To obtain reasonable assurance the auditor is

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Unformatted text preview: in order to fulfill the responsibilities of the engagement. 7-2 . Internet Problem Solution: International and PCAOB Audit Objectives 6-1 The objectives of an audit under U.S. GAAS and international auditing standards are defined by AU 110 and ISA 200, respectively. Similarly, PCAOB Auditing Standard 5 defines the objective of an audit of internal control over financial reporting. 1. Compare the objective of an audit under AU 110 and ISA 200 (hint: see paragraph 11). Are there substantive differences in the objective of an audit as defined by these two standards? Answer: Paragraph .01 of AU 110 states that “[T]he objective of the ordinary audit of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, in all material respects, financial position, results of operations, and its cash flows in conformity with generally accepted accounting principles.” U.S. GAAS require the auditor to express an opinion on whether the financial statements are presented in conformity with generally accepted accounting principles and to identify those circumstances in which such principles have not been consistently observed in the preparation of financial statements. Paragraph .11 of ISA 200 states that “In conducting an audit of financial statements, the overall objectives of the auditor are (a) to obtain reasonable assurance about whether the financial statements 7-3 Internet Problem 6-1 (continued) 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 financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework and (b) to report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor’s findings. While there are differences in the wording about the objective of an audit of financial statements, the overall objectives stated in U.S. GAAS and the ISAs are the same. Both U.S. GAAS and the ISAs note that the objective of the audit of financial statements is the expression of an opinion of whether the financial statements comply, in all material respects, with accounting standards. 2. What is the objective of an audit of internal control over financial reporting? Answer: Paragraph .03 of PCAOB Auditing Standard 5 states that “The auditor’s objective in an audit of internal control over financial reporting is to express an opinion on the effectiveness of the company’s internal control over financial reporting.” That standard notes that to form a basis for an opinion, the auditor must plan and perform the audit to obtain competent evidence that is sufficient to obtain reasonable assurance about whether material weaknesses exist as of the date specified in management’s assessment. 3. What defines whether financial statements are fairly stated, and what defines whether internal control is considered effective? Are they related? Answer: Both U.S. GAAS and international auditing standards define financial statements as being fairly stated when they are free of material misstatements. PCAOB Auditing Standard 5 defines internal control as effective when no material weaknesses exist. These definitions are related. The presence of a material misstatement generally suggests the presence of a material weakness, since management’s internal controls over financial reporting failed to detect the material misstatement. While the presence of a material weakness in internal control does not automatically mean the financial statements contain a material misstatement, there is a high likelihood that a material misstatement could occur. (Note: Internet problems address current issues using Internet sources. Because Internet sites are subject to change, Internet problems and solutions may change. Current information on Internet problems is available at www.pearsonglobaleditions.com/arens). 7-4 1Chapter 7 Audit Evidence Review Questions 7-1 In both a legal case and in an audit of financial statements, evidence is used by an unbiased person to draw conclusions. In addition, the consequences of an incorrect decision in both situations can be equally undesirable. For example, if a guilty person is set free, society may be in danger if the person repeats his or her illegal act. Similarly, if investors rely on materially misstated financial statements, they could lose significant amounts of money. Finally, the guilt of a defendant in a legal case must be proven beyond a reasonable doubt. This is similar to the concept of sufficient appropriate evidence in an audit situation. As with a judge or jury, an auditor cannot be completely convinced that his or her opinion is correct, but rather must obtain a high level of assurance. The nature of evidence in a legal case and in an audit of financial statements differs because a legal case relies heavily on testimony by witnesses and other parties involved. While inquiry is a form of evidence used by au...
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This note was uploaded on 02/04/2014 for the course ACCOUNTING 211 taught by Professor Alikapur during the Fall '13 term at American University of Sharjah.

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