Auditing 81.3550

Responsibilities & ObjectivesChapter 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 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 Regarding illegal actsillegal acts, , auditors should, in auditors should, in allall audits 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

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EE

Inan auditengagement,where doesthe auditorstart?

TTNN

CCLLII

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A better approach would be to grouptogether similar accounts and audit

each group (cycle approach).

NO! grossly inefficientgrossly inefficient

Would it make sense to startwith the financial statements and

audit each line item?

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financial statements

financialstatement

cyclesmanagementassertions

generalaudit

objectivesspecificaudit

objectives

thecycle

approach

audittests

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financial statements

financialstatement

cycles

thecycle

approach

What transaction cyclesand groups of accounts are

relevant to this particular client?

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financial statements

financialstatement

cyclesmanagementassertions

thecycle

approach

What is client’s management“asserting” about the statements,

cycles, and internal controls?

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 - com- ponents 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 obligations6. statement presentation and

disclosure - components of financial statements are properly combined, separated, described and disclosed

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}

financial statements

financialstatement

cyclesmanagementassertions

generalaudit

objectives

thecycle

approach

Audit evidence must be

gathered to support/refute management assertions.

specificaudit

objectives

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TransactionTransaction--related Audit Objectivesrelated Audit Objectives

related tomanagement

assertions

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

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TransactionTransaction--related Audit Objectivesrelated Audit Objectives- existence

Did recordedDid recordedtransactionstransactions

actually occur?actually occur?

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TransactionTransaction--related Audit Objectivesrelated Audit Objectives- existence- completeness

Have allHave alltransactionstransactions

been recorded?been recorded?

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TransactionTransaction--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy

Are recorded transAre recorded trans--actions stated at theactions stated at the

correct amounts?correct amounts?

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TransactionTransaction--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification

Are transactionsAre transactionsproperlyproperly

classified?classified?

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TransactionTransaction--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification- timing

Are transactionsAre transactionsrecorded on therecorded on thecorrect dates?correct dates?

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TransactionTransaction--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification- timing- posting and

summarization

Are recorded Are recorded transactionstransactions

properly included properly included in the accountingin the accounting

records and records and correctly correctly

summarized?summarized?

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BalanceBalance--related Audit Objectivesrelated Audit Objectives

alsorelated to

managementassertions

• 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 Objectives

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BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence

Do amountsDo amountsincluded in theincluded in the

financial statementsfinancial statementsactually exist?actually exist?

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BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence- completeness

Have Have allall amounts thatamounts thatshould have been inshould have been in--

cludedcluded in the financialin the financialstatements actuallystatements actually

been included?been included?

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Are financial stateAre financial state--mentment balances inbalances in--

cludedcluded at the correctat the correctarithmetic amounts?arithmetic amounts?

BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy

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Are amounts properlyAre amounts properlyclassified in theclassified in the

correct accounts?correct accounts?

BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification

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Are transactions near theAre transactions near thebalance sheet date recordedbalance sheet date recorded

in the proper period?in the proper period?

BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification- cutoff

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Do details in Do details in account balances account balances agree with other agree with other

related accounting related accounting information?information?

BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification- cutoff- detail tie-in

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When When appropriate, appropriate, are assets are assets

included in the included in the financial financial

statements at statements at realizable realizable

value?value?

BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification- cutoff- detail tie-in- realizable value

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BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification- cutoff- detail tie-in- realizable value- rights and

obligations

Do liabilities Do liabilities represent represent

actual actual obligations?obligations?

Are assets Are assets owned?owned?

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BalanceBalance--related Audit Objectivesrelated Audit Objectives- existence- completeness- accuracy- classification- cutoff- detail tie-in- realizable value- rights and

obligations- presentation and

disclosure

Are account Are account balances and balances and

related related disclosures disclosures

properly properly presented in presented in the financial the financial statements?statements?

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financial statements

financialstatement

cyclesmanagement

assertionsgeneral

auditobjectives

specificaudit

objectives

thecycle

approach

obtain sufficient

appropriate audit evidence

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An audit can be divided into An audit can be divided into four four phasesphases..

I II

III IV

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An audit can be divided into An audit can be divided into four four phasesphases..

II

III IV

I. Plan and designan audit approach.

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An audit can be divided into An audit can be divided into four four phasesphases..

II. Perform testsof controls .

Tests of controlsexamine the effective-

ness of internal controls.

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An audit can be divided into An audit can be divided into four four phasesphases..

III. Perform analyt-ical procedures and

tests of details ofbalances.

Analytical proceduresuse comparisons and relation-ships to determine reasonable-

ness of transactions and balances.

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An audit can be divided into An audit can be divided into four four phasesphases..

III. Perform analyt-ical procedures and

tests of details ofbalances.

Tests of detailsof balances examine monetary

errors and irregularities indetails of financial statements.

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An audit can be divided into An audit can be divided into four four phasesphases..

I. Plan and designan audit approach.

II. Perform testsof controls.

III. Perform analyt-ical procedures and

tests of details ofbalances.

IV. Complete theaudit and issue an

audit report.