AEB_SM_CH06_1.pdf

7/24/2019 AEB_SM_CH06_1.pdf

1/19

1Chapter 6

Audit Responsibilities and Objectives

Review Questions

6-1 The objective of the audit of financial statements by the independentauditor is the expression of an opinion on the fairness with which the financialstatements present financial position, results of operations, and cash flows inconformity with generally accepted accounting principles.

The auditor meets that objective by accumulating sufficient appropriateevidence to determine whether the financial statements are fairly stated.

6-2 It is management's responsibility to adopt sound accounting policies,maintain adequate internal control and mae fair representations in the financial

statements. The auditor's responsibility is to conduct an audit of the financialstatements in accordance with auditing standards and report the findings of theaudit in the auditor's report.

6-3 !n error is an unintentional misstatement of the financial statements."raud represents intentional misstatements. The auditor is responsible for obtainingreasonable assurance that material misstatements in the financial statements aredetected, whether those misstatements are due to errors or fraud .

!n audit must be designed to provide reasonable assurance of detectingmaterial misstatements in the financial statements. "urther, the audit must beplanned and performed with an attitude of professional skepticismin all aspects

of the engagement. #ecause there is an attempt at concealment of fraud, materialmisstatements due to fraud are usually more difficult to uncover than errors. Theauditor$s best defense when material misstatements %either errors or fraud& arenot uncovered in the audit is that the audit was conducted in accordance withauditing standards.

6-4 isappropriation of assets represents the theft of assets by employees."raudulent financial reporting is the intentional misstatement of financial informationby management or a theft of assets by management, which is covered up bymisstating financial statements.

isappropriation of assets ordinarily occurs either because of inadequateinternal controls or a violation of existing controls. The best way to prevent theftof assets is through adequate internal controls that function effectively. anytimes theft of assets is relatively small in dollar amounts and will have no effecton the fair presentation of financial statements. There are also the cases of largetheft of assets that result in banruptcy to the company. "raudulent financialreporting is inherently difficult to uncover because it is possible for one or moremembers of management to override internal controls. In many cases theamounts are extremely large and may affect the fair presentation of financialstatements.

()1

7/24/2019 AEB_SM_CH06_1.pdf

2/19

6-5 True, the auditor must rely on management for certain information in theconduct of his or her audit. *owever, the auditor must not accept management'srepresentations blindly. The auditor must, whenever possible, obtain appropriateevidence to support the representations of management. !s an example, ifmanagement represents that certain inventory is not obsolete, the auditor shouldbe able to examine purchase orders from customers that prove part of the

inventory is being sold at a price that is higher than the company's cost plusselling expenses. If management represents an account receivable as being fullycollectible, the auditor should be able to examine subsequent payments by thecustomer or correspondence from the customer that indicates a willingness andability to pay.

6-6

CARAC!"R#$!#C A%! $!"'$

1. anagement$s characteristics and

influence over the control environment.

Investigate the past history of the

firm and its management. +iscuss the possibility of fraudulent

financial reporting with previousauditor and company legal counselafter obtaining permission to do sofrom management.

. Industry conditions. -esearch current status of industryand compare industry financialratios to the company$s ratios.Investigate any unusual differences.

-ead !I/!$s Industry Audit RiskAlertfor the company$s industry, ifavailable. onsider the impact ofspecific riss that are identified onthe conduct of the audit.

0. perating characteristics and financialstability.

/erform analytical procedures toevaluate the possibility of businessfailure.

Investigate whether materialtransactions occur close to year)end.

6-( The cycle approach is a method of dividing the audit such that closelyrelated types of transactions and account balances are included in the samecycle. "or example, sales, sales returns, and cash receipts transactions and theaccounts receivable balance are all a part of the sales and collection cycle. Theadvantages of dividing the audit into different cycles are to divide the audit intomore manageable parts, to assign tass to different members of the audit team,and to eep closely related parts of the audit together.

()

7/24/2019 AEB_SM_CH06_1.pdf

3/19

6-)

*"+"RA, ,"&*"R ACCO%+! CC,"

2ales!ccounts /ayable

-etained 3arnings!ccounts -eceivableInventory-epairs 4 aintenance

2ales 4 ollection!cquisition 4 /ayment

apital !cquisition 4 -epayment2ales 4 ollectionInventory 4 5arehousing

!cquisition 4 /ayment

6-. There is a close relationship between each of these accounts. 2ales,sales returns and allowances, and cash discounts all affect accounts receivable.

