APP I Chapter 5, PT I, Audit Responsibility and Objectives

Chapter 4
Audit Responsibility,
Objectives, Evidence and
Documentation
4.1 Audit Responsibility &
Objectives
Learning Objective
4.1.1 Distinguish between management’s and auditor’s
responsibility
4.1.2 Explain the auditor’s responsibility for discovering
material misstatements due to fraud or error.
4.1.3 Discuss the three categories of management assertions
about financial information
4.1.4 Describe the need to maintain professional skepticism
when conducting an audit.
4.1.5 Identify the benefits of a cycle approach to segmenting
the audit.
4.1.6 Describe how audit objectives (transaction related
balance related) relate to management assertions
4.1.6 Explain the relationship between audit objectives and
the accumulation of audit evidence.
Audit Responsibility & Objective
 The objective of an audit of the financial statements- is an expression
of an opinion on the fairness of the financial statements in all
material respects.
• How auditor’s achieve this objective?
• Auditors accumulate evidence in order to reach conclusions
about whether the financial statements are fairly stated and to
determine the effectiveness of internal control, after which they
issue the appropriate
. audit report.
• If the auditor believes that the statements are not fairly
presented or is unable to reach a conclusion because of
insufficient evidence, the auditor has the responsibility of
notifying users through the auditor’s report.
 Subsequent to their issuance, if facts indicate that the
statements were not fairly presented, the auditor will probably
have to demonstrate/experess to the courts or regulatory agencies
that the audit was conducted in a proper manner and the
auditor reached reasonable conclusions.
..Audit Responsibility & Objective
Audit I YA AAUSC 2022

Steps to develop an audit Objective
Step 1: Understand objectives and responsibilities for the
audit
Management’s Responsibilities: Management of a company is
responsible for
 Designing and implementing internal control systems effectively,
 Adopting sound accounting policies, and
 Making fair representations in the financial statements (preparing
financial statements of the entity genuinely)

-A company’s management knows more about the company’s
transactions and related assets, liabilities, and equity more than the auditor
since they operate the business daily
•
-The auditor’s knowledge of these matters and internal control is limited
to that acquired during the audit.

- The management responsibility report is usually attached in the annual
reports of public companies
…Steps to develop an audit Objective
..Step 1: Understand objectives and responsibilities for the audit
Auditor’s Responsibilities:
– As per ISA 200 the independent auditor is responsible:
(a)To obtain reasonable assurance -about whether the
financial statements as a whole are free from
material misstatement ( whether due to fraud or
error), thereby enabling the auditor to express an
opinion on whether the financial statements are
prepared, in all material respects, in accordance with an
applicable financial reporting framework; and
(b) To report on the financial statements, and
communicate as required by the ISAs, in accordance
with the auditor's findings
…Step 1: Understand objectives and responsibilities for the audit
….Auditor’s Responsibilities:
•
Major points emphasized in the auditors responsibilities are:
 Detecting material misstatements in the financial
statement
 Identifying material weaknesses in internal control
over financial reporting.
 Providing reasonable assurance on the fairness of
financial statements and about control systems ( For
larger public companies, the auditor also issues a report
on internal control over financial reporting as required
by Section 404 of the Sarbanes–Oxley Act.)
•
Material Versus Immaterial Misstatements
– Misstatements are usually considered material –
-if the combined uncorrected errors and fraud in the FSs
would likely have changed or influenced the decisions of a
reasonable person using the statements.
– Although it is difficult to quantify a measure of materiality,
auditors are responsible for obtaining reasonable assurance
that this materiality threshold has been satisfied.
– It would be extremely costly (and probably impossible) for
auditors to have responsibility for finding all immaterial
errors and fraud.
•
Reasonable Assurance
– Assurance - is a measure of the level of certainty that the
auditor has obtained at the completion of the audit.
 Auditing standards indicate reasonable assurance- is a high
level of assurance, but not absolute level of assurance that
indicates financial statements are free of material
misstatements.
 The concept of reasonable, but not absolute, assurance
indicates that the auditor is not an insurer or guarantor of
the correctness of the FSs.
– Thus, an audit that is conducted in accordance with auditing
standards may fail to detect a material misstatement.
•
Why the auditor is responsible for reasonable but not
absolute assurance?
1. Audits are usually conducted on test basis (sampling)
 Sampling inevitably includes some risk of not
detecting a material misstatement.
 Auditors may also make mistake in making
judgments about the area to be tested, the type,
extent, and timing of the tests and also
evaluation of the evidences.
2. In accounting complex estimates are used, which inherently

involve uncertainty and can be affected by future events.
Because of the uncertainties involved in the estimates, an audit
can not give absolute assurance

