Auditing and Assurance Services

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

• ISBN13: 9780131457348
• ISBN10: 0131457349
• Edition: 10th
• Format: Hardcover
• Copyright: 2005-01-01
• Publisher: Pearson College Div

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