Objective of an Audit and Management Responsibilities | Auditing and Attestation | CPA Exam

To download the PowerPoints slides and practice quizzes, visit: https://farhatlectures.pathwright.com/ Follow me on: Instagram: @farhatlectures Linkedin: https://www.linkedin.com/in/professor... Facebook: @accountinglectures Twitter:@farhatlectures Email: [email protected] Like us on Facebook: https://www.facebook.com/accountinglectures Visit the website where you can search using a specific term: http://www.farhatlectures.org/ Connect with Linked In: https://www.linkedin.com/in/mansour-farhat-cpa-cia-cfe-macc-2453423a/ Explain the objective of conducting an audit of financial statements and an audit of internal controls. The preface to the clarified AICPA auditing standards indicates The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial accounting framework. An auditor’s opinion enhances the degree of confidence that intended users can place in the financial statements. Our primary focus is the section that emphasizes issuing an opinion on financial statements. For larger public companies, the auditor also issues a report on internal control over financial reporting as required by Section 404 of the Sarbanes–Oxley Act. Auditors accumulate evidence in order to reach conclusions about whether the financial statements are fairly stated and to determine the effectiveness of internal control, after which they issue the appropriate audit report. If the auditor believes that the statements are not fairly presented or is unable to reach a conclusion because of insufficient evidence, the auditor has the responsibility of notifying users through the auditor’s report. Subsequent to their issuance, if facts indicate that the statements were not fairly presented, as in the Satyam case, the auditor will probably have to demonstrate to the courts or regulatory agencies that the audit was conducted in a proper manner and the auditor reached reasonable conclusions. The responsibility for adopting sound accounting policies, maintaining adequate internal control, and making fair representations in the financial statements rests with management rather than with the auditor. Because they operate the business daily, a company’s management knows more about the company’s transactions and related assets, liabilities, and equity than the auditor. In contrast, the auditor’s knowledge of these matters and internal control is limited to that acquired during the audit. The annual reports of many public companies include a statement about management’s responsibilities and relationship with the CPA firm. Figure 6-2 presents selected sections of the report of management for International Business Machines (IBM) Corporation as a part of its annual report. Read the report carefully to determine what management states about its responsibilities. Management’s responsibility for the integrity and fairness of the representations (assertions) in the financial statements carries with it the privilege of determining which presentations and disclosures it considers necessary. If management insists on financial statement disclosure that the auditor finds unacceptable, the auditor can either issue an adverse or qualified opinion or withdraw from the engagement. The Sarbanes–Oxley Act requires the chief executive officer (CEO) and the chief financial officer (CFO) of public companies to certify the quarterly and annual financial statements submitted to the SEC. In signing those statements, management certifies that the financial statements fully comply with the requirements of the Securities Exchange Act of 1934 and that the information contained in the financial statements fairly presents, in all material respects, the financial condition and results of operations. The Sarbanes–Oxley Act provides for criminal penalties, including significant monetary fines or imprisonment up to 20 years, for anyone who knowingly falsely certifies those statements. Objective to conducting an audit of financial statements, management’s responsibility for the financial statements, SOX, Report of management,