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CHAPTER 6 (AUDIT RESPONSIBILITIES AND OBJECTIVES - Coggle Diagram
CHAPTER 6 (AUDIT RESPONSIBILITIES AND OBJECTIVES
STEPS TO DEVELOP AUDIT OBJECTIVES
Understand objectives and responsibilities for the audit
Divide financial statements into cycles
Know management assertions about accounts
Know general audit objectives for classes of transactions and accounts
Know specific audit objectives for classes of transactions and accounts
The objective of an audit of financial statements
to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified reposting framework
MANAGEMENT'S RESPONSIBILITIES
The responsibility for
adopting sound accounting policies
maintaining adequate internal control
making fair representations in the FS
preparing and presenting the FS
AUDITOR'S RESPONSIBILITIES
Material versus Immaterial Misstatements
Errors versus Fraud
Error
- an unintentional misstatement of the FS
Examples:
A mistake in extending prices times quantity on a sales invoice
Overlooking older raw materials in determining the lower of cost or market for inventory
Fraud
- an intentional misstatement of the FS
Misappropriation of Assets
or
Defalcation
or
Employee Fraud
e.g: a clerk taking cash at the time a sale is made and not entering the sale in the cash register
Fraudulent Financial Reporting
or
Management Fraud
e.g: the intentional overstatement of sales near the balance sheet date to increase reported earnings.
Reasonable Assurance
Several reason why auditor is responsible for reasonable but not absolute assurance
Most audit evidence results from testing a sample of a population such as
accounts and inventory
where
includes some risk
of not uncovering a material misstatement
Accounting presentations contain
complex estimates
, which inherently
involve uncertainty persuasive
,
but not convincing
.
Fraudulent prepared financial statements are
often extremely difficult
, if not impossible, for the auditor to detect, especially
when there is collusion among management
Professional Skepticism
An attitude that includes a questioning mind and a critical assessment of audit evidence.
Fraud resulting from fraudulent financial reporting versus misappropriation of assets
CYCLE APPROACH TO SEGMENTING AN AUDIT
Payroll and Personnel Cycle
Inventory and Warehousing Cycle
Acquisition and Payment Cycle
Capital Acquisition and Repayment Cycle
Sales and Collection Cycle
MANAGEMENT ASSERTIONS
implied or expressed representations by management about classes of transactions and the related accounts in the FS
Existence
Occurrence
Rights and Obligations
Completeness
Valuation or Allocation
Measurement
Presentation and Disclosure
GENERAL TRANSACTION-RELATED AUDIT OBJECTIVES
applied to classes of transactions
Existence
- Recorded transactions exist
Completeness
- Existing transactions are recorded
Accuracy
- Recorded transactions are stated at the correct amounts
Classification
- Transactions included in the client's journals are properly classified
Timing
- Transactions are recorded on the correct dates
Posting and Summarisation
- Recorded transactions are properly included in the master files and are correctly summarised
GENERAL BALANCE-RELATED AUDIT OBJECTIVES
applied to account balances
Existence
- Amounts included exist
Completeness
- Existing amounts are included
Accuracy
- Amounts included are stated at the correct amounts
Classification
- Amounts are properly classified
Cutoff
- Transactions are recorded in the proper period
Detail Tie-In
- Account balance agree with master file amounts, and with the general ledger
Realizable Value
- Assets are included at estimated realizable value
Rights and Obligations
- Assets must be owned
Presentation and Disclosure
- Account balances and related disclosure requirements are properly presented in the FS
4 PHASES OF A FINANCIAL STATEMENT AUDIT
PHASE 1
Plan and design an audit approach
PHASE 2
Perform tests of controls and substantive tests of transactions
PHASE 3
Perform analytical procedures and tests of details of balances
PHASE 4
Complete the audit and issue an audit report