AUDIT

RESPONSIBILITIES
AND OBJECTIVES
CHAPTER 6
Copyright © 2017 Pearson Education, Ltd. 6-1
LEARNING OBJECTIVES
At the end of this lecture you should be able to:

1. Explain the auditor’s responsibility VS management’s

responsibilities re the financial statements
2. Distinguish among the management assertions about
financial information s
3. Outline the audit process

2
 OBJECTIVE 1
Explain the auditor’s responsibility VS
management’s responsibilities re the
financial statements
.

Copyright © 2017 Pearson Education, Ltd. 6-3

 MANAGEMENT’S RESPONSIBILITIES

Financial statements and internal controls.

Sarbanes-Oxley increases management’s

responsibility for the financial statements.
N/A to
Jamaica
CEO and CFO must certify quarterly and annual
financial statements submitted to the SEC.

.
OBJECTIVE OF CONDUCTING AN AUDIT OF
FINANCIAL STATEMENTS – ISA 200
The overall objectives of the auditor are:
• To obtain reasonable assurance about whether the financial statements as
a whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the
financial statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework; and

• To report on the financial statements, and communicate as required by the

ISAs, in accordance with the auditor's findings.
The primary focus is on issuing an opinion on the financial statements.

5
AUDITOR’S RESPONSIBILITIES

➢ Material versus immaterial misstatements

➢ Reasonable assurance

➢ Errors versus fraud

➢ Fraud resulting from fraudulent financial
reporting versus misappropriation of assets
➢ Professional skepticism

6
 AUDITOR’S RESPONSIBILITIES (CONT.)
Errors versus Fraud:
An error is an unintentional misstatement of the financial statements, whereas fraud is
intentional.

For fraud, there is a distinction between misappropriation of assets, usually committed

by employees, and fraudulent financial reporting, usually committed by management.

Auditor’s Responsibilities for Detecting Material Errors:

Auditors spend a great portion of their time planning and performing audits to detect
unintentional errors made by management and employees.

Copyright © 2017 Pearson Education, Ltd. 6-7

 AUDITOR’S RESPONSIBILITIES (CONT.)
Auditor’s Responsibilities for Detecting Material Fraud:
Auditing standards make no distinction between the auditor’s responsibilities for
detecting errors versus fraud.

However, the standards do recognize that fraud is more difficult to detect because those
who are committing the fraud attempt to conceal the fraud.

Fraudulent Financial Reporting versus Misappropriation of Assets: Both are

harmful to financial statement users. Fraudulent financial statements present users
with incorrect financial information that is used for decision making. Misappropriation
of assets is harmful to creditors, stockholders, and others because the assets have been
taken from their rightful owners, the company.

Copyright © 2017 Pearson Education, Ltd. 6-8

AUDITOR’S RESPONSIBILITIES FOR DISCOVERING
ILLEGAL ACTS

Type Responsibility
Same as for
Direct-Effect errors and
fraud

Indirect-Effect No Assurance
 AUDITOR’S RESPONSIBILITIES (CONT.)
Audit Procedures When Noncompliance Is Identified or Suspected: The auditor
should obtain an understanding of the situation and discuss the matter with
management at a level above those involved.

Auditors should obtain sufficient evidence regarding material amounts that are
directly affected by laws and regulations.

Laws such as those relating to taxes and pensions usually have a direct effect on the
amounts or disclosures in the financial statements, and therefore require the auditor’s
attention.

Reporting Identified or Suspected Noncompliance: Unless the matter is

inconsequential, the auditor should communicate with those charged with governance
of matters of noncompliance.

Copyright © 2017 Pearson Education, Ltd. 6-10

AUDITOR’S RESPONSIBILITIES - RESPONSE TO
FRAUD
ISA 240 – The Auditor’s Responses to the Assessed Risks of Material Misstatement
Due to Fraud

• Assign and supervise personnel taking account of the knowledge, skill and ability of the
individuals

• Evaluate whether the selection and application of accounting policies by the entity,
especially re subjective measurements and complex transactions, may be indicative of
fraudulent financial reporting resulting from management's effort to manage earnings;
and

• Incorporate an element of unpredictability in the selection of the nature, timing and

extent of audit procedures.

