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Chapter 3 Audit Responsibilities - Objectives and Evidence

The document outlines audit responsibilities, objectives, and evidence. It discusses management assertions, audit objectives to obtain reasonable assurance about whether the financial statements are free of material misstatement, and types of audit evidence like observation, confirmation, inquiry, and analytical procedures. It also covers audit documentation requirements.

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samrawithagos2002
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19 views40 pages

Chapter 3 Audit Responsibilities - Objectives and Evidence

The document outlines audit responsibilities, objectives, and evidence. It discusses management assertions, audit objectives to obtain reasonable assurance about whether the financial statements are free of material misstatement, and types of audit evidence like observation, confirmation, inquiry, and analytical procedures. It also covers audit documentation requirements.

Uploaded by

samrawithagos2002
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CHAPTER THREE

Audit Responsibilities, Objectives and


Evidences

Org. by: Solomon,Habtamu.Mahder, Kehaliw &


Anteneh
OUTLINE
1) Audit Responsibility
2) Management Assertions
3) Audit Objectives
4) Audit Evidence
5) Audit Documentation

Org. by Solomon,Habtamu.Mahder,
2
Kehaliw&Anteneh
1.Auditor’s Responsibilities (ISA – 240)

Material Reasonable
misstatements Assurance

Professional
Errors vs. Fraud
Skepticism
Fraudulent
reporting
vs.
theft of assets
6-3
Type Responsibility
Same for
Direct-Effect errors and
fraud

Indirect-Effect No Assurance

6-4
 The responsibility for adopting sound accounting
policies, maintaining adequate internal control,
and making fair representations in the financial
statements rests with management rather than
with the auditor.
 Because they operate the business daily, a
company’s management knows more about the
company’s transactions and related assets,
liabilities, and equity than the auditor.
 If management insists on financial statement
disclosure that the auditor finds unacceptable,
the auditor can either issue an adverse or
qualified opinion or withdraw from the
engagement.(adverse means the audit report does not presented fairly 5)
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

6-6
Transactions and Events Account Balances Presentation and Disclosure
Occurrence Existence Occurrence and rights
and obligations
Completeness Completeness Completeness
Accuracy Valuation and Accuracy and
allocation valuation
Classification Classification and
understandability
Cutoff
Rights and
obligations
6-7
Recorded transactions
Occurrence
exist

Existing transactions
Completeness
are recorded

Recorded transactions
Accuracy are stated at the
correct amounts
6-8
Transactions are included
Posting and
in the master files and
summarization
are correctly summarized.

Transactions are properly


Classification
classified.

Transactions are recorded


Timing
on the correct dates.
6-9
Existence Amounts included exist

Existing amounts are


Completeness
included

Amounts included are


Accuracy stated at the correct
amounts

6-10
Amounts are properly
Classification
classified

Transactions are recorded


Cutoff
in the proper period

Account balances agree


Detail tie-in with master file amounts,
and with the general ledger

6-11
Realizable Assets are included at
value estimated realizable value

Rights and
Assets must be owned
obligations

6-12
The audit must be planned and performed with an
attitude of professional skepticism in all aspects of the
engagement, recognizing the possibility that a material
misstatement could exist regardless of the auditor’s
prior experience with the integrity and honesty of
client management and those charged with
governance

13
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.

6-14
6-15
Obtain Free from
Financial
reasonable material
statements
assurance misstatements

Applicable
Financial
Opine reporting
statements
framework
Communicate
Financial
Report per audit
statements
standards

6-16
The auditor must obtain sufficient appropriate
audit evidence to support all management
assertions in the financial statements.
 An audit process has four specific phases

6-17
Any information used by the auditor to
determine whether the information being
audited is stated in accordance with
established criteria

The use of evidence is not unique to auditors

Evidence is also used by scientists, lawyers,


and historians

7-18
1. Which audit procedures to use

2. What sample size to select for a given procedure

3. Which items to select from the population

4. When to perform the procedures (timing)

7-19
It includes a list of the audit procedures
the auditor considers necessary.

 Sample sizes
 Items to select
 Timing of the tests

Many auditors use audit software


packages to generate audit programs.
7-20
Two determinants:

The persuasiveness of evidence can be evaluated


only after considering the combination of
appropriateness and sufficiency 7-21
Six Characteristics of Reliable Evidence
1) Independence of provider
2) Effectiveness of client’s internal controls
3) Auditor’s direct knowledge
4) Qualification of individuals providing the information
5) Degree of objectivity
6) Timeliness

7-22
Relationships Among Evidence Decisions and Persuasiveness

Qualities Affecting
Audit Evidence Decisions
Persuasiveness
Audit procedures and timing Appropriateness
of Evidence
Relevance
Reliability
Independence of provider
Effectiveness of internal controls
Auditor's direct knowledge
Qualifications of provider
Objectivity of evidence
Timeliness
When procedures are performed
Portion of period being audited
Sample size and items to select Sufficiency
Adequate sample size
Selection of proper population items

7-23
In making decisions about evidence for
a given audit, both persuasiveness
and cost must be considered.

The auditor’s goal is to obtain a


sufficient amount of Appropriate
evidence at the lowest total cost.

7-24
Physical
Examination Confirmation
Observation

Audit
Reperformance Evidence
Inspection

Recalculation Analytical
Client Inquiries
procedures
7-25
9-26
9-27
9-28
9-29
9-30
9-31
Audit documentation is the record of the audit
procedures performed, relevant audit evidence, and
conclusions the auditor reached.

Purposes of audit documentation

Ownership of audit files

Confidentiality of audit files

Requirements for Retention of


audit Documentation
7-32
7-33
 Audit program
 General information
 Working trial balance
 Adjusting and reclassification
entries
 Supporting schedules

7-34
 Analysis
 Trial balance or list
 Reconciliation of amounts
 Tests of reasonableness
 Summary of procedures
 Examination of supporting
documents
 Informational
 Outside documentation
7-35
Proper identification of each file

Files indexed and cross-referenced

Clear indication of work performed

Include sufficient information


State conclusions reached
7-36
 Audit evidence is increasingly in electronic form
 Auditors must evaluate how electronic
information affects their ability to gather
evidence
 Auditors use computers to read and examine
evidence
 Software programs are typically Windows-
based
7-37
 Audit evidence is increasingly in electronic form
 Auditors must evaluate how electronic information
affects their ability to gather evidence
 Auditors use computers to read and examine
evidence
 Software programs are typically Windows-based
7-38
Reading Material
Arens , Elder and Beasley, Auditing and Assurance
Service, Global Edition, 177hEdition, 2020

•ISA 40, Auditors Responsibilities(IAASB – 2018 – HB – Vol .2)


•ISA 250, Consideration of Laws and Regulations in an Audit of Financial
Statements (Page 206 -224) vol-1

Org. by Solomon,Habtamu.Mahder,
39
Kehaliw&Anteneh
Org. by Solomon,Habtamu.Mahder,
40
Kehaliw&Anteneh

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