Auditing and Assurance Services

Seventeenth Edition, Global Edition

Chapter 5
Audit Responsibilities and
Objectives

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Learning Objectives (1 of 3)
5.1 Explain the objective of conducting an audit of financial
statements and an audit of internal controls
5.2 Distinguish management’s responsibility for the
financial statements from the auditor’s responsibility for
verifying those statements
5.3 Explain the auditor’s responsibility for discovering
material misstatements due to fraud or error
5.4 Describe the need to maintain professional skepticism
when conducting an audit

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Learning Objectives (2 of 3)
5.5 Describe the key elements of an effective professional
judgment process
5.6 Identify the benefits of a cycle approach to segmenting
the audit
5.7 Describe why the auditor obtains assurance by
auditing transactions and ending balances, including
presentation and disclosure
5.8 Distinguish among the management assertions about
financial information

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Learning Objectives (3 of 3)
5.9 Link transaction-related audit objectives to
management assertions for classes of transactions
5.10 Link balance-related audit objectives to management
assertions
5.11 Explain the relationship between audit objectives and
the accumulation of audit evidence

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Learning Objective 5.1
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
the applicable financial accounting framework,
which enhances the degree of confidence that
intended users can place in the financial statements

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Figure 5.1 Steps to Develop Audit Objectives

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Learning Objective 5.2
Distinguish management’s responsibility for the financial
statements from the auditor’s responsibility for verifying
those statements

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Management’s Responsibilities
• Management’s responsibility includes:
– Adopting sound accounting policies
– Maintaining adequate internal control
– Making fair representations in the financial statements
– Certifying the quarterly and annual financial
statements

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Figure 5.2 International Business
Machines Corporation’s Report of
Management

Source: IBM 2017 Annual Report: Report of Management.

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Let’s Discuss (1 of 6)
• State the objective of the audit of financial statements.
– In general terms, how do auditors meet that objective?
• Describe management’s responsibility for the financial
statements.
– Do you believe the CEO and CFO of a public
company perceive an even greater responsibility as a
result of the Sarbanes–Oxley Act requirement to certify
the financial statements submitted to the SEC?

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Learning Objective 5.3
Explain the auditor’s responsibility for discovering material
misstatements due to fraud or error

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Auditor’s Responsibilities (1 of 2)
• The overall objectives of the auditor are to:
– Obtain reasonable assurance about whether the
financial statements as a whole are free from material
misstatement, whether due to fraud or error, thereby
enabling the auditor to
 Express an opinion on whether the financial
statements are presented fairly, in all material
respects, in accordance with an applicable financial
reporting framework

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Auditor’s Responsibilities (2 of 2)
• The overall objectives of the auditor are to:
– Report on the financial statements, and communicate
as required by auditing standards, in accordance with
the auditor’s findings
• Auditor are also responsible to:
– Detect material unintentional mistakes
– Detect material fraud
– Consider laws and regulations relevant to the client

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Learning Objective 5.4
Describe the need to maintain professional skepticism when
conducting an audit

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Professional Skepticism (1 of 2)
• Audit must be planned and performed with an attitude of
professional skepticism
• Professional skepticism consists of two primary
components:
– A questioning mind
– A critical assessment of the audit evidence

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Professional Skepticism (2 of 2)
• Elements of professional skepticism include:
– Questioning mindset
– Suspension of judgment
– Search for knowledge
– Interpersonal understanding
– Autonomy
– Self-esteem

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Learning Objective 5.5
Describe the key elements of an effective professional
judgment process

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Professional Judgment
• Professional skepticism is one component of professional
judgment
• The profession has developed frameworks to assist
auditors in making appropriate judgments during an audit
to make them aware of their own judgment tendencies,
traps, and biases

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Figure 5.3 Elements of an Effective
Judgment Process

Source: Professional Judgment Resource, provided courtesy of the Center for

Audit Quality (2014).

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Potential Judgment Tendencies,
Traps, and Biases
• Auditors should be alert for the following potential
judgment tendencies, traps, and biases that may
impact their decision-making process:
– Confirmation
– Overconfidence
– Anchoring
– Availability

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Table 5.1 Strategies to Mitigate
Common Judgment Tendencies
Judgment Tendency
Confirmation: The tendency to put more weight
on information that is consistent with initial
beliefs or preferences
Overconfidence: The tendency to overestimate
one’s own abilities to perform tasks or to make
accurate assessments of risks or other
judgments and decisions
Anchoring: The tendency to make assessments by
starting from an initial value and then adjusting
insufficiently away from that initial value
Availability: The tendency to consider information
that is easily retrievable or easily accessible as
being more likely or more relevant
Source: Professional Judgment Resource, Provided courtesy of the Center for Audit
Quality (2014).
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Strategy to Avoid or Mitigate Tendency
Make the opposing case and consider
alternative explanations
Consider potentially disconfirming or
conflicting information
Challenge opinions and experts
Challenge underlying assumptions
Solicit input from others
Consider management bias, including the
potential for fraud or material misstatements
Consider why something comes to mind
Obtain and consider objective data
Consult with others and make the opposing
case
Let’s Discuss (2 of 6)
• Distinguish between management’s and the auditor’s
responsibility for the financial statements being audited.
• What is the auditor’s responsibility when noncompliance
with laws or regulations is identified or suspected?

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Let’s Discuss (3 of 6)
• What are the six elements of professional skepticism?
– Describe two of those six elements.
• Describe two of the more common judgment traps and
biases.

