Arens, alvin a beasley, mark s elder, randal j auditing and assurance services pearson (2016 2017)

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Auditing And AssurAnce services An integrAted ApproACh sixteenth edition gloBAl edition Alvin A Arens Former PricewaterhouseCoopers Emeritus Professor Michigan State University rAndAl J elder Syracuse University Professor MArk s BeAsley North Carolina State University Deloitte Professor of Enterprise Risk Management Chris e hogAn Michigan State University Professor Boston Columbus Indianapolis New York San Francisco Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Vice President, Business Publishing: Donna Battista Editor-in-Chief: Adrienne D’Ambrosio Acquisitions Editor: Ellen Geary Editorial Assistant: Christine Donovan Assistant Acquisitions Editor, Global Editions: Ananya Srivastava Associate Project Editor, Global Edition: Amrita Kar Project Manager, Global Editions: Ruchi Sachdev Manager, Media Production, Global Edition: Vikram Kumar Senior Manufacturing Controller, Production, 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Arens, Randal J Elder, Mark S Beasley and Chris E Hogan to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988 Authorized adaptation from the United States edition, entitled Auditing and Assurance Services Sixteenth Edition: An Integrated Approach, ISBN 978-0-13-406582-3 by Alvin A Arens, Randal J Elder, Mark S Beasley and Chris E Hogan, published by Pearson Education © 2017 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC 1N 8TS All trademarks used herein are the property of their respective owners The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners ISBN-10: 1-292-14787-3 ISBN-13: 978-1-292-14787-1 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 Typeset in Albertina MT Pro Regular by Integra Printed and bound by Lego Italy continuing the LegAcy of ALvin A Arens Alvin A Arens: The author team of Randy Elder, Mark Beasley, and newest member of the author team, Chris Hogan, are pleased to continue the outstanding legacy of our book’s founding author, Al Arens, in this 16th edition of Auditing and Assurance Services: An Integrated Approach As was done for the 15th edition, we again dedicate this new edition to Al’s memory Randy and Mark joined Al as coauthors on this textbook in the 8th edition, and have been honored to continue Al’s leadership in helping shape classroom instruction and student learning about auditing concepts and their practical implementation around the world Since the first edition was published, this textbook has impacted audit education for over 30 years in the U.S and globally, including seven different language translations Al’s leadership at national and international levels and November 24, 1935 – December 6, 2010 his commitment to expanding knowledge through the development of educational materials, including this textbook, continue to inspire us as we strive to advance his legacy for future generations of auditing professionals Al was the PricewaterhouseCoopers Auditing Professor and member of the Accounting & Information Systems faculty in the Eli Broad College of Business at Michigan State University from 1968 through 2007 Thus, we are especially pleased to have Chris Hogan, Professor at Michigan State University, join the author team on this edition, continuing the Michigan State connection started by Al Among his many honors, Al was selected as one of five national auditing educators to hold a Price Waterhouse Auditing professorship, was honored as AICPA Educator of the Year, served on the AICPA Auditing Standards Board, and was President of the American Accounting Association Al taught accounting, mainly auditing, with a passion that is legendary He had a heart for sharing his knowledge of auditing with students throughout his career This 16th edition continues his outstanding legacy in audit education About the Authors Alvin A Arens Al Arens, founding author of this textbook, was the PricewaterhouseCoopers Professor of Accounting Emeritus at Michigan State University In addition to writing books on auditing, he was a coauthor of computerized accounting supplements and he was actively involved in the continuing education of practitioners with local and regional CPA firms Al was a past president of the American Accounting Association and a former member of the AICPA Auditing Standards Board He practiced public accounting with both a local CPA firm and the predecessor firm to Ernst & Young He received many awards including the AAA Auditing Section Outstanding Educator award, the AICPA Outstanding Educator award, the national Beta Alpha Psi Professor of the Year award, and many teaching and other awards at Michigan State rAndAl J elder randy elder, who has served as a coauthor of this textbook since the 8th edition, is Professor of Accounting at Syracuse University He teaches undergraduate and graduate auditing courses, and has received several teaching awards His research focuses on audit quality and current audit firm practices and he served as the team leader for the American Accounting Association Auditing Section PCAOB research synthesis teams on audit confirmations and audit sampling He has extensive public accounting experience with a large regional CPA firm, frequently teaches continuing education for a large international CPA firm, and is a member of the AICPA and Michigan Association of CPAs MArk s BeAsley Mark Beasley, who has also served as a coauthor of this textbook since the 8th edition, Chris e hogAn We are pleased to have Chris hogan join us as a coauthor for this 16th edition Chris is a Professor of Accounting in the Eli Broad College of Business at Michigan State University We are thrilled to continue the Michigan State connection started by Al Arens Chris teaches graduate auditing and her research focuses on internal controls and integrated audits, audit firm client portfolios, and the impact of regulation on audit markets Chris has auditing experience with Price Waterhouse, one of the predecessor firms to PricewaterhouseCoopers, LLP She has served in multiple leadership roles within the American Accounting Association, including serving as President of the Auditing Section and on the Audit Committee of the AAA is the Deloitte Professor of Enterprise Risk Management and Professor of Accounting at North Carolina State University He has taught undergraduate and graduate auditing courses, and has received several teaching awards including membership in NC State’s Academy of Outstanding Teachers He has extensive professional audit experience with the predecessor firm to Ernst & Young and has extensive standards-setting experience working with the Auditing Standards Board as a Technical Manager in the Audit and Assurance Division of the AICPA He served on the ASB Fraud Standard Task Force responsible for developing SAS 99, the ASB Antifraud Programs and Controls Task Force, and the Advisory Council overseeing the COSO Enterprise Risk Management— Integrated Framework project He served over seven years as a member of the COSO Board, representing the AAA contents prefACe 17 The AudiTing Profession The demAnd for AudiT And oTher AssurAnce services leArning oBJeCtives 27 Nature of Auditing 28 Distinction Between Auditing and Accounting 30 Economic Demand for Auditing 30 Assurance Services 32 Types of Audits 36 Types of Auditors 38 Certified Public Accountant 40 Summary 41 Essential Terms 41 Review Questions 42 Multiple Choice Questions from CPA Examinations 42 Discussion Questions and Problems 44 The cPA Profession leArning oBJeCtives 48 Certified Public Accounting Firms 49 Structure of CPA Firms 51 Sarbanes–Oxley Act and Public Company Accounting Oversight Board Securities and Exchange Commission 54 American Institute of Certified Public Accountants (AICPA) 55 International and U.S Auditing Standards 56 Organization of U.S Auditing Standards 58 Quality Control 62 Summary 64 Essential Terms 65 pArt ChApter ChApter 53 Review Questions 65 Multiple Choice Questions from CPA Examinations Discussion Questions and Problems 68 ChApter ChApter CONTENTS 66 AudiT rePorTs leArning oBJeCtives 70 Standard Unmodified Opinion Audit Report for Nonpublic Entities 71 Conditions for Standard Unmodified Opinion Audit Report 74 Standard Audit Report and Report on Internal Control Over Financial Reporting Under PCAOB Auditing Standards 74 Unmodified Opinion Audit Report with Emphasis-of-Matter Explanatory Paragraph or Nonstandard Report Wording 78 Modifications to the Opinion in the Audit Report 82 Materiality 84 Discussion of Conditions Requiring a Modification of Opinion 87 Auditor’s Decision Process for Audit Reports 90 International Accounting and Auditing Standards 92 Summary 93 Essential Terms 93 Review Questions 94 Multiple Choice Questions from CPA Examinations 95 Discussion Questions and Problems 96 ProfessionAl eThics leArning oBJeCtives 102 What Are Ethics? 103 Ethical Dilemmas 104 Special Need for Ethical Conduct in Professions 107 Code of Professional Conduct 109 Independence Rule 113 Sarbanes–Oxley and Related Independence Requirements Other Rules of Conduct 120 Enforcement 127 Summary 129 Essential Terms 129 Review Questions 129 Multiple Choice Questions from CPA Examinations 130 Discussion Questions and Problems 132 Cases 135 117 legAl liAbiliTy leArning oBJeCtives 138 Changed Legal Environment 139 Distinguishing Business Failure, Audit Failure, and Audit Risk Legal Concepts Affecting Liability 141 Liability to Clients 143 Liability to Third Parties Under Common Law 146 Civil Liability Under the Federal Securities Laws 148 Criminal Liability 154 The Profession’s Response to Legal Liability 155 Summary 156 Essential Terms 156 Review Questions 157 Multiple Choice Questions from CPA Examinations 158 Discussion Questions and Problems 160 Case 164 140 The AudiT Process AudiT resPonsibiliTies And objecTives leArning oBJeCtives 166 Objective of Conducting an Audit of Financial Statements 167 Management’s Responsibilities 168 Auditor’s Responsibilities 169 Professional Skepticism 172 Professional Judgment 174 Financial Statement Cycles 176 Setting Audit Objectives 181 Management Assertions 182 Transaction-Related Audit Objectives 185 Balance-Related and Presentation and Disclosure-Related Audit Objectives 186 How Audit Objectives Are Met 190 Summary 192 Essential Terms 192 Review Questions 193 Multiple Choice Questions from CPA Examinations 194 Discussion Questions and Problems 196 ChApter pArt ChApter CONTENTS ChApter ChApter ChApter CONTENTS AudiT evidence leArning oBJeCtives 219 Nature of Evidence 220 Audit Evidence Decisions 221 Persuasiveness of Evidence 222 Types of Audit Evidence 225 Analytical Procedures 232 Common Financial Ratios 