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Auditing 81.3550 Responsibilities & Objectives Chapter 5 Responsibilities & Objectives Chapter 5.
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Transcript of Auditing 81.3550 Responsibilities & Objectives Chapter 5 Responsibilities & Objectives Chapter 5.
Auditing 81.3550Auditing 81.3550
Responsibilities & Objectives
Chapter 5
Responsibilities & Objectives
Chapter 5
HighlightsHighlights
• Audit Objectives – the specifics
• Management & Auditor Responsibilities
• Audit Approach
• Assertions, Objectives Transactions, & Ending Balances
• The Audit Process
• Audit Objectives – the specifics
• Management & Auditor Responsibilities
• Audit Approach
• Assertions, Objectives Transactions, & Ending Balances
• The Audit Process
Audit ObjectivesAudit Objectives
• To express an opinion on the F/S that they present fairly in all material respects in accordance with GAAP
• Accumulate evidence to enable auditor to express an opinion
• Need to ensure complete and verifiable evidence incase called upon to the defend quality of audit and/or opinion
• To express an opinion on the F/S that they present fairly in all material respects in accordance with GAAP
• Accumulate evidence to enable auditor to express an opinion
• Need to ensure complete and verifiable evidence incase called upon to the defend quality of audit and/or opinion
Management’s ResponsibilityManagement’s Responsibility
• What exactly are management responsibilities when it comes to the F/S?– Maintaining adequate Internal Controls
– Fair representations
– Setting/adopting sound accounting policies
– F/S preparation including notes
• Management has the most intimate knowledge of the business, transactions, as well as the ultimate level of control
• What exactly are management responsibilities when it comes to the F/S?– Maintaining adequate Internal Controls
– Fair representations
– Setting/adopting sound accounting policies
– F/S preparation including notes
• Management has the most intimate knowledge of the business, transactions, as well as the ultimate level of control
Auditor’s ResponsibilitiesAuditor’s Responsibilities• Performs audit meeting GAAS and GAAP
requirements• Including:
– Maintaining “professional skepticism”– Using professional judgment– Adequate planning and gathering of evidence
• Not responsible to uncover fraud but must act on fraud if it is discovered during the audit
• May include expanding testing to determine if an unintentional error vs. fraudulent behaviour
• Performs audit meeting GAAS and GAAP requirements
• Including:– Maintaining “professional skepticism”– Using professional judgment– Adequate planning and gathering of evidence
• Not responsible to uncover fraud but must act on fraud if it is discovered during the audit
• May include expanding testing to determine if an unintentional error vs. fraudulent behaviour
General Fraud & The AuditGeneral Fraud & The Audit
• Fraud Fraud – is criminal deception intended to benefit the deceiver most often financially
• Estimated 75% of Fraud goes undetected• when performing the audit need to think about the
likelihood of fraud and the type in a particular area• GONE Theory – essential ingredients for fraud to occur
– G – Greed– O – Opportunity– N – Need (motivation)– E - Exposure
• Fraud Fraud – is criminal deception intended to benefit the deceiver most often financially
• Estimated 75% of Fraud goes undetected• when performing the audit need to think about the
likelihood of fraud and the type in a particular area• GONE Theory – essential ingredients for fraud to occur
– G – Greed– O – Opportunity– N – Need (motivation)– E - Exposure
Fraud & The AuditFraud & The Audit• Employee Fraud• Chances fraud is committed by an employee (in Canada)
4 out of 5 times (Report on Business Magazine)• Most common theft of assets• Management Fraud – often more difficulty to uncover
due to increased level of opportunity, and increased level of sophistication in covering up the fraud
• Typical frauds involve share price manipulation, related party transactions, expense related and kickbacks
• Employee Fraud• Chances fraud is committed by an employee (in Canada)
4 out of 5 times (Report on Business Magazine)• Most common theft of assets• Management Fraud – often more difficulty to uncover
due to increased level of opportunity, and increased level of sophistication in covering up the fraud
• Typical frauds involve share price manipulation, related party transactions, expense related and kickbacks
Fraud & The AuditFraud & The Audit
• Computer Fraud - basically fraud with assistance from a(n) computer(s) often involves using software
• Examples include: obtaining customer information, theft of credit card numbers, identity theft, redirecting/manipulation of automatic payroll/payments
• Computer Fraud - basically fraud with assistance from a(n) computer(s) often involves using software
• Examples include: obtaining customer information, theft of credit card numbers, identity theft, redirecting/manipulation of automatic payroll/payments
Illegal ActsIllegal Acts
• Defn: a violation of a domestic of foreign statutory law or government regulation attributable to the entity under audit, or to management or employees acting on the entity's behalf. (Section 5136)
• Defn: a violation of a domestic of foreign statutory law or government regulation attributable to the entity under audit, or to management or employees acting on the entity's behalf. (Section 5136)
