Auditing 81.3550
Responsibilities & Objectives
Chapter 5
Highlights
•
•
•
•
Audit Objectives – the specifics
Management & Auditor Responsibilities
Audit Approach
Assertions, Objectives Transactions, &
Ending Balances
• The Audit Process
Audit Objectives
• To express an opinion on the F/S
that they present fairly in all
material respects in accordance with
GAAP
• Accumulate evidence to enable
auditor to express an opinion
• Need to ensure complete and
verifiable evidence incase called
upon to the defend quality of audit
and/or opinion
Management’s Responsibility
• What exactly are management responsibilities
when it comes to the F/S?
–
–
–
–
Maintaining adequate Internal Controls
Fair representations
Setting/adopting sound accounting policies
F/S preparation including notes
• Management has the most intimate knowledge of
the business, transactions, as well as the ultimate
level of control
Auditor’s Responsibilities
• Performs audit meeting GAAS and GAAP
requirements
• Including:
– Maintaining “professional skepticism”
– Using professional judgment
– Adequate planning and gathering of evidence
• Not responsible to uncover fraud but must act on
fraud if it is discovered during the audit
• May include expanding testing to determine if an
unintentional error vs. fraudulent behaviour
General Fraud & The Audit
• Fraud – is criminal deception intended to benefit
the deceiver most often financially
• Estimated 75% of Fraud goes undetected
• when performing the audit need to think about the
likelihood of fraud and the type in a particular area
• GONE Theory – essential ingredients for fraud to
occur
–
–
–
–
G – Greed
O – Opportunity
N – Need (motivation)
E - Exposure
Fraud & The Audit
• Employee Fraud
• Chances fraud is committed by an employee (in
Canada) 4 out of 5 times (Report on Business
Magazine)
• Most common theft of assets
• Management Fraud – often more difficulty to
uncover due to increased level of opportunity, and
increased level of sophistication in covering up the
fraud
• Typical frauds involve share price manipulation,
related party transactions, expense related and
kickbacks
Fraud & The Audit
• Computer Fraud - basically fraud with
assistance from a(n) computer(s) often
involves using software
• Examples include: obtaining customer
information, theft of credit card numbers,
identity theft, redirecting/manipulation of
automatic payroll/payments
Illegal Acts
• Defn: a violation of a domestic
of foreign statutory law or
government regulation
attributable to the entity under
audit, or to management or
employees acting on the
entity's behalf. (Section 5136)
Regarding illegal acts,
auditors should, in all audits,
- read minutes of board meetings
- enquire of client’s lawyers
- enquire of client management
regarding
the occurrence of illegal acts AND
client policies regarding illegal acts
Auditor’s Responsibility
• Other than the min required procedures not expected to specifically search for
illegal acts unless lead to believe that they
exist
Auditor’s Responsibility
• If illegal act believed to have occurred need to
– determine those involved(normally enquire at a level or
so above those suspected)
– Consult client’s lawyer
– Consider if additional evidence is required to confirm
existence
– If determined illegal act has occurred consider effect
and required disclosure on F/S
– Inform audit committee
– May need opinion of Firm lawyers as well
– In client refused to disclose or remedy situation may
need to withdraw from audit
In
an audit
engagement,
where does
the auditor
start?
C
L
I
E
N
T
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Would it make sense to start
with the financial statements and
audit each line item?
NO!
grossly inefficient
A better approach would be to group
together similar accounts and audit
each group (cycle approach).
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financial
statements
financial
statement
cycles
management
assertions
general
audit
objectives
specific
audit
objectives
the
cycle
approach
audit
tests
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financial
statements
financial
statement
cycles
the
cycle
approach
What transaction cycles
and groups of accounts are
relevant to this particular client?
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financial
statements
financial
statement
cycles
management
assertions
the
cycle
approach
What is client’s management
“asserting” about the statements,
cycles, and internal controls?
