Section 4: Audit Responsibilities and Assertions

Management responsibilities
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Adopting sound accounting policies
Maintaining adequate internal control
Making fair representations (assertions)
SOX requires CEO/CFO certifications

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Section 4: Audit Responsibilities and Assertions

Auditor responsibilities
• Plan/perform the audit to provide reasonable assurance... o high level of assurance, but not absolute assurance
(guarantee)
o auditor only provides reasonable assurance because:
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• ... of detecting material misstatements o misstatements likely to change a reasonable person’s decisions o whether intentional (fraud) or unintentional (errors)
• Need to have an attitude of professional skepticism o o

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Section 4: Audit Responsibilities and Assertions

Auditor responsibilities: Fraud
• Difficult to detect due to concealment
• Two types of fraud: o fraudulent financial reporting o misappropriation of assets (defalcation)
 theft of assets
 can result in misstatements
 often immaterial

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Section 4: Audit Responsibilities and Assertions

Noncompliance with laws and regulations
• Also referred to as illegal acts
• Some have direct effects on FS o responsibility is the same as for errors/fraud
• Others have an indirect effect on FS o fines result in need to disclose contingency o auditor provides no assurance of detecting these but must
 inquire of management/those charged w/governance
(BOD) about compliance w/laws and regs
 inspect any correspondence with relevant authorities
• When such an act is suspected, questioning begins one level above the suspected perpetrator

Examples of illegal acts:

image source: http://www.pennsylvaniafiduciarylitigation.com/articles/taxation/ image source: http://blog.enn.com/?attachment_id=40

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Section 4: Audit Responsibilities and Assertions

How can we audit this account?

image source: Figure 6-6 from Arens, Elder, and Beasley, Auditing and Assurance Services: An Integrated Approach, 15th ed

Two general approaches to segmenting the audit
• Balance Sheet Approach
• Cycle Approach

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Section 4: Audit Responsibilities and Assertions

Financial statement cycles
• Cycles used in the textbook o Sales & collections cycle o Acquisition & payments cycle o Payroll & personnel cycle o Inventory & warehousing cycle o Capital acquisition & repayment cycle

image source: Figure 6-3 from Arens, Elder, and Beasley, Auditing and Assurance Services: An Integrated Approach, 15th ed

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Section 4: Audit Responsibilities and Assertions

Management assertions
• Implicit or explicit management representations about transactions, account balances, and disclosures in the FS
• AICPA standards classifies assertions into o Assertions about classes of transactions o Assertions about account balances at period end o Assertions about presentation and disclosure
• PCAOB AS15 does not classify the assertions into categories
• We will focus on the assertions from AICPA standards
• The text says that the auditor has objectives that correspond to the assertions; our focus is on the assertions, not objectives

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Section 4: Audit Responsibilities and Assertions

Assertions about transactions for the period
• Occurrence - transactions and events that have been recorded have occurred and pertain to the entity
• Completeness - all transactions and events that should have been recorded have been recorded
• Accuracy - amounts and other data relating to recorded transactions and events have been recorded appropriately
• Cutoff - transactions and events have been recorded in the correct accounting period
• Classification - transactions and events have been recorded in the proper accounts

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Section 4: Audit Responsibilities and Assertions

Assertions about period end account balances
• Existence - assets, liabilities, and equity interests exist
• Completeness - all assets, liabilities, and equity interests that should have been recorded have been recorded
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