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Audit Responsibilitiesand Objectives

Topic 4

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Learning Objective 1

Explain the objective of

conducting an audit of

financial statements.

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Objective of Conducting an Audit of Financial Statements

The primary objective of the auditis to express an opinion on the

financial statements.

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Steps to DevelopAudit Objectives

Understand objectives andresponsibilities for the audit.

1

2Divide financial statements

into cycles.

3Know management

assertions about accounts.

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Steps to DevelopAudit Objectives

Know general audit objectives forclasses of transactions and accounts.

4

5Know specific audit objectives for

classes of transactions and accounts.

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Learning Objective 2

Explain the auditor’s

responsibility for discovering

material misstatements.

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Auditor’s Responsibilities

Material versus immaterial misstatements

Reasonable assurance

Errors versus fraud

Professional skepticism

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Responsibilities for Discovering Illegal Acts

Direct-effect illegal acts

Indirect-effect illegal acts

Evidence accumulationwhen there is no reasonto believe indirect-effect

illegal act exists

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Responsibilities for Discovering Illegal Acts

Evidence accumulation andother actions when there isreason to believe direct- orindirect-effect illegal acts

may exist

Actions when the auditorknows of an illegal act

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Learning Objective 3

Classify transactions and account

balances into financial statement

cycles and identify benefits of a cycle

approach to segmenting the audit.

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Transaction Flow Example

Transactions JournalsLedger, Trial Balance, and

Financial Statements

Acquisitionof goods

and services

Cash receiptsjournal

SalesSales

journal

Cashreceipts

Acquisitionsjournal

General ledgerand subsidiary

records

General ledgertrial balance

Financialstatements

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Transaction Flow Example

Transactions JournalsLedger, Trial Balance, and

Financial Statements

Allocation andadjustments

Payrolljournal

Cashdisbursements

Cash disburse-ments journal

Payrollservices and

disbursements

Generaljournal

General ledgerand subsidiary

records

General ledgertrial balance

Financialstatements

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Relationships Among Transaction Cycles

Generalcash

Capital acquisitionand repayment cycle

Sales andcollection

cycle

Acquisitionand payment

cycle

Payroll andpersonnel

cycle

Inventory andwarehousing

cycle

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Learning Objective 4

Describe why the auditor obtains

a combination of assurance by

auditing classes of transactions

and ending balances in accounts.

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Balance and Transactions Affecting Balances Example

$ 19,454

144,328

$ 20,197

139,020

1,242

3,328Charge-off ofuncollectible

debts

Cashreceipts

Sales returnsand allowances

Sales

Accounts Receivable (in thousands)Beginning balance

Ending balance

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Learning Objective 5

Distinguish among

the five categories of

management assertions

about financial information.

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Management Assertions

1. Existence or occurrence

2. Completeness

3. Valuation or allocation

4. Rights and obligations

5. Presentation and disclosure

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Learning Objective 6

List the six general transaction-

related audit objectives to the

five management assertions.

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Transaction-RelatedAudit Objectives

Existence

Completeness

Accuracy

Recordedtransactions exist.

Existing transactionsare recorded.

Recorded transactionsare stated at thecorrect amount.

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Transaction-RelatedAudit Objectives

Classification

Timing

Posting andsummarization

Transactions areproperly classified.

Transactions are recordedon the correct dates.

Transactions are includedin the master files and

are correctly summarized.

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Transaction-Related Audit Objectives

and Management Assertions

ManagementAssertions

General Transaction-Related Audit Objectives

Existence or occurrenceCompleteness

Valuation or allocation

Rights and obligationsPresentation and disclosure

ExistenceCompleteness

Accuracy, Classification timing,Posting and summarization

N/AN/A

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Learning Objective 7

Link the nine general balance-

related audit objectives to the

five management assertions.

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General Balance-RelatedAudit Objectives

Existence

Completeness

Accuracy

Amountsincluded exist.

Existing amountsare included.

Amounts includedare stated at thecorrect amounts.

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General Balance-RelatedAudit Objectives

Classification

Cutoff

Detail tie-in

Amounts areproperly classified.

Transactions are recordedin the proper period.

Account balances agreewith master file amounts,

and with the general ledger.

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General Balance-RelatedAudit Objectives

Realizablevalue

Rights andobligations

Presentationand

disclosure

Assets are included atestimated realizable value.

Assets must be owned.

Account balances anddisclosures are presentedin financial statements.

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Assertions and Balance-Related Audit Objectives

ManagementAssertions

General Balance-Related Audit Objectives

Existence or occurrenceCompleteness

Valuation or allocation

Rights and obligationsPresentation and disclosure

ExistenceCompleteness

Accuracy, Classification, Cutoff,Detail tie-in, Realizable value

Rights and obligationsPresentation and disclosure

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Learning Objective 8

Explain the relationship

between audit objectives

and the accumulation

of audit evidence.

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How Audit ObjectivesAre Met

Auditors plan the combinationof objectives and evidence by

following an audit process.

An audit process is a methodologyfor organizing an audit.

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Four Phases of an Audit

Phase I

Phase II

Phase III

Phase IV

Plan and designan audit approach.

Perform tests ofcontrols and

substantive testsof transactions.

Perform analyticalprocedures andtests of detailsof balances.

Complete theaudit and issuean audit report.

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