236 Audit Documentation 239 Summary 247 Essential Terms 247 Review Questions 248 Multiple Choice Questions from CPA Examinations Discussion Questions and Problems 251 Case 258 ACL Problem 259 249 AudiT PlAnning And mATeriAliTy leArning oBJeCtives 260 Planning 261 Accept Client and Perform Initial Audit Planning 262 Understand the Client’s Business and Industry 266 Perform Preliminary Analytical Procedures 271 Materiality 274 Materiality for Financial Statements as a Whole 275 Determine Performance Materiality 278 Estimate Misstatement and Compare with Preliminary Judgment Summary 283 Essential Terms 283 Review Questions 285 Multiple Choice Questions from CPA Examinations 287 Discussion Questions and Problems 289 Case 296 Integrated Case Application—Pinnacle Manufacturing: Part I 297 ACL Problem 300 Assessing The risk of mATeriAl missTATemenT leArning oBJeCtives 301 Audit Risk 302 Risk Assessment Procedures 303 281 Considering Fraud Risk 307 Identification of Significant Risks 308 Audit Risk Model 309 Assessing Acceptable Audit Risk 313 Assessing Inherent Risk 316 Relationship of Risks to Evidence and Factors Influencing Risks Relationship of Risk and Materiality to Audit Evidence 323 Summary 324 Essential Terms 324 Review Questions 324 Multiple Choice Questions from CPA Examinations 326 Discussion Questions and Problems 328 Cases 332 Integrated Case Application—Pinnacle Manufacturing: Part II 334 318 Assessing And resPonding To frAud risks leArning oBJeCtives 337 Types of Fraud 338 Conditions for Fraud 339 Assessing the Risk of Fraud 343 Corporate Governance Oversight to Reduce Fraud Risks 347 Responding to the Risk of Fraud 351 Specific Fraud Risk Areas 353 Responsibilities When Fraud Is Suspected 359 Documenting the Fraud Assessment 363 Summary 363 Essential Terms 364 Review Questions 364 Multiple Choice Questions from CPA Examinations 365 Discussion Questions and Problems 367 Case 372 Integrated Case Application—Pinnacle Manufacturing: Part III 373 ACL Problem 374 inTernAl conTrol And coso frAmework leArning oBJeCtives 375 Internal Control Objectives 376 Management and Auditor Responsibilities for Internal Control COSO Components of Internal Control 379 Internal Controls Specific to Information Technology 389 ChApter 10 ChApter 11 377 CONTENTS b In assessing the competence of internal auditors, an independent CPA most likely would obtain information about the (1) influence of management on the scope of the internal auditors’ duties (2) policies limiting internal auditors from communicating with the audit committee (3) quality of the internal auditors’ working paper documentation (4) entity’s ability to continue as a going concern c Which of the following is generally considered to be a major reason for establishing an internal auditing function? (1) To relieve overburdened management of the responsibility for establishing effective systems of internal control (2) To ensure that operating activities comply with the policies, plans, and procedures established by management (3) To ensure the accuracy, reliability, and timeliness of financial and operating data used in management’s decision making (4) To evaluate and improve the effectiveness of control processes 26-17 (Objective 26-2) The following questions deal with governmental auditing Choose the best response a Although the scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies, these audits generally have which of the following elements in common? (1) The auditor is to determine whether the financial assistance has been administered in accordance with applicable laws and regulations (2) The materiality levels are lower and are determined by the governmental entities that provided the federal financial assistance to the recipient (3) The auditor should obtain written management representations that the recipient’s internal auditors will report their findings objectively and without fear of political repercussions (4) The auditor is required to express both positive and negative assurance that illegal acts that could have a material effect on the recipient’s financial statements are disclosed to the inspector general b A governmental audit may extend beyond an examination leading to the expression of an opinion on the fairness of financial statement presentation to include program results Compliance economy and efficiency (1) Yes Yes No (2) Yes Yes Yes (3) No Yes Yes (4) Yes No Yes c Ward is auditing an entity’s compliance with requirements governing a major federal financial assistance program in accordance with the Single Audit Act Ward detected noncompliance with requirements that have a material effect on the program Ward’s report on compliance should express (1) no assurance on the compliance tests (2) reasonable assurance on the compliance tests (3) a qualified or adverse opinion (4) an adverse opinion or a disclaimer of opinion 26-18 (Objectives 26-3, 26-4, 26-5) The following questions deal with operational auditing Choose the best response a Which of the following best describes the operational audit? (1) It requires constant review by internal auditors of the administrative controls as they relate to the operations of the company (2) It concentrates on implementing financial and accounting controls in a newly organized company 882 Part / OTHER ASSURANCE AND NONASSURANCE SERVICES (3) It attempts and is designed to verify the fair presentation of a company’s results of operations (4) It concentrates on seeking aspects of operations in which waste would be reduced by the introduction of controls b The purpose of governmental effectiveness or program auditing is to determine if the desired results of a program are being achieved The first step in conducting such an audit is to (1) evaluate the system used to measure results (2) determine the time frame to be audited (3) collect quantifiable data on the program’s success or failure (4) identify the legislative intent of the program being audited c A means of limiting production delays caused by equipment breakdown and repair is to (1) schedule production based on capacity planning (2) plan maintenance activity based on an analysis of equipment repair work orders (3) pre-authorize equipment maintenance and overtime pay (4) establish a preventive maintenance program for all production equipment Chapter 26 / Internal and Governmental FInanCIal audItInG and operatIonal audItInG 883 dIScuSSIon QueStIonS and problemS 26-19 (Objectives 26-1, 26-4) Lajod Company has an internal audit department consisting of a manager and three staff auditors The manager of internal audit, in turn, reports to the corporate controller Copies of audit reports are routinely sent to the audit committee of the board of directors as well as to the corporate controller and the individual responsible for the area or activity being audited The manager of internal audit is aware that the external auditors have relied on the internal audit function to a substantial degree in the past However, recently the external auditors have suggested there may be a problem related to the objectivity of the internal audit function This objectivity problem may result in more extensive testing and analysis by the external auditors The external auditors are concerned about the amount of nonaudit work performed by the internal audit department The percentage of nonaudit work performed by the internal auditors in recent years has increased to about 25% of their total hours worked A sample of five recent nonaudit activities are as follows: One of the internal auditors assisted in the preparation of policy statements on internal control These statements included such things as policies regarding sensitive payments and standards of control for internal controls The bank statements of the corporation are reconciled each month as a regular assignment for one of the internal auditors The corporate controller believes this strengthens internal controls because the internal auditor is not involved in the receipt and disbursement of cash The internal auditors are asked to review the budget data in every area each year for relevance and reasonableness before the budget is approved In addition, an internal auditor examines the variances each month, along with the associated explanations These variance analyses are prepared by the corporate controller’s staff after consultation with the individuals involved One of the internal auditors has recently been involved in the design, installation, and initial operation of a new computer system The auditor was primarily concerned with the design and implementation of internal accounting controls and the computer application controls for the new system The auditor also conducted the testing of the controls during the test runs The internal auditors are often asked to make accounting entries for complex transactions before the transactions are recorded The employees in the accounting department are not adequately trained to handle such transactions In addition, this serves as a means of maintaining internal control over complex transactions The manager of internal audit has always made an effort to remain independent of the corporate controller’s office and believes that the internal auditors are objective and independent in their audit and nonaudit activities required a Define objectivity as it relates to the internal audit function b For each of the five situations outlined, explain whether the objectivity of Lajod Company’s internal audit department has been materially impaired Consider each situation independently c The manager of internal audit reports to the corporate controller (1) Does this reporting relationship result in a problem of objectivity? Explain your answer (2) Would your answer to any of the five situations in requirement b have changed if the manager of internal audit reported to the audit committee of the board of directors? Explain your answer.