Auditing and Assurance Services: An Integrated Approach, 14th Edition

Cover......Page 1
Title Page......Page 3
Copyright Page......Page 4
A TRIBUTE TO ALVIN A. ARENS
......Page 5
CONTENTS......Page 7
PREFACE......Page 17
ACKNOWLEDGMENTS......Page 21
ABOUT THE AUTHORS......Page 23
PART 1 THE AUDITING PROFESSION......Page 24
Learning Objectives......Page 25
Nature of Auditing......Page 26
Economic Demand for Auditing......Page 28
Assurance Services......Page 30
Types of Audits......Page 34
Types of Auditors......Page 37
Certi.ed Public Accountant......Page 39
Essential Terms......Page 40
Review Questions......Page 41
Multiple Choice Questions from CPA Examinations......Page 42
Discussion Questions and Problems......Page 43
Internet Problem 1-1: CPA Requirements......Page 46
Learning Objectives......Page 47
Certified Public Accounting Firms......Page 48
Activities of CPA Firms......Page 49
Structure of CPA Firms......Page 50
Securities and Exchange Commission......Page 52
American Institute of Certified Public Accountants (AICPA)......Page 53
International and U.S. Auditing Standards......Page 54
Generally Accepted Auditing Standards......Page 56
Statements on Auditing Standards......Page 58
Quality Control......Page 59
Essential Terms......Page 61
Review Questions......Page 62
Multiple Choice Questions from CPA Examinations......Page 63
Discussion Questions and Problems......Page 64
Internet Problem 2-1: International Auditing and Assurance Standards Board......Page 66
Learning Objectives......Page 67
Standard Unqualified Audit Report......Page 68
Report on Internal Control Over Financial Reporting Under Section 404 of the Sarbanes–Oxley Act......Page 71
Unqualified Audit Report with Explanatory Paragraph or Modified Wording......Page 73
Departures from an Unqualified Audit Report......Page 77
Materiality......Page 78
Discussion of Conditions Requiring a Departure......Page 81
Auditor’s Decision Process for Audit Reports......Page 84
Summary......Page 87
Review Questions......Page 88
Multiple Choice Questions from CPA Examinations......Page 90
Discussion Questions and Problems......Page 91
Internet Problem 3-1: Research Annual Reports......Page 96
Learning Objectives......Page 99
What Are Ethics?......Page 100
Ethical Dilemmas......Page 101
Special Need for Ethical Conduct in Professions......Page 104
Code of Professional Conduct......Page 106
Independence......Page 109
Independence Rule of Conduct and Interpretations......Page 112
Other Rules of Conduct......Page 117
Summary......Page 125
Review Questions......Page 126
Multiple Choice Questions from CPA Examinations......Page 127
Discussion Questions and Problems......Page 128
Cases......Page 131
Internet Problem 4-1: IESBA Code of Ethics......Page 134
Learning Objectives......Page 135
Changed Legal Environment......Page 136
Distinguishing Business Failure, Audit Failure, and Audit Risk......Page 137
Legal Concepts Affecting Liability......Page 138
Liability to Clients......Page 140
Liability to Third Parties Under Common Law......Page 143
Civil Liability Under the Federal Securities Laws......Page 145
Criminal Liability......Page 149
Protecting Individual CPAs from Legal Liability......Page 152
Summary......Page 153
Essential Terms......Page 154
Multiple Choice Questions from CPA Examinations......Page 155
Discussion Questions and Problems 135 Case......Page 157
Internet Problem 5-1: SEC Enforcement......Page 161
PART 2 THE AUDIT PROCESS......Page 162
Learning Objectives......Page 163
Objective of Conducting an Audit of Financial Statements......Page 164
Management’s Responsibilities......Page 165
Auditor’s Responsibilities......Page 166
Financial Statement Cycles......Page 170
Setting Audit Objectives......Page 174
Management Assertions......Page 175
Transaction-Related Audit Objectives......Page 178
Balance-Related Audit Objectives......Page 180
How Audit Objectives Are Met......Page 183
Summary......Page 185
Essential Terms......Page 186
Review Questions......Page 187
Multiple Choice Questions from CPA Examinations......Page 188
Discussion Questions and Problems......Page 189
Case......Page 193
Internet Problem 6-1: International and PCAOB Audit Objectives......Page 194
Learning Objectives......Page 195
Nature of Evidence......Page 196
Audit Evidence Decisions......Page 197
