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Tables of Contents for Auditing Concepts for a Changing Environment
Potential Bias in Providing Information3
1
Remoteness of Users3
1
Complexity4
1
Need for Assurance Regarding Information and Operations4
8
The Special Role of Financial Statement Audits
12
5
Auditing Defined13
2
The Need for Unbiased Reporting15
1
Requirements to Enter the Public Accounting Profession16
1
The Providers of Assurance Services
17
3
The Public Accounting Profession17
1
The Internal Audit Profession18
1
Governmental Auditing Profession19
1
Other Professional and Regulatory Organizations
20
2
The American Institute of Certified Public Accountants20
1
State Boards of Accountancy21
1
The Securities and Exchange Commission21
1
The Institute of Internal Auditors22
1
The U. S. General Accounting Office22
1
The Court System22
1
Multiple-Choice Questions
25
1
Discussion and Research Questions
26
5
Corporate Governance, Serving Client and Public Interests, and Audit Professionalism
34
46
Corporate Governance: Serving Client and Public Interests
35
6
Roles of Interested Parties35
1
Who Is the Audit Client?35
1
Audit Committees36
2
Serving the Public's Interests38
2
Assuring Quality40
1
Framework for Quality40
1
Maintaining Professionalism: Standards
41
9
Need for Professional Standards41
1
Generally Accepted Auditing Standards42
5
Standards for Other Audit Engagements47
3
Maintaining Professionalism: Ethical Framework
50
13
Importance of Ethical Conduct50
1
AICPA Code of Professional Conduct50
3
SEC Influence on Auditor Independence Rules53
7
Ethical Theories: Resolving Issues That Are Not Black or White60
1
An Ethical Framework61
2
Maintaining Professionalism: Ensuring Quality
63
1
Quality Control Standards and External Peer Reviews63
1
Internal Peer Review Programs64
1
Multiple-Choice Questions
67
2
Discussion and Research Questions
69
6
Overview of Audit Process
81
11
Developing an Understanding with the Client81
3
The Audit Process84
8
Materiality and Audit Risk
92
9
Overall Materiality versus Individual Account Materiality92
1
Materiality Approaches92
1
Risk of Material Misstatement93
1
Risk Concepts93
3
The Profession's Audit Risk Model: Practice Implications96
2
Illustration of the Audit Risk Model98
1
Limitations of the Audit Risk Model99
2
Management Assertions
101
3
Financial Statement Assertions101
2
Assertions for Other Assurance Services103
1
Audit Evidence and Procedures
104
4
Relevance104
1
Persuasiveness104
1
Sufficiency105
1
Relationship Among Audit Procedures and Assertions105
1
Examples of Audit Programs105
3
Multiple-Choice Questions
111
2
Discussion and Research Questions
113
7
Understanding Business Risk: A Framework for Audit Planning
120
50
Business Risk: Audit Implications
121
13
What Is Risk?121
2
The Relationship of Business Risk to the Audit Process123
11
Using Analytical Tools to Develop Expectations
134
6
Assumptions Underlying Analytical Techniques135
2
Trend Analysis137
1
Ratio Analysis138
1
Commonly Used Financial Ratios138
2
Risk Analysis: Auditor Responsibility for Detecting and Reporting Fraud and Other Misstatements
140
7
Responsibilities for Detecting Errors142
1
Responsibilites for Detecting and Reporting Fraud142
1
Responsibilities for Discovering Fraud142
2
Fraud Risk Assessment144
1
Detecting Fraud: Matching Procedures to the Risk145
1
Reporting on Detected Defalcations145
1
Reporting on Fraudulent Financial Statements146
1
Responsibilities for Detecting and Reporting Illegal Acts146
1
Risk Analysis and the Conduct of the Audit
147
2
Linkage to Direct Tests of Account Balances147
1
Quality of Accounting Principles Used147
2
Appendix 4A: Regression and Time Series Analysis
149
6
Multiple-Choice Questions
157
1
Discussion and Research Questions
158
10
Evaluating the Integrity and Effectiveness of the Client's Control Systems
170
54
A Framework for Control
171
8
Internal Control171
1
The Need for Control172
7
A Framework for Understanding and Evaluating Internal Controls
179
18
Components of an Internal Control System180
7
Understanding and Evaluating Accounting Information Systems187
10
Control Risk Assessment
197
11
Obtain an Understanding198
7
Make a Preliminary Assessment of Control Risk205
1
Perform Test of Controls206