* *Based on CMA question paper 884 Part / OTHER ASSURANCE AND NONASSURANCE SERVICES 26-20 (Objective 26-1) The Institute of Internal Auditors (IIA) is an international professional association of more than 180,000 members, with global headquarters in Altamonte Springs, Florida Throughout the world, the IIA is recognized as the internal audit profession’s leader in certification, education, research, and technical guidance Visit the IIA Web site (www theiia.org) to answer questions about the IIA and certification of internal auditors a Why should an organization have an internal auditing department? (Hint: Click on the “About Us” link and review the information under the “About the Profession” link.) b Visit the link for “Certifications” and identify the six steps to receiving a certification in internal auditing as a Certified Internal Auditor (CIA) c What certifications are available to internal auditors? d What are the three parts of the CIA exam? How are the requirements for passing the CIA exam similar to and different from those of the CPA exam? 26-21 (Objective 26-2) Like in the United States, many countries in the world have legislature similar to the Single Audit Act, 1984 In Malaysia, it is the Audit Act 1957 and in the United Kingdom, The National Audit Act 1983 Why are such legislature needed? required 26-22 (Objectives 26-4, 26-5) Haskin Company was founded 40 years ago and now has several manufacturing plants in the Northeast and Midwest The evaluation of proposed capital expenditures became increasingly difficult for management as the company became geographically dispersed and diversified its product line Thus, the Capital Budgeting Group was organized in 2015 to review all capital expenditure proposals in excess of $100,000 The Capital Budgeting Group conducts its annual planning and budget meeting each September for the upcoming calendar year The group establishes a minimum return for investments (hurdle rate) and estimates a target level of capital expenditures for the next year based on the expected available funds The group then reviews the capital expenditure proposals that have been submitted by the various operating segments Proposals that meet either the return on investment criterion or a critical need criterion are approved to the extent of available funds The Capital Budgeting Group also meets monthly, as necessary, to consider any projects of a critical nature that were not expected or requested in the annual budget review These monthly meetings allow the Capital Budgeting Group to make adjustments during the year as new developments occur Haskin’s profits have been decreasing slightly for the past two years despite a small but steady sales growth, a sales growth that is expected to continue through 2017 As a result of the profit stagnation, top management is emphasizing cost control and all aspects of Haskin’s operations are being reviewed for cost reduction opportunities Chapter 26 / Internal and Governmental FInanCIal audItInG and operatIonal audItInG 885 Haskin’s internal audit department has become involved in the companywide cost reduction effort The department has already identified several areas where cost reductions could be realized and has made recommendations to implement the necessary procedures to effect the cost savings Tom Watson, internal audit director, is now focusing on the activities of the Capital Budgeting Group in an attempt to determine the efficiency and effectiveness of the capital budgeting process In an attempt to gain a better understanding of the capital budgeting process, Watson decided to examine the history of one capital project in detail A capital expenditure proposal of Haskin’s Burlington Plant that was approved by the Capital Budgeting Group in 2016 was selected randomly from a population of all proposals approved by the group at its 2015 and 2016 annual planning and budget meetings The Burlington proposal consisted of a request for five new machines to replace equipment that was 20 years old and for which preventive maintenance had become expensive Four of the machines were for replacement purposes, and the fifth was for planned growth in demand Each of the four replacement machines was expected to result in annual maintenance cost savings of $20,000 The fifth machine was exactly like the other four and was expected to generate an annual contribution of $30,000 through increased output Each machine had a cost of $110,000 and an estimated useful life of eight years required a Identify and discuss the issues that Haskin Company’s internal audit department must address in its examination and evaluation of Burlington Plant’s 2016 capital expenditure project b Recommend procedures to be used by Haskin’s internal audit department in the audit review of Burlington Plant’s 2016 capital expenditure project.* 26-23 (Objectives 26-4, 26-5) Lecimore Company has a centralized purchasing department that is managed by Meg Shen Shen has established policies and procedures to guide the clerical staff and purchasing agents in the day-to-day operation of the department She is satisfied that these policies and procedures are in conformity with company objectives and believes there are no major problems in the regular operations of the purchasing department Lecimore’s internal audit department was assigned to perform an operational audit of the purchasing function Their first task was to review the specific policies and procedures established by Shen The policies and procedures are as follows: • All significant purchases are made on a competitive bid basis The probability of timely delivery, reliability of vendor, and so forth, are taken into consideration on a subjective basis • Detailed specifications of the minimum acceptable quality for all goods purchased are provided to vendors • Vendors’ adherence to the quality specifications is the responsibility of the materials manager of the inventory control department and not the purchasing department The materials manager inspects the goods as they arrive to be sure that the quality meets the minimum standards and then sees that the goods are transferred from the receiving dock to the storeroom • All purchase requests are prepared by the materials manager based on the production schedule for a four-month period The internal audit staff then observed the operations of the purchasing function and gathered the following findings: • One vendor provides 90% of a critical raw material This vendor has a good delivery record and is reliable Furthermore, this vendor has been the low bidder over the past few years • As production plans change, rush and expedite orders are made by production directly to the purchasing department Materials ordered for cancelled production runs are stored for future use The costs of these special requests are borne by the purchasing department Shen considers the additional costs associated with these special requests as “costs of being a good member of the corporate team.” *Based on CMA question paper 886 Part / OTHER ASSURANCE AND NONASSURANCE SERVICES • Materials to accomplish engineering changes are ordered by the purchasing depart- ment as soon as the changes are made by the engineering department Shen is proud of the quick response by the purchasing staff to product changes Materials on hand are not reviewed before any orders are placed • Partial shipments and advance shipments (that is, those received before the requested date of delivery) are accepted by the materials manager, who notifies the purchasing department of the receipt The purchasing department is responsible for follow-up on partial shipments No action is taken to discourage advance shipments Based on the purchasing department’s policies and procedures and the findings of Lecimore’s internal audit staff: a Identify deficiencies and/or inefficiencies in Lecimore Company’s purchasing function b Make recommendations for those deficiencies/inefficiencies that you identify.* required Use the following format in preparing your response: Deficiencies/Inefficiencies recommendations 1 26-24 (Objectives 26-4, 26-5) Superior Co manufactures automobile parts for sale to the major U.S automakers Superior’s internal audit staff is to review the internal controls over machinery and equipment and make recommendations for improvements when appropriate The internal auditors obtained the following information during the assignment: • Requests for purchase of machinery and equipment are normally initiated by the supervisor in need of the asset The supervisor discusses the proposed acquisition with the plant manager A purchase requisition is submitted to the purchasing department when the plant manager is satisfied that the request is reasonable and that there is a remaining balance in the plant’s share of the total corporate budget for capital acquisitions • Upon receiving a purchase requisition for machinery or equipment, the purchasing department manager looks through the records for an appropriate supplier A formal purchase order is then completed and mailed When the machine or equipment is received, it is immediately sent to the user department for installation This allows the economic benefits from the acquisition to be realized at the earliest possible date • The property, plant, and equipment ledger control accounts are supported by computerized depreciation lapse schedules organized by year of acquisition These lapse schedules are used to compute depreciation as a unit for all assets of a given type that are acquired in the same year Standard rates, depreciation methods, and salvage values are used for each major type of fixed assets These rates, methods, and salvage values were set 10 years ago during the company’s initial year of operation • When machinery or equipment is retired, the plant manager notifies the accounting department so that the appropriate entries can be made in the accounting records • There has been no reconciliation since the company began operations between the accounting records and the machinery and equipment on hand Identify the internal control deficiencies and recommend improvements that the internal audit staff of Superior Co should include in its report regarding the internal controls over fixed assets Use the following format in preparing your answer:* Deficiencies recommendations 1 required *Based on CMA question paper Chapter 26 / Internal and Governmental FInanCIal audItInG and operatIonal audItInG 887 Index NOTE: Essential Terms appear in Boldface A Absence of causal connection, 146 Acceptable audit risk, 262, 312–315, 584 assessment of, 315t Acceptable risk of incorrect acceptance (ARIA), 608–609, 617 of incorrect rejection (ARIR), 627 of overreliance (ARO), 534–535 specification of ARIA and ARIR, 627, 628–629 Accountability, 382 Accounting, 30 comprehensive basis of, 855–856 by CPA firms, 50 distinguishing between auditing and, 30 principles departure from, 80–81 shopping for, 119–120 Accounting system, walkthroughs of, 411 Accounts payable designing tests of details of balances for, 656–663, 657f fraud risks, 357–358 master file, 648 risk of material misstatement, 656–657 tests of details of balances, 656–663 trial balance, 648 Accounts receivable agreement with master file and general ledger, 571–572 auditing standards requirements, 577–578 balance-related audit objectives, 566, 568f balances and transactions, 181f classification and, 573 completing tests in, 564–603 confirmation of, 577–583 designing tests of details of balances for, 462f, 463–464, 565–571, 565f fraud risks, 