Audit Responsibilities

and Objectives

Chapter 6
 Learning Objective 1

Explain the objective of

conducting an audit of
financial statements
and an audit of internal
controls.
Objective of Conducting an Audit of
Financial Statements

The primary objective of the audit

is to express an opinion on the
financial statements.
 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.
 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.
 Learning Objective 2

Distinguish management’s responsibilities

financial statements and internal
control from the auditor’s responsibilities for
verifying those financial statements
and effectiveness of internal control.
 Responsibilities

Management is responsible
for the financial statements,
and for internal control.
Auditors issue an
opinion on fairness
of the financial statements.
 Learning Objective 3

Explain the auditor’s

responsibility for discovering
material misstatements.
 Auditor’s Responsibilities

Material versus immaterial misstatements

Reasonable assurance
Errors versus fraud
Professional skepticism
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
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
 Learning Objective 4

Classify transactions and account

balances into financial statement
cycles and identify benefits of a cycle
approach to segmenting the audit.
 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
 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
 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
 Learning Objective 5

Describe why the auditor obtains

a combination of assurance by
auditing classes of transactions
and ending balances in accounts,
including presentation and disclosure.
 Balance and Transactions Affecting
Balances Example
Accounts Receivable (in thousands)
Beginning balance $ 19,454
Cash
Sales 144,328 139,020 receipts

Sales returns
1,242 and allowances
Charge-off of
3,328 uncollectible
Ending balance $ 20,197 debts
 Learning Objective 6

Distinguish among
the three categories of
management assertions
about financial information.
1. Assertionsabout classes of transaction
and event for the period under audit
2. Assertions about account balances at period end
3. Assertions about presentation and disclosure
Assertions about classes of transaction
and event for the period under audit

1. Occurrence
2. Completeness
3. Accuracy
4. Classification
5. Cutoff
Assertions about account balances at period end

1. Existence
2. Completeness
3. Valuation and Allocation
4. Right and Obligation
 Assertions about presentation and disclosure

1. Occurance and right and Obligation

2. Completeness
3. Accuracy abd Valuation
4. Classification and understandability
 Learning Objective 7

List the six general transaction-

related audit objectives to the
five management assertions for
classes of transactions.
 Transaction-Related
Audit Objectives

Recorded
Existence
transactions exist.
Existing transactions
Completeness
are recorded.
Recorded transactions
Accuracy are stated at the
correct amount.
 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.
 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
 Learning Objective 8

Link the eight general balance-

related audit objectives to the
five management assertions
for account balances.
 General Balance-Related
Audit Objectives

Amounts
Existence
included exist.
Existing amounts
Completeness
are included.
Amounts included
Accuracy are stated at the
correct amounts.
 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.
 General Balance-Related
Audit Objectives

Realizable Assets are included at

value estimated realizable value.
Rights and
Assets must be owned.
obligations
Specific Balance related audit objectives
 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
 Learning Objective 9

Link the four presentation and

disclosure related audit
objective to management assertions
for presentation and disclosure.
See Table 6-5
 Learning Objective 10

Explain the relationship

between audit objectives
and the accumulation
of audit evidence.
 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.
 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.
End of Chapter 6