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Auditing Chapter 6

Auditing Chapter 6 - Chapter 6 Audit Responsibilities and...

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Chapter 6: Audit Responsibilities and Objectives Objective of Conducting an Audit of Financial Statements Report on fairness of financial statements and report on effectiveness of internal controls (Public companies only) – if statements not presented fairly -> inform user of the fact in the auditor’s report Steps to develop audit objectives Understand objectives and responsibilities for the audit -> divide FS into cycles -> know mgmt assertions about FS -> know general audit objectives for classes of transactions, accounts, and disclosures -> know specific audit objectives for classes of tx, accounts, and disclosures Management’s Responsibilities: Adopt sound accounting policies, maintain adequate internal control and make fair representations in the financial statements Determines which presentations and disclosures are necessary Under SOX act CFO and CEO must certify the qtrly and annual statements submitted to SEC – statements are fairly presented / criminal penalties for falsely certifying Auditor’s Responsibilities: Reasonably ensure that the statements are free of material misstatements, no responsibility to find immaterial misstatements Material vs. Immaterial Misstatements: material if the combined uncorrected erros and fraud would likely have changed or influenced the decisions of a reasonable user Reasonable Assurance: measure of level of certainty – high, but not absolute, an audit may fail to detect a material misstatement, why reasonable and not absolute? 1. use of samples, areas tested, timing of tests and evaluations subject to judgement 2. uncertainty from complex estimates that may be affected by future events 3. possibility of fraud that is not possible to detect Error vs. Fraud: both are types of misstatements, both may be immaterial or material. Error: unintentional Fraud: intentional, may be misappropriation of assets (employee fraud) or fraudulent financial reporting (mgmt fraud) Professional Skepticism: planned and performed with this attitude in all aspects of the engagement (questioning mind and critical assessment) Difficulty of detecting fraud does not change the auditor’s responsibility to properly plan and perform the audit to detect material misstatements Fraud Resulting from Fraudulent Financial Reporting vs. Misappropriation of Assets: Fraudulent FR: harms users with incorrect FS info for decision making Misappropriated assets: harms users because assets are not available to rightful owners Distinction between theft of assets and misstatements arising from theft of assets: Sometimes theft can occur but the statements will still be correct (i.e. when the misappropriation is discovered and the statements clearly describe it) Auditor’s responsibilities for discovering illegal acts (violations of laws or gov’t regulations other than fraud) –
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Direct-Effect Illegal Acts: violations which have a direct financial affect on balances in the FS – auditor’s responsibility for detecting is the same as for errors
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Auditing Chapter 6 - Chapter 6 Audit Responsibilities and...

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