Auditing Concepts for a Changing Environment

by Rittenberg, Larry E.; Schwieger, Bradley J.

• ISBN13: 9780324180237
• ISBN10: 0324180233
• Edition: CD
• Format: Hardcover
• Copyright: 2002-04-30
• Publisher: Cengage Learning

Summary

The fourth edition of this text extends the coverage of the new approaches to the audit function from a systems and assurance services perspective. Business risk analysis and the evaluation of audit evidence is integrated throughout. This edition emphasizes professional services, analytical techniques, less audit sampling, and enhanced computer auditing approaches. The fourth edition also integrates IDEA professional audit software into the text and end-of-chapter problems.

Table of Contents

Assurance Services	2	(32)
Introduction	3	(1)
Need for Assurance	3	(9)
Potential Bias in Providing Information	3	(1)
Remoteness of Users	3	(1)
Complexity	4	(1)
Need for Assurance Regarding Information and Operations	4	(8)
The Special Role of Financial Statement Audits	12	(5)
Auditing Defined	13	(2)
The Need for Unbiased Reporting	15	(1)
Requirements to Enter the Public Accounting Profession	16	(1)
The Providers of Assurance Services	17	(3)
The Public Accounting Profession	17	(1)
The Internal Audit Profession	18	(1)
Governmental Auditing Profession	19	(1)
Other Professional and Regulatory Organizations	20	(2)
The American Institute of Certified Public Accountants	20	(1)
State Boards of Accountancy	21	(1)
The Securities and Exchange Commission	21	(1)
The Institute of Internal Auditors	22	(1)
The U. S. General Accounting Office	22	(1)
The Court System	22	(1)
Summary	22	(1)
Significant Terms	23	(1)
Review Questions	24	(1)
Multiple-Choice Questions	25	(1)
Discussion and Research Questions	26	(5)
Cases	31	(3)
Corporate Governance, Serving Client and Public Interests, and Audit Professionalism	34	(46)
Corporate Governance: Serving Client and Public Interests	35	(6)
Roles of Interested Parties	35	(1)
Who Is the Audit Client?	35	(1)
Audit Committees	36	(2)
Serving the Public's Interests	38	(2)
Assuring Quality	40	(1)
Framework for Quality	40	(1)
Maintaining Professionalism: Standards	41	(9)
Need for Professional Standards	41	(1)
Generally Accepted Auditing Standards	42	(5)
Standards for Other Audit Engagements	47	(3)
Maintaining Professionalism: Ethical Framework	50	(13)
Importance of Ethical Conduct	50	(1)
AICPA Code of Professional Conduct	50	(3)
SEC Influence on Auditor Independence Rules	53	(7)
Ethical Theories: Resolving Issues That Are Not Black or White	60	(1)
An Ethical Framework	61	(2)
Maintaining Professionalism: Ensuring Quality	63	(1)
Quality Control Standards and External Peer Reviews	63	(1)
Internal Peer Review Programs	64	(1)
Summary	64	(1)
Significant Terms	65	(1)
Review Questions	66	(1)
Multiple-Choice Questions	67	(2)
Discussion and Research Questions	69	(6)
Cases	75	(5)
The Audit Process	80	(40)
Overview of Audit Process	81	(11)
Developing an Understanding with the Client	81	(3)
The Audit Process	84	(8)
Materiality and Audit Risk	92	(9)
Overall Materiality versus Individual Account Materiality	92	(1)
Materiality Approaches	92	(1)
Risk of Material Misstatement	93	(1)
Risk Concepts	93	(3)
The Profession's Audit Risk Model: Practice Implications	96	(2)
Illustration of the Audit Risk Model	98	(1)
Limitations of the Audit Risk Model	99	(2)
Management Assertions	101	(3)
Financial Statement Assertions	101	(2)
Assertions for Other Assurance Services	103	(1)
Audit Evidence and Procedures	104	(4)
Relevance	104	(1)
Persuasiveness	104	(1)
Sufficiency	105	(1)
Relationship Among Audit Procedures and Assertions	105	(1)
Examples of Audit Programs	105	(3)
Summary	108	(1)
Significant Terms	109	(1)
Review Questions	109	(2)
Multiple-Choice Questions	111	(2)
Discussion and Research Questions	113	(7)
Understanding Business Risk: A Framework for Audit Planning	120	(50)
Business Risk: Audit Implications	121	(13)
What Is Risk?	121	(2)
The Relationship of Business Risk to the Audit Process	123	(11)
