Auditing and Assurance Services: Understanding the Integrated Audit

PART I INTRODUCTION.

1 An Introduction to Auditing.

Introduction.

Financial Statements, Internal Control, and Integrated Audits.

Definition of an Audit.

Auditing Internal Control Over Financial Reporting.

Purpose and Value of an Audit.

Services Provided by Auditors.

Standards Setters and Governing Authorities.

Internal Auditors.

Other Audit Services.

Accountants Who are not Auditors.

Conclusion.

Key Terms.

Multiple Choice.

Discussion Questions.

Problems.

Activity Assignments.

Appendix A Working in a CPA Firm.

2 Overview of an Integrated Audit.

Introduction.

Integrated Audits.

Preliminary Requirements for an Audit.

Overview of an Integrated Audit.

Fundamental Concepts.

Preliminary Engagement Procedures.

Audit Planning and Risk Assessment.

Tests of IF Operating Effectiveness.

Substantive Procedures on Accounts and Disclosures.

Wrap-Up, Completion, and Reporting.

Nonpublic Company Audits.

Auditing Standards.

Conclusion.

Key Terms.

Multiple Choice.

Discussion Questions.

Problems.

Activity Assignments.

Appendix A: AICPA, Generally Accepted Auditing Standards.

PART II THE AUDIT ENVIRONMENT.

3 The Auditor’s Role in Society.

Introduction.

Society’s Reliance on Auditors.

Influences of Behavior.

Auditing as a Profession.

Ethical Decision Making.

Moral Dilemmas.

External Regulation.

AICPA Code of Professional Conduct.

PCAOB Rules of the Board.

Auditor Independence.

Independence Requirements of Sox and the Sec.

Services that Impair Firm Independence.

Public Accounting Firms and Quality Control.

PCAOB Oversight of Firms.

Conclusion.

Key Terms.

Multiple Choice.

Discussion Questions.

Problems.

Activity Assignments.

4 Legal Environment Affecting Audits.

Introduction.

Auditors and Risk.

Who Can Sue the Auditor?

Events Involved in a Legal Action.

Causes of Action, Defenses, and Potential Damages.

Statutory Civil Law.

Government Civil Actions.

Criminal Actions.

Jurisdiction.

Conclusion.

Key Terms.

Multiple Choice.

Discussion Questions.

Problems.

Activity Assignments.

Appendix A: United State Court Systems.

PART III EXECUTING AN INTEGRATED AUDIT.

5 Client Acceptance and Continuance and Preliminary Engagement Procedures.

Introduction.

Client Acceptance and Continuance.

Guidance in the Professional Literature and Standards.

Opportunity for a New Client.

Sources of Information.

Firm Resources and Expertise.

Economic Considerations.

Proposing on the Engagement.

After the Selection.

Conclusion.

Key Terms.

Multiple Choice.

Discussion Questions.

Problems.

Activity Assignments.

Appendix A Industry Descriptions.

Appendix B Audit Committees and Corporate Governance.

6 Audit Planning and Risk Assessment.

Introduction.

Overview of the Planning and Risk Assessment Process.

Establishing the Overall Audit Strategy.

Planning the Audit Resources

Audit Plan.

Communication on Planning.

Conclusion.

Key Terms.

Multiple Choice.

Discussion Questions.

Problems.

Activity Assignments.

Appendix A Using the Work of Others.

7 Internal Control, Understanding the Client’s Internal Control Over Financial Reporting and Auditing Design Effectiveness.

Introduction.

Internal Control and Reliable Financial Reporting.

Management’s Motivation for Good Internal Control.

The Financial Statement Audit and Internal Control Over Financial Reporting.

Definitions of Internal Control.

Components of Internal Control.

Management’s Responsibilities for ICFR.

Background to an Audit of ICFR.

Management Assertions and Audit Procedures.

Auditor’s Understanding and Assessment of Design Effectiveness of ICFR.

Entity-Level Controls.

Identifying Significant Accounts, Disclosures, and Relevant Assertions.

Assessing Design Effectiveness and Choosing the Controls to Test.

Conclusion.

Key Terms.

Multiple Choice.

Discussion Questions.

Problems.

Activity Assignments.

Appendix A Specifics of IT General Controls.

Appendix B Enterprise Risk Management Integrated Framework.

Appendix C Internal Control over Financial Reporting in Smaller Public Companies.

8 Planning and Testing Operating Effectiveness of Internal Control over Financial Reporting.

Introduction.

Selecting the Controls to Test.

Testing Methods.

Planning the Tests.

Timing of Tests.

Extent of Tests.

Fraud.

Illegal Acts.

Related Party Transactions.

Sampling.

Audit Risk Model.

Audit Documentation.

Evaluating the Results.

Additional Documentation Considerations.

“Big Picture” Topics and Operating Effectiveness.

Impact of Multiple Locations and Business Units.

Impact of Outsourcing.

ICFR Effectiveness and the Financial Statement Audit.

Conclusion.

Key Terms.

Multiple Choice.

Discussion Questions.

Problems.

Activity Assignments.

Appendix A Testing IT Application Controls and Computer Assisted Audit Software.

Appendix B Statistical Techniques and Tests of Controls.

9 Substantive Procedures and the Financial Statement Audit.

Introduction.