Regarding Regarding illegal actsillegal acts, , auditors should, in auditors should, in allall audits audits,,
Regarding Regarding illegal actsillegal acts, , auditors should, in auditors should, in allall audits audits,,
- read minutes of board meetings- enquire of client’s lawyers- enquire of client management
regarding the occurrence of illegal acts AND client policies regarding illegal acts
Auditor’s ResponsibilityAuditor’s Responsibility
• Other than the min required procedures - not expected to specifically search for illegal acts unless lead to believe that they exist
• Other than the min required procedures - not expected to specifically search for illegal acts unless lead to believe that they exist
Auditor’s ResponsibilityAuditor’s Responsibility
• If illegal act believed to have occurred need to– determine those involved(normally enquire at a level or so
above those suspected)– Consult client’s lawyer– Consider if additional evidence is required to confirm
existence– If determined illegal act has occurred consider effect and
required disclosure on F/S– Inform audit committee – May need opinion of Firm lawyers as well– In client refused to disclose or remedy situation may need to
withdraw from audit
• If illegal act believed to have occurred need to– determine those involved(normally enquire at a level or so
above those suspected)– Consult client’s lawyer– Consider if additional evidence is required to confirm
existence– If determined illegal act has occurred consider effect and
required disclosure on F/S– Inform audit committee – May need opinion of Firm lawyers as well– In client refused to disclose or remedy situation may need to
withdraw from audit
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Inan auditengagement,where doesthe auditorstart?
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A better approach would be to grouptogether similar accounts and audit
each group (cycle approach).
NO! grossly inefficientgrossly inefficient
Would it make sense to startwith the financial statements and
audit each line item?
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financial statements
financialstatement
cycles
managementassertions
generalaudit
objectivesspecificaudit
objectives
thecycle
approach
audittests
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financial statements
financialstatement
cycles
thecycle
approach
What transaction cyclesand groups of accounts are
relevant to this particular client?
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financial statements
financialstatement
cycles
managementassertions
thecycle
approach
What is client’s management“asserting” about the statements,
cycles, and internal controls?
Basic Management AssertionsBasic Management Assertions
1. existence or occurrence - financial components exist at a given date, transactions have occurred during a given period
2. completeness - all transactions and accounts are presented, nothing has been left out
1. existence or occurrence - financial components exist at a given date, transactions have occurred during a given period
2. completeness - all transactions and accounts are presented, nothing has been left out
Basic Management AssertionsBasic Management Assertions
3. valuation or allocation - com- ponents of financial statements are included at appropriate amounts 4. rights and obligations - assets are
rights of the entity and liabilities are obligations
3. valuation or allocation - com- ponents of financial statements are included at appropriate amounts 4. rights and obligations - assets are
rights of the entity and liabilities are obligations
Basic Management AssertionsBasic Management Assertions
5. rights and obligations - assets are rights of the entity and liabilities
are obligations6. statement presentation and
disclosure - components of financial statements are properly combined, separated, described and disclosed
5. rights and obligations - assets are rights of the entity and liabilities
are obligations6. statement presentation and
disclosure - components of financial statements are properly combined, separated, described and disclosed
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}
financial statements
financialstatement
cycles
managementassertions
generalaudit
objectives
thecycle
approach
Audit evidence must be
gathered to support/refute management assertions.
specificaudit
objectives
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TransactionTransaction--related Audit Objectivesrelated Audit Objectives
related tomanagement
assertions
Transaction Related ObjectivesTransaction Related Objectives
• Help provide audit framework
• Assists in planning and collecting evidence for groups of transactions
• Two types of transaction objectives – General – applies to all groups of transactions– Specific – tailored to a specific group/class in
particular
• Help provide audit framework
• Assists in planning and collecting evidence for groups of transactions
• Two types of transaction objectives – General – applies to all groups of transactions– Specific – tailored to a specific group/class in
particular
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TransactionTransaction--related Audit Objectivesrelated Audit Objectives
- existence
Did recordedDid recordedtransactionstransactions
actually occur?actually occur?
