1、6-2 It is managements responsibility to adopt sound accounting policies, maintain adequate internal control and make fair representations in the financial statements. The auditors responsibility is to conduct an audit of the financial statements in accordance with auditing standards and report the f
2、indings of the audit in the auditors report.6-3 An error is an unintentional misstatement of the financial statements. Fraud represents intentional misstatements. The auditor is responsible for obtaining reasonable assurance that material misstatements in the financial statements are detected, wheth
3、er those misstatements are due to errors or fraud. An audit must be designed to provide reasonable assurance of detecting material misstatements in the financial statements. Further, the audit must be planned and performed with an attitude of professional skepticism in all aspects of the engagement.
4、 Because there is an attempt at concealment of fraud, material misstatements due to fraud are usually more difficult to uncover than errors. The auditors best defense when material misstatements （either errors or fraud） are not uncovered in the audit is that the audit was conducted in accordance wit
5、h auditing standards.6-4 Misappropriation of assets represents the theft of assets by employees. Fraudulent financial reporting is the intentional misstatement of financial information by management or a theft of assets by management, which is covered up by misstating financial statements. Misapprop
6、riation of assets ordinarily occurs either because of inadequate internal controls or a violation of existing controls. The best way to prevent theft of assets is through adequate internal controls that function effectively. Many times theft of assets is relatively small in dollar amounts and will h
7、ave no effect on the fair presentation of financial statements. There are also the cases of large theft of assets that result in bankruptcy to the company. Fraudulent financial reporting is inherently difficult to uncover because it is possible for one or more members of management to override inter
8、nal controls. In many cases the amounts are extremely large and may affect the fair presentation of financial statements.6-5 True, the auditor must rely on management for certain information in the conduct of his or her audit. However, the auditor must not accept managements representations blindly.
9、 The auditor must, whenever possible, obtain appropriate evidence to support the representations of management. As an example, if management represents that certain inventory is not obsolete, the auditor should be able to examine purchase orders from customers that prove part of the inventory is bei
10、ng sold at a price that is higher than the companys cost plus selling expenses. If management represents an account receivable as being fully collectible, the auditor should be able to examine subsequent payments by the customer or correspondence from the customer that indicates a willingness and ab
11、ility to pay.6-6CHARACTERISTICAUDIT STEPS1. Managements characteristics and influence over the control environment. Investigate the past history of the firm and its management. Discuss the possibility of fraudulent financial reporting with previous auditor and company legal counsel after obtaining p
12、ermission to do so from management.2. Industry conditions. Research current status of industry and compare industry financial ratios to the companys ratios. Investigate any unusual differences. Read AICPAs Industry Audit Risk Alert for the companys industry, if available. Consider the impact of spec
13、ific risks that are identified on the conduct of the audit.3. Operating characteristics and financial stability. Perform analytical procedures to evaluate the possibility of business failure. Investigate whether material transactions occur close to year-end.6-7 The cycle approach is a method of divi
14、ding the audit such that closely related types of transactions and account balances are included in the same cycle. For example, sales, sales returns, and cash receipts transactions and the accounts receivable balance are all a part of the sales and collection cycle. The advantages of dividing the a
15、udit into different cycles are to divide the audit into more manageable parts, to assign tasks to different members of the audit team, and to keep closely related parts of the audit together.6-8GENERAL LEDGER ACCOUNTCYCLESales Accounts Payable Retained EarningsAccounts Receivable Inventory Repairs &
16、 MaintenanceSales & Collection Acquisition & PaymentCapital Acquisition & Repayment CollectionInventory & Warehousing Payment 6-9 There is a close relationship between each of these accounts. Sales, sales returns and allowances, and cash discounts all affect accounts receivable. Allowance for uncoll
17、ectible accounts is closely tied to accounts receivable and should not be separated. Bad debt expense is closely related to the allowance for uncollectible accounts. To separate these accounts from each other implies that they are not closely related. Including them in the same cycle helps the audit
18、or keep their relationships in mind.6-10 Management assertions are implied or expressed representations by management about classes of transactions and the related accounts and disclosures in the financial statements. These assertions are part of the criteria management uses to record and disclose a
19、ccounting information in financial statements. SAS 106 （AU 326） classifies assertions into three categories:1. Assertions about classes of transactions and events for the period under audit2. Assertions about account balances at period end3. Assertions about presentation and disclosure6-11 General a
20、udit objectives follow from and are closely related to management assertions. General audit objectives, however, are intended to provide a framework to help the auditor accumulate sufficient appropriate evidence required by the third standard of field work. Audit objectives are more useful to audito
21、rs than assertions because they are more detailed and more closely related to helping the auditor accumulate sufficient appropriate evidence.6-12RECORDING MISSTATEMENTTRANSACTION-RELATED AUDITOBJECTIVE VIOLATEDFixed asset repair is recorded on the wrong date.Repair is capitalized as a fixed asset in
22、stead of an expense.TimingClassification6-13 The existence objective deals with whether amounts included in the financial statements should actually be included. Completeness is the opposite of existence. The completeness objective deals with whether all amounts that should be included have actually
23、 been included. In the audit of accounts receivable, a nonexistent account receivable will lead to overstatement of the accounts receivable balance. Failure to include a customers account receivable balance, which is a violation of completeness, will lead to understatement of the accounts receivable
24、 balance.6-14 Specific audit objectives are the application of the general audit objectives to a given class of transactions, account balance, or presentation and disclosure. There must be at least one specific audit objective for each general audit objective and in many cases there should be more.
25、Specific audit objectives for a class of transactions, account balance, or presentation and disclosure should be designed such that, once they have been satisfied, the related general audit objective should also have been satisfied for that class of transactions, account, or presentation and disclos
26、ure.6-15 For the specific balance-related audit objective, all recorded fixed assets exist at the balance sheet date, the management assertion and the general balance-related audit objective are both existence.6-16 Management assertions and general balance-related audit objectives are consistent for
27、 all asset accounts for every audit. They were developed by the Auditing Standards Board, practitioners, and academics over a period of time. One or more specific balance-related audit objectives are developed for each general balance-related audit objective in an audit area such as accounts receiva
28、ble. For any given account, a CPA firm may decide on a consistent set of specific balance-related audit objectives for accounts receivable, or it may decide to use different objectives for different audits.6-17 For the specific presentation and disclosure-related audit objective, read the fixed asse
29、t footnote disclosure to determine that the types of fixed assets, depreciation methods and useful lives are clearly disclosed, the management assertion and the general presentation and disclosure-related audit objective are both classification and understandability.6-18 The four phases of the audit
30、 are:1. Plan and design an audit approach.2. Perform tests of controls and substantive tests of transactions.3. Perform analytical procedures and tests of details of balances.4. Complete the audit and issue an audit report. The auditor uses these four phases to meet the overall objective of the audit, which is to express an opinion on the fairness with which the financial statements present fairly, in all material respects, the financial position, results of operations and cash flows in conformity with GAAP. By accumulating sufficient ap
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