An integrated and current approach to auditing. KEY TOPICS: The Auditing Profession; The Audit Process; Application of the Audit Process to the Sales and Collection Cycle; Application of the Audit Process to Other Cycles; Completing the Audit; Other Assurance and Nonassurance Services MARKET: For individuals interested in the auditing, accounting, and consulting fields.
An integrated and current approach to auditing.KEY TOPICS: The Auditing Profession; The Audit Process; Application of the Audit Process to the Sales and Collection Cycle; Application of the Audit Process to Other Cycles; Completing the Audit; Other Assurance and Nonassurance ServicesMARKET: For individuals interested in the auditing, accounting, and consulting fields.
Preface xiPART 1 The Auditing Profession 1. The Demand for Audit and Other Assurance Services 3Learning Objectives 3Nature of Auditing 4Distinction Between Auditing and Accounting 6Economic Demand for Auditing 6Assurance Services 8Types of Audits 13Types of Auditors 15Certified Public Accountant 17Summary 18Essential Terms 18Review Questions 19Multiple Choice Questions from CPA Examinations 20Discussion Questions and Problems 21Internet Problem 1-1: Sarbanes–Oxley Act Internal Control Reporting Requirements 242. The CPA Profession 25Learning Objectives 25Certified Public Accounting Firms 26Activities of CPA Firms 27Structure of CPA Firms 28Sarbanes–Oxley Act and Public Company Accounting Oversight Board 30Securities and Exchange Commission 31American Institute of Certified Public Accountants (AICPA) 32Generally Accepted Auditing Standards 33Statements on Auditing Standards 36International Standards on Auditing 37Quality Control 37Summary 39Essential Terms 40Review Questions 41Multiple Choice Questions from CPA Examinations 41Discussion Questions and Problems 43Internet Problem 2-1: International Auditing and Assurance Standards Board 443. Audit Reports 45Learning Objectives 45Standard Unqualified Audit Report 46Combined Reports on Financial Statements and Internal Control Over Financial Reporting Under Section 404 of the Sarbanes–Oxley Act 49Unqualified Audit Report with Explanatory Paragraph or Modified Wording 51Departures from an Unqualified Audit Report 55Materiality 56Discussion of Conditions Requiring a Departure 59Auditor’s Decision Process for Audit Reports 63Impact of E-Commerce on Audit Reporting 65Summary 65Essential Terms 66Review Questions 66Multiple Choice Questions from CPA Examinations 67Discussion Questions and Problems 69Internet Problem 3-1: Research Annual Reports 744. Professional Ethics 75Learning Objectives 75What Are Ethics? 76Ethical Dilemmas 77Special Need for Ethical Conduct in Professions 80Code of Professional Conduct 81Independence 85Independence Rule of Conduct and Interpretations 88Other Rules of Conduct 93Enforcement 100Summary 100Essential Terms 102Review Questions 102Multiple Choice Questions from CPA Examinations 103Discussion Questions and Problems 104Cases 107Internet Problem 4-1: PCAOB Disciplinary Actions 1105. Legal Liability 111Learning Objectives 111Changed Legal Environment 112Distinguishing Business Failure, Audit Failure, and Audit Risk 113Legal Concepts Affecting Liability 114Liability to Clients 116Liability to Third Parties Under Common Law 119Civil Liability Under the Federal Securities Laws 121Criminal Liability 125The Profession’s Response to Legal Liability 127Protecting Individual CPAs from Legal Liability 128Summary 129Essential Terms 130Review Questions 131Multiple Choice Questions from CPA Examinations 131Discussion Questions and Problems 133Case 137Internet Problem 5-1: SEC Enforcement 137PART 2 The Audit Process6. Audit Responsibilities and Objectives 139Learning Objectives 139Objective of Conducting an Audit of Financial Statements 140Management’s Responsibilities 141Auditor’s Responsibilities 142Financial Statement Cycles 146Setting Audit Objectives 150Management Assertions 151Transaction-Related Audit Objectives 154Balance-Related Audit Objectives 156Presentation and Disclosure-Related Audit Objectives 159How Audit Objectives