Persuasiveness of Evidence......Page 198
Types of Audit Evidence......Page 201
Audit Documentation......Page 210
Essential Terms......Page 218
Review Questions......Page 219
Multiple Choice Questions from CPA Examinations......Page 220
Discussion Questions and Problems......Page 221
Cases......Page 226
Internet Problem 7-1: Use of Audit Software for Fraud Detection and Continuous Auditing......Page 228
Learning Objectives......Page 231
Planning......Page 232
Accept Client and Perform Initial Audit Planning......Page 233
Understand the Client’s Business and Industry......Page 237
Assess Client Business Risk......Page 242
Perform Preliminary Analytical Procedures......Page 244
Analytical Procedures......Page 245
Five Types of Analytical Procedures......Page 248
Common Financial Ratios......Page 252
Summary......Page 255
Review Questions......Page 256
Multiple Choice Questions from CPA Examinations......Page 258
Discussion Questions and Problems......Page 259
Cases......Page 265
Integrated Case Application — Pinnacle Manufacturing: Part I......Page 267
ACL Problem......Page 269
Internet Problem 8-1: Obtain Client Background Information......Page 270
Learning Objectives......Page 271
Materiality......Page 272
Set Preliminary Judgment about Materiality......Page 273
Allocate Preliminary Judgment about Materiality to Segments (Tolerable Misstatement)......Page 276
Estimate Misstatement and Compare with Preliminary Judgment......Page 279
Audit Risk......Page 280
Audit Risk Model Components......Page 283
Assessing Acceptable Audit Risk......Page 285
Assessing Inherent Risk......Page 288
Relationship of Risks to Evidence and Factors Influencing Risks......Page 290
Essential Terms......Page 296
Review Questions......Page 297
Multiple Choice Questions from CPA Examinations......Page 298
Discussion Questions and Problems......Page 300
Cases......Page 306
Integrated Case Application — Pinnacle Manufacturing: Part II......Page 309
Internet Problem 9-1: Materiality and Tolerable Misstatement......Page 310
Learning Objectives......Page 311
Internal Control Objectives......Page 312
Management and Auditor Responsibilities for Internal Control......Page 313
COSO Components of Internal Control......Page 316
Obtain and Document Understanding of Internal Control......Page 324
Assess Control Risk......Page 329
Tests of Controls......Page 334
Section 404 Reporting on Internal Control......Page 337
Evaluating, Reporting, and Testing Internal Control for Nonpublic Companies......Page 339
Summary......Page 341
Essential Terms......Page 342
Review Questions......Page 344
Multiple Choice Questions from CPA Examinations......Page 346
Discussion Questions and Problems......Page 348
Case......Page 353
Integrated Case Application — Pinnacle Manufacturing: Part III......Page 354
Internet Problem 10-1: Disclosure of Material Weaknesses in Internal Control Over Financial Reporting......Page 355
Learning Objectives......Page 357
Types of Fraud......Page 358
Conditions for Fraud......Page 359
Assessing the Risk of Fraud......Page 363
Corporate Governance Oversight to Reduce Fraud Risks......Page 367
Responding to the Risk of Fraud......Page 371
Specific Fraud Risk Areas......Page 373
Responsibilities When Fraud is Suspected......Page 378
Summary......Page 382
Review Questions......Page 383
Multiple Choice Questions from CPA Examinations......Page 384
Discussion Questions and Problems......Page 385
Case......Page 390
ACL Problem......Page 391
Internet Problem 11-1: Brainstorming About Fraud Risks......Page 392
Learning Objectives......Page 393
Assessing Risks of Information Technology......Page 394
Internal Controls Specific to Information Technology......Page 396
Impact of Information Technology on the Audit Process......Page 402
Issues for Different IT Environments......Page 408
Essential Terms......Page 412
Multiple Choice Questions from CPA Examinations......Page 414
Discussion Questions and Problems......Page 416
Case......Page 421
ACL Problem......Page 423
Internet Problem 12-1: Assessing IT Governance......Page 424
Learning Objectives......Page 425
Types of Tests......Page 426
Selecting Which Types of Tests to Perform......Page 431
Impact of Information Technology on Audit Testing......Page 434
Evidence Mix......Page 435
Design of the Audit Program......Page 436
