Lecture 4

Audit
Responsibilities
and Objectives

Adapted from 2014 Pearson Education

 2

Objective of an audit of FS

Management’s responsibilities

Auditor’s responsibilities

Learning Financial Statement Cycles

Objectives Management Assertions

Transaction-related audit objectives

Balance-related audit objectives

Phases of financial statement audit

 6-3

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.
 6-4

Steps to Develop Audit Objectives

 6-5

Management’s Responsibilities

§ Adopting sound accounting policies

§ Maintaining adequate internal controls
§ Making fair representations of financial
statements
 6-6

Management’s Responsibilities
7
8
 Objectives of the Auditor
6-9

Obtain Financial Free from

reasonable assurance statements material misstatements

Financial Applicable
Opinion
statements reporting framework

Financial Communicate
Report
statements per audit standards
 6-10

Auditor’s Responsibilities

§ Material misstatements
§ Reasonable Assurance
§ Professional Skepticism
§ Fraudulent reporting vs. theft of assets
§ Errors vs. Fraud
 Auditor’s Responsibility 6-11

to Consider Laws and Regulations

Type Responsibility

Same for
Direct-Effect errors and
fraud

Indirect-Effect No Assurance
 Auditor’s Responsibility 6-12

to Consider Laws and Regulations

Auditor suspects
ØInquire of management
ØConsult client’s counsel or specialist
ØConsider accumulating evidence

Auditor knows
ØConsider effects on financial
statements
ØConsider effect on relationship
with management
ØCommunicate with audit
committee or equivalent
 6-13

Financial Statement Cycles

Audits are performed by dividing the financial

statements into smaller segments or
components.
 6-14

Transaction Flow Example

 6-15

Relationships Among Transaction Cycles

General
cash

Capital acquisition
and repayment cycle

Sales and Acquisition Payroll and

collection and payment personnel
cycle cycle cycle

Inventory and
warehousing
cycle
 6-16

Balance and Transactions Affecting Balances Example

 6-17

Assertions about
classes of transactions
and events for the
period under audit

Management Assertions about

account balances at
Assertions period end

Assertions about
presentation and
disclosure
 Management Assertions for 6-18

Each Category of Assertions

Transactions & Events Account Balances Presentation & Disclosure

Occurrence and rights
Occurrence Existence
and obligations
Completeness Completeness Completeness
Valuation and Accuracy and
Accuracy
allocation valuation
Classification and
Classification
understandability
Cutoff
Rights and
obligations
 General Transaction-related
6-19

Audit Objectives

Recorded transactions
Occurrence
exist

Existing transactions
Completeness
are recorded

Recorded transactions
Accuracy are stated at the
correct amounts
 6-20

General Transaction-related
Audit Objectives
Transactions are included
Posting and
in the master files and
summarization
are correctly summarized.

Transactions are properly

Classification
classified.

Transactions are recorded

Timing
on the correct dates.
 6-21

Hillsburg Hardware Co. – (Sale Transaction)

 6-22

General Balance-related
Audit Objectives

Existence Amounts included exist

Existing amounts are

Completeness
included

Amounts included are

Accuracy stated at the correct
amounts
 6-23

General Balance-related
Audit Objectives
Amounts are properly
Classification
classified

Transactions are recorded

Cutoff
in the proper period

Account balances agree

Detail tie-in with master file amounts,
and with the general ledger
 6-24

General Balance-related
Audit Objectives

Realizable Assets are included at

value estimated realizable value

Rights and
Assets must be owned
obligations
 6-25

Hillsburg Hardware Co.. – (Inventory)

 6-26

Hillsburg Hardware Co. - (Note payable)

 6-27

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
 6-28

Four Phases of a Financial Statement Audit