©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 11

Audit ResponsibilitiesAudit Responsibilitiesand Objectivesand Objectives

Chapter 6Chapter 6

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 22

Learning Objective 1Learning Objective 1

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

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 33

Objective of Conducting an Objective of Conducting an Audit of Financial Audit of Financial

StatementsStatementsThe purpose of an audit is to provide financialstatement users with an opinion by the auditoron whether the financial statements are presented fairly, in all material respects, inaccordance with applicable financial accounting framework.

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 44

Steps to Develop Audit Steps to Develop Audit Objectives Objectives

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 55

Learning Objective 2Learning Objective 2

Distinguish management’s Distinguish management’s responsibility for the financial responsibility for the financial statements and internal control from statements and internal control from the auditor’s responsibility for the auditor’s responsibility for verifying the financial statements verifying the financial statements and effectiveness of internal control.and effectiveness of internal control.

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 66

Management’s Management’s ResponsibilitiesResponsibilities

Financial statements and internal controls.

Sarbanes-Oxley increases management’sresponsibility for the financial statements.

CEO and CFO must certify quarterly and annualfinancial statements submitted to the SEC.

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 77

Management’s Management’s ResponsibilitiesResponsibilities

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 88

Management’s Management’s ResponsibilitiesResponsibilities

The Sarbanes-Oxley Act provides for criminalpenalties for anyone who knowingly falselycertifies the statements.

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 99

Learning Objective 3Learning Objective 3

Explain the auditor’s responsibility for Explain the auditor’s responsibility for discovering material misstatements.discovering material misstatements.

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1010

Objectives of the AuditorObjectives of the AuditorObtain

reasonable assurance

Free from material

misstatementsFinancial

statements

Opine Applicable reporting framework

Financial statements

Report Communicate

per audit standards

Financial statements

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1111

Professional Skepticism

Material misstatements

Errors vs. Fraud

Reasonable Assurance

Auditor’s ResponsibilitiesAuditor’s Responsibilities

Fraudulent reporting

vs. theft of assets

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1212

Auditor’s Responsibilities for Auditor’s Responsibilities for Discovering Illegal ActsDiscovering Illegal Acts

Direct-Effect Same for

errors and fraud

Indirect-Effect No Assurance

Type Responsibility

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1313

Auditor’s Responsibilities for Auditor’s Responsibilities for Discovering Illegal ActsDiscovering Illegal Acts

Auditor suspects Inquire of managementConsult client’s counsel or specialistConsider accumulating evidence

Auditor knowsConsider effects on financial statementsConsider effect on relationship with managementCommunicate with audit committee or equivalent

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1414

Learning Objective 4Learning Objective 4

Classify transactions and account Classify transactions and account balances into financial statement balances into financial statement cycles and identify benefits of a cycle cycles and identify benefits of a cycle approach to segmenting the audit.approach to segmenting the audit.

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1515

Financial Statements CyclesFinancial Statements Cycles

Audits are performed by dividing the financialstatements into smaller segments or components.

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1616

Transaction Flow ExampleTransaction Flow Example

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1717

Relationships Among Relationships Among Transaction CyclesTransaction Cycles

Generalcash

Capital acquisitionand repayment cycle

Sales andcollection

cycleAcquisition

and paymentcycle

Payroll andpersonnel

cycle

Inventory andwarehousing

cycle

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1818

Learning Objective 5Learning Objective 5

Describe why the auditor obtains a Describe why the auditor obtains a combination of assurance by auditing combination of assurance by auditing classes of transactions and ending classes of transactions and ending balances in accounts, including balances in accounts, including presentation and disclosure.presentation and disclosure.

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1919

Balance and Transactions Balance and Transactions Affecting Balances ExampleAffecting Balances Example

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2020

Learning Objective 6Learning Objective 6

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

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2121

Management AssertionsManagement Assertions

1. Assertions about classes of transactions andevents for the period under audit

2. Assertions about account balances at period end

3. Assertions about presentation and disclosure

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2222

Management Assertions forManagement Assertions forEach Category of AssertionsEach Category of Assertions

Transactions and Events

Account Balances

Presentation and DisclosureOccurrence Existence Occurrence and rights

and obligationsCompleteness Completeness Completeness

Accuracy Valuation andallocation

Accuracy andvaluation

Classification Classification andunderstandability

CutoffRights andobligations

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2323

PCAOB AssertionsPCAOB AssertionsExistence or Occurrence

Completeness

Rights and obligations

Presentation and disclosure

Valuation orallocation

Similar to U.S. GAAS as the first four assertions are applicable to balances and transactions. Presentation is treated as a single assertion

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2424

Learning Objective 7Learning Objective 7

Link the six general transaction-related Link the six general transaction-related audit objectives to management audit objectives to management assertions for classes of transactions.assertions for classes of transactions.

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2525

Occurrence Recorded transactionsexist

Completeness Existing transactionsare recorded

AccuracyRecorded transactionsare stated at thecorrect amounts

General Transaction-related General Transaction-related Audit ObjectivesAudit Objectives

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2626

Classification Transactions are properlyclassified.

Timing Transactions are recordedon the correct dates.

Posting andsummarization

Transactions are includedin the master files andare correctly summarized.

General Transaction-related General Transaction-related Audit ObjectivesAudit Objectives

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2727

Hillsburg Hardware Co.Hillsburg Hardware Co.(Applied to Sales Transactions)

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2828

Learning Objective 8Learning Objective 8

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

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2929

Existence Amounts included exist

Completeness Existing amounts areincluded

AccuracyAmounts included arestated at the correctamounts

General Balance-relatedGeneral Balance-relatedAudit ObjectivesAudit Objectives

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3030

Classification Amounts are properlyclassified

Cutoff Transactions are recordedin the proper period

Detail tie-inAccount balances agreewith master file amounts,and with the general ledger

General Balance-relatedGeneral Balance-relatedAudit ObjectivesAudit Objectives

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3131

Realizablevalue

Assets are included atestimated realizable value

Rights andobligations Assets must be owned

General Balance-relatedGeneral Balance-relatedAudit ObjectivesAudit Objectives

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3232

(Applied to Inventory)Hillsburg Hardware Co.Hillsburg Hardware Co.

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3333

Learning Objective 9Learning Objective 9Link the four presentation- and Link the four presentation- and

disclosure-related audit objectives to disclosure-related audit objectives to management assertions for management assertions for presentation and disclosure.presentation and disclosure.

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3434

(Applied to Notes Payable)Hillsburg Hardware Co.Hillsburg Hardware Co.

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3535

Learning Objective 10Learning Objective 10

Explain the relationship between audit Explain the relationship between audit objectives and the accumulation of objectives and the accumulation of audit evidence.audit evidence.

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3636

How Audit Objectives Are How Audit Objectives Are MetMet

The auditor must obtain sufficient appropriateaudit evidence to support all managementassertions in the financial statements.

An audit process has four specific phases

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3737

Four Phases of a Financial Four Phases of a Financial Statement AuditStatement Audit

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3838

End of Chapter 6End of Chapter 6