01. Objective of an Audit and Management Responsibilities

By Jay

Objective of an Audit

  • Primary objective: To express an opinion, based on reasonable assurance, on whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.
  • Reasonable assurance: A high, but not absolute, level of assurance.
  • Audit opinion: Whether the financial statements are fairly presented, in all material respects, in accordance with the applicable financial reporting framework.

Management Responsibilities

  • Financial statement preparation: Prepare financial statements in accordance with the applicable financial reporting framework.
  • Internal control design and maintenance: Maintain internal control necessary to prepare financial statements free from material misstatement, whether due to fraud or error.
  • Information provision: Provide unrestricted access to all information, documents, and records relevant to the audit.
  • Additional information: Provide additional information requested by the auditor.
  • Fair presentation: Management is responsible for the fair presentation of the financial statements in accordance with the applicable framework.

Auditor's Responsibilities

  • Opinion expression: Express an opinion on the financial statements.
  • GAAS compliance: Conduct the audit in accordance with Generally Accepted Auditing Standards (GAAS).
  • Professional skepticism: Maintain a questioning mind toward management assertions.
  • Materiality consideration: Focus on material misstatements that could influence users' decisions.

Limitations of an Audit

  • Inherent limitations:

    • Sampling
    • Management judgment
    • Subjectivity in accounting estimates

  • Difficulty in fraud detection: Challenges in detecting forgery, collusion, and intentional omission.

  • No absolute assurance: Risk that some material misstatements may not be detected, even with a properly planned and performed audit.

  • Other limitations:

    • Uncertainty about future events (e.g., going concern issues)
    • Time and cost constraints limiting the extent of procedures

Sample Questions

Question 1

Which of the following statements best describes the level of assurance an auditor provides in a standard audit engagement?

A. Absolute assurance
B. Reasonable assurance
C. Limited assurance
D. No assurance

Answer: B
Explanation: Auditors provide reasonable assurance that the financial statements are free from material misstatement. This is a high, but not absolute, level of assurance.

Question 2

The CFO of Walton Company told the company's auditor:
"While we design and maintain the internal control system, the ultimate responsibility for the accuracy and fairness of the financial statements rests with you as the auditor."

The most appropriate response to this statement is:

A. "That is correct. The auditor has the ultimate responsibility for ensuring that the company's financial statements are properly prepared."
B. "That is not correct. Management is responsible for the preparation and fair presentation of the financial statements, while the auditor's responsibility is to express an opinion."
C. "That is partially correct. The auditor and management share joint responsibility for the accuracy of the financial statements."
D. "The design and maintenance of the internal control system is the auditor's responsibility, while the preparation of financial statements is management's responsibility."

Answer: B
Explanation: The responsibility for the preparation and fair presentation of financial statements rests entirely with management. The auditor's responsibility is to express an opinion on whether the financial statements are fairly presented in accordance with the applicable financial reporting framework. Internal control design and maintenance also belong to management.