AUDIT OBJECTIVES, EVIDENCE,
PROCEDURES AND DOCUMENTATION
AUDITOR’S RESPONSIBILITIES: Errors, irregularities, illegal acts
There are audit standards from several sources that set out the
auditor’s responsibilities for errors, irregularities and illegal acts. The
CICA Handbook lists a number of rigorous auditing standards. These
include standards concerning:
• Misstatements – CAS 240 (Sect. 5135)
• Misstatements due to illegal acts by clients – CAS 250 (Sect.
• Auditing accounting estimates – CAS 540 (Sect. 5305)
• Communication with those having responsibility for financial
reporting – CAS 240 & CAS 260 (Sect. 5135 & 5751)
• Communication of matters identified during the financial
statement audit – various sections of CAS (Sect. 5750)
Auditor’s Responsibility to Consider Fraud and Error in Audit of
Since Enron, standards have been revised and require the auditor to
make enquiries of management about fraud and to consider fraud risk
factors on every audit engagement. The traditional assumption on
management’s honesty was removed.
CAS 240.04 “The primary responsibility for the prevention and
detection of fraud rests with both those charged with governance of the
entity and management. It is important that management, with the
oversight of those charged with governance, place a strong emphasis
on fraud prevention, which may reduce opportunities for fraud to take
place, and fraud deterrence, which could persuade individuals not to
commit fraud because of the likelihood of detection and punishment.
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ROBERTSON Page 1 This involves a commitment to creating a culture of honesty and ethical
behavior which can be reinforced by an active oversight by those
charged with governance. Oversight by those charged with governance
includes considering the potential for override of controls or other
inappropriate influence over the financial reporting process, such as
efforts by management to manage earnings in order to influence the
perceptions of analysts as to the entity's performance and profitability.
Responsibilities of the Auditor
CAS 240.05. An auditor conducting an audit in accordance with
CASs is responsible for obtaining reasonable assurance that the
financial statements taken as a whole are free from material
misstatement, whether caused by fraud or error. Owing to the inherent
limitations of an audit, there is an unavoidable risk that some material
misstatements of the financial statements may not be detected, even
though the audit is properly planned and performed in accordance with
the CASs. “
The auditor should assess inherent risk [the probability that material
misstatements have occurred] and control risks [the risk that the
client’s internal control will not prevent or detect a material
misstatement] so that, together with the substantive tests [the
performance of procedures to obtain direct evidence to produce
evidence about the dollar amounts and disclosures in the financial
statements] performed, the risk of material misstatement from fraud
and error is appropriately low. Another important requirement is
obtaining written representations from management concerning the
non-existence or extent of fraud.
The appendices to CAS 240 (Sect. 5135) contain numerous examples
of situations that indicate the possibility of fraud.
Further to the requirements set out in CAS 240.12 (Sect. 5135, Sect.
5090. 05) states that “In accordance with CAS 200, the auditor shall
maintain professional skepticism throughout the audit, recognizing the
possibility that a material misstatement due to fraud could exist,
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ROBERTSON Page 2 notwithstanding the auditor's past experience of the honesty and
integrity of the entity's management and those charged with
governance. (Ref: Para. A7-A8)” & CAS 200.15 states “The auditor
shall plan and perform an audit with professional skepticism
recognizing that circumstances may exist that cause the financial
statements to be materially misstated. (Ref: Para. A18-A22) In other
words, there is no valid excuse for an auditor to omit the consideration
of potential material misstatements when planning an audit.
Illegal Acts by Clients
Responsibility of Management
CAS 250.03 “It is the responsibility of management, with the oversight
of those charged with governance, to ensure that the entity's
operations are conducted in accordance with the provisions of laws
and regulations, including compliance with the provisions of laws and
regulations that determine the reported amounts and disclosures in an
entity's financial statements.”
Responsibility of the Auditor
CAS.04 “The requirements in this CAS are designed to assist the
auditor in identifying material misstatement of the financial statements
due to non-compliance with laws and regulations. However, the auditor
is not responsible for preventing non-compliance and cannot be
expected to detect non-compliance with all laws and regulations.”
CAS.05 “The auditor is responsible for obtaining reasonable
assurance that the financial statements, taken as a whole, are free
from material misstatement, whether caused by fraud or error. In
conducting an audit of financial statements, the auditor takes into
account the applicable legal and regulatory framework. Owing to the
inherent limitations of an audit, there is an unavoidable risk that some
material misstatements in the financial statements may not be
detected, even though the audit is properly planned and performed in
accordance with the CASs. In the context of laws and regulations, the
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ROBERTSON Page 3 potential effects of inherent limitations on the auditor's ability to
detect material misstatements are greater for such reasons as the
• There are many laws and regulations, relating principally to the
operating aspects of an entity, that typically do not affect the
financial statements and are not captured by the entity's
information systems relevant to financial reporting.
