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Tables of Contents for Auditing
Chapter/Section Title
Page #
Page Count
PART 1 Audit Environment: Opportunities and Risks
Introduction to the Auditing Profession
1
26
Introduction
2
1
Auditing Defined
2
5
Need for Outside Attestation Function
3
1
Assertions and Established Criteria
4
1
Obtaining and Evaluating Evidence
4
1
Communicating Results to Users
4
3
The Importance of Auditing in Society
7
2
The Need for Unbiased Reporting
7
1
Expectations of Auditors
8
1
Requirements to Enter the Public Accounting Profession
9
1
Accounting and Auditing Expertise
9
1
Knowledge of Business and Its Risks
10
1
Understanding Accounting System Complexity
10
1
Diversity of Audit Practice
10
6
The Public Accounting Profession
10
4
The Internal Audit Profession
14
1
Governmental Auditing Profession
15
1
Professional and Regulatory Organizations
16
11
The American Institute of Certified Public Accountants
16
1
State Boards of Accountancy
16
1
The Securities and Exchange Commission
17
1
The Institute of Internal Auditors
17
1
The U.S. General Accounting Office
17
1
The Court System
17
1
Summary
18
1
Significant Terms
18
1
Review Questions
19
1
Multiple Choice Questions
20
1
Discussion and Research Questions
21
4
Cases
25
2
Audit Services and Standards
27
28
Introduction
28
5
Historical Background of the Auditing Profession
28
4
Standards for Attestation Services---A Framework
32
1
Generally Accepted Auditing Standards
33
10
The General Standards: Criteria Guiding Auditor Performance
33
2
The Fieldwork Standards: Guiding the Audit Process
35
3
The Reporting Standards: Clarifying the Communication Process
38
1
The Audit Report on a Company's Financial Statements
39
4
Attestation Services beyond Financial Statement Audits
43
1
Communication with Audit Committees
43
12
Audit Committee Defined
44
1
Responsibilities of the Audit Committee
44
1
Required Communication with Audit Committees
44
1
Summary
45
1
Significant Terms
45
1
Review Questions
46
1
Multiple Choice Questions
47
2
Discussion and Research Questions
49
3
Cases
52
3
Professional Ethics: Maintaining Quality and the Public Trust
55
28
Introduction and Overview
56
6
Professionalism in Public Accounting
56
1
Importance of Ethical Conduct
57
1
Ethical Theories
57
2
An Ethical Framework: Utilitarianism Constrained by Rights Considerations
59
3
AICPA Code of Professional Conduct
62
21
Rules of Conduct
62
10
Antitrust Concerns
72
1
Enforcement of the Code
72
1
Summary
72
1
Significant Terms
73
1
Review Questions
73
1
Multiple Choice Questions
74
2
Discussion and Research Questions
76
4
Case
80
3
Auditor Liability and Exposure
83
30
The Legal Environment Affecting Litigation against Auditors
84
3
Joint and Several Liability
85
1
Audit Time and Fee Pressures
85
1
Audits Viewed as an Insurance Policy
85
1
Contingent Fee Compensation for Lawyers
86
1
Class Action Suits
86
1
Punitive Damages and RICO Provisions
86
1
Specific Legal Concepts Affecting the Auditing Profession
87
10
Causes of Legal Action
88
1
Parties That May Bring Suit against Auditors
89
6
Criminal Liability to Third Parties
95
1
Summary of Auditor Liability to Third Parties
96
1
Approaches to Mitigating Liability Exposure
97
16
Continuing Education Requirement
97
1
Membership Requirements for Firms
97
1
Quality Control Programs
98
1
Defensive Auditing
99
1
Role of Insurance
100
3
Summary
103
1
Significant Terms
103
1
Review Questions
104
1
Multiple Choice Questions
105
2
Discussion and Research Questions
107
3
Cases
110
3
Marketing Public Accounting Services
113
20
Growth and Marketing of Auditing Services
114
3
Professionalism and Competition
114
1
Attracting Audit Clients
115
2
Accepting a Client
117
7
Determining the Reason for Changing Auditors
117
1
Considerations for Accepting or Continuing an Audit Client
118
3
Pricing Audit Services
121
1
Importance of the Engagement Letter
121
3
Competition and Nonaudit Work
124
1
Competition and Changes in Audit Methodology
124
1
Summary
125
8
Significant Terms
125
1
Review Questions
