Auditing And Assurance services: An integrated Approach, Sixteenth Edition
By Alvin A. Arens, Randal J. elder, Mark s. Beasley and Chris e. Hogan
Contents:
Preface 17
Contents
Part1 The Auditing Profession
Chapter 1: The demand for Audit And other Assurance services
Learning objectives 27
Nature of Auditing 28
Distinction Between Auditing and Accounting 30
Economic Demand for Auditing 30
Assurance Services 32
Types of Audits 36
Types of Auditors 38
Certified Public Accountant 40
Summary 41
Essential Terms 41
Review Questions 42
Multiple Choice Questions from CPA Examinations 42
Discussion Questions and Problems 44
Chapter 2: The CPA Profession
Learning objectives 48
Certified Public Accounting Firms 49
Structure of CPA Firms 51
Sarbanes–Oxley Act and Public Company Accounting Oversight Board 53
Securities and Exchange Commission 54
American Institute of Certified Public Accountants (AICPA) 55
International and U.S. Auditing Standards 56
Organization of U.S. Auditing Standards 58
Quality Control 62
Summary 64
Essential Terms 65
Review Questions 65
Multiple Choice Questions from CPA Examinations 66
Discussion Questions and Problems 68
Chapter 3: Audit reports
Learning Objectives 70
Standard Unmodified Opinion Audit Report for Nonpublic Entities 71
Conditions for Standard Unmodified Opinion Audit Report 74
Standard Audit Report and Report on Internal Control Over Financial
Reporting Under PCAOB Auditing Standards 74
Unmodified Opinion Audit Report with Emphasis-of-Matter Explanatory
Paragraph or Nonstandard Report Wording 78
Modifications to the Opinion in the Audit Report 82
Materiality 84
Discussion of Conditions Requiring a Modification of Opinion 87
Auditor’s Decision Process for Audit Reports 90
International Accounting and Auditing Standards 92
Summary 93
Essential Terms 93
Review Questions 94
Multiple Choice Questions from CPA Examinations 95
Discussion Questions and Problems 96
Chapter 4 Professional Ethics
Learning Objectives 102
What Are Ethics? 103
Ethical Dilemmas 104
Special Need for Ethical Conduct in Professions 107
Code of Professional Conduct 109
Independence Rule 113
Sarbanes–Oxley and Related Independence Requirements 117
Other Rules of Conduct 120
Enforcement 127
Summary 129
Essential Terms 129
Review Questions 129
Multiple Choice Questions from CPA Examinations 130
Discussion Questions and Problems 132
Cases 135
Chapter 5: Legal Liability
Learning Objectives 138
Changed Legal Environment 139
Distinguishing Business Failure, Audit Failure, and Audit Risk 140
Legal Concepts Affecting Liability 141
Liability to Clients 143
Liability to Third Parties Under Common Law 146
Civil Liability Under the Federal Securities Laws 148
Criminal Liability 154
The Profession’s Response to Legal Liability 155
Summary 156
Essential Terms 156
Review Questions 157
Multiple Choice Questions from CPA Examinations 158
Discussion Questions and Problems 160
Case 164
Part 2 The Audit Process
Chapter 6: Audit Responsibilities And Objectives
Learning Objectives 166
Objective of Conducting an Audit of Financial Statements 167
Management’s Responsibilities 168
Auditor’s Responsibilities 169
Professional Skepticism 172
Professional Judgment 174
Financial Statement Cycles 176
Setting Audit Objectives 181
Management Assertions 182
Transaction-Related Audit Objectives 185
Balance-Related and Presentation and Disclosure-Related Audit
Objectives 186
How Audit Objectives Are Met 190
Summary 192
Essential Terms 192
Review Questions 193
Multiple Choice Questions from CPA Examinations 194
Discussion Questions and Problems 196
Chapter 7: Audit Evidence
Learning Objectives 219
Nature of Evidence 220
Audit Evidence Decisions 221
Persuasiveness of Evidence 222
Types of Audit Evidence 225
Analytical Procedures 232
Common Financial Ratios 236
Audit Documentation 239
Summary 247
Essential Terms 247
Review Questions 248
Multiple Choice Questions from CPA Examinations 249
Discussion Questions and Problems 251
Case 258
ACL Problem 259
Chapter 8: Audit Planning And Materiality
Learning Objectives 260
Planning 261
Accept Client and Perform Initial Audit Planning 262
Understand the Client’s Business and Industry 266
Perform Preliminary Analytical Procedures 271
Materiality 274
Materiality for Financial Statements as a Whole 275
Determine Performance Materiality 278
Estimate Misstatement and Compare with Preliminary Judgment 281
Summary 283
Essential Terms 283
Review Questions 285
Multiple Choice Questions from CPA Examinations 287
Discussion Questions and Problems 289
Case 296
Integrated Case Application—Pinnacle Manufacturing: Part I 297
ACL Problem 300
Chapter 9: Assessing The Risk Of Material Misstatement
Learning Objectives 301
Audit Risk 302
Risk Assessment Procedures 303
Considering Fraud Risk 307
Identification of Significant Risks 308
Audit Risk Model 309
Assessing Acceptable Audit Risk 313
