Auditing : An Integrated Approach

by Arens, Alvin A.

• ISBN13: 9780130827357
• ISBN10: 0130827355
• Edition: 8th
• Format: Hardcover
• Copyright: 1999-10-01
• Publisher: PRENTICE HALL

Summary

The undisputed #1 market leader now features major contributions from leading scholars: Mark Beasley and Randy Elder. The new edition has been extensively revised to reflect changes in information technology, incorporate valuable in-text Internet references (created by Steve Glover at BYU), adds material on assurance services, and a new PHLIP/CW site. There is also a new casebook by Buckless/Beasley/Glover/Prawitt available.

Table of Contents

Preface	xv
PART I The Auditing Profession
The Demand for Audit and Assurance Services	1	(22)
Learning Objectives	1	(15)
Assurance Services	2	(5)
Economic Demand for Auditing	7	(2)
Nature of Auditing	9	(2)
Distinction between Auditing and Accounting	11	(1)
Types of Audits	11	(2)
Types of Auditors	13	(1)
Certified Public Accountant	14	(1)
Summary	15	(1)
Essential Terms	16	(1)
Review Questions	16	(1)
Multiple Choice Questions from CPA Examinations	17	(1)
Discussion Questions and Problems	18	(3)
Assurance Services	21	(2)
The CPA Profession	23	(20)
Learning Objectives	23	(14)
Certified Public Accounting Firms	24	(1)
Activities of CPA Firms	25	(1)
Structure of CPA Firms	26	(2)
AICPA	28	(1)
Generally Accepted Auditing Standards	29	(2)
Statements on Auditing Standards	31	(2)
Quality Control	33	(3)
Securities and Exchange Commission	36	(1)
Summary	37	(1)
Essential Terms	37	(1)
Review Questions	38	(1)
Multiple Choice Questions from CPA Examinations	38	(1)
Discussion Questions and Problems	39	(2)
CPA Vision Project	41	(2)
Audit Reports	43	(32)
Learning Objectives	43	(19)
Standard Unqualified Audit Report	44	(3)
Unqualified Audit Report with Explanatory Paragraph or Modified Wording	47	(3)
Departures from an Unqualified Audit Report	50	(2)
Materiality	52	(3)
Discussion of Conditions Requiring a Departure	55	(4)
Auditor's Decision Process for Audit Reports	59	(3)
Summary	62	(1)
Essential Terms	62	(1)
Review Questions	62	(1)
Multiple Choice Questions from CPA Examinations	63	(2)
Discussion Questions and Problems	65	(6)
Case	71	(2)
Research Annual Reports	73	(2)
Professional Ethics	75	(36)
Learning Objectives	75	(26)
What are Ethics?	76	(1)
Ethical Dilemmas	77	(3)
Special Need for Ethical Conduct in Professions	80	(2)
Code of Professional Conduct	82	(4)
Independence	86	(6)
Other Rules of Conduct	92	(7)
Enforcement	99	(1)
Summary	100	(1)
Essential Terms	101	(1)
Review Questions	101	(1)
Multiple Choice Questions from CPA Examinations	102	(1)
Discussion Questions and Problems	103	(3)
Case	106	(3)
AICPA Code of Professional Conduct---Ethics Rulings and Case	109	(2)
Legal Liability	111	(30)
Learning Objectives	111	(19)
Changed Legal Environment	112	(1)
Distinction among Business Failure, Audit Failure, and Audit Risk	113	(1)
Legal Concepts Affecting Liability	114	(1)
Liability to Clients	115	(4)
Liability to Third Parties under Common Law	119	(2)
Civil Liability under the Federal Securities Laws	121	(4)
Criminal Liability	125	(2)
The Profession's Response to Legal Liability	127	(1)
Protecting Individual CPAs from Legal Liability	128	(2)
Summary	130	(1)
Essential Terms	130	(1)
Review Questions	131	(1)
Multiple Choice Questions from CPA Examinations	132	(1)
Discussion Questions and Problems	133	(4)
Cases	137	(2)
SEC Enforcement	139	(2)
PART II The Audit Process
Audit Responsibilities and Objectives	141	(34)
Learning Objectives	141	(23)
Objective of Conducting an Audit of Financial Statements	142	(1)
Management's Responsibilities	143	(1)
Auditor's Responsibilities	143	(6)
Financial Statement Cycles	149	(5)
Setting Audit Objectives	154	(2)
Transaction-Related Audit Objectives	156	(2)
