CHAPTER 5 AUDIT RESPONSIBILITIES AND OBJECTIVES OBJECTIVE OF

CHAPTER 5 AUDIT RESPONSIBILITIES AND OBJECTIVES

OBJECTIVE OF CONDUCTING AN AUDIT • THE OBJECTIVE OF AN ORDINARY AUDIT OF FINANCIAL STATEMENTS IS THE EXPRESSION OF AN OPINION REGARDING THE FAIRNESS OF THE PRESENTATION IN COMPARISON TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

MANAGEMENT RESPONSIBILITIES • ADOPTION OF SOUND ACCOUNTING PRINCIPLES • MAINTAINENCE OF ADEQUATE INTERNAL CONTROLS • PREPARATION OF FAILY PRESENTED FINANCIAL STATEMENTS

AUDITOR’S RESPONSIBILITIES • PLAN AND PERFORM AUDIT • OBTAIN REASONABLE ASSURANCE THAT FINANCIAL STATEMENTS ARE NOT MATERIALLY MISSTATED • EXERCISE PROFESSIONAL SKEPTICISM DURING AUDIT

RESPONSIBILITY TO DETECT FRAUD • SAS 82 - CONSIDERATION OF FRAUD – DEFINES FRAUD • FRAUDULENT FINANCIAL REPORTING • MISAPPROPRIATION OF ASSETS – AUDITOR RESPONSIBLE TO ASSESS RISK OF FRAUD • FRAUD RISK FACTORS FOR FINANCIAL REPORTING – MANAGEMENT CHARACTERISTICS – INDUSTRY CONDITIONS – OPERATING CHARACTERISTICS

• FRAUD RISK FACTORS - MISAPPROPRIATION OF ASSETS – SUSCEPTIBILITY OF ASSETS TO MISAPPROPRIATION – INTERNAL CONTROLS – AUDITOR RESPONSIBLE TO EVALUATE RISK FACTORS • PRESENCE OF RISK FACTORS INCREASES RISK THAT FRAUD COULD OCCUR, NOT INDICATE THAT IT DID OCCUR – AUDITOR RESPONSIBLE TO MODIFY EVIDENCE GIVEN RISK FACTORS

RESPONSIBILITY TO DISCOVER ILLEGAL ACTS • DIRECT EFFECT ILLEGAL ACTS – FINANCIAL STATEMENTS ARE MATERIALLY AFFECTED BY ACT • UNDERSTATING TAX LIABILITY • INDIRECT EFFECT ILLEGAL ACTS – FINANCIAL STATEMENTS MAY BE AFFECTED IF DETECTED AND FINES ASSESSED • EMPLOYEE SAFETY LAWS

• EVIDENCE ACCUMULATION IF AUDITOR SUSPECTS ILLEGAL ACTS – INQUIRE OF MANAGEMENT – CONSULT LEGAL COUNSEL – ADDITIONAL EVIDENCE • IDENTIFY ILLEGAL ACT – CONSIDER EFFECT ON FINANCIAL STATEMENTS – HONESTY OF MANAGEMENT – COMMUNICATE WITH AUDIT COMMITTEE • CONSIDER WITHDRAWAL

FINANCIAL STATEMENT CYCLES • CYCLES OF TRANSACTIONS – SALES AND COLLECTIONS CYCLE – ACQUISITION AND PAYMENT CYCLE – PAYROLL AND PERSONNEL CYCLE – INVENTORY AND WAREHOUSING CYCLE – CAPITAL ACQUISITION AND REPAYMENT CYCLE

• CYCLE APPROACH TO SEGMENTING AUDIT – ACCOUNTS ARE AFFECTED BY ONE OR MORE CYCLES – INTERNAL CONTROLS CAN BE ANALYZED BY CYCLE – RISK OF MISSTATEMENT CAN BE ASSESSED BY CYCLE

AUDIT OBJECTIVES • MANAGEMENT ASSERTIONS – EXISTENCE OR OCCURRENCE – COMPLETENESS – VALUATION AND ALLOCATION – RIGHTS AND OBLIGATIONS – PRESENTATION AND DISCLOSURE

TRANSACTION-RELATED AUDIT OBJECTIVES • EXISTENCE – RECORDED TRANSACTIONS EXIST • COMPLETENESS – EXISTING TRANSACTIONS ARE RECORDED • VALUATION – RECORDED TRANSACTIONS ARE STATED AT CORRECT AMOUNTS – TRANSACTIONS ARE PROPERLY CLASSIFIED – TRANSACTIONS ARE IN CORRECT PERIOD

BALANCE-RELATED AUDIT OBJECTIVES • EXISTENCE – BALANCES EXIST • COMPLETENESS – ALL EXISTING BALANCES ARE INCLUDED • VALUATION – – – BALANCES ARE AT CORRECT AMOUNTS PROPER CLASSIFICATION CUTOFF AGREEMENT OF RECORDS REALIZABLE VALUE

• RIGHTS AND OBLIGATIONS – ENTITY HAS RIGHTS TO ASSETS – ENTITY HAS OBLIGATIONS REGARDING LIABILITIES • PRESENTATION AND DISCLOSURE – FINANCIAL STATEMENTS ARE PROPERLY PRESENTED – DISCLOSURES ARE ADEQUATE

MEETING AUDIT OBJECTIVES • PLAN AND DESIGN THE AUDIT • PERFORM TESTS OF CONTROLS AND SUBSTANTIVE TESTS OF TRANSACTIONS • PERFORM ANALYTICAL PROCEDURES AND TESTS OF BALANCES • COMPLETE AUDIT