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TransactionTransaction--related Audit Objectivesrelated Audit Objectives- existence- completeness
Have allHave alltransactionstransactions
been recorded?been recorded?
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TransactionTransaction--related Audit Objectivesrelated Audit Objectives
- existence- completeness- accuracy
Are recorded transAre recorded trans--actions stated at theactions stated at the
correct amounts?correct amounts?
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TransactionTransaction--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification
Are transactionsAre transactionsproperlyproperly
classified?classified?
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TransactionTransaction--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification- timing
Are transactionsAre transactionsrecorded on therecorded on thecorrect dates?correct dates?
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TransactionTransaction--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification- timing- posting and
summarization
Are recorded Are recorded transactionstransactions
properly included properly included in the accountingin the accounting
records and records and correctly correctly
summarized?summarized?
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BalanceBalance--related Audit Objectivesrelated Audit Objectives
alsorelated to
managementassertions
• Instead of examining groups/classes (i.e. sales transactions etc.) of transactions now looking at balances (i.e. ending balances on the balance sheet and income statement)
• Instead of examining groups/classes (i.e. sales transactions etc.) of transactions now looking at balances (i.e. ending balances on the balance sheet and income statement)
Balance Related ObjectivesBalance Related Objectives
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BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence
Do amountsDo amountsincluded in theincluded in the
financial statementsfinancial statementsactually exist?actually exist?
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BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence- completeness
Have Have allall amounts thatamounts thatshould have been inshould have been in--
cludedcluded in the financialin the financialstatements actuallystatements actually
been included?been included?
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Are financial stateAre financial state--mentment balances inbalances in--
cludedcluded at the correctat the correctarithmetic amounts?arithmetic amounts?
BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy
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Are amounts properlyAre amounts properlyclassified in theclassified in the
correct accounts?correct accounts?
BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification
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Are transactions near theAre transactions near thebalance sheet date recordedbalance sheet date recorded
in the proper period?in the proper period?
BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification- cutoff
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Do details in Do details in account balances account balances agree with other agree with other
related accounting related accounting information?information?
BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification- cutoff- detail tie-in
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When When appropriate, appropriate, are assets are assets
included in the included in the financial financial
statements at statements at realizable realizable
value?value?
BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification- cutoff- detail tie-in- realizable value
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BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification- cutoff- detail tie-in- realizable value- rights and
obligations
Do liabilities Do liabilities represent represent
actual actual obligations?obligations?
Are assets Are assets owned?owned?
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BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification- cutoff- detail tie-in- realizable value- rights and
obligations- presentation and
disclosure
Are account Are account balances and balances and
related related disclosures disclosures
properly properly presented in presented in the financial the financial statements?statements?
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financial statements
financialstatement
cycles
managementassertions
generalaudit
objectivesspecificaudit
objectives
thecycle
approach
obtain sufficient
appropriate audit evidence
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An audit can be divided into An audit can be divided into four four phasesphases..
I II
III IV
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An audit can be divided into An audit can be divided into four four phasesphases..
II
III IV
I. Plan and designan audit approach.
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An audit can be divided into An audit can be divided into four four phasesphases..
II. Perform testsof controls .
Tests of controlsexamine the effective-
ness of internal controls.
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An audit can be divided into An audit can be divided into four four phasesphases..
III. Perform analyt-ical procedures and
tests of details ofbalances.
Analytical proceduresuse comparisons and relation-ships to determine reasonable-
ness of transactions and balances.
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An audit can be divided into An audit can be divided into four four phasesphases..
III. Perform analyt-ical procedures and
tests of details ofbalances.
Tests of detailsof balances examine monetary
errors and irregularities indetails of financial statements.
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An audit can be divided into An audit can be divided into four four phasesphases..
I. Plan and designan audit approach.
II. Perform testsof controls.
III. Perform analyt-ical procedures and
tests of details ofbalances.
IV. Complete theaudit and issue an
audit report.