3. Fraudulently prepared financial statements are often
extremely difficult, if not impossible, for the auditor to detect,
especially when there is collusion among management.

.
To conclude:
It is evident that looking at each and every document
is costly and will not be economical;
So the auditor’s best defense, when material
misstatements are not uncovered- is to have
conducted the audit in accordance with auditing
standards

Errors Versus Fraud

- Auditing standards distinguish between two types of
misstatements:

a. errors and

b. fraud.

-Either type of misstatement can be material or immaterial.

-An error is an unintentional misstatement of the financial
statements,

-whereas fraud is intentional .
Fraud has been classified in to two:
1.Misappropriation(taking) of assets,- often called
defalca`tion ( employee fraud)
- eg. a clerk taking cash at the time a sale is made and not
entering the sale in the cash register
2. Fraudulent financial reporting,- often called
management fraud.
-eg. intentional overstatement of sales near the balance sheet
date to increase reported earnings.

. Auditor’s Responsibilities for Detecting Material Errors

•
-Auditors spend a great portion of their time in planning and
performing audits to detect errors in financial statements.

-Auditors find a variety of errors resulting from such things as :
 mistakes in calculations,
 omissions,
 misunderstanding and misapplication of accounting
standards, and
 incorrect summarizations and descriptions.
Auditor’s Responsibilities for Detecting Material Frauds

Auditing standards make no distinction between the
auditor’s responsibilities for searching for errors and fraud.
In either case, the auditor must obtain reasonable
assurance about whether the statements are free of
material misstatements.
The standards also recognize that fraud is often more
difficult to detect because management or the employees
perpetrating/commit the fraud attempt to conceal the
fraud.
Still, the difficulty of detection does not change the
auditor’s responsibility to properly plan and
perform the audit to detect material misstatements,
whether caused by error or fraud, so proper planning
is essential

Fraud Resulting from Fraudulent Financial Reporting
Versus
Misappropriation of Assets
 Both fraudulent financial reporting and misappropriation

of assets are potentially harmful to FS users, but there is
an important difference between them.
 Fraudulent financial reporting -harms users by
providing them incorrect FS information for their
decision making.
 When assets are misappropriated, -stockholders,
creditors, and others are harmed because assets are no
longer available to their rightful owners.
•
Auditor’s responsibility to Consider non-compliance of
Laws and regulations/ illegal acts (ISA 250)- :
– In obtaining reasonable assurance -that the
financial statements are free of material
misstatement, the auditor takes into account
applicable legal and regulatory frameworks
relevant to the -client.
-For example, when auditing the FSs of a

bank, the auditor would need to consider
requirements of banking regulators such
as reserve requirement and others.
 The auditor’s responsibilities regarding
noncompliance with laws and regulations
(called-illegal acts) depend on whether the
laws or regulations are expected to have a
direct effect on the amounts and
disclosures in the financial statements.
 illegal acts: are violations of laws or
government regulations other than fraud.
-Examples of illegal acts include:
-violation of tax laws
-violation of the environmental
protection laws.
Direct-Effect of Illegal Acts:

Certain violations of laws and regulations have
a direct financial effect on specific account
balances in the FS.
Eg. a violation of tax laws directly affects income
tax expense and income taxes payable.
The auditor’s responsibility for direct-effect
illegal acts is the same as for errors and
fraud.
On each audit, the auditor should evaluate
whether or not there is evidence indicating
material violations of tax laws.
 Discussions with client personnel and
examining reports issued by auditors from
Internal Revenue Service (after the completion
of an examination of the client’s tax return) are
helpful for the auditor to see if there is material
violation of tax laws

•
Indirect-Effect illegal Acts:
•
-These are illegal acts that affect the financial statements only
indirectly.
EX. if a company violates environmental protection laws,
financial statements are affected only if there is a fine or sanction.