353–357 inclusion of existing, 572–573 lapping of, 506–508 master file, 491 population and, 607t, 616t risk of material misstatement, 566–567 tests of details of balances audit program for, 466t trial balance, 491 Accrued bonuses, 714 Accrued commissions, 714 Accrued interest, notes payable and, 760–761f Accrued liabilities, audit of, 688–689 Accrued payroll expenses, 713 Accrued payroll taxes, 714 Accrued salaries and wages, 713–714 Accrued vacation pay, sick pay, or other benefits, 714 Accumulated depreciation, ending balance verification, 684–685 Accuracy accounts receivable, 573 as balance-related audit objective, 187 recording of acquisitions, 653 as transaction-related audit objective, 183t transaction-related audit objectives transaction file, 185 ACL, 361, 429 Acquisition and payment cycle accounts and classes of transactions in, 645–646 accounts in, 645f audit of accrued liabilities, 688–689 888 Index income and expense accounts, 689–693 prepaid expenses, 685–687 property, plant, and equipment, 677–685 business functions in, 646–649 misappropriations in, 358 other account types in, 677 tests of, 741–742 tests of controls and substantive tests of transactions, 649–656, 650f, 691 transactions and accounts associated with, 677t Acquisitions journal or listing, 648 Adequate documents and records, 385, 495, 709 Adjusted trial balance, 178f Adjusting entries, 243 Adjustment to revenues, manipulation of, 355 Adverse opinion, 83, 89, 422 Advertising and solicitation rule, 125 Aged trial balance, 571–572, 572f Agreed-upon procedures engagements, 850, 854–855 AICPA Clarity Projects, 57–58, 841, 849 Allocation of expenditures, tests for, 691–693 of preliminary judgment about materiality, 279–281 Alternative procedures, 582 American Institute of Certified Public Accountants (AICPA), 40, 55–56 Code of Professional Conduct, 109, 109t, 111t peer review program, 63, 463 Professional ethics executive committee, 55 American Institute of Certified Public Accountants (AICPA) auditing standards, 56 guidance for auditors, 872 principles underlying an audit, 59f Analysis of differences, 582–583 Analysis of exceptions, 539, 541f Analytical procedures, 185–192, 228–229, 232–236, 305, 679, 690, 712 for accounts payable, 658 for accounts receivable, 463, 569–571 for acquisition and payment cycle, 658t appropriateness of types of evidence, 230–231 during the audit engagement, 233 cash receipts, 782 common financial ratios, 236–239 compare client data with similar prior-period data, 234–235 examples of planning, 272t final, 817 financial instruments, 794 for income and expense accounts, 690t inquiries of the client, 229 for inventory and warehousing, 734–735, 734t for notes payable, 758–759, 759t for payroll and personnel cycle, 712–716, 713t preliminary, 271–274 provide evidence supporting an account balance, 229 relation to substantive tests, 452 signaling of revenue frauds by, 355–356 substantive, 191, 452–453, 461–462 types of, 233 Annual report, example of, 205–217 balance sheet, 212 company description, 206 five-year financial summary, 217 letter to shareholders, 205 management discussion and analysis, 216 management responsibility for financial statement, 211 notes to financial statements, 215 report of accounting firm, 210 statement of cash flows, 214 statement of operations, 213 statement of stockholders’ equity, 213 Annual reports, information included in, 821 Application controls, 389, 393–395 automated controls, 393 categories of, 390t general controls and, 389f input controls, 393–394 processing controls, 394, 394t Application service providers (ASPs), 396 Appropriateness of evidence, 222–224 of types of evidence, 230–231, 230t Assertions see Management Assertions Assessment inquiry, 359–363 Assessment of control risk, 412 related tests and, 712 Asset custody, separation from other functions, 384, 650 Assets and costs, transfer of, 729 fixed, and fraud risk, 358 misappropriation of, 170 and records, physical control over, 386 Association of Certified Fraud Examiners (ACFE), 37 Assurance engagements, limited, 855–857 Assurance services, 32–36, 35t, 839–858, 849 attestation services, 33–34 engagements, 858t nonassurance services, 35–36 Attestation engagements, 847–850 agreed-upon procedures, 850, 854–855 examination, 849 Attestation services, 33–35 Attorneys, clients’, inquiry of, 811–813, 812f Attributes, 528 and exception conditions, 531 sampling, 543–551, 551f, 654–655 Audit in acquisition and payment cycle, 644–664 of capital stock and paid-in capital, 764 communicate with audit committee and management, 472–473, 825–827 completing, 806–836 cycle approach to segmenting of, 177–180 evaluate results, 821–825, 825f evidence see Evidence final evidence accumulation, 472, 817–821 of financial statements, 37–38, 167 of historical financial statements, 33 of internal control over financial reporting, 33 in inventory and warehousing cycle, 730f objectives of, 166–202 purpose, 167 quality around the world, 62 requirements, 872 responsibilities and objectives, 166–202 review for contingent liabilities and commitments, 808–813 subsequent events, 813–816 scope limitation, 82 subsequent discovery of facts, 827–828, 828f types of, 36–37, 36f Audit assurance, 312, 457f Audit committee, 118–119 communicate with, 542–543, 825–827 other communication with, 826 oversight, 350–351 participation in control environment, 381–382 Audit documentation, 239–246 preparation of, 244f, 246 Audit failure, 140–141 Audit file contents and organization, 241f Audit firm rotation in the European Union, 120f Auditing definition, 28 distinguishing between accounting and, 30 economic demand for, 30–32 internal financial, 867–870 in IT environments, 426–427 nature of, 28–29 operational, 873–880 profession, response to legal liability, 155–156 relation of U.S and International standards, 57f reporting and, 29 through the computer, 426 Auditing procedures for finding contingencies, 809 Auditing Standards Board (ASB), 55–58 Audit objectives, 166–202, 468 balance-related, 181, 187–189, 189t, 466 identifying, 414 meeting, 190–192 presentation and disclosure-related, 181, 189, 189t, 466 setting, 181–182 steps to develop, 167f transaction-related, 185–186, 186t, 466 Auditors, 38–39 clients and, 32f decision process for audit reports, 90–92 defenses against client suits, 144–146, 153f third-party suits, 146–148, 147t, 151, 153f direct knowledge of, 223 discovery of material misstatements, 169, 170 evaluation of manaagement’s integrity, 314–315 external users and, 32f independent, 28, 29 legal liability, sources of, 142, 144f, 153t listening techniques, 360 operational, 877 opinion of, and supporting evidence, 822 relationship of internal and external, 868–870 reports involving other auditors, 81 responsibilities, 169 material vs immaterial misstatements, 169 responsibilities for reporting on internal control, 379 restricted scope, 87–88 utilization of monetary unit sampling, 622–623 Audit plan development, 469 evidence mix, 458–459 selection of tests, 454–457 types of tests, 449–454 Audit planning, 261–262 audit risk model for, 309 key parts of, 261f, 284f materiality and, 260–299 understanding client’s business and industry, 309f Audit procedures, 460–461, 611 design and performance, 503 evidence decisions and, 221 for finding commitments, 811 performance of, 538 terms used in, 231–232, 232t Audit process and financial statement cycles, 176–181, 177f, 179t, 180f phases of, 190–192, 467 summary of, 469–473, 470f Audit program, 222, 242 design format, 503 design of, 459–467 evidence decisions and, 222 illustrative, 466, 467t performance format, 503 tests of details development, 583–586 Audit report, 29, 70–101 auditor’s decision process for, 90–91 categories of, 75f conditions requiring departure, 85–90, 91t defined, 29 international accounting and auditing standards, 92–93 international developments related to, 92 issuance of, 188, 472–473, 825 Section 404 reporting on internal control, 422, 423–424 separate report on internal control over financial reporting, 77f unmodified emphasis-of-matter paragraph, 78–81 with explanatory paragraph or modified wording, 78–79 nonstandard report wording, 78–79 Audit risks, 302–303 acceptable, 313–315 assessing, 313–315 audit failure vs., 140–141 model, 309–313, 309f, 310t, 450f for segments, 318–319 Audit sampling, 523, 530–531 summary of steps, 545f terms used in, 529t for tests of controls and substantive tests of transactions, 522–563 for tests of details of balances, 606–644 Audit software, 361, 428, 429t Audit strategy, 264–265 Audit tests expanded in specific areas, 613–614 general cash in the bank and, 788f integration of, for inventory, 741–743, 742f IT effect on testing, 426–430 of prepaid insurance, 686–688 substantive tests of transactions see Substantive tests of transactions tests of controls see Tests of controls for uncollectible accounts, 508 Authorization proper, 495, 709 of purchases, 649 B Backup and contingency planning, 392–393 Bad debt expense, 576 Balance-related audit objectives, 181, 186–189, 189t, 466, 468t, 566, 585t, 660t, 680t, 738t, 740t, 762t, 784t, 795t Bank confirmation receipt, 784–786 standard form, 784, 785f Bank reconciliation, 781–782, 783f tests of, 786–789 Basic precision, 619 Batch input controls, 394t Behavioral cues during inquiry, 360–361 Benford’s Law, 37 Bills not paid after year-end, 660 Blank confirmation form, 578 Block sample selection, 527–528 Board of directors, participation in control environment, 381–382 Bonuses, accrued, 714 Bookkeeping services by CPA firms, 50 Branch bank accounts, 777–779 Breach of contract, 143t Budgets, 235 Business failure, 140–141 C Capital acquisition and repayment cycle, 756 accounts in, 756–757 notes payable, 757–761 Capital stock audit of, 764 certificate record, 763 Cash accounts audit of, 776–804 fraud-oriented procedures, 788–792 imprest petty cash fund, 778 types of, 777–779 Cash disbursements, 648–649, 655t designing tests of controls and substantive tests of transactions for, 654 processing and recording of, 648–649 transaction file, 648–649 Cash equivalents, 778 Cash in the bank, and transaction cycles, 779–780, 779f Cash receipts cutoff, 575 designing tests of controls and substantive tests of transactions for, 504–508 journal or listing, 492 prelisting of, 491–492 processing and recording of, 491–492 proof of, 504–506 subsequent, 582 transaction file, 492 Cenco Incorporated v Seidman & Seidman (1982) Liability to clients, 144f Center for Audit Quality, 53, 64 Certified Public Accountants see CPAs Chart of accounts, 386 Check, 648 Civil liability under federal securities laws, 144f, 148–154 Clarity Project, 57, 58, 841, 849 Classification acquisitions, 653 as balance-related audit objective, 187–188 