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6-1
Chapter 6
Audit Responsibilities and Objectives
Concept Checks
P. 152
1. It is management’s responsibility to adopt sound accounting policies,
findings of the audit in the auditor’s report.
2. Auditing standards require that the audit be planned and performed with an
attitude of professional skepticism in all aspects of the engagement,
recognizing the possibility that a material misstatement could exist regardless
of the auditor’s prior experience with the integrity and honesty of client
P. 168
1. The cycle approach is a method of dividing the audit such that closely
cycle. The advantages of dividing the audit into different cycles are to
together.
2. Management assertions are implied or expressed representations by
financial statements.
1. Existence or occurrence−Assets or liabilities of the public company exist
period.
2. Completeness−All transactions and accounts that should be presented
in the financial statements are so included.
6-2
Concept Check, P. 168 (continued)
3. Valuation or allocation−Assets, liability, equity, revenue, and expense
appropriate amounts.
5. Presentation and disclosure−The components of the financial
statements are properly classified, described, and disclosed.
standards further divide management assertions into three categories:
under audit
2. Assertions about account balances at period end
3. Assertions about presentation and disclosure
Review Questions
6-1 The objective of the audit of financial statements by the independent auditor
is the expression of an opinion on the fairness with which the financial statements
6-2 An error is an unintentional misstatement of the financial statements. Fraud
represents an intentional misstatement. The auditor is responsible for obtaining
An audit must be designed to provide reasonable assurance of detecting
material misstatements in the financial statements. Further, the audit must be
planned and performed with an attitude of professional skepticism in all aspects
6-3
6-3 Misappropriation of assets represents the theft of assets by employees.
Fraudulent financial reporting is the intentional misstatement of financial information
by management or a theft of assets by management, which is covered up by
misstating financial statements.
Misappropriation of assets ordinarily occurs either because of inadequate
internal controls or a violation of existing controls. The best way to prevent theft
of assets is through adequate internal controls that function effectively. Many
times theft of assets is relatively small in dollar amounts and will have no effect
6-4
CHARACTERISTIC
AUDIT STEPS
1. Management’s characteristics and
influence over the control
environment.
Investigate the past history of the firm
and its management.
Discuss the possibility of fraudulent
financial reporting with previous
auditor and company legal counsel
after obtaining permission to do so
from management.
2. Industry conditions.
Research current status of industry
and compare industry financial ratios
to the company’s ratios. Investigate
any unusual differences.
Read the AICPA Industry Audit Risk
Alert for the company’s industry, if
available. Consider the impact of
specific risks that are identified on the
conduct of the audit.
3. Operating characteristics and
financial stability.
Perform analytical procedures to
evaluate the possibility of business
failure.
Investigate whether material
transactions occur close to year-end.
6-4
6-5 (continued)
6-6 If the auditor becomes aware of information concerning an instance of
noncompliance or suspected noncompliance with laws and regulations, the
auditor should obtain an understanding of the nature and circumstances of the
act. Additional information should be obtained to evaluate the possible effects on
statements, the auditor should consider the need to obtain legal advice. The
auditor should also evaluate the effects of the noncompliance on other aspects of
the audit, including the auditor’s risk assessment and the reliability of other
representations from management.
are six characteristics of skepticism:
1. Questioning mindset — a disposition to inquiry with some sense of
doubt
2. Suspension of judgment — withholding judgment until appropriate
evidence is obtained
with a desire to corroborate
4. Interpersonal understanding — recognition that people’s motivations
information
6. Self-esteem — the self-confidence to resist persuasion and to
challenge assumptions or conclusions
Awareness of these six elements throughout the engagement can help
6-5
6-8 The Center for Audit Quality’s Professional Judgment Resource outlines
five key elements of a professional judgment process:
1. Identify and Define the Issue: The starting point to an effective
2. Gather the Facts and Information and Identify the Relevant
Literature: With the problem defined, the auditor seeks to understand
the relevant facts and available information concerning the issue. This
3. Perform the Analysis and Identify Potential Alternatives: The next
element of the professional judgment process involves analyzing the
issue based on the facts and information gathered and the relevant
authoritative literature identified. As part of that analysis, the auditor
4. Make the Decision: Once the analysis of the facts and information
has been completed, the auditor applies judgment to make a decision.