!llowance for uncollectible accounts is closely tied to accounts receivable andshould not be separated. #ad debt expense is closely related to the allowance foruncollectible accounts. To separate these accounts from each other implies thatthey are not closely related. Including them in the same cycle helps the auditor

eep their relationships in mind.

6-1/ anagement assertions are implied or expressed representations bymanagement about classes of transactions and the related accounts anddisclosures in the financial statements. These assertions are part of the criteriamanagement uses to record and disclose accounting information in financialstatements. !6 0( classifies assertions into three categories7

1. !ssertions about classes of transactions and events for the periodunder audit

. !ssertions about account balances at period end

0. !ssertions about presentation and disclosure

6-11 8eneral audit objectives follow from and are closely related to managementassertions. 8eneral audit objectives, however, are intended to provide a frameworto help the auditor accumulate sufficient appropriate evidence required by thethird standard of field wor. !udit objectives are more useful to auditors thanassertions because they are more detailed and more closely related to helpingthe auditor accumulate sufficient appropriate evidence.

6-12

R"COR+* 0#$$!A!"0"+!!RA+$AC!#O+-R",A!"& A%!

O"C!#" #O,A!"&

"ixed asset repair is recorded on the wrongdate.

-epair is capitali9ed as a fixed assetinstead of an expense.

Timing

lassification

()0

7/24/2019 AEB_SM_CH06_1.pdf

4/19

6-13 The existence objective deals with whether amounts included in thefinancial statements should actually be included. ompleteness is the opposite ofexistence. The completeness objective deals with whether all amounts that shouldbe included have actually been included.

In the audit of accounts receivable, a nonexistent account receivable willlead to overstatement of the accounts receivable balance. "ailure to include a

customer's account receivable balance, which is a violation of completeness, willlead to understatement of the accounts receivable balance.

6-14 2pecific audit objectives are the application of the general audit objectivesto a given class of transactions, account balance, or presentation and disclosure.There must be at least one specific audit objective for each general auditobjective and in many cases there should be more. 2pecific audit objectives for aclass of transactions, account balance, or presentation and disclosure should bedesigned such that, once they have been satisfied, the related general auditobjective should also have been satisfied for that class of transactions, account,or presentation and disclosure.

6-15 "or the specific balance)related audit objective, all recorded fixed assetsexist at the balance sheet date, the management assertion and the generalbalance)related audit objective are both :existence.:

6-16 anagement assertions and general balance)related audit objectives areconsistent for all asset accounts for every audit. They were developed by the

!uditing 2tandards #oard, practitioners, and academics over a period of time.ne or more specific balance)related audit objectives are developed for eachgeneral balance)related audit objective in an audit area such as accountsreceivable. "or any given account, a /! firm may decide on a consistent set ofspecific balance)related audit objectives for accounts receivable, or it may decide

to use different objectives for different audits.

6-1( "or the specific presentation and disclosure)related audit objective, readthe fixed asset footnote disclosure to determine that the types of fixed assets,depreciation methods and useful lives are clearly disclosed, the managementassertion and the general presentation and disclosure)related audit objective areboth :classification and understandability.:

6-1) The four phases of the audit are7

1. /lan and design an audit approach.. /erform tests of controls and substantive tests of transactions.

0. /erform analytical procedures and tests of details of balances.;. omplete the audit and issue an audit report.

The auditor uses these four phases to meet the overall objective of the audit,which is to express an opinion on the fairness with which the financial statementspresent fairly, in all material respects, the financial position, results of operations andcash flows in conformity with 8!!/. #y accumulating sufficient appropriateevidence for each audit objective, the overall objective is met. The accumulationof evidence is accomplished by performing the four phases of the audit.

();

7/24/2019 AEB_SM_CH06_1.pdf

5/19

0ultiple Choice Questions ro C'A "ainations

6-1. a. %& b. %& c. %1&

6-2/ a. %1& b. %& c. %1&

&iscussion Questions And 'robles

6-21 a. The purpose of the first part of the report of management is formanagement to state its responsibilities for internal control overfinancial reporting. The second part of the report states management$sresponsibility for the fair presentation of the financial statements.

b. The auditor$s responsibility is to express an opinion on the fairness ofthe presentation of the financial statements and an opinion on theeffectiveness of internal control over financial reporting.

