Auditing and Assurance Services

Cover......Page 1
Auditing & Assurance Services......Page 2
Meet the Authors......Page 7
Look Beneath the Surface . . .......Page 9
Acknowledgments......Page 21
Brief Contents......Page 25
Contents......Page 26
Chapter 1 Auditing and Assurance Services......Page 34
User Demand for Reliable Information......Page 35
Information Risk in a Big Data World......Page 36
Auditing, Attestation, and Assurance Services......Page 37
Definition of Financial Statement Auditing......Page 38
Auditing in a Big Data Environment......Page 39
Attestation Engagements......Page 40
Assurance Services......Page 42
Examples of Assurance Services......Page 43
Management’s Financial Statement Assertions......Page 45
Existence or Occurrence (Existence, Occurrence)......Page 46
Rights and Obligations (Rights and Obligations)......Page 47
Presentation and Disclosure (Classification, Understandability)......Page 48
Importance of Assertions......Page 50
Professional Skepticism......Page 51
Assurance Services......Page 54
Consulting and Advisory Services......Page 56
Internal Auditing......Page 57
Governmental Auditing......Page 58
Become a Professional and Get Certified!......Page 59
Examination......Page 60
Experience......Page 61
State Certificate and License......Page 62
Skill Sets and Your Education......Page 63
Key Terms......Page 64
Multiple-Choice Questions for Practice and Review......Page 65
Exercises and Problems......Page 70
Chapter 2 Professional Standards......Page 73
Introduction......Page 74
Generally Accepted Auditing Standards (GAAS)......Page 75
Fundamental Principle: Responsibilities......Page 78
Fundamental Principle: Performance......Page 81
Fundamental Principle: Reporting......Page 87
System of Quality Control......Page 89
PCAOB Inspection of Firms......Page 91
Summary......Page 93
Key Terms......Page 94
Multiple-Choice Questions for Practice and Review......Page 96
Exercises and Problems......Page 99
Appendix 2 Referencing Professional Standards......Page 106
Chapter 3 Engagement Planning......Page 108
Introduction......Page 109
Client Acceptance or Continuance......Page 110
Compliance with Independence and Ethical Requirements......Page 112
Engagement Letters......Page 113
Audit Plan (AU-C 300, AS 2101)......Page 115
Staffing the Audit Engagement......Page 116
Considering the Work of Internal Auditors (AU-C 610, AS 2605)......Page 117
Time Budget......Page 118
Materiality (AU-C 320, AS 2105)......Page 120
Materiality Calculation......Page 122
Audit Procedures for Obtaining Audit Evidence (AU-C 500, AS 1105)......Page 123
1. Inspection of Records and Documents......Page 126
4. Inquiry......Page 129
7. Reperformance......Page 130
8. Analytical Procedures......Page 131
Planning in a Computerized Environment......Page 132
Effect of Client’s Computerized Processing on Audit Planning......Page 133
Computer-Assisted Audit Techniques (CAATs)......Page 135
Permanent Files......Page 137
Current Files......Page 138
Audit Documentation Arrangement and Indexing......Page 139
Summary......Page 141
Key Terms......Page 142
Multiple-Choice Questions for Practice and Review......Page 143
Exercises and Problems......Page 147
Chapter 4 Management Fraud and Audit Risk......Page 150
Introduction......Page 151
Audit Risk......Page 152
Audit Risk Model......Page 153
Fraud Risk (AU-C 240, AS 2401)......Page 157
Fraud......Page 159
Other Definitions Related to Fraud......Page 161
Inherent Risk Assessment—“What Could Go Wrong?” (AU 315, AS 2110)......Page 163
Industry, Regulatory, and Other External Factors......Page 165
Related Parties......Page 166
Selection and Application of Accounting Principles, Including Related Disclosures......Page 167
Company Objectives, Strategies, and Related Business Risks......Page 168
General Business Sources......Page 170
Preliminary Analytical Procedures (AU 520, AS 2110)......Page 171
Audit Team Brainstorming Discussions......Page 177
Inquiry of Audit Committee, Management, and Others within the Company......Page 178
Overall Assessment and Documentation of Inherent Risk Assessment (AU 500, AS 1105, AU 265, AS 2201)......Page 179
