payable. The list referred to in the objectives is the aged accounts
payable trial balance produced using the supplier master file. The total of the
list equals the accounts payable balance on the general ledger.
1.
All accounts payable included on the list represent amounts due to valid
vendors.
2.
There are no unrecorded accounts payable.
Required:
a.
Explain the difference between these two specific balance-related audit
objectives.
b.
For the audit of accounts payable, which of these two specific balance-related
audit objectives would usually be more important? Explain.