Auditing: Theory and Practice

by Strawser, Jerry R.

• ISBN13: 9780873939331
• ISBN10: 0873939336
• Edition: 9th
• Format: Paperback
• Copyright: 2001-05-22
• Publisher: Dame Publishing

Summary

Auditing, 8e captures the most relevant professional pronouncements and incorporates them into concepts students must know. In this edition students gain an understanding of the important issues currently facing the auditing profession.

Table of Contents

The Auditing Environment

The CPA and the Auditing Environment

The Purpose of Auditing: The Definition of Auditing

Why do Audits Occur? Parties Involved in the Audit

The Public Accounting/Auditing Environment

CPA Firms

Hierarchy within the Firm

Types of Audits

Types of Auditors

Functions Other Than Auditing

Professional Organizations of Accountants

American Institute of Certified Public Accountants (AICPA)

State Societies

Boards of Accountancy

Securities and Exchange Commission

Auditing Standards

General Standards

Standards of Field Work

Standards of Reporting

Statements on Auditing Standards (SASs)

Auditing in the Business Press

Summary of Key Points

Glossary

Summary of Professional Pronouncements

Questions and Problems

The Code of Professional Conduct

Why is a Code of Conduct Important? The Structure of the Code of Professional Conduct

Principles

Rules of Conduct

Interpretations and Ethics Rulings

Rules of Conduct

Independence: Rule 101

Integrity and Objectivity: Rule 102

General Standards: Rule 201

Compliance with Standards: Rule 202

Accounting Principles: Rule 203

Confidential Client Information: Rule 301

Contingent Fees: Rule 302

Acts Discreditable: Rule 501

Advertising: Rule 502

Commissions: Rule 503

Form of Organization and Name: Rule 505

Enforcement of the Code of Conduct

Quality Control

Monitoring Quality Control Standards: Peer Reviews

Appendix

Current Interpretations Under the Code of Professional Conduct

Interpretations of Rule 101: Independence

Interpretations of Rule 102: Integrity and Objectivity

Interpretation of Rule 201: General Standards

Interpretations of Rule 203: Accounting Principles

Interpretations of Rule 301: Confidential Client Information

Interpretation of Rule 302: Contingent Fees

Interpretations of Rule 501: Acts Discreditable

Interpretations of Rule 502: Advertising and Solicitation

Interpretations of Rule 505: Form of Practice and Name.

Summary of Key Points

Glossary

Summary of Professional Pronouncements

Questions and Problems

Auditors' Legal Liability

Litigation, Liability and the Accounting Profession

Overview of Legal Liability

Terminology

Common Law Liability

Liability to Clients and Subrogees

Liability to Third Parties

Significant Court Cases under Common Law

Statutory Liability

Securities and Exchange Commission (SEC)

Securities Act of 1933

Securities Exchange Act of 1934

Auditors' Liabilities under the 1933 Act

Auditors' Liability under the 1934 Act

Other Statutory Liability

Legal Liability: What does the Future Hold?

Summary

Summary of Other Court Cases Under Common Law

Liability to Clients and Subrogees

Liability to Third Parties Other than Primary Beneficiaries

Summary of Other Court Cases Under Statutory Law

McKesson and Robbins

National Student Marketing Case

Yale Express Case

Continental Vending Case

Equity Funding Case

Other Cases

Summary of Key Points

Glossary

Summary of Professional Pronouncements

Questions and Problems

The Audit Process

Audit Planning

Overview of the Audit Examination

Preengagement and Audit Planning

Studying and Evaluating Internal Control

Substantive Testing Procedures

Issuing the Audit Report

Preengagement Procedures

Client Contact

Accepting the Engagement

Engagement Letters

Audit Planning

Obtaining Knowledge about the Client

Responsibility for Financial Statement Misstatements

Responsibility for Detecting Misstatements

Responsibilities if Misstatements are Detected

Responsibilities for Illegal Acts

Summary: Errors, Fraud, and Illegal Acts

Determining an Audit Strategy: Materiality, Management Assertions, and Audit Risk