- Potential material fines and sanctions indirectly affect FSs by
creating the need to disclose a contingent liability for the potential
amount that might ultimately be paid.

- This is called an indirect-effect illegal act.

- Civil rights laws and employee safety requirements can also be
sources of indirect effect legal acts
•

… Auditor’s responsibility to Consider Laws and regulations

ISA 250 - state that the auditor provides no
assurance that indirect-effect illegal acts will be
detected, due to the following reasons:
1. Auditors lack legal expertise,
2. The frequent indirect relationship between illegal
acts and the financial statements
•
So it is it impractical for auditors to assume
responsibility for discovering indirect-effect illegal acts.
•
- When the auditor believes that an illegal act may have
occurred,
•
-several actions are necessary to determine whether the
suspected illegal act actually exists:
1. The auditor should first inquire of management at a level
above those likely to be involved in the potential illegal act.
2. The auditor should consult with the client’s legal counsel
or other specialist who is knowledgeable about the potential
illegal act.
3. The auditor should consider accumulating additional
evidence to determine whether there actually is an illegal act.
Actions When the Auditor Knows of an illegal Act

1. The first action is to consider the effects on the FSs,
including the adequacy of disclosures. Effects may
be complex and difficult to resolve
eg. effect of violation of civil rights laws could be
significant fines, loss of customers or key employees, which
could materially affect future revenues and expenses.
or

-If the auditor concludes that the disclosures relative to an
illegal act are inadequate, the auditor should modify the
audit report accordingly.
 In deciding whether to modify/not to modify the report, the
auditor should analyze the implication of the illegal act on
important issues like –
- the audit firm’s relationship with management, i.e
- if management knew of the illegal act and failed to inform the
auditor, it is questionable whether management can be believed
in other discussions.

2. The auditor should communicate (oral or written) with the audit
committee or others of equivalent authority to make sure that they
know of the illegal act.
- If it is oral, the nature of the communication and discussion should be
documented in the audit files.

-If the client either refuses to accept the auditor’s modified report or fails to
take appropriate remedial action concerning the illegal act, the auditor may
find it necessary to withdraw from the engagement.

- If the client is publicly held, the auditor must also report the matter directly
to the SEC.

- Such decisions are complex and normally involve consultation by the auditor
with the auditor’s legal counsel
…..Auditor’s Responsibilities:
Professional skepticism
 Auditor’s responsibility includes performing an audit with an

attitude of professional skepticism
Assignment 2-on professional judgment and skepticism

–Submission date: end of discussion on Ch 4
1. Explain the concept of professional skepticism and identify its
two elements
2. Describe the key elements of an effective professional judgment
process.
3. List and describe the six elements of professional skepticism?
4. What are the five elements of an effective professional judgment
process?
5. Describe two of the more common judgment traps and biases.
•
Step 2: Divide Financial Statements in to Cycles
 Audits - are performed by dividing the financial statements into
smaller segments or components.
– The division is needed:
 To make the audit more manageable and
 To facilitate the assignment of tasks to different members of the
audit team.
Eg: The audit of fixed assets and notes payable
– These two items may be audited in different segment separately but
not on a completely independent basis.
-(eg. the audit of fixed assets may reveal an unrecorded note payable.)
– After the audit of each segment is completed, the results are combined.
 A conclusion can then be reached about the financial statements taken as
a whole.
•
…Step 2: Divide Financial Statements in to Cycles
•
There are different ways of segmenting an audit.
1. To treat every account balance on the statements as a
separate segment.
 Segmenting in this way is usually inefficient.
 It would result in the independent audit of such closely
related accounts -as inventory and cost of goods sold.
2. To use Cycle Approach to Segment an Audit
 It is a common way to divide an audit
 It involves keeping closely related types (or classes) of
transactions and account balances in the same
segment
•
 The cycle approach combines transactions recorded in different
journals with the general ledger balances that result from those
transactions
 The cycle approach divides financial statement items in to five
cycles
•
1. Sales and collection cycle (S)
•
2. Acquisition and payment cycle (A)
•
3. Payroll and personnel cycle (P)
•
4. Inventory and warehousing cycle (I)
•
5. Capital acquisition and repayment cycle (C)
•
1. Sales and collection cycle (S)

-The sales and collection cycle is the first cycle listed and is a
primary focus on most audits.