6-22 a. 1. The function of the auditor in the audit offinancial statements is to provide users of the statements with

an informed opinion based on reasonable assuranceobtained as to the fairness with which the statements portrayfinancial position, results of operations, and cash flows inaccordance with generally accepted accounting principlesapplied on a basis consistent with that of the precedingyear.

. The responsibility of the independent auditor is to express anopinion on the financial statements he or she has audited.Inasmuch as the financial statements are the representationof management, responsibility rests with management forthe proper recording of transactions in boos of account, for

the safeguarding of assets, and for the substantial accuracyand adequacy of the financial statements.

In developing the basis for his or her opinion, the auditoris responsible for conducting an audit that conforms to auditingstandards. These standards constitute the measure of theadequacy of the audit. Those standards require the auditorto obtain sufficient, appropriate evidence about materialmanagement assertions in the financial statements.

The informed judgment of a qualified professionalaccountant is required of an independent auditor. The auditormust exercise this judgment in selecting the procedures he

or she uses in the audit and in arriving at an opinion.In presenting himself or herself to the public as an

independent auditor, he or she maes himself or herselfresponsible for having the abilities expected of a qualifiedperson in that profession. 2uch qualifications do not includethose of an appraiser, valuer, expert in materials, expert instyles, insurer, or lawyer. The auditor is entitled to rely uponthe judgment of experts in these other areas of nowledge

()

7/24/2019 AEB_SM_CH06_1.pdf

6/19

and sill.6-22 7continued8

b. !uditors are responsible for obtaining reasonable assurance thatmaterial misstatements included in the financial statements aredetected, whether those misstatements are due to error or fraud.

/rofessional standards acnowledge that it is often more difficult todetect fraud than errors because management or employeesperpetrating the fraud attempt to conceal the fraud. That difficulty,however, does not change the auditor$s responsibility to properlyplan and perform the audit. !uditors are required to specificallyassess the ris of material misstatement due to fraud and shouldconsider that assessment in designing the audit procedures to beperformed.

In recent years there has been increased emphasis onauditors$ responsibility to evaluate factors that may indicate anincreased lielihood that fraud may be occurring. "or example,

assume that management is dominated by a president who maesmost of the major operating and business decisions himself. *ehas a reputation in the business community for maing optimisticprojections about future earnings and then putting considerablepressure on operating and accounting staff to mae sure thoseprojections are met. *e has also been associated with othercompanies in the past that have gone banrupt. These factors,considered together, may cause the auditor to conclude that thelielihood of fraud is fairly high. In such a circumstance, the auditorshould put increased emphasis on searching for materialmisstatements due to fraud.

The auditor may also uncover circumstances during theaudit that may cause suspicions of fraudulent financial reporting."or example, the auditor may find that management has lied aboutthe age of certain inventory items. 5hen such circumstances areuncovered, the auditor must evaluate their implications and considerthe need to modify audit evidence.

!dequate internal control should be the principal means ofthwarting and detecting misappropriation of assets. To rely entirelyon an independent audit for the detection of misappropriation ofassets would require expanding the auditor's wor to the extent thatthe cost might be prohibitive.

The auditor normally assesses the lielihood of materialmisappropriation of assets as a part of understanding the entity$sinternal control and assessing control ris. !udit evidence shouldbe expanded when the auditor finds an absence of adequatecontrols or failure to follow prescribed procedures, if he or shebelieves a material fraud could result.

The independent auditor is not an insurer or guarantor. Theauditor$s implicit obligation in an engagement is that the audit be

()(

7/24/2019 AEB_SM_CH06_1.pdf

7/19

6-22 7continued8

made with due professional sill and care in accordance with auditingstandards. ! subsequent discovery of fraud, existent during theperiod covered by the independent audit, does not of itself indicatenegligence on the auditor$s part.

c. If an independent auditor uncovers circumstances arousing suspicionas to the existence of fraud, he or she should weigh the effect ofthe circumstances on the opinion on the financial statements. 5henthe auditor believes that the amount of the possible fraud ismaterial, the matter must be investigated before an opinion can begiven. The auditor should consider the implications for otheraspects of the audit and discuss the matter with an appropriatelevel of management that is at least one level above those involvedand with senior management. !dditionally, the auditor shouldobtain additional evidential matter to determine whether materialfraud has occurred or is liely to have occurred. The auditor may

suggest that the client consult with legal counsel. 5henever theauditor has determined that there is evidence that fraud may exist,that matter should be brought to the attention of the audit committee%or equivalent&, unless the matter is clearly inconsequential.

