The document discusses the objectives and responsibilities of conducting an audit of financial statements. It can be summarized as follows:
1) The purpose of an audit is to provide an opinion on whether an entity's financial statements are fairly presented in accordance with accounting standards. This enhances the reliability of the financial statements for users.
2) Management is responsible for adopting sound accounting policies and maintaining adequate internal controls over financial reporting. The auditor is responsible for obtaining reasonable assurance about whether the financial statements are free of material misstatement.
3) An audit provides high but not absolute assurance that the financial statements do not contain material misstatements due to error or fraud. The auditor expresses an opinion on whether the financial statements are fairly presented but
The document discusses the objectives and responsibilities of conducting an audit of financial statements. It can be summarized as follows:
1) The purpose of an audit is to provide an opinion on whether an entity's financial statements are fairly presented in accordance with accounting standards. This enhances the reliability of the financial statements for users.
2) Management is responsible for adopting sound accounting policies and maintaining adequate internal controls over financial reporting. The auditor is responsible for obtaining reasonable assurance about whether the financial statements are free of material misstatement.
3) An audit provides high but not absolute assurance that the financial statements do not contain material misstatements due to error or fraud. The auditor expresses an opinion on whether the financial statements are fairly presented but
The document discusses the objectives and responsibilities of conducting an audit of financial statements. It can be summarized as follows:
1) The purpose of an audit is to provide an opinion on whether an entity's financial statements are fairly presented in accordance with accounting standards. This enhances the reliability of the financial statements for users.
2) Management is responsible for adopting sound accounting policies and maintaining adequate internal controls over financial reporting. The auditor is responsible for obtaining reasonable assurance about whether the financial statements are free of material misstatement.
3) An audit provides high but not absolute assurance that the financial statements do not contain material misstatements due to error or fraud. The auditor expresses an opinion on whether the financial statements are fairly presented but
The document discusses the objectives and responsibilities of conducting an audit of financial statements. It can be summarized as follows:
1) The purpose of an audit is to provide an opinion on whether an entity's financial statements are fairly presented in accordance with accounting standards. This enhances the reliability of the financial statements for users.
2) Management is responsible for adopting sound accounting policies and maintaining adequate internal controls over financial reporting. The auditor is responsible for obtaining reasonable assurance about whether the financial statements are free of material misstatement.
3) An audit provides high but not absolute assurance that the financial statements do not contain material misstatements due to error or fraud. The auditor expresses an opinion on whether the financial statements are fairly presented but
Objective of Conducting an Audit of Financial Statements o If management insists on FS disclosures
that the auditor finds unacceptable, the
- The purpose of an audit is to provide financial auditor can either issue an adverse or statement users with an opinion by the auditor on qualified opinion or withdraw from the whether the financial statements are presented engagement. fairly, in all material respects, in accordance with o Sarbanes-Oxley Act requires CEO and the appliable financial accounting framework, CFO of public companies to certify which enhances the degree of confidence that quarterly and annual FS. intended users can place in the financial statements. Auditor’s Responsibilities - If the auditor believes that the statements are not The overall objectives of the auditor, in conducting an fairly presented or is unable to reach a conclusion audit of financial statements are to: because of insufficient evidence, the auditor has the responsibility of notifying user through the a. Obtain reasonable assurance about whether the auditor’s report. financial statements as a whole are free from material misstatement, whether due to fraud or Steps to Develop Audit Objectives error, thereby enabling the auditor to express an 1. Understand objectives and responsibilities for the opinion on whether the financial statements are audit. presented fairly, in all material respects, in 2. Divide financial statements into cycles. accordance with an applicable financial reporting 3. Know management assertions about financial framework. statements. b. Report on the FS, and communicate as required 4. Know general audit objectives for class of by auditing standards, in accordance with the transactions, accounts, and disclosures. auditor’s findings. 5. Know specific audit objectives for classes of Material vs Immaterial Misstatements transactions, accounts, and disclosures. - Misstatements are usually considered material if Management’s Responsibilities the combined uncorrected errors and fraud in the - The responsibility for adopting sound accounting FS would likely have changed or influenced the policies, maintaining adequate internal control, decisions of a reasonable person using the and making fair representation in the financial statements. statements rests with management rather that Reasonable Assurance with the auditor. o Management knows more about the - Assurance is a measure of the level of certainty company’s transactions and related that the auditor has obtained at the completion of assets, liabilities, and equity. the audit. o The annual reports of many public - High but not absolute level of assurance that the companies include a statement about FS are free of material misstatements. management’s responsibilities and - Concept indicates that the auditor is not an relationship with the CPA firm. insurer or guarantor of the correctness of the FS. o Management’s responsibility for integrity Errors vs Fraud and fairness of the representations (assertions) in the FS carries with it the - Either type of misstatement can be material or privilege of determining which immaterial presentations and disclosures it considers o Error – unintentional misstatement necessary. o Fraud – intentional misstatement ▪ Misappropriation of Assets came to the auditor’s attention during the course (Employee Fraud) of the audit. • Taking of cash Professional Skepticism ▪ Fraudulent Financial Reporting (Management Fraud) Aspects of Professional Skepticism • Intentional 1. Questioning minds overstatement of sales a. Maintaining a questioning mind helps Mistakes auditors offset the natural bias to want to trust the client 1. Calculations b. Trust but verify mental outlook 2. Omissions 2. Critical assessment of the audit evidence 3. Misunderstanding a. Asking probing questions 4. Misapplication of accounting standards b. Paying attention to inconsistencies 5. Incorrect summarizations and descriptions 6 Characteristics of Professional Skepticism Laws and Regulations with Direct Effect on the FS 1. Questioning mindset 1. Tax 2. Suspension of judgment 2. Pension Laws 3. Search for knowledge Laws and Regulations w/o Direct Effect on the FS 4. Interpersonal understanding 5. Autonomy 1. Complying with the terms of an operating license 6. Self-esteem 2. Federal employee safety requirements 3. Environmental regulations Professional Judgment