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Learning Objective 5.6
Identify the benefits of a cycle approach to segmenting the
audit

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Financial Statement Cycles
• Audits are performed by dividing the financial statements
into smaller segments or components
• The division makes the audit more manageable and aids
in the assignment of tasks to different members of the
audit team
• A common way to divide an audit is to keep closely related
types (or classes) of transactions and account balances in
the same segment

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Figure 5.4 Transaction Flow from
Journals to Financial Statements

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Relationships Among Cycles
• Transaction cycles are an important way to organize
audits
• Auditors treat each cycle separately during the audit
• Although auditors need to consider the interrelationships
between cycles, they typically treat cycles independently
to the extent practical to manage complex audits
effectively

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Figure 5.6 Relationships Among
Transaction Cycles

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Learning Objective 5.7
Describe why the auditor obtains assurance by auditing
transactions and ending balances, including presentation
and disclosure

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Setting Audit Objectives
• Generally, the most efficient and effective way to conduct
audits is to obtain some combination of assurance for
each class of transactions and for the ending balance in
the related accounts
• Audit objectives include:
– Transaction-related audit objectives
– Balance-related audit objectives

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Figure 5.7 Balances and Transactions
Affecting Those Balances for
Accounts Receivable

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Learning Objective 5.8
Distinguish among the management assertions about
financial information

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Management Assertions
• Management assertions are implied or expressed
representations by management about:
– Classes of transactions and the related accounts and
disclosures in the financial statements and
– They are directly related to the financial reporting
framework used by the company

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PCAOB Assertions
• The PCAOB describes five categories of management
assertions:
– Existence or occurrence
– Completeness
– Valuation or allocation
– Rights and obligations
– Presentation and disclosure

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International and AICPA Assertions
• International auditing standards and AICPA auditing
standards further divide management assertions into
two categories:
– Assertions about classes of transactions and events
and related disclosures for the period under audit
– Assertions about account balances and related
disclosures at period end

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Table 5-3 Management Assertions for Each Category of Assertions

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Assertions Lead to Audit Objectives
• Auditors may use different terms to express the
management assertions
– They should consider the relevance of each assertion
for each significant class of transactions and account
balance
• Relevant assertions have a meaningful bearing on
whether the account is fairly stated and are used to
assess the risk of material misstatement and the design
and performance of audit procedures

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Let’s Discuss (4 of 6)
• Identify the cycle to which each of the following general
ledger accounts will ordinarily be assigned:
– sales, accounts payable, retained earnings, accounts
receivable, inventory, and repairs and maintenance.
• Distinguish between the general audit objectives and
management assertions.
– Why are the general audit objectives more useful to
auditors?

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Learning Objective 5.9
Link transaction-related audit objectives to management
assertions for classes of transactions

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Transaction-Related Audit Objectives (1 of 3)
• Occurrence
– Recorded or disclosed transactions exist
• Completeness
– Existing transactions are recorded and disclosures are
included
• Accuracy
– Recorded transactions are stated at the correct
amounts and disclosures are appropriately measured
and described

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Transaction-Related Audit Objectives (2 of 3)
• Posting and Summarization
– Recorded transactions are properly included in the
master files and are correctly summarized
• Classification
– Transactions Included in the client’s journals are
properly classified

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Transaction-Related Audit Objectives (3 of 3)

• Timing
– Transactions are recorded on the correct dates
• Presentation
– Transactions are appropriately aggregated or
disaggregated and described, and disclosures are
relevant and understandable

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Learning Objective 5.10
Link balance-related audit objectives to management
assertions

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Table 5-4 Starkwood Group: Management Assertions and
Transaction-Related Audit Objectives Applied to Sales
Transactions

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Balance-Related Audit Objectives
(1 of 3)

• Existence
– Amounts included exist
• Completeness
– Existing amounts and related disclosures are included
• Accuracy
– Amounts included are stated at the correct amounts,
and disclosures are appropriately measured and
described

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Balance-Related Audit Objectives
(2 of 3)

• Cutoff
– Transactions near the balance sheet date are recorded
in the proper period
• Detail tie-in
– Details in the account balance agree with related
master file amounts, foot to the total in the account
balance, and agree with the total in the general ledger
• Realizable value
– Assets are included at the amounts estimated to be
realized
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Balance-Related Audit Objectives
(3 of 3)

• Classification
– Amounts included in the client’s listing are properly
classified
• Rights and obligations
– Assets are owned or controlled by the entity, and
liabilities are obligations of the entity
• Presentation
– Amounts are appropriately aggregated or
disaggregated and described, and disclosures are
relevant and understandable
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Table 5-5 Starkwood Group: Management Assertions and
Balance-Related Audit Objectives Applied to Inventory

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Learning Objective 5.11
Explain the relationship between audit objectives and the
accumulation of audit evidence

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How Audit Objectives Are Met
• Auditors follow the four phases of the audit process
to ensure that all required audit objectives are both
specified and met:
– Plan and design an audit approach (Phase I)
– Perform tests of controls and substantive tests of
transactions (Phase II)
– Perform substantive analytical procedures and tests of
details of balances (Phase III)
– Complete the audit and issue an audit report (Phase
IV)

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Figure 5.8 Four Phases of a Financial
Statement Audit

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Let’s Discuss (5 of 6)
• Describe what is meant by the cycle approach to auditing.
What are the advantages of dividing the audit into different
cycles?
• Define what is meant by a management assertion about
financial statements.
– Describe how PCAOB assertions and assertions in
international and AICPA auditing standards are similar
and different.

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Let’s Discuss (6 of 6)
• What are specific audit objectives?
– Explain their relationship to the general audit
objectives.
• Identify the four phases of the audit.
– What is the relationship of the four phases to the
objective of the audit of financial statements?

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