Balance-Related Audit Objectives	158	(2)
How Audit Objectives Are Met	160	(3)
Summary	163	(1)
Essential Terms	164	(1)
Review Questions	164	(1)
Multiple Choice Questions from CPA Examinations	165	(2)
Discussion Questions and Problems	167	(5)
Case	172	(1)
Assertions and Evidence Associated with New Assurance Services	173	(2)
Audit Evidence	175	(42)
Learning Objectives	175	(28)
Nature of Evidence	176	(1)
Audit Evidence Decisions	176	(2)
Persuasiveness of Evidence	178	(3)
Types of Audit Evidence	181	(7)
Analytical Procedures	188	(2)
Five Types of Analytical Procedures	190	(4)
Using Statistical Techniques and Computer Software	194	(2)
Common Financial Ratios	196	(1)
Short-Term Debt-Paying Ability	196	(1)
Short-Term Liquidity	197	(1)
Ability to Meet Long-Term Debt Obligations and Preferred Dividends	198	(1)
Operating and Performance Ratios	198	(2)
Illustration	200	(3)
Essential Terms	203	(1)
Review Questions	204	(1)
Multiple Choice Questions from CPA Examinations	205	(1)
Discussion Questions and Problems	206	(8)
Case	214	(1)
Analytical Procedures---Industry Comparisons	215	(2)
Audit Planning and Documentation	217	(32)
Learning Objectives	217	(21)
Planning	218	(1)
Preplan the Audit	219	(5)
Obtain Background Information	224	(2)
Obtain Information about Client's Legal Obligations	226	(1)
Perform Preliminary Analytical Procedures	227	(1)
Summary of the Purposes of Audit Planning	228	(2)
Working Papers	230	(7)
Summary of Working Papers	237	(1)
Essential Terms	238	(1)
Review Questions	238	(2)
Multiple Choice Questions from CPA Examinations	240	(1)
Discussion Questions and Problems	241	(5)
Case	246	(1)
Industry Research and Client Acceptance	247	(2)
Materiality and Risk	249	(38)
Learning Objectives	249	(24)
Materiality	250	(1)
Set Preliminary Judgment about Materiality	251	(3)
Allocate Preliminary Judgment about Materiality to Segments (Tolerable Misstatement)	254	(2)
Estimate Misstatement and Compare with Preliminary Judgment	256	(1)
Risk	257	(2)
Types of Risks	259	(2)
Factors Affecting Acceptable Audit Risk	261	(3)
Factors Affecting Inherent Risk	264	(3)
Other Materiality and Risk Considerations	267	(4)
Evaluating Results	271	(2)
Essential Terms	273	(1)
Review Questions	274	(1)
Multiple Choice Questions from CPA Examinations	275	(1)
Discussion Questions and Problems	276	(7)
Cases	283	(3)
Materiality and Tolerable Misstatement	286	(1)
Internal Control and Control Risk	287	(42)
Learning Objectives	287	(28)
Client and Auditor Concerns	288	(4)
Components of Internal Control	292	(9)
Procedures to Obtain an Understanding of Internal Control	301	(4)
Assess Control Risk	305	(6)
Tests of Controls	311	(2)
Decide Planned Detection Risk and Design Substantive Tests	313	(1)
Summary	313	(2)
Essential Terms	315	(1)
Review Questions	316	(1)
Multiple Choice Questions from CPA Examinations	317	(2)
Discussion Questions and Problems	319	(5)
Case	324	(1)
Integrated Case Application---Pinnacle Manufacturing: Part 1	325	(3)
Corporate Governance	328	(1)
The Impact of Information Technology on the Audit Process	329	(30)
Learning Objectives	329	(17)
How Information Technologies Enhance Internal Control	330	(1)
Assessing Risks of Information Technology	331	(1)
Internal Controls Specific to Information Technology	332	(6)
Impact of Information Technology on the Audit Process	338	(5)
Issues for Different IT Environments	343	(3)
Summary	346	(1)
Essential Terms	346	(1)
Review Questions	347	(1)
Multiple Choice Questions from CPA Examinations	348	(1)
Discussion Questions and Problems	349	(6)
Case	355	(2)
COBIT	357	(2)
Overall Audit Plan and Audit Program	359	(38)
Learning Objectives	359	(24)
Types of Tests	360	(6)
Selecting Which Types of Tests to Perform	366	(4)
Evidence Mix	370	(1)
Design of the Audit Program	371	(8)