Using Analytical Tools to Develop Expectations	134	(6)
Assumptions Underlying Analytical Techniques	135	(2)
Trend Analysis	137	(1)
Ratio Analysis	138	(1)
Commonly Used Financial Ratios	138	(2)
Risk Analysis: Auditor Responsibility for Detecting and Reporting Fraud and Other Misstatements	140	(7)
Responsibilities for Detecting Errors	142	(1)
Responsibilites for Detecting and Reporting Fraud	142	(1)
Responsibilities for Discovering Fraud	142	(2)
Fraud Risk Assessment	144	(1)
Detecting Fraud: Matching Procedures to the Risk	145	(1)
Reporting on Detected Defalcations	145	(1)
Reporting on Fraudulent Financial Statements	146	(1)
Responsibilities for Detecting and Reporting Illegal Acts	146	(1)
Risk Analysis and the Conduct of the Audit	147	(2)
Linkage to Direct Tests of Account Balances	147	(1)
Quality of Accounting Principles Used	147	(2)
Summary	149	(1)
Significant Terms	149	(1)
Appendix 4A: Regression and Time Series Analysis	149	(6)
Review Questions	155	(2)
Multiple-Choice Questions	157	(1)
Discussion and Research Questions	158	(10)
Case	168	(2)
Evaluating the Integrity and Effectiveness of the Client's Control Systems	170	(54)
A Framework for Control	171	(8)
Internal Control	171	(1)
The Need for Control	172	(7)
A Framework for Understanding and Evaluating Internal Controls	179	(18)
Components of an Internal Control System	180	(7)
Understanding and Evaluating Accounting Information Systems	187	(10)
Control Risk Assessment	197	(11)
Obtain an Understanding	198	(7)
Make a Preliminary Assessment of Control Risk	205	(1)
Perform Test of Controls	206	(1)
Update Assessment of Control Risk and Need for Substantive Testing	206	(2)
Summary	208	(1)
Significant Terms	208	(1)
Review Questions	208	(2)
Multiple-Choice Questions	210	(2)
Discussion and Research Questions	212	(8)
Cases	220	(4)
Computer-Based Processing: Developing an Audit Assessment Approach	224	(54)
Introduction	225	(8)
Overview of Computerized Accounting Systems	225	(6)
The New Telecommunications Era: The Virtual Private Network	231	(2)
General and Application Controls	233	(20)
General Control Concepts	233	(12)
Application Control Procedures	245	(8)
Overview of Control Risk Assessment Process	253	(4)
Gaining an Understanding of the Control Structure	253	(1)
Testing the Effectiveness of Control Procedures	254	(3)
Electronic Data Interchange and Electronic Commerce	257	(8)
Risks and Control Considerations	260	(1)
Application Controls	260	(2)
Evaluating Controls in EDI: An Illustration	262	(2)
Electronic Commerce	264	(1)
Summary	265	(1)
Significant Terms	266	(1)
Review Questions	267	(2)
Multiple-Choice Questions	269	(2)
Discussion and Research Questions	271	(5)
Cases	276	(2)
Direct Tests of Account Balances	278	(42)
Overview of Evidence for Directly Testing Financial Statement Items	279	(7)
Approach to Gathering Evidence	283	(1)
Nature of Audit Testing	284	(2)
Audit Procedures	286	(11)
Overview of Audit Procedures	286	(6)
Commonly Used Audit Procedures for Direct Tests of Account Balances	292	(4)
Timing of Procedures	296	(1)
Extent of Procedures	296	(1)
Audit Programs and Documenting Audit Evidence	297	(9)
Audit Program Development	297	(1)
Documenting Audit Evidence	298	(5)
Importance of Quality Review	303	(3)
Summary	306	(1)
Significant Terms	306	(1)
Review Questions	306	(2)
Multiple-Choice Questions	308	(2)
Discussion and Research Questions	310	(7)
Cases	317	(3)
Auditing Computerized Information Systems	320	(40)
Computer Audit Tools to Test Computer Processing	321	(12)
Overview of a Comprehensive Approach to Computerized Data Processing	321	(2)
Approaches to Address Correctness of Processing	323	(1)
Test Data: Auditing through the Computer	323	(3)
Integrated Test Facility	326	(1)
Concurrent Processing Methodologies	327	(3)
Embedded Audit Modules	330	(1)
Relative Advantages of ITF, Concurrent Processing, and Embedded Audit Modules	331	(2)
Using the Computer to Help Test Accounting Records	333	(5)
Generalized Audit Software	335	(2)
