Auditing and assurance services

Cover......Page 1
Title Page ......Page 2
Copyright Page ......Page 3
Contents ......Page 6
Preface ......Page 18
Part 1 The Auditing Profession......Page 27
  Learning Objectives......Page 28
  Nature of Auditing ......Page 29
  Economic Demand for Auditing ......Page 31
  Assurance Services ......Page 33
  Types of Audits ......Page 37
  Types of Auditors ......Page 39
  Certified Public Accountant ......Page 41
   Essential Terms ......Page 42
   Multiple Choice Questions from CPA Examinations......Page 43
   Discussion Questions and Problems ......Page 44
  Learning Objectives......Page 49
  Certified Public Accounting Firms ......Page 50
  Structure of CPA Firms......Page 52
  Sarbanes–Oxley Act and Public Company Accounting Oversight Board......Page 54
  Securities and Exchange Commission ......Page 55
  American Institute of Certified Public Accountants (AICPA)......Page 56
  International and U.S. Auditing Standards......Page 57
  Organization of U.S. Auditing Standards......Page 59
  Quality Control ......Page 63
   Summary ......Page 65
   Review Questions ......Page 66
   Multiple Choice Questions from CPA Examinations......Page 67
   Discussion Questions and Problems ......Page 69
  Learning Objectives......Page 71
  Standard Unmodified Opinion Audit Report for Nonpublic Entities ......Page 72
  Standard Audit Report and Report on Internal Control over Financial Reporting Under Pcaob Auditing Standards ......Page 75
  Unmodified Opinion Audit Report with Emphasis-of-Matter Explanatory Paragraph or Nonstandard Report Wording......Page 79
  Modifications to the Opinion in the Audit Report ......Page 83
  Materiality ......Page 85
  Discussion of Conditions Requiring a Modification of Opinion ......Page 88
  Auditor’s Decision Process for Audit Reports ......Page 91
  International Accounting and Auditing Standards ......Page 93
   Essential Terms ......Page 94
   Review Questions ......Page 95
   Multiple Choice Questions from CPA Examinations......Page 96
   Discussion Questions and Problems ......Page 97
  Learning Objectives......Page 103
  What Are Ethics? ......Page 104
  Ethical Dilemmas ......Page 105
  Special Need for Ethical Conduct in Professions ......Page 108
  Code of Professional Conduct ......Page 110
  Independence Rule ......Page 114
  Sarbanes–Oxley and Related Independence Requirements......Page 118
  Other Rules of Conduct ......Page 121
  Enforcement ......Page 128
   Review Questions ......Page 130
   Multiple Choice Questions from CPA Examinations......Page 131
   Discussion Questions and Problems ......Page 133
   Cases ......Page 136
  Learning Objectives......Page 139
  Changed Legal Environment ......Page 140
  Distinguishing Business Failure, Audit Failure, and Audit Risk ......Page 141
  Legal Concepts Affecting Liability ......Page 142
  Liability to Clients ......Page 144
  Liability to Third Parties Under Common Law ......Page 147
  Civil Liability Under the Federal Securities Laws ......Page 149
  Criminal Liability ......Page 155
  The Profession’s Response to Legal Liability ......Page 156
   Essential Terms ......Page 157
   Review Questions ......Page 158
   Multiple Choice Questions from CPA Examinations......Page 159
   Discussion Questions and Problems ......Page 160
   Case ......Page 165
Part 2 The Audit Process......Page 166
  Learning Objectives......Page 167
  Objective of Conducting an Audit of Financial Statements ......Page 168
  Management’s Responsibilities ......Page 169
  Auditor’s Responsibilities ......Page 170
  Professional Skepticism ......Page 173
  Professional Judgment ......Page 175
  Financial Statement Cycles ......Page 177
  Setting Audit Objectives ......Page 182
  Management Assertions ......Page 183
  Transaction-Related Audit Objectives......Page 186
  Balance-Related and Presentation and Disclosure-Related Audit Objectives......Page 187
  How Audit Objectives Are Met ......Page 191
   Essential Terms ......Page 193
   Review Questions ......Page 194
   Multiple Choice Questions from CPA Examinations......Page 195
