Audit
Responsibilities
and Objectives
Chapter 6
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
6-1
Learning Objective 1
Explain the objective of
conducting an audit of
financial statements and
an audit of internal controls.
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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Objective of Conducting an Audit
of Financial Statements
The objective of the ordinary audit of financial
statements is the expression of an opinion of
the fairness with which they present fairly, in
all respects, financial position, result of
operations, and its cash flows in
conformity with GAAP.
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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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.
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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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.
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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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.
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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Management’s Responsibilities
Management is responsible for the financial
statements and for internal control.
The Sarbanes–Oxley Act increases management’s
responsibility for the financial statements.
It requires the CEO and the CFO of public
companies to certify the quarterly and annual
financial statements submitted to the SEC.
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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Management’s Responsibilities
The Sarbanes-Oxley Act provides for criminal
penalties for anyone who knowingly falsely
certifies the statements.
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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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
Fraud resulting from fraudulent financial
reporting versus misappropriation of assets
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6 - 10
Auditor’s 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
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
6 - 11
Auditor’s 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
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
6 - 12
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
Transactions
Journals
Sales
Sales
journal
Cash
receipts
Ledgers,
Trial Balance,
and Financial
Statements
General ledger
and subsidiary
records
Cash receipts
journal
General ledger
trial balance
Acquisition
of goods
and services
Acquisitions
journal
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Financial
statements
6 - 15
Transaction Flow Example
Transactions
Journals
Cash
disbursements
Cash
disbursements
journal
Payroll
services and
disbursements
Payroll
journal
Allocation
and
adjustments
General
journal
Ledgers,
Trial Balance,
and Financial
Statements
General ledger
and subsidiary
records
General ledger
trial balance
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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
Payroll and
personnel
cycle
Inventory and
warehousing
cycle
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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Learning Objective 5
Describe why the auditor obtains
a combination of assurance by
auditing class of transactions and
ending balances in accounts.
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Balance and Transactions
Affecting Balances Example
Accounts Receivable (in thousands)
Beginning balance $ 17,521
Sales
Ending balance
$144,328
$137,087 Cash receipts
$
Sales returns
1,242 and allowances
$
Charge-off of
3,323 uncollectible
accounts
$ 20,197
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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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 and Management
Assertions
General TransactionManagement Assertions
Existence or occurrence
Completeness
Related Audit Objectives
Existence
Completeness
Valuation or allocation
Accuracy
Classification
Timing
Posting and summarization
Rights and obligations
N/A
Presentation and disclosure N/A
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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Transaction-Related Audit
Objectives and Management
Assertions
Existence
Recorded transactions
exist.
Completeness
Existing transactions are
recorded.
Accuracy
Recorded transactions
are stated at the
correct amounts.
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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Transaction-Related Audit
Objectives and Management
Assertions
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.
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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Learning Objective 8
Link the nine general balancerelated audit objectives to the
five management assertions.
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Assertions and Balance-Related
Audit Objectives
Management Assertions
Existence or occurrence
Completeness
General Balance
Related Audit Objectives
Existence
Completeness
Valuation or allocation
Accuracy
Classification
Cut-off, Detail tie-in
Realizable value
Rights and obligations
Rights and obligations
Presentation and disclosure Presentation and disclosure
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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
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.
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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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.
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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Learning Objective 9
Explain the relationship between
audit objectives and the
accumulation of audit evidence.
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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How Audit Objectives Are Met
The auditor must obtain sufficient competent
audit evidence to support all management
assertions in the financial statements.
An audit process is a methodology
for organizing an audit.
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
6 - 32
Four Phases of a Financial
Statement Audit
Phase I
Plan and design
an audit approach.
Perform analytical
procedures and
Phase III tests of details
of balances.
Phase II
Perform tests of
controls and
substantive tests
of transactions.
Complete the
Phase IV audit and issue
an audit report.
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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End of Chapter 6
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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