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Auditing and Assurance Services

by ; ;
Edition:
10th
ISBN13:

9780131457348

ISBN10:
0131457349
Format:
Hardcover
Pub. Date:
1/1/2005
Publisher(s):
Prentice Hall

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Summary

The undisputed #1 market leading book continues to be an innovative look at the most current changes and happenings in the auditing profession! Up-to-date discussions include Sarbanes Oxley, fraud, and recent corporate scandals. Specific coverage features the bankruptcy of Andersen, LLP; the shifting of auditing standards-setting to the Public Company Accounting Oversight Board (PCAOB); consulting spin-offs; and greater focus on internal controls. For individuals interested in the auditing, accounting, and consulting fields.

Table of Contents

Preface xv
PART 1 The Auditing Profession
The Demand for Audit and Other Assurance Services
3(22)
Learning Objectives
3(16)
Assurance Services
4(5)
Economic Demand for Auditing
9(2)
Nature of Auditing
11(2)
Distinction Between Auditing and Accounting
13(1)
Types of Audits
13(2)
Types of Auditors
15(2)
Certified Public Accountant
17(1)
Impact of E-Commerce on CPAs
18(1)
Summary
18(1)
Essential Terms
19(1)
Review Questions
19(1)
Multiple Choice Questions from CPA Examinations
20(1)
Discussion Questions and Problems
21(3)
Internet Problem 1-1: Assurance Services
24(1)
The CPA Profession
25(20)
Learning Objectives
25(15)
Certified Public Accounting Firms
26(1)
Activities of CPA Firms
27(1)
Structure of CPA Firms
28(2)
E-Commerce and CPA Firm Operations
30(1)
American Institute of Certified Public Accountants (AICPA)
30(2)
Sarbanes--Oxley Act and Public Company Accounting Oversight Board
32(1)
Securities and Exchange Commission
33(1)
Generally Accepted Auditing Standards
33(3)
Statements on Auditing Standards
36(1)
International Standards on Auditing
37(1)
Quality Control
37(2)
Summary
39(1)
Essential Terms
40(1)
Review Questions
40(1)
Multiple Choice Questions from CPA Examinations
41(1)
Discussion Questions and Problems
42(2)
Internet Problem 2-1: CPA Vision Project
44(1)
Audit Reports
45(28)
Learning Objectives
45(19)
Standard Unqualified Audit Report
46(3)
Unqualified Audit Report with Explanatory Paragraph or Modified Wording
49(4)
Departures from an Unqualified Audit Report
53(1)
Materiality
54(3)
Discussion of Conditions Requiring a Departure
57(3)
Auditor's Decision Process for Audit Reports
60(2)
Combined Reports on Financial Statements and Internal Control Over Financial Reporting
62(1)
Impact of E-Commerce on Audit Reporting
63(1)
Summary
64(1)
Essential Terms
64(1)
Review Questions
64(1)
Multiple Choice Questions from CPA Examinations
65(1)
Discussion Questions and Problems
66(6)
Internet Problem 3-1: Research Annual Reports
72(1)
Professional Ethics
73(34)
Learning Objectives
73(26)
What Are Ethics?
74(1)
Ethical Dilemmas
75(3)
Special Need for Ethical Conduct in Professions
78(2)
Code of Professional Conduct
80(3)
Independence
83(3)
Independence Rule of Conduct and Interpretations
86(4)
Other Rules of Conduct
90(7)
Enforcement
97(2)
Summary
99(1)
Essential Terms
99(1)
Review Questions
100(1)
Multiple Choice Questions from CPA Examinations
100(1)
Discussion Questions and Problems
101(3)
Cases
104(2)
Internet Problem 4-1: AICPA Code of Professional Conduct---Ethics Rulings and Case
106(1)
Legal Liability
107(26)
Learning Objectives
107(18)
Changed Legal Environment
108(1)
Distinction Among Business Failure, Audit Failure, and Audit Risk
109(1)
Legal Concepts Affecting Liability
110(2)
Liability to Clients
112(2)
Liability to Third Parties Under Common Law
114(3)
Civil Liability Under the Federal Securities Laws
117(4)
Criminal Liability
121(1)
The Professional's Response to Legal Liability
122(2)
Protecting Individual CPAs from Legal Liability
124(1)
Summary
125(1)
Essential Terms
125(1)
Review Questions
126(1)
Multiple Choice Questions from CPA Examinations
127(1)
Discussion Questions and Problems
128(3)
Case
131(1)
Internet Problem 5-1: SEC Enforcement
131(2)
PART 2 The Audit Process
Audit Responsibilities and Objectives
133(28)
Learning Objectives
133(20)
Objective of Conducting an Audit of Financial Statements
134(1)
Management's Responsibilities
135(1)
Auditor's Responsibilities
136(3)
Financial Statement Cycles
139(5)
Setting Audit Objectives
144(2)
