The Objectives of Conducting an Audit of

Financial Statements
The objective of the audit of financial
statements by the independent auditor is the
expression of an opinion which they present
fairly the financial position , results of
operation , and its cash flows in conformity with
generally accepted accounting principles.
 Audit of financial statements
Understand objectives and responsibilities
for the audit

Divide financial statements into cycle

Know management assertions about

accounts

Know general audit objectives for classes

of transactions and accounts

Know specific audit objectives for

balances
 Fraud Resulting From Financial Versus
Misappropriation Of Assets
An important concept for misappropriation of assets the
distinction between the theft of assets and misstatements arising
from the theft of assets. to illustrate , following are two
situations.
• Assets were taken and the theft was covered by overstating
assets. For example, cash collected from a customer was
stolen, and the account receivable for the customer’s account
was not credited. The misstatement has not been discovered.
• Assets were taken and the theft was covered by understanding
revenues or overstating expense. For example , cash from cash
sale was stolen , and the transaction was not recorded . the
assets were taken , but the misappropriation was discovered .
The income statement and relate footnotes clearly describe
the misappropriation.
 Direct –Effect illegal Acts
Certain violations of laws and regulations have direct
financial effect on specific account balances in the
financial statement. For example , A violation of
federal tax laws directly affects income tax expense
and income taxes payable . The auditor’s
responsibilities for these direct-effect illegal acts is
the same as for errors and fraud. On each audit ,
Therefore , The auditor will normally evaluate
whether or not there is evidence available to indicate
material violations of federal state tax laws .
 Indirect –Effect illegal Acts
Most illegal acts effect the financial statements
indirectly ,For Example, if the company violates
environmental protection laws these is an effect
on the financial statements only if there is a fine
or sanction , potential material fines and
sanction indirect financial statements by
creating the need to disclose a contingent
liability for the potential amount that might he
paid.
 Evidence Accumulation when there is no reason to
believe indirect -effect illegal acts exist

Many audit procedures normally performed on audits to

search for errors and frauds may also cover illegal acts.
Example include reading the minutes of the broad of
directors and inquiring of the client’s attorney about
litigation . The auditor should also inquire of management
about policies they have established to prevent illegal acts
and whether management knows of any laws or
regulations that the company has violated . Other than
these procedures , the auditor should no search for
indirect-effect illegal acts inks there is reason to believe
they may exist.
Evidence Accumulation and other Actions when there is
reason to believe direct-effect illegal acts may exist

When the auditor believes that an illegal act may

have occurred it is necessary to take several actions:
First, the auditor should inquire of management at a
level above those likely to be involved in the
potential illegal act. Second, The auditor should
consul with the client’s legal consul or other
specialist who in knowledgeable about the potential
illegal act. Third, the auditor should consider
accumulating additional evidence to determine
whether there actually is all illegal act .
 What are The Types of errors

1- Omission errors.
2- Mathematical errors.
3- Accounting manipulation errors.
4- Matching and conflicting errors.
 Omission errors
First: total omission errors: omitting both sides
of the entry, for example not recording sales
return, this error doesn't affect the trial
balance, therefore it is hard to be discovered.
Second: partial omission errors: occurs when
recording the transaction in journal but when
posting to ledger only one side is posted while
the other is omitted, this error leads to
unbalancing the trial balance.
 Mathematical errors
are errors in subtraction, addition,
multiplication, and division . these errors occur
in commercial or cash discount, balancing
statements, usually these errors don't affect the
trial balance.
 Accounting manipulation errors
Results from insufficient awareness of accounting
concepts, for example :