Custom-Designed Software	337	(1)
Unique Audit Approaches for Electronic Commerce	338	(4)
Risk Analysis	338	(1)
The Process and Control Audit	339	(1)
Detailed Testing of Account Balances---Using Computerized Audit Techniques	339	(3)
Use of Personal Computing in Conducting an Audit	342	(5)
Traditional Uses of Personal Computers: Word Processing and Spreadsheets	343	(1)
Expanded Uses of Personal Computing Software for Audit Purposes	343	(3)
Unique Problems: Auditing a Client's Spreadsheet	346	(1)
Summary	347	(1)
Significant Terms	347	(1)
Review Questions	348	(2)
Multiple-Choice Questions	350	(2)
Discussion and Research Questions	352	(6)
Cases	358	(2)
Auditing Revenue and Related Accounts	360	(66)
Introduction	361	(5)
Overview of Revenue Cycle	361	(5)
Assessment of Environment Risk	366	(14)
Audit Steps	366	(1)
Inherent Risk	367	(3)
The Control Environment: Effect on Sales	370	(1)
Developing an Understanding of Internal Controls	371	(2)
Monitoring Controls	373	(1)
Control Structure Regarding Returns, Allowances, and Warranties	374	(1)
Importance of Credit Policies Authorizing Sales	374	(3)
Assessing and Documenting Environment Risk	377	(3)
Substantive Testing in the Revenue Cycle	380	(23)
Planning for Direct Tests of Account Balances	380	(3)
Audit Objectives and Assertions	383	(3)
Standard Accounts Receivable Audit Procedures	386	(13)
Allowance for Doubtful Accounts	399	(2)
Analytical Procedures for Revenue Cycle Accounts	401	(1)
Notes Receivable	402	(1)
Summary	403	(1)
Significant Terms	403	(1)
Review Questions	404	(2)
Multiple-Choice Questions	406	(3)
Discussion and Research Questions	409	(11)
Cases	420	(6)
Audit Sampling	426	(66)
Introduction	427	(11)
Overview of Audit Sampling	428	(1)
Nonsampling and Sampling Risk	428	(3)
Selecting a Sampling Approach	431	(1)
Sampling to Test Controls	432	(1)
Substantive Sampling Considerations	433	(5)
Nonstatistical Sampling	438	(3)
Determining Sample Size	438	(1)
Selecting the Sample	438	(1)
Evaluating the Sample Results	438	(1)
Nonstatistical Sampling Using Audit Software	439	(2)
Probability Proportional to Size Sampling	441	(12)
Overview of PPS Sample Design	442	(2)
Sample Size and Selection	444	(3)
Sample Evaluation	447	(6)
Summary	453	(1)
Significant Terms	453	(3)
Appendix 10A: Sampling to Test Controls	456	(13)
Appendix 10B: Classical Sampling Methods	469	(9)
Review Questions	478	(2)
Multiple-Choice Questions	480	(2)
Discussion and Research Questions	482	(8)
Case	490	(2)
Audit of Acquisition Cycle and Inventory	492	(40)
Audit of the Acquisition Cycle	492	(10)
Overview of Control Procedures and Control Risk Assessment	494	(5)
Testing Controls over Accounts Payable and Related Expenses	499	(1)
Substantive Tests of Accounts Payable	500	(1)
Audits of Expense Accounts	501	(1)
Audit of Inventory and Cost of Goods Sold	502	(15)
Internal Controls for Inventory	504	(5)
Substantive Testing of Inventory and Cost of Goods Sold	509	(7)
Cost of Goods Sold	516	(1)
Summary	517	(1)
Significant Terms	517	(1)
Review Questions	518	(2)
Multiple-Choice Questions	520	(2)
Discussion and Research Questions	522	(8)
Cases	530	(2)
Auditing Liquid Assets	532	(42)
Introduction	532	(6)
Cash Accounts Affected	533	(1)
Types of Marketable Security Accounts	534	(1)
Planning for Audits of Cash and Marketable Securities	534	(4)
Audits of Cash Accounts	538	(15)
Evaluating Control Risk: Cash Accounts	538	(4)
Understanding and Testing Internal Controls	542	(4)
Substantive Testing of Cash Balances	546	(5)
Operational Audits of Cash	551	(2)
Marketable Securities and Financial Instruments	553	(6)
Audits of Marketable Securities	553	(1)
Audits of Other Short-Term Securities	553	(3)
Sophisticated Financial Instruments and Marketable Securities	556	(3)
Summary	559	(1)
Significant Terms	560	(1)
Review Questions	560	(2)
Multiple-Choice	562	(2)
Discussion and Research Questions	564	(8)
Cases	572	(2)
Audit of Other Assets and Long-term Financing	574	(32)
Audit of Property, Plant, and Equipment	574	(9)
First-Time Audits	575	(1)
