Principles of Auditing & Other Assurance Services

Cover
Principles of Auditing & Other Assurance Services
About the Authors
Preface
Key Features of the Book
New to This Edition
Text Features
Instructor Supplements
Acknowledgments
Brief Contents
Contents
Chapter 1: The Role of the Public Accountant in the American Economy
What Are Assurance Services?
Attest Engagements
Assurance and Nonassurance Services
Financial Statement Audits
What Creates the Demand for Audits?
A Brief Summary of Major Auditing Developments
The Financial Crisis of 2008
Types of Audits
Types of Auditors
The Public Accounting Profession
American Institute of Certified Public Accountants
The CPA Examination
State Boards of Accountancy
Financial Accounting Standards Board
Governmental Accounting Standards Board
Federal Accounting Standards Advisory Board
The Public Company Accounting Oversight Board
Securities and Exchange Commission
The International Federation of Accountants
Other Types of Professional Services
Organization of the Public Accounting Profession
Industry Specialization
Responsibilities of the Professional Staff
Professional Development for Public Accounting Firm Personnel
Seasonal Fluctuations in Public Accounting Work
Relationships with Clients
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 1
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Case
Research and Discussion Case
Supplementary References
Chapter 2: Professional Standards
Auditing Standards
AICPA Generally Accepted Auditing Standards
PCAOB Auditing Standards
The Auditors’ Responsibility for Detecting Misstatements
Errors and Fraud
Compliance with Laws and Regulations
Auditors’ Reports
Public Company Audit Reports—Unqualified Opinion
Nonpublic Company Audit Reports—Unmodified Opinion
Auditors’ Reports with Modified Opinions
The Attestation Standards
Quality Control in CPA Firms
Regulation of Accounting Firms
Public Company Accounting Oversight Board
Peer Review and Inspections
International Accounting and Auditing Standards
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 2
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Case
Research and Discussion Case
Supplementary References
Chapter 3: Professional Ethics
The Nature of Ethics
What Are Ethical Dilemmas?
A Framework for Ethical Decisions
Making Ethical Decisions—A Professional Example
The Need for Professional Ethics
Professional Ethics in Public Accounting
The AICPA Code of Professional Conduct—Overall Structure
Preface of Code of Professional Conduct
Rules and Conceptual Frameworks of Code of Professional Conduct
Code of Professional Conduct: Applicability to Members in Public Practice
Independence
Individual vs. Firm Impaired Independence and the Nature of Covered Members
Independence Requirements for All Partners and Staff
Additional Independence Requirements for Covered Members
Overall Firm Independence Requirements
Additional Code of Professional Conduct Rules
Integrity and Objectivity Rule
General Standards Rule
Compliance with Standards Rule
Accounting Principles Rule
Acts Discreditable Rule
Contingent Fees Rule
Commissions and Referral Fees Rule
Advertising and Other Forms of Solicitation Rule
Confidential Client Information Rule
Form of Organization and Name Rule
Code of Professional Conduct: Applicability to Members in Business and Others
Members in Business
Other Members (Retired and Unemployed)
Enforcement of Professional Ethics
Ethics for Internal Auditors
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 3
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
AICPA Code of Professional Conduct Research Problems
In-Class Team Cases
Research and Discussion Case
Supplementary References
Chapter 4: Legal Liability of CPAs
The Scope of CPA Liability
Litigation Placed in Perspective
Sources of CPA Liability
CPAs’ Liability to Their Clients under Common Law
The Elements of Duty and Breach of Duty
The Element of Losses (Damages)
The Element of Causation (Proximate Cause)
Auditors’ Common Law Liability to Third Parties
Ultramares (Known User) Approach
Restatement of Torts (Foreseen User) Approach
Rosenblum (Foreseeable User) Approach
Summary of Third-Party Liability Approaches
Liability to Third Parties under Statutory Law
Securities Act of 1933
Securities Exchange Act of 1934
Comparison of the 1933 and 1934 Acts
Racketeer Influenced and Corrupt Organizations Act
Auditors’ Criminal Liability under the Securities Acts
Criminal Liability under Other Statutes
SEC and Public Company Accounting Oversight Board Regulation
CPAs’ Liability for Accounting and Review Services
CPAs’ Posture in the Age of Litigation
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 4
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Case
Research and Discussion Case
Chapter 5: Audit Evidence and Documentation
The Relationships among Audit Risk, Audit Evidence, and Financial Statement Assertions
