Sustainability and Strategic Audit

Objective of Conducting an 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

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.
4. Know general audit objectives for classes of transactions and accounts.
5. Know specific audit objectives for classes of transactions and accounts.

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.
 The Sarbanes-Oxley Act provides for criminal penalties for anyone who knowingly falsely certifies the
statements.
 It requires the CEO and the CFO of the public companies to certify the quarterly and annual financial statements
submitted to the SEC.

Auditor’s Responsibility

 Material versus immaterial misstatements

 Reasonable Assurance
 Errors versus fraud
 Professional skepticism
 Fraud resulting from fraudulent financial reporting versus misappropriation of assets.

Auditor’s Responsibilities for Discovering Illegal Acts

 Direct-effect illegal Act

 Indirect- effect illegal act
 Evidence accumulation when there is no reason to believe indirect-effect illegal act exists
 Evidence accumulation and other actions when there is reason to believe direct or indirect-effect illegal act may
exist
 Actions when the auditor knows of an illegal act.

Financial Statements Cycles

 Audits are performed by dividing the financial statements into smaller segments or components.

Transaction Flow Example

Transactions Journals Ledgers, trial balance and financial

statements
Sales Sales Journal General Ledger and Subsidiary
Records
Cash Receipts Cash receipts journal General Ledger trial balance
Acquisition of goods and services Acquisitions journal Financial statements
Cash disbursements Cash disbursements journal General ledger and subsidiary
records
 Payroll services and disbursements Payroll Journal General ledger trial balance
Allocation and adjustments General Journal Financial statements

Relationships Among transaction Cycles

General Cash

Capital Acquisition and

repayment cycle

Sales and Acquisition and Payroll and personnel

collection cycle payment cycle cycle

Inventory and
warehousing cycle

Management Assertions

1. Existence or occurrence
2. Completeness
3. Valuation or Allocation
4. Rights and obligations
5. Presentation and disclosure

Transaction – Related Audit Objectives and Management Assertions

1. Existence or occurrence
a. Existence
2. Completeness
a. Completeness
3. Valuation or Allocation
a. Accuracy
b. Classification
c. Timing
d. Posting and summarization
4. Rights and obligations
5. Presentation and disclosure
 Existence – recorded transactions exist
 Completeness – Existing transactions are recorded
 Accuracy – Recorded transactions are stated at the correct amounts.
 Classifications – 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.
Assertions and Balanced-Related Audit Objectives

1. Existence or occurrence
2. Completeness
3. Valuation or Allocation
a. Accuracy
b. Classification
c. Cut-off, Detail tie-in
d. Realizable Value
4. Rights and obligations
5. Presentation and disclosure

General Balance-Related Audit Objectives

 Existence – Amounts included exist.

 Completeness – Existing amounts are included.
 Accuracy – Amounts included are stated at the correct amounts.
 Classifications – 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.
 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.

How audit objectives are met

 Auditor must obtain sufficient competent audit evidence to support all management audit evidence to support
all management assertions in the financial statements.
 Audit process is a methodology for organizing an audit.

Four Phases of a financial statement audit

i. Plan and design an audit approach

ii. Perform test of controls and substantive tests of transactions.
iii. Perform analytical procedures and tests of details of balances.
iv. Complete the audit and issue an audit report.