Giáo trình principles of auditing other assurance services 20e by whittington

Twentieth Edition Principles of Auditing & Other Assurance Services O Ray Whittington Kurt Pany Principles of Auditing & Other Assurance Services Twentieth Edition O Ray Whittington CIA, CMA, CPA DePaul University Kurt Pany CFE, CPA Arizona State University PRINCIPLES OF AUDITING & OTHER ASSURANCE SERVICES, TWENTIETH EDITION Published by McGraw-Hill Education, Penn Plaza, New York, NY 10121 Copyright © 2016 by McGraw-Hill Education All rights reserved Printed in the United States of America Previous editions © 2014, 2012, and 2010 No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning Some ancillaries, including electronic and print components, may not be available to customers outside the United States This book is printed on acid-free paper DOW/DOW ISBN 978–0–07–772914–1 MHID 0–07–772914 –5 Senior Vice President, Products & Markets: Kurt L Strand Vice President, General Manager, Products & Markets: Marty Lange Vice President, Content Design & Delivery: Kimberly Meriwether David Managing Director: Tim Vertovec Senior Director, Product Development: Rose Koos Lead Product Developer: Ann Torbert Senior Product Developer: Gail Korosa Product Developer: Kevin Moran Director, Digital Content Development: Patricia Plumb Senior Digital Product Analyst: Xin Lin Marketing Director: Brad Parkins Director, Content Design & Delivery: Terri Schiesl Executive Program Manager: Faye M Herrig Content Project Managers: Mary Jane Lampe, Sandra Schnee Buyer: Debra R Sylvester Cover Design: Studio Montage Content Licensing Specialist: Lorraine Buczek Cover Image Title: Cityscape of Singapore, Republic of Singapore Cover Image Credit: © George Hammerstein/Corbis/Glow Images Compositor: MPS Limited Typeface: 10/12 Times LT Std Printer: R R Donnelley All credits appearing on page or at the end of the book are considered to be an extension of the copyright page Library of Congress Cataloging-in-Publication Data Whittington, Ray, 1948Principles of auditing & other assurance services / O Ray Whittington, Kurt Pany — Twentieth edition pages cm ISBN 978-0-07-772914-1 (alk paper) Auditing I Pany, Kurt II Title III Title: Principles of auditing and other assurance services HF5667.W39 2016 657'.45—dc23 2014042491 The Internet addresses listed in the text were accurate at the time of publication The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites www.mhhe.com About the Authors O Ray Whittington O Ray Whittington, CIA, CMA, CPA, serves as the dean of the Driehaus College of Business at DePaul University He received his B.B.A., M.S., and Ph.D degrees from Sam Houston State University, Texas Tech University, and the University of Houston, respectively Professor Whittington is an active textbook author on the subjects of auditing and audit sampling He has also published in a variety of journals, including The Accounting Review, The Journal of Accounting Research, and Auditing: A Journal of Practice and Theory He has served as a member of the Board of Regents of The Institute of Internal Auditors and has served as Chairman on the Auditing Standards Committee of the Auditing Section and the Bylaws Committee, both of the American Accounting Association Professor Whittington has served as a member of the AICPA Auditing Standards Board and as the president of the Auditing Section of the American Accounting Association Kurt Pany Kurt Pany, CFE, CPA, is a Professor of Accounting at Arizona State University He received his B.S., M.B.A., and Ph.D degrees from the University of Arizona, the University of Minnesota, and the University of Illinois, respectively He has also served as a staff accountant with Arthur Andersen and Touche Ross, as a member of the Auditing Standards Board, and as an academic fellow with the American Institute of Certified Public Accountants Professor Pany has published articles on auditing in such journals as The Journal of Accounting Research, The Accounting Review, Auditing: A Journal of Practice and Theory, The Journal of Accountancy, and The CPA Journal He is a member of and has served on various committees of the American Accounting Association and the American Institute of Certified Public Accountants iii Preface The 20th edition of Principles of Auditing & Other Assurance Services provides a carefully balanced presentation of auditing theory and practice Written in a clear and understandable manner, it is particularly appropriate for students who have had limited or no audit experience The approach is to integrate auditing material with that of previous accounting financial, managerial, and systems courses The text’s first nine chapters emphasize the philosophy and environment of the auditing profession, with special attention paid to the nature and economic purpose of auditing, auditing standards, professional conduct, legal liability, audit evidence, audit planning, consideration of internal control, and audit sampling Chapters 10 through 16 (the “procedural chapters”) deal with internal control and obtaining evidence about the various financial statement accounts, emphasizing a risk-based approach to selecting appropriate auditing procedures Chapter 17 presents the auditors’ reporting responsibilities when performing financial statement audits Chapter 18 provides detailed guidance on integrated audits of public companies performed in accordance with the Sarbanes-Oxley Act of 2002 and SEC requirements Chapters 19 and 20 present the auditors’ reporting responsibilities