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Summary Ch 6 Audit Responsibilities and Objectives
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The summary covers the material of chapter 6 about audit responsibilities and objectives
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Chapter 6Audit Responsibilities and Objectives
Objective of Conducting An Audit of Financial Statements
The preface to the clarifed AACCA auditing standards indicates:
The purpose of an audit is to provide fnancial statement users with an opinion
by the auditor on whether the fnancial statements are presented fairly, in all
material respects, in accordance with the applicable fnancial accounting
framework. An auditor’s opinion enhances the degree of confdence that
intended users can place in the fnancial statements.
Steps to Develop Audit Objectives
Understand
Divide fnancial Know management
objectives and
statements into assertions about
responsibilities for
cycles fnancial statements
the audit
Know general audit Know specifc audit
objectives for objectives for
classes of classes of
transactions, transactions,
accounts and accounts, and
disclosures disclosures
Management’s Responsibilities
The responsibility for adopting sound accounting policies, maintaining adequate
internal coontrol and making fair representations in the fnancial statements
rests with maagement rather than with the auditor. Because they operate the
business daily, a company’s management knows more about the company’s
transactions and related assets, liabilities, and equity than the auditor.
Auditor’s Responsibility
AACCA auditing standards state The overall objectives of the auditor, in
conductiong an audit of fnancial statements, are to:
a. Obtain reasonable assurance about whether the fnancial statements as a
whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the
fnancial statements are presented fairly, in all material respects, in
accordance with an applicable fnancial reporting framework.
b. Report on the fnancial statements, and communicate as required by
auditing standards, in accordance with auditor’s fnding.
, Explanations about the terms
o Material vs Ammaterial Misstatement
Misstatement are considered material if the combined
uncorrected errors and fraud in the fnancial statements would
likely have changed or infuenced the decisions of a reasonable
person using the statements.
o Reasonable assurance
- Assurance is a measure of the level of certainty that the auditor has
obtained at the completion of the audit.
- Reasonable assurance auditor is not an insurer or guarantor of the
correcteness of the fnancial statements.
- Auditor is responsible for reasonable, but not absolute, assurance for several
reasons:
1. Most audit evidence results from testing a sample of a
population. Sampling inevitably includes some risk of not
uncovering a material misstatement. Also, the areas to be
tested; the type, extent, and timing of those tests; and the
evaluation of test results require signifcant auditor
judgement. Even with good faith and integrity, auditors
can make mistakes and errors in judgement.
2. Accounting presentations contain complex estimates,
which inherently involve uncertainty and can be afected
by future events. As a result, the auditor has to rely on
evidence that is persuasive, but not convincing.
3. Fraudulently prepared fnancial statements are often
extremely difcult, if not possible, for the auditor to
detect, especially when there is collusion among
management.
o Error vs fraud
- Error : unintentional misstatement
- Fraud : intentional. There are 2 types:
Misappropriation of asset : defalcation of
employee fraud (clerk taking cash at the time a
sale is made and not entering the sale in the
cash register)
Fraudulent fnancial reporting : management
fraud (intentional overstatement of sales near
the balance sheet date to increase reported
earnings.
- Auditing standards make no distinction between auditor’s responsibilities for
searching for errors and fraud. Therefore, the auditor must obtain
reasonable assurance about whether the statements are free of material
misstatement.
o Fraud resulting from fraudulent fnancial reporting vs
misappropriation of assets
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