• THE OBJECTIVE OF AN ORDINARY
AUDIT OF FINANCIAL STATEMENTS
IS THE EXPRESSION OF AN OPINION
REGARDING THE FAIRNESS OF THE
PRESENTATION IN COMPARISON TO
GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES

• ADOPTION OF SOUND ACCOUNTING
PRINCIPLES
• MAINTAINENCE OF ADEQUATE
INTERNAL CONTROLS
• PREPARATION OF FAILY PRESENTED
FINANCIAL STATEMENTS

• PLAN AND PERFORM AUDIT
• OBTAIN REASONABLE ASSURANCE
THAT FINANCIAL STATEMENTS ARE
NOT MATERIALLY MISSTATED
• EXERCISE PROFESSIONAL
SKEPTICISM DURING AUDIT

• SAS 82 - CONSIDERATION OF FRAUD
– DEFINES FRAUD
• FRAUDULENT FINANCIAL REPORTING
• MISAPPROPRIATION OF ASSETS
– AUDITOR RESPONSIBLE TO ASSESS RISK
OF FRAUD
• FRAUD RISK FACTORS FOR FINANCIAL
REPORTING
– MANAGEMENT CHARACTERISTICS
– INDUSTRY CONDITIONS
– OPERATING CHARACTERISTICS

• FRAUD RISK FACTORS - MISAPPROPRIATION
OF ASSETS
– SUSCEPTIBILITY OF ASSETS TO MISAPPROPRIATION
– INTERNAL CONTROLS
– AUDITOR RESPONSIBLE TO EVALUATE
RISK FACTORS
• PRESENCE OF RISK FACTORS INCREASES RISK
THAT FRAUD COULD OCCUR, NOT INDICATE
THAT IT DID OCCUR
– AUDITOR RESPONSIBLE TO MODIFY
EVIDENCE GIVEN RISK FACTORS

• DIRECT EFFECT ILLEGAL ACTS
– FINANCIAL STATEMENTS ARE
MATERIALLY AFFECTED BY ACT
• UNDERSTATING TAX LIABILITY
• INDIRECT EFFECT ILLEGAL ACTS
– FINANCIAL STATEMENTS MAY BE
AFFECTED IF DETECTED AND FINES
ASSESSED
• EMPLOYEE SAFETY LAWS

• EVIDENCE ACCUMULATION IF
AUDITOR SUSPECTS ILLEGAL ACTS
– INQUIRE OF MANAGEMENT
– CONSULT LEGAL COUNSEL
– ADDITIONAL EVIDENCE
• IDENTIFY ILLEGAL ACT
– CONSIDER EFFECT ON FINANCIAL
STATEMENTS
– HONESTY OF MANAGEMENT
– COMMUNICATE WITH AUDIT COMMITTEE
• CONSIDER WITHDRAWAL

• CYCLES OF TRANSACTIONS
– SALES AND COLLECTIONS CYCLE
– ACQUISITION AND PAYMENT CYCLE
– PAYROLL AND PERSONNEL CYCLE
– INVENTORY AND WAREHOUSING CYCLE
– CAPITAL ACQUISITION AND
REPAYMENT CYCLE

• CYCLE APPROACH TO SEGMENTING
AUDIT
– ACCOUNTS ARE AFFECTED BY ONE OR
MORE CYCLES
– INTERNAL CONTROLS CAN BE
ANALYZED BY CYCLE
– RISK OF MISSTATEMENT CAN BE
ASSESSED BY CYCLE

• MANAGEMENT ASSERTIONS
– EXISTENCE OR OCCURRENCE
– COMPLETENESS
– VALUATION AND ALLOCATION
– RIGHTS AND OBLIGATIONS
– PRESENTATION AND DISCLOSURE

• EXISTENCE
– RECORDED TRANSACTIONS EXIST
• COMPLETENESS
– EXISTING TRANSACTIONS ARE RECORDED
• VALUATION
– RECORDED TRANSACTIONS ARE STATED AT
CORRECT AMOUNTS
– TRANSACTIONS ARE PROPERLY CLASSIFIED
– TRANSACTIONS ARE IN CORRECT PERIOD

• EXISTENCE
– BALANCES EXIST
• COMPLETENESS
– ALL EXISTING BALANCES ARE INCLUDED
• VALUATION
– BALANCES ARE AT CORRECT AMOUNTS
– PROPER CLASSIFICATION
– CUTOFF
– AGREEMENT OF RECORDS
– REALIZABLE VALUE

• RIGHTS AND OBLIGATIONS
– ENTITY HAS RIGHTS TO ASSETS
– ENTITY HAS OBLIGATIONS REGARDING
LIABILITIES
• PRESENTATION AND DISCLOSURE
– FINANCIAL STATEMENTS ARE PROPERLY
PRESENTED
– DISCLOSURES ARE ADEQUATE

• PLAN AND DESIGN THE AUDIT
• PERFORM TESTS OF CONTROLS AND
SUBSTANTIVE TESTS OF TRANSACTIONS
• PERFORM ANALYTICAL PROCEDURES
AND TESTS OF BALANCES
• COMPLETE AUDIT