Assessing Inherent Risk 316
Relationship of Risks to Evidence and Factors Influencing Risks 318
Relationship of Risk and Materiality to Audit Evidence 323
Summary 324
Essential Terms 324
Review Questions 324
Multiple Choice Questions from CPA Examinations 326
Discussion Questions and Problems 328
Cases 332
Integrated Case Application—Pinnacle Manufacturing: Part II 334
Chapter 10: Assessing And Responding To Fraud Risks
Learning Objectives 337
Types of Fraud 338
Conditions for Fraud 339
Assessing the Risk of Fraud 343
Corporate Governance Oversight to Reduce Fraud Risks 347
Responding to the Risk of Fraud 351
Specific Fraud Risk Areas 353
Responsibilities When Fraud Is Suspected 359
Documenting the Fraud Assessment 363
Summary 363
Essential Terms 364
Review Questions 364
Multiple Choice Questions from CPA Examinations 365
Discussion Questions and Problems 367
Case 372
Integrated Case Application—Pinnacle Manufacturing: Part III 373
ACL Problem 374
Chapter 11: Internal Control And Coso Framework
Learning Objectives 375
Internal Control Objectives 376
Management and Auditor Responsibilities for Internal Control 377
COSO Components of Internal Control 379
Internal Controls Specific to Information Technology 389
Impact of IT Infrastructure on Internal Control 395
Summary 397
Essential Terms 397
Review Questions 399
Multiple Choice Questions from CPA Examinations 400
Discussion Questions and Problems 401
Case 405
Chapter 12: Assessing Control Risk And Reporting On Internal Controls
Learning Objectives 407
Obtain and Document Understanding of Internal Control 408
Assess Control Risk 411
Tests of Controls 417
Decide Planned Detection Risk and Design Substantive Tests 421
Auditor Reporting on Internal Control 422
Evaluating, Reporting, and Testing Internal Control for Nonpublic
and Smaller Public Companies 425
Impact of IT Environment on Control Risk Assessment and Testing 426
Summary 430
Essential Terms 430
Review Questions 432
Multiple Choice Questions from CPA Examinations 433
Discussion Questions and Problems 435
Case 443
ACL Problem 445
Integrated Case Application—Pinnacle Manufacturing: Part IV 445
Chapter 13: Overall Audit Strategy And Audit Program
Learning Objectives 448
Types of Tests 449
Selecting Which Types of Tests to Perform 454
Evidence Mix 458
Design of the Audit Program 459
Summary of Key Evidence-Related Terms 467
Summary of the Audit Process 469
Summary 473
Essential Terms 473
Review Questions 474
Multiple Choice Questions from CPA Examinations 475
Discussion Questions and Problems 476
Cases 482
Part3 Application Of The Audit Process To The Sales And Collection Cycle
Chapter 14: Audit Of The Sales And Collection Cycle:
Tests Of Controls And Substantive
Tests Of Transactions
Learning Objectives 486
Accounts and Classes of Transactions in the Sales and Collection Cycle 487
Business Functions in the Cycle and Related Documents and Records 488
Methodology for Designing Tests of Controls and Substantive
Tests of Transactions for Sales 492
Sales Returns and Allowances 503
Methodology for Designing Tests of Controls and Substantive
Tests of Transactions for Cash Receipts 504
Audit Tests for Uncollectible Accounts 508
Effect of Results of Tests of Controls and Substantive
Tests of Transactions 508
Summary 509
Essential Terms 510
Review Questions 510
Multiple Choice Questions from CPA Examinations 512
Discussion Questions and Problems 514
Case 519
Integrated Case Application—Pinnacle Manufacturing: Part V 520
ACL Problem 521
Chapter 15: Audit Sampling For Tests Of Controls And Substantive Tests Of Transactions
Learning Objectives 522
Representative Samples 523
Statistical Versus Nonstatistical Sampling and Probabilistic Versus
Nonprobabilistic Sample Selection 524
Sample Selection Methods 525
Sampling for Exception Rates 528
Application of Nonstatistical Audit Sampling 529
Statistical Audit Sampling 543
Application of Attributes Sampling 546
Summary 552
Essential Terms 552
Review Questions 553
Multiple Choice Questions from CPA Examinations 554
Discussion Questions and Problems 556
Case 561
Integrated Case Application—Pinnacle Manufacturing: Part VI 561
ACL Problem 563
Chapter 16: Completing The Tests In The Sales And Collection Cycle: Accounts Receivable
Learning Objectives 564
Methodology for Designing Tests of Details of Balances 565
Designing Tests of Details of Balances 571
Confirmation of Accounts Receivable 577
Developing Tests of Details Audit Program 583
Summary 587
Essential Terms 587
Review Questions 587
Multiple Choice Questions from CPA Examinations 589
Discussion Questions and Problems 590
Case 597
Integrated Case Application—Pinnacle Manufacturing: Part VII 598
ACL Problem 603
Chapter 17: Audit Sampling For Tests Of Details Of Balances
Learning Objectives 604
Comparisons of Audit Sampling for Tests of Details of Balances
