Management responsibilities

An audit is conducted on the premise that management and, when appropriate, those charged with governance are responsible for:

1. the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework;

2. the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement due to error or fraud; and

3. providing the auditor with access to information and persons within the entity needed to complete the audit.

Auditors responsibilities

The auditor is responsible for expressing an opinion on the financial statements based on the audit. The auditor is also responsible for:

1. maintaining professional skepticism;

2. complying with relevant ethical requirements;

3. exercising professional judgment throughout the planning and performance of the audit;

4. obtaining sufficient appropriate audit evidence; and

5. complying with generally accepted auditing standards (GAAS).

Impediments to acting with professional skepticism

Examples of impediments include:

• Unconscious human bias, which may cau se the auditor to evaluate and recall information that favors the interest of the client over the interest of the investor. This may be facilitated by incentives and pressures to maintain and build client relationships, provide an unmodified (unqualified) opinion, keep audit costs low, or cross-sell other services.

• Development of an inappropriate level of trust or confidence in management, which may result in the auditor not taking as questioning a stance as needed.

• Pressure to avoid potential negative interactions with, or consequences to, individuals whom auditors know (e. g., management) instead of representing the interest of investors.

Ethical requirements

The auditor should comply with ethical requirements related to financial statement audit engagements, including independence in both fact and appearance.

Professional judgment

In an audit, professional judgment is necessary when making decisions about:

• Materiality

• Audit risk

• The nature, extent, and timing of audit procedures

• Evaluating whether sufficient, appropriate evidence has been obtained

• Evaluating management's judgments in applying the applicable financial reporting framework

• Drawing conclusions based on the audit evidence obtained

Reasonable assurance and inherent limitations of an audit

In order to express an opinion, the auditor obtains reasonable assurance about whether the financial statements are free from material misstatement, whether due to error or fraud.

Reasonable assurance is a high, but not absolute, level of assurance. In order to obtain reasonable assurance, the auditor must:

1. plan the work and properly supervise any assistants;

2. determine and apply appropriate materiality levels;

3. identify and assess risks of material misstatement, whether due to fraud or error; and  

4. obtain sufficient appropriate audit evidence.

The auditor is unable to obtain absolute assurance that the financial statements are free from material misstatement because of the following inherent limitations:

• The Nature of Financial Reporting: Some financial statement items are subject to an inherent level of variability because they involve judgment by management or because they involve subjective decisions or assessments or a degree of uncertainty (e.g., accounting estimates).

• The Nature of Audit Procedures: There are practical and legal limits on an auditor's ability to obtain audit evidence, including:

  • • The possibility that management or others may not provide, intentionally or unintentionally, the complete information that is needed for the preparation and presentation of the financial statements or that is requested by the auditor.

    • Fraud may be concealed in such a way that it is difficult to detect with audit procedures.

    • An audit is neither an investigation into a wrongdoing nor does the auditor have specific legal powers.

• Timeliness of Financial Reporting and the Balance Between Cost and Benefit: There is an expectation by users of financial statements that the auditor will form an opinion on the financial statements within a reasonable period of time and will achieve a balance between benefit and cost, recognizing that it is impracticable to address all information that may exist. Therefore, it is necessary for the auditor to:

  • • plan the audit so that it is performed effectively;

    • direct efforts to areas most expected to contain risks of material misstatement; and

    • use testing and other means of examining populations for misstatement.

Determine the nature and scope of the engagement

The following should be considered as the auditor, the audit committee, and management determine the appropriate nature and scope of the engagement:

• An auditor may be hired to perform an audit for a single period or multiple periods.

• An audit may be on the complete financial statement, single financial statement, or specific elements, accounts, or items of a financial statement.

• Many audit firms are hired to perform tax services in addition to audit services.

Overall objectives of audit engagements

Objectives of the Financial Statement Audit

The overall objectives of the auditor when conducting a financial statement audit (which apply to audits of issuers, nonissuers, and governmental entities) are:

• to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to error or fraud, which enables the auditor to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework; and

• to report on the financial statements and communicate as required by GAAS based on the auditor's findings.

Objectives of the Audit of Internal Control Over Financial Reporting

Issuers are required to have an integrated audit of financial statements and internal control over financial reporting. In some cases, nonissuers and governmental entities may also have an audit of internal control over financial reporting. The overall objectives of the auditor when conducting an audit of internal over financial reporting are:

1. Express an opinion on the effectiveness of the company's internal control over financial reporting; and

2. Plan and perform the audit to obtain appropriate evidence that is sufficient to obtain reasonable assurance about whether material weaknesses exist as of the date specified in management's assessment. 

Audits of internal control over financial reporting must be integrated with an audit of the financial statements.