University:
California State University, Northridge
Course:
ACCT 460 | Auditing Principles and Analytics
Academic year:

2024
Views:

53

Pages:

22
Author:

Joel Harmon

Audit Responsibilities and Objectives Chapter 6 Part 1 Learning Objective 1 Explain the objective of conducting an audit of financial statements and an audit of internal controls. Objective of Conducting an Audit of Financial Statements The objective of the ordinary audit of financial statements is the expression of an opinion of the fairness with which they present fairly, in all respects, financial position, result of operations, and its cash flows in conformity with GAAP. Steps to Develop Audit Objectives Steps to Develop Audit Objectives 4. Know general audit objectives for classes of transactions and accounts. 5. Know specific audit objectives for classes of transactions, accounts and disclosures. Learning Objective 2 Distinguish management’s responsibility for the financial statements and internal control from the auditor’s responsibility for verifying the financial statements and effectiveness of internal control. Management’s Responsibilities Management is responsible for the financial statements and for internal control. The Sarbanes-Oxley Act increases management’s responsibility for the financial statements. It requires the CEO and the CFO of public companies to certify the quarterly and annual financial statements submitted to the SEC. Management’s Responsibilities The Sarbanes-Oxley Act provides for criminal penalties for anyone who knowingly falsely certifies the statements. Learning Objective 3 Explain the auditor’s responsibility for discovering material misstatements. Auditor’s Responsibilities  Material versus immaterial misstatements  Reasonable assurance  Errors versus fraud  Professional skepticism  Fraud resulting from fraudulent financial reporting versus misappropriation of assets Auditor’s Responsibilities for Discovering Illegal Acts  Direct-effect illegal acts  Indirect-effect illegal acts  Evidence accumulation when there is no reason to believe indirect-effect illegal act exists Auditor’s Responsibilities for Discovering Illegal Acts  Evidence accumulation and other actions when there is reason to believe direct- or indirect-effect illegal acts may exist  Actions when the auditor knows of an illegal act Learning Objective 4 Classify transactions and account balances into financial statement cycles and identify benefits of a cycle approach to segmenting the audit. Financial Statements Cycles Audits are performed by dividing the financial statements into smaller segments or components. Transaction Flow Example Transactions Journals Sales Sales journal Cash receipts Cash receipts journal Acquisition of goods and services Acquisitions journal Ledgers, Trial Balance, and Financial Statements General ledger and subsidiary records General ledger trial balance Financial statements Transaction Flow Example Transactions Cash disbursements Journals Cash disbursements journal Payroll services and disbursements Payroll journal Allocation and adjustments General journal Ledgers, Trial Balance, and Financial Statements General ledger and subsidiary records General ledger trial balance Financial statements Relationships Among Transaction Cycles General cash Capital acquisition and repayment cycle Sales and collection cycle Acquisition and payment cycle Inventory and warehousing cycle Payroll and personnel cycle Learning Objective 5 Describe why the auditor obtains a combination of assurance by auditing classes of transactions and ending balances in accounts, including presentation and disclosure. Balance and Transactions Affecting Balances Example Accounts Receivable (in thousands) Beginning balance $ 17,521 Sales Ending balance $144,328 $ 20,197 $137,087 Cash receipts $ Sales returns 1,242 and allowances $ Charge-off of 3,323 uncollectible accounts Learning Objective 6 Distinguish among the three categories of management assertions about financial information. Management Assertions 1. Assertions about classes of transactions and events for the period under audit 2. Assertions about account balances at period end 3. Assertions about presentation and disclosure Management Assertions for Each Category of Assertions Assertions About Classes of Transactions and Events Assertions About Assertions About Account Balances Presentation and Disclosure Occurrence Existence Occurrence and rights and obligations Completeness Completeness Completeness Accuracy Valuation and allocation Accuracy and valuation Classification Classification and understandability Cutoff Rights and obligations