prepaid insurance-related expense, 687–688 of recorded sales, 501 as transaction-related audit objective, 183t, 185–186, 185t Client business risk, 262 affecting accounts payable, 656–657 cash, 781 financial instruments, 793 payroll, 712 Clients acceptance of, 262–266 attorneys of, inquiry of, 811–813, 812f and CPA firms, litigation between, 116–117 data comparisons of, as analytic procedures, 233–236 investigation of new, 263 liability to, 145f objectives and strategies, 270–271 personnel, inquiries of, 411 rights to accounts receivable, 576–577 all insurance policies, 687 suits by, auditor defenses against, 144–146 Client’s business and industry, understanding of, 228, 266–270, 267f Client’s internal controls effectiveness of, 223 Closely held corporation, 761 Cloud computing environments, 396 Code of Professional Conduct, 55, 59, 61, 109–110, 112 AICPA, 109t American Institute of Certified Public Accountants (AICPA), 55, 109 classification system, 126–127 threats to compliance with rules under, 111t Codification of Auditing Standards, 58, 61 Index 889 Collusion, 377 Combined report on financial statements and internal control over financial reporting, 76 Commissions accrued, 714 rules of conduct and, 124–125 Commitments, 809 Committee of Sponsoring Organizations of the Treadway Commission see COSO Common financial ratios, 236–239 Common law, 143t Comparability, vs consistency of financial statements, 79–80 Compensating control, 415 Competence commitment to, 382 of operational auditor, 877 Compilation omission of disclosures in, 845f Compilation services, 844–846 Completeness as balance-related audit objective, 187 existing acquisitions and, 653 as transaction-related audit objective, 185 Completing the audit checklist, 822, 822f Complex transactions, 317 Compliance audit, 37 Computed upper exception rate (CUER), 529 Computer-generated random numbers, 525–526, 526f Confidence factor, 618, 618t, 620t Confidence limits, calculation of, 630–631t Confidentiality, 122–123 of audit files, 240 need for, 122 rules of conduct and, 122–123 Confirmation, 226 accounts payable, 660–661 of accounts receivable, 577–583 as audit evidence, 226, 227t bank, 784, 785f of code of conduct compliance, 349 Consistency, explanatory paragraph for, 79–80 Consulting services, 118f Content and Skill Specifications for the Uniform CPA Examination, 40 Contingent fees rule, 123–124 Contingent liabilities, 786 review for, 808–813, 809f Contract labor, 715 Contributory negligence, 145–146 Control activities, 383–387 adequate documents and records, 385 adequate separation of duties, 384 independent checks on performance, 386–387 physical control over assets and records, 386 proper authorization of transactions, 384–385 Control deficiency, 414–417 Control environment, 380–383 control activities, 383–387 information and communication, 387 monitoring, 387–388 risk assessment, 382–383 Control risk, 311–312, 585 acceptable risk of overreliance (ARO), 534–535 assessment of, 408f, 411–417, 412, 420t, 431f, 542, 649–651, 712, 781–782, 793–794 matrix, 412, 413f, 414, 506f for payroll and personnel cycle, 707 planned acquisitions, 649–651 sales, 493–495 for sales and collection cycle, 567–568 Controls over classes of transactions, 379 over reliability of financial reporting, 378–379 related audit objectives and, 414 Corporate governance oversight, to reduce fraud risks, 347–351 Corporate minutes, 270 890 Index Corporate Social Responsibility (CSR), 27 Corporations closely held, 761 general, of CPA firms, 51 professional, 51 publicly held, 761 Correspondence with attorneys, 816 with clients, 582 COSO, 28 components of internal control, 379–388, 380f, 388t principles, 380 Cost of audit test types, 455 of evidence types, 231 persuasiveness and, 224–225 Cost accounting audit of, 725–754 controls, 731–732 records, 727 tests, 743 tests of controls, 732–734 Cost or market, 741 Covered members rule, 114 CPA examination of, 39f CPA exam, next version of, 39 CPA firms, 38, 49–51, 876–877 activities of, 50–51 and client, litigation between, 116–117 ethical conduct by, 108 quality control, 62–64 revenue and other data from US, 49 size categories, 49–50, 49t structure of, 51–52 CPAs, 40 assurance services provided by, 32–36 legal liability, 142, 143t nonassurance services provided by, 35–36 profession of, 48–69 requirements for becoming, 40f Credit Alliance, 147 Credit approval, 489 Credit memo, 492 Criminal liability for accountants, 154–155, 154f Criteria established information and, 28 for evaluating efficiency and effectiveness, 877–878 Critical evaluation of evidence, 343 Current files, 242 adjusting entries, 243 supporting schedules, 243–244 working trial balance, 242 Current year acquisitions and disposals, verifying, 679–682 balance, comparison with preceding year’s, 234 Customer billing and recording of sales, 489–491 business risk for, 30 order processing, 489 Cutoff, 188 for accounts payable, 661 for accounts receivable, 573–575 bank statement, 786 for insurance transactions, 688 misstatement, 573 physical observation of inventory and, 661 Cyberattacks, 375 Cybersecurity, 392 Cycle approach, 177–180, 179f D Database management systems, 395 Data comparisons, client, 233–236 Debit memo, 647 Debt compliance letters, 856 Debt compliance report, 857f Decisions audit evidence, 221–222 auditors’ in observation of inventory, 736–737 regarding audit reports, 90 materiality, 85–86 Deduction authorization, 704 Deficiencies in control identification of, 423f letter regarding, 423f Depreciation expense, verifying, 684 Detail tie-in as balance-related audit objective, 188 Difference estimation, 626, 628–631 Digital signatures, 396 Direct financial interest, 116 Direction of testing, 499, 500f Disclaimer of opinion, 83, 423–424 due to lack of independence, 90f Disclosure-related audit objectives, 466 Discovery of facts, subsequent, 827–828, 828f Discreditable acts rule, 126 Discussion among engagement team members, 305–306 Distribution of the reports, 873 Dividends, audit of, 766 Documentary discrepancies, 356 Documentation audit, 239–246, 244f, 823–824 evidence planning and, 543 of fraud assessment, 363 of understanding of internal control, 408–411 Documents and records acquisition and payment cycle, 646–649 adequate, 385, 709 examination of, 411 inventory and warehousing cycle, 726–728 payroll and personnel cycle, 703–705 sales and collection cycle, 488–492 for transferring inventory, 732 Dodd-Frank financial reform legislation, 345 Dual-dated audit report, 816 Dual dating, 816 E Earnings management, 338 Earnings, retained, 766–767 Economy and efficiency audit, 875–876 Effectiveness, 873 criteria for evaluating, 877–878 operating, of controls, 378 vs efficiency, 873–874 Efficiency, 873–874 Embedded audit module approach, 429–430 Emphasis of other matters, 81 Employees, appropriate, hiring and promoting, 348 Employment relationships conflicts arising from, 121 Encryption techniques, 396 Enforcement action by AICPA professional ethics division, 127 action by a State Board of Accountancy, 127 PCAOB Enforcement actions, 127–129 Engagement attestation, 847–850 staff selection for, 266 types of, 854 Engagement letter, 264, 265f Engagement quality review, 824 Engagement risk, 313 Engagements types of and related reports, 850f Enron, 260 Enterprise resource planning (ERP) systems, 395 Entity-level controls, 388 Equipment-related accounts, 678–679, 678f Error, 170 Errors vs fraud, 170 Escott et al v BarChris Construction Corporation (1968), 149f Estimated population exception rate (EPER), 535–536 Estimated population misstatement, 618 Ethical conduct elements of, 348t need for, 107–108 Ethical dilemmas, 104–105 Ethical values, as subcomponent of control environment, 381 Ethics, 103–104 code of, 270 need for ethics, 103 principles of, 103f and reducing fraud risks, 347–349 unethical behavior and, 104–105 Evaluating audit results, 530, 547, 629–630, 825f Evidence, 28, 219–258 see also Documentation; Information accumulation assurance and, 840f and evaluation of, 28–29, 879 appropriateness of, 222–223 decisions regarding, 221, 468 differing, among cycles, 310t evaluation of, 824–825 final, 817–821 key terms, 469t nature of, 220 persuasiveness of, 224–225 from prior year’s audit, 419 relationship to risk, 318–323, 321t, 322f reliability of, 222–223, 662–663 sufficient appropriate, 60–61, 223–224, 821–822 terms related to, 467–469 types of, 225–230, 230t audit tests involving, 454–455, 454t, 468 vs legal and scientific evidence, 220, 220t Evidence mix, 458–459 variations in, 458t Evidence-planning worksheet, 322f, 544f tests of details of balances and, 584f Examination, 849 Examination report under attestation standards, 850 Examine minutes issues subsequent to the balance sheet date, 816 Exception rate, 528–529 estimated population, 535–536 tolerable, 533–534 Existence as balance-related audit objective, 187 occurrence as transaction-related audit objective, 185 Expense account tests of details of balances for, 691, 713 Expense account analysis, 691 Explanatory paragraph, of unmodified audit report, 80f, 81 External document, 228 F Fair Labor Standards Act (FLSA), 141 Fair value estimates, 793 Fees contingent and rules of conduct, 123–124 referral and rules of conduct, 124–125 unpaid, 117 Fictitious revenues, 354, 358t Final evidence accumulation, 472, 817–821 Financial audit and reporting requirements—Yellow Book, 871 Financial instruments audit of, 776–804 defined, 778–779 types of accounts, 777–779 Financial interests direct versus indirect, 114 material or immaterial, 114–115 rules of conduct and, 114 Financial reporting fraudulent, 338, 357–359 internal control over, 33 risk assessment for, 382–383 Financial statements audit documentation and, 243f audit of, 32, 36, 37–38, 190f audit of historical, 33 cycles of, 176–181 disclosure checklist, 822–823, 824f disclosures, 822–823 information accompanying, 819–821 preparation, GAAP departure, 82–86, 88–90 prospective, 853–855 Finished goods, storage and shipping of, 727–728 Firewall, 396 Fixed asset master file, 678 Flowchart of internal control, 409 of sales and cash receipts, 494f Follow-up on nonresponses, 581–582 Forecasts, 853 and projections, 853 Foreign Corrupt Practices Act of 1977, 152 charges against Walmart, 152 Foreseeable users, 147–148 Foreseen users, 146–147 Fraud, 143t audit software analysis, 361–362 characteristics of perpetrators, 341f conditions for, 339–343 detection methods, 359f error vs., 169 and general cash account audit, 788–792 and illegal acts, communicate, 825 material, 170 other audit implications, 362–363 responsibilities when fraud is suspected, 359–363 risk factors, 339–340, 345 suspected, 359–363 types of, 338–339 Fraud examiners big data and, 37 Fraud risk, 