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Chapter 5

BUS 426 Chapter Notes - Chapter 5: Risk Assessment, Accounts Payable, General Ledger


Department
Business Administration
Course Code
BUS 426
Professor
Craig Emby
Chapter
5

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Chapter 5
Audit Responsibilities and Objectives
Objective of an Audit of Historical Financial Statements
- To express an opinion as to whether the financial statements present fairly in conformity with
an applicable financial reporting framework, in all material respects
- Objective of an auditor
o To collect sufficient appropriate audit evidence (SAAE) to allow the auditor to express an
opinion
Management Responsibilities
- Management is responsible for the financial statements and the financial reporting system
o To adopt sound and appropriate accounting policies
o Implement and maintain adequate internal controls
o Provide fair presentations in the financial statements
Responsibilities of those Charged with Governance
- The oversight (疏忽)of management
- Approval of the audited financial statements
- The audit committee of the Board of Directors (BoD) is responsible for oversight of management
in relation to financial statement preparation, internal controls, and the external auditors
Auditor’s Responsibilities
- Provide reasonable (not absolute) assurance that financial statements are free from material
misstatements
- To report o the fiaial stateets ad ouiate i aordae with the auditor’s
findings (ex. To express an opinion)
Material vs. Immaterial Misstatements
- Usually considered material if the combined uncorrected misstatements in the financial
statements would likely have changed or influenced the decisions of a reasonable person using
the statements
- May arise because of error or fraud
Error vs. Fraud
- An error is an unintentional misstatement
- Fraud and other irregularities are intentional misstatements
o Fraudulent financial reporting management fraud
o Misappropriation of assets defalcation or employee fraud
- Auditing standards require that an audit be designed to provide reasonable assurance of
detecting both
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Fraudulent Financial Reporting (FFR) at the Financial Statement Level
- Systematic misstatement of financial results, often through deliberate (故意) misstatement or
manipulation (篡改) of accounting records
- Harms users by providing them with incorrect financial statement information for their decision
making
o Usually committed by management
Fraud Misappropriation of Assets
- When assets are misappropriated, stockholders, creditors, and others are harmed because
assets are no longer available to their rightful owners
- Usually theft of assets is perpetrated by employees
Auditor’s Responsibility to Consider Laws and Regulations
- With respect to illegal acts can be considered to be indirect
o The criterion is whether the illegal act could either directly or indirectly result in a
material misstatement in the financial statement
o Potentially the tricky area, as it is a legal liability to clients
- The auditor must obtain written representation from management (or those charged with
governance of the organization) with respect to noncompliance with laws and regulations or
possible acts of noncompliance that would affect the financial statements or their notes
- Inspect correspondence, if any, with the relevant licensing or regulatory authorities
- The auditor is not expected to search for illegal acts unless there is a reason to believe they may
exist
The Audit Process
- These standards should be foremost in the auditor’s id whe egaged to perfor a audit
- Prior to accepting or continuing an audit, the auditor must assess independence
The Fraud
Triangle
Motive
OpportunityClimate
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