- Collections on trade accounts receivable in the cash receipts
journal is the primary operating inflow to cash in the bank.
33

Classes of transactions and accounts in Sales and Collection Cycle
Five Classes of transactions in sales and collection Accounts in each classes of
cycle transactions in sales and
collection cycle
1. Sales Transaction ( Cash and on account sales) •Cash, A/R, Sales
2. Cash Receipts Transaction: Collections from all •Cash, A/R, Sales discount,
sources, collection of AR with or with no discount; other accounts
3. Sales Returns and Allowances Transaction •Sales returns and allowances
and A/R
4. Write off of uncollectible A/R Transaction - •Allowance for Bad debt
expense, A/R
5. Estimate of Bad Debt Expense Transaction •Bad debt expense,

Allowance for uncollectible
accounts
•
•
2. Acquisition and payment cycle (A);

Involves transactions related to :
 the acquisitions of goods and services used in operation
 the cash disbursements for those acquisitions
 Purchase returns & allowances, purchase discounts
•
3. Payroll and personnel cycle (P) Involves transactions related to
 Payment of salary expenses
 Accrual of salaries incurred but not paid
 Withheld of payroll related taxes, allocation of labor cost in to
DL,IL
• 4. Inventory and warehousing cycle (I)
 This cycle is unique because it has close
relationships to other transaction cycles .
 Involve acquisition of raw materials, labor, and
others-this relates to Acquisition & Payment
cycle
 Involve shipping goods and record revenue and
costs -this relates to Sales & Collection cycle

•
..Step 2: Divide Financial Statements in to Cycles
•
5. Capital acquisition and repayment cycle (C)
•
-Transactions in the capital acquisition and repayment cycle
are related to financing the business, such as issuing stock or
debt, paying dividends, and repaying debt.

Identifying account balances belonging to different transaction
cycles
– It is logical to use the cycle approach since it agrees with the way
transactions are recorded in journals and summarized in the
general ledger and FSs.
– eg, Sales, Sales returns, Cash receipts, Estimate and Write-offs of
Uncollectible accounts are the five classes of transactions that
cause accounts receivable to increase and decrease.
– Therefore, they are all parts of the sales and collection cycle.
•
…Steps
..Step to Financial
2: Divide developStatements
an audit inObjective
to Cycles
Identifying account balances belonging to different transaction

cycles
– Trial balance - is a primary focus of every audit as it is the
starting point to prepare financial statements.
– The letter representing a cycle is shown for each account in the left
column beside the account name.
Note:
-Each account has at least one cycle associated with it, and only
cash and inventory are a part of two or more cycles.
– Some journals and general ledger accounts are included in
more than one cycle; which shows the journal is used to
record transactions from more than one cycle and indicates a
tie-in between the cycles.
 The most important general ledger account included in
and affecting several cycles is general cash (cash in
bank).
– General cash connects most cycles.
 Although auditors need to consider the
interrelationships between cycles, they typically treat
cycles independently to the extent practical to manage
complex audits effectively.

