4.1 Audit Objectives
Summary
TLDRIn this installment of the auditing and assurance lecture series, Christine explores the vital components of an audit, including objectives, procedures, evidence, and documentation. She revisits management assertions and their relation to audit objectives, distinguishing between general and specific objectives tailored to transaction and balance categories. The lecture aims to prepare auditors to evaluate financial statements and express an opinion on their accuracy.
Takeaways
- 📚 The lecture series focuses on auditing and assurance, covering audit objectives, procedures, evidence, and documentation.
- 🎯 Audit objectives are the goals auditors aim to achieve in conducting a financial statement (FS) audit.
- 🗣️ Management assertions are representations made by management, which auditors evaluate through audit objectives.
- 🔍 There are two categories of management assertions: those related to transactions and disclosures, and those related to balances and disclosures.
- 📈 Audit objectives are derived from management assertions and are divided into general and specific objectives for transactions and balances.
- 🔑 General audit objectives apply broadly to all clients and accounts, while specific audit objectives are tailored to particular accounts and transactions.
- 📝 Specific audit objectives are detailed and include references to particular account titles, unlike general objectives which are broad and account-agnostic.
- 📉 The script provides examples of both general and specific audit objectives, illustrating the difference in their application and specificity.
- 📋 Audit procedures are methods and techniques used by auditors to gather necessary evidence to support their audit objectives.
- 📑 Documentation is crucial in an audit, as it records the evidence collected and the procedures performed to achieve audit objectives.
- 🚀 The lecture series progresses from foundational concepts to more detailed discussions on internal controls and audit processes, building a comprehensive understanding of auditing practices.
Q & A
What are the primary topics covered in the fourth installment of the auditing and assurance lecture series?
-The fourth installment of the auditing and assurance lecture series covers audit objectives, audit procedures, types of audit evidence, and documentation.
What is the relationship between management assertions and audit objectives?
-Audit objectives represent the goals of the auditor in evaluating management assertions. There are two categories of management assertions: transactions and related disclosures, and balances and related disclosures. Each assertion has a corresponding audit objective.
What are the two categories of management assertions?
-The two categories of management assertions are transactions and related disclosures, and balances and related disclosures.
How do auditors use management assertions to design their audit objectives?
-Auditors test and evaluate management assertions by creating audit objectives that correspond to each assertion. For transactions, objectives include completeness, classification, cutoff, accuracy, presentation, and occurrence. For balances, objectives include existence, rights and obligations, and valuation and allocation.
What is the difference between general audit objectives and specific audit objectives?
-General audit objectives apply to every class of transaction, account balance, and disclosure and are stated in broad terms. Specific audit objectives, on the other hand, are stated for a specific class of transactions, account balances, and disclosures and include references to particular accounts or transactions.
Can you provide an example of a general audit objective related to the management assertion of occurrence?
-A general audit objective related to the management assertion of occurrence could be: 'Recorded or disclosed transactions exist or occurred.'
How does the concept of 'posting and summarization' relate to the audit objective of accuracy under transactions?
-The audit objective of posting and summarization tests the accuracy of transactions by ensuring that transactions are properly included in the ledgers and correctly summarized, which is crucial for mathematical accuracy and proper recording.
What is the role of 'cut off' in the context of balance-related audit objectives?
-In the context of balance-related audit objectives, 'cut off' refers to the timing detail, tie-in, and ensures that transactions are recorded in the proper period, which is essential for the accuracy, valuation, and allocation of balances.
Can you give an example of a specific audit objective for the management assertion of completeness in the context of sales transactions?
-A specific audit objective for the management assertion of completeness in the context of sales transactions could be: 'Existing sales transactions are recorded, and all sales disclosures required by accounting standards are included in the financial statements.'
How do auditors ensure that the audit objectives are effectively translated into audit procedures?
-Auditors tailor and customize specific audit objectives to the specific accounts and the risks involved, which then drive the development of audit procedures. These procedures involve the methods and techniques used to gather the necessary audit evidence.
Outlines
📚 Introduction to Auditing and Assurance
Christine, the auditing theory conversation partner, warmly welcomes viewers back to the auditing and assurance lecture series. This fourth installment focuses on audit objectives, procedures, evidence, and documentation. The session builds on previous discussions about the essence of auditing, assurance concepts, and the financial statement (FS) audit process, including pre-engagement activities, audit planning, and materiality. The emphasis is on how auditors design and execute work to express an opinion on financial statements. The session begins with an exploration of audit objectives, which are tied to management assertions, and the two categories of these assertions: transactions and related disclosures, and balances and related disclosures. The discussion also covers the development of audit objectives from these assertions.
