AUDIT
RESPONSIBILITIES
AND OBJECTIVES
CHAPTER 6
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CHAPTER 1 LEARNING OBJECTIVES
6-1 Explain the
objective of
conducting an audit
of financial
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CHAPTER 1 LEARNING OBJECTIVES
(CONT.)
6-5 Describe the
key elements of an
effective
professional
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CHAPTER 1 LEARNING OBJECTIVES
6-3
(CONT.)
6-9 Link transaction-
related audit objectives to
management assertions
for classes of
transactions.
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OBJECTIVE 6-1
Explain the objective of conducting an audit
of financial statements and an audit of
internal controls.
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OBJECTIVE TO CONDUCTING AN AUDIT
OF FINANCIAL STATEMENTS
The preface to the clarified AICPA auditing standards:
The primary focus is on issuing an opinion on the financial statements.
The steps to develop audit objectives are listed in Figure 6-1.
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OBJECTIVE 6-2
Distinguish management’s responsibility for
the financial statements from the auditor’s
responsibility for verifying those statements.
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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.
Many public companies include a statement regarding management responsibility in
relation to the CPA firm. An example of such a statement is included in Figure 6-2.
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OBJECTIVE 6-3
Explain the auditor’s responsibility
for discovering material misstatements due
to fraud or error.
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AUDITOR’S RESPONSIBILITIES
AICPA auditing standards state:
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Errors versus Fraud:
AUDITOR’S RESPONSIBILITIES (CONT.)
An error is an unintentional misstatement of the financial statements, whereas fraud is
intentional.
For fraud, there is a distinction between misappropriation of assets, usually committed
by employees, and fraudulent financial reporting, usually committed by management.
Auditor’s Responsibilities for Detecting Material Errors:
Auditors spend a great portion of their time planning and performing audits to detect
unintentional errors made by management and employees.
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AUDITOR’S RESPONSIBILITIES (CONT.)
Auditor’s Responsibilities for Detecting Material Fraud:
Auditing standards make no distinction between the auditor’s responsibilities for
detecting errors versus fraud.
However, the standards do recognize that fraud is more difficult to detect because those
who are committing the fraud attempt to conceal the fraud.
Fraudulent Financial Reporting versus Misappropriation of Assets: Both are harmful
to financial statement users. Fraudulent financial statements present users with
incorrect financial information that is used for decision making. Misappropriation of
assets is harmful to creditors, stockholders, and others because the assets have been
taken from their rightful owners, the company.
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AUDITOR’S RESPONSIBILITIES FOR
DISCOVERING ILLEGAL ACTS
Type Responsibility
Same as for
Direct-Effect errors and
fraud
Indirect-Effect No Assurance
AUDITOR’S RESPONSIBILITIES (CONT.)
Audit Procedures When Noncompliance Is Identified or Suspected: The auditor should
obtain an understanding of the situation and discuss the matter with management at a
level above those involved.
Auditors should obtain sufficient evidence regarding material amounts that are directly
affected by laws and regulations.
Laws such as those relating to taxes and pensions usually have a direct effect on the
amounts or disclosures in the financial statements, and therefore require the auditor’s
attention.
Reporting Identified or Suspected Noncompliance: Unless the matter is
inconsequential, the auditor should communicate with those charged with governance
of matters of noncompliance.
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OBJECTIVE 6-4
Describe the need to maintain professional
skepticism when conducting an audit.
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PROFESSIONAL
Aspects of Professional SKEPTICISM
Skepticism: Two primary components: A
questioning mindset and a critical assessment of audit evidence.
Elements of Professional Skepticism:
1. Questioning mindset—“trust but verify”—a disposition to inquiry with
some sense of doubt.
2. Suspension of judgment—withholding judgment until appropriate
evidence is obtained.
3. Search for knowledge—a desire to investigate beyond the obvious, with a
desire to corroborate.
4. Interpersonal understanding—recognition that people’s motivations and
perceptions can lead them to provide biased or misleading information.
