Preface                                            xiii
Guided Tour                                        xv
Website                                            xvii
Acknowledgments                                    xx
About the Authors                                  xxi
  PART I Introduction to Assurance and
  Financial Statement Auditing
    An Introduction to Assurance and Financial     3   (36)
    Statement Auditing
      The Study of Auditing                        5   (1)
      The Demand for Auditing and Assurance        5   (3)
      An Assurance Analogy: The Case of the        8   (2)
      Building Surveyor
      Auditing and Assurance Defined               10  (1)
      Fundamental Concepts in Conducting a         11  (3)
      Financial Statement Audit
      Sampling: Inferences Based on Limited        14  (1)
      Observations
      The Audit Process                            14  (6)
      Conclusion                                   20  (1)
      Key Terms                                    21  (1)
      Review Questions                             22  (1)
      Problems                                     22  (1)
      Discussion Case                              23  (1)
      Internet Assignments                         24  (15)
      EarthWear Annual Report 2009 (See colour
      section)
    The Financial Statement Auditing Environment   39  (36)
      A Time of Challenge and Change for           40  (3)
      Auditors
      Auditors' Legal Liability                    43  (1)
      International Organizations that Affect      44  (5)
      the Accounting Profession
      Auditing Standards                           49  (4)
      Society's Expectations and the Auditor's     53  (1)
      Responsibilities
      Ethics, Independence and the IFAC Code of    54  (1)
      Ethics for Professional Accountants
      Audit Firms                                  54  (2)
      Types of Services Offered by Audit Firms     56  (2)
      Types of Auditors                            58  (2)
      The Context of Financial Statement           60  (1)
      Auditing
      A Model of Business                          61  (1)
      A Model of Business Processes: Five          62  (2)
      Components
      Management Assertions                        64  (1)
      Conclusion                                   65  (1)
      Key Terms                                    66  (1)
      Review Questions                             67  (1)
      Problems                                     68  (1)
      Discussion Cases                             68  (2)
      Internet Assignments                         70  (5)
  PART II Basic Auditing Concepts: Risk
  Assessment, Materiality and Evidence
    Risk Assessment and Materiality                75  (38)
      Audit Risk                                   76  (1)
      The Audit Risk Model                         77  (3)
      The Auditor's Risk Assessment Process        80  (6)
      Evaluate the Entity's Risk Assessment        86  (1)
      Process
      Assessing the Risk of Material               86  (6)
      Misstatements Due to Error or Fraud
      The Auditor's Response to the Results of     92  (1)
      the Risk Assessments
      Evaluation of Audit Test Results             93  (1)
      Documentation of the Auditor's Risk          94  (2)
      Assessment and Response
      Communications about Fraud to Management,    96  (1)
      Those Charged with Governance and Others
      Materiality                                  96  (6)
      Advanced Module: Auditing of Accounting      102 (3)
      Estimates, Including Fair Value
      Accounting Estimates
      Key Terms                                    105 (1)
      Review Questions                             106 (1)
      Problems                                     107 (3)
      Discussion Cases                             110 (1)
      Internet Assignment                          111 (2)
    Audit Evidence and Audit Documentation         113 (30)
      The Relationship of Audit Evidence to the    114 (1)
      Audit Report
      Management Assertions                        115 (5)
      Audit Procedures                             120 (1)
      The Concept of Audit Evidence                120 (3)
      Audit Procedures for Obtaining Audit         123 (4)
      Evidence
      Reliability of the Types of Evidence         127 (1)
      Audit Documentation                          128 (6)
      Key Terms                                    134 (1)
      Review Questions                             135 (1)
      Problems                                     135 (3)
      Discussion Cases                             138 (1)
      Internet Assignment                          139 (4)
  PART III Planning the Audit and Internal
  Control
    Audit Planning and Types of Audit Tests        143 (42)
      Client Acceptance and Continuance            146 (1)
      Establishing an Understanding with the       147 (3)
      Client
      Preliminary Engagement Activities            150 (1)
      Planning the Audit                           151 (5)
      Types of Audit Tests                         156 (1)
      Substantive Analytical Procedures            157 (11)
      The Audit Testing Hierarchy                  168 (4)
      Advanced Module 1: Selected Financial        172 (3)
      Ratios Useful as Analytical Procedures
      Advanced Module 2: Special Considerations    175 (3)
      in the Audit of Group Financial Statements
