Auditing and Assurance Services: An Integrated Approach

by Arens, Alvin A; Elder, Randal J; Beasley, Mark

• ISBN13: 9780131867123
• ISBN10: 0131867121
• Edition: 11th
• Format: Hardcover
• Copyright: 2006-01-01
• Publisher: Prentice Hall

Summary

Theundisputed #1 market leading bookcontinues to be an innovative look at the most current changes and happenings in the auditing profession! Topics appear as they would during the audit planning and execution stage rather than as isolated pieces of information.Fraud detection; integration of SECTION 404 of the Sarbanes-Oxley Act of 2002 and related SEC and PCAOB rulemakings; internal controls -- Internal Control and Control Risk.For individuals interested in the auditing, accounting, and consulting fields.

Table of Contents

Preface	xii
PART 1 The Auditing Profession
The Demand for Audit and Other Assurance Services	3	(22)
Learning Objectives	3	(15)
Nature of Auditing	4	(2)
Distinction Between Auditing and Accounting	6	(1)
Economic Demand for Auditing	6	(2)
Assurance Services	8	(6)
Types of Audits	14	(1)
Types of Auditors	15	(2)
Certified Public Accountant	17	(1)
Summary	18	(1)
Essential Terms	18	(1)
Review Questions	19	(1)
Multiple Choice Questions from CPA Examinations	19	(1)
Discussion Questions and Problems	20	(3)
Internet Problem 1-1: Assurance Services	23	(2)
The CPA Profession	25	(20)
Learning Objectives	25	(14)
Certified Public Accounting Firms	26	(1)
Activities of CPA Firms	27	(1)
Structure of CPA Firms	28	(2)
Sarbanes--Oxley Act and Public Company Accounting Oversight Board	30	(1)
Securities and Exchange Commission	31	(1)
American Institute of Certified Public Accountants (AICPA)	32	(1)
Generally Accepted Auditing Standards	33	(3)
Statements on Auditing Standards	36	(1)
International Standards on Auditing	36	(1)
Quality Control	37	(2)
Summary	39	(1)
Essential Terms	39	(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)
Combined Reports on Financial Statements and Internal Control Over Financial Reporting	49	(2)
Unqualified Audit Report with Explanatory Paragraph or Modified Wording	51	(3)
Departures from an Unqualified Audit Report	54	(2)
Materiality	56	(2)
Discussion of Conditions Requiring a Departure	58	(4)
Auditor's Decision Process for Audit Reports	62	(2)
Impact of E-Commerce on Audit Reporting	64	(1)
Summary	64	(1)
Essential Terms	64	(1)
Review Questions	65	(1)
Multiple Choice Questions from CPA Examinations	66	(1)
Discussion Questions and Problems	67	(5)
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	99	(1)
Multiple Choice Questions from CPA Examinations	99	(2)
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 Profession'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)
Section 404 Audits of Internal Control and Control Risk	269	(44)
Learning Objectives	269	(31)
Internal Control Objectives	270	(1)
Management and Auditor Responsibilities Related to Internal Control	271	(3)
COSO Components of Internal Control	274	(9)
Obtain and Document 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)
Section 404 Reporting on Internal Control	295	(2)
Evaluating, Reporting, and Testing Internal Control for Nonpublic Company	297	(2)
Summary	299	(1)
Essential Terms	300	(1)
Review Questions	301	(2)
Multiple Choice Questions from CPA Examinations	303	(1)
Discussion Questions and Problems	304	(5)
Case	309	(1)
Integrated Case Application---Pinnacle Manufacturing: Part III	310	(2)
Internet Problem 10-1: Corporate Governance	312	(1)
Fraud Auditing	313	(32)
Learning Objectives	313	(24)
Types of Fraud	314	(1)
Conditions for Fraud	315	(4)
Assessing the Risk of Fraud	319	(3)
Corporate Governance Oversight to Reduce Fraud Risks	322	(5)
Responding to the Risk of Fraud	327	(2)
Specific Fraud Risk Areas	329	(5)
Responsibilities when Fraud is Suspected	334	(3)
Summary	337	(1)
Essential Terms	337	(1)
Review Questions	338	(1)
Multiple Choice Questions from CPA Examinations	338	(2)
Discussion Questions and Problems	340	(2)
Case	342	(1)
Internet Problem 11-1: Fraud Best Practices	343	(2)
The Impact of Information Technology on the Audit Process	345	(30)
Learning Objectives	345	(19)
How Information Technologies Enhance Internal Control	346	(1)
Assessing Risks of Information Technology	347	(1)
Internal Controls Specific to Information Technology	348	(6)
Impact of Information Technology on the Audit Process	354	(5)
Issues for Different IT Environments	359	(4)
Summary	363	(1)
Essential Terms	364	(1)
Review Questions	364	(1)
Multiple Choice Questions from CPA Examinations	365	(1)
