Contents
Contents
A s s u r a n c e S e r v ic e s a n d t h e
In t e g r i t y o f F i n a n c i a l R e p o r t i n g
E ig h th E d itio n
William c. Boynton
Raymond N. Johnson
WILEY
P A R T 2 / A U D IT IN G P L A N N IN G
5. O verview of the Financial Statem ent A udit
6. A udit Evidence
7. Accepting the Engagem ent and Planning the Audit
8. M ateriality D ecisions and A nalytical Procedures
9. A udit Risk, Including the Risk of Fraud
10. Understanding Internal Control
P A R T 3 / A U D IT T E S T I N G M E T H O D O L O G Y
11. A udit Procedures in Response to A ssessed Risks: Tests of Controls
12. A udit Procedures in Response to A ssessed Risks: Substantive Tests
13. Audit Sampling
part 4 / A U D IT IN G TH E T R A N S A C T I O N C Y C L E S
14. Auditing the R evenue Cycle
15. Auditing the Expenditure Cycle
16. Auditing the Production and Personnel Services Cycles
17. Auditing the Investing and Financing Cycles
18. Auditing Investm ents and C ash Balances
P A R T 5 / C O M P L E T I N G TH E A U D IT / O T H E R S E R V I C E S
AND R E P O R T S
19. Com pleting the A udit/Postaudit Responsibilities
20. A ttest and A ssurance Services and Related Reports
21. Internal, O perational, and G overnm ental Auditing
ix in
P A R T 1 / TH E A U D ITIN G Relationship Between Accounting and Auditing
EN V IR O N M EN T 1 44
Verifiability, Professional Judgment, and Fair
1 Auditing and the Public A ccounting Presentation 45
Profession-Integrity of Financial Reporting 3 Independent Auditor Relationships 47
Auditing Standards 50
Internal Auditors Uncover Financial Fraud at
Generally Accepted Auditing Standards (G AAS)
Worldcom 3
50
Preview of Chapter 1 4
Statements on Auditing Standards (SAS) 54
Auditing and Assurance Sendees Defined 5
PCAOB Auditing Standards 54
Auditing Defined 6
Assurance Provided by an Audit 55
Types of Audits 8
Auditor independence 56
Types of Auditors 10
Reasonable Assurance 56
Assurance Services Defined 11
Detecting and Reporting Fraud 57
Value of Audit and Assurance Sendees 15
Detecting and Reporting Illegal Acts 59
The Demand for Auditing 18
Evaluation of Internal Control 61
The Roots o f Auditing 18
Assurance About a Going Concern 61
Need for Financial Statement Audits 20
A Clean Bill of Health? 62
Economic Benefits of an Audit 21
The Auditor's Report on Financial Statements 64
Limitations of an Audit 22
The Standard Report on Financial Statements 64
Organizations Associated with the Public
Departures from the Standard Report 68
Accounting Profession 23
Other Types of Opinions 69
Public Sector Organizations 23
Thé Auditor's Report on Internal Control 72
Private Sector Organizations 25
The Standard Report 72
Regulatory Framework for Ensuring High-Quality
Departures From the Standard Report 78
Services 29
Focus on Auditor Knowledge and Audit Decisions
Standard Setting 29
82
Firm Regulation 33
Appendix 84
Inspection and Peer Review 33
Objective Questions 94
Government Regulation 34
Comprehensive Questions 94
Focus on Auditor Knowledge 35
Cases 98
Objective Questions 37
Professional Simulation 100
Comprehensive Questions 37
Professional Simulation 41
3 Professional Ethics 101
2 A uditors' Responsibilities and Reports 42 Independence and Nonaudit Services 101
Preview of Chapter 3 102
Auditor Responsibility for Going Concern. 42
Ethics and Morality 103
Preview of Chapter 2 43
General Ethics 103
Fundamentals Underlying Financial Statement
Professional Ethics 104
Audits 44
[x ív ] CONTENTS
Focus on Auditor Knowledge and Audit Relate Risk Factors to Potential Financial Statement
Decisions 134 Misstatements 202
Objective Questions 137 Determine the Magnitude of Potential
Comprehensive Questions 137 Misstatements 203