The analysis may identify only one appropriate response to the issue
5. Review and Complete the Documentation and Rationale for the
Conclusion: As the auditor articulates in written form the rationale of
his or her judgment, the auditor may find that the reasoning appears
6-9 Auditors should be alert for potential judgment tendencies, traps, and
Judgment Tendency
Description
Confirmation
The tendency to put more weight on information that is
consistent with initial beliefs or preferences
Overconfidence
The tendency to overestimate one’s own abilities to
perform tasks or to make accurate assessments of risks or
other judgments and decisions
6-6
6-9 (continued)
Judgment Tendency
Description
Anchoring
The tendency to make assessments by starting from an
initial value and then adjusting insufficiently away from that
initial value
Availability
The tendency to consider information that is easily
retrievable or what’s easily accessible as being more likely
or more relevant
6-10
GENERAL LEDGER ACCOUNT
CYCLE
Sales
Accounts Payable
Retained Earnings
Accounts Receivable
Inventory
Repairs & Maintenance
Sales & Collection
Acquisition & Payment
Capital Acquisition & Repayment
Sales & Collection
Inventory & Warehousing
Acquisition & Payment
keep their relationships in mind.
6-12 AICPA auditing standards classify assertions into three categories:
under audit
2. Assertions about account balances at period end
3. Assertions about presentation and disclosure
6-13 General audit objectives follow from and are closely related to management
appropriate evidence.
6-7
6-14
RECORDING MISSTATEMENT
TRANSACTION-RELATED AUDIT
OBJECTIVE VIOLATED
Fixed asset repair is recorded on the
wrong date.
Repair is capitalized as a fixed asset
instead of an expense.
Timing
Classification
customer’s account receivable balance, which is a violation of completeness, will
lead to understatement of the accounts receivable balance.
6-16 Specific audit objectives are the application of the general audit objectives
or presentation and disclosure.
6-17 For the specific balance-related audit objective, all recorded fixed assets
both “classification and understandability.”
6-19 The four phases of the audit are:
1. Plan and design an audit approach based on risk assessment
procedures.
balances.
4. Complete the audit and issue an audit report.
6-8
6-19 (continued)
Multiple Choice Questions From CPA Examinations
6-20 a. (2) b. (3) c. (1)
Discussion Questions And Problems
6-24
a. obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement,
b. report on the financial statements, and communicate as
As a results of the clarity project, Paragraph .11 of ISA 200 has
paragraph b.
b. Paragraph .03 of PCAOB Auditing Standard 5 states that “The
auditor’s objective in an audit of internal control over financial
reporting is to express an opinion on the effectiveness of the
6-9
6-24 (continued)
c. Both U.S. GAAS and international auditing standards define financial
statements as being fairly stated when they are free of material
misstatements. PCAOB Auditing Standard 5 defines internal control
as effective when no material weaknesses exist. These definitions
material misstatement could occur.
6-25 a. The purpose of the first part of the report of management is for
management to state its responsibilities for internal control over
6-26 a. Auditing standards indicate that reasonable assurance is a high
level of assurance. Accordingly, financial statement users should
have a high degree of confidence in the financial statements.
b. The responsibility of the independent auditor is to express an
opinion on the financial statements he or she has audited. Inasmuch
as the financial statements are the representation of management,
statements.
In developing the basis for his or her opinion, the auditor is
responsible for conducting an audit that conforms to auditing
standards. These standards constitute the measure of the adequacy
6-10
6-26 (continued)
of a qualified person in that profession. Such qualifications do not
include those of an appraiser, expert in valuation, expert in materials,
not change the auditor’s responsibility to properly plan and perform
the audit. Auditors are required to specifically assess the risk of
material misstatement due to fraud and should consider that
assessment in designing the audit procedures to be performed.
and then putting considerable pressure on operating and accounting
staff to make sure those projections are met. He has also been
associated with other companies in the past that have gone
bankrupt. These factors, considered together, may cause the auditor
auditor about the age of certain inventory items. When such
circumstances are uncovered, the auditor must evaluate their
implications and consider the need to modify audit evidence.
Adequate internal control should be the principal means of
the cost might be prohibitive.