Financial Statement Assertions
Audit Risk at the Account Balance, Class of Transaction, or Disclosure Level
Audit Risk Illustrated
Measuring Audit Risk
Audit Evidence
Types of Audit Procedures
Substantive Procedures
Types of Substantive Procedures
Analytical Procedures
Nature of Analytical Procedures
Timing of Analytical Procedures
Extent of Analytical Procedures
Data Analytics
Application of Data Analytics to Auditing
Audit Evidence for Subjective Areas
Evidence Regarding Accounting Estimates
Evidence Regarding Fair Values
Evidence Regarding Related Party Transactions
Audit Documentation
Confidential Nature of Working Papers
Ownership of Audit Working Papers
Working Papers and Auditors’ Liability
Types of Working Papers
Organization of Working Papers
Guidelines for Preparation of Working Papers
Computer-Generated Working Papers
Review of Audit Working Papers
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 5
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Case
Research and Discussion Case
Supplementary References
Chapter 6: Audit Planning, Understanding the Client, Assessing Risks, and Responding
The Audit Process
Obtaining Clients
Submitting a Proposal
Communication with Predecessor Auditors
Planning the Audit
Establish an Understanding with the Client
Develop an Overall Audit Strategy and Audit Plan
Use of the Client’s Staff
Involvement of More Than One CPA Firm
Use of Specialists
Additional First-Year Considerations
Obtaining an Understanding of the Client and Its Environment
Risk Assessment Procedures
Sources of Information
Determining Materiality
Assessing the Risks of Material Misstatement and Designing Further Audit Procedures
Assessing Risks of Material Misstatement
Addressing the Risks of Material Misstatement Due to Fraud
Designing Further Audit Procedures in Response to Assessed Risks
The Audit Trail and Directional Testing
Transaction Cycles (Classes of Transactions)
The Audit Plan’s Systems and Substantive Portions
The Systems (Internal Control) Portion of the Plan
The Substantive Procedures Portion of the Plan
Summary of the Relationship between Tests of Controls and Substantive Procedures
Objectives of Audit Plans
General Objectives of Audit Plans for Assets
Substantiation of Account Balances
Existence of Assets
Rights to the Assets
Establishing Completeness
Verifying the Cutoff
Valuation of Assets
Financial Statement Presentation and Disclosure
An Illustration of Audit Plan Design
Timing of Audit Work
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 6
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
Ethics Case
Appendix 6A: Audit Data Analytics
Steps Involved in Performing Audit Data Analytics
ADAs in Risk Assessment and Forming an Overall Conclusion
ADAs in Tests of Controls
ADAs in Substantive Analytical Procedures
ADAs in Substantive Tests of Details
Appendix 6B: Examples of Fraud Risk Factors
Risk Factors Relating to Misstatements Arising from Fraudulent Financial Reporting
Risk Factors Relating to Misstatements Arising from Misappropriation of Assets
Appendix 6C: Illustrative Audit Case: Keystone Computers & Networks Inc.
Part I: Audit Planning
Appendix 6C Problems
Chapter 7: Internal Control
The Meaning of Internal Control
The Foreign Corrupt Practices Act of 1977
Means of Achieving Internal Control
The Control Environment
Commitment to Integrity and Ethical Values
Effective Board of Directors
Effective Organizational Structure
Attracting, Developing, and Retaining Competent Employees
Individual Accountability
Risk Assessment
Control Activities
Performance Reviews
Transaction Control Activities
General Controls and Application Controls
Physical Controls
Segregation of Duties
Controls over Accounting Estimates
Fidelity Bonds
The Accounting Information System
Monitoring of Controls
Management Review Controls
Internal Audit Function
Limitations of Internal Control
Enterprise Risk Management
Corporate Governance and Its Relationship to Internal Control
Financial Statement Audits: The Role of Internal Control
Obtain an Understanding of the Client and Its Environment, Including Internal Control
Required Auditor Understanding of Internal Control Components
Areas Difficult to Control
Risk Assessment Procedures for Internal Control
Documenting the Understanding of Internal Control
Assess the Risks of Material Misstatement
Assess Risks at the Financial Statement Level
Assess Risks at the Relevant Assertion Level
Design and Perform Further Audit Procedures
Tests of Controls
Revise the Risk of Material Misstatement Based on the Results of Tests of Controls
Design and Perform Substantive Procedures
Effects of Data Analytics
Documentation
Decision Aids for Audit Plan Modification
Using the Work of Internal Auditors
Consideration of Outsourced Computer Processing to Service Organizations
Communication of Control-Related Matters
Internal Control Reporting by Public Companies and Their Auditors