🔍 Understanding General and Specific Audit Objectives
This paragraph delves into the distinction between general and specific audit objectives. General audit objectives apply broadly to all transactions, account balances, and disclosures, stated in broad terms without mentioning specific account titles. Specific audit objectives, conversely, are tailored for particular classes of transactions, account balances, and disclosures, often referencing specific accounts or transactions. Examples are provided to illustrate the difference, such as general objectives for transaction occurrences being applicable across various transactions like sales, purchases, and utilities, while specific objectives might focus solely on sales transactions. The importance of aligning audit objectives with management assertions is highlighted, emphasizing the role of auditors in evaluating these assertions.
📈 Examples of Transaction and Balance Related Audit Objectives
Christine provides examples to further clarify the concepts of general and specific audit objectives, particularly in relation to transaction and balance related assertions. She explains how general audit objectives, such as those for transaction occurrence or completeness, can be broadly applied across different transactions, while specific objectives are more targeted, such as ensuring recorded sales reflect actual shipments to customers. The paragraph also covers the addition of audit objectives related to posting and summarization, and the potential for multiple specific objectives to align with a single general objective, demonstrating the complexity and specificity required in audit planning.
📊 Balance Related Audit Objectives and Their Specifics
Continuing the discussion on audit objectives, the focus shifts to balance related objectives. The general objective for existence, for instance, states that amounts included actually exist, while a specific objective might assert that all recorded inventory exists at the reporting date. The paragraph explores the nuances of crafting specific objectives that align with general objectives, such as ensuring all inventory is counted and included in the inventory list, and that all inventory disclosures are included in the financial statements as required by accounting standards. The emphasis is on the precision and customization needed in specific audit objectives to address the unique risks and characteristics of different accounts.
📘 Conclusion on Audit Objectives and Transition to Procedures, Evidence, and Documentation
Christine concludes the discussion on audit objectives by summarizing the key points about general and specific objectives, emphasizing the importance of tailoring objectives to specific accounts and the risks involved. She then transitions to the next topics in the lecture series: audit procedures, evidence, and documentation. This sets the stage for further exploration into how auditors gather and evaluate evidence to support their audit objectives and how this process is documented, which is crucial for the credibility and reliability of the audit.
Mindmap
Keywords
💡Auditing
💡Management Assertions
💡Audit Objectives
💡Audit Procedures
💡Audit Evidence
💡Documentation
💡General Audit Objectives
💡Specific Audit Objectives
💡Accuracy
💡Cut Off
💡Realizable Value
Highlights
Introduction to the fourth installment of the auditing and assurance lecture series.
Exploration of audit objectives, procedures, evidence, and documentation.
Recall of management assertions and their importance in auditing.
Discussion on the two categories of management assertions: transactions and related disclosures, and balances and related disclosures.
Explanation of the mnemonics used to remember management assertions: 'C Cube' and 'APO' for transactions, 'C squ' and 'PARO' for balances.
Introduction of the concept of 'storyteller' in assurance engagements and the role of the auditor in evaluating these stories.
Definition of audit objectives as the goals of the auditor to evaluate management assertions.
Differentiation between general and specific audit objectives and their application to transactions and balances.
Examples of general and specific audit objectives for transaction-related assertions.
Explanation of how specific audit objectives can be tailored for different accounts and clients.
Illustration of the difference between general and specific audit objectives through examples related to sales transactions.
Discussion on the additional audit objective of 'posting and summarization' under the category of transactions.
Examples of balance-related audit objectives and their connection to management assertions.
Clarification that multiple specific audit objectives can correspond to a single general audit objective.
Explanation of the audit objectives related to the management assertion of 'accuracy valuation and allocation'.
Introduction of the mnemonic 'CDR' to remember additional balance-related audit objectives: 'cut off', 'detail tie-in', and 'realizable value'.
Discussion on the audit objectives related to the management assertions of 'classification', 'rights and obligations', and 'presentation'.
Conclusion of the discussion on audit objectives and transition to the topics of audit procedures, evidence, and documentation.
