5 - 1 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Audit Responsibilities and Objectives Chapter 5

5 - 1©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley

Audit Responsibilitiesand Objectives

Chapter 5


Learning Objective 1

Explain the objective of

conducting an audit of

financial statements.


Objective of Conducting an Audit of Financial Statements

The primary objective of the auditis to express an opinion on the

financial statements.


Steps to DevelopAudit Objectives

Understand objectives andresponsibilities for the audit.

1

2Divide financial statements

into cycles.

3Know management

assertions about accounts.


Steps to DevelopAudit Objectives

Know general audit objectives forclasses of transactions and accounts.

4

5Know specific audit objectives for

classes of transactions and accounts.



Distinguish management’s

responsibilities for preparing

financial statements from the

auditor’s responsibilities for

verifying those financial statements.


Responsibilities

Management is responsiblefor the financial statements,

and for internal control.

Auditors issue anopinion on fairness

of the financial statements.



Explain the auditor’s

responsibility for discovering

material misstatements.


Auditor’s Responsibilities

Material versus immaterial misstatements

Reasonable assurance

Errors versus fraud

Professional skepticism


Responsibilities forDiscovering Illegal Acts

Direct-effect illegal acts

Indirect-effect illegal acts

Evidence accumulationwhen there is no reasonto believe indirect-effect

illegal act exists


Responsibilities forDiscovering Illegal Acts

Evidence accumulation andother actions when there isreason to believe direct- orindirect-effect illegal acts

may exist

Actions when the auditorknows of an illegal act



Classify transactions and account

balances into financial statement

cycles and identify benefits of a cycle

approach to segmenting the audit.


Transaction Flow Example

Transactions

Acquisitionof goods

and services

Sales

Cashreceipts

Journals

Cash receiptsjournal

Salesjournal

Acquisitionsjournal

Ledger, Trial Balance, andFinancial Statements

General ledgerand subsidiary

records

General ledgertrial balance

Financialstatements


Transaction Flow Example

Transactions

Allocation andadjustments

Cashdisbursements

Payrollservices and

disbursements

Journals

Payrolljournal

Cash disburse-ments journal

Generaljournal

Ledger, Trial Balance, andFinancial Statements

General ledgerand subsidiary

records

General ledgertrial balance

Financialstatements


Relationships AmongTransaction Cycles

Generalcash

Acquisitionand payment

cycle

Payroll andpersonnel

cycle

Capital acquisitionand repayment cycle

Sales andcollection

cycle

Inventory andwarehousing

cycle



Describe why the auditor obtains

a combination of assurance by

auditing classes of transactions

and ending balances in accounts.


Balance and TransactionsAffecting Balances Example

$ 18,827

144,328

$ 20,197

138,393

1,242

3,323Charge-off ofuncollectible

debts

Cashreceipts

Sales returnsand allowances

Sales

Accounts Receivable (in thousands)Beginning balance

Ending balance



Distinguish among

the five categories of

management assertions

about financial information.


Management Assertions

1. Existence or occurrence

2. Completeness

3. Valuation or allocation

4. Rights and obligations

5. Presentation and disclosure



Link the six general transaction-

related audit objectives to the

five management assertions.


Transaction-RelatedAudit Objectives

ExistenceRecorded

transactions exist.

CompletenessExisting transactions

are recorded.

AccuracyRecorded transactions

are stated at thecorrect amount.


Transaction-RelatedAudit Objectives

ClassificationTransactions are

properly classified.

TimingTransactions are recorded

on the correct dates.

Posting andsummarization

Transactions are includedin the master files and

are correctly summarized.


Transaction-Related Audit Objectives

and Management Assertions

ManagementAssertions

General Transaction-Related Audit Objectives

Existence or occurrence Existence

Completeness Completeness

Valuation or allocationAccuracy, Classification timing,

Posting and summarization

Rights and obligations N/A

Presentation and disclosure N/A



Link the nine general balance-

related audit objectives to the

five management assertions.


General Balance-RelatedAudit Objectives

ExistenceAmounts

included exist.

CompletenessExisting amounts

are included.

AccuracyAmounts included

are stated at thecorrect amounts.



ClassificationAmounts are

properly classified.

CutoffTransactions are recorded

in the proper period.

Detail tie-inAccount balances agree

with master file amounts,and with the general ledger.



Realizablevalue

Assets are included atestimated realizable value.

Rights andobligations

Assets must be owned.

Presentationand

disclosure

Account balances anddisclosures are presentedin financial statements.


Assertions and Balance-Related Audit Objectives

ManagementAssertions

General Balance-Related Audit Objectives

Existence or occurrence Existence

Completeness Completeness

Valuation or allocationAccuracy, Classification, Cutoff,Detail tie-in, Realizable value

Rights and obligations Rights and obligations

Presentation and disclosure Presentation and disclosure



Explain the relationship

between audit objectives

and the accumulation

of audit evidence.


How Audit ObjectivesAre Met

Auditors plan the combinationof objectives and evidence by

following an audit process.

An audit process is a methodologyfor organizing an audit.


Four Phases of an Audit

Phase IPlan and design

an audit approach.

Phase II

Perform tests ofcontrols and

substantive testsof transactions.

Phase III

Perform analyticalprocedures andtests of detailsof balances.

Phase IVComplete the

audit and issuean audit report.


End of Chapter 5

Documents

5 - 1 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Audit Responsibilities and Objectives Chapter 5