Overall Approach to an Audit of Internal Control
Internal Control in the Small Company
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 7
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Case
Appendix 7A: Antifraud Programs and Control Measures
Chapter 8: Consideration of Internal Control in an Information Technology Environment
Nature of IT-Based Systems
Characteristics of Various Types of IT-Based Systems
Impact of IT on the Audit Trail
Internal Control in an IT Environment
Segregation of Duties
Computer-Based Fraud
Internal Auditing in an IT Environment
Control Activities in an IT System
General Control Activities
Application Control Activities
User Control Activities
Controls When Using Cloud Computing
Control in Decentralized and Single Workstation Environments
Monitoring in an IT Environment
The Auditors’ Consideration of Internal Control in an IT Environment
Obtaining an Understanding of IT-Based System Controls
Assessing the Risks of Material Misstatement
Tests of Controls
Evidence When Services Are Outsourced
Designing Substantive Procedures with Computers
Using Audit Software: An Illustration
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 8
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Case
Chapter 9: Audit Sampling
Comparison of Statistical and Nonstatistical Sampling
Selecting a Random Sample
Other Methods of Sample Selection
Stratification
Types of Statistical Sampling Plans
Allowance for Sampling Risk (Precision)
Sample Size
Audit Sampling for Tests of Controls
Sampling Risk for Tests of Controls
Attributes Sampling
Determine the Objective of the Test
Define the Attributes and Deviation Conditions
Define the Population
Specify the Risk of Assessing Control Risk Too Low and the Tolerable Deviation Rate
Estimate the Expected Population Deviation Rate
Determine the Sample Size
Select the Sample
Test the Sample Items
Evaluate the Sample Results
Document the Sampling Procedure
Detailed Illustration of Attributes Sampling
Other Statistical Attributes Sampling Approaches
Nonstatistical Attributes Sampling
Audit Sampling for Substantive Tests of Details
Sampling Risk for Substantive Tests of Details
Sample Size for Substantive Tests of Details
Variables Sampling Approaches Included in Modules 9A, 9B, and 9C
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 9, Including Modules and Appendix
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Cases
Module 9A: Monetary Unit Sampling (MUS)
Determination of Sample Size
Controlling Sampling Risk
Method of Sample Selection
Evaluation of Sample Results
Illustration of MUS
Considerations in Using Monetary Unit Sampling
Questions and Problems for Module A
Objective Questions
In-Class Team Case
Module 9B: Classical Variables Sampling
Mean-Per-Unit
Determination of Sample Size
Evaluation of Sample Results
Illustration of Mean-per-Unit Estimation
Difference and Ratio Estimation
Illustration of Difference and Ratio Estimation
Questions and Problems for Module 9B
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
Integrating Problem
Module 9C: Nonstatistical Sampling for Substantive Procedures
Illustration of Nonstatistical Sampling
Questions and Problems for Module 9C
Questions Requiring Analysis
Objective Questions
Review Questions
Problems
Appendix Audit Risk
Appendix Questions
Chapter 10: Cash and Financial Investments
Cash
Sources and Nature of Cash
The Auditors’ Objectives in the Audit of Cash
How Much Audit Time for Cash?
Internal Control over Cash Transactions
Internal Control over Cash Receipts
Internal Control over Cash Disbursements
Audit Documentation for Cash
Audit of Cash
Interim Audit Work on Cash
Financial Investments
The Need for Specialized Knowledge
The Auditors’ Objectives in Auditing Financial Investments
Internal Control over Financial Investments
Internal Control Questionnaire
Audit of Financial Investments
Risks of Material Misstatement of Financial Investments
Substantive Procedures for Financial Investments
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 10
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Cases
Research and Discussion Case
Ethics Case
Chapter 11: Accounts Receivable, Notes Receivable, and Revenue
Receivables and Revenue
Sources and Nature of Accounts Receivable
Sources and Nature of Notes Receivable
The Auditors’ Objectives in Auditing Receivables and Revenue
Internal Control of Accounts Receivable and Revenue
Control Environment
Risk Assessment
Revenue Cycle—Accounting System and Control Activities
Monitoring
Internal Control over Notes Receivable
Audit Documentation for Receivables and Revenue
Audit of Receivables and Revenue
Interim Audit Work on Receivables and Revenue
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 11
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Case
Ethics Cases
Appendix 11 AIllustrative Audit Case: Keystone Computers & Networks Inc.