Cases 140 Determine the Likelihood of Material
Professional Simulation 142 Misstatments 203
Determine Significant Inherent Risks 204
4 A uditor's Legal Liability 344 Phase III: Respond to Assessed Risks 205
The Cost of Malpractice 144 Staffing and Supervision 206
Preview of Chapter 4 145 Nature of Audit Tests 206
Liability Under Common Law 146 Timing of Audit Tests 207
Liability to Clients 146 Extent of Audit Tests 208
Liability to Third Parties 147 Respond to Significant Inherent Risks 208
Common Law Defenses 153 Phase IV: Perform Further Audit Procedures 209
Liability Under Securities Law 155 Further Risk Assessment Procedures 210
Securities Act of 1933 155 Test of Controls 210
Securities Exchange Act of 1934 159 Substantive Tests 211
Private Securities Litigation Reform Act Phase V: Evaluate Evidence 212
of 1995 163 Reevaluate Risk Assessment Procedures 212
Sarbanes-Oxley Act of 2002 165 Determine the Significance of Findings 212
Other Considerations 168 Form and Document Conclusions 213
Liability Under Racketeer Influenced and Corrupt Phase VI: Communicate Audit Findings 214
Organizations Act (RICO) 168 The Auditor's Opinion 214
Minimizing the Risk of Litigation 169 Other Required Communications 215
Summary 170 Other Assurance Service Findings 215
Focus on Auditor Knowledge 171 Focus on Auditor Knowledge 217
Objective Questions 174 Focus on Audit Decisions 218
Comprehensive Questions 174 Objective Questions 219
CONTENTS [XV]
9 A u d it R isk , Inclu d in g the R isk of Fraud 350 Focus on Auditor Knowledge and Audit
Decisions 436
Fraud is on the Rise: Results of the KPMG Fraud
Appendix 10a 438
Survey 2003
Preview of Chapter 9 351 Appendix 10b 447
Audit Risk—An Overview 352 Appendix 10c 453
Assessing the Risk of Fraud 353 Objective Questions 456
Comprehensive Questions 456
How Significant is Fraud? 353
Cases 461
Fraud Defined 353
Professional Simulation 463
The Fraud Triangle 355
Auditing for Fraud 360
The Audit Risk Model 364
Illustrating the Audit Risk Model 364
Assessing the Components of Audit Risk 366 P A R T 3 / A U D IT T E S T I N G
Relationship Between Audit Risk and Audit M ETHODOLOGY 4 6 5
Evidence 371
Preliminary Audit Strategies 373 11 A u d it Procedures in R esponse to A ssessed
Components of Preliminary Audit Strategies 374 R isks: Tests o f C ontrols 467
Three Basic Preliminary Audit Strategies 374 Internal Controls at Enron 402
Focus on Auditor Knowledge and Audit Preview of Chapter 11 468
Decisions 379 Process for Assessing Control Risk 469
Objective Questions 381
Consider Knowledge Acquired from Procedures
Comprehensive Questions 381 to Obtain an Understanding 470
Cases 386
Identify Potential Misstatements 470
Professional Simulation 387
Identify Necessary Controls 471
Perform Tests of Controls 474
10 U nderstanding Internal C ontrol 389 Evaluate Evidence and Make Assessment 475
The Importance of Internal Control 389 Assessing Control Risk in an Information
Preview of Chapter 10 390 Technology Environment 476
Introduction to Internal Control 391 Strategies for Performing Tests of Controls 476
Definition and Components 391 Computer-Assisted Audit Techniques 478
Entity Objectives and Related Internal Control Assessing Information Technology Controls 481
Relevant to an Audit 392 Effects of Preliminary Audit Strategies 484
Limitations of an Entity's System of Internal Primarily Substantive Approaches 484
Control 393 Lower Assessed Level of Control Risk 487
Roles and Responsibilities 394 Designing Tests of Controls 487
Components of Internal Control 396 Nature of Tests of Controls 488
Control Environment 397 Timing of Tests of Controls 489
Risk Assessment 402 Extent of Tests of Controls 491
Information and Communication 404 Staffing Tests of Controls 492
