Principles of external auditing

About the Authors xi    Preface xiii     Structure of the Financial Reporting Council xvii     Glossary of Terms xix     1 What is Auditing? 1     1.1 Introduction 1     1.2 What is an audit? 2     1.3 Types of audit 3     1.4 Auditing vs Accounting 8     1.5 Why are external fi nancial statement audits needed? 8     1.6 Benefi ts derived from external fi nancial statement audits 11     1.7 Summary 18     Self-review questions 18     References 19     Additional reading 20     2 The Development of Auditing and Its Objectives 23     2.1 Introduction 23     2.2 Overview of the development of company auditing 23     2.3 Development of auditing in the period up to 1844 26     2.4 Development of company auditing 1844   1920s 27     2.5 Development of company auditing 1920s   1960s 32     2.6 Development of company auditing 1960s   1990s 36     2.7 Development of company auditing 1990s   present 39     2.8 Summary 51     Self-review questions 52     References 53     Additional reading 55     3 A Framework of Auditing Concepts 57     3.1 Introduction 57     3.2 Social purpose, postulates and framework for concepts of auditing 59     3.3 Concepts relating to the credibility of auditors    work 60     3.4 Concepts relating to the audit process 70     3.5 Concept relating to auditors    communication: reporting 86     3.6 Concepts relating to the standard of auditors    performance 90     3.7 Summary 94     Self-review questions 95     References 95     Additional reading 98     4 Threats to, and Safeguarding of, Auditors    Independence 99     4.1 Introduction 99     4.2 Threats to auditors    independence 100     4.3 Steps taken by parliament and regulators to safeguard auditors    independence 104     4.4 Other proposals to strengthen auditors    independence 140     4.5 Role and responsibilities of audit committees 143     4.6 Summary 151     Self-review questions 152     References 153     Additional reading 157     5 Auditors    Legal, Regulatory and Professional Responsibilities 161     5.1 Introduction 161     5.2 Reporting and auditing requirements of companies 165     5.3 Appointment, remuneration and removal of company auditors 181     5.4 Auditor   client relationship 189     5.5 Auditors    duties and rights 191     5.6 Audit fi rms    transparency reports and governance code 207     5.7 Summary 211     Self-review questions 212     References 213     Additional reading 216     6 Auditors    Duties with Respect to Fraud and Non-compliance with Laws and Regulations 217     6.1 Introduction 217     6.2 Defi nition of fraud 218     6.3 Development of auditors    responsibility to detect and report fraud 220     6.4 Auditors    current responsibilities to detect and report fraud 229     6.5 Aggressive earnings management 241     6.6 Auditors    responsibility to detect and report non-compliance with laws and regulations 242     6.7 Auditors    duty of confi dentiality to their clients 250     6.8 Summary 253     Self-review questions 254     References 255     Additional reading 257     Appendix: Examples of fraud risk factors 258     7 Overview of the Audit Process, Audit Evidence, Staffing and Documenting an Audit 261     7.1 Introduction 261     7.2 Overview of the audit process 262     7.3 Clarification of some jargon 265     7.4 Audit evidence 271     7.5 Staffi ng an audit 277     7.6 Documenting an audit 289     7.7 Summary 306     Self-review questions 307     References 309     Additional reading 310     8 Commencing an Audit: Engagement Procedures, Understanding the Client and Identifying Risks 311     8.1 Introduction 311     8.2 Pre-engagement investigation 312     8.3 Audit engagement letters 320     8.4 Understanding the client, its business and its industry and how it evaluates its performance 325     8.5 Identifying and assessing risks of material misstatement in the financial statements 332     8.6 Analytical procedures 336     8.7 Summary 340     Self-review questions 341     References 342     Additional reading 342     9 Planning the Audit
 Materiality and Audit Risk 345     9.1 Introduction 345     9.2 Phases of planning an audit 346     9.3 Impact of materiality on planning an audit 350     9.4 Desired level of audit risk (desired level of assurance) 362     9.5 Impact of audit risk on planning the audit 366     9.6 Summary 375     Self-review questions 377     References 377     Additional reading 378     10 Internal Control and the External Audit 381     10.1 Introduction 381     10.2 The accounting system 382     10.3 Conceptual aspects of internal control 385     10.4 Reviewing the accounting system and evaluating its internal controls 402     10.5 Developing the audit plan 411     10.6 Compliance testing 415     10.7 Reporting internal control deficiencies to management 419     10.8 Summary 