()=

7/24/2019 AEB_SM_CH06_1.pdf

8/19

6-23

C,A$$ O!RA+$AC!#O+$

a9#+A+C#A,

$!A!"0"+!A,A+C"

b9

!#!," OO%R+A,

c9

!RA+$AC!#O+CC,"

/6-*!23-3T6->2

/urchase returns4 allowances

!cquisitions?ournal

!cquisition4 /ayment

-3>T!@-3A3>63

-ent revenue -evenue ?ournal 2ales 4ollection

*!-83)"" "6>@@3TI#@3

!6>T2

#ad debts !djustments?ournal

2ales 4ollection

!B6I2ITI> "8+2 !>+23-AI32

-epair andmaintenance

!cquisitions?ournal


-3>T!@!@@5!>32

-entalallowances

!djustments?ournal

2ales 4ollection

!+?62TI>83>T-I32 %"-/!C-@@&

-entalallowances

!ccruedpayroll

!djustments?ournal

!djustments?ournal

2ales 4ollection

/ayroll 4/ersonnel

/!C-@@23-AI3 4/!C3>T2

2ales salaries /ayroll ?ournal /ayroll 4/ersonnel

!2*+I2#6-233>T2

!ccountspayable

ash +isburse)ments ?ournal


!2* -33I/T2 !ccountsreceivable

ash -eceipts?ournal

2ales 4ollection

d. -ental revenue is liely to be recorded in the cash receipts journal atthe time the cash is received from renters. It is therefore liely to berecorded as a debit to cash receipts and a credit to rentalrevenue. The journal will be summari9ed monthly and posted to the

general ledger. There will be required adjusting entries for unearnedrent and for rent receivable. ! record will be ept of each renter anda determination made whether rent is unpaid or unearned at the endof each accounting period. The entries that are liely to be made inthe adjustments journal are posted to the general ledger. Then thefinancial statements are prepared from the adjusted general ledger.-eversing entries may be used to eliminate the adjusting entries.

()D

7/24/2019 AEB_SM_CH06_1.pdf

9/19

6-24 a.

CC," A,A+C" $""!ACCO%+!$#+CO0" $!A!"0"+!

ACCO%+!$

2!@32 !>+

@@3TI>

!ccounts receivable

ash>otes receivableEtrade!llowance for doubtful accountsInterest receivable

2ales

#ad debt expenseInterest income

!B6I2ITI>!>+ /!C3>T

Income tax payable!ccounts payable6nexpired insurance"urniture and equipmentash

!ccumulated depreciation offurniture and equipment

Inventory/roperty tax payable

Income tax expense!dvertising expenseTravel expense/urchases/roperty tax expense+epreciation expenseE furniture and equipmentTelephone and fax

expenseInsurance expense-ent expense

/!C-@@ !>+/3-2>>3@

ash!ccrued sales salaries

2ales salaries expense2alaries, office and

general

I>A3>T-C !>+5!-3*62I>8

Inventory /urchases

!/IT!@!B6I2ITI>!>+-3/!C3>T

#onds payableommon stocash>otes payable-etained earnings/repaid interest expense

Interest expense

b. The general ledger accounts are not liely to differ much between aretail and a wholesale company unless there are departments forwhich there are various categories. There would be large differencesfor a hospital or governmental unit. ! governmental unit would usethe fund accounting system and would have entirely differenttitles. *ospitals are liely to have several different inds of revenueaccounts, rather than sales. They are also liely to have suchthings as drug expense, laboratory supplies, etc. !t the sametime, even a governmental unit or a hospital will have certainaccounts such as cash, insurance expense, interest income, rentexpense, and so forth.

()F

7/24/2019 AEB_SM_CH06_1.pdf

10/19

6-25 a. anagement assertions about transactions relate to transactionsand other events that are reflected in the accounting records. Incontrast, assertions about account balances relate to the endingaccount balances that are included in the financial statements, andassertions about presentation and disclosure relate to how thosebalances are reflected and disclosed in the financial statements.

0A+A*"0"+! A$$"R!#O+

b9CA!"*OR O0A+A*"0"+!