Control Activities 405 Audit Programs for Tests of Controls 492
Monitoring 413 Dual-Purpose Tests 492
Antifraud Programs and Controls 414 Additional Considerations 495
Applications of Components to Small and Assessing Control Risk for Account Balance
Midsized Entities 415 Assertions Affected by a Single Transaction
Summary 416 Class 495
Understanding Internal Control 422 Assessing Control Risk for Account Balance
What to Understand About Internal Control 422 Assertions Affected by Multiple Transaction
Effects of Preliminary Audit Strategies 425 Class 495
Procedures to Obtain an Understanding 426 Documenting the Assessed Level of Control Risk
Documenting the Understanding 429 497
Flowcharts 430 Communicating Internal Control Matters 498
CONTENTS [xVii]
Focus on Auditor Knowledge and Audit Framework for Audit Sampling for Substantive
Decisions 500 Tests 567
Objective Questions 502 Summary 582
Comprehensive Questions 502 Focus on Auditor Knowledge and Audit
__ Cases 508 Decisions 583
Professional Simulation 511 Appendix 13a 585
Appendix 13b 593
12 Audit Procedures in Response to Assessed Appendix 13c 604
Risks: Substantive Tests 513 Objective Questions 609
Comprehensive Questions 609
The Importance of Risk Assessment Procedures and
Cases 616
Audit Programs 523
Professional Simulation 623
Preview of Chapter 12 514
Assessing the Risk of Material Misstatement 515
Steps for Assessing the Risk of Material
Misstatement 515 P A R T 4 / A U D ITIN G THE
Determining Detection Risk 518 T R A N SA C T IO N C Y C L E S 625
Designing Substantive Tests 520
Performing Further Audit Procedures 520 14 Auditing the Revenue Cycle 627
Using Information Technology to Support What is the Most Frequent Cause of Financial
Substantive Tests 520 Statement Restatements? 627
Audit Choices in the Design of Substantive Tests Preview of Chapter 14 628
523 Risk Assessment Procedures in the Revenue
Special Considerations in Designing Substantive Cycle 629
Tests 533 Develop Audit Objectives 629
Developing Audit Programs for Substantive Tests Understand the Entity and Its Environment 630
535 Inherent Risk, Including the Risk of Fraud 633
A General Framework for Developing an Audit Analytical Procedures 634
Program for Substantive Tests 535 Consideration of Internal Control Components
Focus on Auditor Knowledge and Audit 636
Decisions 540 Control Activities for Credit Sales Transactions 639
Objective Questions 542 Common Documents and Records 640
Comprehensive Questions 542 Functions and Control Activities 640
Professional Simulation 549 Illustrative System for Credit Sales 644
Control Activities for Cash Receipts Transactions
647
13 Audit Sam pling 551
Common Documents and Records 647
What is an Appropriate Sample Size? 551 Functions and Central Activities 648
Preview of Chapter 13 552 Illustrative System for Cash Receipts 651
Basic Audit Sampling Concepts 553 Control Activities for Sales Adjustment Transactions
Nature and Purpose of Audit Sampling 553 and Other Controls 651
Uncertainty and Audit Sampling 553 Common Documents and Records 651
Sampling Risk and Nonsampling Risk 553 Function and Control Activities 651
Nonstatistical and Statistical Sampling 555 Other Controls in the Revenue Cycle 653
Tests of Controls 558 Revenue Cycle Tests of Controls 654
Tests of Controls That Do Not Involve Audit Substantive Tests of Accounts Receivable 655
Sampling 558 Determining Detection Risk 655 ,
Framework for Audit Sampling for Tests of Designing Substantive Tests 658
Controls 559 Other Assurance Services 672
Substantive Tests 566 Focus on Audit Decisions 672
Substantive Tests That Do Not Involve Audit Objective Questions 675
Sampling 566 Comprehensive Questions 675
[ XV Ï Ï i ] CONTENTS