      Key Terms                                    178 (1)
      Review Questions                             179 (1)
      Problems                                     179 (3)
      Discussion Cases                             182 (1)
      Internet Assignments                         183 (2)
    Internal Control in a Financial Statement      185 (37)
    Audit
      Introduction                                 187 (1)
      Internal Control: An Overview                188 (1)
      The COSO Framework                           189 (6)
      Planning an Audit Strategy                   195 (3)
      Obtain an Understanding of Internal          198 (5)
      Control
      Assessing Control Risk                       203 (2)
      Substantive Procedures                       205 (1)
      Timing of Audit Procedures                   206 (2)
      Auditing Accounting Applications             208 (1)
      Processed by Service Organizations
      Communication of Deficiencies in Internal    209 (1)
      Control
      Advanced Module 1: Types of Control in an    210 (3)
      IT Environment
      Advanced Module 2: Computer-Assisted         213 (2)
      Audit Techniques
      Advanced Module 3: Flowcharting Techniques   215 (1)
      Key Terms                                    216 (1)
      Review Questions                             217 (1)
      Problems                                     217 (3)
      Discussion Cases                             220 (2)
    Auditing Internal Control Over Financial       222 (35)
    Reporting
      Management Responsibilities under Section    224 (1)
      404
      Auditor Responsibilities under Section       224 (1)
      404 and AS5
      Internal Control over Financial Reporting    224 (1)
      Defined
      Internal Control Deficiencies Defined        225 (1)
      Management's Assessment Process              226 (4)
      Performing an Audit of ICFR                  230 (1)
      Planning the Audit of ICFR                   231 (2)
      Using a Top-Down Approach                    233 (2)
      Test the Design and Operating                235 (3)
      Effectiveness of Controls
      Evaluating Identified Control Deficiencies   238 (2)
      Remediation of a Material Weakness           240 (1)
      Written Representations                      241 (1)
      Auditor Documentation Requirements           241 (1)
      Auditing Reporting on ICFR                   241 (4)
      Other Reporting Issues                       245 (1)
      Additional Required Communications in an     246 (1)
      Audit of ICFR
      Advanced Module: Special Considerations      247 (1)
      for an Audit of Internal Control
      Key Terms                                    248 (1)
      Review Questions                             249 (1)
      Problems                                     249 (5)
      Internet Assignments                         254 (3)
  PART IV Statistical and Non-Statistical
  Sampling Tools for Auditing
    Audit Sampling: An Overview and Application    257 (34)
    to Tests of Controls
      What If You Were an Apple Inspector?         259 (1)
      Introduction                                 260 (1)
      Definitions and Key Concepts                 261 (3)
      Types of Auditing Sampling                   264 (1)
      Attribute Sampling Applied to Tests of       265 (17)
      Controls
      Non-Statistical Sampling for Tests of        282 (1)
      Controls
      Conclusion                                   283 (1)
      Advanced Module: Considering the Effect      284 (1)
      of the Population Size
      Key Terms                                    284 (1)
      Review Questions                             285 (1)
      Problems                                     285 (4)
      Discussion Case                              289 (2)
    Audit Sampling: An Application to              291 (38)
    Substantive Tests of Account Balances
      Sampling for Substantive Tests of Details    293 (1)
      of Account Balances
      Monetary-Unit Sampling                       294 (13)
      Non-Statistical Sampling for Tests of        307 (5)
      Account Balances
      The Rise and Fall of Statistical Audit       312 (1)
      Sampling
      Advanced Module: Classical Variables         312 (6)
      Sampling
      Key Terms                                    318 (1)
      Review Questions                             319 (1)
      Problems                                     319 (4)
      Discussion Cases                             323 (6)
  PART V Auditing Business Processes
    Auditing the Revenue Process                   329 (44)
      Revenue Recognition                          331 (3)
      Overview of the Revenue Process              334 (9)
      Inherent Risk Assessment                     343 (1)
      Control Risk Assessment                      344 (2)
      Control Activities and Tests of Controls:    346 (4)
      Revenue Transactions
      Control Activities and Tests of Controls:    350 (3)
      Cash Receipts Transactions
      Control Activities and Tests of Controls:    353 (1)
      Sales Returns and Allowances Transactions
      Relating the Assessed Level of Control       354 (1)
      Risk to Substantive Procedures
      Auditing Accounts Receivable and Related     354 (1)
      Accounts
      Substantive Analytical Procedures            355 (1)
      Tests of Details of Classes of               356 (6)
      Transactions, Account Balances, and
      Disclosures
