1. AUDIT RESPONSIBILITIES AND OBJECTIVES SECTION 4

2. Overall Audit Objective
According to the reporting standard and the handbook
An audit is conducted in accordance with GAAS
Express an opinion
The essence of auditing is gathering evidence
Why does the auditor gather evidence?

3. Management’s Responsibility for Financial Reporting
Managers are responsible for providing F/S to owners, creditors, and others
Managers normally have a special interest
Managers may acknowledge their responsibility by including a statement in the annual report

4. McDonald’s Corporation Management Report
Management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements and Financial Comments appearing in this annual report. The financial statements were prepared in accordance with generally accepted accounting principles and included certain amounts based on management’s judgment and best estimates. Other financial information presented in the annual report is consistent with the financial statements.
The Company maintains a system of internal control over financial reporting including safeguarding assets against unauthorized acquisition, use or disposition, which is designed to provide reasonable assurance to the Company's management and Board of Directors regarding preparation of reliable published financial statements and such asset safeguarding. The system includes a documented organizational structure and appropriate division of responsibilities; established policies and procedures which are communicated throughout the Company; careful selection, training, and development of our people; and utilization of an internal audit program Policies and procedures prescribe that the Company and all employees are to maintain the highest ethical standards and that business practices throughout the world are to be conducted in a manner which is above reproach.
There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can only provide reasonable assurance with respect to financial statement preparation and safeguarding of assets. Furthermore, the effectiveness of an internal control system can change with the circumstances. The Company believes that at December 31, 200X, it maintained an effective system of internal control over financial reporting and safeguarding of assets against unauthorized acquisition, use or disposition.
The consolidated financial statements have been audited by independent auditors, Ernst & Young LLP, who were given unrestricted access to all financial records and related data. The audit report of Ernst & Young LLP is presented below.
The Board of Directors, operating through its Audit Committee composed entirely of outside Directors, provides oversight to the financial reporting process. Ernst & Young LLP has independent access to the Audit Committee and periodically meets with the Committee to discuss accounting, auditing, and financial reporting matters.
McDONALD”S CORPORATION
Oak Brook, Illinois
January 25, 200X

5. Auditor’s Responsibility
Affected by the fact that an audit is designed to provide reasonable assurance
Why not absolute assurance?
Assumption of management’s good faith

6. Detecting errors and irregularities
Design audits to provide assurance of detecting material misstatements due to errors and irregularities
Defalcations
Management fraud

7. Factors That Affect Detection of Errors and Irregularities
Materiality
An audit performed in accordance with GAAS may detect errors or irregularities that are not material
Generally the smaller the errors or irregularities

8. Level of Employee Involved
Employees may perpetrate defalcations that involve minor thefts
Lower levels of management generally commit defalcations that are immaterial
Senior managers – typically material

9. Senior management are frequently in the position to override controls
Ultramares
McKesson Robbins Drug Company
Equity Funding

10. Management Characteristics
A single manager dominating operating and financing decisions
Unduly aggressive management attitude towards financial reporting
High turnover in management
Management's undue emphasis on meeting projections
Management's poor reputation

11. Skillfulness of Concealment
Alteration of accounting records and supporting documentation
Relationship to Internal Control
The quality of internal and the way an error or irregularity occurred
When a client lacks internal controls

12. Illegal Acts Violation of laws or government regulations Direct effect
Indirect effect
Auditors have the same responsibility for detecting illegal acts that have a material effect on the financial statements as for detecting material errors and irregularities

13. If the auditor suspects no illegal acts
Required evidence
Inquire of management
Reading of the minutes
Inquiry of clients lawyers

14. If the auditor suspects an illegal act
Direct effect illegal acts and indirect-effect illegal acts
Inquire of management
Clients lawyers
Additional evidence

15. Known illegal acts Effects on F/S Disclosure
Relationship with management
Lawyers

16. Financial Statement Cycles
Managers group activities into categories
Sales and
Collections
Investing and
Finance
Acquisition and
Payments
Payroll and
Personnel
Production and
Warehousing
Cash
Sales
Production
Salaries
Purchase of Goods and Services

17. All of an entity’s activities of concern may be viewed as transactions
A class of transactions groups transaction of similar activities
Processed in a similar manner
Same internal controls
A transaction cycle is all of the classes of transactions for a group of related activities

18. The nature of double-entry bookkeeping
By auditing credits to sales an auditor also audits debits to accounts receivable
Examining related transactions and accounts together makes the audit more efficient

19. Management Financial Statement Assertions
When auditors attest, they express an opinion about the reliability of managements assertions
Auditing standards place the management claims or assertions into seven broad categories:
Existence
Occurrence
Completeness
Valuation
Measurement
Ownership
Presentation and disclosure