- Conflicting between expenses and capitalized

expenses.
- Miscalculation of provisions to face expected risk.
- Conflicting the meaning of reserve and
provisions.
These kinds of errors do not affect the trial balance.
 Matching and conflicting errors
These errors match with each other so they are
very difficult to be detected as they deceive
the eye.(when 367 is written as 376).these
errors don't affect the balance of trial balance.
 Methods to trace and discover errors
• Documentary review.
• Stocktaking stores.
• Mathematical review.
• Entry review.
How to make-up errors
There are many methods to make up errors ,first
cancel the entry and rewrite it properly ,second
reconcile the mistaken entry with another entry.
 Example 1
The co paid rent LE 300,(but the actual rent is LE 350) , Determine the error type,
then Write the entry and make it up by two methods.
Solution:
It is a matching and conflicting error
The mistaken entry
Rent . . . . 300
Cash . . . . . 300
Making up in two steps:
First entire canceling of the mistaken error
Cash . . . . 300
Rent . . . . . 300
Then properly write the entry
Rent . . . . 350
Cash . . . . . 350
 Example 1
Proof by ledgering either rent or cash
Rent 300 300
350 Bal.350
650
Making up in one step: 650

Rent . . . 50 Ed bal350

Cash. . . . . 50 300
50 Bal.350
350 350
Ed bal350
 Example 2
A firm paid rent LE 300,(but the actual rent is LE 200) Determine the error type,
then Write the entry and make it up by two methods.
Solution:
It is a matching and conflicting error
The mistaken entry
Rent. . . . 300
Cash. . . . . 300
Making up in two steps:
First entire canceling of the mistaken error
Cash . . . . 300
Rent . . . . . 300
Then properly write the correct entry
Rent . . . 200
Cash . . . . 200
 Example 2
Making up in one step:
Cash . . . . 100
Rent . . . . 100
Proof by ledgering either rent or cash
300 100
Bal.200
300 300
Ed bal200
 Ex 3
Cash sales of LE 1000 with discount 10% the entry in the firm's book were as follows
Cash . .1100
Sales Revenue. . .1100
Determine the error type, then Write the entry and make it up by two methods.
Solution:
It is a mathematical errors
Discount = 1000 x 10% = 100
Sales revenue after discount = 1000-100 = 900
The mistaken entry
Cash . .1100
Sales Revenue. . .1100
Making up in two steps:
First entire canceling of the mistaken error
Sales Revenue . . . . .1100
Cash. . . . .1100
 Ex 3
Then properly write the entry
Cash . . .900
Sales Revenue. . .900
Proof by ledgering either sales revenue or cash
Sales revenue

1100 1100
bal.900 900
2000 2000
Ed bal 900
Making up in one step:
sales revenue . 200
cash . . . .200
Proof by ledgering either sales revenue or cash
Sales revenue

200 1100

bal.900

1100 1100

Ed. Bal. 900

 Ex 4
: A company recorded changing a car motor costing LE 2500 as follows :
Motor expense 2500
Cash . . .2500
Knowing that car's book value is LE 50000 and
The car's accumulated depreciation is LE 35000
Determine the error type, then Write the entry and make it up by possible methods .
Solution:
The error is accounting manipulation error because here the capitalized expense is
treated as current expense.
The mistaken entry
Motor expense 2500
Cash . . 2500
Making up in two steps:
First entire canceling of the mistaken error
Cash . . .2500
Motor expense . . 2500
 Ex. 4
Then properly write the entry
Car . . 2500
Cash . 2500
Proof by ledgering car
Car's fair value is 50000 – 35000 = 15000 LE
car
15000
2500 Bal.17500
17500 17500
Ed bal 17500

