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Edited By: Dr. Elie Menassa 2005 1 - 1 Audit Responsibilities and Objectives Topic 4.
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Transcript of Edited By: Dr. Elie Menassa 2005 1 - 1 Audit Responsibilities and Objectives Topic 4.
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Edited By: Dr. Elie Menassa 2005 1 - 1
Audit Responsibilitiesand Objectives
Topic 4
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Edited By: Dr. Elie Menassa 2005 1 - 2
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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Edited By: Dr. Elie Menassa 2005 1 - 12
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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Edited By: Dr. Elie Menassa 2005 1 - 13
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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