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Tables of Contents for Auditing Concepts for a Changing Environment
Chapter/Section Title
Page #
Page Count
Assurance Services
2
32
Introduction
3
1
Need for Assurance
3
9
Potential Bias in Providing Information
3
1
Remoteness of Users
3
1
Complexity
4
1
Need for Assurance Regarding Information and Operations
4
8
The Special Role of Financial Statement Audits
12
5
Auditing Defined
13
2
The Need for Unbiased Reporting
15
1
Requirements to Enter the Public Accounting Profession
16
1
The Providers of Assurance Services
17
3
The Public Accounting Profession
17
1
The Internal Audit Profession
18
1
Governmental Auditing Profession
19
1
Other Professional and Regulatory Organizations
20
2
The American Institute of Certified Public Accountants
20
1
State Boards of Accountancy
21
1
The Securities and Exchange Commission
21
1
The Institute of Internal Auditors
22
1
The U. S. General Accounting Office
22
1
The Court System
22
1
Summary
22
1
Significant Terms
23
1
Review Questions
24
1
Multiple-Choice Questions
25
1
Discussion and Research Questions
26
5
Cases
31
3
Corporate Governance, Serving Client and Public Interests, and Audit Professionalism
34
46
Corporate Governance: Serving Client and Public Interests
35
6
Roles of Interested Parties
35
1
Who Is the Audit Client?
35
1
Audit Committees
36
2
Serving the Public's Interests
38
2
Assuring Quality
40
1
Framework for Quality
40
1
Maintaining Professionalism: Standards
41
9
Need for Professional Standards
41
1
Generally Accepted Auditing Standards
42
5
Standards for Other Audit Engagements
47
3
Maintaining Professionalism: Ethical Framework
50
13
Importance of Ethical Conduct
50
1
AICPA Code of Professional Conduct
50
3
SEC Influence on Auditor Independence Rules
53
7
Ethical Theories: Resolving Issues That Are Not Black or White
60
1
An Ethical Framework
61
2
Maintaining Professionalism: Ensuring Quality
63
1
Quality Control Standards and External Peer Reviews
63
1
Internal Peer Review Programs
64
1
Summary
64
1
Significant Terms
65
1
Review Questions
66
1
Multiple-Choice Questions
67
2
Discussion and Research Questions
69
6
Cases
75
5
The Audit Process
80
40
Overview of Audit Process
81
11
Developing an Understanding with the Client
81
3
The Audit Process
84
8
Materiality and Audit Risk
92
9
Overall Materiality versus Individual Account Materiality
92
1
Materiality Approaches
92
1
Risk of Material Misstatement
93
1
Risk Concepts
93
3
The Profession's Audit Risk Model: Practice Implications
96
2
Illustration of the Audit Risk Model
98
1
Limitations of the Audit Risk Model
99
2
Management Assertions
101
3
Financial Statement Assertions
101
2
Assertions for Other Assurance Services
103
1
Audit Evidence and Procedures
104
4
Relevance
104
1
Persuasiveness
104
1
Sufficiency
105
1
Relationship Among Audit Procedures and Assertions
105
1
Examples of Audit Programs
105
3
Summary
108
1
Significant Terms
109
1
Review Questions
109
2
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 Process
123
11
Using Analytical Tools to Develop Expectations
134
6
Assumptions Underlying Analytical Techniques
135
2
Trend Analysis
137
1
Ratio Analysis
138
1
Commonly Used Financial Ratios
138
2
Risk Analysis: Auditor Responsibility for Detecting and Reporting Fraud and Other Misstatements
140
7
Responsibilities for Detecting Errors
142
1
Responsibilites for Detecting and Reporting Fraud
142
1
Responsibilities for Discovering Fraud
142
2
Fraud Risk Assessment
144
1
Detecting Fraud: Matching Procedures to the Risk
145
1
Reporting on Detected Defalcations
145
1
