1 Chapter 6 Audit Responsibilities and Objectives

2 What is the overall objective of an audit? AU-C 200 Ashley

3 Overall Objectives of the Independent Auditor AU-C The overall objectives of the auditor, in conducting an audit of financial statements, are to a.obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework; and b. report on the financial statements, and communicate as required by GAAS, in accordance with the auditor's findings.

4 What is the auditor’s responsibility for detecting material misstatements? Sam

5 Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework.

6 Think of the Independent Auditor’s Report Think of first paragraph of the Auditor’s Responsibility section? What is the auditor’s responsibility for detecting fraud? For detecting errors? Julia

7 Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.2 Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

8 Think of the Independent Auditor’s Report State the opinion paragraph of the standard audit report. Tim

9 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 2015, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

10 Discuss reasonable assurance. Jake S

11 What is the definition of Materiality Christina

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13 Discuss sampling risk. Jake M

14 Discuss the difference between fraud and errors. Romy

15 What do we call the type of fraud that affects financial statements? Janet

16 Misappropriation of assets Fraudulent financial reporting Direct-effect illegal acts (effect on financial statements) Indirect-effect illegal acts

17 Define Professional Skepticism. Madyson

18 An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence.

19 Audit objectives

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22 We typically audit transactions differently than account balances differently than disclosures

23 Vivian Describe a Financial Statement cycle. Describe a Significant Class of Transactions ? page 53

24 Revenue & Collection Cycle Accounts receivablexxx.xx Salesxxx.xx Cashxxx.xx Accounts receivablexxx.xx Class of Transactions Accounts receivablexxx.xx Salesxxx.xx

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30 Name the 5 management assertions that relate to transactions. Fiona

31 Think about the management assertions that relate to transactions and create 5 audit objectives for sales revenue or wage expense Bryce

32 If our audit objectives are based on the management assertions, then for each significant class of transactions or for each significant account balance The auditor must obtain sufficient appropriate evidence to support Each management assertion

33 Name the 4 management assertions that relate to account balances. Jena

34 think about the assertions for account balances and create 4 related audit objectives for an asset account. Inventory or Accounts receivable Loren

35 Name the 4 management assertions which relate to disclosures. Katina

36 think about the assertions for disclosures and create 2 audit objectives for disclosures. Lauren

37 Audit Risk Model Page 127

38 the Audit Risk Model AAR = IR * CR * PDR Risk of Material Misstatement RoMM = combines IR * CR Materiality and Risk Page 127

39 Audit Risk Model

40 What are the elements of the “Audit Risk Model”? Aleksandr

41 What is the definition of Audit Risk? Not the definition of acceptable audit risk but audit risk Chen

42 the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

43 What is the definition of Acceptable Audit Risk? Marc

44 a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unmodified opinion has been issued.

45 What is the definition of Planned Detection Risk? Gordon

46 the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

47 Describe the mathematical relationship between the Planned level of Detection Risk and Control Risk. Nicole

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49 Audit Risk Model

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51 Which Component(s) of Audit Risk do you think the auditor can reduce? Which Component(s) of Audit Risk do you think the auditor is unable to reduce? Huyen

52 Under what conditions are we required to obtain an understanding of the internal controls? Ricardo

53 Why are we always required to obtain an understanding of internal controls regardless the type of audit approach? Christine

54 What is the objective of AU-c 315 Julissa

55.03 The objective of the auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels through understanding the entity and its environment, including the entity's internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement. AU-C 315 Understanding the Entity & Its Environment & Assessing RoMM

56 Under what conditions are we required to obtain sufficient appropriate audit evidence? Alyssa

57 How do we obtain audit evidence? Xiadan

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59.04 The objective of the auditor is to design and perform audit procedures that enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion. AU-C 500 Audit Evidence

60 Iris If the assessed level of CR = Low, what does that tell us about PDR ….? If assessed level of CR = High, what does that tell us about PDR …. ?

61 If we assess CR = Low, will we need to TEST the effectiveness of the Internal Controls? Ciara

62 Steph If PDR = High, what does that tell us about the assessed level of Control Risk …. ? If PDR = Low, what does that tell us about the assessed level of Control Risk …. ?

63 Katie In your statistics class, why does a larger sample increase your level of confidence? How does evidence reduce risk?

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70 When the auditor has knowledge of illegal acts that have a direct-effect on the financial statements, to whom must the auditor communicate about the illegal acts? Jay

71 After discovering an Illegal Act Inconsequential – minor misappropriation by low level employees –Report to management one level above Frauds that could cause material misstatement Illegal acts involving senior management –Report to the Board of Directors

72 After discovering an Illegal Act –Private Securities Litigation Reform Act 1995 When auditors believe an illegal act has a material effect on the financial statements –Notify the Board of Directors –The Board must notify the SEC within 1 day –If the Board doesn’t notify SEC –Auditor must notify the SEC