Are Met 159Summary 162Essential Terms 162Review Questions 163Multiple Choice Questions from CPA Examinations 164Discussion Questions and Problems 165Case 169Internet Problem 6-1: International and PCAOB Audit Objectives 1707. Audit Evidence 171Learning Objectives 171Nature of Evidence 172Audit Evidence Decisions 173Persuasiveness of Evidence 174Types of Audit Evidence 177Audit Documentation 185Summary 194Essential Terms 195Review Questions 196Multiple Choice Questions from CPA Examinations 197Discussion Questions and Problems 198Cases 203ACL Problem 205Internet Problem 7-1: Use of Audit Software for Fraud Detection and Data Quality Assurance 2058. Audit Planning and Analytical Procedures 207Learning Objectives 207Planning 208Accept Client and Perform Initial Audit Planning 209Understand the Client’s Business and Industry 214Assess Client Business Risk 218Perform Preliminary Analytical Procedures 220Summary of the Parts of Audit Planning 221Analytical Procedures 223Five Types of Analytical Procedures 224Common Financial Ratios 230Summary 232Essential Terms 232Review Questions 232Multiple Choice Questions from CPA Examinations 234Discussion Questions and Problems 236Cases 241Integrated Case Application—Pinnacle Manufacturing: Part I 243ACL Problem 246Internet Problem 8-1: Obtain Client Background Information 2469. Materiality and Risk 247Learning Objectives 247Materiality 248Set Preliminary Judgment about Materiality 249Allocate Preliminary Judgment about Materiality to Segments(Tolerable Misstatement) 252Estimate Misstatement and Compare with Preliminary Judgment 255Risk 257Types of Risks 259Assessing Acceptable Audit Risk 261Assessing Inherent Risk 263Relationship of Risks to Evidence and Factors Influencing Risks 266Evaluating Results 271Summary 273Essential Terms 274Review Questions 275Multiple Choice Questions from CPA Examinations 276Discussion Questions and Problems 277Cases 283Integrated Case Application—Pinnacle Manufacturing: Part II 287Internet Problem 9-1: Materiality and Tolerable Misstatement 28810. Section 404 Audits of Internal Control and Control Risk 289Learning Objectives 289Internal Control Objectives 290Management and Auditor Responsibilities for Internal Control 291COSO Components of Internal Control 294Obtain and Document Understanding of Internal Control 303Assess Control Risk 307Tests of Controls 313Decide Planned Detection Risk and Design Substantive Tests 315Section 404 Reporting on Internal Control 316Evaluating, Reporting, and Testing Internal Control for Nonpublic Companies 318Summary 321Essential Terms 321Review Questions 324Multiple Choice Questions from CPA Examinations 326Discussion Questions and Problems 328Case 333Integrated Case Application—Pinnacle Manufacturing: Part III 334Internet Problem 10-1: Disclosure of Material Weaknesses in Internal Control Over Financial Reporting 33511. Fraud Auditing 337Learning Objectives 337Types of Fraud 338Conditions for Fraud 340Assessing the Risk of Fraud 343Corporate Governance Oversight to Reduce Fraud Risks 346Responding to the Risk of Fraud 351Specific Fraud Risk Areas 353Responsibilities when Fraud is Suspected 358Summary 362Essential Terms 363Review Questions 363Multiple Choice Questions from CPA Examinations 364Discussion Questions and Problems 365Case 369ACL Problem 370Internet Problem 11-1: Brainstorming About Fraud Risks 37012. The Impact of Information Technology on the Audit Process 371Learning Objectives 371How Information Technologies Improve Internal Control 372Assessing Risks of Information Technology 372Internal Controls Specific to Information Technology 374Impact of Information Technology on the Audit Process 380Issues for Different IT Environments 387Summary 390Essential Terms 390Review Questions 392Multiple Choice Questions from CPA Examinations 392Discussion Questions and Problems 394Case 400ACL Problem 401Internet Problem 12-1: Assessing IT Governance 40213. Overall Audit Plan and Audit Program 403Learning Objectives 403Types of Tests 404Selecting Which Types of Tests to Perform 409Impact of Information Technology on Audit Testing 412Evidence Mix 413Design of the Audit Program 414Summary of Key Evidence-Related Terms 424Summary of the Audit Process 425Essential Terms 429Review Questions 429Multiple Choice Questions from CPA Examinations 431Discussion Questions and Problems 433Cases 438Internet Problem 13-1: Assessing Effects of Evidence Mix 440PART 3 Application of the Audit Process to the Sales and Collection Cycle14. Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions 443Learning Objectives 443Accounts and Classes of Transactions in the Sales and Collection Cycle 444Business Functions in the Cycle and Related Documents and Records 445Methodology for Designing Tests of Controls and Substantive Tests of Transactions for Sales 450Sales Returns and Allowances 460Methodology for Designing Tests of Controls and Substantive Tests of Transactions for Cash Receipts 461Audit Tests for the Write-off of Uncollectible Accounts 465Additional Internal Controls over Account Balances and Presentation and Disclosure 466Effect of Results of Tests of Controls and Substantive Tests of Transactions 466Summary 467Essential Terms 468Review Questions 468Multiple Choice Questions from CPA Examinations 469Discussion Questions and Problems 471Case 477Integrated Case Application—Pinnacle Manufacturing: Part IV 478ACL Problem 479Internet Problem 14-1: Point of Sales Systems Controls 47915. Audit Sampling for Tests of Controls and Substantive Tests of Transactions 481Learning Objectives 481Representative Samples 482Statistical Versus Nonstatistical Sampling and Probabilistic Versus Nonprobabilistic Sample Selection 483Nonprobabilistic Sample Selection Methods 484Probabilistic Sample Selection Methods 485Sampling for Exception Rates 488Application of Nonstatistical Audit Sampling 489Statistical Audit Sampling 505Sampling Distribution 505Application of Attributes Sampling 506Summary 512Essential Terms 512Review Questions 513Multiple Choice Questions from CPA Examinations 514Discussion Questions and Problems 516Case 520Integrated Case Application—Pinnacle Manufacturing: Part V 521Internet Problem 15-1: Applying Statistical Sampling 52316. Completing the Tests in the Sales and Collection Cycle: Accounts Receivable 525Learning Objectives 525Methodology for Designing Tests of Details of Balances 526Designing Tests of Details of Balances 533Confirmation of Accounts Receivable 539Developing Tests of Details Audit Program 545Essential Terms 548Review Questions 549Multiple Choice Questions from CPA Examinations 550Discussion Questions and Problems 552Case 557Integrated Case Application—Pinnacle Manufacturing: Part VI 558ACL Problem 560Internet Problem 16-1: Revenue Recognition 56017. Audit Sampling for Tests of Details of Balances 565Learning Objectives 565Comparisons of Audit Sampling for Tests of Details of Balances and for Tests of Controls and Substantive Tests of Transactions 566Nonstatistical Sampling 567Monetary Unit Sampling 576Variables Sampling 586Illustration Using Difference Estimation 592Summary 598Essential Terms 599Review Questions 599Multiple Choice Questions from CPA Examinations 601Discussion Questions and Problems 602Cases 606Internet Problem 17-1: Monetary Unit Sampling Considerations 607PART 4 Application of the Audit Process to Other Cycles18. Audit of the Payroll and Personnel Cycle 609Learning Objectives 609Accounts and Transactions in the Payroll and Personnel Cycle 610Business Functions in the Cycle and Related Documents and Records 610Methodology for Designing Tests of Controls and Substantive Tests of Transactions 614Methodology for Designing Tests of Details of Balances 619Summary 623Essential Terms 624Review Questions 624Multiple Choice Questions from CPA Examinations 625Discussion Questions and Problems 627Case 631Internet Problem 18-1: Accounts Payable Fraud 63219. Audit of the Acquisition and Payment Cycle: Tests of Controls,Substantive Tests of Transactions, and Accounts Payable 633Learning Objectives 633Accounts and Classes of Transactions in the Acquisition and Payment Cycle 634Business Functions in the Cycle and Related Documents and