Fraud and Other Significant Risks (AU 330, AS 2301)......Page 180
Communication of Fraud Risks......Page 181
Auditors’ Responsibilities for Noncompliance with Laws and Regulations (AU 250, AS 2405)......Page 182
Audit Strategy Memorandum......Page 184
Key Terms......Page 185
Multiple-Choice Questions for Practice and Review......Page 187
Exercises and Problems......Page 191
Appendix 4A Selected Financial Ratios......Page 202
Appendix 4B Sample Audit Memorandum......Page 203
Chapter 5 Risk Assessment: Internal Control Evaluation......Page 206
Introduction......Page 207
Internal Control Defined......Page 208
Auditors’ Internal Control Responsibilities......Page 209
Components of Internal Control......Page 212
Control Environment......Page 213
Risk Assessment......Page 214
Control Activities......Page 216
Information and Communication......Page 220
Monitoring......Page 221
Limitations of Internal Control......Page 223
Internal Control Evaluation......Page 224
Phase 1: Understand and Document the Client’s Internal Control......Page 225
Phase 2: Assess the Control Risk (Preliminary)......Page 230
Phase 3: Identify Controls to Test and Perform Tests of Controls......Page 232
Responsibilities in Public Company Audits Required by PCAOB Auditing Standard No. 2201......Page 236
Requirements......Page 237
Internal Control Communications......Page 240
Summary......Page 241
Key Terms......Page 242
Multiple-Choice Questions for Practice and Review......Page 243
Exercises and Problems......Page 247
Appendix 5B Auditor Reports on Internal Control over Financial Reporting......Page 253
Chapter 6 Employee Fraud and the Audit of Cash......Page 260
Introduction......Page 261
Employee Fraud Overview......Page 262
Characteristics of Fraudsters......Page 263
The Fraud Triangle (AU-C 315, AS 2401)......Page 265
Opportunity......Page 266
Attitude/Rationalization......Page 267
Managing People and Pressures in the Workplace......Page 268
Internal Control Activities and Employee Monitoring......Page 269
Tone at the Top......Page 271
Audit Evidence Used to Test Cash......Page 272
Significant Accounts and Relevant Assertions......Page 276
Evaluating the Design and Operating Effectiveness of Internal Controls......Page 277
Substantive Procedures......Page 283
“Extended Procedures” to Detect Fraud......Page 290
Summary......Page 293
Key Terms......Page 294
Multiple-Choice Questions for Practice and Review......Page 295
Exercises and Problems......Page 298
Appendix 6A Internal Control Questionnaires......Page 309
Appendix 6B Audit Plans......Page 311
Chapter 7 Revenue and Collection Cycle......Page 312
Revenue and Collection Cycle: Typical Activities......Page 313
Receiving and Processing Customer Orders, Including Credit Granting......Page 314
Billing Customers and Accounting for Accounts Receivable......Page 315
Management Reports and Data Files in the Revenue and Collection Cycle......Page 316
Significant Accounts and Relevant Assertions......Page 318
Revenue Recognition......Page 320
Internal Control Activities and Design Evaluation......Page 323
Control Considerations at the Account and Assertion Level......Page 324
Tests of Operating Effectiveness of Internal Control......Page 326
Summary: Control Risk Assessment......Page 329
Substantive Analytical Procedures and Tests of Details......Page 330
Analytical Procedures......Page 333
Confirmation of Accounts and Notes Receivable......Page 334
Alternative Procedures......Page 338
Review for Collectability......Page 339
Cutoff and Sales Returns......Page 340
Application in the Field......Page 342
Audit Cases: Extended Audit Procedures (AS 2301)......Page 343
Key Terms......Page 350
Multiple-Choice Questions for Practice and Review......Page 351
Exercises and Problems......Page 355
Appendix 7A Internal Control Questionnaires......Page 365
Appendix 7B Audit Plan......Page 367
Chapter 8 Acquisition and Expenditure Cycle......Page 369
Introduction......Page 370
Purchasing Goods and Services......Page 371
Receiving the Goods or Services......Page 373
Significant Accounts and Relevant Assertions......Page 374