Transaction-Related Audit Objectives
146(2)
Balance-Related Audit Objectives
148(2)
How Audit Objectives Are Met
150(2)
Summary
152(1)
Essential Terms
153(1)
Review Questions
153(1)
Multiple Choice Questions from CPA Examinations
154(1)
Discussion Questions and Problems
155(4)
Case
159(1)
Internet Problem 6-1: Assertions and Evidence Associated with New Assurance Services
160(1)
Audit Evidence
161(32)
Learning Objectives
161(22)
Nature of Evidence
162(1)
Audit Evidence Decisions
163(1)
Persuasiveness of Evidence
164(3)
Types of Audit Evidence
167(7)
Audit Documentation
174(9)
Summary of Audit Documentation
183(1)
Essential Terms
183(1)
Review Questions
184(1)
Multiple Choice Questions from CPA Examinations
185(1)
Discussion Questions and Problems
186(3)
Cases
189(3)
Internet Problem 7-1: Electronic Evidence
192(1)
Audit Planning and Analytical Procedures
193(38)
Learning Objectives
193(24)
Planning
194(1)
Accept Client and Perform Initial Audit Planning
194(5)
Understand the Client's Business and Industry
199(5)
Assess Client Business Risk
204(1)
Perform Preliminary Analytical Procedures
205(2)
Summary of the Purposes of Audit Planning
207(1)
Analytical Procedures
208(1)
Five Types of Analytical Procedures
209(6)
Common Financial Ratios
215(2)
Summary of Analytical Procedures
217(1)
Essential Terms
217(1)
Review Questions
217(1)
Multiple Choice Questions from CPA Examinations
218(2)
Discussion Questions and Problems
220(4)
Cases
224(3)
Integrated Case Application---Pinnacle Manufacturing: Part I
227(2)
Internet Problem 8-1: Industry Research and Client Acceptance
229(1)
Internet Problem 8-2: Obtain Client Background Information
229(2)
Materiality and Risk
231(38)
Learning Objectives
231(24)
Materiality
232(1)
Set Preliminary Judgment about Materiality
233(3)
Allocate Preliminary Judgment about Materiality to Segments (Tolerable Misstatement)
236(2)
Estimate Misstatement and Compare with Preliminary Judgment
238(1)
Risk
239(2)
Types of Risks
241(2)
Assessing Acceptable Audit Risk
243(2)
Assessing Inherent Risk
245(3)
Relationship of Risks to Evidence and Factors Influencing Risks
248(4)
Evaluating Results
252(3)
Essential Terms
255(1)
Review Questions
255(1)
Multiple Choice Questions from CPA Examinations
256(2)
Discussion Questions and Problems
258(5)
Cases
263(3)
Integrated Case Application---Pinnacle Manufacturing: Part II
266(1)
Internet Problem 9-1: Materiality and Tolerable Misstatement
267(2)
Internal Control and Control Risk
269(40)
Learning Objectives
269(27)
Client and Auditor Concerns
270(3)
Effect of Information Technology on Internal Control
273(1)
Components of Internal Control
273(10)
Procedures to Obtain an Understanding of Internal Control
283(4)
Assess Control Risk
287(5)
Tests of Controls
292(3)
Decide Planned Detection Risk and Design Substantive Tests
295(1)
Reporting on Internal Control
295(1)
Summary
296(1)
Essential Terms
296(3)
Review Questions
299(1)
Multiple Choice Questions from CPA Examinations
300(1)
Discussion Questions and Problems
301(3)
Case
304(2)
Integrated Case Application---Pinnacle Manufacturing: Part III
306(1)
Internet Problem 10-1: Corporate Governance
307(2)
Fraud Auditing
309(32)
Learning Objectives
309(24)
Types of Fraud
310(1)
Conditions for Fraud
311(4)
Assessing the Risk of Fraud
315(3)
Corporate Governance Oversight to Reduce Fraud Risks
318(5)
Responding to the Risk of Fraud
323(1)
Specific Fraud Risk Areas
324(6)
Responsibilities when Fraud is Suspected
330(3)
Summary
333(1)
Essential Terms
333(1)
Review Questions
333(1)
Multiple Choice Questions from CPA Examinations
334(1)
Discussion Questions and Problems
335(3)
Case
338(1)
Internet Problem 11-1: Fraud Best Practices
339(2)
The Impact of Information Technology on the Audit Process
341(28)
Learning Objectives
341(18)
How Information Technologies Enhance Internal Control
342(1)
Assessing Risks of Information Technology
343(1)
Internal Controls Specific to Information Technology
344(6)
Impact of Information Technology on the Audit Process
350(5)
Issues for Different IT Environments
355(4)
Summary
359(1)
Essential Terms
359(1)
Review Questions
360(1)
Multiple Choice Questions from CPA Examinations
361(1)
Discussion Questions and Problems
362(5)
Case
367(1)
Internet Problem 12-1: COBIT
368(1)
Overall Audit Plan and Audit Program
369(34)
Learning Objectives
369(23)
Types of Tests
