Chapter 6 Reading - Chapter 6 Reading Auditors...

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Chapter 6 Reading Auditors Responsibilities and Objectives AU 110 : Objective of audit of financial statements by the in depended auditors the expression of an opinion on the fairness with which they represent, in all material respects, financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Idea is to just express an opinion on the financial statements. For public companies the auditor also issues a report over the internal controls of the company, required by section 404 of SoX. If issues an improper letter, then they must prove why audit is improper Management Responsibilities Maintain adequate internal controls; make fair representations in the financial statements. Annual reports of many public companies, include a statement about management’s responsibilities and relationships with the CPA firm. SOX increases management’s responsibility for the financial statements, by requiring the CEO ad CFO of public companies certify the annual and quarterly reports. They have to sign. 20 years of prison if knowingly singed off report. Auditors Responsibilities It is the auditor’s responsibility for determining material misstatements in the F/S The auditor is also responsible for identifying material weaknesses in the internal control over financial reporting. Materiality: Considered material if the combined uncorrected errors and fraud in the financial statements would likely have changed or influenced the decisions of its users. Reasonable Assurance: Measure of the level of certainty that the auditor has obtained at the completion of the audit. Reasonable Assurance is high, but not absolute. Auditor is not an insurer or guarantor of the correctness of financial statements. Auditing evidence comes from a testing sample of A/R or inventory.
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Areas tested require significant auditor judgment. If auditor was responsible for making extreme assertions, the evidence required would be very costly, that it makes the audit not economically practical. AUDITORS DEFENSE : they have conducted the audit in accordance with auditing standards. Error : unintentional misstatement of financial statements. Fraud: intentional misstatement of F/S. Misappropriation of assets – or employee fraud. Making a sale and not entering cash in register. Theft happened, and it was covered by misappropriation of assets. Theft happened and it was covered by understating revenues, and increasing expenses. o These lead to the F/S being misstated. Fraudulent Financial Reporting – or management fraud . intentional overstatement of sales near the balance sheet date. audit should be performed with attitude of professional skepticism
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This note was uploaded on 11/23/2009 for the course ACCT 411 taught by Professor Jackson during the Fall '09 term at Michigan State University.

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Chapter 6 Reading - Chapter 6 Reading Auditors...

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