Summary of Key Evidence-Related Terms......Page 445
Summary of the Audit Process......Page 446
Essential Terms......Page 450
Review Questions......Page 451
Multiple Choice Questions from CPA Examinations......Page 452
Discussion Questions and Problems......Page 453
Cases......Page 458
Internet Problem 13-1: Assessing Effects of Evidence Mix......Page 461
PART 3 APPLICATION OF THE AUDIT PROCESS TO THE SALES AND COLLECTION CYCLE......Page 462
Learning Objectives......Page 463
Accounts and Classes of Transactions in the Sales and Collection Cycle......Page 464
Business Functions in the Cycle and Related Documents and Records......Page 465
Methodology for Designing Tests of Controls and Substantive Tests of Transactions for Sales......Page 469
Sales Returns and Allowances......Page 480
Methodology for Designing Tests of Controls and Substantive Tests of Transactions for Cash Receipts......Page 481
Audit Tests for the Write-off of Uncollectible Accounts......Page 485
Effect of Results of Tests of Controls and Substantive Tests of Transactions......Page 486
Summary......Page 487
Review Questions......Page 488
Multiple Choice Questions from CPA Examinations......Page 489
Discussion Questions and Problems......Page 491
Case......Page 496
Integrated Case Application — Pinnacle Manufacturing: Part V......Page 497
Internet Problem 14-1: Revenue Recognition Fraud......Page 498
Learning Objectives......Page 499
Representative Samples......Page 500
Statistical Versus Nonstatistical Sampling and Probabilistic Versus Nonprobabilistic Sample Selection......Page 501
Nonprobabilistic Sample Selection Methods......Page 502
Probabilistic Sample Selection Methods......Page 504
Sampling for Exception Rates......Page 506
Application of Nonstatistical Audit Sampling......Page 507
Sampling Distribution......Page 523
Application of Attributes Sampling......Page 524
Summary......Page 529
Essential Terms......Page 530
Review Questions......Page 531
Multiple Choice Questions from CPA Examinations......Page 532
Discussion Questions and Problems......Page 534
Integrated Case Application — Pinnacle Manufacturing: Part VI......Page 538
Internet Problem 15-1: Applying Statistical Sampling......Page 540
Learning Objectives......Page 541
Methodology for Designing Tests of Details of Balances......Page 542
Designing Tests of Details of Balances......Page 548
Confirmation of Accounts Receivable......Page 554
Developing Tests of Details Audit Program......Page 560
Essential Terms......Page 563
Review Questions......Page 564
Multiple Choice Questions from CPA Examinations......Page 565
Discussion Questions and Problems......Page 566
Case......Page 572
Integrated Case Application — Pinnacle Manufacturing: Part VII......Page 573
Internet Problem 16-1: Revenue Recognition......Page 578
Learning Objectives......Page 579
Comparisons of Audit Sampling for Tests of Details of Balances and for Tests of Controls and Substantive Tests of Transactions......Page 580
Nonstatistical Sampling......Page 581
Monetary Unit Sampling......Page 589
Variables Sampling......Page 600
Illustration Using Difference Estimation......Page 605
Summary......Page 611
Review Questions......Page 612
Multiple Choice Questions from CPA Examinations......Page 614
Discussion Questions and Problems......Page 615
Cases......Page 620
Internet Problem 17-1: Monetary Unit Sampling Considerations......Page 621
PART 4 APPLICATION OF THE AUDIT PROCESS TO OTHER CYCLES......Page 622
Learning Objectives......Page 623
Accounts and Classes of Transactions in the Acquisition and Payment Cycle......Page 624
Business Functions in the Cycle and Related Documents and Records......Page 625
Methodology for Designing Tests of Controls and Substantive Tests of Transactions......Page 628
Methodology for Designing Tests of Details of Balances for Accounts Payable......Page 634
Summary......Page 642
Review Questions......Page 643
Multiple Choice Questions from CPA Examinations......Page 645
Discussion Questions and Problems......Page 646
Case......Page 652
Internet Problem 18-1: Identifying Accounts Payable Fraud......Page 654
Learning Objectives......Page 655
Audit of Property, Plant, and Equipment......Page 656
Audit of Prepaid Expenses......Page 663
Audit of Accrued Liabilities......Page 666
