Auditing: The Art and Science of Assurance Engagements, Fifteenth Canadian Edition
By Alvin A. Arens, Randal J. Elder, Mark S. Beasley, Chris E. Hogan, Joanne C. Jones and Bartosz M. Amerski
Contents:
Preface ix
1 The Demand for Audit and Other
Assurance Services 1
LEARNING OBJECTIVES 1
What are Assurance Engagements? 2
What is Auditing? 3
Why are Audits and Other Assurance Engagements
Needed? 7
Common Types of Assurance Engagements 10
Types of Auditors 11
Accounting vs. Auditing 14
Assurance and Nonassurance Services Offered
by Public Accountants 15
Summary 19
Review Questions 19
Multiple Choice Questions 20
Discussion Questions and Problems 21
Professional Judgment Problems and Cases 23
Applying Your Professional Judgment to Hillsburg
Hardware 24
2 The Public Accounting Profession
and Audit Quality 25
LEARNING OBJECTIVES 25
An Overview of the Canadian Public Accounting
Industry 26
Organizations Affecting the Canadian Public
Accounting Profession 29
CPA Canada Assurance Standards 32
Principles Underlying the Financial Statement
Audit 33
The Drivers of Audit Quality 39
Quality Control 40
Summary 43
Review Questions 44
Multiple Choice Questions 44
Discussion Questions and Problems 46
Professional Judgment Problems and Cases 47
Applying Your Professional Judgment at Hillsburg 48
3 Professional Ethics and Legal Liability 50
LEARNING OBJECTIVES 50
Professional Ethics and Public Accountants 51
A Framework for Ethical Reasoning 52
Ethical Blind Spots 57
Professional Guidance on Ethical Conduct 57
The Independence Standard for Assurance
Engagements 61
Enforcement of the Code of Professional Conduct 67
The Expectations Gap 68
Audit Failure and Audit Liability 70
Summary 75
Review Questions 76
Multiple Choice Questions 76
Discussion Questions and Problems 78
Professional Judgment Problems and Cases 82
Applying Your Professional Judgment to Hillsburg Hardware 85
4 Audit Responsibilities and Objectives 86
LEARNING OBJECTIVES 86
Management’s Responsibilities 87
Responsibilities of those Charged with Governance 88
Auditor’s Responsibilities 89
Framework for Professional Judgment 94
Professional Skepticism 97
Financial Statement Cycles 99
Management Assertions 104
An Overview of the Audit Process 112
Summary 117
Review Questions 117
Multiple Choice Questions 118
Discussion Questions and Problems 119
Professional Judgment Problems and Cases 123
Applying Your Professional Judgment to Hillsburg 125
5 Audit Evidence 126
LEARNING OBJECTIVES 126
Nature of Audit Evidence 127
Audit Evidence Decisions 128
Persuasiveness of Evidence 130
Types of Audit Procedures 134
Design Analytical Procedures 143
Use of Audit Data Analytics and Advanced
Technologies 150
Documentation 156
Professional Skepticism, Evidence, and Documentation 160
APPENDIX 5A: Common Financial Ratios 162
Summary 164
Review Questions 164
Multiple Choice Questions and Task-Based Simulations 165
Discussion Questions and Problems 168
Professional Judgment Problems and Cases 171
Applying Your Professional Judgment to Hillsburg Hardware 172
6 Client Acceptance, Preliminary
Planning, and Materiality 174
LEARNING OBJECTIVES 174
Planning for What Can Go Wrong 175
Client Acceptance and Continuance 177
Overall Audit Strategy 185
Understand the Entity and Its Environment and the
Applicable Accounting Framework 188
Risk Assessment Procedures and Information from
Other Sources 192
Preliminary Analytical Review 196
Materiality 199
Determine Overall Materiality 200
Determine Performance Materiality 204
Determine Specific Materiality 208
Applying Materiality—Evaluating Results and
Completing the Audit 208
Summary 211
Review Questions 211
Multiple Choice Questions and Task-Based Simulations 212
Discussion Questions and Problems 215
Professional Judgment Problems and Cases 218
Applying Your Professional Judgment to Hillsburg Hardware 221
7 Risk Assessment and Inherent Risk 222
LEARNING OBJECTIVES 222
The Audit Risk Model 223
Inherent Risk Assessment 229
Risk Response for Levels of Risk 234
Considering Fraud Risk 236
Conditions for Fraud 238