Materiality

Management Assertions

Audit Risk Model

Other Planning Issues

Related Parties and Related-Party Transactions

Using the Work of a Specialist

Internal Audit Function

Performing Preliminary Analytical Procedures

Preparing the Audit Program

Supervision and Staffing

Role of Planning in the Audit

Summary of Key Points

Glossary

Summary of Professional Pronouncements

Questions and Problems

Financial Statement Fraud

Internal Control and the Assessment of Control Risk

The Audit Process and Audit Risk

Overview of Internal Control

Definition of Internal Control

Components of Internal Control

Other Internal Control Considerations

Studying Internal Control

Identifying a Preliminary Audit Strategy

Understanding the Components of Internal Control

Documenting the Understanding of Internal Control

Making an Initial Assessment of Control Risk

Obtaining an Additional Reduction in Control Risk

Making a Final Assessment of Control Risk

Documenting Control Risk Assessments

Using the Audit Risk Model to Determine the Maximum Allowable Level of Detection Risk

Summary: the Auditor's Study of Internal Control

Other Issues Related to Internal Control

Communicating Internal Control Deficiencies

Reporting on Internal Control

Summary of Key Points

Glossary

Summary of Professional Pronouncements

Questions and Problems

Substantive Testing and Control of Detection Risk

The Audit Process and Audit Risk

Over View of Substantive Tests

Third Standard of Field Work

Types of Evidence

Qualities of Evidence

Qualities of Evidence: A Summary

General Approaches to Substantive Testing

Determining Detection Risk

Factors Affecting Levels of Detection Risk

Detection Risk and Management Assertions

Substantive Testing Procedures

Physical Observation

Inspecting Documents

Confirmation

Analytical Procedures

Recalculations

Comparisons

Oral Inquiry

Summary: Substantive Testing Procedures

Working Papers

Types of Workpapers

Interrelationship Among Workpapers

Filing of Workpapers

Ownership and Custody of Workpapers

Workpaper Review

Summary of Key Points

Glossary

Summary of Professional Pronouncements

Questions and Problems

Introduction to Sampling and Attribute Sampling

Audit Sampling

Sampling Risk versus Nonsampling Risk

Statistical versus Nonstatistical Sampling

Precision and Reliability

Incorporating Statistical Concepts into the Sampling Plan

Attribute Sampling

Overview of Attribute Sampling

Risks Associated with Attribute Sampling

Steps in Performing Attribute Sampling

Defining the Deviation Conditions

Defining the Population

Determining the Sample Selection Method

Determining Sampling Size

Performing the Sampling Plan

Evaluating the Sample Results

Other Attribute Sampling Applications

Nonstatistical Sampling

Discovery Sampling

Sequential (Stop-or-Go) Sampling

Summary of Key Points

Glossary

Summary of Professional Pronouncements

Questions and Problems

Variables Estimation Sampling

Overview of Variables Sampling

Sampling Risks

Overview: Classical Variables Sampling

Normal Distribution

Standard Deviation

Basic Decision Process in Classical Variables Sampling

Classical Variables Sampling: Mean-Perunit Estimation

Determining the Audit Objective of the Test

Defining the Population

Choosing an Audit Sampling Technique

Determining Sample Size

Determining the Method of Selecting the Sample

Performing the Sampling Plan

Evaluating the Sample Results

Example: Mean-per-Unit Estimation

Other Classical Variables Methods: Difference and Ratio Estimation

Difference Estimation

Ratio Estimation

Alternative Approaches to Classical Variables Sampling

Summary: Classical Variables Sampling Methods

Probability-Proportional-to-Size (PPS) Sampling

Determining Sample Size

Selecting the Sample

Evaluating Sample Results

PPS Sampling versus Classical Variables Sampling

Controlling Exposure to Sampling Risks

Risk of Incorrect Rejection

Risk of Incorrect Acceptance

Nonstatistical Sampling

Example: Nonstatistical Sampling

Summary of Key Points

Glossary

Summary of Professional Pronouncements

Questions and Problems

Computer Controls and Audit Techniques

Computerized Accounting Systems

Batch Processing

Interactive Processing

Batch Processing versus Interactive Processing

Computerized versus Manual Processing

Computer Controls

General Controls

Application Controls

Evaluating Computer Controls and Assessing Control Risk

General Controls

Application Controls

Service Organizations

Assessing Data Maintained on Client Computer Files

Summary of Key Points

Glossary

Summary of Professional Pronouncements

Questions and Problems

Auditing Procedures

The Revenue Cycle

What is an Operating Cycle?