Transaction Cycles and Account Balances.

Materiality and Reasonable Assurance.

Performing Substantive Test and Procedures.

Audit Documentation.

Important Considerations in a Financial Statement Audit.

Summary of Substantive Tests and Procedures.

Conclusion.

Key Terms.

Multiple Choice.

Discussion Questions.

Problems.

Activity Assignments.

Appendix A Statistical Techniques and Tests of Details of Balances.

10 The Revenue Cycle Process and Related Accounts: Sales, Billing and Collection in the Health Care Provider and Retailing Industries.

Introduction.

Overview.

Health-Care Providers.

Retailing.

Business Processes, Documents, and Internal Controls.

Management Assertions in an Integrated Audit.

Audit Tests and Procedures.

Tests of Controls.

Substantive Procedures: Dual Purpose Tests, Analytical Procedures, and Tests of Details of Balances.

Tests of Details of Balance.

Auditing Sales, Billing, and Collections in the Health-Care Provider Industry.

Auditing Sales, Billing, and Collections in the Retail Industry.

Conclusion.

Key Terms.

Multiple Choice.

Discussion Questions.

Problems.

Activity Assignments.

11 Completing the Integrated Audit and Reporting.

Introduction.

Final Audit Procedures.

Reporting.

Reporting on the Audit of the Financial Statements.

Financial Statement Audit Reports that Differ from Unqualified, Standard Reports.

Reporting on an Audit of Internal Control over Financial Reporting.

Conclusion.

Key Terms.

Multiple Choice.

Discussion Questions.

Problems.

Activity Assignments.

PART IV ADDITIONAL TRANSACTION CYCLES AND OTHER TOPICS.

12 Auditing Acquisition and Payments Processes: Purchases, Cash Disbursements, and Related Activities in the Automotive Industry.

Introduction.

Overview.

Acquisition and Payment Aspects of Retailing.

Acquisition and Payment Aspects of Manufacturing.

Acquisition and Payment Considerations of Other Environments.

The Automotive Industry: An Overview.

Business Processes, Documents, and Internal Control.

Audit Tests and Procedures.

Tests of Controls for Purchases and Expenditure Transactions.

Tests of Controls for Purchase Returns and Discounts.

Tests of Controls for Cash Disbursements.

Dual Purpose Tests.

Substantive Analytical Procedures.

Tests of Details of Balances.

Audit of Prepaid Expenses and Accrued Liabilities.

Audit of Expenses.

Audit of Property, Plant and Equipment.

Audit of Intangible Assets.

Auditing Acquisitions and Payments in the Automotive Industry.

ICFR.

Conclusion.

Key Terms.

Multiple Choice.

Discussion Questions.

Problems.

Activity Assignments.

13 The Human Resources Cycle Process and Related Accounts: Personnel and Payroll in the Service Industries.

Introduction.

Overview.

Human Resources Aspects of Public Accounting.

Business Processes, Documents, and Internal Controls.

Using an Outside Service Provider for Payroll: Overview.

Reports on the Processing of Transactions by a Service Organization.

Audit Tests and Procedures.

Tests of Controls for Human Resources Transactions.

Tests of Controls for Payroll Cash Disbursements.

Dual Purpose Tests.

Substantive Analytical Procedures.

Tests of Details of Balances.

Human Resources Related Disclosures.

Audit of Share-Based Compensation.

Auditing Human Resources in the Services Industries.

Conclusion.

Key Terms.

Multiple Choice.

Discussion Questions.

Problems.

Activity Assignments.

Appendix A An Engagement to Issue a Report on the Processing of Transactions by a Service Organization for Use by Other Auditors.

14 The Inventory Cycle and Related Accounts: Tracking and Costing Products in the Land Development and Home Building Industry.

Introduction.

Overview.

Land Development and Home Building Industry.

Inventory in the Manufacturing Environment: Overview.

Business Processes, Documents, and Internal Controls.

Accounting for Inventory.

Audit Tests and Procedures.

Tests of Details of Balances.

Auditing Inventory in the Land Development and Home Building Industry.

Conclusion.

Key Terms.

Multiple Choice.

Discussion Questions.

Problems.

Activity Assignments.

15 Assets, Liabilities and Equity Related to the Financing Cycle.

Introduction.

Overview.

Assets and the Financing Cycle.

Liabilities and the Financing Cycle.

Equity and the Financing Cycle.

Auditing Related Party Transactions.

Conclusion.

Key Terms.

Multiple Choice.

Discussion Questions.

Problems.

Activity Assignments.

16 Topics Beyond the Integrated Audit.

Introduction.

Forensic Accounting.

Internal Auditing.

State and Local Government Audits.

Government Auditing Standards and the Yellow Book.

Government Accountability Office (GAO) Activities.

Compilation and Review Engagements.

Attest Engagements.

Sec-Related Engagements.

Conclusion.

Key Terms.

Multiple Choice.

Discussion Questions.

Problems.

Activity Assignments.

Appendix A Institute of Internal Auditors, Code of Ethics.

Appendix B Institute of Internal Auditors, International Standards for the Professional Practice of Internal Auditing.

Appendix C Yellow Book Ethical Principles.

Appendix D Illustrative Inquiries for a SSARS Review Engagement.

Index.

Credits.