Risk Response for Fraud Risks 242
Summary 244
Review Questions 244
Multiple Choice Questions and Task-Based Simulations 245
Discussion Questions and Problems 248
Professional Judgment Problems and Cases 251
Applying Your Professional Judgment to the Hillsburg Audit 253
8 Understanding the Internal
Control System 255
LEARNING OBJECTIVES 255
Internal Control Objectives 256
Management’s Responsibility for Internal Control 257
Auditors Responsibilities for Internal Control 258
COSO Components of Internal Control 260
Internal Controls Specific to Information
Technology 273
Impact of Information Technology on the System of
Internal Control 278
Impact of Emerging Technologies on Internal
Control 284
Understanding Controls of Small Businesses 285
Summary 286
Review Questions 287
Multiple Choice Questions and Task-Based Simulations 288
Discussion Questions and Problems 290
Professional Judgment Problems and Cases 291
Applying Your Professional Judgment to Hillsburg Hardware 293
9 Control Risk Assessment 294
LEARNING OBJECTIVES 294
Understand and Evaluate Internal Control 295
Control Risk Assessment 311
Tests of Controls 314
Auditor Reporting on Internal Control 319
Reporting on Internal Controls for Some Public
Companies 320
Summary 321
Review Questions 321
Multiple Choice Questions and Task-Based Simulations 322
Discussion Questions and Problems 324
Professional Judgment Problems and Cases 327
Applying Your Professional Judgment to Hillsburg Hardware 329
10 Risk Response: Audit Strategy, Overall
Approach, and Audit Program 330
LEARNING OBJECTIVES 330
Overall Audit Strategy 331
Audit Plan and Audit Procedures 335
Appropriate Mix of Audit Procedures and Audit
Approach 340
Design Effective Further Audit Procedures 346
Design Audit Programs 350
Summary 352
Review Questions 352
Multiple Choice Questions and Task-Based Simulations 353
Discussion Questions and Problems 356
Professional Judgment Problems and Cases 357
Applying Your Professional Judgment to Hillsburg Hardware 361
11 Audit Sampling Concepts 362
LEARNING OBJECTIVES 362
Selecting Items to Test and Sampling 363
Representative Sampling and Its Risks 364
Statistical vs. Nonstatistical Sampling and Probabilistic
Nonprobabilistic Sample Selection 365
Sample Selection Methods 367
An Overview of the Audit Sampling Process 370
Using Sampling for Tests of Controls 372
Statistical Sampling for Tests of Controls 382
Using Sampling for Substantive Tests of Details 384
Nonstatistical Sampling for Substantive Tests 384
Statistical Sampling for Substantive Tests of Details 392
Audit Data Analytics vs. Sampling 395
Adequate Documentation and Professional Judgment 397
Summary 398
Review Questions 399
Multiple Choice Questions and Task-Based Simulations 400
Discussion Questions and Problems 401
Professional Judgment Problems and Cases 403
Applying Your Professional Judgment to
Hillsburg Hardware 405
12 Audit of the Revenue Cycle 407
LEARNING OBJECTIVES 407
Overview of the Revenue Process 408
Identify Inherent Risk Factors and Determine Significant
Risks 415
Assess Control Risk 423
Determine Audit Approach for Revenue Cycle 424
Design Tests of Controls 426
Design Substantive Procedures 433
Design Fraud Procedures for Revenue 447
Summary 448
Review Questions 449
Multiple Choice Questions and Task-Based Simulations 450
Discussion Questions and Problems 452
Professional Judgment Problems and Cases 455
Applying Your Professional Judgment to Hillsburg
Hardware 460
13 Audit of the Acquisition and
Payment Cycle 462
LEARNING OBJECTIVES 462
An Overview of the Acquisition and
Payment Cycle 463
Identify Inherent Risk factors and Determine Significant
Risks 469
Understand Key Controls 475
Determine Audit Approach for Acquisition and Payment
Cycle 477
Design Tests of Controls 478
Design Substantive Procedures 482
Auditing Property, Plant, and Equipment 487
Summary 493
Review Questions 494
Multiple Choice Questions and Task-Based Simulations 495
Discussion Questions and Problems 497
Professional Judgment Problems and Cases 500
Applying Your Professional Judgment to Hillsburg
