5 - 1 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Bea Audit Responsibilities and Objectives Chapter 5
5 - 1©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Audit Responsibilitiesand Objectives
Chapter 5
5 - 2©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 1
Explain the objective of
conducting an audit of
financial statements.
5 - 3©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Objective of Conducting an Audit of Financial Statements
The primary objective of the auditis to express an opinion on the
financial statements.
5 - 4©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Steps to DevelopAudit Objectives
Understand objectives andresponsibilities for the audit.
1
2Divide financial statements
into cycles.
3Know management
assertions about accounts.
5 - 5©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Steps to DevelopAudit Objectives
Know general audit objectives forclasses of transactions and accounts.
4
5Know specific audit objectives for
classes of transactions and accounts.
5 - 6©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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.
5 - 7©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Responsibilities
Management is responsiblefor the financial statements,
and for internal control.
Auditors issue anopinion on fairness
of the financial statements.
5 - 8©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 3
Explain the auditor’s
responsibility for discovering
material misstatements.
5 - 9©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Auditor’s Responsibilities
Material versus immaterial misstatements
Reasonable assurance
Errors versus fraud
Professional skepticism
5 - 10©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Responsibilities forDiscovering Illegal Acts
Direct-effect illegal acts
Indirect-effect illegal acts
Evidence accumulationwhen there is no reasonto believe indirect-effect
illegal act exists
5 - 11©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Responsibilities forDiscovering 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
5 - 12©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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.
5 - 13©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Transaction Flow Example
Transactions
Acquisitionof goods
and services
Sales
Cashreceipts
Journals
Cash receiptsjournal
Salesjournal
Acquisitionsjournal
Ledger, Trial Balance, andFinancial Statements
General ledgerand subsidiary
records
General ledgertrial balance
Financialstatements
5 - 14©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Transaction Flow Example
Transactions
Allocation andadjustments
Cashdisbursements
Payrollservices and
disbursements
Journals
Payrolljournal
Cash disburse-ments journal
Generaljournal
Ledger, Trial Balance, andFinancial Statements
General ledgerand subsidiary
records
General ledgertrial balance
Financialstatements
5 - 15©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Relationships AmongTransaction Cycles
Generalcash
Acquisitionand payment
cycle
Payroll andpersonnel
cycle
Capital acquisitionand repayment cycle
Sales andcollection
cycle
Inventory andwarehousing
cycle
5 - 16©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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.
5 - 17©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Balance and TransactionsAffecting Balances Example
$ 18,827
144,328
$ 20,197
138,393
1,242
3,323Charge-off ofuncollectible
debts
Cashreceipts
Sales returnsand allowances
Sales
Accounts Receivable (in thousands)Beginning balance
Ending balance
5 - 18©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 6
Distinguish among
the five categories of
management assertions
about financial information.
5 - 19©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Management Assertions
1. Existence or occurrence
2. Completeness
3. Valuation or allocation
4. Rights and obligations
5. Presentation and disclosure
5 - 20©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 7
Link the six general transaction-
related audit objectives to the
five management assertions.
5 - 21©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Transaction-RelatedAudit Objectives
ExistenceRecorded
transactions exist.
CompletenessExisting transactions
are recorded.
AccuracyRecorded transactions
are stated at thecorrect amount.
5 - 22©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Transaction-RelatedAudit Objectives
ClassificationTransactions are
properly classified.
TimingTransactions are recorded
on the correct dates.
Posting andsummarization
Transactions are includedin the master files and
are correctly summarized.
5 - 23©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Transaction-Related Audit Objectives
and Management Assertions
ManagementAssertions
General Transaction-Related Audit Objectives
Existence or occurrence Existence
Completeness Completeness
Valuation or allocationAccuracy, Classification timing,
Posting and summarization
Rights and obligations N/A
Presentation and disclosure N/A
5 - 24©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 8
Link the nine general balance-
related audit objectives to the
five management assertions.
5 - 25©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
General Balance-RelatedAudit Objectives
ExistenceAmounts
included exist.
CompletenessExisting amounts
are included.
AccuracyAmounts included
are stated at thecorrect amounts.
5 - 26©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
General Balance-RelatedAudit Objectives
ClassificationAmounts are
properly classified.
CutoffTransactions are recorded
in the proper period.
Detail tie-inAccount balances agree
with master file amounts,and with the general ledger.
5 - 27©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
General Balance-RelatedAudit Objectives
Realizablevalue
Assets are included atestimated realizable value.
Rights andobligations
Assets must be owned.
Presentationand
disclosure
Account balances anddisclosures are presentedin financial statements.
5 - 28©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Assertions and Balance-Related Audit Objectives
ManagementAssertions
General Balance-Related Audit Objectives
Existence or occurrence Existence
Completeness Completeness
Valuation or allocationAccuracy, Classification, Cutoff,Detail tie-in, Realizable value
Rights and obligations Rights and obligations
Presentation and disclosure Presentation and disclosure
5 - 29©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 9
Explain the relationship
between audit objectives
and the accumulation
of audit evidence.
5 - 30©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
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.
5 - 31©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Four Phases of an Audit
Phase IPlan and design
an audit approach.
Phase II
Perform tests ofcontrols and
substantive testsof transactions.
Phase III
Perform analyticalprocedures andtests of detailsof balances.
Phase IVComplete the
audit and issuean audit report.
5 - 32©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
End of Chapter 5