and other attestation and accounting services, such as reviews and compilations of financial statements and reports on prospective financial statements Chapter 21 presents coverage of internal compliance and operational auditing The text is well suited for an introductory one-semester or one-quarter auditing course Alternatively, it is appropriate for a two-course auditing sequence that covers the material in greater detail For example, an introductory course might emphasize Chapters through 10, 16, and 17 A second course may include coverage of the other procedural chapters (Chapters 11 through 15); integrated audits (Chapter 18); other attestation and accounting services; and internal, operational, and compliance auditing (Chapters 19, 20, and 21) The instructor might also wish to consider covering portions of Chapter on sampling in the second course, with or without ACL software Overall, the text and supporting materials provide: A balanced presentation The text provides a carefully balanced presentation of auditing and assurance theory and practice The concepts are written in a clear, concise, and understandable manner Real company examples are integrated throughout the text to bring this material to life Finally, Keystone Computers & Networks, Inc., the text’s illustrative audit case, is integrated into selected chapters, providing students with hands-on audit experience Organization around balance sheet accounts emphasized in previous accounting courses Organizing the text around balance sheet accounts is a particularly straightforward and user-friendly way to address the risk assessment–based approach to auditing required by both U.S and international auditing standards These standards require an in-depth understanding of the audited company and its environment, a rigorous assessment of the risks of where and how the financial statements could be materially misstated, and an improved linkage between the auditors’ assessed risks and the particulars of audit procedures performed in response to those risks Chapters through of the text describe the risk assessment approach in detail Chapters 10 through 16 are aligned with the risk assessment approach presented in the professional standards Accordingly, the suggested audit approach and procedures of the professional standards flow smoothly from the approach suggested in earlier chapters of the text In short, our organization of the book facilitates student learning of the risk assessment process in a very straightforward manner Also, although the text chapters are structured around balance sheet accounts, they include a significant amount of material on transaction cycles For example, Chapters 10 through 13 include detailed coverage of revenue, cash receipts, acquisitions, and disbursements cycles iv Preface v CPA examination support Both the text’s emphasis on current auditing standards and its many objective questions (both multiple choice and other objective format) are aimed at helping students pass the CPA exam As discussed in detail in the following section, this edition has significantly expanded the number of task-based simulations like the ones included on the CPA exam Strong student and instructor support Both McGraw-Hill Connect® Accounting and the Online Learning Center provide instructors and students with a wealth of material to help keep students up-to-date The Center also contains quizzes and other resources to help students in this course The address of the Center (and the text website) is www.mhhe.com/whittington20e We are confident that the 20th edition of Principles of Auditing & Other Assurance Services will provide students with a clear perspective of today’s auditing environment O Ray Whittington Kurt Pany Key Features of the Book The first nine chapters of the text emphasize the philosophy and environment of the profession, with special attention paid to the nature and economic purpose of auditing and assurance services, professional standards, professional conduct, legal liability, audit evidence, audit planning, consideration of internal control, audit sampling, audit documentation, and general records Chapter 1: Emphasizes the role of the public accountant, the structure of CPA firms, and the various types of audits and auditors It also introduces the important concept of corporate governance and includes a brief history of the auditing profession, including up-to-date coverage of the Sarbanes-Oxley Act of 2002 and the Public Company Accounting Oversight Board Chapter 2: Includes detailed coverage of the new Principles Underlying an Audit Conducted in Accordance with Generally Accepted Auditing Standards, which replace the 10 generally accepted auditing standards for audits of nonpublic companies An appendix highlights a number of differences between international and U.S standards Chapter 3: Updated to reflect the most recent AICPA and PCAOB requirements This includes the new AICPA Code of Professional Conduct passed in 2014 Chapter 4: Clear, concise coverage of CPA legal liability based on suggestions by legal scholar Professor Marianne Jennings of Arizona State University Chapters through 7: Material from the risk assessment standards is thoroughly integrated throughout Chapter 5: The discussion of evidence has been streamlined to parallel the presentation of evidence in recently issued auditing standards Chapter 6: The risk assessment approach to an audit is concisely summarized in a summary of the audit process Chapter 7: Discusses internal control