MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES (STUDY OBJECTIVE 5)

Responsibility for operations, compliance, and financial reporting lies with management of the company. A company's various reports are assumed to represent a set of management assertions. Management assertions are claims regarding the condition of the business organization in terms of its operations, financial results, and compliance with laws and regulations. The role of the auditors is to analyze the underlying facts to decide whether information provided by management is fairly presented. Auditors design audit tests to analyze information in order to determine whether management's assertions are valid. To accomplish this, audit tests are created to address general audit objectives. Each audit objective relates to one of management's assertions. Exhibit 7-2 summarizes the relationship between management assertions and general audit objectives for a financial statement audit.

The general audit objectives described in Exhibit 7-2 may be applied to any category of transaction and the related account balances. Auditors design specific tests to address these objectives in each audit area. For example, an auditor will develop tests to determine whether a company has properly accounted for its borrowing transactions during the period. These tests are specific to the accounts and information systems in place at the company being audited. Audit tests developed for an audit client are documented in an audit program. Exhibit 7-3 presents an excerpt from a typical audit program covering notes payable and the related accounts and information systems. The related management assertions are shown in parentheses.

Exhibit 7-2 Management Assertions and Related Audit Objectives

Exhibit 7-3 Specific Audit Procedures Address General Audit Objectives and Assertions

As shown in Exhibit 7-3, a unique set of audit tests determines whether each general objective is met for each major account or type of transaction. For example, a test for completeness of notes payable involves the review of minutes to determine whether additional borrowing arrangements exist that are not recorded. If, instead, the auditor were testing for the completeness objective related to accounts receivable and sales, an appropriate test would be to examine shipping reports and investigate whether each of the related sales transactions was properly included in the accounting records. Thus, audit testing for any single general objective may involve diverse testing techniques with different kinds of information collected to support each different account and transaction.

Auditors must think about how the features of a company's IT systems influence management's assertions and the general audit objectives. These matters have a big impact on the choice of audit methodologies used. The next section relates these IT considerations to the different phases of an audit.