307–308 antifraud controls and fraud deterrence, 350f assessment of, 308, 337–350 commonly cited conditions for, 341f management’s responsibility to evaluate, 349–350 mitigating, 349 reduction by corporate governance oversight, 347–351 responding to, 351–353 responsibility for mitigating, 351f specific areas of, 353–359 Fraud triangle, 339, 339f Fraudulent expense reports, 711–712 Fraudulent financial reporting, 169–171 Fraudulent Financial Reporting 1998–2007, 269–270 Frequency distribution of sample means, 624f Full disclosure, compilation with, 845f Functional audit, 875 Further audit procedures, 449 audit risk model and, 450f evidence and, 454t G General authorization, 385 General cash account audit of, 777, 780–788 other cash accounts and, 778f General controls, 389, 390–393 administration of the IT function, 390 application controls and, 389f backup and contingency planning, 392–393 categories of, 390t physical and online security, 392 separation of IT duties, 391f systems development, 391–392 Generalized audit software (GAS), 429, 429f Generalizing from sample to population, 619–621 Generally accepted accounting principles (GAAP), 28 lack of consistent application of, 79–80 Generally Accepted Attestation Standards, 848t Generally accepted auditing standards (GAAS), 56 Principles, 58–62 Generally Accepted Government Auditing Standards (GAGAS), 870, 871 General Standards Rule, 121 Global Reporting Initiative (GRI), 35 Going concern entity’s ability to continue as, 228–229 evaluate assumption about, 817 substantial doubt about, 80, 80f Government accountability office auditor, 38 Governmental financial auditing, 870–872 Government Auditing Standards (GAGAS), 871–872 Government auditors, 875–876 Government audits, 870 Guidelines for ARO and TER for nonstatistical sampling: Substantive tests of transactions, 536t Guidelines for ARO and TER for nonstatistical sampling: Tests of controls, 536t Guidelines, for materiality, 277, 278f H Haphazard sample selection, 527–528 Hardware controls, 393 Hierarchy of CPA firm, 52 Hochfelder v Ernst & Ernst (1976), 150f Horizontal analysis, 345, 346f Howard Sirota v Solitron Devices, Inc (1982), 151f Human resource records, 704 Human resources, policies and practices, 704 I Idea, 361, 429 Illegal acts, 171–172 Imprest accounts, 777 Imprest payroll account, 706 Imprest petty cash fund, 778 Income and expense accounts, audit of, 689–693 Income smoothing, 338 Independence in appearance, 113 covered members and, 114 in fact, 113 financial interests and, 114 in mental attitude, 29 of mind, 113 of operational auditor, 877 of provider, evidence and, 223 rule of conduct, 113–114 and Sarbanes-Oxley Act, 117–120 Independent auditors, 29 Independent checks, 386–387 performance and, 709 Independent registrar, 764 Independent review in completion of audit, 824 of transactions, 650–651 Indirect financial interest, 116 Information about fraud risks, sources of, 344–346, 344f accompanying basic financial statements, 819–821, 820f and communication, 387 and established criteria, 28 interim financial, review of, 846–847 often confirmed, 227t Informational inquiry, 360 Information risk, 30 biases and motives of the provider, 31 causes of, 30–31 complex exchange transactions, 31 reduction of, 31–32 remoteness of information, 31 voluminous data and, 31 Index 891 Information technology (IT) internal controls specific to, 389–395 Inherent limitations, 377 Inherent risk, 311, 316–318, 585, 781 for accounts receivable, 463 assessing, 316–318, 712, 793 Initial audit planning, 262–266 Initial sample size, 536–537, 609–611, 629 Input controls, 393–394 Inquiry of client, 229 of client’s attorneys, 811–813, 812f interrogative, 359 of management, 816 of management, regarding fraud, 304–305, 344–345 Inspection, 226, 305 Institute of Internal Auditors (IIA), 867–868 Ethical principles and rules of conduct, 868f Insurance, prepaid, 685–686 Insurance register, 686 Integrity and objectivity rule, 121 as subcomponent of control environment, 381 Interbank transfers schedule, 792f tests of, 790–791 Interest rate, risk-free, 30 Interim proof of Cash, 790f Internal auditors, 39, 875 Internal comparisons and relationships, 235t Internal control, 376, 762–764 see also Tests of controls auditor responsibilities for reporting on, 379 communicate deficiencies in, 825–826 COSO components of, 379–388, 381f, 388t COSO framework and, 375–406 deficiencies in, 416f design of, 378 evaluating implementation of, 411 financial reporting and, 33 IT enhancement of, 395–396 management and auditor responsibilities for, 377–378 for non-public companies, 425–426 objectives of, 376 over financial reporting, 33 for prepaid insurance, 686 procedures to obtain an understanding of, 450 questionnaire, 409 relationship to operational auditing, 874 understanding, 408f in acquisition and payment cycle, 649 in outsourced systems, 420 in payroll and personnel cycle, 707 summary of, 431f Internal document, 227 Internal financial auditing, 867–870 Internal Revenue Agents, 38–39 Internal Revenue Service (IRS), 28 Internal verification procedures, 495 International and AICPA assertions, 182 International Auditing and Assurance Standards Board (IAASB), 56 International Business Machines Corporation’s report of management, 168f International Ethics Standard Board for Accountants (IESBA) Code of Ethics for Professional Conduct, 113f International Federation of Accountants (IFAC), 56 International Federation of Independent Audit Regulators (IFIAR), 62 International Financial Reporting Standards (IFRS), 28 International Standards for the Professional Practice of Internal Auditing, 867–868, 869f International Standards on Auditing (ISAs), 56–58 Interrogative inquiry, 360 Inventory audit of, 729–731 compilation tests, 730, 737–741 and costs, flow of, 726f fraud risks, 357, 357t 892 Index and fraudulent payroll considerations, 710–711 master file, perpetual, 728, 732–733 observation requirements, 735–737 price and compilation of, 730–731 price tests, 737 pricing and compilation of, 737–741, 740t in transit, 661–662 valuation of, 739–741 Inventory and warehousing cycle, 726 audit of, 725–754 cost accounting, 731–734 pricing and compilation of, 737–741 business functions in, 726–728 functions in, 729f integration of tests, 741–743 physical observation of inventory, 730, 735–737 Invoice sales, 490 vendors’, 647 Invoice confirmation, 578–579 J Job cost system, 727 JOBS Act of 2012, 765 Job time ticket, 705 Joint and several liability, 143t Journal or listing acquisitions, 648 payroll, 705 sales, 490 Judgment, professional, 60, 174–176, 550–551 common biases, 176, 176t elements of effective process, 174f framework, 174–176, 174f strategies to mitigate common judgment tendencies, 176t traps, 176, 176t K Key controls, 414, 502, 708t Kiting, 791 L Lack of duty to perform, 145 Laws and regulations, 171–172 Lawsuits, opposed by CPA firms, 155 Lead schedule, 242 Legal concepts affecting liability, 141–143 Legal expense expense analysis for, 692f Legal liability, 138–164 for the acts of others, 142 business failure and, 140 changed legal environment, 139–140 of CPAs, 142, 143t legal terms affecting, 143t protection from, 155–156 lack of privileged communication, 142 profession’s response to, 155–156 prudent person concept, 141 sources of, 142, 144f Lending procedures, independence and, 117 Letter of representation, 816 Level of disaggregation of planning activities, 465–466, 465f Liability accrued, audit of, 688–689 civil, under federal securities laws, 148–154 civil, under the federal securities laws, 142 to clients, 142–146, 145f criminal, 142, 144f legal concepts affecting, 141–143, 143t out-of-period liability tests, 659 payroll, tests of details of balances for, 713 recognition of, 647–648 to third parties under common law, 142, 144f, 146–148, 147t Limited liability company (LLC), 52 Limited liability partnership (LLP), 52 Liquidity activity ratios, 238 Listening techniques, auditors’, 360 Litigation between CPA firm and client, 116–117 Local area networks (LANS), 395 Long-term debt obligations, ability to meet, 238 M Madoff, Bernie, 342 Management communication with, 542–543, 825–827 and governance, 269–270 information risk shared with, 31–32 inquiries of, 304–305 inquiries of, regarding fraud, 344–345 letter, 422, 827 override of controls, 352–353 payment of audit fees, 120 representation letter, 816, 817–819 responsibilities, 168 related to internal control, 377 section 404 reporting responsibilities, 377–378 Management assertions, 182–184, 183t, 189, 189t about account balances, 184 about classes of transactions and events, 183 about presentation and disclosure, 184 audit objectives and, 184 International and AICPA assertions, 182 Management consulting services, 50–51 PCAOB assertions, 182 Management letters, 422, 827 Manual controls, 393 Manufactured inventory, pricing of, 740–741 Materiality, 83–86, 274–275 applying, steps in, 275f decisions, 85–86 for financial statements as a whole, 275–278 levels of, 60, 84–86, 85t performance, 567, 584, 657, 781 preliminary judgment about, 276–277 as relative concept, 276 revised judgment about, 276 Material weakness, 414–417, 424f McKesson-Robbins, 337 Mean-per-unit estimation, 627 Measurement limitations, 320–321 Minutes of meetings, 270 Misappropriation in acquisition and payment cycle, 358 of assets, 169–171, 338–339, 354 of receipts involving revenue, 356–357 Misstatement bound, 617 Misstatements, 606–607 analysis of, 613 comparison with preliminary judgment, 281–283 cutoff, 573 known, 281 likely, 281 material, 60, 73, 84 discovery by auditors, 169–170 and monetary unit sampling, 620–622 in population, 629 possible, 229 as a result of fraud, 352, 359–363 in sales, 498 tolerable, 618 Monetary unit sampling (MUS), 615–623 acceptability of population using, 617 audit uses of, 622–623 comparison with nonstatistical sampling, 615–617 defined, 615 generalizing from sample to population, 617 when misstatements are found, 620–622 when no misstatements found, 619–620 sample size determined using, 616, 617–619, 619t Monitoring fraud risk prevention programs, 349 of internal control performance, 387–388 Monthly statements, 491, 495 N Name and form of organization rule, 125–126 Narrative, describing internal controls, 409 National Association of State Boards of Accountancy (NASBA), 40 Negative confirmation, 579–580, 580f Negligence constructive fraud, 143t gross negligence, 143t ordinary negligence, 143t Nonassurance services, 35–36 Nonaudit services, 117–118 Noncompliance with laws and regulations, 171–172 Nonexistent payroll, tests for, 711 Nonexistent transactions, 499 Nonnegligent performance, 145 Nonprobabilistic sample selection, 525 methods, 527–528 Nonpublic companies, internal