   Discussion Questions and Problems ......Page 198
  Learning Objectives......Page 220
  Nature of Evidence ......Page 221
  Audit Evidence Decisions ......Page 222
  Persuasiveness of Evidence ......Page 223
  Types of Audit Evidence ......Page 226
  Analytical Procedures ......Page 233
  Common Financial Ratios ......Page 237
  Audit Documentation ......Page 240
   Essential Terms ......Page 248
   Review Questions ......Page 249
   Multiple Choice Questions from CPA Examinations......Page 250
   Discussion Questions and Problems ......Page 252
   Case ......Page 259
   ACL Problem......Page 260
  Learning Objectives......Page 261
  Planning ......Page 262
  Accept Client and Perform Initial Audit Planning ......Page 263
  Understand the Client’s Business and Industry ......Page 267
  Perform Preliminary Analytical Procedures ......Page 272
  Materiality ......Page 275
  Materiality for Financial Statements as a Whole ......Page 276
  Determine Performance Materiality ......Page 279
  Estimate Misstatement and Compare with Preliminary Judgment ......Page 282
   Essential Terms ......Page 284
   Review Questions ......Page 286
   Multiple Choice Questions from CPA Examinations......Page 288
   Discussion Questions and Problems ......Page 290
   Case ......Page 297
   Integrated Case Application — Pinnacle Manufacturing: Part I ......Page 298
   ACL Problem......Page 301
  Learning Objectives......Page 302
  Audit Risk ......Page 303
  Risk Assessment Procedures ......Page 304
  Considering Fraud Risk ......Page 308
  Identification of Significant Risks ......Page 309
  Audit Risk Model ......Page 310
  Assessing Acceptable Audit Risk ......Page 314
  Assessing Inherent Risk ......Page 317
  Relationship of Risks to Evidence and Factors Influencing Risks ......Page 319
  Relationship of Risk and Materiality to Audit Evidence ......Page 324
   Review Questions ......Page 325
   Multiple Choice Questions from CPA Examinations......Page 327
   Discussion Questions and Problems ......Page 329
   Cases ......Page 333
   Integrated Case Application— Pinnacle Manufacturing: Part II......Page 335
  Learning Objectives......Page 338
  Types of Fraud ......Page 339
  Conditions for Fraud ......Page 340
  Assessing the Risk of Fraud ......Page 344
  Corporate Governance Oversight to Reduce Fraud Risks ......Page 348
  Responding to the Risk of Fraud ......Page 352
  Specific Fraud Risk Areas ......Page 354
  Responsibilities When Fraud Is Suspected ......Page 360
   Summary ......Page 364
   Review Questions ......Page 365
   Multiple Choice Questions from CPA Examinations......Page 366
   Discussion Questions and Problems ......Page 368
   Case ......Page 373
   Integrated Case Application— Pinnacle Manufacturing: Part III......Page 374
   ACL Problem......Page 375
  Learning Objectives......Page 376
  Internal Control Objectives ......Page 377
  Management and Auditor Responsibilities for Internal Control ......Page 378
  Coso Components of Internal Control ......Page 380
  Internal Controls Specific to Information Technology ......Page 390
  Impact of It Infrastucture on Internal Control ......Page 396
   Essential Terms ......Page 398
   Review Questions ......Page 400
   Multiple Choice Questions from CPA Examinations......Page 401
   Discussion Questions and Problems ......Page 402
   Case ......Page 406
  Learning Objectives......Page 408
  Obtain and Document Understanding of Internal Control ......Page 409
  Assess Control Risk ......Page 412
  Tests of Controls ......Page 418
  Decide Planned Detection Risk and Design Substantive Tests ......Page 422
  Auditor Reporting on Internal Control ......Page 423
  Evaluating, Reporting, and Testing Internal Control for Nonpublic and Smaller Public Companies ......Page 426
  Impact of IT Environment on Control Risk Assessment and Testing......Page 427
   Essential Terms ......Page 431
   Review Questions ......Page 433
   Multiple Choice Questions from CPA Examinations......Page 434
   Discussion Questions and Problems ......Page 436
   Case ......Page 444
