Audit Responsibilities and Objectives

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Audit Responsibilitiesand Objectives

• Chapter 6

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Managements Responsibilities

• Management is responsible for the financial
  statements and for internal control.
• The SarbanesOxley Act requires the CEO and the
  CFO of public companies to certify the quarterly
  and annual financial statements.
• Criminal penalties for knowingly certifying false
  statements

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Auditor Responsibilities

• Gather sufficient competent evidential matter
• Materiality
• Reasonable assurance
• Professional skepticism

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Errors versus fraud

• Auditors usually find many errors
• Postings
• Incorrect application of GAAP
• Fraud
• Misappropriation of assets
• Financial reporting fraud
• Misappropriation at any level
• Reporting fraud perpetrated by management
• Fraud harder to find than errors because of
  attempt to conceal

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Discovering Illegal Acts Other than Fraud

• Illegal Acts defined in SAS 54 as being other
  than fraud
• Direct-effect illegal acts
• Auditor responsible for detection, just as in
  errors and fraud
• Indirect-effect illegal acts
• Auditor provides no assurance of detection

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Evidence Accumulation

• Evidence accumulation when there is no reason to
  believe indirect-effect illegal act exists
• Not expected to search
• When there is reason to believe direct- or
  indirect-effect illegal acts may exist
• Inquire of management
• Consult with clients legal counsel
• Additional evidence

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When Illegal Act is Known

• Consider effects on f.s. and disclosures
• Modify report if inadequate
• Consider believability of management
• Consult audit committee
• Consider resignation
• If public, must report to SEC

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Transaction Cycles

• Useful for auditor to break it down into cycles
• Cycles include related accounts
• Example Sales cycle includes sales, cash
  receipts, accounts receivable, write-offs
• Other cycles
• Acquisition and payment
• Payroll
• Inventory
• Capital acquisition (funding, not assets) and
  repayment

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Management Assertions

• P resentation and Disclosure
• E xistence or occurrence
• R ights and obligations
• C ompleteness
• V aluation or allocation

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Steps to Develop Audit Objectives
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Steps to Develop Audit Objectives
Know general audit objectives for classes of
transactions and accounts.
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Transaction-Related Audit Objectives
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Balance-Related Audit Objectives
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How Audit Objectives Are Met

• The auditor must obtain sufficient competent
  audit evidence to support all management
  assertions in the financial statements.
• An audit process is a methodology for organizing
  an audit.

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4 Phases of a Financial Statement Audit

• Phase 1 Plan and design an audit approach.
• Phase 2 Perform tests of controls and
  substantive tests of transactions.
• Phase 3 Perform analytical procedures and tests
  of details of balances.
• Phase 4 Complete the audit and issue an audit
  report.