Part One Introduction to Auditing and Financial Statement Audits 1
1 AN INTRODUCTION TO AUDITING 3
Learning Objectives 3
Relevant Accounting and Auditing Pronouncements 3
The Demand for Auditing 3
Auditing，Attestation，and Assurance 5
Types of Audits 8
Types of Auditors 11
The Public Accounting Profession 14
Organizations That Affect Financial Audits 20
Generally Accepted Auditing Standards 24
Statements on Auditing Standards 27
Review Questions 28
Multiple-Choice Questions from CPA Examinations 28
Problems 31
Discussion Cases 34
2 AN OVERVIEW OF FINANCIAL STATEMENT AUDITS 36
Learning Objectives 36
Relevant Accounting and Auditing Pronouncements 36
Generally Accepted Accounting Principles as an Audit Criterion 37
Financial Statements：Management Assertions and Audit Objectives 38
Three Fundamental Concepts in Conducting an Audit 40
Sampling：Inferences Based on Limited Observations 42
Ethics and Independence 43
Overview of the Audit Process 45
Audit Reporting 48
Case Illustration：Calabro Paging Services 54
Review Questions 62
Multiple-Choice Questions from CPA Examinations 62
Problems 65
Discussion Cases 67
Part Two Basic Auditing Concepts：Materiality，Audit Risk，and Evidence 71
Relevant Accounting and Auditing Pronouncements 73
3 MATERIALITY AND AUDIT RISK 73
Learning Objectives 73
Materiality 74
Audit Risk 84
Appendix：A Quantitative Approach to Allocating Materiality 96
Review Questions 98
Multiple-Choice Questions from CPA Examinations 98
Problems 100
Discussion Case 104
Relevant Accounting and Auditing Pronouncements 106
4 EVIDENTIAL MATTER，TYPES OF AUDIT EVIDENCE，AND WORKPAPER DOCUMENTATION 106
Learning Objectives 106
The Relationship of Evidential Matter to the Audit Report 107
Management Assertions 108
Audit Objectives and Audit Procedures 111
Basic Concepts of Evidential Matter 114
Types of Audit Evidence 117
Working Papers 123
Review Questions 131
Multiple-Choice Questions from CPA Examinations 131
Problems 133
Discussion Case 137
SCAD Assignment 138
Part Three Planning the Audit and Understanding Internal Control 139
5 AUDIT PLANNING AND TYPES OF AUDIT TESTS 141
Learning Objectives 141
Relevant Accounting and Auditing Pronouncements 141
Preengagement Activities 142
Engagement Planning 149
Types of Audit Tests 159
Analytical Procedures 161
Appendix：Selected Financial Ratios Useful as Analytical Procedures 169
Review Questions 173
Multiple-Choice Questions from CPA Examinations 174
Problems 177
Discussion Case 181
SCAD Assignment 185
6 INTERNAL CONTROL IN A FINANCIAL STATEMENT AUDIT 186
Learning Objectives 186
Relevant Accounting and Auditing Pronouncements 186
Internal Control 187
The Components of Internal Control 188
Consideration of Internal Control in Planning and Performing an Audit 197
Timing of Audit Procedures 212
Communication of Internal Control-Related Matters 214
Appendix：Flowcharting Techniques 216
Review Questions 217
Multiple-Choice Questions from CPA Examinations 219
Problems 222
Discussion Case 224
SCAD Assignment 225
Relevant Accounting and Auditing Pronouncements 226
7 THE EFFECT OF COMPUTER PROCESSING ON THE AUDIT FUNCTION 226
Learning Objectives 226
Changes in Computer Technology and Their Effect on Auditing 227
The Effect of EDP on Internal Control 231
Controls in an EDP Environment 233
The Complexity of EDP Systems 244
The Audit Process in an EDP Environment 245
Computer-Assisted Audit Techniques 247
Use of Microcomputers as an Audit Tool 255
Auditing Accounting Applications Processed by Outside Service Organizations 257
Review Questions 258
Multiple-Choice Questions from CPA Examinations 259
Problems 262
Discussion Case 267
Part Four Statistical Tools for Auditing 271
8 AUDIT SAMPLING：AN OVERVIEW AND APPLICATION TO TESTS OF CONTROLS 271
Learning Objectives 271
Relevant Accounting and Auditing Pronouncements* 271
Introduction 271
Terminology 273
Types of Audit Sampling 275
Requirements of SAS No．39 276
Attribute Sampling Applied to Tests of Controls 278
An Example of an Attribute-Sampling Plan 287
Nonstatistical Sampling for Tests of Control 298
Review Questions 300
Multiple-Choice Questions from CPA Examinations 301
Problems 304
Discussion Case 306
SCAD Assignment 306
Learning Objectives 307
Relevant Accounting and Auditing Pronouncements 307
