Audit Responsibilities

and Objectives
Chapter 6

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Learning Objective 1
Explain the objective of conducting an
audit of financial statements and an
audit of internal controls.

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Objective of Conducting an
Audit of Financial
Statements

The purpose of an audit is to provide financial

statement users with an opinion by the audito
on whether the financial statements are
presented fairly, in all material respects, in
accordance with applicable financial accountin
framework.

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Steps to Develop Audit

Objectives

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Learning Objective 2
Distinguish managements
responsibility for the financial
statements and internal control from
the auditors responsibility for
verifying the financial statements
and effectiveness of internal control.

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Managements
Responsibilities
Financial statements and internal controls.
Sarbanes-Oxley increases managements
responsibility for the financial statements.
CEO and CFO must certify quarterly and annual
financial statements submitted to the SEC.
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Managements
Responsibilities

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Managements
Responsibilities
The Sarbanes-Oxley Act provides for criminal
penalties for anyone who knowingly falsely
certifies the statements.

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Learning Objective 3
Explain the auditors responsibility for
discovering material misstatements.

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Objectives of the Auditor

Obtain
reasonable
assurance
Opine

Report

Financial
statements

Free from
material
misstatements

Financial
statements

Applicable
reporting
framework

Financial
statements

Communicate
per audit
standards

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Auditors Responsibilities

Material
misstatements
Professional
Skepticism

Reasonable
Assurance

Errors vs. Fraud

Fraudulent
reporting
vs.
theft of assets

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Auditors Responsibilities for

Discovering Illegal Acts
Type

Responsibility

Direct-Effect

Same for
errors and
fraud

Indirect-Effect

No Assurance

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Auditors Responsibilities for

Discovering Illegal Acts
Auditor suspects
Inquire of management
Consult clients counsel or specialist
Consider accumulating evidence
Auditor knows
Consider effects on financial
statements
Consider effect on relationship
with management
Communicate with audit
committee or equivalent
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Learning Objective 4
Classify transactions and account
balances into financial statement
cycles and identify benefits of a cycle
approach to segmenting the audit.

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Financial Statements Cycles

Audits are performed by dividing the financial

statements into smaller segments or component

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Transaction Flow Example

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Relationships Among
Transaction Cycles
General
cash
Capital acquisition
and repayment cycle
Sales and
collection
cycle

Acquisition
and payment
cycle

Payroll and
personnel
cycle

Inventory and
warehousing
cycle
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Learning Objective 5
Describe why the auditor obtains a
combination of assurance by auditing
classes of transactions and ending
balances in accounts, including
presentation and disclosure.

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Balance and Transactions

Affecting Balances Example

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Learning Objective 6
Distinguish among the three
categories of management
assertions about financial
information.

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Management Assertions
1. Assertions about classes of transactions and
events for the period under audit

2. Assertions about account balances at period e

3. Assertions about presentation and disclosure

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Management Assertions for

Each Category of Assertions
Transactions and Events Account Balances
Presentation and Disclosure

Occurrence
Completeness
Accuracy

Existence

Occurrence and rights

and obligations
Completeness
Completeness
Valuation and
allocation

Classification

Accuracy and
valuation
Classification and
understandability

Cutoff
Rights and
obligations
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PCAOB Assertions
Existence or Occurrence
Completeness
Valuation or
allocation
Rights and obligations
Presentation and
disclosure

Similar to U.S. GAAS as the first four assertions are applicable to

balances and transactions. Presentation is treated as a single assertion
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Learning Objective 7
Link the six general transaction-related
audit objectives to management
assertions for classes of transactions.

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General Transaction-related
Audit Objectives
Occurrence

Completeness

Accuracy

Recorded transactions
exist
Existing transactions
are recorded
Recorded transactions
are stated at the
correct amounts

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General Transaction-related
Audit Objectives
Posting and
summarization

Transactions are included

in the master files and
are correctly summarized

Classification

Transactions are properly

classified.

Timing

Transactions are recorde

on the correct dates.

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Hillsburg Hardware Co.

(Applied to Sales Transactions)

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Learning Objective 8
Link the eight general balance-related
audit objectives to management
assertions for account balances.

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General Balance-related
Audit Objectives
Existence

Amounts included exist

Completeness

Existing amounts are

included

Accuracy

Amounts included are

stated at the correct
amounts

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General Balance-related
Audit Objectives
Classification

Amounts are properly

classified

Cutoff

Transactions are recorde

in the proper period

Detail tie-in

Account balances agree

with master file amounts
and with the general ledg

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General Balance-related
Audit Objectives
Realizable
value

Assets are included at

estimated realizable valu

Rights and
obligations

Assets must be owned

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Hillsburg Hardware Co.

(Applied to Inventory)

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Learning Objective 9
Link the four presentation- and
disclosure-related audit objectives to
management assertions for
presentation and disclosure.

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Hillsburg Hardware Co.

(Applied to Notes Payable)

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Learning Objective 10
Explain the relationship between audit
objectives and the accumulation of
audit evidence.

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How Audit Objectives Are

Met

The auditor must obtain sufficient appropriate

audit evidence to support all management
assertions in the financial statements.
An audit process has four specific phases

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Four Phases of a Financial

Statement Audit

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End of Chapter 6

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