20. Cash and cash equivalents (Note 1) $7,650,000 Note 1
Current assets:
Cash and cash equivalents (Note 1) $7,650,000
Note 1
The Company’s policy is to invest cash in excess of operating requirements, arising primarily from the proceeds of the subordinated debt offering, in income producing investments. Temporary cash investments of $4,325,000 at January 1, 200X, include money market and commercial paper amounts stated at cost, which approximates market.
By stating cash and cash equivalents at $7,650,000 management asserts:
$7,650,00 represents only cash and cash equivalents.
The company has no other cash.
The entity owns the cash.
$7,650,000 is the value.
The note to the financial statements

21. Existence Occurrence For balance sheet accounts
For income statement accounts

22. Completeness F/S include all transaction and accounts that they should
Also relates to individual accounts
Cutoff
Related to existence, occurrence, and completeness

23. Valuation
Balance sheet accounts
Also deals with allocation
Measurement
Income statement accounts

24. Ownership
Balance sheet accounts
Also deals with rights and obligation
All accounts
Presentation and disclosure
Properly classified, described and disclosed

25. Using Assertions to Determine Audit Procedures
Audit procedures are the methods used to gather audit evidence
Most of the audit work consists of obtaining and evaluating evidence regarding F/F assertions
Basically identify audit objectives or goals for each F/S assertion and then identify audit procedures to fulfill that objective

26. Financial Statement Assertions for Sales
Occurrence – sales actually made
Completeness – all sales transactions recorded
Rights and obligations – sales recorded represent only sales transactions
Measurement – sales are correctly billed
Presentation – in accordance with GAAP

27. Typical Misstatements Misstatements That May Occur in Sales
Assertions
Typical Misstatements
Misstatements That May Occur in Sales
Occurrence
Transactions that did not occur are recorded
A fictitious sale is recorded in the account of a regular customer
Completeness
Transactions that occurred are not recorded
A sale is not recorded for goods sold and shipped to customers
Rights and Obligations
Transactions are recorded when title has not passed
A sale is recorded for consigned goods
Measurement
Transactions are improperly measured
Incorrect unit prices are used in preparing sales invoices
Presentation
Transactions are misclassified
Sales may be recorded as wholesale sales when they should be recorded as retail sales

28. An Overview of the Audit Process
Planning the audit
Understanding the client
Understand the client’s system of internal control

29. Gathering and evaluating evidence
Tests of controls
Good controls
Poor controls
Tests of transactions and balances

30. Issuing a report
Based on the accumulated evidence

31. Problem 1: (5-22)
The following are specific balance-related audit objectives applied to the audit of accounts receivable ( a through g), management assertions (1 through 4). The list referred to in the specific balance-related audit objectives is the list of accounts receivable from each customer at the balance sheet date.
SPECIFIC BALANCE –RELATED AUDIT OBJECTIVE
There are no unrecorded receivables.
Receivables have not been sold or discounted.
Uncollectible accounts have been provided for.
Receivables that have become uncollectible have been written off.
All accounts on the list are expected to be collected within one year.
All accounts on the list arose from the normal course of business and are not due from related parties.
Sales cut-off at year end is proper.
MANAGEMENT ASSERTION
Existence or Occurrence. 2. Completeness. 3. Measurement or Valuation. 4. Allocation.
REQUIRED: For each specific balance-related audit objective, identify the appropriate management assertion.

32. Problem 2: (5-23)
The following are specific transaction-related audit objectives applied to the audit of cash disbursements ( a through f), management assertions (1 through 7), and general transaction-related audit objectives (8 through 13).
SPECIFIC AUDIT OBJECTIVE
Recorded cash disbursement transactions are for the amount of goods or services received and are correctly recorded.
Cash disbursement transactions are properly included in the accounts payable master file and are correctly summarized.
Recorded cash disbursements are for goods and services actually received.
Cash disbursements are for goods and properly classified.
Existing cash disbursement transactions are properly classified.
Cash disbursement transactions are recorded on the correct dates.

33. MANAGEMENT ASSERTION
Existence or Occurrence
Completeness
Measurement or Valuation
Allocation

34. GENERAL TRANSACTION-RELATED AUDIT OBJECTIVE
Occurrence
Completeness
Accuracy
Classification
Posting and summarization
Timing
Required:
Explain the differences among management assertions, general transaction-related audit objectives, and specific transaction-related audit objectives and their relationship to one another.
For each specific transaction-related audit objective, identify the appropriate management assertion.
For each specific transaction-related audit objective, identify the appropriate general transaction-related audit objective.

35. Problem 3: (5-24)
The following are two specific balance-related audit objectives in the audit of accounts payable. The list referred to in the objectives is the aged accounts payable trial balance produced using the supplier master file. The total of the list equals the accounts payable balance on the general ledger.
All accounts payable included on the list represent amounts due to valid vendors.
There are no unrecorded accounts payable.
Required:
Explain the difference between these two specific balance-related audit objectives.
For the audit of accounts payable, which of these two specific balance-related audit objectives would usually be more important? Explain.