control for, 425–426 Nonresponses, follow-up on, 581–582 Nonroutine transactions, 308, 317 Nonsampling risk, 524, 552 Nonstatistical sampling application of, 529–543 comparison with monetary unit sampling, 615–617 variables sampling, 623 defined, 525 for tests of details of balances, 606–615 Nonverbal cues, during inquiry, 361t Notes payable, 757–761 analytic procedures, 758–759, 759t internal controls, 758 and related interest accounts, 757f tests of controls and substantive tests of transactions, 758 tests of details of balances, 759–760, 762t O Objectivity and evidence, 223 and integrity rule, 121 Obligations long-term debt, 238 Observation, 305 as audit evidence, 230 of entity activities and operations, 411 physical, of inventory, 735–737 Occurrence rate of see Exception rate recorded acquisitions and, 653 of recorded sales, 498–499 as transaction-related audit objective, 185 Office of Management and Budget (OMB) Circular A-133, 872 Officer’s compensation, 714–715 Omitted transactions, 499 Online security, 392 Operational auditing, 36, 873–880 criteria for evaluating efficiency and effectiveness, 877–878 difference from financial auditing, 873 effectiveness vs efficiency, 873–874 examples of findings, 880 independence and competence of auditor, 877 performance of, 875–876 phases in, 878–879 types of, 874–875 Opinion paragraph, 75 of separate report on internal control, 77f of unmodified shared report, 81, 82f Organizational audit, 875 Organizational structures and control environment, 382 of CPA firms, 51–52, 52t Out-of-period liability tests, 659 Output controls, 394 Outsourced systems, understanding internal controls in, 420 Owner’s equity, 761–767 dividend accounts and, 763f Ownership interests, 119 Ownership of audit files, 240 P Parallel simulation testing, 428–429 Parallel testing, 392 Partner rotation, 119 Partnerships general, of CPA firms, 51 limited liability (LLP), 52 Payments, authorization of, 651 Payroll payment of, 706 preparation of, 704–705 Payroll and personnel cycle, 703 accounts and classes of transactions in, 705t accounts and transactions in, 703, 704f audit of, 702–723 business functions in, 703–706 integration of, for inventory, 742 Payroll bank account reconciliation, 706 Payroll expenses, and fraud risk, 358–359 Payroll master file, 705 Payroll taxes, 706, 709–710, 715 PCAOB Staff alert on professional skepticism, 173 Peer review, 62 exceptions to confidentiality and, 123 Percent of misstatement, 620t Performance independent checks on, 386–387 Performance materiality, 275, 278–281, 280f, 463, 567, 584, 657, 712, 781, 793 planned evidence and, 323f Permanent files, 241–242 Perpetual inventory master files, 728, 732–733 Persuasiveness of evidence, 222–225 appropriateness of evidence, 222–223 Petty cash, 778 Phantom inventory (chapter opener), 725–726 Phases of the audit process, 190–192, 469–473 Physical control over assets and records, 386, 709 over computer equipment, 392 over inventory, 732 Physical examination, as audit evidence, 226 Physical inventory, pricing and compilation, 743 Physical observation of inventory, 735–737 Pilot testing, 392 Planned detection risk, 311, 421–422 and planned audit evidence, 586 Planning and supervision, adequate, 60 Planning phase of audit process, 190–191, 469 in operational auditing, 878–879 Plan the sample, 530, 546–547 Pocketing parking cash, 356 Point estimate, 611–612 Ponzi, Charles, 342 Ponzi scheme, 342 Population defining, 531–532, 607–608 effect of size, 547–548 generalize from sample to, 539, 611–612, 619–622, 629–631 misstatements in, 609, 629 recorded dollar, 607, 615–616 rejected, subsequent action, 613–615 requesting client to correct, 614–615 Positive confirmation, 578–579, 579f Preliminary judgment about materiality, 275, 276–277 Premature revenue recognition, 354–356, 490, 574 Prenumbered documents, for sales, 495 Prepaid expenses, audit of, 685–688 Prepaid insurance related accounts and, 686f Preparation services, 846 Prepare proof of cash receipts, 504–506 Presentation and disclosure-related audit objectives, 187–189, 715, 807t for accounts receivable, 577 for capital stock, 765 and completing the audit, 472, 807–808 Pricing and compilation audit of, 737–741 controls, 738–739 procedures, 739 Principles performance, 60–61 reporting, 61 responsibilities, 59–60 underlying an audit, 58 underlying GAAS, 58–62 Private Companies Practice Section (PCPS), 64 Private Securities Litigation Reform Act of 1995, 155 Privileged information, 123 Probability proportional to size sample selection (PPS), 527, 616–617 Procedures suggested for reviews, 841–842 Procedures to obtain an understanding, 409 Process cost system, 727 Processing controls, 394, 394t Professional conduct see also Ethical conduct code of, 109–112 by CPAs, 110f principles of, 112, 112t Professional ethics, 31, 102–137 Professional judgment, 174–176 common biases, 176, 176t elements of effective process, 174f framework, 174–176, 174f strategies to mitigate common judgment tendencies, 176t traps, 176, 176t Professional skepticism, 60, 172–174, 343–344 Profitability ratios, 238–239 Program audit, 876 Projections, 853 Prompt and accurate recording, 647 Proof of cash, 789–791 Proper authorization of transactions and activities, 384–385 Property, plant, and equipment audit of, 677–685 classification of accounts, 678t Property taxes, accrued, audit of, 688–689, 688f Proprietorship, 51 Prospective financial statements, 853–855 potential legal liability in, 854 use of, 853–854 Prudent person concept, 141 Public Company Accounting Oversight Board (PCAOB), 53 auditing standards, 57–58 considering changes to the audit report, 78 report on internal control, 76–77, 77f, 421 sanctions and, 151–152 unqualified report, 75–76, 76f Public company interim review, 846–847, 847f Publicly held corporation, 761 Purchased inventory, pricing of, 739–740 Purchase orders, processing of, 646, 727 Purchase requisition, 646 Purchases authorization of, 649 fraud risks for, 357–358 Index 893 Q Qualifications of individuals providing information, 223 Qualified opinion, 82–84, 87–90, 88f, 89f, 423–424 Quality control, 62 of CPA firms, 62–64 elements of, 63, 63t peer review, 63 relationships, 64f Questionaire, internal control, 409–410, 410f, 411 Questioning mind, 343 R Random sample, 525–526 Ratio estimation, 626–627 Raw materials receipt and storage of, 727 Realizable value of accounts receivable, 575–576 as balance-related audit objective, 188 Reasonable assurance, 169, 377 Recalculation, 229 Receipts involving revenue, misappropriation of, 356–357 Receiving report, 646–647 Recorded population value, 617 Related party, 268–269 Related party transaction, 268–269 Relating performance materiality and risks to balance audit objectives, 320 Relevance of evidence, 222 Relevant assertions, 184 Reliability of evidence, 222–223, 662–663 Remittance advice, 491 Reperformance, 229–230 Report on income tax basis, example of, 856f Reports on Controls at Service Organizations (SOC Reports), 851–853 Type report, 851 Type report, 852 Type report, 852–853 Reports on internal control over financial reporting management assertions, 33 separate or combined report, 76 Representative sample, 523–524 Resolving ethical dilemmas, 106–107 Restatement of Torts, 147 Retained earnings, 766–767 Revenue fraud risks, 353–357 Review accounting estimates for biases, 352–353 Review attestation engagement review of, 849–850 Review for subsequent events, 813–816, 814f Review internal statements prepared subsequent to the balance sheet date, 815–816 Review of audit documentation, 823–824 Review of historical financial statements, 34 Review records prepared subsequent to the balance sheet date, 815 Review report, 843, 843f Review services, 840–844 Review services (SSARS review), 840–844 Rights and obligations as balance-related audit objective, 188 Risk, 302 see also Acceptable risk; Client business risk; Control risk evidence and, 309, 319t inherent see Inherent risk of material misstatement, 60, 262, 301–336, 462 of material misstatement at the assertion level, 303 of material misstatement at the overall financial statement level, 303 relationship to materiality, 323 sampling and nonsampling, 523–524 in variables sampling, 627–628 894 Index Risk advisory services, 50 Risk assessment for financial reporting, 382–383 procedures, 267, 303–307, 304f, 449–450 update process, 353 Risk factors for fraudulent financial reporting, 316–317, 339, 340t, 353–359 for misappropriation of assets, 316–317, 340–343, 342t Rules of conduct, 111–112, 120–127 advertising and solicitation, 125 applicability of, 112 commissions and referral fees, 124–125 conceptual framework of, 110–111 confidentiality, 122–123 discreditable acts, 126 enforcement of, 127–129 form of organization and name, 125 independence, 113–114 integrity and objectivity, 121 interpretations of, 112 safeguards, 111 summary of, 128t technical standards, 121 threats to compliance, 110–111 Rusch Factors v Levin (1968)–Liability to third parties, 147 S Salaries and wages, accrued, 713–714 Sales cutoff, 573–574 designing substantive tests of transactions for, 498 designing tests of controls and substantive tests of transactions for, 493f internal control, 493 journal or listing, 490 recorded, existing, 499–501 returns and allowances, 492, 503, 574 summary of methodology for, 502–503 transaction file, 490 Sales and collection cycle, 488 accounts and classes of transactions in, 488f accounts in, 487–488, 487f analytical procedures for, 569t business functions for, 488–492 classes of transactions in, 487–488 control risk for, 463 integration of tests, for inventory, 741–743 role of audit tests in audit of, 451f substantive tests of transactions and, 463 tests of controls and, 463 tests of controls and substantive tests of transactions, 486–520 transaction-related audit objectives, 568f types of audit tests for, 509f Sales order, 489 Sample exception rate (SER), 539 Sample selection, 525, 537–538 evidence decisions and, 221 methods, 525–528 probabilistic, 525–527 probabilistic vs nonprobabilistic, 525 probability proportional to size, 527, 616–617 stratified, 527 Sample size, 618 for accounts payable tests, 663 for attributes sampling, 548t calculation with difference estimation, 628–629 for confirming accounts receivable, 581 determination using monetary unit sampling, 617–618 effect of, 537t evidence decisions and, 221 expanding, 541–542 increasing, 614 initial, 536–537 in physical observation, 736–737 for small populations, 537 tests of details of balances, 610t Sampling attributes, 543–551 audit, 523 decisions about, 581 for exception rates, 528–529, 546t monetary unit, 615–623 nonstatistical, 525, 529–543, 544, 606–615 statistical, 524 statistical vs nonstatistical, 