Reporting on Fraudulent Financial Statements
146
1
Responsibilities for Detecting and Reporting Illegal Acts
146
1
Risk Analysis and the Conduct of the Audit
147
2
Linkage to Direct Tests of Account Balances
147
1
Quality of Accounting Principles Used
147
2
Summary
149
1
Significant Terms
149
1
Appendix 4A: Regression and Time Series Analysis
149
6
Review Questions
155
2
Multiple-Choice Questions
157
1
Discussion and Research Questions
158
10
Case
168
2
Evaluating the Integrity and Effectiveness of the Client's Control Systems
170
54
A Framework for Control
171
8
Internal Control
171
1
The Need for Control
172
7
A Framework for Understanding and Evaluating Internal Controls
179
18
Components of an Internal Control System
180
7
Understanding and Evaluating Accounting Information Systems
187
10
Control Risk Assessment
197
11
Obtain an Understanding
198
7
Make a Preliminary Assessment of Control Risk
205
1
Perform Test of Controls
206
1
Update Assessment of Control Risk and Need for Substantive Testing
206
2
Summary
208
1
Significant Terms
208
1
Review Questions
208
2
Multiple-Choice Questions
210
2
Discussion and Research Questions
212
8
Cases
220
4
Computer-Based Processing: Developing an Audit Assessment Approach
224
54
Introduction
225
8
Overview of Computerized Accounting Systems
225
6
The New Telecommunications Era: The Virtual Private Network
231
2
General and Application Controls
233
20
General Control Concepts
233
12
Application Control Procedures
245
8
Overview of Control Risk Assessment Process
253
4
Gaining an Understanding of the Control Structure
253
1
Testing the Effectiveness of Control Procedures
254
3
Electronic Data Interchange and Electronic Commerce
257
8
Risks and Control Considerations
260
1
Application Controls
260
2
Evaluating Controls in EDI: An Illustration
262
2
Electronic Commerce
264
1
Summary
265
1
Significant Terms
266
1
Review Questions
267
2
Multiple-Choice Questions
269
2
Discussion and Research Questions
271
5
Cases
276
2
Direct Tests of Account Balances
278
42
Overview of Evidence for Directly Testing Financial Statement Items
279
7
Approach to Gathering Evidence
283
1
Nature of Audit Testing
284
2
Audit Procedures
286
11
Overview of Audit Procedures
286
6
Commonly Used Audit Procedures for Direct Tests of Account Balances
292
4
Timing of Procedures
296
1
Extent of Procedures
296
1
Audit Programs and Documenting Audit Evidence
297
9
Audit Program Development
297
1
Documenting Audit Evidence
298
5
Importance of Quality Review
303
3
Summary
306
1
Significant Terms
306
1
Review Questions
306
2
Multiple-Choice Questions
308
2
Discussion and Research Questions
310
7
Cases
317
3
Auditing Computerized Information Systems
320
40
Computer Audit Tools to Test Computer Processing
321
12
Overview of a Comprehensive Approach to Computerized Data Processing
321
2
Approaches to Address Correctness of Processing
323
1
Test Data: Auditing through the Computer
323
3
Integrated Test Facility
326
1
Concurrent Processing Methodologies
327
3
Embedded Audit Modules
330
1
Relative Advantages of ITF, Concurrent Processing, and Embedded Audit Modules
331
2
Using the Computer to Help Test Accounting Records
333
5
Generalized Audit Software
335
2
Custom-Designed Software
337
1
Unique Audit Approaches for Electronic Commerce
338
4
Risk Analysis
338
1
The Process and Control Audit
339
1
Detailed Testing of Account Balances---Using Computerized Audit Techniques
339
3
Use of Personal Computing in Conducting an Audit
342
5
Traditional Uses of Personal Computers: Word Processing and Spreadsheets
343
1
Expanded Uses of Personal Computing Software for Audit Purposes
