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©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 12/e,Auditing 12/e, Arens/Beasley/Elder Arens/Beasley/Elder 6 - 1
Audit ResponsibilitiesAudit Responsibilitiesand Objectivesand Objectives
Chapter 6Chapter 6
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 22
Learning Objective 1Learning Objective 1
Explain the objective ofExplain the objective of
conducting an audit ofconducting an audit of
financial statements andfinancial statements and
an audit of internal controls.an audit of internal controls.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 33
Objective of Conducting an Objective of Conducting an Audit of Financial StatementsAudit of Financial Statements
The objective of the ordinary audit of financialstatements is the expression of an opinion ofthe fairness with which they present fairly, inall respects, financial position, result ofoperations, and its cash flows inconformity with GAAP.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 44
Steps to Develop Audit Steps to Develop Audit Objectives Objectives
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 55
Steps to Develop Audit Steps to Develop Audit ObjectivesObjectives
4. Know general audit objectives forclasses of transactions and accounts.
5. Know specific audit objectives forclasses of transactions, accounts and
disclosures.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 66
Learning Objective 2Learning Objective 2
Distinguish management’sDistinguish management’s
responsibility for the financialresponsibility for the financial
statements and internal controlstatements and internal control
from the auditor’s responsibilityfrom the auditor’s responsibility
for verifying the financialfor verifying the financial
statements and effectivenessstatements and effectiveness
of internal control.of internal control.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 77
Management’s ResponsibilitiesManagement’s Responsibilities
Management is responsible for the financialstatements and for internal control.
The Sarbanes-Oxley Act increases management’sresponsibility for the financial statements.
It requires the CEO and the CFO of publiccompanies to certify the quarterly and annualfinancial statements submitted to the SEC.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 88
Management’s ResponsibilitiesManagement’s Responsibilities
The Sarbanes-Oxley Act provides for criminalpenalties for anyone who knowingly falselycertifies the statements.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 99
Learning Objective 3Learning Objective 3
Explain the auditor’sExplain the auditor’s
responsibility for discoveringresponsibility for discovering
material misstatements.material misstatements.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1010
Auditor’s ResponsibilitiesAuditor’s Responsibilities
Material versus immaterial misstatements
Reasonable assurance
Errors versus fraud
Professional skepticism
Fraud resulting from fraudulent financialreporting versus misappropriation of assets
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1111
Auditor’s Responsibilities for Auditor’s Responsibilities for Discovering Illegal ActsDiscovering Illegal Acts
Direct-effect illegal acts
Indirect-effect illegal acts
Evidence accumulation when there is no reasonto believe indirect-effect illegal act exists
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1212
Auditor’s Responsibilities for Auditor’s Responsibilities for Discovering Illegal ActsDiscovering Illegal Acts
Evidence accumulation and other actionswhen there is reason to believe direct- orindirect-effect illegal acts may exist
Actions when the auditor knows of an illegal act
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1313
Learning Objective 4Learning Objective 4
Classify transactions and accountClassify transactions and account
balances into financial statementbalances into financial statement
cycles and identify benefits of acycles and identify benefits of a
cycle approach to segmentingcycle approach to segmenting
the audit.the audit.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1414
Financial Statements CyclesFinancial Statements Cycles
Audits are performed by dividing the financialstatements into smaller segments or components.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1515
Transaction Flow ExampleTransaction Flow ExampleLedgers,
Trial Balance,and FinancialStatements
General ledgerand subsidiary
records
General ledgertrial balance
Financialstatements
Acquisitionof goods
and services
Sales
Cashreceipts
Transactions
Cash receiptsjournal
Salesjournal
Acquisitionsjournal
Journals
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1616
Transaction Flow ExampleTransaction Flow Example
Allocationand
adjustments
Cashdisbursements
Payrollservices and
disbursements
Ledgers,Trial Balance,and FinancialStatements
General ledgerand subsidiary
records
General ledgertrial balance
Financialstatements
Transactions
Payrolljournal
Cashdisbursements
journal
Generaljournal
Journals
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1717
Relationships Among Relationships Among Transaction CyclesTransaction Cycles
Generalcash
Capital acquisitionand repayment cycle
Sales andcollection
cycle
Acquisitionand payment
cycle
Payroll andpersonnel
cycle
Inventory andwarehousing
cycle
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1818
Learning Objective 5Learning Objective 5
Describe why the auditor obtainsDescribe why the auditor obtains