370(4)
Selecting Which Types of Tests to Perform
374(3)
Impact of Information Technology on Audit Testing
377(1)
Evidence Mix
378(1)
Design of the Audit Program
379(9)
Summary of Key Evidence-Related Terms
388(1)
Summary of the Audit Process
389(3)
Essential Terms
392(1)
Review Questions
392(1)
Multiple Choice Questions from CPA Examinations
393(1)
Discussion Questions and Problems
394(5)
Cases
399(2)
Internet Problem 13-1: Assessing Effects of Evidence Mix
401(2)
PART 3 Application of the Audit Process to the Sales and Collection Cycle
Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions
403(34)
Learning Objectives
403(22)
Accounts and Classes of Transactions in the Sales and Collection Cycle
404(1)
Business Functions in the Cycle and Related Documents and Records
405(5)
Methodology for Designing Tests of Controls and Substantive Tests of Transactions for Sales
410(9)
Sales Returns and Allowances
419(1)
Methodology for Designing Tests of Controls and Substantive Tests of Transactions for Cash Receipts
420(4)
Audit Tests for Uncollectible Accounts
424(1)
Additional Internal Controls over Account Balances
425(1)
Effect of Results of Tests of Controls and Substantive Tests of Transactions
425(1)
Summary
426(11)
Essential Terms
426(1)
Review Questions
427(1)
Multiple Choice Questions from CPA Examinations
428(1)
Discussion Questions and Problems
429(5)
Case
434(1)
Integrated Case Application---Pinnacle Manufacturing: Part IV
435(1)
Internet Problem 14-1: Electronic Signatures
435(2)
Audit Sampling for Tests of Controls and Substantive Tests of Transactions
437(38)
Learning Objectives
437(29)
Representative Samples
438(1)
Statistical Versus Nonstatistical Sampling and Probabilistic Versus Nonprobabilistic Sample Selection
439(1)
Nonprobabilistic Sample Selection Methods
440(1)
Probabilistic Sample Selection Methods
441(2)
Sampling for Exception Rates
443(2)
Application of Nonstatistical Audit Sampling
445(14)
Statistical Audit Sampling
459(1)
Sampling Distribution
459(1)
Application of Attributes Sampling
460(6)
Essential Terms
466(1)
Review Questions
467(1)
Multiple Choice Questions from CPA Examinations
468(1)
Discussion Questions and Problems
469(3)
Case
472(1)
Integrated Case Application---Pinnacle Manufacturing: Part V
473(1)
Internet Problem 15-1: Sampling for U.S. Census
474(1)
Completing the Tests in the Sales and Collection Cycle: Accounts Receivable
475(36)
Learning Objectives
475(22)
Methodology for Designing Tests of Details of Balances
476(7)
Designing Tests of Details of Balances
483(6)
Confirmation of Accounts Receivable
489(5)
Developing Tests of Details Audit Program
494(3)
Essential Terms
497(1)
Review Questions
497(1)
Multiple Choice Questions from CPA Examinations
498(1)
Discussion Questions and Problems
499(6)
Case
505(1)
Integrated Case Application---Pinnacle Manufacturing: Part VI
505(1)
Internet Problem 16-1: Revenue Recognition
506(5)
Audit Sampling for Tests of Details of Balances
511(40)
Learning Objectives
511(31)
Comparisons of Audit Sampling for Tests of Details of Balances and for Tests of Controls and Substantive Tests of Transactions
512(1)
Nonstatistical Sampling
512(9)
Monetary Unit Sampling
521(10)
Variables Sampling
531(5)
Illustration Using Difference Estimation
536(6)
Essential Terms
542(1)
Review Questions
542(2)
Multiple Choice Questions from CPA Examinations
544(1)
Discussion Questions and Problems
545(3)
Cases
548(1)
Internet Problem 17-1: Audit Sampling Strategies
549(2)
PART 4 Application of the Audit Process to Other Cycles
Audit of the Payroll and Personnel Cycle
551(22)
Learning Objectives
551(14)
Accounts and Transactions in the Payroll and Personnel Cycle
552(1)
Business Functions in the Cycle and Related Documents and Records
552(4)
Methodology for Designing Tests of Controls and Substantive Tests of Transactions
556(5)
Methodology for Designing Tests of Details of Balances
561(3)
Summary
564(1)
Essential Terms
565(1)
Review Questions
565(1)
Multiple Choice Questions from CPA Examinations
566(1)
Discussion Questions and Problems
567(3)
Case
570(1)
Internet Problem 18-1: Outsourcing the Payroll Function
571(2)
Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable
573(30)
Learning Objectives
573(19)
Accounts and Classes of Transactions in the Acquisition and Payment Cycle
574(1)
Business Functions in the Cycle and Related Documents and Records