11
 PROFESSIONAL SKEPTICISM
Aspects of Professional Skepticism: Two primary components: (1)A
questioning mindset and (2) a critical assessment of audit evidence.
Elements of Professional Skepticism:
1. Questioning mindset—“trust but verify”—a disposition to inquiry with some sense
of doubt.
2. Suspension of judgment—withholding judgment until appropriate evidence is
obtained.
3. Search for knowledge—a desire to investigate beyond the obvious, with a desire to
corroborate.
4. Interpersonal understanding—recognition that people’s motivations and
perceptions can lead them to provide biased or misleading information.
5. Autonomy—the self-direction, moral independence, and conviction to decide for
oneself, rather than accepting the claims of others.
6. Self-esteem—the self-confidence to resist persuasion and to challenge assumptions
or conclusions.

Copyright © 2017 Pearson Education, Ltd. 6-18

 OBJECTIVE 2
Distinguish among the management
assertions about financial information.

Copyright © 2017 Pearson Education, Ltd. 6-13

ANOTHER AUDIT DEFINITION
“An audit is a systematic process of objectively
obtaining and evaluating evidence regarding
assertions about economic actions and events to
ascertain the degree of correspondence between
these assertions and established criteria and
communicating the results to interested users.”
American Accounting Association

14
MANAGEMENT ASSERTIONS AND AUDIT
OBJECTIVES
Where does an audit start?
The audit starts with the financial statements prepared by the client
and the claims or “assertions” that the client makes about these
numbers.
Examples of managements claims or assertions:
• Management claims (asserts) that sales occurred – i.e. sales are not
fictitiously created by management
• Managements claims that expenses and liabilities are complete – i.e.
they did not leave out any expenses to make net profit look good.

15
 MANAGEMENT ASSERTIONS
Management assertions are implied or expressed representations by
management about classes of transactions and the related accounts and
disclosures in the financial statements.

Management assertions lead to the audit objectives. Therefore,

auditors must have a thorough understanding of management
assertions to perform quality audits.

Copyright © 2017 Pearson Education, Ltd. 6-35

MANAGEMENT ASSERTIONS AND AUDIT
OBJECTIVES

It is the auditor's job to

validate management's
assertions.

17
ASSERTIONS ABOUT CLASSES OF TRANSACTIONS
AND EVENTS
Assertions Description
Completeness All transactions and events that should have
been recorded have been recorded.

Occurrence Transaction and events that have been recorded

have occurred and pertain to the entity.

Cutoff Transactions and events have been recorded in

the correct accounting period.

Accuracy Amounts and other data relating to recorded

transactions and events have been recorded
appropriately.
Classification Transactions and events have been recorded in
the proper accounts.

18
ASSERTIONS ABOUT ACCOUNT
BALANCES
Valuation and allocation Assets, liabilities, and equity interests are included in
the financial statements at appropriate amounts and
any resulting valuation or allocation adjustments are
appropriately recorded.

Existence Assets, liabilities and equity interests exist.

Rights and obligations An entity holds or controls the rights to assets, and
liabilities are the obligations of the entity.

Completeness All assets, liabilities and equity interests that should

have been recorded have been recorded.

19
ASSERTIONS ABOUT PRESENTATION AND
DISCLOSURE

Completeness All disclosures that should have

been included in the financial
statements have been included.
Occurrence and rights and Disclosed events, transactions, and
obligations other matters have occurred and
pertain to the entity.

Classification and Financial information is

understandability appropriately presented and
described, and disclosures are
clearly expressed.

Accuracy and valuation Financial and other information

are disclosed fairly and at
appropriate amounts.