•
..Step 2: Divide Financial Statements in to Cycles
•
Activity
•
Listed below are several accounts listed from a company's trial balance. Next to each
account put the letter corresponding to the transaction cycle used to audit the account.
•
S = Sales and collection cycle I = Inventory and warehousing cycle
•
A = Acquisition and payment cycle C = Capital acquisition and repayment cycle
•
P = Payroll and personnel cycle
•
•
1. ______S__ Sales returns and allowances 5. ___P_____ Salaries and
commissions
•
2. ______C__ Capital stock 6. _____I___ Cost of goods sold
•
3. ______A__ Buildings 7. _____S___ Trade accounts receivable
•
4. _______C_ Notes payable 8. ___A_____ Rent
Steps to develop an audit Objective
•
Step 3: Setting Audit Objectives
 Since the objective of an audit is to express opinion that
financial statements are fairly stated, they develop audit
objectives that test each management assertions
•
Management assertions
– Management is responsible for the preparation of financial
statements that give a true and fair view.
– Assertions are implied or expressed representations
made by the client’s management about classes of
transactions, account balances and disclosures in the
financial statements
– Assertions are tested by the auditor to check the different types
of potential misstatements that may occur
– Financial statements represent -management's assertions
– Management assertions are directly related to the
financial reporting framework used by the company
(usually U.S. GAAP or IFRS)
Why Assertions matter for the Auditor?
– The auditor’s responsibility is to determine whether
management assertions - about financial statements
are justified.

•
….Step 3: Setting Audit Objectives

= In order to provide opinion on financial
statements, it is necessary to test transactions, balances
and disclosures.
•
-Management assertions are classified in to three
categories:
1. Transaction –related assertions- Assertions about
transactions and events
2. Balance –related assertions- Assertions about
account balances
3. Disclosure –related assertions- Assertions about
Disclosures
•
•
…..Management Assertions
•
Management assertion related to classes of transactions
•
.1. Occurrence. Transactions and events that have been recorded
have occurred and pertain to the entity.
•
2. Completeness. All transactions and events that should have been
recorded have been recorded.
•
3. Accuracy. Amounts and other data relating to recorded
transactions and events have been recorded appropriately.
•
4. Classification. Transactions and events have been recorded in
the proper accounts.
•
5. Cutoff. Transactions and events have been recorded in the
correct accounting period
•
•
Management assertion related to balances
•
1. Existence. Are Assets, liabilities, and equity interests exist.
•
2. Completeness. All assets, liabilities, and equity interests that
should have been recorded have been recorded.
3. Valuation and allocation. Assets, liabilities, and equity interests
are included in the financial statements at appropriate amounts
and any resulting valuation adjustments are appropriately
recorded.
•
4. Rights and obligations. Does the entity holds or controls the
rights to assets, and liabilities are the obligation of the entity.
•
•
Management assertion related to presentation &
disclosures
•
1. Occurrence and rights and obligations. Disclosed events
and transactions have occurred and pertain to the entity.
•
2. Completeness. All disclosures that should have been
included in the financial statements have been included.
•
4. Accuracy and valuation. Financial and other information
are disclosed appropriately and at appropriate amounts.
•
5. Classification and understandability. Financial and other
information is appropriately presented and described and
disclosures are clearly expressed.
•
-Auditors develop the following audit objectives to test management
assertions:
1. Transaction-Related Audit objective- reach a conclusion that transactions are
properly recorded
. General transaction-related audit objectives-apply to all classes of transaction (Sales
& Collection, Payment & acquisition….
• Specific transaction-related audit objectives - apply to all classes of transaction
but tailored to each class
2. Balance-Related Audit Objective- reach a conclusion that balances are
properly stated .
General balance-related audit objectives-apply to all account balances
Eg Testing Existence of A/R & Inventory
Specific transaction-related audit objectives - apply to all account balances but
tailored to each (Audit procedure to test existence of inventory is different from
audit procedure to test existence of A/R)
•
•
The Six General Transaction Related Audit Objectives
•
1. Occurrence
•
2. Completeness
•
3. Accuracy
•
4. Posting and summarization
•
5. Classification
•
6. Timing
•
*These transaction related audit objectives - follow related
management assertion and help the auditor to accumulate
sufficient appropriate evidence about transactions
•
•
The Six General Transaction Related Audit Objectives
•
1. Occurrence
– This objective deals with whether recorded transactions have
actually occurred
 Eg Vouching recorded sales from the sales journal to the file
of bills of lading.
 Vouching recorded expenses from the Cash payment journal
to the file of check payment.
– Eg. inclusion of payment for expenses in cash disbursement
journal when the event does not occur violates occurrence
objectives
– This objective corresponds with management assertion of
occurrence
•
..The Six General Transaction Related Audit Objectives
•
2. Completeness
– This objective deals with whether all transactions that should be
included in the journals have actually been included
 Auditors account for the sequence of pre-numbered sales
invoices to check completeness
– Eg. Failure to include a sales in a sales journal when a sale
occurred violates the completeness objectives
– This objective corresponds with management assertion of
completeness
 Occurrence is checked to see if there is overstatement
 Completeness is checked to see if there is understatement
due to unrecorded transactions
•
…The Six General Transaction Related Audit Objectives
•
3. Accuracy
– This objective deals with the accuracy of information
for accounting transactions
– Eg. in recording sales, if the quantity shipped is
different from what is billed, or
– if wrong selling price is used,
– if wrong amount is recorded in sales journal,
it is considered as a violation of the accuracy
objectives
– This objective tests management’s assertion of
valuation or allocation
•
…The Six General Transaction Related Audit Objectives
•
4. Posting and summarization
– This objective involves determining whether
transactions recorded in journals are transferred to
the appropriate general and subsidiary ledger
accounts
Eg.
- if a receivable from customer “A” is recorded in Customer “B”s
subsidiary ledger, or
- if the control ledger shows an amount different from the summary
of subsidiary ledgers, it is considered as violation of the posting
and summarization objectives
– This objective also tests management’s assertion of valuation or
allocation
– The use of computerized system usually reduce this problem
•
•
..The Six General Transaction Related Audit Objectives
•
5. Classification
– This objective involves determining whether transactions are
properly coded/classified
– Eg. error in classifying cash sales as credit sales,
– recording collections from sale of operating fixed assets as
revenue,
– Both are violation of the classification objectives
6. Timing
– This objective involves determining whether the transactions are
recorded in the correct date the transaction take place
– Eg. A sales transaction should be recorded at the time of
shipment (when title passes)
– This objective is also tests management’s assertion of valuation or
allocation
•
•
The Eight General Balance Related Audit Objectives
•
1.Existence
•
2. Completeness
•
3.Accuracy
•
4. Classification
•
5. Cutoff
•
6. Detail tie-in
•
7. Realizable value
8. Rights and obligations