Hardware 502
14 Audit of the Inventory and
Distribution Cycle 504
LEARNING OBJECTIVES 504
Overview of the Inventory and Distribution Cycle 505
Identify Inherent Risks and Determine Significant
Risks 509
Assess Control Risk 513
Determine Audit Approach for Inventory and
Distribution Cycle 516
Design Tests of Controls 518
Design Substantive Procedures 519
Design Fraud Procedures for Inventory 525
Summary 526
Review Questions 526
Multiple Choice Questions and Task-Based
Simulations 527
Discussion Questions and Problems 529
Professional Judgment Problems and Cases 532
Applying Your Professional Judgment to Hillsburg
Hardware 534
15 Audit of the Human Resources
and Payroll Cycle 536
LEARNING OBJECTIVES 536
An Overview of the Human Resources and Payroll
Cycle 537
Identify Inherent Risk Factors and Determine Significant
Risks 540
Understand Key Controls 542
Determine Audit Approach for Human Resources and
Payroll 546
Design Tests of Controls 547
Design Substantive Procedures 547
Design Fraud Procedures for Human Resources and
Payroll 551
Summary 552
Review Questions 553
Multiple Choice Questions and Task-Based Simulations 554
Discussion Questions and Problems 555
Professional Judgment Problems and Cases 556
Applying Your Professional Judgment to Hillsburg
Hardware 558
16 Audit of Cash and Cash
Equivalents 559
LEARNING OBJECTIVES 559
Overview of Cash Accounts 561
Identify Inherent Risk Factors and Determine
Significant Risks 562
Understand Key Controls and Assess Control Risk 563
Design Substantive Procedures 565
Design Fraud Procedures for Cash 570
Summary 574
Review Questions 575
Multiple Choice Questions and Task-Based Simulations 576
Discussion Questions and Problems 577
Professional Judgment Problems and Cases 579
Applying Your Professional Judgment to Hillsburg
Hardware 580
17 Completing the Audit 581
LEARNING OBJECTIVES 581
Complete Final Evidence Gathering 582
Review for Contingent Liabilities and
Commitments 584
Obtain Confirmations from Client’s External and/or In-
House Legal Counsel 588
Review for Subsequent Events 591
Accumulate Final Evidence 594
Evaluate Results 597
Evaluate Other Information 604
Communicate with the Audit Committee and
Management 606
Summary 610
Review Questions 610
Multiple Choice Questions 611
Discussion Questions and Problems 612
Professional Judgment Problems and Cases 616
Applying Your Professional Judgment to Hillsburg 617
18 Audit Reports on Financial
Statements 619
LEARNING OBJECTIVES 619
The Audit Opinion and the Auditors’ Reporting
Responsibilities 620
The Unmodified Audit Opinion 622
Elements of the Auditor’s Report 622
Reporting Material Uncertainty for Going
Concern 628
Identify and Disclose Key Audit Matters 629
Determine Whether Emphasis of Matter or Other
Matter Paragraphs are Necessary 630
Decide Whether Modifications to the Audit Opinion are
Necessary 633
Qualified Audit Opinions 636
Adverse Audit Opinion 640
Disclaimer of Opinion 640
How the Audit Report Adds Value 642
Summary 643
Review Questions 644
Multiple Choice Questions 645
Discussion Questions and Problems 646
Professional Judgment Problems and Cases 648
Applying Your Professional Judgment to Hillsburg 650
19 Other Audits, Assurance Engagements,
and Related Services 651
LEARNING OBJECTIVES 651
Deciding which Standards Apply 652
Reviews and Compilations of Financial information 657
The Review Engagement Process 659
Compilation Engagements 665
Review of Interim Financial Statements 668
Assurance Engagements for Nonfinancial
Information 669
Assurance Over Compliance with Agreements and
Regulations 675
Agreed-upon Procedures Engagements 678
Reports on Supplemental Matters Arising from an Audit
or Review Engagement 683
The Future of Assurance Services 684
Summary 685
Review Questions 686
Multiple Choice Questions 687
Discussion Questions and Problems 687
Professional Judgment Problems and Cases 689
Applying Your Professional Judgment to Hillsburg 691
Online
20 Audit of the Capital Acquisition and
Repayment Cycle
Appendix: Hillsburg Hardware Limited 692
Index 701
Credits 719