Discussion Questions and Problems	366	(5)
Case	371	(2)
Internet Problem 12-1: COBIT	373	(2)
Overall Audit Plan and Audit Program	375	(34)
Learning Objectives	375	(23)
Types of Tests	376	(4)
Selecting Which Types of Tests to Perform	380	(3)
Impact of Information Technology on Audit Testing	383	(1)
Evidence Mix	384	(1)
Design of the Audit Program	385	(9)
Summary of Key Evidence-Related Terms	394	(1)
Summary of the Audit Process	395	(3)
Essential Terms	398	(1)
Review Questions	398	(1)
Multiple Choice Questions from CPA Examinations	399	(2)
Discussion Questions and Problems	401	(4)
Cases	405	(2)
Internet Problem 13-1: Assessing Effects of Evidence Mix	407	(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	409	(34)
Learning Objectives	409	(23)
Accounts and Classes of Transactions in the Sales and Collection Cycle	410	(1)
Business Functions in the Cycle and Related Documents and Records	411	(5)
Methodology for Designing Tests of Controls and Substantive Tests of Transactions for Sales	416	(9)
Sales Returns and Allowances	425	(1)
Methodology for Designing Tests of Controls and Substantive Tests of Transactions for Cash Receipts	426	(4)
Audit Tests for Uncollectible Accounts	430	(1)
Additional Internal Controls over Account Balances	431	(1)
Effect of Results of Tests of Controls and Substantive Tests of Transactions	431	(1)
Summary	432	(1)
Essential Terms	432	(1)
Review Questions	433	(1)
Multiple Choice Questions from CPA Examinations	434	(1)
Discussion Questions and Problems	435	(5)
Case	440	(1)
Integrated Case Application---Pinnacle Manufacturing: Part IV	441	(1)
Internet Problem 14-1: Electronic Signatures	441	(2)
Audit Sampling for Tests of Controls and Substantive Tests of Transactions	443	(40)
Learning Objectives	443	(29)
Representative Samples	444	(1)
Statistical Versus Nonstatistical Sampling and Probabilistic Versus Nonprobabilistic Sample Selection	445	(1)
Nonprobabilistic Sample Selection Methods	446	(1)
Probabilistic Sample Selection Methods	447	(2)
Sampling for Exception Rates	449	(2)
Application of Nonstatistical Audit Sampling	451	(15)
Statistical Audit Sampling	466	(1)
Sampling Distribution	466	(1)
Application of Attributes Sampling	467	(5)
Essential Terms	472	(1)
Review Questions	473	(1)
Multiple Choice Questions from CPA Examinations	474	(1)
Discussion Questions and Problems	475	(4)
Case	479	(1)
Integrated Case Application---Pinnacle Manufacturing: Part V	479	(2)
Internet Problem 15-1: Sampling for U.S. Census	481	(2)
Completing the Tests in the Sales and Collection Cycle: Accounts Receivable	483	(36)
Learning Objectives	483	(22)
Methodology for Designing Tests of Details of Balances	484	(7)
Designing Tests of Details of Balances	491	(6)
Confirmation of Accounts Receivable	497	(5)
Developing Tests of Details Audit Program	502	(3)
Essential Terms	505	(1)
Review Questions	505	(1)
Multiple Choice Questions from CPA Examinations	506	(1)
Discussion Questions and Problems	507	(6)
Case	513	(1)
Integrated Case Application---Pinnacle Manufacturing: Part VI	513	(1)
Internet Problem 16-1: Revenue Recognition	514	(5)
Audit Sampling for Tests of Details of Balances	519	(40)
Learning Objectives	519	(31)
Comparisons of Audit Sampling for Tests of Details of Balances and for Tests of Controls and Substantive Tests of Transactions	520	(1)
Nonstatistical Sampling	520	(9)
Monetary Unit Sampling	529	(10)
Variables Sampling	539	(5)
Illustration Using Difference Estimation	544	(6)
Essential Terms	550	(1)
Review Questions	550	(2)
Multiple Choice Questions from CPA Examinations	552	(1)
Discussion Questions and Problems	553	(3)
Cases	556	(1)
Internet Problem 17-1: Audit Sampling Strategies	557	(2)
PART 4 Application of the Audit Process to Other Cycles
Audit of the Payroll and Personnel Cycle	559	(22)
Learning Objectives	559	(14)
Accounts and Transactions in the Payroll and Personnel Cycle	560	(1)
Business Functions in the Cycle and Related Documents and Records	560	(4)
Methodology for Designing Tests of Controls and Substantive Tests of Transactions	564	(5)
Methodology for Designing Tests of Details of Balances	569	(4)
Summary	573	(1)
Essential Terms	573	(1)
Review Questions	573	(1)
Multiple Choice Questions from CPA Examinations	574	(1)
Discussion Questions and Problems	575	(3)
Case	578	(1)
Internet Problem 18-1: Outsourcing the Payroll Function	579	(2)
Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable	581	(30)
Learning Objectives	581	(19)
Accounts and Classes of Transactions in the Acquisition and Payment Cycle	582	(1)
