4.1 Audit Objectives

Summary

In 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

00:00

📚 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.

05:01

🔍 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.

10:02

📈 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.

15:03

📊 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.

20:04

📘 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.

Keywords

💡Auditing

Auditing is the systematic process of examining and verifying an organization's financial records and statements to ensure their accuracy, completeness, and compliance with relevant laws and regulations. In the context of the video, auditing is the central theme, with a focus on the objectives, procedures, evidence, and documentation involved in the process. The script discusses how auditors express an opinion on financial statements based on their audit work.

💡Management Assertions

Management assertions are representations made by the management of an organization regarding the transactions and balances within their financial statements. These assertions are the foundation upon which audit objectives are built. The script explains that there are two categories of management assertions: those related to transactions and disclosures, and those related to balances and disclosures, each with specific attributes like completeness, accuracy, and existence.

💡Audit Objectives

Audit objectives are the goals that auditors aim to achieve during the conduct of a financial statement (FS) audit. They are designed to evaluate the management assertions and ensure the reliability of the financial statements. The script outlines that there are general and specific audit objectives, which correspond to the different categories of management assertions, and are crucial for guiding audit procedures.

💡Audit Procedures

Audit procedures are the methods and techniques used by auditors to gather evidence that supports or refutes the management's assertions. The script mentions that these procedures are integral to the audit process and are selected based on the audit objectives, which in turn are derived from management's assertions.

💡Audit Evidence

Audit evidence refers to the information obtained by the auditor during the audit process that is used to provide a reasonable basis for the auditor's opinion on the financial statements. The script touches on the different types of audit evidence, emphasizing its importance in validating the assertions made by management.

💡Documentation

Documentation in an audit context refers to the written records and evidence that auditors create and maintain during the audit process. These documents are crucial for supporting the auditor's findings, conclusions, and ultimately their opinion on the financial statements. The script suggests that documentation is an essential part of wrapping up the audit process.

💡General Audit Objectives

General audit objectives are broad goals that apply to every class of transaction, account balance, and disclosure. They are stated in general terms without referencing specific account titles. The script provides examples of general audit objectives related to transaction and balance assertions, illustrating their application across various audit scenarios.

💡Specific Audit Objectives

Specific audit objectives are tailored for particular classes of transactions, account balances, and disclosures. They are more detailed and reference specific account titles or transactions. The script contrasts these with general audit objectives by providing examples that demonstrate their specificity and customization to particular audit situations.

💡Accuracy

Accuracy in the context of auditing refers to the correctness of the amounts stated in the financial statements and the appropriate measurement and description of disclosures. The script discusses accuracy as a key component of management assertions and audit objectives, with specific audit objectives aimed at ensuring that transactions and balances are recorded at the correct amounts.

💡Cut Off

Cut off, or timing, in auditing is the process of ensuring that transactions are recorded in the proper accounting period. It is an important aspect of the accuracy, valuation, and allocation assertions. The script mentions the general audit objective of cut off, which seeks to confirm that transactions near the reporting date are recorded in the correct period.

💡Realizable Value

Realizable value is the amount estimated to be realized from the sale of assets, and it is a concept particularly relevant to the valuation of inventory and other assets. The script introduces the audit objective related to realizable value, which aims to ensure that assets are included in financial statements at amounts that reflect their potential to generate future cash flows.

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