126
1
Multiple Choice Questions
127
1
Discussion and Research Questions
128
5
PART 2 Fundamental Audit Concepts: Planning, Evidence, and Risk Assessment
Understanding Audit Responsibilities and Planning
133
42
Management's Representations: A Key to Risk Analysis
134
4
Management's Assertions Conveyed in the Financial Statements
137
1
Materiality: Defining Important Misstatements
138
2
Overall Materiality versus Individual Materiality
140
1
Materiality Approaches
140
1
Risk-Based Approach to Auditing
140
7
Risk Concepts
141
2
The Profession's Audit Risk Model: Practice Implications
143
2
Illustration of the Audit Risk Model
145
1
Limitations of the Audit Risk Model
146
1
Adjusting Audit Risk
146
1
Obtaining an Understanding of the Client
147
9
Individual Risk Factors Affecting the Planning of the Audit
147
3
Gathering Information on Client and Engagement Risk
150
2
Problem Identification: The Role of Analytical Review Procedures
152
2
Risk Analysis and Audit Planning
154
2
Risk Analysis and Fraud Auditing
156
19
Responsibilities for Detecting Errors
156
1
Responsibilities for Detecting and Reporting Irregularities
157
3
Responsibilities for Detecting and Reporting Illegal Acts
160
1
Summary
161
1
Significant Terms
161
1
Review Questions
162
2
Multiple Choice Questions
164
2
Discussion and Research Questions
166
7
Case
173
2
Obtaining Evidence to Minimize Audit Risk
175
46
Introduction: Audit Evidence Framework
176
5
Overview of Evidence-Gathering Framework
176
4
Nature of Audit Testing
180
1
Typical Types of Audit Procedures
181
15
Realiability of Evidence
182
3
Paper versus Electronic Documentation
185
1
Description of Commonly Used Audit Procedures
186
9
Audit Procedures, Assertions, and Audit Programs
195
1
Documenting Audit Evidence
196
9
Audit Planning Documentation
197
1
The Audit Program
197
1
Copies of Documents
197
1
Auditor-Generated Memos
197
1
Computer Printouts
198
1
Audit Working Papers
199
1
Audit Program to Directly Test Account Balances
200
4
Summary
204
1
Significant Terms
204
1
Appendix A: Regression and Time Series Analysis
205
16
Review Questions
209
2
Multiple Choice Questions
211
2
Discussion and Research Questions
213
7
Case
220
1
Assessing Control Risk: An Overview
221
42
Introduction
222
2
Internal Control Definition and Relation to Audit
223
1
A Framework for Understanding and Evaluating Internal Controls
224
15
Components of an Internal Control System
224
5
Understanding and Evaluating Accounting Information Systems
229
10
Control Risk Assessment
239
24
Phase 1---Obtain an Understanding
241
5
Phase 2---Make Preliminary Assessment of Control Risk
246
1
Phase 3---Perform Test of Control
247
1
Phase 4---Update Assessment of Control Risk and Need for Substantive Testing
248
1
Reporting Control Deficiencies
248
2
Summary
250
1
Significant Terms
251
1
Review Questions
251
1
Multiple Choice Questions
252
2
Discussion and Research Questions
254
7
Cases
261
2
PART 3 Auditing in a Computerized Environment
Assessing Risk in Computerized Applications
263
40
Introduction
264
5
Overview of Computerized Accounting Systems
264
5
General and Application Controls
269
13
General Control Concepts
269
6
Application Control Procedures
275
7
Overview of Control Risk Assessment Process
282
4
Gaining an Understanding of the Control Structure
282
1
Testing the Effectiveness of Control Procedures
283
2
Client's Use of a Service Bureau
285
1
Electronic Data Interchange
286
17
Risk and Control Considerations
288
2
Evaluating Controls in EDI: An Illustration
290
3
Summary
293
1
Significant Terms
293
1
Review Questions
294
2
Multiple Choice Questions
296
1
Discussion and Research Questions
297
5
Case
302
1
Computer-Assisted Auditing: Today's Environment for Efficient Auditing
303
30
Computer Audit Tools to Test Computer Processing
304
8
Test Data: Auditing through the Computer
304
3
Integrated Test Facility
307
1
Concurrent Processing Methodologies
308
2
Embedded Audit Modules
310
1
Relative Advantages of ITF, Concurrent Processing, and Embedded Audit Modules
