Topic 1 (Part 2)

OBJECTIVES AND SCOPE OF

FINANCIAL STATEMENTS AUDIT

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At the end of this topic, students should be able to:

 Explain the objectives of financial statements audit

 Discuss auditors responsibilities in detecting &
reporting fraud
 Differentiate between fraud and error
 Describe categories of management assertions

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 Topic outline

 This chapter covers the following topics:

 Audit objectives
 Basic principles governing an audit
 Auditor’s responsibility for detecting fraud
 Management Assertions

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 Objective of a FS Audit

o Objective = To enable the auditor to express an

opinion whether:
 The FS are prepared
 In all material aspects
 In accordance with an identified FR reporting

o The phrases used to express opinion are:

 Give true and fair view
 Present fairly, in all material respects

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 Objective of a FS Audit (contd.)

o Both terms indicate FS are actually free from

material misstatements

o Auditor needs to obtain:

 a degree of reasonable assurance;
 that the accounting & other records;
 are not affected by material misstatements
 which resulting from fraud & error

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 Auditor’s Responsibilities for
detecting & reporting of fraud & error

 Provide reasonable assurance that are FS taken as whole

are free from material misstatements

 Auditors are responsible to detect material misstatements in

the FS

 Report on the effectiveness of internal control over financial

reporting

 Identify material weaknesses in internal control and provide

recommendations to overcome weaknesses.

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 What is fraud?

 Intentional misrepresentations

 Example :
 Manipulation, falsification or alteration of
records or documents
 Misappropriation of assets
 Omission of the effects of transactions from
records/documents
 Recording of transactions without substance
 Misapplication of accounting policies

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 What is error?

 unintentional mistakes in financial information

 Example :
 Mathematical/clerical mistakes in the
underlying records and accounting data
 Oversight or misinterpretation of facts
 Misapplication of accounting policies

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 Who is responsible to detect
fraud & error?

Through the
Responsible to
implementation
MANAGEMENT prevent & detect
of adequate
F&E
system of IC

Not eliminating However, such

the possibility of system will only
F&E reduce

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Who is responsible to detect
fraud & error? (contd.)

Responsible
AUDITOR
to plan audit

In order to
Designing a
detect
sufficient audit
material
programme
misstatements

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 Management Assertions

o Management represents their business

existence through laid down several classes of
transactions and related accounts in the FS.

o FS audit involves evaluation of evidence to

support management assertion in the FS

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 Management Assertions (contd.)
o Example:

The mgt basically

When SOFP
asserting/stating Have a NRV of
contains an item
that those AR are RM 2m
for AR of RM 2m
exist

Which rose from

From the normal
selling
course of
goods/services on
business
credit

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 Categories of Management Assertions

• Deals with whether assets/liability that included

Existence in BS is actually exists at the SOFP date

Rights & • Assets are rights of the entity

obligations • Liabilities are the obligations at a specified date

Valuation • Assets/Liabilities are recorded at appropriate

carrying value
or • Allocation deals with whether revenue/expenses
Allocation are allocate at the proper accounting period

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Categories of Management Assertions (contd.)

• All transactions are included in the journals &

completeness
posted to GL & all accounts included in the FS

Presentatio • Components of the FS are properly disclosed,

n& classified & described
disclosure

• Recorded transactions or other events

Occurrence occurred during the relevant period & pertain
to the entity

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 Example: Audit objective for assets
MGT ASSERTIONS AUDIT OBJECTIVE

Existence The petty cash funds, undeposited receipts, bank

accounts are exists at SOFP date

Completeness Reported all accounts balances at SOFP date

Rights & Obligations All items included in assets are controlled by the
entity at SOFP date

Valuation The items constituting assets have been correctly

valued
All values are mathematically correct and have been
posted to the GL

Presentations & Required disclosures have been made

disclosure
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