UDE 1013 AUDITING 1

03- Audit responsibilities and objectives

MUSTAFFA BUKHARI UMCCED KL

 OBJECTIVE OF CONDUCTING AUDIT OF
FINANCIAL STATEMENTS
• “to express an opinion as to the fairness with
which the financial statement present fairly, in
all material respect, the financial position,
results of operation, and cash flows, in
conformity with generally accepted
accounting principles”.
MANAGEMENT’S RESPONSIBILITIES
• To maintain proper and adequate accounting
records and supporting documents.
• To develop and implement a good internal /
accounting control system.
• To prepare the FS and issue the FS to the
shareholders. - To ensure that the FS reflect a
true & fair view of the company’s financial
position.
 MANAGEMENT ASSERTIONS
• Management is responsible for the true and
fair presentation of the financial statement.
Assertions are expressed or implied
representation by management that are
reflected in the financial statement
component.
MANAGEMENT ASSERTIONS CONT.
• Management assertions can be classified into:
– Assertion about classes of transactions and event for the
period under audit
• Occurrence : Transaction and event that have been recorded
have occurred and pertain to the entity.
• Completeness : All transaction and event have been recorded
• Accuracy : Amount and other data relating to recorded
transaction and events have been recorded properly
• Cutoff : transaction have been recorded in correct accounting
period
• Classification : transaction and event have been recorded in
proper account.
MANAGEMENT ASSERTIONS CONT.
– Assertions about account balances as the period
end
• Existence : Assets, liabilities and equity interest exist.
• Right & Obligation : The entity hold or control the right
to asset and liabilities are the obligation of the entity.
• Completeness : All assets, liabilities and equity interest
have been recorded.
• Valuation and allocation: Assets, liabilities and equity
interest are include in the financial statement at
appropriate amount and any resulting valuation or
allocation adjustment are appropriately recorded.
MANAGEMENT ASSERTIONS CONT.
– Assertions about presentation and disclosure.
• Occurrence and right and obligation : Disclosed events,
transaction, and other matter have occurred and
pertain to entity.
• Completeness : All disclosure that should have been
included in financial statements have been included.
• Classification and understandability: financial
information is appropriately presented and described.
• Accuracy and valuation: financial and other information
are disclosed fairly at appropriate amount.
 AUDITOR’S RESPONSIBILITIES
• Planning and performing the audit
• Providing reasonable assurance that the
statements are free of material misstatement.
• The auditor may also be responsible for
reporting on internal control weaknesses.
 AUDITOR’S RESPONSIBILITIES CONT.
• the term “reasonable assurance” requires professional judgment.
• The standard is not requiring 100% assurance, but clearly, there
must be some substantive evidence available in judging the
financial statements.
• This is because the assurance is based on sampling information—
– which introduces the possibility of risk that problems may exist, but not
within the sample measures.
– the complexity of accounting measures may add a layer of difficulty in
making a clear judgment.
– One must also consider the possibility that employees may be hiding
some data from the auditor. All of these cloud the issue of what is
reasonable assurance.
 AUDITOR’S RESPONSIBILITIES CONT.
• It is also auditor's responsibility to provide
assurance whether the material
misstatements are caused by error or by
fraud.
– Errors—unintentional misstatements of financial
statements;
– Fraud—intentional misstatements, either by
misappropriation of assets, or by fraudulent
financial reporting
 AUDITOR’S RESPONSIBILITIES CONT.
• It is also auditor's responsibility to provide assurance whether
the material misstatements are caused by error or by fraud.
– Errors—unintentional misstatements of financial statements;
– Fraud—intentional misstatements, either by misappropriation of
assets, or by fraudulent financial reporting
• The auditor must develop a sense of “professional scepticism”
that seeks awareness of both types of misstatements
• the auditing standards do not make a distinction in setting the
auditor's responsibilities. However, the standards do recognize
the possibility that employees may deceive the auditor, making
it more difficult to discover fraud.
 AUDITOR’S RESPONSIBILITIES CONT.
• Auditors on fraud merely a watchdog not a
bloodhound.
• Nevertheless auditors are required to
– understand fraud,
– assess fraud risks,
– design audits to provide reasonable assurance of detecting
material management/employee fraud that could have a
material effect on the financial statements,
– and report the findings to management, directors, users of
financial statements (sometimes), and outside agencies
(under certain conditions).
 AUDITOR’S RESPONSIBILITIES CONT.
• 2 types of intentional misstatement that
auditors should consider are:
– Fraudulent financial reporting
• Manipulation, falsification, alteration,
misrepresentation in financial statement and
intentional misapplication of accounting principles.
– Misappropriation of assets.
• Embezzling receipts, stealing physical assets, causing
entity to pay goods not received, using entity assets for
personal use.
 AUDITOR’S RESPONSIBILITIES CONT.
• Detecting error are relatively easier than
detecting intentional fraud.
• Although auditor has a responsibility to be
cautious of the existence of error and fraud,
the prevention and detection of error and
fraud and rest with management.
• A good internal control may reduce the
probability of error and fraud but it may also
be otherwise.
 AUDITOR’S RESPONSIBILITIES CONT.
• Condition or event that increase the risk fraud
and error:
– Integrity and competent of the management
– Unusual pressure within the entity
– Problems in obtaining sufficient appropriate evidence.
• Although auditor may not be held responsible for
the prevention of fraud and error, auditor need
to perform audit with an attitude of “professional
skepticisms” that error and fraud may exist.
 HOW AUDIT OBJECTIVES ARE MET
• The objective is to ensure that the evidence gathered is sufficient and
competent—and that it is accumulated in a cost-effective manner.
• This include the following phase:
Phase I :
– Plan and Design the Audit Approach--The firm must consider its own
profit-making objectives, which requires adequate planning of the
audit. Knowledge of the client's business is necessary, as well as an
understanding of the risk of financial statement errors is essential.
Additionally, the auditor must asses control risk.
Phase II:
– Perform Tests of Controls and Substantive Tests of Transactions—the
auditor tests whether the controls actually exist, and the amounts of
the transactions.
 HOW AUDIT OBJECTIVES ARE MET
Phase III:
– Perform Analytical Procedures and Test of Details
of Balances—use comparisons and relationships
to determine if account balances are reasonable,
and test for monetary misstatements in the
balances of financial statements.
Phase IV:
– Complete the Audit and Issue an Audit Report—
reach an overall conclusion regarding the financial
statements.