Evaluating Internal Control: The Revenue Cycle

Control Environment

Risk Assessment and Control Activities: The Credit Sales Subcycle

Risk Assessment and Control Activities: The Sales Adjustments Subcycle

Risk Assessment and Control Activities: The Cash Receipts Subcycle

Information and Communication

Monitoring

Computerized Processing in the Revenue Cycle

Credit Sales

Cash Receipts and Sales Adjustment

Summary of Key Points

Glossary

Questions and Problems

The Revenue Cycle: Substantive Tests

Overall Audit Approach

Accounts Receivable

Inherent and Control Risk

Detection Risk

Cash

Inherent and Control Risk

Detection Risk

Auditing Sales

Tests of the Sales Register (or Sales Journal)

Analytical Procedures

Sales Cutoff Tests

Summary of Key Points

Glossary

Summary of Professional Pronouncements

Questions and Problems

The Purchases and Disbursements Cycle

Evaluating Internal Control: The Purchases and Disbursements Cycle

Control Environment

Risk Assessment and Control Activities: The Purchases Subcycle

Risk Assessment and Control Activities: The Cash Disbursements Subcycle

Information and Communication

Monitoring

Computerized Processing in the Purchases and Disbursements Cycle

Purchases Subcycle

Cash Disbursements Subcycle

Summary of Key Points

Glossary

Questions and Problems

The Purchases and Disbursements Cycle: Substantive Tests

Overall Audit Approach. Inventory

Inherent and Control Risk

Detection Risk

Accounts Payable

Inherent and Control Risk

Detection Risk

Accrued Payables and Deferred Assets

Cost of Goods Sold/Purchases

Tests of the Voucher Register (Purchases Journal)