Accounts Payable......Page 375
Expenses......Page 376
Risk of Material Misstatement......Page 377
Control Considerations......Page 379
Periodic Reconciliation......Page 381
Tests of Controls......Page 382
Open Purchase Orders......Page 384
Audit Risk Model Applied......Page 392
Fraud Cases: Extended Audit Procedures (Isa/As 2301)......Page 394
Audit Issues in the Expense and Acquisition Cycle......Page 397
Key Terms......Page 398
Multiple-Choice Questions for Practice and Review......Page 399
Exercises and Problems......Page 402
Appendix 8A Internal Control Questionnaires......Page 410
Appendix 8B Audit Plans......Page 413
Appendix 8C The Payroll Cycle......Page 415
Multiple-Choice Questions for Practice and Review......Page 423
Exercises and Problems......Page 425
Chapter 9 Production Cycle......Page 427
Phar-Mor Inc.......Page 428
Production Cycle: Typical Activities......Page 429
Significant Accounts and Relevant Assertions......Page 433
Risk of Material Misstatement......Page 435
Internal Control Activities and Design Evaluation......Page 437
Testing of Operating Effectiveness of Internal Control......Page 441
Substantive Analytical Procedures and Tests of Details......Page 444
Inventory Circumstances......Page 449
Fraud Case: Extended Audit Procedures (AS 2301)......Page 454
Summary......Page 456
Key Terms......Page 458
Multiple-Choice Questions for Practice and Review......Page 459
Exercises and Problems......Page 462
Appendix 9A Internal Control Questionnaires......Page 472
Appendix 9B Audit Plans......Page 474
Chapter 10 Finance and Investment Cycle......Page 476
Introduction......Page 477
Finance and Investment Cycle: Typical Activities......Page 478
Financing the Entity through Debt and Stockholder Equity......Page 479
Raising Capital (2)......Page 480
Investing Transactions: Investments and Intangibles (3)......Page 482
Significant Accounts and Relevant Assertions......Page 485
Risk of Material Misstatement......Page 486
Fair Market Value......Page 487
Lease Accounting......Page 488
Loan Covenants......Page 489
Presentation and Disclosure......Page 490
Internal Control Activities and Design Evaluation......Page 491
Tests of Operating Effectiveness of Internal Control......Page 493
Control over Accounting Estimates......Page 496
Record Keeping......Page 497
Summary: Control Risk Assessment......Page 498
Substantive Analytical Procedures and Tests of Details......Page 499
Auditing Fair Value Measurements (AS 2502)......Page 505
Derivative Instruments, Hedging Activities, and Investments in Securities (AS 2503)......Page 506
Long-Term Liabilities and Related Accounts......Page 507
Auditing Stock-Based Compensation Plans......Page 509
Fraud Cases: Extended Audit Procedures (AS 2301)......Page 510
Summary......Page 515
Multiple-Choice Questions for Practice and Review......Page 517
Exercises and Problems......Page 521
Appendix 10A Internal Control Questionnaires......Page 529
Appendix 10B Substantive Audit Plans......Page 530
Chapter 11 Completing the Audit......Page 533
Introduction......Page 534
Audit Timeline......Page 535
Completing Substantive Procedures......Page 537
Attorney Letters......Page 538
Written Representations......Page 542
Ability to Continue as a Going Concern......Page 545
Adjusting Entries and Financial Statement Disclosure......Page 546
Audit Documentation Review......Page 549
Subsequent Events......Page 550
Subsequently Discovered Facts......Page 552
Communications with Individuals Charged with Governance......Page 554
Summary of Audit Communications......Page 556
Key Terms......Page 557
Multiple-Choice Questions for Practice and Review......Page 558
Exercises and Problems......Page 561
Chapter 12 Reports on Audited Financial Statements......Page 573
Introduction......Page 574
Overview of Auditors’ Reports......Page 575
The Standard Report......Page 576
Auditors’ Reports for Public Entities......Page 577
Types of Opinions......Page 579
Departures from GAAP......Page 580
Scope Limitations......Page 582
Audits of Group Financial Statements......Page 586
“Going-Concern” Uncertainties......Page 589
Other Information Accompanying Audited Financial Statements......Page 590