A$$"R!#O+

c9

+A0" OA$$"R!#O+

a. !ll sales transactions have beenrecorded.

lasses oftransactions

ompleteness

b. -eceivables are appropriatelyclassified as to trade and otherreceivables in the financialstatements and are clearly

described.

/resentation anddisclosure

lassification andunderstandability

c. !ccounts receivable are recordedat the correct amounts.

!ccount balances Aaluation andallocation

d. 2ales transactions have beenrecorded in the proper period.


utoff

e. 2ales transactions have beenrecorded in the appropriateaccounts.


lassification

f. !ll required disclosures aboutsales and receivables have been

made.


ompleteness

g. !ll accounts receivable havebeen recorded.

!ccount balances ompleteness

h. There are no liens or otherrestrictions on accountsreceivable.

!ccount balances -ights and obligations

i. +isclosures related to accountsreceivable are at the correctamounts.


!ccuracy andvaluation

j. -ecorded sales transactions

have occurred.

lasses of

transactions

ccurrence

. -ecorded accounts receivableexist.

!ccount balances 3xistence

l. 2ales transactions have beenrecorded at the correct amounts.


!ccuracy

f. +isclosures related to sales andreceivables relate to the entity.


ccurrence and rightsand obligations

()1G

7/24/2019 AEB_SM_CH06_1.pdf

11/19

6-26

$'"C##C A,A+C"-R",A!"&A%!

O"C!#"0A+A*"0"+!

A$$"R!#O+ CO00"+!$

a. There are nounrecordedreceivables.

. ompleteness 6nrecorded transactions oramounts deal with thecompleteness objective.

b. -eceivables havenot been sold ordiscounted.

;. -ights andobligations

-eceivables not being sold ordiscounted concerns the rightsand obligations objective andassertion.

c. 6ncollectibleaccounts have beenprovided for.

0. Aaluation orallocation

/roviding for uncollectibleaccounts concerns whether theallowance for uncollectibleaccounts is adequate. It is part ofthe reali9able value objective andthe valuation or allocationassertion.

d. -eceivables thathave becomeuncollectible havebeen written off.


This is part of the reali9able valueobjective and the valuation orallocation assertion. There mayalso be some argument that this ispart of the existence objective andassertion. !ccounts that areuncollectible are no longer validassets.

e. !ll accounts on thelist are expected tobe collected withinone year.


!ccounts that are not expected tobe collected within a year shouldbe classified as long)termreceivables. It is therefore beingincluded as part of theclassification objective andconsequently under the valuationor allocation assertion.

f. The total of theamounts on the

accounts receivablelisting agrees withthe general ledgerbalance for accountsreceivable.


This is part of the detail tie)inobjective and is part of the

valuation or allocation assertion.

()11

7/24/2019 AEB_SM_CH06_1.pdf

12/19

6-26 7continued8

$'"C##C A,A+C"-R",A!"&A%!

O"C!#"0A+A*"0"+!

A$$"R!#O+ CO00"+!$

g. !ll accounts on thelist arose from thenormal course ofbusiness and are notdue from relatedparties.


oncerns the classification ofaccounts receivable and istherefore a part of theclassification objective and thevaluation or allocation assertion.2ome people believe that lieitem e., it is a part of presentationand disclosure.

h. 2ales cutoff at year)end is proper.


utoff is a part of the cutoffobjective and therefore part of thevaluation or allocation assertion.

6-2( a. anagement assertions are implied or expressed representationsby management about the classes of transactions and relatedaccounts in the financial statements. !6 0( identifies fiveassertions about classes of transactions which are stated in theproblem. These assertions are the same for every transaction cycleand account. 8eneral transaction)related audit objectives areessentially the same as management assertions, but they areexpanded somewhat to help the auditor decide which auditevidence is necessary to satisfy the management assertions.

!ccuracy and posting and summari9ation are a subset of the

accuracy assertion. 2pecific transaction)related audit objectives aredetermined by the auditor for each general transaction)relatedaudit objective. These are done for each transaction cycle to helpthe auditor determine the specific amount of evidence needed forthat cycle to satisfy the general transaction)related audit objectives.

b.

and

c. The easiest way to do this problem is to first identify the general

transaction)related audit objectives for each specific transaction)related audit objective. It is then easy to determine the managementassertion using Table ()0 %p. 1

7/24/2019 AEB_SM_CH06_1.pdf

13/19

6-2( 7continued8

$'"C##C !RA+$AC!#O+-

R",A!"& A%! O"C!#"

b9

0A+A*"0"+!

