Chapter 6 Audit Responsibilities and Objectives

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Material Versus Immaterial Misstatements

Misstatements are usually considered material if the combined uncorrected errors and fraud in the financial statements would like have changed or influenced the decisions of a reasonable person using the statements

Reasonable Assurance

Assurance is a measure of the level of certainty that the auditor has obtained at the completion of the audit. Auditing standards (AU 230) financial statements are free of material misstatements. (the auditor is not a insurer or guarantor of the correctness of the financial statements.
1. evidence results from testing a sample of a population
2. contain complex estimates
3. fraudulently prepared financial statements are often extremely difficult

Errors Versus Fraud SAS 99 (AU 316)

error is an unintentional misstatement, whereas fraud is intentional.
Fraud, distinction between misappropriation of assets, often called defalcation or employee fraud and fraudulent financial reporting, often called management fraud.

Professional Skepticism

an atittude that includes a questioning mind and a critical assessment of audit evidence. The auditor should not assume that management is either honest or dishonest.

direct-effect illegal acts

Violations of laws or government regulations by the entity or its management or employees that produce direct and material effects on dollar amounts in financial statements

indirect-effect illegal acts

most illegal acts effect the financial statement only indirectly. Ex: material fines and sanctions from violating environmental protection laws, violations of insider securities trading regulations. Hard to trace. Auditors provide NO ASSURANCE that indirect-illegal acts will be detected.

cycle approach

1. Audits are performed by dividing the financial statements into smaller segments or components. The division makes the audit more manageable & aids in the assignment of tasks to diff member of the audit team.
2. After the audit of each segment is completed, including interrelationships with other segment, the results are combined. A conclusion can then be reached about the financial statements taken as a whole.
3. A common way to divide an audit is to keep closely related types (classes) of transactions and account balances in the same segment

transaction-related audit objectives

For any given class of transactions, several audit objectives must be met before the auditor can conclude that the transactions are properly recorded

balance-related audit objectives

several audit objectives must be met for each account balance.

presentation and disclosure-related audit objectives

relates to the presentation and disclosure of information in the financial statements

management assertions

-implied or expressed representations by management about classes of transactions and the related accounts and disclosures in the financial statements. In most cases they are implied.
-These assertions apply to classes of transaction, account balances, and presentation disclosures.

Occurrence assertion

transactions and events that have been recorded have occurred and pertain to the entity

Completeness assertion

all transactions and events that should havebeen recorded in the fina stmts are included

audit tests indlue search for missing sequence numbers, confirmation with customers and vendors

primarily a test of UNDERSTATEMENT

accuracy assertion

amounts and other data relating to recorded transactions and events have been recorded appropriately

classification assertion

Transactions and events have been recorded in the proper accounts

cutoff assertion

transactions and events have been recorded in the correct accoutning period

audit tests include examining shipping and receiving documents, confirmations with customers and vendors, examination of bank stmts, etc.

Existence assertion

on fina stmts...

prove assets, liabilities and equity actually existed

audit tests include counting cash and inventory, confirming receivables with customers

Valuation and allocation assertion

all accounts have been properly valued and cost prop. allocated bw bs and is, assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded

right and obligations assertion

entity holds and controls the rights to assets

all liabilities shown are obligations of the entity

audit tests include verifying ownership of title to items shown as assets; confirming that liabilities are not obligations of a different entity

Occurrence and Rights and Obligations assertion

This assertion addresses whether disclosed events have occurred and are the rights and obligations of the entity. ex. If the client discloses that it has acquired another company, it asserts that the transaction has been completed

Classification and Understandability assertion

relates to whether amounts are appropriately classified in the financial statements and footnotes, and whether the balance descriptions and related disclosures are understandable.

realizable value

The amount that is expected to be collected in cash.

Management Assertions about Classes of Transactions

1. Occurrence
2. Completeness
3. Accuracy
4. Classification
5. Cutoff

General Transaction-Related Audit Objective

1. Occurrence
2. Completeness
3. Accuracy
b. Posting and summarization
4. Classification
5. Timing

Management Assertions about Account Balances

1. Existence
2. Completeness
3. Valuation and allocation
4. Rights and obligations

General Balance-Related Audit Objectives

1. Existence
2. Completeness
3. Accuracy
b. Classification
c. Cutoff
d. Detail tie-in
e. Realizable Value
4. Rights and Obligations

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