      The Confirmation Process: Accounts           362 (4)
      Receivable
      Auditing Other Receivables                   366 (1)
      Evaluating the Audit Findings: Accounts      366 (1)
      Receivable and Related Accounts
      Key Terms                                    367 (1)
      Review Questions                             367 (1)
      Problems                                     368 (3)
      Discussion Case                              371 (1)
      Internet Assignment                          371 (2)
    Auditing the Purchasing Process                373 (35)
      Expense and Liability Recognition            376 (1)
      Overview of the Purchasing Process           377 (7)
      Inherent Risk Assessment                     384 (1)
      Control Risk Assessment                      384 (3)
      Control Activities and Tests of Controls:    387 (3)
      Purchase Transactions
      Control Activities and Tests of Controls:    390 (3)
      Cash Disbursement Transactions
      Control Activities and Tests of Controls:    393 (1)
      Purchase Return Transactions
      Relating the Assessed Level of Control       393 (1)
      Risk to Substantive Procedures
      Auditing Accounts Payable and Accrued        394 (1)
      Expenses
      Substantive Analytical Procedures            394 (1)
      Tests of Details of Classes of               395 (4)
      Transactions, Account Balances and
      Disclosures
      Accounts Payable Confirmations               399 (2)
      Evaluating the Audit Findings: Accounts      401 (1)
      Payable and Related Accounts
      Key Terms                                    401 (1)
      Review Questions                             402 (1)
      Problems                                     402 (4)
      Discussion Case                              406 (1)
      Internet Assignments                         407 (1)
    Auditing the Human Resource Management         408 (23)
    Process
      Overview of the Human Resource               410 (6)
      Inherent Risk Assessment                     416 (1)
      Control Risk Assessment                      416 (2)
      Control Activities and Tests of Controls:    418 (2)
      Payroll Transactions
      Relating the Assessed Level of Control       420 (1)
      Risk to Substantive Procedures
      Auditing Payroll-Related Accounts            420 (1)
      Substantive Analytical Procedures            420 (1)
      Tests of Details of Classes of               421 (4)
      Transactions, Account Balances and
      Disclosures
      Evaluating the Audit Findings:               425 (1)
      Payroll-Related Accounts
      Key Terms                                    425 (1)
      Review Questions                             426 (1)
      Problems                                     426 (3)
      Discussion Cases                             429 (1)
      Internet Assignment                          430 (1)
    Auditing the Inventory Management Process      431 (28)
      Overview of the Inventory Management         433 (5)
      Process
      Inherent Risk Assessment                     438 (2)
      Control Risk Assessment                      440 (1)
      Control Activities and Tests of Controls:    441 (3)
      Inventory Transactions
      Relating the Assessed Level of Control       444 (1)
      Risk to Substantive Procedures
      Auditing Inventory                           444 (1)
      Substantive Analytical Procedures            445 (1)
      Auditing Standard Costs                      446 (1)
      Observing Physical Inventory                 447 (1)
      Tests of Details of Classes of               448 (4)
      Transactions, Account Balances and
      Disclosures
      Evaluating the Audit Findings: Inventory     452 (1)
      Key Terms                                    453 (1)
      Review Questions                             453 (1)
      Problems                                     454 (3)
      Discussion Case                              457 (1)
      Internet Assignment                          458 (1)
    Auditing the Financing/Investing Process:      459 (22)
    Prepaid Expenses; Intangible Assets and
    Goodwill; and Property, Plant and Equipment
      Auditing Prepaid Expenses                    461 (1)
      Inherent Risk Assessment: Prepaid Expenses   461 (1)
      Control Risk Assessment: Prepaid Expenses    462 (1)
      Substantive Procedures: Prepaid Insurance    462 (2)
      Auditing Intangible Assets and Goodwill      464 (1)
      Inherent Risk Assessment: Intangible         464 (1)
      Assets and Goodwill
      Control Risk Assessment: Intangible          465 (1)
      Assets and Goodwill
      Substantive Procedures: Intangible Assets    465 (2)
      and Goodwill
      Auditing the Property Management Process     467 (1)
      Inherent Risk Assessment: Property           468 (2)
      Management Process
      Control Risk Assessment: Property            470 (1)
      Management Process
      Substantive Procedures: Property, Plant      471 (4)
      and Equipment
      Evaluating the Audit Findings: Property,     475 (1)
      Plant and Equipment
      Key Terms                                    475 (1)
      Review Questions                             476 (1)
      Problems                                     476 (3)
      Discussion Case                              479 (1)
      Internet Assignment                          479 (2)
    Auditing the Financing/Investing Process:      481 (18)