These balance related objectives also follow management
assertions and they provide a framework to help the auditor
accumulate sufficient appropriate evidence related to
account balances.
•
•
How balance related audit objectives differ from transaction
related audit objectives?
 Balance-related objectives are almost always applied to the ending
balances in balance sheet accounts
 Some balance-related audit objectives are applied to certain income
statement accounts of non-routine nature, and unpredictable expenses
such as legal expense or repairs and maintenance
 Income statement accounts closely related to balance sheet accounts are
tested simultaneously such as (Dep. exp with Acc dep. , interest expense
with notes payable).
 There are eight balance related audit objectives, but only six transaction
related audit objectives.
•
•
1.Existence
– This objective deals with whether the amounts included
in the financial statements should actually be existed
– Eg. inclusion of an accounts payable to a supplier that
doesn’t exist in the accounts payable ledger violates
the existence objectives
– This objective tests management assertion of existence
•
2. Completeness
– This objective deals with whether the amounts that
should be included have actually been included
– Eg. Failure to include an accounts payable to a supplier
in the accounts payable ledger when a payable exists
violates the completeness objectives
•
•
3.Accuracy
– This objective deals with the arithmetic accuracy/dollar amount/ of
amounts enter in the financial statements
– Eg. Failure to state inventory items’ correct quantity, unit cost or
total cost violates the accuracy objectives
– This objective tests management’s assertion of valuation or
allocation
•
4. Classification
– This objective involves determining whether the amounts that enter
in client’s listings/classifications are in correct accounts
– Eg. reporting short-term investment balance under the caption
‘Receivable’ is violation of the classification objective
– This objective also tests part of management’s assertion of
•
•
…The Eight General Balance Related Audit Objectives
•
5. Cutoff
– This objective aims to determine whether accounts in ledger reflect
transactions recorded in the proper period
– An account balance will be misstated if transactions near the end of the
accounting period are not properly recorded.
– This objective also tests part of management’s assertion of valuation or
allocation
•
6. Detail tie-in (GL with SL)
– This objective deals about the agreement of balances in subsidiary
accounts with that of the general ledger accounts
– Eg. if the total of subsidiary ledgers for accounts receivable do not agree
with that of the accounts receivable general ledger , the detail tie-in
objective is violated
– This objective also tests part of management’s assertion of valuation or
allocation
•
•
•
7. Realizable value (about valaution)
•
This objective is concerned whether asset accounts are
properly valued,
•
- i.e whether declines from historical costs are adequate
Eg.
-if the allowance for uncollectible account is not adequate,
-If inventory write-downs for obsolete stock is not
adequate,
-if items that should be reported at fair value are reported
at book value, this objective is not met
– This objective tests management’s assertion of
•
•
•
8. Rights and obligations
 Rights- apply for assets, and obligations- for liability
 Existence is not sufficient for an asset to be included in
balance sheet, it has to be owned by the client’s
organization
 Similarly, liabilities should belong to the entity
 This objective tests management’s assertion of rights
and obligation
•
The Presentation & Disclosure Related Audit Objectives