343
3
Unique Problems: Auditing a Client's Spreadsheet
346
1
Summary
347
1
Significant Terms
347
1
Review Questions
348
2
Multiple-Choice Questions
350
2
Discussion and Research Questions
352
6
Cases
358
2
Auditing Revenue and Related Accounts
360
66
Introduction
361
5
Overview of Revenue Cycle
361
5
Assessment of Environment Risk
366
14
Audit Steps
366
1
Inherent Risk
367
3
The Control Environment: Effect on Sales
370
1
Developing an Understanding of Internal Controls
371
2
Monitoring Controls
373
1
Control Structure Regarding Returns, Allowances, and Warranties
374
1
Importance of Credit Policies Authorizing Sales
374
3
Assessing and Documenting Environment Risk
377
3
Substantive Testing in the Revenue Cycle
380
23
Planning for Direct Tests of Account Balances
380
3
Audit Objectives and Assertions
383
3
Standard Accounts Receivable Audit Procedures
386
13
Allowance for Doubtful Accounts
399
2
Analytical Procedures for Revenue Cycle Accounts
401
1
Notes Receivable
402
1
Summary
403
1
Significant Terms
403
1
Review Questions
404
2
Multiple-Choice Questions
406
3
Discussion and Research Questions
409
11
Cases
420
6
Audit Sampling
426
66
Introduction
427
11
Overview of Audit Sampling
428
1
Nonsampling and Sampling Risk
428
3
Selecting a Sampling Approach
431
1
Sampling to Test Controls
432
1
Substantive Sampling Considerations
433
5
Nonstatistical Sampling
438
3
Determining Sample Size
438
1
Selecting the Sample
438
1
Evaluating the Sample Results
438
1
Nonstatistical Sampling Using Audit Software
439
2
Probability Proportional to Size Sampling
441
12
Overview of PPS Sample Design
442
2
Sample Size and Selection
444
3
Sample Evaluation
447
6
Summary
453
1
Significant Terms
453
3
Appendix 10A: Sampling to Test Controls
456
13
Appendix 10B: Classical Sampling Methods
469
9
Review Questions
478
2
Multiple-Choice Questions
480
2
Discussion and Research Questions
482
8
Case
490
2
Audit of Acquisition Cycle and Inventory
492
40
Audit of the Acquisition Cycle
492
10
Overview of Control Procedures and Control Risk Assessment
494
5
Testing Controls over Accounts Payable and Related Expenses
499
1
Substantive Tests of Accounts Payable
500
1
Audits of Expense Accounts
501
1
Audit of Inventory and Cost of Goods Sold
502
15
Internal Controls for Inventory
504
5
Substantive Testing of Inventory and Cost of Goods Sold
509
7
Cost of Goods Sold
516
1
Summary
517
1
Significant Terms
517
1
Review Questions
518
2
Multiple-Choice Questions
520
2
Discussion and Research Questions
522
8
Cases
530
2
Auditing Liquid Assets
532
42
Introduction
532
6
Cash Accounts Affected
533
1
Types of Marketable Security Accounts
534
1
Planning for Audits of Cash and Marketable Securities
534
4
Audits of Cash Accounts
538
15
Evaluating Control Risk: Cash Accounts
538
4
Understanding and Testing Internal Controls
542
4
Substantive Testing of Cash Balances
546
5
Operational Audits of Cash
551
2
Marketable Securities and Financial Instruments
553
6
Audits of Marketable Securities
553
1
Audits of Other Short-Term Securities
553
3
Sophisticated Financial Instruments and Marketable Securities
556
3
Summary
559
1
Significant Terms
560
1
Review Questions
560
2
Multiple-Choice
562
2
Discussion and Research Questions
564
8
Cases
572
2
Audit of Other Assets and Long-term Financing
574
32
Audit of Property, Plant, and Equipment
574
9
First-Time Audits
575
1
Inherent Risks
575
3
Evaluating Control Risk and Control Effectiveness
578
1
Tests of Property Additions and Disposals
579
2
Audit Considerations for Capitalized Leases
581
1
Asset Impairment
581
1