a combination of assurance bya combination of assurance by
auditing classes of transactionsauditing classes of transactions
and ending balances in accounts,and ending balances in accounts,
including presentation andincluding presentation and
disclosure.disclosure.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 1919
Balance and Transactions Balance and Transactions Affecting Balances ExampleAffecting Balances Example
Beginning balance
Sales
$ 17,521
$144,328 $137,087 Cash receipts
$ 1,242Sales returnsand allowances
Charge-off ofuncollectibleaccounts
Ending balance $ 20,197
$ 3,323
Accounts Receivable (in thousands)
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2020
Learning Objective 6Learning Objective 6
Distinguish among the threeDistinguish among the three
categories of managementcategories of management
assertions about financialassertions about financial
information.information.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2121
Management AssertionsManagement Assertions
1. Assertions about classes of transactions andevents for the period under audit
2. Assertions about account balances at period end
3. Assertions about presentation and disclosure
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2222
Management Assertions forManagement Assertions forEach Category of AssertionsEach Category of Assertions
Assertions About Classes Assertions About Classes of Transactions and Eventsof Transactions and Events
Assertions About Assertions About Account BalancesAccount Balances
Assertions About Assertions About Presentation and DisclosurePresentation and Disclosure
Occurrence Existence Occurrence and rightsand obligations
Completeness Completeness Completeness
Accuracy Valuation andallocation
Accuracy andvaluation
Classification Classification andunderstandability
Cutoff
Rights andobligations
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2323
Learning Objective 7Learning Objective 7
Link the six general transaction-Link the six general transaction-
related audit objectives torelated audit objectives to
management assertionsmanagement assertions
for classes of transactions.for classes of transactions.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2424
OccurrenceRecorded transactionsexist
CompletenessExisting transactionsare recorded
AccuracyRecorded transactionsare stated at thecorrect amounts
General Transactions-related General Transactions-related Audit ObjectivesAudit Objectives
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2525
ClassificationTransactions are properlyclassified.
TimingTransactions are recordedon the correct dates.
Posting andsummarization
Transactions are includedin the master files andare correctly summarized.
General Transactions-related General Transactions-related Audit ObjectivesAudit Objectives
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2626
Management AssertionsManagement AssertionsAbout Classes ofAbout Classes ofTransactions and EventsTransactions and Events
General Transaction-General Transaction-related Auditrelated AuditObjectivesObjectives
Specific Sales Transaction-Specific Sales Transaction-related Audit Objectivesrelated Audit Objectives
Occurrence Occurrence Recorded sales are forshipments made tononfictitious customers
Completeness Completeness Existing salestransactions are recorded
Accuracy Accuracy Recorded sales are forthe amount of goodsshipped and are correctlybilled and recorded
Hillsburg Hardware Co.Hillsburg Hardware Co.(Applied to Sales Transactions)
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2727
Accuracy Posting andsummarization
Sales transactions areproperly included in themaster file and arecorrectly summarized
Classification Classification Sales transactions areproperly classified
Cutoff Timing Sales transactions arerecorded on the correctdates.
General Transaction-General Transaction-related Auditrelated AuditObjectivesObjectives
Management AssertionsManagement AssertionsAbout Classes ofAbout Classes ofTransactions and EventsTransactions and Events
Specific Sales Transaction-Specific Sales Transaction-related Audit Objectivesrelated Audit Objectives
Hillsburg Hardware Co.Hillsburg Hardware Co.(Applied to Sales Transactions)
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2828
Learning Objective 8Learning Objective 8
Link the eight general balance-Link the eight general balance-
related audit objectives torelated audit objectives to
management assertionsmanagement assertions
for account balances.for account balances.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 2929
Existence Amounts included exist
CompletenessExisting amounts areincluded
AccuracyAmounts included arestated at the correctamounts
General Balance-relatedGeneral Balance-relatedAudit ObjectivesAudit Objectives
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3030
ClassificationAmounts are properlyclassified
CutoffTransactions are recordedin the proper period
Detail tie-inAccount balances agreewith master file amounts,and with the general ledger
General Balance-relatedGeneral Balance-relatedAudit ObjectivesAudit Objectives
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3131
Realizablevalue
Assets are included atestimated realizable value
Rights andobligations
Assets must be owned
General Balance-relatedGeneral Balance-relatedAudit ObjectivesAudit Objectives
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3232
Management AssertionsManagement AssertionsAbout Account BalancesAbout Account Balances