A$$"R!#O+

c9*"+"RA,

!RA+$AC!#O+-R",A!"& A%!

O"C!#"

a. -ecorded cash disbursementtransactions are for the amount ofgoods or services received andare correctly recorded.

0. !ccuracy D. !ccuracy

b. ash disbursement transactionsare properly included in theaccounts payable master file andare correctly summari9ed.

0. !ccuracy F. /osting andsummari9ation

c. -ecorded cash disbursements

are for goods and servicesactually received.

1. ccurrence (. ccurrence

d. ash disbursement transactionsare properly classified.

;. lassification 1G.lassification

e. 3xisting cash disbursementtransactions are recorded.

. ompleteness =. ompleteness

f. ash disbursement transactionsare recorded on the correct dates.

7/24/2019 AEB_SM_CH06_1.pdf

14/19

6-2. a. The first objective concerns amounts that should not be included onthe list of accounts payable because there are no amounts due tosuch vendors. This objective concerns only the overstatement ofaccounts payable. The second objective concerns the possibilityof accounts payable that should be included but that have not beenincluded. This objective concerns only the possibility of understated

accounts payable.b. The first objective deals with existence and the second deals with

completeness.c. "or accounts payable, the auditor is usually most concerned about

understatements. !n understatement of accounts payable is usuallyconsidered more important than overstatements because of potentiallegal liability. The completeness objective is therefore normally moreimportant in the audit of accounts payable. The auditor is alsoconcerned about overstatements of accounts payable. The existenceobjective is also therefore important in accounts payable, butusually less so than the completeness objective.

()1;

7/24/2019 AEB_SM_CH06_1.pdf

15/19

6-3/

A%! 'ROC"&%R"

A,A+C"-R",A!"&

A%!O"C!#"

!RA+$AC!#O+R",A!"&

A%!O"C!#"

'R"$"+!A!#O+A+&

$C,O$%R"A%!

O"C!#"

a. 3xamine a sample of duplicate sales invoices to determinewhether each one has a shipping document attached.

%F& ccurrence

b. !dd all customer balances in the accounts receivable trialbalance and agree the amount to the general ledger.

%(& +etail Tie)In

c. "or a sample of sales transactions selected from the salesjournal, verify that the amount of the transaction has beenrecorded in the correct customer account in the accountsreceivable subledger.

%1;& /osting andsummari9ation

d. Inquire of the client whether any accounts receivablebalances have been pledged as collateral on long)termdebt and determine whether all required information isincluded in the footnote description for long)term debt.

%1

7/24/2019 AEB_SM_CH06_1.pdf

16/19

Case

6-31 a. ! review provides limited assurance about the fair presentation offinancial statements in accordance with generally acceptedaccounting principles but far less assurance than an audit./resumably, the ban decided that the assurances provided by a

review were needed before a loan could be approved, but an auditwas not necessary. ! review includes a /! firm performinganalytical procedures, maing inquiries about the fair presentationof the statements, and examining the information for reasonableness.#ecause of a /! firm$s expertise in accounting, the accountantfrom the /! firm can often identify incorrect presentations in thefinancial statements that have been overlooed by the accountantfor the company. -eviews are common for smaller privately)heldcompanies with relatively small amounts of debt.

The ban probably did not require an audit because theadditional cost of an audit was greater than the benefit the ban

perceived. In many cases, the decision as to whether to have areview or an audit is negotiated between the company seeing aloan and the ban loan officer. #oth the company and the banhave options in negotiating such things as the amount of the loan,the rate of interest, and whether to require an audit or a review. Theban can reject the loan request and the company can go to otherbans that want to mae loans.

