copyright © 2014 pearson education, inc. publishing as prentice hall. chapter 6 6-1
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Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.
Chapter 6
6-1
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-2
Explain the objective of conducting an audit of financial statements and an audit of internal controls.
Distinguish management’s responsibility for the financial statements and internal control from the auditor’s responsibility for verifying the financial statements and effectiveness if internal control.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-3
Explain the auditor’s responsibility for discovering material misstatements due to fraud or error, and the need to maintain professional skepticism when conducting the audit.
Classify transactions and account balances into financial statement cycles and identify benefits of a cycle approach to segmenting the audit.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-4
Describe why the auditor obtains a combination of assurance by auditing classes of transactions and ending balances in accounts, including presentation and disclosure.
Distinguish among the three categories of management assertions about financial information.
List the six general transaction-related audit objectives to management assertions for classes of transactions.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-5
Link the eight general balance-related audit objectives to management assertions for account balances.
Link the four presentation and disclosure-related audit objectives to management assertions for presentation and disclosure.
Explain the relationship between audit objectives and the accumulation of audit evidence.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.
Explain the objective of conducting an audit of financial statements and an audit of internal
controls.
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Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-7
The purpose of an audit is to provide financialstatement users with an opinion by the auditoron whether the financial statements are presented fairly, in all material respects, inaccordance with applicable financial accounting framework.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-8
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.
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.
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Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-10
Financial statements and internal controls.
Sarbanes-Oxley increases management’sresponsibility for the financial statements.
CEO and CFO must certify quarterly and annualfinancial statements submitted to the SEC.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-11
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-12
The Sarbanes-Oxley Act provides for criminalpenalties for anyone who knowingly falselycertifies the statements.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.
Explain the auditor’s responsibility for discovering material misstatements due to
fraud or error, and the need to maintain professional skepticism when conducting the
audit.
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Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-14
Obtain reasonable assurance
Opine
Report
Financial statements
Free from material
misstatements
Financial statements
Applicable reporting framework
Financial statements
Communicate per audit standards
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-15
Material misstatements
Reasonable Assurance
Professional Skepticism
Errors vs. Fraud
Fraudulent reporting
vs. theft of assets
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-16
Type Responsibility
Direct-Effect Same for errors and
fraud
Indirect-Effect No Assurance
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-17
Auditor suspects Inquire of managementConsult client’s counsel or specialistConsider accumulating evidence
Auditor knowsConsider effects on financial statementsConsider effect on relationship with managementCommunicate with audit committee or equivalent
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.
Classify transactions and account balances into financial statement cycles and identify
benefits of a cycle approach to segmenting the audit.
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Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-19
Audits are performed by dividing the financialstatements into smaller segments or components.
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Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-21
Generalcash
Capital acquisitionand repayment cycle
Sales andcollection
cycle
Acquisitionand payment
cycle
Payroll andpersonnel
cycle
Inventory andwarehousing
cycle
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.
Describe why the auditor obtains a combination of assurance by auditing classes
of transactions and ending balances in accounts, including presentation and
disclosure.
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Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-23
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.
Distinguish among the three categories of management assertions about financial
information.
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Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-25
1. Assertions about classes of transactions andevents for the period under audit
2. Assertions about account balances at period end
3. Assertions about presentation and disclosure
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-26
OccurrenceTransactions and Events
Account Balances
Presentation and Disclosure
Existence Occurrence and rightsand obligations
Completeness
Accuracy
Classification
Cutoff
Completeness Completeness
Valuation andallocation
Accuracy andvaluation
Classification andunderstandability
Rights andobligations
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-27
Existence or Occurrence
Completeness
Valuation orallocation
Rights and obligations
Presentation and disclosure
Similar to AICPA auditing standards as the first three assertions are applicable to balances and transactions. Presentation is treated as a single assertion.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.
Link the six general transaction-related audit objectives to management assertions for
classes of transactions.
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Occurrence
Completeness
Accuracy
Recorded transactionsexist
Existing transactionsare recorded
Recorded transactionsare stated at thecorrect amounts
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-30
Posting andsummarization
Classification
Timing
Transactions are includedin the master files andare correctly summarized.
Transactions are properlyclassified.
Transactions are recordedon the correct dates.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-31
(Applied to Sales Transactions)
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.
Link the eight general balance-related audit objectives to management assertions for
account balances.
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Existence
Completeness
Accuracy
Amounts included exist
Existing amounts areincluded
Amounts included arestated at the correctamounts
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-34
Classification
Cutoff
Detail tie-in
Amounts are properlyclassified
Transactions are recordedin the proper period
Account balances agreewith master file amounts,and with the general ledger
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-35
Realizablevalue
Rights andobligations
Assets are included atestimated realizable value
Assets must be owned
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.
Hillsburg Hardware Co. ..
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(Applied to Inventory)
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.
Link the four presentation- and disclosure-related audit objectives to management
assertions for presentation and disclosure.
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Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-38
(Applied to Notes Payable)
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.
Explain the relationship between audit objectives and the accumulation of audit
evidence.
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1010
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-40
The auditor must obtain sufficient appropriateaudit evidence to support all managementassertions in the financial statements.
An audit process has four specific phases
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-41
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.6-42
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.
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