Audit of Income and Expense Accounts......Page 668
Summary......Page 671
Review Questions......Page 672
Multiple Choice Questions from CPA Examinations......Page 673
Discussion Questions and Problems......Page 675
Cases......Page 677
Internet Problem 19-1: Centerpulse Ltd. Fraud......Page 679
Learning Objectives......Page 681
Business Functions in the Cycle and Related Documents and Records......Page 682
Methodology for Designing Tests of Controls and Substantive Tests of Transactions......Page 686
Methodology for Designing Tests of Details of Balances......Page 690
Summary......Page 694
Review Questions......Page 695
Multiple Choice Questions from CPA Examinations......Page 696
Discussion Questions and Problems......Page 697
Case......Page 701
Internet Problem 20-1: Risks of Outsourcing the Payroll Function......Page 702
Learning Objectives......Page 703
Business Functions in the Cycle and Related Documents and Records......Page 704
Parts of the Audit of Inventory......Page 706
Audit of Cost Accounting......Page 708
Physical Observation of Inventory......Page 711
Audit of Pricing and Compilation......Page 715
Integration of the Tests......Page 719
Essential Terms......Page 721
Review Questions......Page 722
Multiple Choice Questions from CPA Examinations......Page 723
Discussion Questions and Problems......Page 724
Case......Page 730
Internet Problem 21-1: Using Inventory Count Specialists......Page 732
Learning Objectives......Page 733
Accounts in the Cycle......Page 734
Notes Payable......Page 735
Owners’ Equity......Page 738
Essential Terms......Page 745
Review Questions......Page 746
Multiple Choice Questions from CPA Examinations......Page 747
Discussion Questions and Problems......Page 748
Internet Problem 22-1: Overview of the NYSE......Page 752
Learning Objectives......Page 753
Cash in the Bank and Transaction Cycles......Page 754
Types of Cash Accounts......Page 756
Audit of the General Cash Account......Page 757
Fraud-Oriented Procedures......Page 764
Audit of the Imprest Payroll Bank Account......Page 768
Summary......Page 769
Review Questions......Page 770
Multiple Choice Questions from CPA Examinations......Page 771
Discussion Questions and Problems......Page 772
Internet Problem 23-1: Check Clearing for the 21st Century Act......Page 777
PART 5 COMPLETING THE AUDIT......Page 778
Learning Objectives......Page 779
Perform Additional Tests for Presentation and Disclosure......Page 780
Review for Contingent Liabilities and Commitments......Page 781
Review for Subsequent Events......Page 786
Final Evidence Accumulation......Page 789
Evaluate Results......Page 793
Communicate with the Audit Committee and Management......Page 798
Subsequent Discovery of Facts......Page 800
Essential Terms......Page 801
Review Questions......Page 802
Multiple Choice Questions from CPA Examinations......Page 803
Discussion Questions and Problems......Page 805
Internet Problem 24-1: Audit Committee Responsibilities......Page 809
PART 6 OTHER ASSURANCE AND NONASSURANCE SERVICES......Page 810
Learning Objectives......Page 811
Review and Compilation Services......Page 812
Review of Interim Financial Information for Public Companies......Page 817
Attestation Engagements......Page 818
WebTrust and SysTrust Services......Page 821
Reports on Controls at Service Organizations......Page 822
Prospective Financial Statements......Page 823
Agreed-Upon Procedures Engagements......Page 825
Other Audits or Limited Assurance Engagements......Page 826
Summary......Page 828
Essential Terms......Page 829
Review Questions......Page 830
Multiple Choice Questions from CPA Examinations 809......Page 831
Discussion Questions and Problems......Page 832
Internet Problem 25-1: Accounting and Review Services Committee......Page 836
Learning Objectives......Page 837
Internal Financial Auditing......Page 838
Governmental Financial Auditing......Page 841
Operational Auditing......Page 843
Essential Terms......Page 851
Review Questions......Page 852
Multiple Choice Questions from CPA, CIA, and CMA Examinations......Page 853
Cases......Page 855
Internet Problem 26-1: Institute of Internal Auditors......Page 859
APPENDIX: ACL INSTALLATION AND INSTRUCTIONS......Page 860
A......Page 865
C......Page 866
E......Page 867
I......Page 868
N......Page 869
R......Page 870
S......Page 871
Y......Page 872