Making up in one step:

car . . . 2500
motor expense 2500
 Audit Objectives
Assertion about Right and Obligations
Management assertions deal with whether assets are the rights of
the entity and liabilities are the obligations of entity at a given data.
Assertions about presentation and Disclosure :
These assertion deal with whether components of the financial
statements are properly combined or described , and disclosed .
Actions when the auditor knows of an illegal act:
The first course of action when an illegal act has been identified is to
consider the effects on the financial statements , including the
adequacy of disclosure these effects may be complex and difficult to
resolve .
The auditor should also consider the effect of such illegal acts on its
relation with management
 Transactions Audit Objectives
• Completeness – Existing Transactions are recorded:
This objective deals with whether all transactions that should be
included in the journals have actually been included.
• Accuracy –Recorded Transactions are stated at the correct
amount.
This objective deals with the accuracy of accounting transactions
( quantities , calculations ) .
• Classification – Transactions included in the client’s journal are
properly classified.
Examples of misclassification for car maintenance expenses classified
as a capitalized expense but must treated as current expense.
• Timing –Transactions are recorded on the correct dated:
A timing error occurs if transactions are not recorded on the dated
the transaction took place
 Balance Audit Objectives
They follow from management assertions and they provide a framework to related audit objectives to
help the auditor accumulate sufficient competent evidence .
-Existence – Amounts included exist.
This objectives deals with whether the amounts included in the financial statement should actually be
included .
-Completeness – existing amounts are included.
The existence and completeness objectives emphasize opposite audit concerns existence deals with
potential overstatement and completeness with unrecorded transactions and amounts
( understatement).
-Accuracy- amounts included are stated at the correct amounts.
The accuracy objective refers to amounts being included at the correct arithmetic amount .
-Included in the client’s listing are properly classified.
Classification involves determining whether items on a client’s listing are included in the correct
accounts .
-Cutoff –transactions near the balance sheet date are recorded in the proper period.
The transactions that are most likely to be misstated are those recorded near the end of the accounting
period .
-Detail tie-in – details in the account balance agree with related master file amount , foot to the total
in the account balance , and agree with the total in the general ledger.
-Realizable value–assets are included at the amounts estimated to be realized.
This objective concerns whether an account balance has been reduced for declines from historical cost
to not realizable value.
 Four Phases of Audit
1- Plan and design an audit

2- Perform tests of control

3- Perform analytical procedures

4- Complete the audit and issue an audit report

 Auditing Process Steps
1- Obtaining knowledge of the client’s business.
2- Understanding internal control and assessing
control risk .
3- Perform analytical procedures tests of details
of balances.
4- Complete the audit and issue an audit report.
 Essential terms
Analytical procedures Use of comparisons and relationships to assess whether
account balances or other data appear reasonable.
Balance –related audit objectives Nine audit objectives that must be met before
the auditor can conclude that any given account balance is fairly stated , the general
balance –related audit objectives are existence , completeness , accuracy ,
classification , cutoff , detail tie , realize value , rights and obligations , and
presentation an disclosure.
Cyclic approach A method of dividing an audit by keeping closely related types to
transactions and account balances in the same segment.
Error An unintentional misstatement of the financial statements.
Fraud An international misstatement of the financial statements .
Fraudulent financial reporting – International misstatements or missions of amount
or disclosure in financial statements to deceive users.
Illegal acts- violations of laws or government regulations other than fraud
management- Assertion – implied or expressed representations by management
about classes of transactions and related accounts in the financial statements .
Misappropriation of assets – A fraud involving the theft of an entity’s assets .
 Essential terms
Phases of the audit process the four aspects of a complete audit (1) plan
and design an audit approach , (2) perform tests of control and substantive
tests of transactions ,(3) perform analytical procedures and tests of details
of balances , and (4) complete the audit and issue the audit report.
Substantive tests of transactions audit procedures testing for monetary
misstatements to determine whether the six transaction related audit
objectives have seen satisfied for each class of transactions.
Tests of controls – Audit procedures to test effectiveness of controls in
support of a reduced assessed control risk.
Tests of details of balances – audit procedures testing for monetary
misstatements to determine whether the nine balance - related audit
objectives have been satisfied for each significant account balance.
Transaction – related audit objectives – Six audit objectives that must be
met before the auditor can conclude that the total for any given class of
transactions is fairly stated , The general transaction –related audit
objectives are existence , completeness accuracy , classification , timing ,
and posting and summarization.