574(4)
How E-Commerce Affects the Acquisition and Payment Cycle
578(1)
Methodology for Designing Tests of Controls and Substantive Tests of Transactions
578(6)
Methodology for Designing Tests of Details of Balances for Accounts Payable
584(7)
Summary
591(1)
Essential Terms
592(1)
Review Questions
593(1)
Multiple Choice Questions from CPA Examinations
594(1)
Discussion Questions and Problems
595(5)
Case
600(2)
Internet Problem 19-1: Managing the Accounts Payable Function
602(1)
Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts
603(26)
Learning Objectives
603(17)
Types of Other Accounts in the Acquisition and Payment Cycle
604(1)
Audit of Property, Plant, and Equipment
604(8)
Audit of Prepaid Expenses
612(2)
Audit of Accrued Liabilities
614(2)
Audit of Income and Expense Accounts
616(4)
Summary
620(1)
Essential Terms
620(1)
Review Questions
620(1)
Multiple Choice Questions from CPA Examinations
621(1)
Discussion Questions and Problems
622(2)
Cases
624(2)
Internet Problem 20-1: Managing Fixed Assets
626(3)
Audit of the Inventory and Warehousing Cycle
629(28)
Learning Objectives
629(19)
Business Functions in the Cycle and Related Documents and Records
630(3)
How E-Commerce Affects Inventory Management
633(1)
Parts of the Audit of Inventory
633(2)
Audit of Cost Accounting
635(3)
Analytical Procedures
638(1)
Methodology for Designing Tests of Details of Balances
638(2)
Physical Observation of Inventory
640(3)
Audit of Pricing and Compilation
643(3)
Integration of the Tests
646(1)
Summary
647(1)
Essential Terms
648(1)
Review Questions
648(1)
Multiple Choice Questions from CPA Examinations
649(1)
Discussion Questions and Problems
650(5)
Case
655(1)
Internet Problem 21-1: Using Inventory Count Specialists
656(1)
Audit of the Capital Acquisition and Repayment Cycle
657(20)
Learning Objectives
657(14)
Accounts in the Cycle
658(2)
Notes Payable
660(5)
Owners' Equity
665(5)
E-Commerce and Capital Acquisition
670(1)
Summary
671(1)
Essential Terms
671(1)
Review Questions
671(1)
Multiple Choice Questions from CPA Examinations
672(1)
Discussion Questions and Problems
673(3)
Internet Problem 22-1: Stock Exchange Requirements
676(1)
Audit of Cash Balances
677(26)
Learning Objectives
677(17)
Cash in the Bank and Transaction Cycles
678(2)
Types of Cash Accounts
680(1)
Audit of the General Cash Account
681(7)
Fraud-Oriented Procedures
688(5)
Audit of the Imprest Payroll Bank Account
693(1)
Audit of Imprest Petty Cash
693(1)
Summary
694(1)
Essential Terms
694(1)
Review Questions
695(1)
Multiple Choice Questions from CPA Examinations
696(1)
Discussion Questions and Problems
696(4)
Case
700(1)
Internet Problem 23-1: Electronic Money
701(2)
PART 5 Completing the Audit
Completing the Audit
703(28)
Learning Objectives
703(20)
Review for Contingent Liabilities and Commitments
704(5)
Review for Subsequent Events
709(2)
Final Evidence Accumulation
711(4)
Evaluate Results
715(4)
Issue the Audit Report
719(1)
Communicate with the Audit Committee and Management
720(1)
Subsequent Discovery of Facts
721(2)
Essential Terms
723(1)
Review Questions
723(1)
Multiple Choice Questions from CPA Examinations
724(2)
Discussion Questions and Problems
726(3)
Case
729(1)
Internet Problem 24-1: Subsequent Events
729(2)
PART 6 Other Assurance and Nonassurance Services
Other Assurance Services
731(28)
Learning Objectives
731(20)
Attestation Engagements
732(3)
WebTrust Services
735(2)
SysTrust Services
737(1)
Prospective Financial Statements
737(3)
Agreed-Upon Procedures Engagements
740(1)
Review and Compilation Services
740(5)
Review of Interim Financial Information for Public Companies
745(1)
Other Audits or Limited Assurance Engagements
746(4)
Summary
750(1)
Essential Terms
751(1)
Review Questions
752(1)
Multiple Choice Questions from CPA Examinations
752(2)
Discussion Questions and Problems
754(4)
Internet Problem 25-1: Reporting on Quarterly Financial Information
758(1)
Internal and Governmental Financial Auditing and Operational Auditing
759(24)
Learning Objectives
759(15)
Internal Financial Auditing
760(3)
Governmental Financial Auditing
763(3)
Operational Auditing
766(8)
Summary
774(1)
Essential Terms
774(1)
Review Questions
775(1)
Multiple Choice Questions from CPA, IIA, and CMA Examinations
776(2)
Cases
778(3)
Internet Problem 26-1: Institute of Internal Auditors
781(2)
Index 783

