Solutions manual for Auditing & Assurance Services, 15th edition

Solutions manual for Auditing & Assurance Services, 15th edition

Chapter 6
Audit Responsibilities and Objectives
Chapter 6 is important because students have difficulty visualizing the relationship
between giving an opinion on financial statements and determining specific audit
objectives for each component of the statements. We believe this chapter is an
essential one to help students understand the audit process.
In teaching this chapter, we cover the following topics:
Chapter Opening Vignette ― “Riding the Tiger:
Indian Computer Company Engages in Billion Dollar Fraud”
The recent fraud at Satyam is one of the most significant frauds involving nonU.S. companies. It is an excellent case for consideration of audit evidence and
fraud. It highlights incentives for companies to manipulate revenue, the risks when
auditors do not properly obtain and evaluate evidence, even when that evidence is
considered to be reliable, as is usually the case with confirmations.
Objective of Conducting an Audit of Financial Statements (page 142)
We bring different annual reports or Form 10-Ks to class for each student and
ask the students to state the objective of an audit as it relates to the annual report.
Given the study of audit reports, this takes little time.
Management’s Responsibilities (page 143)
We don’t spend a lot of time on this section, except to briefly discuss the fact
that management, and not the auditor, is responsible for adopting sound accounting
policies, maintaining adequate internal control, and making fair representations in the
financial statements. It may be useful to highlight the discussion by the management
of International Business Machines Corporation (IBM) in their “Report of Management”
in Figure 6-2 on page 143.
(See Figure 6-2; shown on Slide 6-11)
Auditor’s Responsibilities (page 144)
We begin discussion of auditor’s responsibilities by referring to the excerpt
from auditing standards on page 144. While the standards do not state that the
auditor is responsible for finding all instances of material errors and fraud, it
requires the auditor to plan and perform the audit to obtain reasonable assurance
that material errors and fraud will be found. Problem 6-23 is useful for comparing
the auditor’s responsibilities with management’s responsibilities, and Problem 6-24
can be used to discuss the concept of “reasonable assurance.”

6-2
Next, it is helpful to distinguish between errors and fraud. Review Question 6-3
can be used here. Overhead OH-6-1 is also helpful.
(See OH-6-1)
After introducing fraud, the two types of fraud can be discussed: fraudulent
financial reporting and misappropriation of assets. Review Question 6-4 can be
used to emphasize the likely significance of each type of fraud.
Finally, we briefly discuss the auditor’s responsibility for discovering noncompliance
with laws and regulations. We distinguish between noncompliance with a direct
effect on the financial statements and acts of noncompliance with indirect effects,
and discuss the auditor’s responsibility for discovering and reporting noncompliance.
Financial Statement Cycles (page 149)
We use the financial statements in the annual reports or Form 10-Ks students
have in their possession for the session to discuss dividing the statements into
manageable segments. Looking at the financials, it becomes obvious that it is difficult
to audit without more detailed information.
The relationship between financial statements and the general ledger and the
importance of the general ledger can be shown with OH-6-2.
(See OH-6-2)
Next, we spend some time defining the cycles and explaining their role in the
audit process. We use OH-6-3, Figure 6-3 (page 149), and Figure 6-5 (page 153)
to discuss cycles.
(See OH-6-3)
(See Figures 6-3 and 6-5; shown on Slides 6-20 and 6-21)
We use Problem 6-26 to practice relating accounts to cycles.
Setting Audit Objectives (page 153)
We put considerable emphasis on transaction-related audit objectives and
balance-related audit objectives, both in this chapter and subsequent chapters. A
good way to introduce setting audit objectives is to review Figure 6-1 (page 142).
(See Figure 6-1)
Management Assertions (page 154)
We use Table 6-2 (page 155) to present the three categories of management
assertions. Problem 6-27 is useful for students to identify the management
assertions in each category of assertions.
(See Table 6-2)

6-3
Transaction-Related Audit Objectives (page 157)
It is useful to cover each general transaction-related audit objective in detail.
We suggest using OH-6-4 during this discussion. Table 6-3 (page 158) can be used
to illustrate specific transaction-related audit objectives for each general transactionrelated audit objective.
(See OH-6-4)
(See Table 6-3; shown on Slide 6-31)
Problem 6-29 is useful to relate general transaction-related audit objectives to
management assertions and specific transaction-related audit objectives.
Balance-Related Audit Objectives (page 159)
We use OH-6-5 as a frame of reference to discuss the general balance-related
audit objectives. Table 6-4 (page 161) can be used to illustrate specific balancerelated audit objectives for each general balance-related audit objective.
(See OH-6-5)
(See Table 6-4; shown on Slide 6-36)
Problem 6-28 or Problem 6-30 can be used to address specific balance-related
objectives.
Presentation and Disclosure-Related Audit Objectives (page 162)
Next, we discuss the presentation and disclosure-related audit objectives.
Table 6-5 (page 162) can be used to illustrate specific presentation and disclosurerelated audit objectives for each general presentation and disclosure-related audit
objective.
(See Table 6-5)
After discussing the three categories of audit objectives, Problem 6-31 is useful
to relate specific audit objectives to general balance-related, transaction-related,
and presentation and disclosure-related audit objectives.
How Audit Objectives are Met (page 162)
It is useful to finish the chapter by briefly discussing how audit objectives are
met. Display Figure 6-7 (page 163) and discuss it briefly. We refer back to Figure
6-7 in later chapters.
(See Figure 6-7; shown on Slide 6-41)
Problem 6-32 can be used to related specific audit activities to phases of the
audit process.