Audit Procedures When Noncompliance is Identified or Elements
Suspected 1. Identify and define the issue. 1. Obtain an understanding of the nature and 2. Gather the facts and information and identify the circumstances of the act. relevant literature. 2. Additional information should be obtained to 3. Perform the analysis and identify potential evaluate the possible effects on the FS. alternatives. 3. Discuss the matter with management at a level 4. Make the decision. above those involved with the suspected 5. Review and complete the documentation and noncompliance, and when appropriate, those rationale for the conclusion. charged with government. Judgment Tendency Strategy to Avoid 4. If management or those charged with governance Confirmation: put more Make the opposing are unable to provide sufficient evidence, and the weight on information case and consider auditor believes the effect of the noncompliance consistent with initial alternative explanations may be material, the auditor should consider the beliefs need to obtain legal advice. Overconfidence: Challenge opinions and overestimate one’s own experts Reporting of Identified or Suspected Noncompliance abilities to perform tasks Challenge underlying - Unless the matters involved are inconsequential, or make accurate assumptions the auditor should communicate with those assessments charged with governance matters involving Anchoring: make Solicit input from others noncompliance with laws and regulations that assessments by starting to form an initial value and then adjusting Management Assertions insufficiently away from that initial value - Implied or expressed representations by Availability: tendency to Consider why management about classes of transaction and the consider information something comes to related accounts and disclosures in the FS. that is easily retrievable mind. - Most of the time, implied. or accessible as being Obtain and consider - Directly related to the financial reporting more likely or more objective data. framework used by the company (usually GAAP or relevant Consult with others and IFRS), as they are part of the criteria that make the opposing case management uses to record and disclose accounting information in financial statements. Financial Statement Cycles 2 Categories of Management Assertions - Audits are performed by dividing the FS into 1. Assertions about classes of transactions and smaller segments or components. events and related disclosures for the period - Makes the audit more manageable. under audit Different ways of segmenting an audit 2. Assertions about account balances and related disclosures at period end 1. Treat every account balance on the statements as a separate segment (inefficient) PCAOB Auditing International Auditing Standards and Standards AICPA Auditing Standards 2. Keep closely related types (or classes) of Assertions transactions and account balances in the same Assert about Classes of Account segment. (Cycle approach) Transactions, Transactions and Balances and Cycles Balances, and Events and Related Presentation and Related Disclosures 1. Sales and collection cycle Disclosure Disclosures 2. Acquisition and payment cycle Existence or Occurrence Existence 3. Payroll and personnel cycle occurrence 4. Inventory and warehousing cycle Completeness Completeness Completeness 5. Capital acquisition and repayment cycle Valuation or Accuracy Accuracy, Allocation Classification valuation, and Setting Audit Objectives Cutoff allocation Auditors conduct FS audits using the cycle approach by Classification performing audit tests of the transactions making up the Rights and Rights and Obligations Obligations ending balances and also by performing audit tests of the Presentation and Presentation Presentation account balances and related disclosures Disclosure - Transaction-related Audit Objectives – for any given class of transactions and related Relevant Assertions – have a meaningful bearing on disclosures, several audit objectives must be met whether the account is fairly stated and are used to before the auditor can conclude that the assess the risk of material misstatement and the design transactions are properly recorded and and performance of audit procedures. appropriately disclosed. - Balance-related Audit Objectives – several audit objectives must be met for each account balance and related disclosures. Transaction-Related Audit Objectives Four Phases of a Financial Statement Audit General Objectives 1. Pland and design an audit approach based on risk assessment procedures 1. Occurrence – recorded or disclosed transactions 2. Perform tests of controls and substantive tests of exist. transactions 2. Completeness – existing transactions are 3. Perform substantive analytical procedures and recorded and disclosures are included. tests of details of balances 3. Accuracy – recorded transactions are stated at 4. Complete the audit and issue an audit report the correct amounts and disclosures are appropriately measured and described. 4. Posting and Summarization – recorded transactions are properly included in the master files and are correctly summarized 5. Classification – transactions included in the client’s journals are properly classified 6. Timing – transactions are recorded on the correct dates 7. Presentation – transactions are appropriately aggregated or disaggregated and described and disclosure are relevant and understandable. Balance-Related Audit Objectives - Applied to account balances rather than classes of transactions - 9 balance-related audit objectives 1. Existence – amounts included exist 2. Completeness – existing amounts and related disclosures are included 3. Accuracy – amounts included are stated at the correct amounts and disclosures are appropriately measured and described 4. Cutoff – transactions near the balance sheet date are recorded in the proper period 5. Detail tie-in – details in the account balance agree with related master file amounts, foot to the total in the account balance, and agree with the total in the general ledger 6. Realizable value – assets are included at the amounts estimated to be realized 7. Classification – amounts included in the client’s listing are properly classified 8. Rights and obligations – assets and liabilities must be owned 9. Presentation – amounts are appropriately aggregated or disaggregated and described, and disclosures are relevant and understandable