Transcripts
hi there it's me again Christine your
auditing Theory conversation partner
excitedly welcoming you back to our
auditing and Assurance lecture series
I'm thrilled to have you join us for a
fourth installment where we will delve
into the crucial topics of audit
objectives procedures evidence and
documentation so in our previous
sessions we've laid down the foundation
for understanding the essence of
auditing and the fundamentals of
assurance Concepts and then we went into
giving an overview about the fs audit
process itself with a special highlight
of course on pre-engagement activities
audit planning and materiality after
that in our third installment we talked
in detail about internal controls well
today we're taking a significant step
forward as we explore how Auditors
design and execute the work in order to
carry out their objective of expressing
an opinion on the financial statements
we will start by unpacking audit
objectives discussing the goals Auditors
aim to achieve in the conduct of an FS
audit next we'll dive into audit
procedures which of course involve the
the methods and techniques that Auditors
use to gather the necessary evidence and
speaking of evidence we will also cover
the different types of audit evidence
and then wrap it up with a discussion on
documentation exciting huh so I hope you
guys are ready because right now we're
going to jump into audit objectives and
when we talk about audit objectives we
can't help but recall manage agement
assertions so in the past we have talked
time and again about how management
assertions represent or are the
representations of management there are
the claims of management in other words
they are the stories of management and
we pointed out that there are two
categories of management assertions the
first category pertaining of course to
transactions and related disclosures
where in our previous video we tried to
recall this one by saying that well if
it's transaction and disclosures we have
three C's so C Cube and then
APO the other category of course is
balances and related disclosures whereby
we only have two C's so only C squ and
then p a r o that's for presentation
then Ava would of course start stand for
accuracy valuation and allocation and
then we also have rights and obligations
and then finally of course existence now
if we Circle back to our initial
discussion on the very concept of
assurance engagement ments we mentioned
that in an assurance engagement there is
always a Storyteller and of course this
Storyteller ends up telling stories and
the practitioner would
evaluate would examine AKA would audit
the stories that are being told by these
storytellers and so if you think about
it this one right here the management
assertions these are the stories and
because the practitioner aka the auditor
would Endeavor to evaluate valuate these
stories the auditor then comes up with
what we call audit objectives so audit
objectives represent the goals of the
auditor in order to evaluate management
assertions and because there are two
categories of assertions need as to say
there will also be two categories of
audit objectives so one pertaining to
transactions and the other one
pertaining to balances if you are able
to recall management assertions with the
pneumonics or the tips that we have laid
out in the previous uh series then it
would be very easy for you to remember
the audit objectives just remember that
the auditor would like to test evaluate
examine audit the management assertions
therefore for every management assertion
there will be a corresponding audit
objective so there will be an audit
objective for completeness
classification cutof accuracy
presentation and occurrence in the case
of the uh of the category for
transactions and related disclosures the
assertion on accuracy would have an
added objective and that will refer to
the objective of posting and
summarization on the other hand if we
talk about balances or the category un
balances we still have the same set of
management assertions which we would
like to test and so therefore we carry
forward the management assertions to
become our objectives as well but if you
take a look at the assertion of accuracy
valuation and allocation we add to that
the audit objective of cut off which
would actually refer to timing detail
tie-in and this is uh this is usually
tested when we compare a more detailed
schedule with a more aggregated schedule
such as for example looking at the lead
schedule and the totals of the lead
schedule versus that of what is
reflected in the GL or in the trial
balance and then of course we can't ever
forget realize value as in Intermediate
Accounting we have been talking so much
about not just initial recognition but
also subsequent recognition so you get
to see that the auditor simply wants to
test the assertions of management and
carries them forward as his or her audit
objectives with the inclusion of course
of some additional objectives now to
these two categories of audit objectives
the auditor then prepares or creates or
comes up with what is called a general
audit objective or a specific audit
objective and this is done for both
categories and so therefore we will get
to read in our texts or in our materials
about General transaction related audit
objectives or specific transaction
related audit objectives similarly we
will get to hear about General balance
related audit objectives and specific
balance related audit objectives so at
it's very core what do we mean by
General and specific specific objectives
whether you're referring to transactions
or balances the meaning would be the
same when we talk about General
objectives they apply to every class of
transaction account balance and
disclosure and are stated in Broad terms
in other words when we talk about the
general audit objectives this is
something that you can apply from client
to client because all of our clients
would basically have the same assertions
so regardless of the client we can use
the same general assertions and the
sorry General audit of objectives and
these General audit objectives are
stated in Broad terms meaning to say you
do not mention a specific account title
no specific account title is named in
the general audit objective when you
compare that with a specific audit
objectives specific audit objectives are
stated for a specific class of