311
1
Using the Computer to Help Test Accounting records
312
6
Generalized Audit Software
315
2
Custom-Designed Software
317
1
Use of Personal Computing in Conducting an Audit
318
15
Traditional Uses of Personal Computers: Word Processing and Spreadsheets
318
1
Expanded Use of Personal Computing Software for Audit Purposes
318
3
Unique Problems: Auditing a Client's Spreadsheet
321
1
Summary
322
1
Significant Terms
322
1
Review Questions
323
2
Multiple Choice Questions
325
2
Discussion and Research Questions
327
5
Case
332
1
PART 4 Implementing the Risk Model in the Revenue Cycle: Nature and Extent of Testing
Assessing Control Risk: Revenue Cycle
333
42
An Overview of Control Risk in the Revenue Cycle
334
7
Assessment of Environment Risk: Audit Steps
334
1
Overview of Revenue Cycle
335
6
Inherent and Control Risk Considerations
341
11
Inherent Risk
341
3
The Control Environment: Effect on Sales
344
1
Develop an Understanding of Internal Controls
345
2
Monitoring Controls
347
3
Control Structure Regarding Returns, Allowances, and Warranties
350
2
Importance of Credit Policies Authorizing Sales
352
1
Assessing and Documenting Control Risk
352
3
Testing for the Operating Effectiveness of Control Procedures
354
1
Linking Control Risk Assessment and Substantive Testing
355
1
Illustrative Example: Nature Sporting Goods Manufacturing Company
355
20
Background
355
4
Accounting System and Internal Controls
359
6
Summary
365
1
Significant Terms
365
1
Review Questions
365
2
Multiple Choice Questions
367
2
Discussion and Research Questions
369
5
Case
374
1
Introduction to Audit Sampling
375
34
Introduction
376
4
Overview of Audit Sampling
376
1
Nonsampling and Sampling Risk
377
2
Selecting a Sampling Approach
379
1
Sampling to Test Control Procedures and Transaction Processing
380
14
Planning Factors
380
3
Attribute Estimation Sampling
383
10
Nonstatistical Sampling for Control Testing
393
1
Illustrative Example: Nature Sporting Goods Manufacturing Company
394
15
Nonstatistical Tests
394
1
Statistical Tests
395
2
Summary
397
1
Significant Terms
397
1
Review Questions
398
1
Multiple Choice Questions
399
2
Discussion and Research Questions
401
3
Cases
404
1
Computer-Assisted Problems
405
4
Substantive Testing in the Revenue Cycle
409
40
Introduction to Substantive Testing
410
4
Auditor Risk Concerns: Sales Transactions
410
1
Planning for Direct Tests of Account Balances
411
2
Determining Optimal Mix of Audit Procedures
413
1
Developing Audit Procedures
414
16
Audit Objectives and Assertions
414
2
Standard Accounts Receivable Audit Procedures
416
10
Allowance for Doubtful Accounts
426
2
Analytical Procedures for Revenue Cycle Accounts
428
1
Notes Receivable
429
1
Illustrative Example: Nature Sporting Goods Manufacturing Company
430
19
Selecting Procedures
431
3
Summary
434
1
Significant Terms
434
1
Review Questions
435
1
Multiple Choice Questions
436
1
Discussion and Research Questions
437
7
Case
444
2
Computer-Assisted Problems
446
3
Sampling for Substantive Tests of Account Balances
449
42
Introduction
450
4
Substantive Sampling Considerations
450
4
Probability Proportional to Size Sampling
454
11
Overview of PPS Sample Design
454
3
Sample Size and Selection
457
3
Subsampling
460
1
Sample Evaluation
460
5
Nonstatistical Substantive Sampling
465
2
Determining Sample Size
465
1
Selecting the Sample
465
1
Evaluating the Sample Results
466
1
Choosing between Nonstatistical and Statistical Sampling
466
1
Illustrative Example: Nature Sporting Goods Manufacturing Company
467
4
Planning the Sample
467
1
Determining the Sample Size
467
1
Evaluation
468
1
Summary of Confirmation Responses
468
1
Summary
469
1
Significant Terms
469
2
Appendix A: Classical Sampling Methods
471
20
Sample Size
471
4
Sample Selection
475
1
Sample Evaluation
475
1
Achieved Precision
476
1
Adjusted Achieved Precision
477
1
Choosing the Proper Sampling Method
478
1
Comparison of PPS and Classical Sampling
478
1
Microcomputer Support
479
1
Review Questions
479
2
Multiple Choice Questions
481
2