Summary of the Audit Process	379	(4)
Essential Terms	383	(1)
Review Questions	383	(2)
Multiple Choice Questions from CPA Examinations	385	(1)
Discussion Questions and Problems	386	(5)
Cases	391	(6)
PART III 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	397	(40)
Learning Objectives	397	(27)
Accounts and Classes of Transactions in the Sales and Collection Cycle	398	(1)
Business Functions in the Cycle and Related Documents and Records	399	(4)
Methodology for Designing Tests of Controls and Substantive Tests of Transactions for Sales	403	(8)
Sales Returns and Allowances	411	(1)
Methodology for Designing Tests of Controls and Substantive Tests of Transactions for Cash Receipts	412	(2)
Audit Tests for Uncollectible Accounts	414	(1)
Additional Internal Controls over Account Balances	415	(1)
Effect of Results of Tests of Controls and Substantive Tests of Transactions	415	(1)
Case Illustration---Hillsburg Hardware, Part I	416	(8)
Summary	424	(1)
Essential Terms	424	(1)
Review Questions	425	(1)
Multiple Choice Questions from CPA Examinations	426	(2)
Discussion Questions and Problems	428	(6)
Case	434	(1)
Integrated Case Application---Pinnacle Manufacturing: Part II	435	(1)
Electronic Funds Transfer	436	(1)
Audit Sampling for Tests of Controls and Substantive Tests of Transactions	437	(38)
Learning Objectives	437	(28)
Representative Samples	438	(1)
Statistical versus Nonstatistical Sampling and Probabilistic versus Nonprobabilistic Sample Selection	439	(1)
Nonprobailistic Sample Selection Methods	440	(1)
Probabilistic Sample Selection Methods	441	(2)
Sampling for Exception Rates	443	(1)
Application of Nonstatistical Audit Sampling	444	(9)
Statistical Audit Sampling	453	(1)
Sampling Distribution	453	(1)
Application of Attributes Sampling	454	(4)
Case Illustration---Hillsburg Hardware, Part II	458	(7)
Essential Terms	465	(1)
Review Questions	466	(2)
Multiple Choice Questions from CPA Examinations	468	(1)
Discussion Questions and Problems	469	(4)
Case	473	(1)
Integrated Case Application---Pinnacle Manufacturing: Part III	474	(1)
Completing the Tests in the Sales and Collection Cycle: Accounts Receivable	475	(38)
Learning Objectives	475	(22)
Methodology for Designing Tests of Details of Balances	476	(6)
Designing Tests of Details of Balances	482	(6)
Confirmation of Accounts Receivable	488	(5)
Case Illustration---Hillsburg Hardware, Part III	493	(4)
Essential Terms	497	(1)
Review Questions	498	(1)
Multiple Choice Questions from CPA Examinations	499	(1)
Discussion Questions and Problems	500	(6)
Case	506	(1)
Integrated Case Application---Pinnacle Manufacturing: Part IV	507	(5)
Revenue Recognition	512	(1)
Audit Sampling for Tests of Details of Balances	513	(44)
Learning Objectives	513	(33)
Comparisons of Audit Sampling for Tests of Details of Balances and for Tests of Controls and Substantive Tests of Transactions	514	(1)
Nonstatistical Sampling	514	(8)
Monetary Unit Sampling	522	(11)
Variables Sampling	533	(5)
Illustration Using Difference Estimation	538	(7)
Formulas for Monetary Unit Sampling	545	(1)
Essential Terms	546	(1)
Review Questions	547	(1)
Multiple Choice Questions from CPA Examinations	548	(1)
Discussion Questions and Problems	549	(5)
Cases	554	(3)
PART IV Application of the Audit Process to Other Cycles
Audit of the Payroll and Personnel Cycle	557	(24)
Learning Objectives	557	(14)
Accounts and Transactions in the Payroll and Personnel Cycle	558	(1)
Business Functions in the Cycle and Related Documents and Records	558	(4)
Methodology for Designing Tests of Controls and Substantive Tests of Transactions	562	(5)
Methodology for Designing Tests of Details of Balances	567	(3)
Summary	570	(1)
Essential Terms	571	(1)
Review Questions	571	(1)
Multiple Choice Questions from CPA Examinations	572	(1)