 The four presentation and disclosure-related audit objectives are
identical to the management assertions for presentation and
disclosure.
 The same concepts that apply to balance-related audit objectives
apply equally to presentation and disclosure audit objectives
•
1.Occurrence and rights and obligations. Disclosed events and
transactions have occurred and pertain to the entity.
•
2. Completeness. All disclosures that should have been included in
the financial statements have been included.
•
4. Accuracy and valuation. Financial and other information are
disclosed appropriately and at appropriate amounts.
•
5. Classification and understandability. Financial and other information
is appropriately presented and described and disclosures are clearly
expressed.
•
Relationships between Audit Objectives

 There is a significant overlap between the transaction-
related and balance-related audit objectives.
 Rights and obligations is the only balance-related
assertion without a similar transaction-related assertion.
 Presentation and disclosure-related audit objectives are
closely related to the balance-related audit objectives.
 Auditors often consider presentation and disclosure
audit objectives when addressing the balance related
audit objectives.
•
How Audit Objectives are Met?

-
 The auditor must obtain sufficient appropriate audit
evidence to support all management assertions in the
financial statements.
 This is done by accumulating evidence in support of
some appropriate combination of transaction-related
audit objectives and balance-related audit objectives.
 The auditor must decide the appropriate audit objectives
and the evidence to accumulate, to meet those
objectives on every audit
•
..How Audit Objectives are Met?

 To accumulate evidence that enables to achieve audit
objectives, auditors follow the audit process.
 The audit process -= is a well-defined methodology for
organizing an audit to ensure that the evidence
gathered is both sufficient and appropriate and that all
required audit objectives are both specified and met.
- The auditor should know the legal and operating
environment in which the client organization operates, and
also the reporting requirement so that the audit plan can
meet the objectives associated with reporting requirements
in the industry
Four Phases of the Audit Process
1. Plan and design the audit approach

2. Perform tests of control and substantive tests of
transactions
3. Perform analytical procedures and tests of details of
balances
4. Complete the audit and issue an audit report

End of Chapter 4:
Questions

Audit assertions
• Auditors need to use assertions when assessing the risk of

material misstatement and designing audit procedures.
How—by collecting evidence
• Means- auditors need to gather sufficient(how much audit
evidence) and appropriate (tripe of evidence)evidence
about each assertion for each transaction and account
balance or disclosure.

Assertions about classes of transactions and Events
P/L Statement
• Occurrence:- Whether transactions actually occurred
during the accounting period – it happened
• Completeness;- whether all transactions that should be
included are in fact included
• Accuracy:- whether transactions have been recorded in
correct journal account
• Classification- Whether transactions are recorded at
correct amounts ( ledgers Drs and Crs)
• Cutoff:- whether transactions are recorded in the proper
accounting period

Assertions about account balances : Balance
sheet B/S
• Existence: whether A, L, and E interests actually existed at
the balance sheet date (are there any fake assets)
• Completeness: whether all the accounts that should be
presented are included (liabilities concerned)
• Valuation (dollar value ) and allocation (Current and
N/current) : whether A, L and E interests have been
included at appropriate amounts
• Rights (ownership/control ) and obligations; whether the
assets are the rights of the entity, and whether the
liabilities are the obligations of the entity.