1
Update Assessment of Control Risk and Need for Substantive Testing206
2
Multiple-Choice Questions
210
2
Discussion and Research Questions
212
8
Computer-Based Processing: Developing an Audit Assessment Approach
224
54
Overview of Computerized Accounting Systems225
6
The New Telecommunications Era: The Virtual Private Network231
2
General and Application Controls
233
20
General Control Concepts233
12
Application Control Procedures245
8
Overview of Control Risk Assessment Process
253
4
Gaining an Understanding of the Control Structure253
1
Testing the Effectiveness of Control Procedures254
3
Electronic Data Interchange and Electronic Commerce
257
8
Risks and Control Considerations260
1
Application Controls260
2
Evaluating Controls in EDI: An Illustration262
2
Electronic Commerce264
1
Multiple-Choice Questions
269
2
Discussion and Research Questions
271
5
Direct Tests of Account Balances
278
42
Overview of Evidence for Directly Testing Financial Statement Items
279
7
Approach to Gathering Evidence283
1
Nature of Audit Testing284
2
Overview of Audit Procedures286
6
Commonly Used Audit Procedures for Direct Tests of Account Balances292
4
Timing of Procedures296
1
Extent of Procedures296
1
Audit Programs and Documenting Audit Evidence
297
9
Audit Program Development297
1
Documenting Audit Evidence298
5
Importance of Quality Review303
3
Multiple-Choice Questions
308
2
Discussion and Research Questions
310
7
Auditing Computerized Information Systems
320
40
Computer Audit Tools to Test Computer Processing
321
12
Overview of a Comprehensive Approach to Computerized Data Processing321
2
Approaches to Address Correctness of Processing323
1
Test Data: Auditing through the Computer323
3
Integrated Test Facility326
1
Concurrent Processing Methodologies327
3
Embedded Audit Modules330
1
Relative Advantages of ITF, Concurrent Processing, and Embedded Audit Modules331
2
Using the Computer to Help Test Accounting Records
333
5
Generalized Audit Software335
2
Custom-Designed Software337
1
Unique Audit Approaches for Electronic Commerce
338
4
Risk Analysis338
1
The Process and Control Audit339
1
Detailed Testing of Account Balances---Using Computerized Audit Techniques339
3
Use of Personal Computing in Conducting an Audit
342
5
Traditional Uses of Personal Computers: Word Processing and Spreadsheets343
1
Expanded Uses of Personal Computing Software for Audit Purposes343
3
Unique Problems: Auditing a Client's Spreadsheet346
1
Multiple-Choice Questions
350
2
Discussion and Research Questions
352
6
Auditing Revenue and Related Accounts
360
66
Overview of Revenue Cycle361
5
Assessment of Environment Risk
366
14
Audit Steps366
1
Inherent Risk367
3
The Control Environment: Effect on Sales370
1
Developing an Understanding of Internal Controls371
2
Monitoring Controls373
1
Control Structure Regarding Returns, Allowances, and Warranties374
1
Importance of Credit Policies Authorizing Sales374
3
Assessing and Documenting Environment Risk377
3
Substantive Testing in the Revenue Cycle
380
23
Planning for Direct Tests of Account Balances380
3
Audit Objectives and Assertions383
3
Standard Accounts Receivable Audit Procedures386
13
Allowance for Doubtful Accounts399
2
Analytical Procedures for Revenue Cycle Accounts401
1
Notes Receivable402
1
Multiple-Choice Questions
406
3
Discussion and Research Questions
409
11
Overview of Audit Sampling428
1
Nonsampling and Sampling Risk428
3
Selecting a Sampling Approach431
1
Sampling to Test Controls432
1
Substantive Sampling Considerations433
5
Nonstatistical Sampling
438
3
Determining Sample Size438
1
Selecting the Sample438
1
Evaluating the Sample Results438
1
Nonstatistical Sampling Using Audit Software439
2
Probability Proportional to Size Sampling
441
12
Overview of PPS Sample Design442
2
Sample Size and Selection444
3
Sample Evaluation447
6
Appendix 10A: Sampling to Test Controls
456
13
Appendix 10B: Classical Sampling Methods
469
9
Multiple-Choice Questions
480
2
Discussion and Research Questions
482
8
Audit of Acquisition Cycle and Inventory
492
40
Audit of the Acquisition Cycle
492
10
Overview of Control Procedures and Control Risk Assessment494
5
Testing Controls over Accounts Payable and Related Expenses499
1
Substantive Tests of Accounts Payable500
