Audit Responsibilities
and Objectives
Chapter 6
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Learning Objective 1
Explain the objective of conducting an audit
of financial statements and an audit of
internal controls.
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Objective of Conducting an
Audit of Financial Statements
The purpose of an audit is to provide financial
statement users with an opinion by the auditor
on whether the financial statements are
presented fairly, in all material respects, in
accordance with applicable financial accounting
framework.
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Steps to Develop Audit
Objectives
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Learning Objective 2
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.
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Management’s Responsibilities
Financial statements and internal controls.
Sarbanes-Oxley increases management’s
responsibility for the financial statements.
CEO and CFO must certify quarterly and annual
financial statements submitted to the SEC.
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Management’s Responsibilities
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Management’s Responsibilities
The Sarbanes-Oxley Act provides for criminal
penalties for anyone who knowingly falsely
certifies the statements.
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Learning Objective 3
Explain the auditor’s responsibility for
discovering material misstatements.
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Objectives of the Auditor
Obtain
reasonable
assurance
Opine
Report
Financial
statements
Free from
material
misstatements
Financial
statements
Applicable
reporting
framework
Financial
statements
Communicate
per audit
standards
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Auditor’s Responsibilities
Material
misstatements
Professional
Skepticism
Reasonable
Assurance
Errors vs. Fraud
Fraudulent
reporting
vs.
theft of assets
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Auditor’s Responsibilities for
Discovering Illegal Acts
Type
Responsibility
Direct-Effect
Same for
errors and
fraud
Indirect-Effect
No Assurance
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Auditor’s Responsibilities for
Discovering Illegal Acts
Auditor suspects
Inquire of management
Consult client’s counsel or specialist
Consider accumulating evidence
Auditor knows
Consider effects on financial
statements
Consider effect on relationship
with management
Communicate with audit
committee or equivalent
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Learning Objective 4
Classify transactions and account balances
into financial statement cycles and identify
benefits of a cycle approach to
segmenting the audit.
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Financial Statements Cycles
Audits are performed by dividing the financial
statements into smaller segments or components.
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Transaction Flow Example
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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
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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.
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Balance and Transactions
Affecting Balances Example
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Learning Objective 6
Distinguish among the three categories of
management assertions about financial
information.
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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
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Management Assertions for
Each Category of Assertions
Transactions and Events
Account Balances Presentation and Disclosure
Occurrence
Existence
Completeness
Completeness
Accuracy
Valuation and
allocation
Classification
Occurrence and rights
and obligations
Completeness
Accuracy and
valuation
Classification and
understandability
Cutoff
Rights and
obligations
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PCAOB Assertions
Existence or Occurrence
Completeness
Valuation or
allocation
Rights and obligations
Presentation and
disclosure
Similar to U.S. GAAS as the first four assertions are applicable to
balances and transactions. Presentation is treated as a single assertion
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Learning Objective 7
Link the six general transaction-related audit
objectives to management assertions for
classes of transactions.
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General Transaction-related
Audit Objectives
Occurrence
Completeness
Accuracy
Recorded transactions
exist
Existing transactions
are recorded
Recorded transactions
are stated at the
correct amounts
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General Transaction-related
Audit Objectives
Posting and
summarization
Transactions are included
in the master files and
are correctly summarized.
Classification
Transactions are properly
classified.
Timing
Transactions are recorded
on the correct dates.
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Hillsburg Hardware Co.
(Applied to Sales Transactions)
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Learning Objective 8
Link the eight general balance-related audit
objectives to management assertions for
account balances.
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General Balance-related
Audit Objectives
Existence
Amounts included exist
Completeness
Existing amounts are
included
Accuracy
Amounts included are
stated at the correct
amounts
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General Balance-related
Audit Objectives
Classification
Cutoff
Detail tie-in
Amounts are properly
classified
Transactions are recorded
in the proper period
Account balances agree
with master file amounts,
and with the general ledger
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General Balance-related
Audit Objectives
Realizable
value
Assets are included at
estimated realizable value
Rights and
obligations
Assets must be owned
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Hillsburg Hardware Co.
(Applied to Inventory)
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Learning Objective 9
Link the four presentation- and disclosurerelated audit objectives to management
assertions for presentation and disclosure.
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Hillsburg Hardware Co.
(Applied to Notes Payable)
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Learning Objective 10
Explain the relationship between audit
objectives and the accumulation of audit
evidence.
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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
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Four Phases of a Financial
Statement Audit
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End of Chapter 6
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