Appendix 11A Problems
Part II: Consideration of Internal Control
Appendix 11 BIllustrative Audit Case: Keystone Computers & Networks Inc.
Part III: Substantive Tests—Accounts Receivable and Revenue
Appendix 11B Problems
Chapter 12: Inventories and Cost of Goods Sold
Inventories and Cost of Goods Sold
Sources and Nature of Inventories and Cost of Goods Sold
The Auditors’ Objectives in Auditing Inventories and Cost of Goods Sold
Internal Control over Inventories and Cost of Goods Sold
Control Environment
Risk Assessment
Monitoring
Purchases and Production Cycles—Accounting Systems and Control Activities
Audit Documentation for Inventories and Cost of Goods Sold
Audit of Inventories and Cost of Goods Sold
Problems Associated with Inventory of First-Year Audit Clients
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 12
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Case
Ethics Case
Research and Discussion Case
Chapter 13: Property, Plant, and Equipment: Depreciation and Depletion
Property, Plant, and Equipment
The Auditors’ Objectives in Auditing Property, Plant, and Equipment
Contrast with Audit of Current Assets
Internal Control over Plant and Equipment
Audit Documentation
Initial Audits and Repeat Engagements
Audit of Property, Plant, and Equipment
Depreciation
The Auditors’ Perspective toward Depreciation
The Auditors’ Objectives in Auditing Depreciation
Audit Program—Depreciation Expense and Accumulated Depreciation
Testing the Client’s Provision for Depreciation
Examination of Natural Resources
Audit of Intangible Assets
Audit of Plant, Equipment, and Intangibles in Advance of the Balance Sheet Date
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 13
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Case
Chapter 14: Accounts Payable and Other Liabilities
Accounts Payable
Sources and Nature of Accounts Payable
The Auditors’ Objectives in Auditing Accounts Payable
Internal Control over Accounts Payable
Audit Documentation for Accounts Payable
Audit of Accounts Payable
Other Liabilities
Amounts Withheld from Employees’ Pay
Sales Taxes Payable
Unclaimed Wages
Customers’ Deposits
Accrued Liabilities
Balance Sheet Presentation
Time of Examination
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 14
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Case
Appendix 14A: Illustrative Audit Case: Keystone Computers & Networks Inc.
Part IV: Consideration of Internal Control
Appendix 14A Problems
Chapter 15: Debt and Equity Capital
Debt
Source and Nature of Debt
The Auditors’ Objectives in Auditing Debt
Assessment of the Inherent Risks Related to Debt
Internal Control over Debt
Audit Documentation
Audit of Debt
Time of Examination—Debt
Equity Capital
Sources and Nature of Owners’ Equity
The Auditors’ Objectives in Auditing Owners’ Equity
Internal Control over Owners’ Equity
Audit Documentation for Owners’ Equity
Audit Plan—Capital Stock
Retained Earnings and Dividends
Financial Statement Presentation of Stockholders’ Equity
Time of Examination—Stockholders’ Equity
Audit of Partnerships and Sole Proprietorships
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 15
Review Questions
Questions Requiring Analysis
Objective Questions
Chapter 16: Auditing Operations and Completing the Audit
Auditing Operations
The Auditors’ Approach to Auditing Operations
Internal Control over Revenues and Expenses
Revenue
Relationship of Revenue to Balance Sheet Accounts
Miscellaneous Revenue
Expenses
Relationship of Expenses to Balance Sheet Accounts
Substantive Procedures for Selling, General, and Administrative Expenses
The Audit of Payroll
Internal Control over Payroll
Outsourcing the Payroll Function
Documentation of Internal Control for Payroll
Audit Plan for Payroll
Audit of the Statement of Cash Flows
Completing the Audit
Search for Unrecorded Liabilities
Review the Minutes of Meetings
Perform Final Analytical Procedures
Perform Procedures to Identify Loss Contingencies
Perform the Review for Subsequent Events
Obtain Representation Letter
Communicate Misstatements to Management
Evaluate Audit Findings
Review the Engagement
Responsibilities for Other Information
Other Information Included in Annual Reports
Required Supplementary Information
Supplementary Information in Relation to the Financial Statements as a Whole
Opinion Formulation and Report Issuance
Additional Communications
Post-Audit Responsibilities
The Auditors’ Subsequent Discovery of Facts Existing at the Date of Their Report
Subsequent Discovery of Omitted Audit Procedures
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 16
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Case
Research and Discussion Case
Supplementary References
Chapter 17: Auditors’ Reports
Financial Statements and Audit Reports with Unmodified (Unqualified) Opinions
Financial Statements
Financial Statement Disclosures