Discontinued Operations
582
1
Depreciation Expense and Accumulated Depreciation
582
1
Natural Resources
582
1
Audits of Mergers and Acquisitions
583
5
An Overview of Accounting Issues Associated with Mergers and Acquisitions
583
1
Audits of Mergers and Acquisitions
584
4
Audits of Financing Activities
588
5
Bonds
589
1
Common Stock and Owner's Equity
590
3
Summary
593
1
Significant Terms
593
1
Review Questions
593
1
Multiple-Choice Questions
594
1
Discussion and Research Questions
595
7
Cases
602
4
Completing the Audit
606
30
Final Review of the Audit
607
16
Contingencies
607
2
Adequacy of Disclosures
609
3
Management Representation Letter
612
2
Management Letter
614
1
Summarizing Possible Adjustments
615
1
Evaluating the Going Concern Assumption
615
5
Review of Major Estimates
620
1
Analytical and Quality Review of the Audit
621
1
Communicating with the Audit Committee
622
1
Subsequent Events
623
4
Normal Review of Subsequent Events
623
2
Subsequent Discovery of Facts Existing at the Date of the Auditor's Report
625
2
Consideration of Omitted Procedures after the Report Date
627
1
Summary
627
1
Significant Terms
627
1
Review Questions
628
1
Multiple-Choice Questions
628
2
Discussion and Research Questions
630
4
Case
634
2
Communicating Levels of Assurance
636
56
Audits, Reviews, and Compilations of Historical Financial Statements
637
22
Audit Reports
637
16
Reviews and Compilations
653
6
Reports on Other Financial Information
659
7
Special Reports
659
4
Interim Financial Information
663
3
Changing Information Needs of Investors and Creditors
666
1
Reports on Non-Financial and Other Information
666
9
Reports on Internal Control
667
4
Reporting on Evolving Assurance Services
671
4
Summary
675
1
Significant Terms
675
1
Review Questions
676
2
Multiple-Choice Questions
678
2
Discussion and Research Questions
680
10
Case
690
2
Professional Liability
692
32
The Legal Environment Affecting Litigation against Auditors
692
3
Joint and Several Liability
694
1
Audit Time and Fee Pressures
694
1
Audits Viewed as an Insurance Policy
695
1
Contingent-Fee Compensation for Lawyers
695
1
Class Action Suits
695
1
Legal Concepts
695
10
Causes of Legal Action
696
1
Parties That May Bring Suit against Auditors
697
8
Approaches to Mitigating Liability Exposure
705
7
Continuing Education Requirement
705
1
Membership Requirements for Firms
705
1
Quality Control Programs
706
1
Defensive Auditing
707
2
Role of Insurance
709
1
Tort Reform
710
1
Effect of Court Cases on Auditing Standards and Practice
711
1
Summary
712
1
Significant Terms
713
1
Review Questions
714
1
Multiple-Choice Questions
715
2
Discussion and Research Questions
717
3
Cases
720
4
Internal and Value-Added Auditing
724
32
Internal Auditing
724
8
Internal Auditing Defined
725
7
The Institute of Internal Auditors Code of Ethics
732
1
Reporting Company Fraud
732
1
Scope of Value-Added Internal Auditing
732
12
Operational Auditing
735
6
Information Systems Audits
741
1
Compliance Audits
742
1
Financial Reporting and Control Audits
742
1
Program and Performance Audits
743
1
Trends in Value-Added and Internal Auditing
744
2
Global Internal Auditing
744
1
Outsourcing Internal Auditing
745
1
Internal Auditing by Any Other Name
745
1
Summary
746
1
Significant Terms
746
1
Review Questions
746
1
Multiple-Choice Questions
747
2
Discussion and Research Questions
749
6
Case
755
1
Appendix: IDEA Tutorial and Cases
756
91
Tutorial
756
87
IDEA Case 1---Fraud
843
1
IDEA Case 2---Accounts Receivable
844
1
IDEA Case 3---Inventory
845
2
Case Index
847
1
Index
848
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