Business Functions in the Cycle and Related Documents and Records	582	(4)
How E-Commerce Affects the Acquisition and Payment Cycle	586	(1)
Methodology for Designing Tests of Controls and Substantive Tests of Transactions	586	(6)
Methodology for Designing Tests of Details of Balances for Accounts Payable	592	(7)
Summary	599	(1)
Essential Terms	600	(1)
Review Questions	601	(1)
Multiple Choice Questions from CPA Examinations	602	(1)
Discussion Questions and Problems	603	(5)
Case	608	(2)
Internet Problem 19-1: Managing the Accounts Payable Function	610	(1)
Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts	611	(26)
Learning Objectives	611	(17)
Types of Other Accounts in the Acquisition and Payment Cycle	612	(1)
Audit of Property, Plant, and Equipment	612	(8)
Audit of Prepaid Expenses	620	(2)
Audit of Accrued Liabilities	622	(2)
Audit of Income and Expense Accounts	624	(4)
Summary	628	(1)
Essential Terms	628	(1)
Review Questions	628	(1)
Multiple Choice Questions from CPA Examinations	629	(1)
Discussion Questions and Problems	630	(2)
Cases	632	(2)
Internet Problem 20-1: Managing Fixed Assets	634	(3)
Audit of the Inventory and Warehousing Cycle	637	(28)
Learning Objectives	637	(19)
Business Functions in the Cycle and Related Documents and Records	638	(3)
How E-Commerce Affects Inventory Management	641	(1)
Parts of the Audit of Inventory	641	(2)
Audit of Cost Accounting	643	(3)
Analytical Procedures	646	(1)
Methodology for Designing Tests of Details of Balances	646	(2)
Physical Observation of Inventory	648	(3)
Audit of Pricing and Compilation	651	(3)
Integration of the Tests	654	(1)
Summary	655	(1)
Essential Terms	656	(1)
Review Questions	656	(1)
Multiple Choice Questions from CPA Examinations	657	(1)
Discussion Questions and Problems	658	(5)
Case	663	(1)
Internet Problem 21-1: Using Inventory Count Specialists	664	(1)
Audit of the Capital Acquisition and Repayment Cycle	665	(20)
Learning Objectives	665	(14)
Accounts in the Cycle	666	(2)
Notes Payable	668	(5)
Owners' Equity	673	(5)
E-Commerce and Capital Acquisition	678	(1)
Summary	679	(1)
Essential Terms	679	(1)
Review Questions	679	(1)
Multiple Choice Questions from CPA Examinations	680	(1)
Discussion Questions and Problems	681	(3)
Internet Problem 22-1: Stock Exchange Requirements	684	(1)
Audit of Cash Balances	685	(26)
Learning Objectives	685	(17)
Cash in the Bank and Transaction Cycles	686	(2)
Types of Cash Accounts	688	(1)
Audit of the General Cash Account	689	(7)
Fraud-Oriented Procedures	696	(5)
Audit of the Imprest Payroll Bank Account	701	(1)
Audit of Imprest Petty Cash	701	(1)
Summary	702	(1)
Essential Terms	702	(1)
Review Questions	703	(1)
Multiple Choice Questions from CPA Examinations	704	(1)
Discussion Questions and Problems	704	(4)
Case	708	(1)
Internet Problem 23-1: Electronic Money	709	(2)
PART 5 Completing the Audit
Completing the Audit	711	(30)
Learning Objectives	711	(20)
Review for Contingent Liabilities and Commitments	712	(5)
Review for Subsequent Events	717	(3)
Final Evidence Accumulation	720	(3)
Evaluate Results	723	(5)
Issue the Audit Report	728	(1)
Communicate with the Audit Committee and Management	728	(2)
Subsequent Discovery of Facts	730	(1)
Essential Terms	731	(1)
Review Questions	732	(1)
Multiple Choice Questions from CPA Examinations	733	(2)
Discussion Questions and Problems	735	(3)
Case	738	(1)
Internet Problem 24-1: Subsequent Events	739	(2)
PART 6 Other Assurance and Nonassurance Services
Other Assurance Services	741	(28)
Learning Objectives	741	(20)
Attestation Engagements	742	(5)
SysTrust Services	747	(1)
Prospective Financial Statements	747	(3)
Agreed-Upon Procedures Engagements	750	(1)
Review and Compilation Services	750	(5)
Review of Interim Financial Information for Public Companies	755	(1)
Other Audits or Limited Assurance Engagements	756	(5)
Summary	761	(1)
Essential Terms	761	(1)
Review Questions	761	(1)
Multiple Choice Questions from CPA Examinations	762	(2)
Discussion Questions and Problems	764	(4)
Internet Problem 25-1: Reporting on Quarterly Financial Information	768	(1)
Internal and Governmental Financial Auditing and Operational Auditing	769	(24)
Learning Objectives	769	(15)
Internal Financial Auditing	771	(2)
Governmental Financial Auditing	773	(3)
Operational Auditing	776	(8)
Summary	784	(1)
Essential Terms	784	(1)
Review Questions	785	(1)
Multiple Choice Questions from CPA, IIA, and CMA Examinations	786	(2)
Cases	788	(3)
Internet Problem 26-1: Institute of Internal Auditors	791	(2)
Index	793