Analytical Procedures

Purchase Cutoff Tests

Summary of Key Points

Glossary

Summary of Professional Pronouncements

Questions and Problems

The Conversion Cycle

Evaluating Internal Control: The Conversion Cycle

Control Environment

Risk Assessment and Control Activities: The Payroll Subcycle

Risk Assessment and Control Activities: The Production Subcycle

Information and Communication

Monitoring

Substantive Tests of Inventory Balances

Substantive Tests of Payroll Transactions

Inherent and Control Risk for Payroll Transactions

Detection Risk (Substantive Tests) for Payroll Transactions

Computerized Processing in the Conversion Cycle

Payroll Subcycle

Production Subcycle

Summary of Key Points

Glossary

Questions and Problems

The Investing and Financing Cycle

Auditing the Investing and Financing Cycle

Evaluating Internal Control: The Investing and Financing Cycle

Control Environment

Risk Assessment and Control Activities

Information and Communication

Monitoring

Substantive Tests: Investments

Obtaining or Preparing a Listing of Securities

Verifying Investment Transactions

Inspecting or Confirming Securities

Verifying Market Values

Examining Investment Revenue Accounts

Performing Analytical Procedures

Evaluating Financial Statement Presentation

Substantive Tests

Property, Plant and Equipment

Obtaining or Preparing a Listing of PPE

Verifying PPE Transactions

Inspecting PPE and Title to PPE

Examining Subsequent Expenditures

Evaluating the Provision for Depreciation

Performing Analytical Procedures

Evaluating Financial Statement Presentation

Substantive Tests: Notes Payable and Long-Term Debt

Obtaining or Preparing a Listing of IBLS

Verifying IBL Transactions

Inspecting or Confirming IBLS

Recalculating Interest Expense

Searching for Unrecorded Liabilities

Performing Analytical Procedures

Evaluating Financial Statement Presentation

Substantive Tests: Stockholders' Equity Accounts

Obtaining or Preparing a Schedule of Changes in Stockholders' Equity

Verifying Stockholders' Equity Transactions

Inspecting or Confirming Shares Issued and Outstanding

Verifying Retained Earnings

Performing Analytical Procedures

Evaluating Financial Statement Presentation

Summary of Key Points

Glossary

Summary of Professional Pronouncements

Questions and Problems

Completing the Audit Examination

Completing the Audit

Subsequent Events

Letters of Inquiry

Management Representations

Analytical Procedures

Workpaper Review

Evaluating the Results

The Postaudit Period

Subsequent Discovery of Facts

Consideration of Omitted Procedures After the Report Date

Communications with the Client

Communications Related to Internal Control

Other Communications with Audit Committees

Management Letters

Summary of Key Points

Glossary

Summary of Professional Pronouncements

Questions and Problems

Auditor's Communications

The Auditor's Report

The Auditor's Report

The Body of the Report

Other Information in the Report

Reporting Standards

Types of Opinions

Reasons for Departure from the Wording of the Standard Report

Scope Limitations

Division of Responsibility

Lack of Conformity with GAAP

Departure from a Promulgated Principle

Consistency

Uncertainties

Emphasizing a Matter in the Report

Independence

Summary: Departures from the Auditor's Standard Report

Comparative Financial Statements

Comparative Statements not Audited

Comparative Statements Examined by the Same Auditor

Comparative Statements Examined by Another Auditor

Summary: Comparative Reporting

Summary of Key Points

Glossary

Summary of Professional Pronouncements

Questions and Problems

Reporting: Other Information and Special Reports

Reporting on Information Presented with the Financial Statements

Other Information Prepared by the Client

Segment Information

Reporting on Required Supplementary Information

Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents

Summary: Other Reporting Responsibilities

Special Reports

Basis Other than GAAP

Reports on Specific Elements, Accounts, or Items

Compliance with Contractual Agreements

Financial Presentations Intended to Comply with Contractual or Regulatory Requirements

Prescribed Forms

Summary: Special Reports

Other Types of Reports Issued in Conjunction with Audited Financial Statements

Financial Statements Prepared for use in Other Countries

Review of Interim Financial Information

Letters for Underwriters and Other Third Parties

Condensed Financial Statements and Selected Financial Data

Summary of Key Points

Glossary

Summary of Professional Pronouncements

Questions and Problems

Other Accountant Engagements and Reports

Attestation Services

Reporting On Internal Control

Effectiveness of the Organization's Internal Control

Effectiveness of a Segment of the Organization's Internal Control

Suitability of the Design of the Organization's Internal Control

Evaluating Internal Control Based on Criteria Specified by a Regulatory Agency

Reporting on Management's Assertion about Compliance with Specified Requirements

Prospective Financial Information

Types of Prospective Financial Information

Information Provided as Prospective Financial Information

Use of Prospective Financial Information

Engagements Related to Prospective Financial Information

Pro Forma Financial Information

Management's Discussion and Analysis

Accounting and Review Services

Compilation Engagements

Review Engagements

Comparative Reporting Involving Accounting and Review Services

Other Issues Involving Accounting and Review Services

Summary: Accounting and Review Services for Nonpublic Companies

Attestation Standards

Summary of Key Points

Glossary

Summary of Professional Pronouncements

Questions and Problems

Other Types of Auditing

Compliance, Internal, and Operational Auditing

Compliance Auditing

Compliance Auditing in a GAAS Audit

Government Auditing Standards (The Yellow Book)

The Single Audit Act

Summary: Compliance Auditing

Internal Auditing

The Role of Internal Auditing in the Organization

Differences Between Internal Auditing and External Auditing

Code of Ethics

Standards of Internal Auditing

Operational Auditing

Who Performs Operational Audits

Steps in Performing an Operational Audit

Summary: Classifications of Auditing

Internal Auditing Standards

Summary of Key Points

Glossary

Summary of Professional Pronouncements

Questions and Problems

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