©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Audit Responsibilities and Objectives Chapter 6

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 1 Explain the objective of conducting an audit of financial statements.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Objective of Conducting an Audit of Financial Statements The primary objective of the audit is to express an opinion on the financial statements.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Steps to Develop Audit Objectives Understand objectives and responsibilities for the audit. 1 2 Divide financial statements into cycles. 3 Know management assertions about accounts.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Steps to Develop Audit Objectives Know general audit objectives for classes of transactions and accounts. 4 5 Know specific audit objectives for classes of transactions and accounts.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 2 Distinguish management’s responsibilities for preparing financial statements from the auditor’s responsibilities for verifying those financial statements.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Responsibilities Management is responsible for the financial statements, and for internal control. Auditors issue an opinion on fairness of the financial statements.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 3 Explain the auditor’s responsibility for discovering material misstatements.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Auditor’s Responsibilities Material versus immaterial misstatements Reasonable assurance Errors versus fraud Professional skepticism

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Responsibilities for Discovering Illegal Acts Direct-effect illegal acts Indirect-effect illegal acts Evidence accumulation when there is no reason to believe indirect-effect illegal act exists

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Responsibilities for Discovering Illegal Acts Evidence accumulation and other actions when there is reason to believe direct- or indirect-effect illegal acts may exist Actions when the auditor knows of an illegal act

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 4 Classify transactions and account balances into financial statement cycles and identify benefits of a cycle approach to segmenting the audit.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Transaction Flow Example TransactionsJournals Ledger, Trial Balance, and Financial Statements Acquisition of goods and services Cash receipts journal Sales journal Cash receipts Acquisitions journal General ledger and subsidiary records General ledger trial balance Financial statements

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Transaction Flow Example TransactionsJournals Ledger, Trial Balance, and Financial Statements Allocation and adjustments Payroll journal Cash disbursements Cash disburse- ments journal Payroll services and disbursements General journal General ledger and subsidiary records General ledger trial balance Financial statements

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 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

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 5 Describe why the auditor obtains a combination of assurance by auditing classes of transactions and ending balances in accounts.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Balance and Transactions Affecting Balances Example $ 19, ,328 $ 20, ,020 1,242 3,328 Charge-off of uncollectible debts Cash receipts Sales returns and allowances Sales Accounts Receivable (in thousands) Beginning balance Ending balance

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 6 Distinguish among the five categories of management assertions about financial information.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Management Assertions 1. Existence or occurrence 2. Completeness 3. Valuation or allocation 4. Rights and obligations 5. Presentation and disclosure

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 7 List the six general transaction- related audit objectives to the five management assertions.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Transaction-Related Audit Objectives Existence Completeness Accuracy Recorded transactions exist. Existing transactions are recorded. Recorded transactions are stated at the correct amount.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Transaction-Related Audit Objectives Classification Timing Posting and summarization Transactions are properly classified. Transactions are recorded on the correct dates. Transactions are included in the master files and are correctly summarized.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Transaction-Related Audit Objectives and Management Assertions Management Assertions General Transaction- Related Audit Objectives Existence or occurrence Completeness Valuation or allocation Rights and obligations Presentation and disclosure Existence Completeness Accuracy, Classification timing, Posting and summarization N/A

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 8 Link the nine general balance- related audit objectives to the five management assertions.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley General Balance-Related Audit Objectives Existence Completeness Accuracy Amounts included exist. Existing amounts are included. Amounts included are stated at the correct amounts.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley General Balance-Related Audit Objectives Classification Cutoff Detail tie-in Amounts are properly classified. Transactions are recorded in the proper period. Account balances agree with master file amounts, and with the general ledger.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley General Balance-Related Audit Objectives Realizable value Rights and obligations Presentation and disclosure Assets are included at estimated realizable value. Assets must be owned. Account balances and disclosures are presented in financial statements.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Assertions and Balance- Related Audit Objectives Management Assertions General Balance- Related Audit Objectives Existence or occurrence Completeness Valuation or allocation Rights and obligations Presentation and disclosure Existence Completeness Accuracy, Classification, Cutoff, Detail tie-in, Realizable value Rights and obligations Presentation and disclosure

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 9 Explain the relationship between audit objectives and the accumulation of audit evidence.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley How Audit Objectives Are Met Auditors plan the combination of objectives and evidence by following an audit process. An audit process is a methodology for organizing an audit.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Four Phases of an Audit Phase I Phase II Phase III Phase IV Plan and design an audit approach. Perform tests of controls and substantive tests of transactions. Perform analytical procedures and tests of details of balances. Complete the audit and issue an audit report.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley End of Chapter 6