CHAPTER 6

Objective of Conducting an Audit of Financial Statements

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
the applicable financial accounting framework.

Steps to Develop Audit Objectives

Auditors Responsibilities
The overall objectives of the auditor are:
(a) To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the auditor to express an
opinion 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 auditing standards, in
accordance with the auditors findings.

Material Versus Immaterial Misstatements- Misstatements are usually considered material if the
combined uncorrected errors and fraud in the financial statements would likely have changed or
influenced the decisions of a reasonable person using the statements.
Reasonable Assurance- Assurance is a measure of the level of certainty that the auditor
has obtained at the completion of the audit.
Errors Versus Fraud- Auditing standards distinguish between two types of
misstatements: errors and fraud. Either type of misstatement can be material or
immaterial. An error is an unintentional misstatement of the financial statements,
whereas fraud is intentional
Professional Skepticism- Auditing standards require that an audit be designed to provide
reasonable assurance of detecting both material errors and fraud in the financial
statements.
Fraud Resulting from Fraudulent Financial Reporting versus Misappropriation of Assets-
both fraudulent financial reporting and misappropriation of assets are potentially
harmful to financial statement users, but there is an important difference between
them.
Auditors Responsibilities for Discovering Illegal Acts
Direct-effect illegal acts- Certain violations of laws and regulations have a direct financial
effect on specific account balances in the financial statements.
Indirect-effect illegal acts- Most illegal acts affect the financial statements only indirectly.
Evidence accumulation when there is no reason to believe indirect-effect illegal act exists-
Many audit procedures normally performed on audits to search for errors and fraud may
also uncover illegal acts.
Evidence accumulation and other actions when there is reason to believe
direct- or indirect-effect illegal acts may exist- The auditor may find indications of
possible illegal acts in a variety of ways
Actions when the auditor knows of an illegal act- The first course of action when
an illegal act has been identified is to consider the effects on the financial statements,
including the adequacy of disclosures.

Financial Statements Cycles

Audits are performed by dividing the financial statements into smaller segments or
components.
Management assertions are implied or expressed representations by
management about classes of transactions and the related accounts and disclosures
in the financial statements.
International auditing standards and U.S. GAAS classify assertions into
three categories:
Assertions about classes of transactions and events for the period under audit
Assertions about account balances at period end
Assertions about presentation and disclosure

General Transactions-related Audit Objectives

OccurrenceRecorded Transactions Exist
CompletenessExisting Transactions Are Recorded
AccuracyRecorded Transactions Are Stated at the Correct Amounts
Posting and SummarizationRecorded Transactions Are Properly Included in the Master Files
and Are Correctly Summarized
ClassificationTransactions Included in the Clients Journals Are Properly
Classified
TimingTransactions Are Recorded on the Correct Dates

General Balance-related Audit Objectives

ExistenceAmounts Included Exist
CompletenessExisting Amounts Are Included
AccuracyAmounts Included Are Stated at the Correct Amounts
ClassificationAmounts Included in the Clients Listing Are Properly Classified
CutoffTransactions Near the Balance Sheet Date Are Recorded in the Proper Period
Detail Tie-InDetails in the Account Balance Agree with Related Master File Amounts, Foot to
the Total in the Account Balance, and Agree with the Total in the General Ledger
Realizable ValueAssets Are Included at the Amounts Estimated to Be Realized