Comparative Financial Statements
Audit Reports with Unmodified Opinions—Nonpublic Clients
Audit Reports with Unqualified Opinions—Public Clients
Additional Information Disclosed under PCAOB Form AP
Expression of an Opinion
Reports with an Unmodified Opinion and Additional Financial Statement–Related Information Included
Substantial Doubt about a Company’s Going-Concern Status
Generally Accepted Accounting Principles Not Consistently Applied
Additional Financial Statement-Related Information Added—Auditor Discretionary Circumstances
Group Financial Statements
Modified Opinions
Materially Misstated Financial Statements (“Departures from GAAP”)
Inability to Obtain Sufficient Appropriate Audit Evidence (Scope Limitation)
Effects of Opinion Modification on Reporting of Key (Critical) Audit Matters
Additional Reporting Issues
Two or More Report Modifications
Reporting on Comparative Financial Statements
Reports to the SEC
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 17
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Cases
Research and Discussion Case
Chapter 18: Integrated Audits of Public Companies
Overview
Management’s Responsibility for Internal Control
Management’s Evaluation Process and Assessment
The Auditors’ Responsibility for Reporting on Internal Control in PCAOB Audits
Plan the Engagement
Use a Top-Down Approach to Identify Controls to Test
Test and Evaluate Design Effectiveness of Internal Control over Financial Reporting
Test and Evaluate Operating Effectiveness of Internal Control over Financial Reporting
Form an Opinion on the Effectiveness of Internal Control over Financial Reporting
Audit Report Modifications
Other Communication Requirements
Reporting on Whether a Previously Reported Material Weakness Continues to Exist
Integrated Audits for Nonpublic Companies
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 18
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Cases
Chapter 19: Additional Assurance Services: Historical Financial Information
Audit-Based Services: Assurance on Additional Information
Reporting on Compliance with Aspects of Contractual Agreements or Regulatory Requirements in Connection with Audited Financial Statements
Letters for Underwriters
Summary Financial Statements
Auditing Financial Statements That Use a Financial Reporting Framework Other Than GAAP
Audits of Financial Statements Prepared in Accordance with Special-Purpose Financial Reporting Frameworks
Financial Statements Prepared Using a Financial Reporting Framework Generally Accepted in Another Country
Additional GAAS Audits and Other Types of Assurance Engagements
Single Financial Statements and Specific Elements, Accounts, or Items of Financial Statements
Audits of Personal Financial Statements
Reviews of Historical Financial Statements
SSARS Reviews of Nonpublic Companies (Nonissuers)
PCAOB and Auditing Standards Board Reviews of Interim Information
Compilation and Preparation of Historical Financial Statements
Compilation of Financial Statements
Preparation of Financial Statements
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 19
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Case
Research and Discussion Case
Supplementary References
Chapter 20: Additional Assurance Services: Other Information
Assurance Services
The Demand for Assurance Services
Attestation Standards
The Criteria
Direct Reporting Without the Assertion
Attestation Risk and Materiality
The Character of the Engagement
Assurance Service Examples
Trust Services
System and Organization Controls (SOC) Engagements
Assurance on Sustainability Information
Assurance on Compliance
XBRL Engagements
Elder Care Services
Assurance on Prospective Financial Statements
Assurance on Management’s Discussion and Analysis
Future Assurance Services
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 20
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Case
Research and Discussion Case
Chapter 21: Internal, Operational, and Compliance Auditing
Internal Auditing
What Is the Purpose of Internal Auditing?
Evolution of Internal Auditing
The Internal Auditors’ Role in Sarbanes-Oxley Compliance
Professional Standards of Internal Auditing
Certification of Internal Auditors
Operational Auditing
Objectives of Operational Audits
General Approach to Operational Audits
Compliance Auditing
Attesting to Compliance with Laws and Regulations
Compliance Reporting by Broker-Dealers under PCAOB Requirements
Compliance Auditing of Government Entities and Organizations Receiving Federal Financial Assistance
Compliance Auditing—A Summary
Chapter Summary
Key Terms Introduced or Emphasized in Chapter 21
Review Questions
Questions Requiring Analysis
Objective Questions
Problems
In-Class Team Case
Appendix 21A: International Standards for the Practice of Internal Auditing
Attribute Standards
Performance Standards
Glossary
Appendix
Index