ch 6 - HCC Learning Web

January 6, 2018 | Author: Anonymous | Category: Business, Accounting, Financial Accounting
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Chapter 6

6-1

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.

Explain the objective of conducting an audit of financial statements and an audit of internal controls. Distinguish management’s responsibility for the financial statements and internal control from the auditor’s responsibility for verifying the financial statements and effectiveness if internal control.

6-2

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.

Explain the auditor’s responsibility for discovering material misstatements due to fraud or error, and the need to maintain professional skepticism when conducting the audit. Classify transactions and account balances into financial statement cycles and identify benefits of a cycle approach to segmenting the audit. 6-3

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.

Describe why the auditor obtains a combination of assurance by auditing classes of transactions and ending balances in accounts, including presentation and disclosure. Distinguish among the three categories of management assertions about financial information. List the six general transaction-related audit objectives to management assertions for classes of transactions. 6-4

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Link the eight general balance-related audit objectives to management assertions for account balances.

Link the four presentation and disclosurerelated audit objectives to management assertions for presentation and disclosure. Explain the relationship between audit objectives and the accumulation of audit evidence. 6-5

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.

Explain the objective of conducting an audit of financial statements and an audit of internal controls.

6-6

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The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with applicable financial accounting framework.

6-7

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Steps to Develop Audit Objectives

6-8

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2 Distinguish management’s responsibility for the financial statements and internal control from the auditor’s responsibility for verifying the financial statements and effectiveness of internal control. 6-9

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Financial statements and internal controls.

Sarbanes-Oxley increases management’s responsibility for the financial statements. CEO and CFO must certify quarterly and annual financial statements submitted to the SEC. 6-10

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6-11

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The Sarbanes-Oxley Act provides for criminal penalties for anyone who knowingly falsely certifies the statements.

6-12

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3 Explain the auditor’s responsibility for discovering material misstatements due to fraud or error, and the need to maintain professional skepticism when conducting the audit. 6-13

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Obtain reasonable assurance Opine

Report 6-14

Financial statements

Free from material misstatements

Financial statements

Applicable reporting framework

Financial statements

Communicate per audit standards

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.

Auditor’s Responsibilities

Reasonable Assurance

Material misstatements Professional Skepticism

6-15

Errors vs. Fraud Fraudulent reporting vs. theft of assets Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.

6-16

Type

Responsibility

Direct-Effect

Same for errors and fraud

Indirect-Effect

No Assurance

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Auditor suspects Inquire of management Consult client’s counsel or specialist Consider accumulating evidence Auditor knows Consider effects on financial statements Consider effect on relationship with management Communicate with audit committee or equivalent 6-17

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4 Classify transactions and account balances into financial statement cycles and identify benefits of a cycle approach to segmenting the audit.

6-18

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.

Audits are performed by dividing the financial statements into smaller segments or components.

6-19

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6-20

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General cash Capital acquisition and repayment cycle Sales and collection cycle

Acquisition and payment cycle

Payroll and personnel cycle

Inventory and warehousing cycle 6-21

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5 Describe why the auditor obtains a combination of assurance by auditing classes of transactions and ending balances in accounts, including presentation and disclosure. 6-22

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.

6-23

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.

6 Distinguish among the three categories of management assertions about financial information.

6-24

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1. Assertions about classes of transactions and events for the period under audit 2. Assertions about account balances at period end

3. Assertions about presentation and disclosure

6-25

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Transactions and Events

Account Balances

Occurrence

Existence

Completeness

Completeness

Occurrence and rights and obligations Completeness

Accuracy

Valuation and allocation

Accuracy and valuation

Classification

Presentation and Disclosure

Classification and understandability

Cutoff

Rights and obligations 6-26

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Existence or Occurrence Completeness Valuation or allocation Rights and obligations Presentation and disclosure Similar to AICPA auditing standards as the first three assertions are applicable to balances and transactions. Presentation is treated as a single assertion. 6-27

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7 Link the six general transaction-related audit objectives to management assertions for classes of transactions.

6-28

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Occurrence

Completeness

Accuracy 6-29

Recorded transactions exist Existing transactions are recorded Recorded transactions are stated at the correct amounts Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.

Posting and summarization

Transactions are included in the master files and are correctly summarized.

Classification

Transactions are properly classified.

Timing

Transactions are recorded on the correct dates.

6-30

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Hillsburg Hardware Co. (Applied to Sales Transactions)

6-31

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8 Link the eight general balance-related audit objectives to management assertions for account balances.

6-32

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Existence

Amounts included exist

Completeness

Existing amounts are included

Accuracy

Amounts included are stated at the correct amounts

6-33

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Classification

Cutoff

Detail tie-in

6-34

Amounts are properly classified Transactions are recorded in the proper period

Account balances agree with master file amounts, and with the general ledger Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.

Realizable value

Assets are included at estimated realizable value

Rights and obligations

Assets must be owned

6-35

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Hillsburg Hardware Co.

.

(Applied to Inventory)

6-36

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9 Link the four presentation- and disclosurerelated audit objectives to management assertions for presentation and disclosure.

6-37

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Hillsburg Hardware Co. (Applied to Notes Payable)

6-38

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.

10 Explain the relationship between audit objectives and the accumulation of audit evidence.

6-39

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The auditor must obtain sufficient appropriate audit evidence to support all management assertions in the financial statements.  An audit process has four specific phases

6-40

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6-41

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6-42

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Copyright

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. 6-43

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