    Long-Term Liabilities, Stockholders' Equity
    and Income Statement Accounts
      Auditing Long-Term Debt                      483 (1)
      Inherent Risk Assessment: Long-Term Debt     484 (1)
      Control Risk Assessment: Long-Term Debt      484 (2)
      Substantive Procedures: Long-Term Debt       486 (3)
      Auditing Stockholders' Equity                489 (1)
      Control Risk Assessment: Stockholders'       489 (1)
      Equity
      Auditing Equity Capital Accounts             490 (1)
      Auditing Dividends                           491 (1)
      Auditing Retained Earnings                   492 (1)
      Auditing Income Statement Accounts           492 (1)
      Assessing Control Risk for Business          492 (1)
      Processes: Income Statement Accounts
      Substantive Test: Income Statement           493 (1)
      Accounts
      Key Terms                                    494 (1)
      Review Questions                             494 (1)
      Problems                                     495 (2)
      Discussion Cases                             497 (1)
      Internet Assignment                          498 (1)
    Auditing the Financing/Investing Process:      499 (26)
    Cash and Investments
      Auditing Cash                                501 (1)
      Types of Bank Accounts                       502 (1)
      Control Risk Assessment: Cash                503 (1)
      Substantive Procedures: Cash                 503 (9)
      Auditing Investments                         512 (1)
      Control Risk Assessment: Investments         512 (2)
      Substantive Procedures: Investments          514 (3)
      Key Terms                                    517 (1)
      Review Questions                             517 (1)
      Problems                                     518 (4)
      Internet Assignment                          522 (3)
  PART VI Completing the Audit and Reporting
  Responsibilities
    Completing the Audit Engagement                525 (25)
      Review for Contingencies                     527 (3)
      Commitments                                  530 (1)
      Review for Subsequent Events                 531 (2)
      Final Evidence Evaluation Processes          533 (6)
      Communications with Those Charged with       539 (1)
      Governance and Management
      Key Terms                                    540 (1)
      Review Questions                             541 (1)
      Problems                                     541 (5)
      Discussion Cases                             546 (2)
      Internet Assignment                          548 (2)
    Reports on Audited Financial Statements        550 (27)
      Reporting on the Financial Statement         553 (1)
      Audit: The Audit Report with an
      Unmodified Opinion
      An Emphasis of Matter Paragraph or Other     554 (2)
      Matter Paragraph Added in the Audit Report
      Audit Reports with Modified Opinion          556 (2)
      Discussion of Conditions Requiring Audit     558 (4)
      Reports with Modified Opinion
      Special Reporting Issues                     562 (1)
      Reporting on Comparative Information         562 (2)
      Other Information in Documents Containing    564 (1)
      Audited Financial Statements
      Reporting on Specialized Areas               565 (3)
      Key Terms                                    568 (1)
      Review Questions                             569 (1)
      Problems                                     569 (3)
      Discussion Case                              572 (1)
      Internet Assignment                          573 (4)
  PART VII Professional Responsibilities
    Professional Ethics, Independence and          577 (38)
    Quality Control
      Ethics and Ethical Professional Behaviour    579 (3)
      IFAC Code of Ethics for Professional         582 (9)
      Accountants
      Independence: Audit and Review Engagements   591 (10)
      Professional Ethics for Professional         601 (1)
      Accountants in Business
      Auditor Independence in the EU               602 (1)
      Quality Control Systems                      602 (3)
      Quality Assurance Programmes                 605 (1)
      Key Terms                                    605 (1)
      Review Questions                             606 (1)
      Problems                                     607 (2)
      Discussion Cases                             609 (2)
      Internet Assignments                         611 (4)
  PART VIII Assurance, Related Services and
  Internal Auditing
    Assurance, Related Services and Internal       615 (35)
    Auditing
      Assurance Services                           616 (1)
      The IAASB International Framework for        617 (5)
      Assurance Engagements
      The IAASB Assurance Standards and            622 (1)
      Assurance Level
      Review of Historical Financial Information   623 (2)
      Assurance Engagements Other Than Audits      625 (9)
      or Reviews of Historical Financial
      Information
      Related Services                             634 (3)
      Internal Auditing                            637 (7)
      Key Terms                                    644 (1)
      Review Questions                             645 (1)
      Problems                                     646 (1)
      Discussion Cases                             646 (1)
      Internet Assignments                         647 (3)
Index                                              650