20
SUMMARY_CATEGORIES OF ASSERTIONS
Classes of tranx and events Account balances Presentation and disclosure

Completeness Completeness Completeness

Occurrence Existence Occurrence and rights and

obligations
Classification Rights and obligations Classification and
understandability
Accuracy Valuation and Accuracy and valuation
allocation
Cutoff
Acronym - CAVEROCC

21
EXAMPLE: ACCOUNTS RECEIVABLE
ASSERTIONS, DEFINITIONS & PROCEDURES
Assertions Definition Procedures
Existence Receivables are genuine • confirm customer balances
and exist • Inspect shipping documents

Rights & obligation The entity holds or • inspect cash receipts

controls the rights to the • Inquire about factoring of
receivable receivables

Completeness All assets that should • Inspect sales invoices

have been recorded have
been recorded
Valuation & allocation Assets are included in the • Test adequacy of allowance for
FS at the appropriate doubtful debt
amount

22
US GAAS AUDIT OBJECTIVES
Balance Related Transaction Related P&D
Existence X
Completeness X X X
Accuracy X X
Classification X X X
Cut-off X
Detailed tie-in X
Realisable value X
Rights & Obligation X X
Occurrence X X
Posting & summarization X
Timing X
Valuation & Allocation X
Understandability X
23
VIDEO ON AUDITING ASSERTIONS
Auditing Assertions

Copyright © 2017 Pearson Education, Ltd. 24

 OBJECTIVE 3
Outline the Audit Process

Copyright © 2017 Pearson Education, Ltd. 6-25

 HOW AUDIT OBJECTIVES ARE MET
Figure 6-8 illustrates four phases of the audit.
The main objective of an audit is to accumulate enough evidence to
provide an opinion on the financial statements. Two overriding
considerations affect how an auditor approaches the audit:
1. Sufficient appropriate evidence must be accumulated to meet the
auditor’s professional responsibility.
2. The cost of accumulating the evidence should be minimized.
The audit plan should result in an effective audit at a reasonable
cost.

Copyright © 2017 Pearson Education, Ltd. 6-48

Copyright © 2017 Pearson Education, Ltd. 6-27
 HOW AUDIT OBJECTIVES ARE MET (CONT.)
Phase I: Plan and Design and Audit Approach
Risk assessment procedures include the following:
• Obtain an understanding of the entity and its environment.
• Understand internal control and assess control risk.
• Assess risk of material misstatement.

Phase II: Perform Tests of Controls and Substantive Tests of Transactions.

• Tests of controls allow the auditor to evaluate the effectiveness of internal
controls and determine whether the controls can be relied upon to reduce
planned control risks.
• Substantive tests of transactions allow the auditor to evaluate the client’s
recording of transactions.
Copyright © 2017 Pearson Education, Ltd. 6-28
 HOW AUDIT OBJECTIVES ARE MET (CONT.)
Phase III: Perform Substantive Analytical Procedures and Tests of Details
of Balances.
• Analytical procedures consist of evaluations of plausible relationships
among financial and non-financial data.
• Tests of details of balances are specific procedures intended to test for
monetary misstatements in the financial statements.

Phase IV: Complete the Audit and Issue and Audit Report.
• After all procedures have been completed, the auditor will reach an overall
conclusion as to whether the financial statements are fairly presented.
• After the conclusion, the auditor must issue an audit report that will
accompany the client’s financial statements.
Copyright © 2017 Pearson Education, Ltd. 6-29
 FINANCIAL STATEMENT CYCLES

Segmenting makes the execution of the audit objectives more

manageable.
A common form of segmenting is called the cycle approach, which
divides classes of transactions and account balances that are
closely related into segments.
Examples of cycles include:
• Sales and collection cycle or Revenue & Receivable cycle
• Acquisition and payment cycle or Purchasing & Payables cycle

Copyright © 2017 Pearson Education, Ltd. 6-24

Copyright © 2017 Pearson Education, Ltd. 6-31
32