   Integrated Case Application— Pinnacle Manufacturing: Part IV......Page 446
  Learning Objectives......Page 449
  Types of Tests ......Page 450
  Selecting Which Types of Tests to Perform ......Page 455
  Evidence Mix ......Page 459
  Design of the Audit Program ......Page 460
  Summary of Key Evidence-Related Terms......Page 468
  Summary of the Audit Process ......Page 470
   Essential Terms ......Page 474
   Review Questions ......Page 475
   Multiple Choice Questions from CPA Examinations......Page 476
   Discussion Questions and Problems ......Page 477
   Cases ......Page 483
Part 3 Application of the Audit Process to the Sales and Collection Cycle......Page 486
  Learning Objectives......Page 487
  Accounts and Classes of Transactions in the Sales and Collection Cycle ......Page 488
  Business Functions in the Cycle and Related Documents and Records ......Page 489
  Methodology for Designing Tests of Controls and Substantive Tests of Transactions for Sales ......Page 493
  Sales Returns and Allowances ......Page 504
  Methodology for Designing Tests of Controls and Substantive Tests of Transactions for Cash Receipts ......Page 505
  Effect of Results of Tests of Controls and Substantive Tests of Transactions ......Page 509
   Summary ......Page 510
   Review Questions ......Page 511
   Multiple Choice Questions from CPA Examinations......Page 513
   Discussion Questions and Problems ......Page 515
   Case ......Page 520
   Integrated Case Application— Pinnacle Manufacturing: Part V ......Page 521
   ACL Problem......Page 522
  Learning Objectives......Page 523
  Representative Samples ......Page 524
  Statistical Versus Nonstatistical Sampling and Probabilistic Versus Nonprobabilistic Sample Selection ......Page 525
  Sample Selection Methods ......Page 526
  Sampling for Exception Rates ......Page 529
  Application of Nonstatistical Audit Sampling ......Page 530
  Statistical Audit Sampling ......Page 544
  Application of Attributes Sampling ......Page 547
   Essential Terms ......Page 553
   Review Questions ......Page 554
   Multiple Choice Questions from CPA Examinations......Page 555
   Discussion Questions and Problems ......Page 557
   Integrated Case Application — Pinnacle Manufacturing: Part VI......Page 562
   ACL Problem......Page 564
  Learning Objectives......Page 565
  Methodology for Designing Tests of Details of Balances ......Page 566
  Designing Tests of Details of Balances ......Page 572
  Confirmation of Accounts Receivable ......Page 578
  Developing Tests of Details Audit Program ......Page 584
   Review Questions ......Page 588
   Multiple Choice Questions from CPA Examinations......Page 590
   Discussion Questions and Problems ......Page 591
   Case ......Page 598
   Integrated Case Application— Pinnacle Manufacturing: Part VII......Page 599
   ACL Problem......Page 604
  Learning Objectives......Page 605
  Comparisons of Audit Sampling for Tests of Details of Balances and for Tests of Controls and Substantive Tests of Transactions ......Page 606
  Nonstatistical Sampling ......Page 607
  Monetary Unit Sampling ......Page 616
  Variables Sampling ......Page 624
  Illustration Using Difference Estimation ......Page 629
   Summary ......Page 632
   Review Questions ......Page 633
   Multiple Choice Questions from CPA and CIA Examinations......Page 634
   Discussion Questions and Problems ......Page 636
   Cases ......Page 642
   ACL Problem......Page 643
Part 4 Application of the Audit Process to Other Cycles......Page 644
  Learning Objectives......Page 645
  Accounts and Classes of Transactions in the Acquisition and Payment Cycle ......Page 646
  Business Functions in the Cycle and Related Documents and Records ......Page 647
  Methodology for Designing Tests of Controls and Substantive Tests of Transactions ......Page 650
  Methodology for Designing Tests of Details of Balances for Accounts Payable ......Page 657
   Essential Terms ......Page 665
   Review Questions ......Page 666
   Multiple Choice Questions from CPA Examinations......Page 667
   Discussion Questions and Problems ......Page 669
   Case ......Page 675