Inherent Risks	575	(3)
Evaluating Control Risk and Control Effectiveness	578	(1)
Tests of Property Additions and Disposals	579	(2)
Audit Considerations for Capitalized Leases	581	(1)
Asset Impairment	581	(1)
Discontinued Operations	582	(1)
Depreciation Expense and Accumulated Depreciation	582	(1)
Natural Resources	582	(1)
Audits of Mergers and Acquisitions	583	(5)
An Overview of Accounting Issues Associated with Mergers and Acquisitions	583	(1)
Audits of Mergers and Acquisitions	584	(4)
Audits of Financing Activities	588	(5)
Bonds	589	(1)
Common Stock and Owner's Equity	590	(3)
Summary	593	(1)
Significant Terms	593	(1)
Review Questions	593	(1)
Multiple-Choice Questions	594	(1)
Discussion and Research Questions	595	(7)
Cases	602	(4)
Completing the Audit	606	(30)
Final Review of the Audit	607	(16)
Contingencies	607	(2)
Adequacy of Disclosures	609	(3)
Management Representation Letter	612	(2)
Management Letter	614	(1)
Summarizing Possible Adjustments	615	(1)
Evaluating the Going Concern Assumption	615	(5)
Review of Major Estimates	620	(1)
Analytical and Quality Review of the Audit	621	(1)
Communicating with the Audit Committee	622	(1)
Subsequent Events	623	(4)
Normal Review of Subsequent Events	623	(2)
Subsequent Discovery of Facts Existing at the Date of the Auditor's Report	625	(2)
Consideration of Omitted Procedures after the Report Date	627	(1)
Summary	627	(1)
Significant Terms	627	(1)
Review Questions	628	(1)
Multiple-Choice Questions	628	(2)
Discussion and Research Questions	630	(4)
Case	634	(2)
Communicating Levels of Assurance	636	(56)
Audits, Reviews, and Compilations of Historical Financial Statements	637	(22)
Audit Reports	637	(16)
Reviews and Compilations	653	(6)
Reports on Other Financial Information	659	(7)
Special Reports	659	(4)
Interim Financial Information	663	(3)
Changing Information Needs of Investors and Creditors	666	(1)
Reports on Non-Financial and Other Information	666	(9)
Reports on Internal Control	667	(4)
Reporting on Evolving Assurance Services	671	(4)
Summary	675	(1)
Significant Terms	675	(1)
Review Questions	676	(2)
Multiple-Choice Questions	678	(2)
Discussion and Research Questions	680	(10)
Case	690	(2)
Professional Liability	692	(32)
The Legal Environment Affecting Litigation against Auditors	692	(3)
Joint and Several Liability	694	(1)
Audit Time and Fee Pressures	694	(1)
Audits Viewed as an Insurance Policy	695	(1)
Contingent-Fee Compensation for Lawyers	695	(1)
Class Action Suits	695	(1)
Legal Concepts	695	(10)
Causes of Legal Action	696	(1)
Parties That May Bring Suit against Auditors	697	(8)
Approaches to Mitigating Liability Exposure	705	(7)
Continuing Education Requirement	705	(1)
Membership Requirements for Firms	705	(1)
Quality Control Programs	706	(1)
Defensive Auditing	707	(2)
Role of Insurance	709	(1)
Tort Reform	710	(1)
Effect of Court Cases on Auditing Standards and Practice	711	(1)
Summary	712	(1)
Significant Terms	713	(1)
Review Questions	714	(1)
Multiple-Choice Questions	715	(2)
Discussion and Research Questions	717	(3)
Cases	720	(4)
Internal and Value-Added Auditing	724	(32)
Internal Auditing	724	(8)
Internal Auditing Defined	725	(7)
The Institute of Internal Auditors Code of Ethics	732	(1)
Reporting Company Fraud	732	(1)
Scope of Value-Added Internal Auditing	732	(12)
Operational Auditing	735	(6)
Information Systems Audits	741	(1)
Compliance Audits	742	(1)
Financial Reporting and Control Audits	742	(1)
Program and Performance Audits	743	(1)
Trends in Value-Added and Internal Auditing	744	(2)
Global Internal Auditing	744	(1)
Outsourcing Internal Auditing	745	(1)
Internal Auditing by Any Other Name	745	(1)
Summary	746	(1)
Significant Terms	746	(1)
Review Questions	746	(1)
Multiple-Choice Questions	747	(2)
Discussion and Research Questions	749	(6)
Case	755	(1)
Appendix: IDEA Tutorial and Cases	756	(91)
Tutorial	756	(87)
IDEA Case 1---Fraud	843	(1)
IDEA Case 2---Accounts Receivable	844	(1)
IDEA Case 3---Inventory	845	(2)
Case Index	847	(1)
Index	848