CHAPTER 5

AUDIT RESPONSIBILITIES AND OBJECTIVES

OBJECTIVE OF CONDUCTING AN AUDIT

• THE OBJECTIVE OF AN ORDINARY AUDIT OF FINANCIAL STATEMENTS IS THE EXPRESSION OF AN OPINION REGARDING THE FAIRNESS OF THE PRESENTATION IN COMPARISON TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

MANAGEMENT RESPONSIBILITIES

• ADOPTION OF SOUND ACCOUNTING PRINCIPLES

• MAINTAINENCE OF ADEQUATE INTERNAL CONTROLS

• PREPARATION OF FAILY PRESENTED FINANCIAL STATEMENTS

AUDITOR’S RESPONSIBILITIES

• PLAN AND PERFORM AUDIT

• OBTAIN REASONABLE ASSURANCE THAT FINANCIAL STATEMENTS ARE NOT MATERIALLY MISSTATED

• EXERCISE PROFESSIONAL SKEPTICISM DURING AUDIT

RESPONSIBILITY TO DETECT FRAUD

• SAS 82 - CONSIDERATION OF FRAUD– DEFINES FRAUD

• FRAUDULENT FINANCIAL REPORTING

• MISAPPROPRIATION OF ASSETS

– AUDITOR RESPONSIBLE TO ASSESS RISK OF FRAUD

• FRAUD RISK FACTORS FOR FINANCIAL REPORTING

– MANAGEMENT CHARACTERISTICS

– INDUSTRY CONDITIONS

– OPERATING CHARACTERISTICS

• FRAUD RISK FACTORS - MISAPPROPRIATION OF ASSETS

– SUSCEPTIBILITY OF ASSETS TO MISAPPROPRIATION

– INTERNAL CONTROLS

– AUDITOR RESPONSIBLE TO EVALUATE RISK FACTORS

• PRESENCE OF RISK FACTORS INCREASES RISK THAT FRAUD COULD OCCUR, NOT INDICATE THAT IT DID OCCUR

– AUDITOR RESPONSIBLE TO MODIFY EVIDENCE GIVEN RISK FACTORS

RESPONSIBILITY TO DISCOVER ILLEGAL ACTS

• DIRECT EFFECT ILLEGAL ACTS– FINANCIAL STATEMENTS ARE

MATERIALLY AFFECTED BY ACT• UNDERSTATING TAX LIABILITY

• INDIRECT EFFECT ILLEGAL ACTS– FINANCIAL STATEMENTS MAY BE

AFFECTED IF DETECTED AND FINES ASSESSED

• EMPLOYEE SAFETY LAWS

• EVIDENCE ACCUMULATION IF AUDITOR SUSPECTS ILLEGAL ACTS– INQUIRE OF MANAGEMENT– CONSULT LEGAL COUNSEL– ADDITIONAL EVIDENCE

• IDENTIFY ILLEGAL ACT– CONSIDER EFFECT ON FINANCIAL

STATEMENTS– HONESTY OF MANAGEMENT– COMMUNICATE WITH AUDIT

COMMITTEE• CONSIDER WITHDRAWAL

FINANCIAL STATEMENT CYCLES

• CYCLES OF TRANSACTIONS– SALES AND COLLECTIONS CYCLE– ACQUISITION AND PAYMENT CYCLE– PAYROLL AND PERSONNEL CYCLE– INVENTORY AND WAREHOUSING

CYCLE– CAPITAL ACQUISITION AND

REPAYMENT CYCLE

• CYCLE APPROACH TO SEGMENTING AUDIT– ACCOUNTS ARE AFFECTED BY ONE OR

MORE CYCLES– INTERNAL CONTROLS CAN BE

ANALYZED BY CYCLE– RISK OF MISSTATEMENT CAN BE

ASSESSED BY CYCLE

AUDIT OBJECTIVES

• MANAGEMENT ASSERTIONS– EXISTENCE OR OCCURRENCE– COMPLETENESS– VALUATION AND ALLOCATION– RIGHTS AND OBLIGATIONS– PRESENTATION AND DISCLOSURE

TRANSACTION-RELATED AUDIT OBJECTIVES

• EXISTENCE– RECORDED TRANSACTIONS EXIST

• COMPLETENESS– EXISTING TRANSACTIONS ARE RECORDED

• VALUATION– RECORDED TRANSACTIONS ARE STATED AT

CORRECT AMOUNTS– TRANSACTIONS ARE PROPERLY CLASSIFIED– TRANSACTIONS ARE IN CORRECT PERIOD

BALANCE-RELATED AUDIT OBJECTIVES

• EXISTENCE– BALANCES EXIST

• COMPLETENESS– ALL EXISTING BALANCES ARE INCLUDED

• VALUATION– BALANCES ARE AT CORRECT AMOUNTS

– PROPER CLASSIFICATION

– CUTOFF

– AGREEMENT OF RECORDS

– REALIZABLE VALUE

• RIGHTS AND OBLIGATIONS– ENTITY HAS RIGHTS TO ASSETS

– ENTITY HAS OBLIGATIONS REGARDING LIABILITIES

• PRESENTATION AND DISCLOSURE– FINANCIAL STATEMENTS ARE PROPERLY

PRESENTED

– DISCLOSURES ARE ADEQUATE

MEETING AUDIT OBJECTIVES

• PLAN AND DESIGN THE AUDIT

• PERFORM TESTS OF CONTROLS AND SUBSTANTIVE TESTS OF TRANSACTIONS

• PERFORM ANALYTICAL PROCEDURES AND TESTS OF BALANCES

• COMPLETE AUDIT