• Non-compliance may involve conduct designed to conceal it,
such as collusion, forgery, deliberate failure to record
transactions, management override of controls or intentional
misrepresentations being made to the auditor.
• Whether an act constitutes non-compliance is ultimately a matter
for legal determination by a court of law.
Ordinarily, the further removed non-compliance is from the events and
transactions reflected in the financial statements, the less likely the
auditor is to become aware of it or to recognize the non-compliance.”
Auditing Accounting Estimates
There have been numerous fraud cases based on the use of
intentionally incorrect accounting estimates. By their nature,
accounting estimates are subject to some degree of inexactness. The
auditor, however, is responsible for determining the reasonableness of
management’s accounting estimates in the context of the financial
statements. There are a number of recommendations in the CICA
Handbook in this area and they need to be taken under consideration
when planning and performing the audit.
CAS 540.06 (Sect. 5306.04) “The objective of the auditor is to obtain
sufficient appropriate audit evidence about whether:
(a) accounting estimates, including fair value accounting
estimates, in the financial statements, whether recognized or
disclosed, are reasonable; and
(b) related disclosures in the financial statements are
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OBJECTIVE OF AN AUDITOR
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT
AND ASSESSING THE RISKS OF MATERIAL
CAS 315.03 (paragraph 5141.022,) “The objective of the auditor is to
identify and assess the risks of material misstatement, whether due to
fraud or error, at the financial statement and assertion levels, through
understanding the entity and its environment, including the entity's
internal control, thereby providing a basis for designing and
implementing responses to the assessed risks of material
Communication with Audit Committees
During the course of an audit, the auditor may become aware of
matters that should be brought to that attention of the audit committee.
Matters such as significant weaknesses in the system of internal
control, misstatements (other than trivial matters), fraud, misstatements
that may cause future financial statements to be materially misstated
or illegal or possibly illegal acts, other than ones considered
inconsequential. In various CAS sections (Sect. 5750) the Handbook
sets out the content for the communications, the timing of the
communications and the documentation for the communications.
Auditor’s Ranking of the Relative Importance of Fraud
1. Managers have lied to the auditors or have been overly evasive in
response to audit enquiries.
2. The auditor's experience with management indicates a degree of
3. Management places undue emphasis on meeting earnings
projections or the quantitative targets.
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ROBERTSON Page 5 4. Management has engaged in frequent disputes with auditors,
particularly about aggressive application of accounting principles
that increase earnings.
5. The client has engaged in opinion shopping.
6. Management's attitude toward financial reporting is unduly
7. The client has a weak control environment.
8. A substantial portion of management compensation depends on
meeting quantified targets.
9. Management displays significant disrespect for regulatory bodies.
10. Management operating and financial decisions are
dominated by a single person or a few persons acting in concert.
11. Client managers display a hostile attitude toward the
12. Management displays a propensity to take undue risks.
13. There are frequent and significant difficult-to-audit
14. Key managers are considered highly unreasonable.
15. The client's organization is decentralized without adequate
5 Assertions: Specific Audit Objectives
The overall objective of an audit of financial statements to
express an opinion whether the financial statements present
fairly, in all material respects, the financial position, results of
operation and changes in financial position in accordance with
generally accepted accounting principles.
Management is responsible for the financial statements and
accordingly, they make assertions about their correctness. As an
auditor, we obtain and evaluate evidence about the assertions made
by management in those financial statements. Auditors examine five
main assertions that support the financial statements. The auditor’s
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ROBERTSON Page 6 audit objectives can therefore be analyzed in specific financial
statement areas based on these five assertions:
1.Existence – establish with evidence that assets, liabilities and
equities actually exist and revenue and expense transactions
2.Completeness – establish with evidence that all transactions that
should be presented in the financial statements are included.
3.Ownership – establish with evidence that amounts reported as
the assets of the company represent its property rights and that
the amounts reported as liabilities represent its obligations.
4.Valuation – determine whether proper values have been
assigned to assets, liabilities, equities, revenue and expense.
5.Presentation – determine whether accounting principles are
properly selected and applied, whether information is presented in
accordance with underlying economic reality, whether disclosures
are adequate, and whether any GAAP that apply have been
6.Compliance – determine whether corporation has complied with
appropriate laws and regulations.
CAS 500.06 (CICA Handbook Sect. 5300.) (Chapter 8 Pages 288 –
“The auditor shall design and perform audit procedures that are
appropriate in the circumstances for the purpose of obtaining
sufficient appropriate audit evidence. (Ref: Para. A1-A25)”
Bookkeeping records, in isolation, do not provide adequate evidence to
support the financial statements. The auditor is required to gather
evidence to support the financial statements through the auditor’s
direct personal knowledge, examination of documents and the enquiry
of company personnel. The auditor must use critical thinking skills and
obtain evidence appropriate to support the audit opinion.
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ROBERTSON Page 7 Appropriateness of Evidence
It is not sufficien