9 AUDIT SAMPLING：AN APPLICATION TO SUBSTANTIVE TESTS OF ACCOUNT BALANCES 307
A Sampling Plan for Substantive Tests of Account Balances 308
Monetary-Unit Sampling 314
Nonstatistical Sampling for Tests of Account Balances 324
Appendix：Classical Variables Sampling 329
Review Questions 334
Multiple-Choice Questions from CPA Examinations 335
Problems 338
Discussion Case 341
Relevant Accounting and Auditing Pronouncements 345
Learning Objectives 345
10 AUDITING THE REVENUE CYCLE 345
Part Five Auditing Accounting Applications and Related Accounts 345
Revenue Recognition 346
Inherent Risk Assessment 347
Overview of the Revenue Cycle 350
Control Risk Assessment 361
Control Procedures and Tests of Controls-Revenue Transactions 363
Control Procedures and Tests of Controls-Cash Receipts Transactions 370
Control Procedures and Tests of Controls-Sales Returns and Allowances Transactions 375
Review Questions 376
Relating the Assessed Level of Control Risk to Substantive Testing 376
Multiple-Choice Questions from CPA Examinations 377
Problems 380
Discussion Case 385
SCAD Assignment 386
11 AUDITING ACCOUNTS RECEIVABLE AND RELATED ACCOUNTS 387
Learning Objectives 387
Relevant Accounting and Auditing Pronouncements 387
Substantive Tests of Revenue-Related Accounts 388
Substantive Tests of Transactions 389
Tests of Account Balances-Accounts Receivable 390
Analytical Procedures 390
The Confirmation Process-Accounts Receivable 399
Auditing Other Receivables 405
Evaluating the Audit Findings-Accounts Receivable and Related Accounts 406
Review Questions 407
Multiple-Choice Questions from CPA Examinations 408
Problems 410
Discussion Case 414
SCAD Assignment 415
Relevant Accounting and Auditing Pronouncements 416
Learning Objectives 416
12 AUDITING THE PURCHASING CYCLE AND RELATED ACCOUNTS 416
Expense and Liability Recognition 417
Inherent Risk Assessment 418
Overview of the Purchasing Cycle 420
Control Risk Assessment 428
Control Procedures and Tests of Controls-Purchase Transactions 432
Control Procedures and Tests of Controls-Cash Disbursement Transactions 437
Control Procedures and Tests of Controls-Purchase Return Transactions 441
Auditing Accounts Payable and Accrued Expenses 442
Relating the Assessed Level of Control Risk to Substantive Testing 442
Substantive Tests of Transactions 443
Analytical Procedures 443
Tests of Account Balances-Accounts Payable and Accrued Expenses 445
Accounts Payable Confirmations 450
Evaluating the Audit Findings-Accounts Payable and Related Accounts 451
Review Questions 453
Multiple-Choice Questions from CPA Examinations 454
Problems 456
Discussion Case 461
13 AUDITING THE PAYROLL CYCLE AND RELATED ACCOUNTS 462
Learning Objectives 462
Relevant Accounting and Auditing Pronouncements 462
Inherent Risk Assessment 463
Overview of the Payroll Cycle 463
Control Risk Assessment 469
Control Procedures and Tests of Controls-Payroll Transactions 471
Relating the Assessed Level of Control Risk to Substantive Testing 475
Auditing Payroll-Related Accounts 475
Analytical Procedures 476
Substantive Tests of Transactions 476
Tests of Account Balances 478
Evaluating the Audit Findings-Payroll-Related Accounts 482
Review Questions 482
Multiple-Choice Questions from CPA Examinations 483
Problems 485
Discussion Case 490
14 AUDITING THE INVENTORY CYCLE AND RELATED ACCOUNTS 491
Learning Objectives 491
Relevant Accounting and Auditing Pronouncements 491
Inherent Risk Assessment 492
Overview of the Inventory Cycle 494
Control Risk Assessment 501
Control Procedures and Tests of Controls-Inventory Transactions 503
Auditing Inventory 507
Substantive Tests of Transactions 507
Analytical Procedures 508
Auditing Standard Costs 509
Observation of Physical Inventory 510
Tests of Account Balances 511
Evaluating the Audit Findings-Inventory 515
Multiple-Choice Questions from CPA Examinations 516
Review Questions 516
Problems 519
Discussion Case 523
15 AUDITING SELECTED ASSET ACCOUNTS：PREPAID EXPENSES AND PROPERTY，PLANT，AND EQUIPMENT 525
Learning Objectives 525
Relevant Accounting and Auditing Pronouncements 525
Auditing Prepaid Expenses 526
Inherent Risk Assessment-Prepaid Expenses 527
Control Risk Assessment-Prepaid Expenses 527
Substantive Testing-Prepaid Insurance 527
Auditing Property，Plant，and Equipment 530
