Audit Responsibilities and Objectives
Chapter 5
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Learning Objective 1
Explain the objective of conducting an audit of financial statements.
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Objective of Conducting an Audit of Financial Statements
The primary objective of the audit is to express an opinion on the financial statements.
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Steps to Develop
Audit Objectives
1
2
3
Understand objectives and responsibilities for the audit.
Divide financial statements into cycles.
Know management assertions about accounts.
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Steps to Develop
Audit Objectives
4
5
Know general audit objectives for classes of transactions and accounts.
Know specific audit objectives for classes of transactions and accounts.
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Learning Objective 2
Distinguish management’s responsibilities for preparing financial statements from the auditor’s responsibilities for verifying those financial statements.
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Responsibilities
Management is responsible for the financial statements, and for internal control.
Auditors issue an opinion on fairness of the financial statements.
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Learning Objective 3
Explain the auditor’s responsibility for discovering material misstatements.
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Auditor’s Responsibilities
Material versus immaterial misstatements
Reasonable assurance
Errors versus fraud
Professional skepticism
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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
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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
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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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Transaction Flow Example
Transactions
Sales
Journals
Sales journal
Ledger, Trial Balance, and
Financial Statements
General ledger and subsidiary records
Cash receipts
Cash receipts journal
General ledger trial balance
Acquisition of goods and services
Acquisitions journal
Financial statements
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Transaction Flow Example
Transactions
Cash disbursements
Payroll services and disbursements
Journals
Cash disbursements journal
Ledger, Trial Balance, and
Financial Statements
General ledger and subsidiary records
Payroll journal
General ledger trial balance
Allocation and adjustments
General journal
Financial statements
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Relationships Among
Transaction Cycles
General cash
Capital acquisition and repayment cycle
Sales and collection cycle
Acquisition and payment cycle
Inventory and warehousing cycle
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Payroll and personnel cycle
5 - 15

Learning Objective 5
Describe why the auditor obtains a combination of assurance by auditing classes of transactions and ending balances in accounts.
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Balance and Transactions
Affecting Balances Example
Accounts Receivable (in thousands)
Beginning balance $ 18,827
Sales 144,328 138,393
Cash receipts
1,242
Sales returns and allowances
Ending balance $ 20,197
3,323
Charge-off of uncollectible debts
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Learning Objective 6
Distinguish among the five categories of management assertions about financial information.
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Management Assertions
1. Existence or occurrence
2. Completeness
3. Valuation or allocation
4. Rights and obligations
5. Presentation and disclosure
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Learning Objective 7
Link the six general transactionrelated audit objectives to the five management assertions.
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Transaction-Related
Audit Objectives
Existence
Completeness
Recorded transactions exist.
Existing transactions are recorded.
Accuracy
Recorded transactions are stated at the correct amount.
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Transaction-Related
Audit Objectives
Classification
Timing
Transactions are properly classified.
Transactions are recorded on the correct dates.
Posting and summarization
Transactions are included in the master files and are correctly summarized.
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Transaction-Related Audit Objectives and Management Assertions
Management
Assertions
Existence or occurrence
Completeness
Valuation or allocation
Rights and obligations
Presentation and disclosure
General Transaction-
Related Audit Objectives
Existence
Completeness
Accuracy, Classification timing,
Posting and summarization
N/A
N/A
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Learning Objective 8
Link the nine general balancerelated audit objectives to the five management assertions.
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General Balance-Related
Audit Objectives
Existence
Completeness
Amounts included exist.
Existing amounts are included.
Accuracy
Amounts included are stated at the correct amounts.
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General Balance-Related
Audit Objectives
Classification
Cutoff
Amounts are properly classified.
Transactions are recorded in the proper period.
Detail tie-in
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.
Presentation and disclosure
Account balances and disclosures are presented in financial statements.
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Assertions and Balance-Related
Audit Objectives
Management
Assertions
Existence or occurrence
General Balance-
Related Audit Objectives
Existence
Completeness
Valuation or allocation
Rights and obligations
Completeness
Accuracy, Classification, Cutoff,
Detail tie-in, Realizable value
Rights and obligations
Presentation and disclosure Presentation and disclosure
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Learning Objective 9
Explain the relationship between audit objectives and the accumulation of audit evidence.
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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.
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Four Phases of an Audit
Phase I
Plan and design an audit approach.
Phase III
Perform analytical procedures and tests of details of balances.
Phase II
Perform tests of controls and substantive tests of transactions.
Phase IV
Complete the audit and issue an audit report.
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End of Chapter 5
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