5. Autonomy—the self-direction, moral independence, and conviction to
decide for oneself, rather than accepting the claims of others.
6. Self-esteem—the self-confidence to resist persuasion and to challenge
assumptions
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OBJECTIVE 6-5
Describe the key elements of an effective
professional judgment process.
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PROFESSIONAL
Professional judgment JUDGMENT
is part of professional skepticism.
Elements of the Judgment Process:
• Identify and define the issue.
• Gather the facts and information and identify the relevant literature.
• Perform the analysis and identify potential alternatives.
• Make the decision.
• Review and complete the documentation and rationale for the conclusion.
These five key elements are illustrated in Figure 6-3.
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PROFESSIONAL JUDGMENT (CONT.)
Some potential judgment tendencies, traps, and biases to keep in mind:
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SOME POTENTIAL JUDGMENT TENDENCIES,
TRAPS, AND BIASES TO KEEP IN MIND:
confirmation: the tendency to put more weight on information that is consistent with
initial beliefs or preference
Overconfidence: the tendency to overestimate ones own abilities to perform tasks or to make
accurate assessments of risks or other judgments and decisions
Anchoring: the tendency to make assessments by starting from an initial value and then
adjusting insufficiently away from that initial value
availability: the tendency to consider information that is retrievable or what's easily accessible
as being more likely or more relevant
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OBJECTIVE 6-6
Identify the benefits of a cycle approach
to segmenting the audit.
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FINANCIAL STATEMENT CYCLES
A common form of segmenting is called the cycle approach, which divides classes of
transactions and account balances that are closely related into segments.
The cycles used in this text are listed below and detailed in Figure 6-4.
• Sales and collection cycle
• Acquisition and payment cycle
• Payroll and personnel cycle
• Inventory and warehousing cycle
• Capital acquisition and repayment cycle
A trial balance is illustrated in Figure 6-5, with accounts categorized by cycle.
Cycles applied to the trial balance are illustrated in Table 6-2.
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FINANCIAL
Relationships among cycles areSTATEMENT CYCLES
illustrated in Figure 6-6 below. (CONT.)
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OBJECTIVE 6-7
Describe why the auditor obtains assurance by
auditing transactions and ending balances,
including presentation and disclosure.
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SETTING AUDIT OBJECTIVES
The most efficient way to conduct audits is to obtain some
combination of assurance for each class of transactions and for the
ending balances in the related accounts.
Audit objectives for each class of transactions include:
• Transaction-related audit objectives
• Balance-related audit objectives
• Presentation and disclosure-related audit objectives.
Figure 6-7 presents an illustration of balances and transactions affecting the
balances for Accounts Receivable.
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OBJECTIVE 6-8
Distinguish among the management assertions
about financial information.
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MANAGEMENT ASSERTIONS
Management assertions are implied or expressed representations by
management about classes of transactions and the related accounts and
disclosures in the financial statements.
Assertions by management are directly related to the financial reporting
framework (U.S. GAAP or IFRS) that forms the criteria that management
uses to record and disclose accounting information in financial statements.
Management assertions lead to the audit objectives. Therefore, auditors
must have a thorough understanding of management assertions to perform
quality audits.
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MANAGEMENT ASSERTIONS (CONT.)
The PCAOB standards describe five categories of management assertions:
• Existence or occurrence
• Completeness
• Valuation or allocation
• Rights and obligations
• Presentation and disclosure
AICPA and IFRS describe three categories of assertions:
• Assertions about classes of transactions and events
• Assertions about account balances
• Assertions about presentation and disclosure
Table 6-3 maps the PCAOB standards with the AICPA and IFRS standards.
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OBJECTIVE 6-9
Link transaction-related audit objectives
to management assertions for
classes of transactions.
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TRANSACTION-RELATED AUDIT OBJECTIVES
General Transaction-Related Audit Objectives:
• Occurrence—Recorded transactions exist.