Assertions about Presentation and Disclosure
• This all about annual report
• Numbers and notes
• Occurrence and rights and obligation
• -whether disclosed events have occurred and are the
rights and obligations of the entity
• Completeness
• -whether all the required disclosures have been included
• Accuracy and valuation; whether financial information is
disclosed fairly and at appropriate amount
• Classification and understandability
• Whether amounts are appropriately classified
How do valuations Fit together
Transactions Balances
• Occurrence Occurrence
• Completeness Completeness
• Accuracy Valuation and allocation
• Classification Allocation
• Cutoff Cutoff

General transaction related audit objectives
• Occurrence-did my transaction occur
• Completeness- did I recorded all of them
• Accuracy- at the right dollar value
• Posting and summarizing (pull to the accuracy)
(technicallity of accounting)- have all these transactions
posted in the right places
• Classification- in the right journal entry
• Timing(cutoff)- in the right period
• The first three are the key
General Balance related audit objectives
• Existence
• Completeness
• Valuation
• Classification
• Cutoff
• Detail tie- in
• Realizable value
• Rights and Obligations
Presentation and dusclosure audit objevtives
• Occurrence and rights and obligations
• Complteness
• Accuracy and valyaution
• Classification and aunderstandability

How audit objectives are met?
The Auditor plans the appropriate combination of:
Audit objectives
The evidence that must be accumulated to meet them
-This plan is called AUDIT PROGRAM (Design)
Audit process is :
 A well defined methodology for organizing an audit to
ensure that:
o The evidence gathered is sufficient and appropriate
o All audit objectives are both specified and met.

Four Phases of the Audit Process
1. Plan and design the audit approach

2. Perform tests of control and substantive tests of
transactions
3. Perform analytical procedures and tests of details
of balances
4. Complete the audit and issue an audit report

APP I Chapter 5, PT I, Audit Responsibility and Objectives

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

APP I Chapter 5, PT I, Audit Responsibility and Objectives

Uploaded by

Copyright:

Available Formats

Chapter 4

Audit I YA AAUSC 2022

2. In accounting complex estimates are used, which inherently

Audit I YA AAUSC 2022

Audit I YA AAUSC 2022

. Auditor’s Responsibilities for Detecting Material Errors

Auditor’s Responsibilities for Detecting Material Frauds

Audit I YA AAUSC 2022

 Both fraudulent financial reporting and misappropriation

-For example, when auditing the FSs of a

Direct-Effect of Illegal Acts:

Audit I YA AAUSC 2022

Actions When the Auditor Knows of an illegal Act

Audit I YA AAUSC 2022

 Auditor’s responsibility includes performing an audit with an

Assignment 2-on professional judgment and skepticism

…Steps to develop an audit Objective

…Step 2: Divide Financial Statements in to Cycles

5. Estimate of Bad Debt Expense Transaction •Bad debt expense,

Audit I YA AAUSC 2022

Identifying account balances belonging to different transaction

Audit I YA AAUSC 2022

Audit I YA AAUSC 2022

The Presentation & Disclosure Related Audit Objectives

Relationships between Audit Objectives

How Audit Objectives are Met?

..How Audit Objectives are Met?

1. Plan and design the audit approach

Audit I YA AAUSC 2022

Audit I YA AAUSC 2022

• Auditors need to use assertions when assessing the risk of

Audit I YA AAUSC 2022

Audit I YA AAUSC 2022

Audit I YA AAUSC 2022

• Accuracy Valuation and allocation

Audit I YA AAUSC 2022

• Accuracy and valyaution

• Classification and aunderstandability

Audit I YA AAUSC 2022

Audit I YA AAUSC 2022

1. Plan and design the audit approach

Audit I YA AAUSC 2022

You might also like