524–525 variables, 623–628 Sampling distribution, 544–546, 624t for a population distribution, 625f Sampling interval, 618–619 Sampling risk, 282, 523 in monetary unit sampling, 621–622 in variables sampling, 627–628 Sampling unit, defining of, 532–533, 608 Sarbanes–Oxley Act, 33, 56, 152–153 and audit documentation, 240 independence and, 117–120 and PCAOB, 53 Section 404, 33, 75–76, 421–422 Scienter, 150 Scientific evidence, 220t Scope limitation of audit, 82 Scope paragraph, 75 of unmodified shared report, 82f Section 404 of the Sarbanes–Oxley Act of 2002 auditor responsibilities, 378–379 management responsibilities, 377–378, 378f report on internal control over financial reporting, 75–77 types of audit opinions, 422–424 Securities Act of 1933, 54, 148–149, 153f Securities Act of 1934, 151f, 153f Securities and Exchange Commission (SEC), 54 authority to sanction, 151–152 provisions addressing auditor independence and, 117–118 Securities Exchange Act of 1933, 149–150, 149f Securities Exchange Act of 1934, 149–151, 150f Rule 10b-5 of, 150 Segregation of IT duties, 391f Separate and proportionate liability, 143t Separate report on internal control over financial reporting, 75–77, 77f Separation of authorization of transactions from custody of related assets, 384 Separation of duties adequate, 384, 494–495, 709 and proper record keeping for owners’ equity, 763–764 Separation of IT duties, 390–391 from user departments, 384 Separation of operational responsibility from recordkeeping responsibility, 384 Service auditor, 420–421 Service center, 396, 420–421 Service organization control (SOC), 851–853 Shareholders’ capital stock master file, 763 Shipping contract FOB destination, 661 FOB origin, 661 Shipping document, 489, 582 Short-term debt-paying ability, 236–238 Significant deficiency, 414–417, 415f Significant risks, 308, 419, 462 Simple random sample selection, 525–526 Single Audit Act of 1984, 872 Six-step approach to resolving ethical dilemmas, 106–107 Skepticism, professional, 172–174, 343–344 Special assignments, in operational auditing, 875 Specialists, 266 Specific authorization, 385 Specified elements, accounts, or items, 856 Standard bank confirmation form, 784, 785f Standard cost records, 738 Standards accounting principles, 122 attestation, 848 compliance with, 110–111, 122 of conduct, 112f performance, 60–61 reporting, 61 responsibilities, 59–60 set by AICPA, 55–56 Standard unmodified opinion audit report, 71, 76, 82–83 conditions for, 74 for nonpublic entities, 71–74 parts of, 71–72 for public companies, 75 Statements on Auditing Standards (SASs), 55, 64 Statements on Internal Auditing Standards (SIASs), 868 Statements on Standards for Accounting and Review Services (SSARS), 840 Statements on Standards for Attestation Engagements (SSAE), 848 Statistical inferences, 625–626 Statistical sampling, 524 Statistical versus nonstatistical sampling, 524–525 Statutory law, 143t Stock transfer agent, 764 Stratified sampling, 527, 607–608 Stratified statistical methods, 627 Subpoenas, 125 Subsequent discovery of facts, 827–828, 828f Subsequent events, 814 audit tests, 815–816 dual dating, 816 review for, 814f types of, 814–815 Substantive analytical procedures, 191, 229, 586 for equipment, 679–681 sales and collection cycle, 570t Substantive testing, 451 expanded when fraud is suspected, 362 Substantive tests of transactions, 191, 451–452, 502–503, 568, 586 audit sampling for, 522–563 designing, 460f, 461f designing for acquisitions and payment cycle, 649–656, 650f financial instruments, 782, 794 payroll and personnel cycle, 706–712 sales, 493f effect of results of, 508–509 for notes payable, 758 in phase II of audit process, 191–192 relationship to tests of controls, 460–461 trade-off with tests of controls, 456–457 Sufficiency of evidence, 223–224, 821–822 Supporting schedules, 243–245 Sustainability reporting, 849 Systematic sample selection, 526–527 Systems development, 391–392 SysTrust services, 853 T Tainting, 620 Tax return audit of, 29f payroll, 706, 713 Tax services, by CPA firms, 50 Test data approach, 426–428, 427f Tests of controls, 417–421, 502, 568 in audit plan development, 450–451 audit sampling for, 522–563 cash receipts, 504 designing, 460f, 461f acquisition and payment cycle, 649–656, 650f, 657–658 cash receipts, 504–508 financial instruments, 794 payroll and personnel cycle, 706–711 sales, 496–498 effect of results of, 508–509 extent of, 418–419, 495–496 illustration of, 452t in phase II of audit process, 191–192 procedures for, 417–418 purpose of, 417 relationship to substantive tests, 456 substantive tests of transactions, 460–461 trade-off with substantive tests, 456–457 Tests of details of balances, 192, 462–465, 680t, 759–760 for accounts payable, 656–663, 657f in audit plan development, 453 audit program, 583–586 of cash, 782–784, 784t, 794–795 designing, 464f accounts receivable, 462–464, 565–577, 565f payroll and personnel cycle, 712–716 evidence-planning worksheet, 321–322 expense account analysis, 714–715 for financial instruments, 794–795, 795t inventory and, 738t for inventory pricing and compiliation, 740t for notes payable, 759–760 for notes payable and interest, 762t in phase III of audit process, 191–192 The Uniform CPA Examination Candidate Bulletin, 40 Third parties legal liability to, 144f, 147t suits by, auditor defenses against, 146–148 Third-party beneficiary, 143t Those charged with governance, 382, 422 Tick marks, 246 Timekeeping payroll preparation and, 704–705 Time record, 705 Timing of audit tests, 471t of confirmations, 580–581 difference, 575 evidence decisions and, 221 as transaction-related audit objective, 186 Tolerable exception rate (TER), 533–534 Tolerable misstatement, 608, 617, 618 Total payroll, 715 Tracing, 228 Training, fraud awareness, 349 Transaction classes in sales and collection cycle, 487–488 Transaction cycles, 180f cash in the bank and, 779–780, 779f Transaction file acquisitions, 647–648 payroll, 705 Transaction-related audit objectives, 181, 185–186, 466, 468t, 497t, 502, 505t, 652t, 655t, 708t Transactions flow of from journals to financial statements, 177f timely recording of, 650–651 Trial balance accounts payable, 648 working, 242 Trust Services, five principles of, 852t Type report, 851 Type report, 852 Types of attestation engagements, 848–849 Types of tests, 449–454, 468 U Ultramares Corporation v Touche (1931), 146f Ultramares doctrine, 146 Unadjusted misstatement audit schedule, 822, 823f Unasserted claim, 811 Uncollectible accounts, 576f audit tests for, 508 authorization form, 492 Unethical behavior, 103–104 Unit cost records, 733–734 United States v Andersen (2002), 154f Unmodified audit report with explanatory paragraph or modified wording, 78–79 Unmodified opinion, refusal to give, 615 Unqualified opinion on internal control over financial reporting, 422 Unusual fluctuations, 229 Unusual transactions, significant, 308, 353 U.S Government Accountability Office (GAO), 38 V Vacation pay, accrued, 714 Valuation of inventory, 739–741 Variables methods, 626–627 Variables sampling, 623–628 comparison with nonstatistical sampling, 623 difference estimation, 626 mean-per-unit estimation, 627 ratio estimation, 626–627 sampling distributions, 623–625 sampling risks, 627–628 statistical inference, 625–626 stratified statistical methods, 627 Vendor’s invoice, 647, 660 Vendor’s statement, 648, 660 Verbal cues, during inquiry, 360t Verification of addresses, 581 in audit of property, plant, and equipment, 679–685 of information, by user, 31 Vertical analysis, 346 Voucher, 647 Vouching, 228 W Walkthrough, 411 WebTrust assurance services, 853 W-2 Form, 706 whistleblower, 345 Wide area networks (WANs), 395 Working trial balance, 242 Workplace environment, positive, 348 Y Yellow Book, 870 Index 895 Credits Chapter 25: p 839, Volodymyr Kyrylyuk/Fotolia Chapter 2: p 48, adimas/Fotolia Chapter 10: p 337, Keystone-France\ Gamma-Rapho/Getty Images Chapter 3: p 70, Justaman/Fotolia Chapter 11: p 375, Focus Pocus LTD/Fotolia Chapter 4: p 102, Andrew Martin/Fotolia; p 109 bulleted list, © 2015, AICPA All rights reserved Used by permission; p 111 numbered list, © 2015, AICPA All rights reserved Used by permission; pp 113-126 excerpts, Copyright by American Institute of CPAs All rights reserved Used with permission Chapter 12: p 407, BillionPhotos.com/ Fotolia Chapter 5: p 138, sergign/Fotolia; p 141 text excerpt, A Treatise on the Law of Torts: Or the Wrongs which Arise Independent of Contract, by Thomas M Cooley Chapter 17: p 604, WavebreakMediaMicro/ Fotolia Hillsburg Hardware Insert: p 27, Monkey Business/Fotolia; p 28 left to right, Michael Levy/ Shutterstock; omkar.a.v/Shutterstock; photocell/ Shutterstock; Chad McDermott/Shutterstock; p 29, BillionPhotos.com/Fotolia; p 30 bottom left, golubovy/Fotolia: right, top to bottom, ostill/ Shutterstock; EDHAR/Shutterstock; Monkey Business/Fotolia; szefei/Shutterstock; Kurhan/ Fotolia; Carlos E Santa Maria/Shutterstock; Kurhan/Fotolia; Steve Cukrov/Shutterstock; p 31, Sergii Moscaliuk/Fotolia; p 33 left to right, Shebeko/Shutterstock; Alex Kuzovlev/ Shutterstock; STILLFX/Shutterstock; Shutterstock; p 35 left to right, Pi-Lens/Shutterstock; Andrew Williams/Shutterstock; Melissa King/ Shutterstock; sint/Shutterstock; p. 36 left to right, hektoR/Shutterstock; Olegusk/Shutterstock; Olegusk/Shutterstock; Artography/Shutterstock; p 37, francescodemarco/Fotolia Chapter 1: p 27, Naj/Fotolia Chapter 6: p 166, Vladimir Wrangel/Fotolia; p 182 bulleted list, from Auditing Standard No 15 - Financial Statement Assertions Chapter 13: p 448, Wavebreak Media Ltd/123RF Chapter 14: p 486, boscorelli/Fotolia Chapter 15: p 522, acnaleksy/Fotolia Chapter 16: p 564, adam121/Fotolia Chapter 18: p 644, Andrey Popov/Fotolia Chapter 19: p 676, Vladyslav Danilin/Fotolia Chapter 20: p 702, eXpose/Fotolia Chapter 21: p 725, Rolandino/Fotolia Chapter 7: p 219, chatchaiyo/Fotolia Chapter 22: p 755, frenk58/Fotolia Chapter 8: p 260, Keith Wood/Corbis Chapter 23: p 776, Niki Love/Fotolia Chapter 9: p 301, bloomua/Fotolia Chapter 24: p 806, javiindy/Fotolia 896 Credits Chapter 26: p 866, Gary Blakeley/Fotolia ... Auditing and Assurance Standards Board (IAASB) in the issuance of international standards on auditing (ISAs) and the Auditing Standards Board? ?s efforts to converge U .S standards to international standards... in standards issued by the Auditing Standards Board (ASB) and the International Auditing and Assurance Standards Board (IAASB), including emphasis on significant risks, are integrated into all... PrefAce Integrated approach For rIsk assessment and audIt decIsIon makIng Auditing and Assurance Services: An Integrated Approach is an introduction to auditing and other assurance services It is