Inherent Risk Assessment-Property，Plant，and Equipment 531
Control Risk Assessment-Property，Plant，and Equipment 533
Substantive Testing-Property，Plant，and Equipment 535
Analytical Procedures-Property，Plant，and Equipment 535
Tests of Account Balances-Property，Plant，and Equipment 537
Review Questions 541
Multiple-Choice Questions from CPA Examinations 542
Problems 544
Discussion Case 547
Relevant Accounting and Auditing Pronouncements 550
16 AUDITING LONG-TERM LIABILITIES，STOCKHOLDESRS EQUITY，AND INCOME STATEMENT ACCOUNTS 550
Learning Objectives 550
Auditing Long-term Debt 551
Control Risk Assessment-Long-term Debt 552
Substantive Tests of Long-term Debt 554
Auditing Stockholders Equity 555
Control Risk Assessment-Stockholders Equity 557
Auditing Capital-Stock Accounts 559
Auditing Dividends 560
Auditing Income Statement Accounts 561
Auditing Retained Earnings 561
Multiple-Choice Questions from CPA Examinations 564
Review Questions 565
Problems 567
Discussion Cases 570
17 AUDITING CASH AND INVESTMENTS 572
Learning Objectives 572
Relevant Accounting and Auditing Pronouncements 572
Cash and the Effect of Other Accounting Cycles 573
Types of Bank Accounts 575
Tests of Account Balances-Cash 576
Analytical Procedures-Cash 576
Substantive Tests of Transactions-Cash 576
Investments 588
Control Risk Assessment-Investments 590
Substantive Tests of Investments 593
Review Questions 595
Multiple-Choice Questions from CPA Examinations 596
Problems 598
Part Six Completing the Audit and Reporting Responsibilities 607
Relevant Accounting and Auditing Pronouncements 609
Learning Objectives 609
18 COMPLETING THE ENGAGEMENT 609
Review for Contingent Liabilities 610
Commitments 615
Review for Subsequent Events 616
Final Evidential Evaluation Processes 619
Communications with the Audit Committee and Management 625
Subsequent Discovery of Facts Existing at the Date of the Auditor s Report 626
Review Questions 629
Multiple-Choice Questions from CPA Examinations 629
Problems 632
Discussion Cases 635
19 REPORTS ON AUDITED FINANCIAL STATEMENTS AND SPECIAL REPORTING ISSUES 639
Learning Objectives 639
Relevant Accounting and Auditing Pronouncements 639
The Auditor s Standard Unqualified Audit Report 640
Explanatory Language Added to the Standard Unqualified Audit Report 640
Departures from an Unqualified Audit Report 646
Discussion of Conditions Requiring Other Types of Reports 648
Special Reporting Issues 652
Reports on Comparative Financial Statements 653
Other Information in Documents Containing Audited Financial Statements 658
Going-Concern Evaluation 659
Special Reports 662
Review Questions 670
Multiple-Choice Questions from CPA Examinations 671
Problems 674
Discussion Cases 678
Part Seven Professional Responsibilities and Other Forms of Services 683
20 THE CODE OF PROFESSIONAL CONDUCT AND QUALITY CONTROL STANDARDS 685
Learning Objectives 685
Relevant Accounting and Auditing Pronouncements 685
An Ethical Framework 686
Code of Professional Conduct 691
Principles of Professional Conduct 692
Rules of Conduct 693
Independence，Integrity，and Objectivity 696
General Standards and Accounting Principles 704
Responsibilities to Clients 706
Other Responsibilities and Practices 707
Quality Control Standards 711
Review Questions 714
Multiple-Choice Questions from CPA Examinations 715
Problems 718
Discussion Cases 724
21 LEGAL LIABILITY 726
Learning Objectives 726
Relevant Accounting and Auditing Pronouncements 726
The Legal Environment 727
Overview 728
Common Law—Clients 729
Common Law—Third Parties 733
Statutory Liability 739
Criminal Liability 747
Approaches to Minimizing Legal Liability 748
Appendix：Summary of Significant Legal Cases 750
Review Questions 756
Multiple-Choice Questions from CPA Examinations 757
Problems 761
Discussion Case 765
22 ATTESTATION ENGAGEMENTS AND OTHER ACCOUNTING SERVICES 766
Learning Objectives 766
Relevant Accounting and Auditing Pronouncements 766
Attestation Engagements 767
Attestation Standards 769
Reporting on an Entity s Internal Control over Financial Reporting 772
Financial Forecasts and Projections 776
Accounting and Review Services 782
Compilation of Financial Statements 785
Review of Financial Statements 787
Review Questions 790
Multiple-Choice Questions from CPA Examinations 791
Problems 794
Discussion Case 799
INDEX 801