transactions account balance and
disclosures and so therefore when you
read an objective that has invoked a
particular account title then that is
most definitely a specific audit
objective and I think you could
already sense as right now that when we
talk about specific audit objectives you
may have different specific audit
objectives for different accounts and
different specific audit objectives for
different clients so let's try to draw
out even more the difference between
General and specific audit objectives by
taking a look at some examples okay so
word of caution do not be overwhelmed
just remember that when you talk about
General audit objectives it does not
make mention of any account title but
when you talk about specific audit
objectives there is now a reference to a
particular account or transaction all
right so let's take a look at some
examples just so we could Embrace these
Concepts more tightly so let's start
with examples of transaction related
audit of objectives so we're going to
show here a table wherein we will get to
see what are management assertions and
what would be the corresponding General
objective okay transaction related and
what would be the corresponding specific
transaction related audit objectives
like I said do not be overwhelmed keep
an open mind and just draw out the
difference between General versus
specific let's start for example with
the management assertion on occurrence
so if the auditor were to prepare a
general objective relating to the
transaction assertion of occurrence then
the auditor will simply say recorded or
disclosed transactions exist or you may
say recorded or disclosed transactions
occurred okay so in this case without
looking at the specific uh objectives
first try to reflect when you say
recorded or disclosed transactions exist
can you use this particular objective
for sales can you use it for purchases
can you use it for say for example
utilities the answer is yes right why
because it's quite broad it is not
anchored to a specific account title as
compared with a specific sales
transaction related audit objective
where we say recorded sales are for
shipments made to actual customers now
this is a perfect example of a speciic
specific audit objective which you can
only use for sales you cannot use this
objective for purchases for example you
cannot use it for consumption of
utilities for example this will only be
for sales okay let's take a look at
another
example let's look at the assertion
management assertion of completeness if
we were to convert that to a general
audit objective on the assertion
transaction assertion of completeness
then our general audit objective would
sound something like existing
transactions are recorded and
disclosures are included again no
mention of what transaction okay and so
therefore you could readily use this
General transaction rated audit
objective to just about any client and
just about any transaction for that
matter but when we craft the specific
transaction related audit objective
assuming we're still looking at sales
then our specific objective would sound
something like existing sales trans
transactions are recorded all sales
disclosures required by pfrs are
included in the financial statement so
this one right here is very specific to
sales okay and normally it will be the
specific uh audit objectives in this
case specific transaction related audit
objectives that we get to find in our
audit program at and which will drive
later on our audit procedures okay now
let's look at the assertion and accuracy
now if you remembered we added one audit
objective and that was the audit
objective of posting and summarization
because we're still under the
transactions category so accuracy then
can be stated in terms of the general
audit objective as recorded transactions
are stated at the correct amounts
meaning looking into mathematical
accuracy and disclosures are
appropriately measured and
described then when we talk about the
added audit objective of posting and
summarization which is still intended to
test accuracy then the general audit
objective would sound something like
recorded transactions are properly
included in the ledgers and they're
correctly summarized referring this time
to the recording of the transactions to
say for example the correct schedules or
the correct subsidiary
ledger when we talk about the specific
transaction related objective again
assuming we're still uh in sales so the
specific uh audit objective for accuracy
would then sound something like recorded
sales are for the amounts of goods
shipped and are correctly build and
recorded sales related disclosures are
accurately measured and described in
terms of posting and summarization we'd
also get to say sales transactions are
properly included in the sales
subsidiary record and are correctly
summarized now one thing I would like to
point out to you here other than you
know the main difference between General
and specific is if we look at for
example the management assertion of
accuracy which we countered with a
General audit objective also relating to
accuracy look at the specific
transaction related audit objective for
accuracy then you would notice that we
are actually having or we actually have
two specific sales transaction related
audit objective for accuracy that means
it is possible for you to have more than
one
specific
objective to match or to make good your
general transaction objective so it
doesn't necessarily it doesn't
necessarily have to be one is to one it
doesn't mean that for every General
transaction related audit objective you
need to only have one specific no you
can have multiple specific transaction
related audit objectives two one General
transaction related audit objectives so
the ratio is not necessarily 1 is to one
okay so there moving forward because
again there are six assertions and we
have seven objectives because we added
post and summarization so the remaining
three assertions would of course talk
about classification and how
transactions are included in the journal
as included in the journals are properly
classified the specific audit objective
to that would be sales transactions are
properly classified in terms of cut off
or timing the transactions are recorded
on the correct dates but when we talk
about specific then we mention the
account sales transactions are recorded
on the correct dates in terms of