Discussion Questions and Problems	573	(6)
Case	579	(2)
Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable	581	(32)
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	583	(3)
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	(7)
Cases	610	(3)
Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts	613	(32)
Learning Objectives	613	(21)
Types of Other Accounts in the Acquisition and Payment Cycle	614	(1)
Audit of Property, Plant, and Equipment	615	(7)
Audit of Prepaid Expenses	622	(5)
Audit of Accrued Liabilities	627	(1)
Audit of Income and Expense Accounts	628	(6)
Summary	634	(1)
Essential Terms	634	(1)
Review Questions	634	(1)
Multiple Choice Questions from CPA Examinations	635	(2)
Discussion Questions and Problems	637	(3)
Cases	640	(5)
Audit of the Inventory and Warehousing Cycle	645	(32)
Learning Objectives	645	(19)
Business Functions in the Cycle and Related Documents and Records	646	(3)
Parts of the Audit of Inventory	649	(1)
Audit of Cost Accounting	650	(3)
Analytical Procedures	653	(1)
Methodology for Designing Tests of Details of Balances	653	(2)
Physical Observation of Inventory	655	(4)
Audit of Pricing and Compilation	659	(3)
Integration of the Tests	662	(1)
Summary	663	(1)
Essential Terms	664	(1)
Review Questions	664	(1)
Multiple Choice Questions from CPA Examinations	665	(2)
Discussion Questions and Problems	667	(6)
Cases	673	(4)
Audit of the Capital Acquisition and Repayment Cycle	677	(22)
Learning Objectives	677	(14)
Accounts in the Cycle	678	(2)
Notes Payable	680	(5)
Owners' Equity	685	(6)
Summary	691	(1)
Essential Terms	691	(1)
Review Questions	691	(1)
Multiple Choice Questions from CPA Examinations	692	(1)
Discussion Questions and Problems	693	(6)
Audit of Cash Balances	699	(28)
Learning Objectives	699	(17)
Cash in the Bank and Transaction Cycles	700	(2)
Types of Cash Accounts	702	(1)
Audit of the General Cash Account	703	(7)
Fraud-Oriented Procedures	710	(5)
Audit of the Imprest Payroll Bank Account	715	(1)
Audit of Imprest Petty Cash	715	(1)
Summary	716	(1)
Essential Terms	716	(1)
Review Questions	716	(2)
Multiple Choice Questions from CPA Examinations	718	(1)
Discussion Questions and Problems	719	(4)
Case	723	(4)
PART V Completing the Audit
Completing the Audit	727	(30)
Learning Objectives	727	(18)
Review for Contingent Liabilities and Commitments	728	(5)
Review for Subsequent Events	733	(2)
Final Evidence Accumulation	735	(3)
Evaluate Results	738	(3)
Issue the Audit Report	741	(1)
Communicate with the Audit Committee and Management	742	(1)
Subsequent Discovery of Facts	743	(2)
Essential Terms	745	(1)
Review Questions	745	(2)
Multiple Choice Questions from CPA Examinations	747	(1)
Discussion Questions and Problems	748	(4)
Cases	752	(3)
Subsequent Events	755	(2)
PART VI Other Assurance and Nonassurance Services
Other Audit, Attestation Services, and Compilation Engagements	757	(34)
Learning Objectives	757	(23)
Review and Compilation Services	758	(4)
Review of Interim Financial Information for Public Companies	762	(1)
Other Audits or Limited Assurance Engagements	763	(6)
Attestation Engagements	769	(3)
Prospective Financial Statements	772	(3)
Reporting on Internal Control	775	(2)
Agreed-Upon Procedures Engagements	777	(2)
Summary	779	(1)
Essential Terms	780	(1)
Review Questions	781	(1)
Multiple Choice Questions from CPA Examinations	782	(3)
Discussion Questions and Problems	785	(6)
Internal and Governmental Financial Auditing and Operational Auditing	791	(26)
Learning Objectives	791	(16)
Internal Financial Auditing	792	(2)
Governmental Financial Auditing	794	(3)
Operational Auditing	797	(10)
Summary	807	(1)
Essential Terms	807	(1)
Review Questions	808	(1)
Multiple Choice Questions from CPA, IIA, and CMA Examinations	809	(2)
Cases	811	(6)
Index	817