Excerpts

OBJECTIVE Auditing and Assurance Services: An Integrated Approachis an introduction to auditing and other assurance services for students who have not had significant experience in providing such services. It is intended for either a one-quarter or one-semester course at the undergraduate or graduate level. This book is also appropriate for introductory professional development courses for CPA firms, internal auditors, and government auditors. The primary emphasis in this text is on the auditor's decision-making process. We believe that the most fundamental concepts in auditing relate to determining the nature and amount of evidence the auditor should accumulate after considering the unique circumstances of each engagement. If a student of auditing understands the objectives to be accomplished in a given audit area, the circumstances of the engagement, and the decisions to be made, he or she should be able to determine the appropriate evidence to gather and how to evaluate the evidence obtained. Thus, as the title of this book reflects, our purpose is to integrate the most important concepts of auditing and other assurance services as well as certain practical aspects in a logical manner to assist students in understanding audit decision making and evidence accumulation. For example, internal control is integrated into each of the chapters dealing with a particular functional area and is related to tests of controls and substantive tests of transactions; tests of controls and substantive tests of transactions are, in turn, related to the tests of details of financial statement balances for the area; and audit sampling is applied to the accumulation of audit evidence rather than treated as a separate topic. Technology, e-commerce, and fraud issues are integrated throughout the chapters. MOST IMPORTANT CHANGES IN THE TENTH EDITION Chapter 11 On Fraud Auditing and Expanded Fraud Coverage A new chapter on fraud auditing provides expanded coverage of the auditor's responsibility for assessing the risk of fraud and detecting material misstatements due to fraud based on the fraud triangle in SAS 99. The chapter includes coverage of corporate governance and other factors that reduce fraud risk. Specific fraud risk areas and procedures to detect fraud are also discussed. Most other text chapters include new vignettes highlighting specific examples of fraud. Coverage of Sarbanes-Oxley Act and Related PCAOB and SEC Rules The requirements of the Sarbanes-Oxley Act and implementing rules adopted by the PCAOB and SEC are integrated throughout the text. The effects of the Act on the accounting profession are discussed in Chapter 2, and revised SEC independence requirements are described in Chapter 4 on professional ethics. Chapter 3 on audit reports includes an example of reporting on internal control required for public companies by the Sarbanes-Oxley Act, and evidence requirements for reporting on internal control are included in Chapter 10 on internal control. Additional requirements of the Act are incorporated throughout the text. Hillsburg Hardware Annual Report The annual report for the Hillsburg Hardware Company is included as a four-color insert to the text. Financial statements and other information included in the annual report are used in examples throughout the text to illustrate chapter concepts. Pinnacle Manufacturing Integrated Case Example The Pinnacle Manufacturing integrated case has been modified to represent a larger, multi-division company, and expanded from four to six parts. Each part of the case is included at the end of the chapter to which that part relates. The parts of the case are connected so that students will gain a better understanding of how the parts of the audit are interrelated and integrated by the audit process. Internet Problems and Margin Links All chapters include an Internet-based case/homewor


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