and for Tests of Controls and Substantive Tests of Transactions 605
Nonstatistical Sampling 606
Monetary Unit Sampling 615
Variables Sampling 623
Illustration Using Difference Estimation 628
Summary 631
Essential Terms 632
Review Questions 632
Multiple Choice Questions from CPA and CIA Examinations 633
Discussion Questions and Problems 635
Cases 640
ACL Problem 642
Part4 Application Of The Audit Process To Other Cycles
Chapter 18: Audit Of The Acquisition And Payment Cycle: Tests Of Controls, Substantive Tests Of Transactions, And
Accounts Payable
Learning Objectives 644
Accounts and Classes of Transactions in the Acquisition
and Payment Cycle 645
Business Functions in the Cycle and Related Documents and Records 646
Methodology for Designing Tests of Controls and Substantive Tests of
Transactions 649
Methodology for Designing Tests of Details of Balances for Accounts
Payable 656
Summary 664
Essential Terms 664
Review Questions 665
Multiple Choice Questions from CPA Examinations 666
Discussion Questions and Problems 668
Case 674
Chapter 19: Completing The Tests In The Acquisition And Payment Cycle: Verification Of Selected Accounts
Learning Objectives 676
Types of Other Accounts in the Acquisition and Payment Cycle 677
Audit of Property, Plant, and Equipment 677
Audit of Prepaid Expenses 685
Audit of Accrued Liabilities 688
Audit of Income and Expense Accounts 689
Summary 693
Essential Terms 693
Review Questions 693
Multiple Choice Questions from CPA Examinations 694
Discussion Questions and Problems 696
Cases 699
Chapter 20: Audit Of The Payroll And Personnel Cycle
Learning Objectives 702
Accounts and Transactions in the Payroll and Personnel Cycle 703
Business Functions in the Cycle and Related Documents and Records 703
Methodology for Designing Tests of Controls and Substantive
Tests of Transactions 706
Methodology for Designing Substantive Analytical Procedures and
Tests of Details of Balances 712
Summary 716
Essential Terms 716
Review Questions 716
Multiple Choice Questions from CPA Examinations 717
Discussion Questions and Problems 719
Case 723
Chapter 21: Audit Of The Inventory And Warehousing Cycle
Learning Objectives 725
Business Functions in the Cycle and Related Documents and Records 726
Parts of the Audit of Inventory 729
Audit of Cost Accounting 731
Substantive Analytical Procedures 734
Physical Observation of Inventory 735
Audit of Pricing and Compilation 737
Integration of the Tests 741
Summary 743
Essential Terms 743
Review Questions 744
Multiple Choice Questions from CPA Examinations 745
Discussion Questions and Problems 746
Case 753
Chapter 22: Audit Of The Capital Acquisition And Repayment Cycle
Learning Objectives 755
Accounts in the Cycle 756
Notes Payable 757
Owners’ Equity 761
Summary 767
Essential Terms 767
Review Questions 768
Multiple Choice Questions from CPA Examinations 768
Discussion Questions and Problems 770
Chapter 23: Audit Of Cash And Financial Instruments
Learning Objectives 776
Types of Cash and Financial Instruments Accounts 777
Cash in the Bank and Transaction Cycles 779
Audit of the General Cash Account 780
Fraud-Oriented Procedures 788
Audit of Financial Instruments Accounts 793
Summary 796
Essential Terms 796
Review Questions 797
Multiple Choice Questions from CPA Examinations 798
Discussion Questions and Problems 799
Part5 Completing The Audit
Chapter 24: Completing The Audit
Learning Objectives 806
Perform Additional Tests for Presentation and Disclosure 807
Review for Contingent Liabilities and Commitments 808
Review for Subsequent Events 813
Final Evidence Accumulation 817
Evaluate Results 821
Issue the Audit Report 825
Communicate with the Audit Committee and Management 825
Subsequent Discovery of Facts 827
Summary 829
Essential Terms 829
Review Questions 830
Multiple Choice Questions from CPA Examinations 831
Discussion Questions and Problems 833
Case 837
Part6 Other Assurance And Nonassurance Services
Chapter 25: Other Assurance Services
Learning Objectives 839
Review, Compilation, and Preparation Services 840
Review of Interim Financial Information for Public Companies 846
Attestation Engagements 847
Reports on Controls at Service Organizations (SOC Reports) 851
Prospective Financial Statements 853
Agreed-Upon Procedures Engagements 854
Other Audits or Limited Assurance Engagements 855
Summary 857
Essential Terms 858
Review Questions 859
Multiple Choice Questions from CPA Examinations 860
Discussion Questions and Problems 861
Chapter 26: Internal And Governmental Financial Auditing And Operational Auditing
Learning Objectives 866
Internal Financial Auditing 867
Governmental Financial Auditing 870
Operational Auditing 873
Summary 880
Essential Terms 880
Review Questions 881
Multiple Choice Questions from CPA, CIA, and CMA Examinations 881
Discussion Questions and Problems 884
index 888
Credits 896