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Basic Management Assertions
1. existence or occurrence - financial
components exist at a given date,
transactions have occurred during
a given period
2. completeness - all transactions and
accounts are presented, nothing has
been left out
Basic Management Assertions
3. valuation or allocation - components of financial statements
are included at appropriate
amounts
4. rights and obligations - assets are
rights of the entity and liabilities
are obligations
Basic Management Assertions
5. rights and obligations - assets are
rights of the entity and liabilities
are obligations
6. statement presentation and
disclosure - components of financial
statements are properly combined,
separated, described and disclosed
financial
statements
the
cycle
approach
financial
statement
cycles
management
assertions
general
audit
objectives
specific
audit
objectives
Audit evidence
must be
gathered to
support/refute
management
assertions.
}
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Transaction-related Audit Objectives
related to
management
assertions
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Transaction Related Objectives
• Help provide audit framework
• Assists in planning and collecting evidence
for groups of transactions
• Two types of transaction objectives
– General – applies to all groups of transactions
– Specific – tailored to a specific group/class in
particular
Transaction-related Audit Objectives
- existence
Did recorded
transactions
actually occur?
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Transaction-related Audit Objectives
- existence
- completeness
Have all
transactions
been recorded?
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Transaction-related Audit Objectives
- existence
- completeness
- accuracy
Are recorded transactions stated at the
correct amounts?
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Transaction-related Audit Objectives
- existence
- completeness
- accuracy
- classification
Are transactions
properly
classified?
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Transaction-related Audit Objectives
- existence
- completeness
- accuracy
- classification
- timing
Are transactions
recorded on the
correct dates?
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Transaction-related Audit Objectives
- existence
- completeness
- accuracy
- classification
- timing
- posting and
summarization
Are recorded
transactions
properly included
in the accounting
records and
correctly
summarized?
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Balance-related Audit Objectives
also
related to
management
assertions
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Balance Related Objectives
• Instead of examining
groups/classes (i.e.
sales transactions etc.)
of transactions now
looking at balances
(i.e. ending balances
on the balance sheet
and income statement)
Balance-related Audit Objectives
- existence
Do amounts
included in the
financial statements
actually exist?
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Balance-related Audit Objectives
- existence
- completeness
Have all amounts that
should have been included in the financial
statements actually
been included?
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Balance-related Audit Objectives
- existence
- completeness
- accuracy
Are financial statement balances included at the correct
arithmetic amounts?
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Balance-related Audit Objectives
- existence
- completeness
- accuracy
- classification
Are amounts properly
classified in the
correct accounts?
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Balance-related Audit Objectives
- existence
- completeness
- accuracy
- classification
- cutoff
Are transactions near the
balance sheet date recorded
in the proper period?
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Balance-related Audit Objectives
- existence
- completeness
- accuracy
- classification
- cutoff
- detail tie-in
Do details in
account balances
agree with other
related accounting
information?
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Balance-related Audit Objectives
- existence
When
- completeness
appropriate,
- accuracy
are assets
- classification
included in the
- cutoff
- detail tie-in
financial
- realizable value
statements at
realizable
value?
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Balance-related Audit Objectives
- existence
- completeness
- accuracy
- classification
- cutoff
- detail tie-in
- realizable value
- rights and
obligations
Are assets
owned?
Do liabilities
represent
actual
obligations?
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Balance-related Audit Objectives
- existence
Are account
- completeness
balances and
- accuracy
related
- classification
- cutoff
disclosures
- detail tie-in
properly
- realizable value
presented in
- rights and
the financial
obligations
- presentation and statements?
disclosure
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financial
statements
the
cycle
approach
financial
statement
cycles
management
assertions
general
audit
objectives
specific
audit
objectives
obtain
sufficient
appropriate
audit evidence
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An audit can be divided into four
phases.
I
II
III
IV
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An audit can be divided into four
phases.
I. Plan and design
an audit approach.
II
III
IV
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An audit can be divided into four
phases.
II. Perform tests
of controls .
Tests of controls
examine the effectiveness of internal controls.
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An audit can be divided into four
phases.
III. Perform analytical procedures and
tests of details of
balances.
Analytical procedures
use comparisons and relationships to determine reasonableness of transactions and balances.
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An audit can be divided into four
phases.
III. Perform analytical procedures and
tests of details of
balances.
Tests of details
of balances examine monetary
errors and irregularities in
details of financial statements.
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An audit can be divided into four
phases.
I. Plan and design
an audit approach.
III. Perform analytical procedures and
tests of details of
balances.
II. Perform tests
of controls.
IV. Complete the
audit and issue an
audit report.
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