Discussion and Research Questions
483
5
Cases
488
1
Computer-Assisted Problems
489
2
PART 5 Implementing the Risk Model: Developing Audit Approaches for Other Financial Statement Accounts
Audits of Cash, Marketable Securities, and Other Financial Instruments
491
42
Introduction
492
4
Risks Associated with Cash
492
1
Cash Accounts Affected
492
1
Types of Marketable Security Accounts
493
1
Planning for Audits of Cash and Marketable Securities
493
3
Audits of Cash Accounts
496
13
Evaluating Control Risk: Cash Accounts
496
3
Understanding and Testing Internal Controls
499
4
Substantive Testing of Cash Balances
503
5
Operational Audits of Cash
508
1
Marketable Securities and Financial Instruments
509
4
Audits of Marketable Securities
509
1
Audits of Other Short-term Securities
509
2
Development of New Financial Instruments and Marketable Securities
511
2
Illustrative Example: Nature Sporting Goods Manufacturing Company
513
20
Understanding the System
515
1
Assessing Control Risk
516
1
Substantive Tests
516
3
Summary
519
1
Significant Terms
520
1
Review Questions
520
2
Multiple Choice Questions
522
2
Discussion and Research Questions
524
7
Cases
531
2
Audit of Acquisition Cycle and Inventory
533
38
Audits of the Acquisition Cycle
534
7
Overview of Control Procedures and Control Risk Assessment
534
5
Testing Controls over Accounts Payable and Related Expenses
539
1
Substantive Tests of Accounts Payable
539
1
Audits of Expense Accounts
540
1
Audit of Inventory and Cost of Goods Sold
541
9
Inventory Flow and Cost Components
541
4
Substantive Testing of Inventory and Cost of Goods Sold
545
5
Cost of Goods Sold
550
1
Illustrative Example: Nature Sporting Goods Manufacturing Company
550
21
Acquisition Cycle
550
4
Inventory
554
3
Summary
557
1
Significant Terms
557
1
Review Questions
557
2
Multiple Choice Questions
559
2
Discussion and Research Questions
561
7
Cases
568
1
Computer-Assisted Problems
569
2
Audit of Employee Compensation and Related Benefits
571
32
Payroll and Related Expenses
572
12
Understanding Internal Controls for Payroll
572
3
Gaining an Understanding of the Control Environment
575
2
Understanding and Testing Application Controls
577
2
Approach to Testing Controls and Correctness of Processing
579
2
Other Substantive Tests of Payroll
581
1
Tests of Accrued Liabilities
582
1
Tests of Officers' Compensation
583
1
Travel and Entertainment Expense Reimbursements
583
1
Auditing Employee Benefits
584
19
Pension Expense and Liabilities
584
5
Other Postretirement Employee Benefits
589
1
Summary
590
1
Significant Terms
591
1
Review Questions
591
1
Multiple Choice Questions
592
2
Discussion and Research Questions
594
7
Cases
601
2
Audit of Other Assets and Long-Term Financing
603
30
Audits of Prepaid Accounts
604
1
Substantive Tests of Prepaid Insurance
604
1
Other Prepaid Assets
605
1
Audits of Property, Plant, and Equipment
605
6
First-Time Audits
607
1
Evaluating Control Risk and Control Effectiveness
607
1
Tests of Additions and Disposals
608
1
Asset Impairment
609
1
Depreciation Expense and Accumulated Depreciation
610
1
Natural Resources
610
1
Audits of Mergers and Acquisitions
611
4
An Overview of Accounting Issues Associated with Mergers and Acquisitions
611
2
Audits of Mergers and Acquisitions
613
2
Audits of Financing Activities
615
18
Bonds
616
1
Common Stock and Owner's Equity
617
3
Summary
620
1
Significant Terms
620
1
Review Questions
621
1
Multiple Choice Questions
622
1
Discussion and Research Questions
623
9
Case
632
1
Audits of Financial Institutions
633
28
Nature and Audit of Financial Institutions
634
5
Understanding Financial Institutions
634
4
Unique Risks Inherent in Financial Institutions
638
1
Planning and Conducting the Audit of Financial Institutions
639
22
Competitive Environment
639
1
Economic Environment
640
1
Specific Financial Risks
641
1
The Regulatory Environment
642
1
Assessing Management Controls
642
1
Assessing Financial Risk
643
1
Assessing Control Risk and Reporting on Controls
644
1
Audit of Investment and Loan Assets of Financial Institutions