presentation then we say transactions
are appropriate aggregated or
disaggregated and described and
disclosures are relevant and
understandable but in terms of the
specific then we say sales revenue is
properly aggregated and related
disclosures in the fs are relevant and
understandable I hope you were able to
get uh to see the difference between
General and specific okay let's try to
reinforce this even more by looking at
sample objectives for balance related
audit objectives this time so a while
back it was transaction related
objectives this time let's look at
balance related objectives so similar to
what we presented we start with the
management assertion and for example for
the management assertion on existence
our general objective would be that
amounts included actually exist the
specific balance related audit objective
let's now assume that what we are
looking at is inventory so we will say
all recorded inventory exists at the
reporting date I mean right so we're now
being very specific about a particular
account and that is inventory notice
again in our example in the case of
completeness we have one General
objective which is that existing amounts
and related disclosures are included but
we have here two specific audit
objectives one pertaining to that all
inventory or all existing inventory has
been counted and included in the
inventory list and and another one
pertaining to that all inventory
disclosures required by accounting
standards are included in the financial
statements so what did I tell you a
while back right that you can have
multiple specific objectives to one
General objective so there okay let's
move for with the other examples this
time we have the assertion of Ava do you
remember Ava accuracy valuation and
allocation to the assertion of Ava we
actually have four General balance
related objectives the first one
referring to accuracy and that is of
course that amounts included are stated
in the correct amounts and disclosures
are appropriately measured and described
if we visit the specific objectives to
that we will find at least four here
right that inventory quantities on the
Perpetual records agree with the items
physically on hand that prizes used to
evaluate or rather prizes used to Value
inventory are materially
correct that quantity and price are
correctly extended and the totals
correctly added and that inventory
disclosures are appropriately measured
and described all of those specific
objectives refer to one General
objective which is accuracy and then we
also have the objective of the
transactions near the reporting date are
recorded in the proper period this is
the general objective of cut off or
sometimes we call it timing right so cut
off or timing that purchase cut off off
at year end is proper and that sales cut
off at year end is proper then we also
have detail tie-in that is an additional
General audit objective but which would
which would still answer the management
assertion of accuracy valuation and
allocation so this one would say details
in the account balance agree with the
related subsidiary record Put to the
total in the account balance and agree
with the total in the GL actually if you
have been uh doing audit work perhaps in
your internship then you would notice
that this is one of the very first
things we do whenever we udit an account
right we ask for a detailed schedule we
foot it and then we compare it with some
aggregate or some total so that is the
objective of detail tie in an example of
a specific objective for that in terms
of inventory will be that the total of
the inventory items would agree with the
general
ledger and then lastly in terms of
accuracy evaluation and allocation one
audit objective that we added is that of
realizable value okay looking into for
of course the subsequent recognition so
that assets are included at the amounts
estimated to be realized notice that it
simply just says assets it did not
actually mention what particular asset
so that's a general objective looking at
the specific objective then we would
have to say that inventories have been
written down where net relable value is
impaired so again we take note that in
the case of the management assertion of
Ava we have four General audit
objectives the first one of course
referring to accuracy and then CDR if
you're in the Philippines and you know
if you're a little bit on the matur side
then you must have heard before of this
store that we called CDR King I don't
know if they're still around but they do
sell all all sorts of stuff so if CDR
King if you were still able to have
transactions with CDR King that might be
a good pneumonic to remember the three
additional balance related objectives so
C cut off or sometimes you call it
timing D for detail tie-in and then R
for realizable Value okay and we still
have other management assertions the
remaining three of course we talk about
classification and whether amounts
included in the client's listings for
example are properly classified so an
example specific balance related
assertion to objective to that would be
that en inventory items are properly
classified as to raw materials working
process and finished goods for rights
and obligations we would like to know if
all assets are owned by The Entity okay
and the entity must be accountable for
all liabilities so in this case the
specific objective is that the company
has title to all inventory items listed
and that inventories are not pledged or
pledged as
collateral finally on the assertion of
presentation the general objective would
sound something like like amounts are
properly aggregated or disaggregated and
described and disclosures are relevant
and understandable and in the case of
the specific objective we would of
course say inventory is properly
aggregated and costing methods is
clearly described in the financial
statements so I hope you were able to
see the difference between General and
specific essentially we just say if
General we don't make specific mention
of an account but if it's specific then
the auditor has to tailor and customize
it to the specific account and of course
the risks involved in that particular
account okay so we have just effectively
closed our discussion on audit
objectives up next we're going to talk
about audit procedures evidence and
documentation
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