Required Supplementary Information......Page 591
Summary: Emphasis-of-Matter and Other-Matter Paragraphs......Page 592
Comparative Financial Statements......Page 593
Summary Financial Statements......Page 595
Disclaimers of Opinion......Page 596
Summary......Page 597
Key Terms......Page 599
Multiple-Choice Questions for Practice and Review......Page 600
Exercises and Problems......Page 602
Module A Other Public Accounting Services......Page 616
Introduction to Attestation Engagements......Page 618
Prospective Financial Information and Pro Forma Financial Information......Page 621
An Examination of an Entity’s Internal Control over Financial Reporting That Is Integrated with an Audit of Its Financial Statements (AT 501)......Page 623
Compliance Attestation......Page 624
Broker–Dealer Compliance......Page 625
Service Organizations......Page 627
Review Services......Page 631
Compilation Services......Page 635
Preparation of Financial Statements......Page 636
Responsibilities Related to Reporting on Interim Financial Information......Page 637
Specified Elements, Accounts, or Items......Page 639
Special-Purpose Frameworks......Page 640
Reports on Application of Requirements of an Appropriate Financial Reporting Framework......Page 642
Why Develop New Assurance Services?......Page 644
Definition: Assurance Services......Page 645
Integrated Reporting......Page 646
Trust Services......Page 647
Sustainability Reporting......Page 648
Summary......Page 649
Key Terms......Page 650
Multiple-Choice Questions for Practice and Review......Page 651
Exercises and Problems......Page 654
Module B Professional Ethics......Page 661
Introduction......Page 662
General Ethics......Page 663
An Ethical Decision Process......Page 664
The Imperative Principle......Page 665
Virtue Ethics......Page 667
Ethical Codes of Conduct......Page 668
The International Federation of Accountants (IFAC)......Page 669
The Professional Ethics Executive Committee (PEEC) of the American Institute of CPAs (AICPA)......Page 670
American Institute of Certified Public Accountants......Page 672
SEC and PCAOB Independence Rules......Page 679
Other Effects of Sarbanes–Oxley on Auditor Independence......Page 681
Government Accountability Office (GAO) Independence Requirements......Page 682
Integrity and Objectivity Rule......Page 683
Confidential Client Information Rule......Page 685
Compliance with Standards Rule......Page 684
Fees and Other Types of Remuneration......Page 687
Acts Discreditable Rule......Page 689
Advertising and Other Forms of Solicitation Rule......Page 690
Form of Organization and Name Rule......Page 691
Self-Regulatory Discipline......Page 692
Public Regulation Discipline......Page 693
Summary......Page 695
Multiple-Choice Questions for Practice and Review......Page 696
Exercises and Problems......Page 700
Module C Legal Liability......Page 709
The Legal Environment......Page 711
Liability to Clients......Page 713
Liability to Third Parties......Page 714
Liability for Compilation and Review Services......Page 719
Liability Under Statutory Law......Page 720
Section 11: Civil Liability......Page 721
Auditors’ Defenses under the Securities Act......Page 722
Section 24: Criminal Liability......Page 723
Section 10 and Rule 10(b)-5: Antifraud......Page 724
Auditors’ Defenses under the Securities Exchange Act......Page 726
Foreign Corrupt Practices Act (FCPA)......Page 727
Summary of Auditors’ Liability to Clients and Third Parties......Page 728
Sarbanes–Oxley......Page 730
Racketeer Influenced and Corrupt Organizations Act......Page 731
Organization of Accounting Firms as Limited Liability Partnerships......Page 732
Class-Action Suits......Page 733
Other Developments......Page 735
Summary......Page 736
Key Terms......Page 737
Multiple-Choice Questions for Practice and Review......Page 738
Exercises and Problems......Page 743
Module D Internal Audits, Governmental Audits, and Fraud Examinations......Page 753
Introduction......Page 754
“External,” Governmental, and Internal Audits......Page 755
Independence......Page 756
Value-Added Audit......Page 758