420     Self-review questions 421     References 422     Additional reading 423     11 Testing Financial Statement Assertions: Substantive Testing 425     11.1 Introduction 425     11.2 Significance of substantive testing in the audit process 426     11.3 Objectives of, and approaches to, substantive testing 428     11.4 Substantive audit procedures 433     11.5 Requirements of auditors when misstatements are detected 441     11.6 Introduction to substantive testing of inventory and accounts receivable 443     11.7 Signifi cant aspects of auditing inventory 444     11.8 Signifi cant aspects of auditing accounts receivable 452     11.9 Initial engagements 462     11.10 Summary 463     Self-review questions 463     References 464     Additional reading 465     12 Audit Sampling and Computer Assisted Auditing Techniques (CAATs) 467     12.1 Introduction 467     12.2 Meaning and importance of sampling in auditing 468     12.3 Basic terminology relating to sampling 470     12.4 Judgmental sampling vs statistical sampling and sampling methods 472     12.5 Designing and selecting samples 474     12.6 Judgmental sampling 481     12.7 Statistical sampling of attributes and variables, and pps sampling 482     12.8 Following up sample results 490     12.9 Computer assisted audit techniques 491     12.10 Summary 495     Self-review questions 496     References 497     Additional reading 497     13 Completion and Review 499     13.1 Introduction 499     13.2 Review for contingent liabilities and commitments 501     13.3 Review for subsequent events 503     13.4 (re)Assessment of the going concern assumption 508     13.5 Written representations 520     13.6 Final review of the fi nancial statements 527     13.7 Evaluation of audit evidence gathered and formation of the audit opinion 530     13.8 Review of unaudited information 533     13.9 Final conference 537     13.10 Summary 537     Self-review questions 538     References 539     Additional reading 540     14 Auditors    Reports to Users of Financial Statements and to Management 543     14.1 Introduction 543     14.2 Auditors    reporting obligations under the companies act 2006 544     14.3 Format and content of audit reports 549     14.4 Types of audit opinion 564     14.5 Different forms of modifi ed audit opinion 566     14.6 Emphasis of matter and other matter paragraphs 576     14.7 The audit report     the auditor   s chance to communicate 580     14.8 Auditors    communication with those charged with governance 590     14.9 Summary 603     Self-review questions 604     References 605     Additional reading 609     15 Legal Liability of Auditors 611     15.1 Introduction 611     15.2 Overview of auditors    legal liability 612     15.3 Auditors    contractual liability to their clients 615     15.4 Liability to third parties under the common law 622     15.5 The effect of out-of-court settlements 661     15.6 Summary 663     Self-review questions 663     References 664     Additional reading 666     Appendix 1 667     Appendix 2 669     16 Avoiding and Limiting Auditors    Liability 673     16.1 Introduction 673     16.2 Importance of, and responsibility for, quality control of audits 675     16.3 The profession   s measures to secure high quality audits 676     16.4 Regulators    measures for securing high quality audits 689     16.5 Proposals for limiting auditors    liability 708     16.6 Summary 720     Self-review questions 721     References 722     Additional reading 725     17 Corporate Responsibility Reporting and Assurance 727     17.1 Introduction 727     17.2 Development of corporate responsibility reporting 729     17.3 Why do companies publish corporate responsibility reports? 733     17.4 Corporate responsibility reporting guidelines 743     17.5 Corporate responsibility assurance engagements 746     17.6 Why do some companies have their corporate responsibility reports independently assured while others do not? 763     17.7 Relevance of corporate responsibility issues to external financial statement audits 766     17.8 Summary 772     Self-review questions 773     References 774     Additional reading 777     Appendix: Brief descriptions of    responsible investment    indices 777     18 The Audit Expectation-Performance Gap and Proposals for Reforming the External Audit Function 783     18.1 Introduction 783     18.2 The audit expectation-performance gap 784     18.3 Overview of proposed reforms following the global financial crisis 798     18.4 Enhancing auditors    reporting responsibilities 799     18.5 Audit market concentration and strengthening auditors    independence 816     18.6 Emergence of competition from china 837     18.7 Inherent conflicts in the current audit model 839     18.8 Summary 841     Self-review questions 842     References 843     Additional reading 849     Index 851