  Learning Objectives......Page 677
  Audit of Property, Plant, and Equipment ......Page 678
  Audit of Prepaid Expenses ......Page 686
  Audit of Accrued Liabilities ......Page 689
  Audit of Income and Expense Accounts ......Page 690
   Review Questions ......Page 694
   Multiple Choice Questions from CPA Examinations......Page 695
   Discussion Questions and Problems ......Page 697
   Cases ......Page 700
  Learning Objectives......Page 703
  Business Functions in the Cycle and Related Documents and Records ......Page 704
  Methodology for Designing Tests of Controls and Substantive Tests of Transactions ......Page 707
  Methodology for Designing Substantive Analytical Procedures and Tests of Details of Balances ......Page 713
   Essential Terms ......Page 717
   Multiple Choice Questions from CPA Examinations......Page 718
   Discussion Questions and Problems ......Page 720
   Case ......Page 724
  Learning Objectives......Page 726
  Business Functions in the Cycle and Related Documents and Records ......Page 727
  Parts of the Audit of Inventory ......Page 730
  Audit of Cost Accounting ......Page 732
  Substantive Analytical Procedures ......Page 735
  Physical Observation of Inventory ......Page 736
  Audit of Pricing and Compilation ......Page 738
  Integration of the Tests ......Page 742
   Essential Terms ......Page 744
   Review Questions ......Page 745
   Multiple Choice Questions from CPA Examinations......Page 746
   Discussion Questions and Problems ......Page 747
   Case ......Page 754
  Learning Objectives......Page 756
  Accounts in the Cycle ......Page 757
  Notes Payable ......Page 758
  Owners’ Equity ......Page 762
   Essential Terms Summary ......Page 768
   Multiple Choice Questions from CPA Examinations......Page 769
   Discussion Questions and Problems ......Page 771
  Learning Objectives......Page 777
  Types of Cash and Financial Instruments Accounts ......Page 778
  Cash in the Bank and Transaction Cycles ......Page 780
  Audit of the General Cash Account ......Page 781
  Fraud-oriented Procedures ......Page 789
  Audit of Financial Instruments Accounts ......Page 794
   Essential Terms Summary ......Page 797
   Review Questions ......Page 798
   Multiple Choice Questions from CPA Examinations......Page 799
   Discussion Questions and Problems ......Page 800
Part 5 Completing the Audit......Page 806
  Learning Objectives......Page 807
  Perform Additional Tests for Presentation and Disclosure ......Page 808
  Review for Contingent Liabilities and Commitments ......Page 809
  Review for Subsequent Events ......Page 814
  Final Evidence Accumulation ......Page 818
  Evaluate Results ......Page 822
  Communicate with the Audit Committee and Management ......Page 826
  Subsequent Discovery of Facts ......Page 828
   Essential Terms ......Page 830
   Review Questions ......Page 831
   Multiple Choice Questions from CPA Examinations......Page 832
   Discussion Questions and Problems ......Page 834
   Case ......Page 838
Part 6 Other Assurance and Nonassurance Services......Page 839
  Learning ObjeCtives......Page 840
  Review, Compilation, and Preparation Services ......Page 841
  Review of Interim Financial Information for Public Companies ......Page 847
  Attestation Engagements ......Page 848
  Reports on Controls at Service Organizations (SOC Reports)......Page 852
  Prospective Financial Statements ......Page 854
  Agreed-Upon Procedures Engagements......Page 855
  Other Audits or Limited Assurance Engagements ......Page 856
   Summary ......Page 858
   Essential Terms ......Page 859
   Review Questions ......Page 860
   Multiple Choice Questions from CPA Examinations......Page 861
   Discussion Questions and Problems ......Page 862
  Learning Objectives......Page 867
  Internal Financial Auditing ......Page 868
  Governmental Financial Auditing ......Page 871
  Operational Auditing ......Page 874
   Essential Terms ......Page 881
   Multiple Choice Questions from CPA, CIA, and CMA Examinations......Page 882
   Discussion Questions and Problems ......Page 885
Index ......Page 889
Credits ......Page 897