• Completeness—Existing transactions are recorded.
• Accuracy—Recorded transactions are stated at the correct amounts.
• Posting and Summarization—Recorded transactions are properly included
in the master files and are correctly summarized.
• Classification—Transactions included in the client’s journals are properly
classified.
• Timing—Transactions are recorded on the correct dates.
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TRANSACTION-RELATED AUDIT OBJECTIVES
(CONT.)
Specific Transaction-Related Audit Objectives—The specific transaction-related
objectives are tailored to the specific class of transactions being audited.
Relationship Among Management Assertions and Transaction-Related Audit
Objectives—For each management assertion, there are general transaction-related
audit objectives as well as specific transaction-related audit objectives.
Table 6-4 illustrates these relationships using sales transactions.
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OBJECTIVE 6-10
Link balance-related and presentation and
disclosure-related audit objectives to management
assertions.
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BALANCE-RELATED AND PRESENTATION AND
DISCLOSURE-RELATED AUDIT OBJECTIVES
General Balance-Related Audit Objectives:
• Existence—Amounts included exist.
• Completeness—Existing amounts are included.
• Accuracy—Amounts included are stated at the correct amounts.
• Classification—Amounts included in the client’s listing are properly classified.
• Cutoff—Transactions near the balance sheet date are recorded in the proper
period.
• Detail Tie-In—Details in the account balance agree with related master file
amounts, foot to the total in the account balance, and agree with the total.
• Realizable Value—Assets are included at the amounts estimated to be realized.
• Rights and Obligations—Assets are owned or controlled by the entity, and
liabilities are obligations of the entity.
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BALANCE-RELATED AND PRESENTATION AND
DISCLOSURE-RELATED AUDIT OBJECTIVES
(CONT.)
Specific Balance-Related Audit Objectives—The same as for transaction-
related audit objectives, each balance-related audit objective should be
tailored to the account balance being audited.
Relationship Among Management Assertions and Balance-Related Audit
Objectives—These relationships for Inventory are illustrated in Table 6-5.
Presentation and Disclosure-Related Audit Objectives—These relationships
for Notes Payable are illustrated in Table 6-6.
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OBJECTIVE 6-11
Explain the relationship between audit objectives and
the accumulation of audit evidence.
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HOW AUDIT OBJECTIVES ARE MET
Figure 6-8 illustrates four phases of the audit.
Phase I: Plan and Design an Audit Approach.
The main objective of an audit is to accumulate enough evidence to provide an
opinion on the financial statements. Two overriding considerations affect how
an auditor approaches the audit:
1. Sufficient appropriate evidence must be accumulated to meet the auditor’s
professional responsibility.
2. The cost of accumulating the evidence should be minimized.
The audit plan should result in an effective audit at a reasonable cost.
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Phase HOW AUDIT
I: Plan and OBJECTIVES
Design and Audit ApproachARE
(cont.).MET (CONT.)
Risk assessment procedures include the following:
• Obtain an understanding of the entity and its environment.
• Understand internal control and assess control risk.
• Assess risk of material misstatement.
Phase II: Perform Tests of Controls and Substantive Tests of Transactions.
• Tests of controls allow the auditor to evaluate the effectiveness of internal
controls and determine whether the controls can be relied upon to reduce
planned control risks.
• Substantive tests of transactions allow the auditor to evaluate the client’s
recording of transactions.
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Phase HOW AUDIT
III: Perform OBJECTIVES
Substantive ARE MET
Analytical Procedures (CONT.)
and Tests of Details of
Balances.
• Analytical procedures consist of evaluations of plausible relationships among
financial and nonfinancial data.
• Tests of details of balances are specific procedures intended to test for
monetary misstatements in the financial statements.
Phase IV: Complete the Audit and Issue and Audit Report.
• After all procedures have been completed, the auditor will reach an overall
conclusion as to whether the financial statements are fairly presented.
• After the conclusion, the auditor must issue an audit report that will
accompany the client’s financial statements.
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