Records 634How E-Commerce Affects the Acquisition and Payment Cycle 638Methodology for Designing Tests of Controls and Substantive Tests of Transactions 639Methodology for Designing Tests of Details of Balances for Accounts Payable 645Summary 653Essential Terms 654Review Questions 655Multiple Choice Questions from CPA Examinations 656Discussion Questions and Problems 657Case 664Internet Problem 19-1: Managing the Accounts Payable Function 66620. Completing the Tests in the Acquisition and Payment Cycle:Verification of Selected Accounts 667Learning Objectives 667Types of Other Accounts in the Acquisition and Payment Cycle 668Audit of Property, Plant, and Equipment 668Audit of Prepaid Expenses 677Audit of Accrued Liabilities 679Audit of Income and Expense Accounts 681Summary 685Essential Terms 685Review Questions 685Multiple Choice Questions from CPA Examinations 686Discussion Questions and Problems 688Cases 691Internet Problem 20-1: Risks of Outsourcing the Payroll Function 69321. Audit of the Inventory and Warehousing Cycle 695Learning Objectives 695Business Functions in the Cycle and Related Documents and Records 696How E-Commerce Affects Inventory Management 698Parts of the Audit of Inventory 699Audit of Cost Accounting 701Analytical Procedures 704Methodology for Designing Tests of Details of Balances 705Physical Observation of Inventory 706Audit of Pricing and Compilation 709Integration of the Tests 713Summary 714Essential Terms 715Review Questions 715Multiple Choice Questions from CPA Examinations 716Discussion Questions and Problems 718Case 724Internet Problem 21-1: Using Inventory Count Specialists 72522. Audit of the Capital Acquisition and Repayment Cycle 727Learning Objectives 727Accounts in the Cycle 728Notes Payable 730Owners’ Equity 735Summary 741Essential Terms 741Review Questions 741Multiple Choice Questions from CPA Examinations 743Discussion Questions and Problems 743Internet Problem 22-1: Stock Exchange Requirements 74823. Audit of Cash Balances 749Learning Objectives 749Cash in the Bank and Transaction Cycles 750Types of Cash Accounts 752Audit of the General Cash Account 753Fraud-Oriented Procedures 760Audit of the Imprest Payroll Bank Account 765Audit of Imprest Petty Cash 765Summary 766Essential Terms 766Review Questions 767Multiple Choice Questions from CPA Examinations 768Discussion Questions and Problems 769Case 772Internet Problem 23-1: Automated Clearing House System for Electronic Funds Transfers 774PART 5 Completing the Audit24. Completing the Audit 777Learning Objectives 777Perform Additional Tests for Presentation and Disclosure 778Review for Contingent Liabilities and Commitments 779Review for Subsequent Events 784Final Evidence Accumulation 788Evaluate Results 791Issue the Audit Report 796Communicate with the Audit Committee and Management 796Subsequent Discovery of Facts 798Summary 799Essential Terms 799Review Questions 800Multiple Choice Questions from CPA Examinations 801Discussion Questions and Problems 803Case 807Internet Problem 24-1: Audit Committee Responsibilities 807PART 6 Other Assurance and Nonassurance Services25. Other Assurance Services 809Learning Objectives 809Review and Compilation Services 810Review of Interim Financial Information for Public Companies 814Attestation Engagements 815WebTrust Services 818SysTrust Services 820Prospective Financial Statements 820Agreed-Upon Procedures Engagements 823Other Audits or Limited Assurance Engagements 823Summary 827Essential Terms 827Review Questions 828Multiple Choice Questions from CPA Examinations 828Discussion Questions and Problems 830Internet Problem 25-1: Accounting and Review Services Committee 83426. Internal and Governmental Financial Auditing and Operational Auditing 835Learning Objectives 835Internal Financial Auditing 836Governmental Financial Auditing 839Operational Auditing 842Summary 850Essential Terms 850Review Questions 851Multiple Choice Questions from CPA, IIA, and CMA Examinations 852Cases 854Internet Problem 26-1: University Internal Audit Departments 858Appendix: ACL Installation and Instructions 859Index 865