Scope of Service......Page 759
Internal Audit Standards......Page 763
Internal Audit Reports......Page 764
Governmental Audits......Page 765
Types of Governmental Audits......Page 767
Audit Procedures—Economy, Efficiency, and Program Results Audits......Page 768
GAO Government Auditing Standards......Page 770
Single Audit Act of 1984 and Amendments of 1996......Page 771
GAO Audit Reports......Page 772
Fraud Examinations......Page 774
The Art of Fraud Examinations......Page 776
Fraud Examiner Responsibilities......Page 778
Summary......Page 780
Multiple-Choice Questions for Practice and Review......Page 782
Exercises and Problems......Page 786
Introduction......Page 795
What Is Sampling?......Page 796
Sampling Risk versus Nonsampling Risk......Page 797
Statistical Sampling versus Nonstatistical Sampling......Page 799
Planning......Page 800
Performing......Page 801
Documenting the Sampling Procedure......Page 804
Use of Sampling in the Audit......Page 805
Study and Evaluation of Internal Control......Page 806
Substantive Procedures......Page 808
Performing......Page 810
Example of Audit Sampling......Page 812
Key Terms......Page 813
Multiple-Choice Questions for Practice and Review......Page 815
Exercises and Problems......Page 818
Module F Attributes Sampling......Page 828
Role of Attributes Sampling in the Audit......Page 829
Step 2: Define the Characteristic of Interest......Page 830
Step 3: Define the Population......Page 831
Performing......Page 832
Step 4: Determine the Sample Size......Page 833
Step 5: Select the Sample Items......Page 838
Step 6: Measure the Sample Items......Page 839
Calculating the Upper Limit Rate of Deviation......Page 841
Making the Evaluation Decision......Page 843
Qualitative Evaluation of Deviations......Page 844
Documenting......Page 845
Other Attributes Sampling Methods......Page 846
Key Terms......Page 847
Multiple-Choice Questions for Practice and Review......Page 848
Exercises and Problems......Page 852
Appendix F.A AICPA Sample Size Tables......Page 865
Appendix F.B AICPA Sample Evaluation Tables......Page 867
Module G Variables Sampling......Page 868
Definition of Variables Sampling......Page 869
Monetary Unit Sampling (MUS)......Page 870
Step 4: Determine the Sample Size......Page 872
Step 5: Select the Sample Items......Page 875
Step 6: Measure the Sample Items......Page 877
Step 7: Evaluate the Sample Results......Page 878
Other Variables Sampling Approaches......Page 882
Variables Sampling: Documenting......Page 883
Summary......Page 884
Key Terms......Page 885
Multiple-Choice Questions for Practice and Review......Page 886
Exercises and Problems......Page 889
Appendix G.A AICPA MUS Tables......Page 905
Appendix G.B Classical Variables Sampling......Page 907
Appendix G.C Nonstatistical Sampling......Page 914
Module H Auditing and Information Technology......Page 916
Introduction......Page 917
Information Technology (IT) Systems......Page 918
General Controls......Page 920
Automated Application Controls......Page 927
Output Controls......Page 929
Assessing Control Risk in an It Environment......Page 931
Testing Controls in an It Environment......Page 933
End-User Computing Control Considerations......Page 934
Service Organizations......Page 936
Computer Abuse and Computer Fraud......Page 937
Preventive, Detective, and Damage-Limiting Controls......Page 938
Summary......Page 940
Multiple-Choice Questions for Practice and Review......Page 941
Exercises and Problems......Page 943
Andersen: An Obstruction of Justice?......Page 952
PTL Club—The Harbinger of Things to Come?......Page 956
GM: Running on Empty?......Page 962
Unhealthy Accounting at HealthSouth......Page 965
KPMG: How Many Firms?......Page 968
Something Went Sour at Parmalat......Page 971
GE: How Much Are Auditors Paid?......Page 974
Satyam Computer Services Ltd.—India’s Enron......Page 977
Auditor Changes at Daily Journal Corporation......Page 981
London Has Fallen......Page 984
Lehman Brothers: Subprime Accounting?......Page 985
Bernard L. Madoff: The Fraud of the Century......Page 988
When the Music Stops: Crazy Eddie’s......Page 991
Index......Page 994