General Balance-General Balance-related Auditrelated AuditObjectivesObjectives
Specific Balance-related AuditSpecific Balance-related AuditObjectives Applied to InventoryObjectives Applied to Inventory
Existence Existence All recorded inventory existsat the balance sheet date
Completeness Completeness All existing inventory hasbeen counted and includedin the inventory summary
Hillsburg Hardware Co.Hillsburg Hardware Co.(Applied to Inventory)
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3333
Management AssertionsManagement AssertionsAbout Account BalancesAbout Account Balances
General Balance-General Balance-related Auditrelated AuditObjectivesObjectives
Valuation andallocation
Accuracy Inventory quantities on the client’s perpetual records agree with items physically on handPrices used to value inventories are materially correctExtensions of price times quantity are correct and details are correctly added
Specific Balance-related AuditSpecific Balance-related AuditObjectives Applied to InventoryObjectives Applied to Inventory
Hillsburg Hardware Co.Hillsburg Hardware Co.(Applied to Inventory)
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3434
Management AssertionsManagement AssertionsAbout Account BalancesAbout Account Balances
General Balance-General Balance-related Auditrelated AuditObjectivesObjectives
Valuation andallocation
Classification
Cutoff
Inventory items are properly classified as to raw materials, work in process, and finished goodsPurchase cutoff at year end is properSales cutoff at year end is proper
Specific Balance-related AuditSpecific Balance-related AuditObjectives Applied to InventoryObjectives Applied to Inventory
Hillsburg Hardware Co.Hillsburg Hardware Co.(Applied to Inventory)
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3535
Management AssertionsManagement AssertionsAbout Account BalancesAbout Account Balances
General Balance-General Balance-related Auditrelated AuditObjectivesObjectives
Valuation andallocation
Detail tie-in
Realizablevalue
Total of inventory items agrees with general ledgerInventories have been written down where net realizable value is impaired
Specific Balance-related AuditSpecific Balance-related AuditObjectives Applied to InventoryObjectives Applied to Inventory
Rights and obligations Rights andobligations
The company has title to all inventory items listedInventories are not pledged as collateral
Hillsburg Hardware Co.Hillsburg Hardware Co.(Applied to Inventory)
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3636
Learning Objective 9Learning Objective 9
Link the four presentation andLink the four presentation and
disclosure-related audit objectivesdisclosure-related audit objectives
to management assertions forto management assertions for
presentation and disclosure.presentation and disclosure.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3737
ManagementManagementAssertions AboutAssertions AboutPresentation andPresentation andDisclosureDisclosure
Specific Presentation andSpecific Presentation andDisclosure-related Audit ObjectivesDisclosure-related Audit ObjectivesApplied to Notes PayableApplied to Notes Payable
Occurrenceand rights andobligations
Occurrenceand rights andobligations
Notes payable as described in thefootnotes exist and areobligations of the company
Completeness Completeness All required disclosures relatedto notes payable are included inthe financial statement footnotes
GeneralGeneralPresentation-Presentation-and Disclosure-and Disclosure-related Auditrelated AuditObjectivesObjectives
Hillsburg Hardware Co.Hillsburg Hardware Co.(Applied to Notes Payable)
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3838
ManagementManagementAssertions AboutAssertions AboutPresentation andPresentation andDisclosureDisclosure
Specific Presentation andSpecific Presentation andDisclosure-related Audit ObjectivesDisclosure-related Audit ObjectivesApplied to Notes PayableApplied to Notes Payable
Valuation andallocation
Valuation andallocation
Footnote disclosures related tonotes payable are accurate.
Classificationandunderstandability
Classificationandunderstandability
Notes payable are appropriatelyclassified as to short-term andlong-term obligations andrelated financial statementdisclosures are understandable
GeneralGeneralPresentation-Presentation-and Disclosure-and Disclosure-related Auditrelated AuditObjectivesObjectives
Hillsburg Hardware Co.Hillsburg Hardware Co.(Applied to Notes Payable)
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 3939
Learning Objective 10Learning Objective 10
Explain the relationship betweenExplain the relationship between
audit objectives and theaudit objectives and the
accumulation of audit evidence.accumulation of audit evidence.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 4040
How Audit Objectives Are MetHow Audit Objectives Are Met
The auditor must obtain sufficient appropriateaudit evidence to support all managementassertions in the financial statements.
An audit process has four specific phases
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 6 - 6 - 4141
Four Phases of a Financial Four Phases of a Financial Statement AuditStatement Audit
Phase IPlan and designan audit approach
Phase II
Perform tests ofcontrols andsubstantive testsof transactions
Phase III
Perform analyticalprocedures andtests of detailsof balances
Phase IVComplete theaudit and issuean audit report
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 12/e,Auditing 12/e, Arens/Beasley/Elder Arens/Beasley/Elder 6 - 42
End of Chapter 6End of Chapter 6