645
3
Audits of the Investment Portfolio
648
2
Auditing the Liabilities of Financial Institutions
650
2
Fraud Exposures
652
1
Summary
652
1
Significant Terms
653
1
Review Questions
653
1
Multiple Choice Questions
654
1
Discussion and Research Questions
655
4
Cases
659
2
Completing the Audit and Assessing Overall Risk and Materiality
661
24
Final Review of the Audit
662
9
Contingencies
662
3
Income Tax Provision
665
1
Adequacy of Disclosures
665
1
Management Representation Letter
666
2
Management Letter
668
1
Summarizing Possible Adjustments
668
2
Analytical and Quality Review of the Audit
670
1
Evaluating the Going Concern Assumption
671
2
Indicators of Potential Going Concern Problems
671
2
Subsequent Events
673
12
Normal Review of Subsequent Events
674
2
Subsequent Discovery of Facts Existing at the Date of the Auditor's Report
676
1
Consideration of Omitted Procedures after the Report Date
677
1
Summary
677
1
Significant Terms
677
1
Review Questions
678
1
Multiple Choice Questions
678
2
Discussion and Research Questions
680
2
Case
682
3
PART 6 Expanding Reporting Horizons
Audit Reports, Compilations, and Reviews
685
34
Audit Reports
686
1
Types of Audit Reports
686
14
Modifications of the Standard Unqualified Report
687
1
Modifications Not Affecting the Opinion
687
5
Modifications Affecting the Opinion
692
4
Reports on Comparative Statements
696
1
Disclaimer for Unaudited Statements of a Public Company
697
1
International Reporting
697
3
Summary of Audit Report Modification
700
1
Compilations and Reviews
700
19
Procedures Common to All Levels of Service
701
1
Compilations
701
2
Reviews
703
1
Standard Review Report
704
1
Distinguishing among Audits, Reviews, and Compilations
705
1
Summary
706
1
Significant Terms
706
1
Review Questions
707
1
Multiple Choice Questions
708
2
Discussion and Research Questions
710
7
Case
717
2
Special-Purpose Reporting Situations: Expansion of the Attest Function
719
36
Introduction
720
1
Reporting: Extensions of Historical Financial Statements
720
12
Special Reports
720
6
Application of Accounting Principles
726
1
Interim Financial Information
727
2
Supplementary Information
729
3
Reporting: Future-Oriented and Pro Forma Financial Statements
732
4
Prospective Financial Statements
732
3
Pro Forma Financial Statements
735
1
Reporting on Internal Accounting Control
736
6
Communication of Internal Control Related Matters Noted in an Audit
736
2
Reporting on a Client's Internal Controls over Financial Reporting
738
3
Reports on the Processing of Transactions by Service Organizations
741
1
Reporting: Expansion of Attestation Services
742
13
General Standards
744
1
Standards of Fieldwork
744
1
Standards of Reporting
744
1
Evolution of Other Assurance Services
745
1
Summary
746
1
Significant Terms
747
1
Review Questions
748
1
Multiple Choice Questions
749
1
Discussion and Research Questions
750
4
Case
754
1
PART 7 Evolution of the Audit Function
Internal, Operational, Government and Compliance Auditing
755
37
Overview of Internal Auditing
756
3
Competitive Advantages of Internal Auditing
756
1
Information Systems Auditing
756
2
The Institute of Internal Auditors' Code of Conduct
758
1
Internal Auditing: Reporting Company Fraud
758
1
Operational Auditing
759
10
The Need for Operational Audits
760
1
Comparison of Operational and Financial Auditing
760
2
Audit Approach
762
5
Benefits of Operational Audits
767
1
Developing and Maintaining Proper Relationships with Auditees
768
1
Governmental and Compliance Auditing
769
23
Evolution of Modern Governmental Auditing
769
1
Types of Government Audits
770
1
Choosing the Proper Standards
771
5
Summary of Reporting Requirements under GAAS, Government Auditing Standards, and the Single Audit Act
776
1
Overview of Financial Audit Procedures
777
4
Additional Audit considerations for a Single Audit Act Audit
781
1
Governmental Auditing Summary
782
1
Significant Terms
782
1
Review Questions
783
1
Multiple Choice Questions
784
1
Discussion and Research Questions
785
6
Case
791
1
Case Index
792
1
Index
793