CHAPTER 6 Arens Summary

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

Audito!s Responsibilities The overall objectives of the auditor are: (a) To 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 To report on the financial statements, and communicate as re!uired by auditing standards, in accordance with the auditor"s findings. "ateial #esus $mmateial "isstatements# "isstatements # $isstatements 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 Assuance% Assurance is a measure of the level of certainty that the auditor has obtained at the completion of the audit. Eos #esus Faud% 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 nancial statements, whereas fraud is intentional

Pofessional S&epticism% Auditing standards require that an audit be designed to provide reasonable assurance of detecting both material errors and fraud in the nancial statements. Faud Resulting fom Faudulent Financial Repoting vesus "isappopiation of Assets% bot' fraudulent nancial reporting and misappropriation of assets are potentially harmful to nancial statement users, but there is an important dierence between them.

Audito!s Responsibilities fo Discoveing $llegal Acts Diect%effect illegal acts% Certain violations of laws and regulations have a direct nancial eect on specic account balances in the nancial statements. $ndiect%effect illegal acts% ost illegal acts aect the nancial statements only indirectly. Evidence accumulation ('en t'ee is no eason to believe indiect%effect illegal act e)ists% any 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-eect illegal acts may exist-  !he auditor may nd indications of possible illegal acts in a variety of ways Actions when the auditor knows of an illegal act-  !he rst course of action when an illegal act has been identied is to consider the eects on the nancial statements, including the adequacy of disclosures.

"inancial #tatements Cycles Audits are performed by dividing the nancial statements into smaller segments or components.

Management assertions are implied or e$pressed representations by management about classes of transactions and the related accounts and disclosures in the nancial statements. International auditing standards and U.. !AA 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

!eneral #ransactions-related Audit $b%ectives %ccurrence&'ecorded Transactions xist ompleteness&xisting Transactions *re 'ecorded

 *ccuracy&'ecorded Transactions *re +tated at the orrect *mounts osting and +ummari-ation&'ecorded Transactions *re roperly ncluded in the $aster /iles and *re orrectly +ummari-ed lassification&Transactions ncluded in the lient"s 0ournals *re roperly lassified Timing&Transactions *re 'ecorded on the orrect 1ates

!eneral &alance-related Audit $b%ectives xistence&*mounts ncluded xist ompleteness&xisting *mounts *re ncluded  *ccuracy&*mounts ncluded *re +tated at the orrect *mounts lassification&*mounts ncluded in the lient"s 2isting *re roperly lassified utoff&Transactions 3ear the 4alance +heet 1ate *re 'ecorded in the roper eriod 1etail Tie#n&1etails in the *ccount 4alance *gree with 'elated $aster /ile *mounts, /oot to the Total in the *ccount 4alance, and *gree with the Total in the 5eneral 2edger  'eali-able 6alue&*ssets *re ncluded at the *mounts stimated to 4e 'eali-ed