1
Audits of Expense Accounts501
1
Audit of Inventory and Cost of Goods Sold
502
15
Internal Controls for Inventory504
5
Substantive Testing of Inventory and Cost of Goods Sold509
7
Cost of Goods Sold516
1
Multiple-Choice Questions
520
2
Discussion and Research Questions
522
8
Auditing Liquid Assets
532
42
Cash Accounts Affected533
1
Types of Marketable Security Accounts534
1
Planning for Audits of Cash and Marketable Securities534
4
Audits of Cash Accounts
538
15
Evaluating Control Risk: Cash Accounts538
4
Understanding and Testing Internal Controls542
4
Substantive Testing of Cash Balances546
5
Operational Audits of Cash551
2
Marketable Securities and Financial Instruments
553
6
Audits of Marketable Securities553
1
Audits of Other Short-Term Securities553
3
Sophisticated Financial Instruments and Marketable Securities556
3
Discussion and Research Questions
564
8
Audit of Other Assets and Long-term Financing
574
32
Audit of Property, Plant, and Equipment
574
9
First-Time Audits575
1
Inherent Risks575
3
Evaluating Control Risk and Control Effectiveness578
1
Tests of Property Additions and Disposals579
2
Audit Considerations for Capitalized Leases581
1
Asset Impairment581
1
Discontinued Operations582
1
Depreciation Expense and Accumulated Depreciation582
1
Natural Resources582
1
Audits of Mergers and Acquisitions
583
5
An Overview of Accounting Issues Associated with Mergers and Acquisitions583
1
Audits of Mergers and Acquisitions584
4
Audits of Financing Activities
588
5
Bonds589
1
Common Stock and Owner's Equity590
3
Multiple-Choice Questions
594
1
Discussion and Research Questions
595
7
Completing the Audit
606
30
Final Review of the Audit
607
16
Contingencies607
2
Adequacy of Disclosures609
3
Management Representation Letter612
2
Management Letter614
1
Summarizing Possible Adjustments615
1
Evaluating the Going Concern Assumption615
5
Review of Major Estimates620
1
Analytical and Quality Review of the Audit621
1
Communicating with the Audit Committee622
1
Normal Review of Subsequent Events623
2
Subsequent Discovery of Facts Existing at the Date of the Auditor's Report625
2
Consideration of Omitted Procedures after the Report Date627
1
Multiple-Choice Questions
628
2
Discussion and Research Questions
630
4
Communicating Levels of Assurance
636
56
Audits, Reviews, and Compilations of Historical Financial Statements
637
22
Audit Reports637
16
Reviews and Compilations653
6
Reports on Other Financial Information
659
7
Special Reports659
4
Interim Financial Information663
3
Changing Information Needs of Investors and Creditors666
1
Reports on Non-Financial and Other Information
666
9
Reports on Internal Control667
4
Reporting on Evolving Assurance Services671
4
Multiple-Choice Questions
678
2
Discussion and Research Questions
680
10
Professional Liability
692
32
The Legal Environment Affecting Litigation against Auditors
692
3
Joint and Several Liability694
1
Audit Time and Fee Pressures694
1
Audits Viewed as an Insurance Policy695
1
Contingent-Fee Compensation for Lawyers695
1
Class Action Suits695
1
Causes of Legal Action696
1
Parties That May Bring Suit against Auditors697
8
Approaches to Mitigating Liability Exposure
705
7
Continuing Education Requirement705
1
Membership Requirements for Firms705
1
Quality Control Programs706
1
Defensive Auditing707
2
Role of Insurance709
1
Tort Reform710
1
Effect of Court Cases on Auditing Standards and Practice711
1
Multiple-Choice Questions
715
2
Discussion and Research Questions
717
3
Internal and Value-Added Auditing
724
32
Internal Auditing Defined725
7
The Institute of Internal Auditors Code of Ethics732
1
Reporting Company Fraud732
1
Scope of Value-Added Internal Auditing
732
12
Operational Auditing735
6
Information Systems Audits741
1
Compliance Audits742
1
Financial Reporting and Control Audits742
1
Program and Performance Audits743
1
Trends in Value-Added and Internal Auditing
744
2
Global Internal Auditing744
1
Outsourcing Internal Auditing745
1
Internal Auditing by Any Other Name745
1
Multiple-Choice Questions
747
2
Discussion and Research Questions
749
6
Appendix: IDEA Tutorial and Cases
756
91
IDEA Case 2---Accounts Receivable
844
1
IDEA Case 3---Inventory
845
2
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