"requently, bans have a list of /! firms in which they haveconsiderable confidence due to their reputation in the community orpast wor they have done for other ban customers.

b. #ecause the amount of the loans from the ban to -itter increased,

the ban probably wanted additional assurance about the reliabilityof the financial statements. It is also liely that -ene -itter negotiatedthe one percent reduction of the interest rate by offering to have anaudit instead of a review. ! one percent reduction in the interestrate saves -itter H;G,GGG annually compared to the H1

7/24/2019 AEB_SM_CH06_1.pdf

17/19

6-31 7continued8

as to the fair presentation of the financial statements. 8iven thepotential biases present when management prepares the financialstatements, the stocholders and creditors must consider thepotential for information ris that might be present. The independent

audit conducted by 8on9ale9 4 "ineberg helps stocholders andcreditors reduce their information ris. anagement also benefits byhaving the external auditors independently assess the financialstatements even though those statements are prepared bymanagement. +ue to the complexities involved in preparing financialstatements in accordance with generally accepted accountingprinciples, the potential for misstatement on the part of managementincreases the need for an objective examination of those financialstatements by a qualified independent party.

e. The auditor is responsible for obtaining reasonable assurance thatmaterial misstatements are detected, whether those misstatements

are due to errors or fraud. To obtain reasonable assurance, theauditor is required to gather sufficient, appropriate evidence. !uditors$chief responsibility to stocholders, creditors, and management isto conduct the audit in accordance with auditing standards in orderto fulfill their responsibilities of the engagement.

#nternet 'roble $olution: #nternational and 'CAO Audit Objectives

6-1 The objectives of an audit under 6.2. 8!!2 and international auditingstandards are defined by !6 11G and I2! GG, respectively. 2imilarly, /!#

!uditing 2tandard < defines the objective of an audit of internal control overfinancial reporting.

1. ompare the objective of an audit under !6 11G and I2! GG %hint7see paragraph 11&. !re there substantive differences in theobjective of an audit as defined by these two standards

Answer:/aragraph .G1 of !6 11G states that JKTLhe objective of the ordinaryaudit of financial statements by the independent auditor is theexpression of an opinion on the fairness with which they present, inall material respects, financial position, results of operations, and itscash flows in conformity with generally accepted accounting

principles.M 6.2. 8!!2 require the auditor to express an opinion onwhether the financial statements are presented in conformity withgenerally accepted accounting principles and to identify thosecircumstances in which such principles have not been consistentlyobserved in the preparation of financial statements.

/aragraph .11 of I2! GG states that JIn conductingan audit of financial statements, the overall objectives of the auditorare %a& to obtain reasonable assurance about whether the financial

()1=

7/24/2019 AEB_SM_CH06_1.pdf

18/19

statements

()1D

7/24/2019 AEB_SM_CH06_1.pdf

19/19

#nternet 'roble 6-1 7continued8

as a whole are free from material misstatement, whether due to fraudor error, thereby enabling the auditor to express an opinion onwhether the financial statements are prepared, in all material respects,in accordance with an applicable financial reporting framewor and

%b& to report on the financial statements, and communicate asrequired by the I2!s, in accordance with the auditor$s findings.5hile there are differences in the wording about the objective

of an audit of financial statements, the overall objectives stated in6.2. 8!!2 and the I2!s are the same. #oth 6.2. 8!!2 and theI2!s note that the objective of the audit of financial statements is theexpression of an opinion of whether the financial statements comply,in all material respects, with accounting standards.

. 5hat is the objective of an audit of internal control over financialreporting

Answer:/aragraph .G0 of /!# !uditing 2tandard < states that JThe auditor$sobjective in an audit of internal control over financial reporting is toexpress an opinion on the effectiveness of the company$s internalcontrol over financial reporting.M That standard notes that to form abasis for an opinion, the auditor must plan and perform the audit toobtain competent evidence that is sufficient to obtain reasonableassurance about whether material weanesses exist as of the datespecified in management$s assessment.

0. 5hat defines whether financial statements are fairly stated, andwhat defines whether internal control is considered effective !rethey related

Answer:#oth 6.2. 8!!2 and international auditing standards define financialstatements as being fairly stated when they are free of materialmisstatements. /!# !uditing 2tandard < defines internal controlas effective when no material weanesses exist. These definitions arerelated. The presence of a material misstatement generally suggeststhe presence of a material weaness, since management$s internalcontrols over financial reporting failed to detect the materialmisstatement. 5hile the presence of a material weaness in internal

control does not automatically mean the financial statements containa material misstatement, there is a high lielihood that a materialmisstatement could occur.

%+ote7 Internet problems address current issues using Internet sources. #ecauseInternet sites are subject to change, Internet problems and solutions may change. urrentinformation on Internet problems is available at www.pearsonhighered.comNarens&.

( 1F

Documents

AEB_SM_CH06_1.pdf