Audit Responsibilities

and Objectives
Chapter 5

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 Learning Objective 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 applicable financial accounting
framework.

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Steps to Develop Audit
Objectives

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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.

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 Management’s Responsibilities

Financial statements and internal controls.

Sarbanes-Oxley increases management’s

responsibility for the financial statements.

CEO and CFO must certify quarterly and annual

financial statements submitted to the SEC.
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Management’s Responsibilities

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Management’s Responsibilities

The Sarbanes-Oxley Act provides for criminal

penalties for anyone who knowingly falsely
certifies the statements.

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 Learning Objective 3

Explain the auditor’s responsibility for

discovering material misstatements.

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 Objectives of the Auditor

Obtain Free from

Financial
reasona material
statemen
ble misstateme
ts
assuranc nts
e Applicable
Financial
Opine reporting
statemen
framework
ts
Communicat
Financial
Report e per audit
statemen
standards
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Auditor’s Responsibilities

Material Reasonable
misstatements Assurance

Professional
Errors vs. Fraud
Skepticism
Fraudulent
reporting
vs.
theft of
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Auditor’s Responsibilities for
Discovering Illegal Acts
Type Responsibility
Same for
Direct-Effect errors and
fraud

Indirect-Effect No Assurance

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 Auditor’s Responsibilities for
Discovering Illegal Acts
Auditor suspects
➢Inquire of management
➢Consult client’s counsel or
specialist
➢Consider accumulating evidence
Auditor knows
➢Consider effects on
financial statements
➢Consider effect on
relationship
with management
➢Communicate with audit
committee or equivalent
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 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

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 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
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 Learning Objective 5

Describe why the auditor obtains a

combination of assuranc e by auditing
classes of transactions and ending
balances in accounts, including
presentation and disclosure.

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 Balance and Transactions
Affecting Balances Example

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 Learning Objective 6

Distinguish among the three categories of

management assertions about financial
information.

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 Management Assertions

1. Assertions about classes of transactions and

events for the period under audit

2. Assertions about account balances at period end

3. Assertions about presentation and disclosure

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 Management Assertions for
Each Category of Assertions
Transactions and Events Account Balances Presentation and Disclosure
Occurrence Existence Occurrence and rights
and obligations
Completeness Completeness Completeness
Accuracy Valuation and Accuracy and
allocation valuation
Classification Classification and
understandability
Cutoff
Rights and
obligations
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 PCAOB Assertions
Existence or Occurrence

Completeness
Valuation or
allocation
Rights and obligations

Presentation and
disclosure

Similar to U.S. GAAS as the first four assertions are applicable to

balances and transactions. Presentation is treated as a single assertion

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 Learning Objective 7

Link the six general transaction-related audit

objectives to management assertions for
classes of transactions.

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 General Transaction-related
Audit Objectives
Recorded transactions
Occurrence
exist

Existing transactions
Completeness
are recorded

Recorded transactions
Accuracy are stated at the
correct amounts
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 General Transaction-related
Audit Objectives
Transactions are included
Posting and
in the master files and
summarizatio
are correctly summarized.
n
Transactions are properly
Classification
classified.

Transactions are recorded

Timing
on the correct dates.
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Hillsburg Hardware Co.
(Applied to Sales Transactions)

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 Learning Objective 8

Link the eight general balance-related audit

objectives to management assertions for
account balances.

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 General Balance-related
Audit Objectives

Existence Amounts included exist

Existing amounts are

Completeness
included

Amounts included are

Accuracy stated at the correct
amounts

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 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

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 General Balance-related
Audit Objectives
Realizable Assets are included at
value estimated realizable value

Rights and
Assets must be owned
obligations

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Hillsburg Hardware Co.
(Applied to Inventory)

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 Learning Objective 9

Link the four presentation- and disclosure-

related audit objectives to management
assertions for presentation and disclosure.

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Hillsburg Hardware Co.
(Applied to Notes Payable)

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 Learning Objective 10

Explain the relationship between audit

objectives and the accumulation of audit
evidence.

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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

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Four Phases of a Financial
Statement Audit

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End of Chapter 5

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