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.
…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
 …Steps to develop an audit Objective
…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.)
 …Steps to develop an audit Objective
..Step 1: Understand objectives and responsibilities
for the audit
•
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
 …Steps to develop an audit Objective
..Step 1: Understand objectives and responsibilities for the
audit
•
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.
 …Steps to develop an audit Objective
..Step 1: Understand objectives and responsibilities for the
audit
….Auditor’s Responsibilities:
•
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
 …Steps to develop an audit Objective
..Step 1: Understand objectives and responsibilities for the
audit

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

Audit I YA AAUSC 2022

 …Steps to develop an audit Objective
..Step 1: Understand objectives and responsibilities for
the audit
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.
Audit I YA AAUSC 2022
 …Steps to develop an audit Objective
..Step 1: Understand objectives and responsibilities for the
audit

. 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.
 …Steps to develop an audit Objective
..Step 1: Understand objectives and responsibilities for the audit

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

Audit I YA AAUSC 2022

 …Steps to develop an audit Objective
..Step 1: Understand objectives and responsibilities for the
audit
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
 …Steps to develop an audit Objective
..Step 1: Understand objectives and responsibilities for the
audit
….Auditor’s Responsibilities:
•
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
Audit I YA AAUSC 2022
protection laws.
 …Steps to develop an audit Objective
..Step 1: Understand objectives and responsibilities for the
audit

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
  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

Audit I YA AAUSC 2022

 …Steps to develop an audit Objective
..Step 1: Understand objectives and responsibilities for the audit
•
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
 …Steps to develop an audit Objective
..Step 1: Understand objectives and responsibilities for the
audit

… 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
 …Steps to develop an audit Objective
..Step 1: Understand objectives and responsibilities for the audit
•
- 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
 …Steps to develop an audit Objective
..Step 1: Understand objectives and responsibilities for the
audit

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
  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.

Audit I YA AAUSC 2022

 …Steps to develop an audit Objective
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
…Steps to develop an audit Objective
…..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.
 …Steps to develop an audit Objective
•
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.
 …Steps to develop an audit Objective
•
…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
 …Steps to develop an audit Objective
•
…Step 2: Divide Financial Statements in to Cycles
 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
 33

…Steps to develop an audit Objective

…Step 2: Divide Financial Statements in to Cycles

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
 …Steps to develop an audit Objective
•
…Step 2: Divide Financial Statements in to Cycles

•
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
Audit I YA AAUSC 2022
 …Steps to develop an audit Objective
•
..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
•
…Steps
..Step to Financial
2: Divide develop an audit
Statements Objective
in 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.

Audit I YA AAUSC 2022

 …Steps to develop an audit Objective
•
..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.

Audit I YA AAUSC 2022

 …Steps to develop an audit Objective
•
….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
 …Steps to develop an audit Objective
•
Step 3: Setting Audit Objectives
•
…..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.
 …Steps to develop an audit Objective
•
Step 3: Setting Audit Objectives
•
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
 …Steps to develop an audit Objective
•
Step 3: Setting Audit Objectives
•
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.
 …Steps to develop an audit Objective
•
-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)
 …Steps to develop an audit Objective
•
….Step 3: Setting Audit Objectives
•
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
 …Steps to develop an audit Objective
•
….Step 3: Setting Audit Objectives
•
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
 …Steps to develop an audit Objective
•
..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
 …Steps to develop an audit Objective
•
…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
 …Steps to develop an audit Objective
•
…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
 …Steps to develop an audit Objective
•
….Step 3: Setting Audit Objectives
•
..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
 …Steps to develop an audit Objective
•
….Step 3: Setting Audit Objectives
•
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.
 …Steps to develop an audit Objective
•
….Step 3: Setting Audit Objectives
•
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.
 …Steps to develop an audit Objective
•
….Step 3: Setting 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
 …Steps to develop an audit Objective
•
….Step 3: Setting Audit 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
valuation or allocation
 …Steps to develop an audit Objective
•
….Step 3: Setting Audit Objectives
•
…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
 …Steps to develop an audit Objective
•
….Step 3: Setting Audit Objectives
•
…The Eight General Balance Related Audit Objectives
•
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
valuation or allocation
 …Steps to develop an audit Objective
•
….Step 3: Setting Audit Objectives
•
…The Eight General Balance Related Audit Objectives
•
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
 …Steps to develop an audit Objective
•
….Step 3: Setting Audit Objectives

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.
 …Steps to develop an audit Objective
•
….Step 3: Setting Audit Objectives

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.
 …Steps to develop an audit Objective
•
….Step 3: Setting 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
 …Steps to develop an audit Objective
•
….Step 3: Setting Audit Objectives

..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

Audit I YA AAUSC 2022

 End of Chapter 4:

Questions

Audit I YA AAUSC 2022

 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.

Audit I YA AAUSC 2022

 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

Audit I YA AAUSC 2022

 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.

Audit I YA AAUSC 2022

 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
Audit I YA AAUSC 2022
 How do valuations Fit together
Transactions Balances

• Occurrence Occurrence

• Completeness Completeness

• Accuracy Valuation and allocation

• Classification Allocation

• Cutoff Cutoff

Audit I YA AAUSC 2022

 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
Audit I YA AAUSC 2022
 General Balance related audit objectives
• Existence
• Completeness
• Valuation
• Classification
• Cutoff
• Detail tie- in
• Realizable value
• Rights and Obligations
Audit I YA AAUSC 2022
 Presentation and dusclosure audit objevtives
• Occurrence and rights and obligations

• Complteness

• Accuracy and valyaution

• Classification and aunderstandability

Audit I YA AAUSC 2022

 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.

Audit I YA AAUSC 2022

 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

Audit I YA AAUSC 2022