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Audit Responsibilities

and Objectives

Chapter 5

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5-1
Learning Objective 1

Explain the objective of


conducting an audit of
financial statements.

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5-2
Objective of Conducting an Audit
of Financial Statements

The primary objective of the audit


is to express an opinion on the
financial statements.

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5-3
Steps to Develop
Audit Objectives

Understand objectives and


1
responsibilities for the audit.

Divide financial statements


2
into cycles.

Know management
3
assertions about accounts.
2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5-4
Steps to Develop
Audit Objectives

Know general audit objectives for


4
classes of transactions and accounts.

Know specific audit objectives for


5
classes of transactions and accounts.

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5-5
Learning Objective 2

Distinguish managements
responsibilities for preparing
financial statements from the
auditors responsibilities for
verifying those financial statements.
2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5-6
Responsibilities

Management is responsible
for the financial statements,
and for internal control.
Auditors issue an
opinion on fairness
of the financial statements.

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5-7
Learning Objective 3

Explain the auditors


responsibility for discovering
material misstatements.

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5-8
Auditors Responsibilities

Material versus immaterial misstatements


Reasonable assurance
Errors versus fraud
Professional skepticism

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5-9
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

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 10


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

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 11


Learning Objective 4

Classify transactions and account


balances into financial statement
cycles and identify benefits of a cycle
approach to segmenting the audit.

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 12


Transaction Flow Example

Ledger, Trial Balance, and


Transactions Journals Financial Statements
Sales General ledger
Sales journal and subsidiary
records
Cash Cash receipts
receipts journal General ledger
trial balance
Acquisition
of goods Acquisitions
Financial
and services journal
statements
2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 13
Transaction Flow Example

Ledger, Trial Balance, and


Transactions Journals Financial Statements
Cash Cash disburse- General ledger
disbursements ments journal and subsidiary
records
Payroll
Payroll
services and General ledger
journal
disbursements trial balance

Allocation and General Financial


adjustments journal statements
2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 14
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
2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 15
Learning Objective 5

Describe why the auditor obtains


a combination of assurance by
auditing classes of transactions
and ending balances in accounts.

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 16


Balance and Transactions
Affecting Balances Example
Accounts Receivable (in thousands)
Beginning balance $ 18,827
Cash
Sales 144,328 138,393 receipts

Sales returns
1,242 and allowances
Charge-off of
3,323 uncollectible
Ending balance $ 20,197 debts
2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 17
Learning Objective 6

Distinguish among
the five categories of
management assertions
about financial information.

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 18


Management Assertions

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

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 19


Learning Objective 7

Link the six general transaction-


related audit objectives to the
five management assertions.

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 20


Transaction-Related
Audit Objectives

Recorded
Existence
transactions exist.
Existing transactions
Completeness
are recorded.
Recorded transactions
Accuracy are stated at the
correct amount.
2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 21
Transaction-Related
Audit Objectives

Transactions are
Classification
properly classified.
Transactions are recorded
Timing
on the correct dates.
Transactions are included
Posting and
in the master files and
summarization
are correctly summarized.
2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 22
Transaction-Related Audit Objectives
and Management Assertions

Management General Transaction-


Assertions Related Audit Objectives
Existence or occurrence Existence
Completeness Completeness
Accuracy, Classification timing,
Valuation or allocation
Posting and summarization
Rights and obligations N/A
Presentation and disclosure N/A
2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 23
Learning Objective 8

Link the nine general balance-


related audit objectives to the
five management assertions.

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 24


General Balance-Related
Audit Objectives

Amounts
Existence
included exist.
Existing amounts
Completeness
are included.
Amounts included
Accuracy are stated at the
correct amounts.
2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 25
General Balance-Related
Audit Objectives

Amounts are
Classification
properly classified.
Transactions are recorded
Cutoff
in the proper period.
Account balances agree
Detail tie-in with master file amounts,
and with the general ledger.
2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 26
General Balance-Related
Audit Objectives

Realizable Assets are included at


value estimated realizable value.
Rights and
Assets must be owned.
obligations
Presentation Account balances and
and disclosures are presented
disclosure in financial statements.
2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 27
Assertions and Balance-Related
Audit Objectives

Management General Balance-


Assertions Related Audit Objectives
Existence or occurrence Existence
Completeness Completeness
Accuracy, Classification, Cutoff,
Valuation or allocation
Detail tie-in, Realizable value
Rights and obligations Rights and obligations
Presentation and disclosure Presentation and disclosure
2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 28
Learning Objective 9

Explain the relationship


between audit objectives
and the accumulation
of audit evidence.

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 29


How Audit Objectives
Are Met

Auditors plan the combination


of objectives and evidence by
following an audit process.
An audit process is a methodology
for organizing an audit.

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 30


Four Phases of an Audit

Perform analytical
Plan and design procedures and
Phase I Phase III
an audit approach. tests of details
of balances.

Perform tests of
Complete the
controls and
Phase II Phase IV audit and issue
substantive tests
an audit report.
of transactions.
2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 31
End of Chapter 5

2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 5 - 32