and how it is considered in an audit of financial statements The chapter is revised to include the new Committee of Sponsoring Organizations (COSO) internal control framework issued in 2013 It also includes a brief overview of integrated audits (audits of internal control integrated with financial statement audits) required for certain public companies under PCAOB Standard No 5, with more detailed coverage provided in Chapter 18 The chapter includes a section on the audit requirements when a client outsources its computer processing to a service organization Finally, it presents the auditors’ internal control communication responsibilities vi Students in auditing need familiarity with auditing standards promulgated by three different bodies: (1) the AICPA’s Auditing Standards Board, (2) the Public Company Accounting Oversight Board, and (3) the International Auditing and Assurance Standards Board While similar in most respects, key differences exist among these sets of standards The text integrates discussions of the various standards, focusing on the differences, in a very readable manner This edition of the text has expanded the number of taskbased simulations included in the after-chapter problem material These questions are designed to help students both to learn the material presented in the text and to prepare them to complete such questions on the CPA exam Many of the task-based simulations are adapted from CPA exam questions released by the AICPA, and others were written by the authors to be similar to those released by the AICPA The Role of the Public Accountant in the American Economy Professional Standards Professional Ethics Legal Liability of CPAs Audit Evidence and Documentation Audit Planning, Understanding the Client, Assessing Risks, and Responding Internal Control Keystone Computers & Networks, Inc., is the text’s Illustrative Audit Case This feature has been updated in this edition and illustrates audit methods and provides realistic, thought-provoking case exercises Although each portion of the case is designed to stand alone, if used in combination, the case will help the student develop problem-solving skills in planning (Chapter 6), in considering internal control and testing account balances (Chapters 11 and 14), and in completing the audit (Chapter 16) The case incorporates the use of computerized accounting applications and also integrates the fundamentals of audit sampling from Chapter Chapter 8: Emphasizes the impact of IT on audits It includes concepts such as “off-theshelf” software packages through the use of cloud computing Chapter 9: Includes attributes and variable sampling For variables sampling there are standalone discussions of classical methods and probability-proportional-to-size sampling Consideration of Internal Control in an Information Technology Environment Audit Sampling 10 Cash and Financial Investments 11 Accounts Receivable, Notes Receivable, and Revenue 12 Inventories and Cost of Goods Sold 13 Property, Plant, and Equipment: Depreciation and Depletion 14 Accounts Payable and Other Liabilities 15 Debt and Equity Capital 16 Auditing Operations and Completing the Audit 17 Auditors’ Reports 18 Integrated Audits of Public Companies 19 Additional Assurance Services: Historical Financial Information 20 Additional Assurance Services: Other Information 21 Internal, Operational, and Compliance Auditing Chapters 10 through 16: These “procedural chapters” deal with internal control and obtaining audit evidence for the various financial statement amounts The chapters emphasize the risk-based approach stressed in recent AICPA, PCAOB, and international standards Chapter 17: Reflects reporting requirements of the AICPA clarity standards, as well as coverage of PCAOB and international audit reports Chapter 18: Reflects PCAOB Standard No on the audit of internal control over financial reporting required for public companies The chapter is revised to include discussion of the concepts included in the 2013 version of COSO Chapter 19: Updated to include 2014 revisions to requirements for financial statement preparation, of compilation and review engagements, auditor reporting on financial statements prepared using a specialpurpose framework, and other changes due to the AICPA clarity standards Chapter 20: Discusses a variety of attestation and other assurance services The material on attestation services describes the current professional standards Recent pronouncements on service organization control (SOC) reports are included Other assurance services are included at both a conceptual and practical level Chapter 21: Includes a discussion of compliance auditing based on the suggestions of Mr Norwood J Jackson, former Deputy Controller, Office of Federal Management, U.S Office of Management and Budget It is updated for the 2007 revision to the “Yellow Book.” vii New to This Edition The 20th edition has been revised to reflect a number of events, to make the material more understandable, and to increase the scope of objective question coverage, including: • Reformatted AICPA Code of Professional Conduct In 2014 the American Institute of Certified Public Accountants AICPA) issued its reformatted Code of Professional Conduct The intent is to maintain the substance of the previous code, while reorganizing material to be more intuitively organized The new code is divided into parts that separate requirements according to whether members are in (1) public practice, (2) business or (3) other (e.g., retired or between jobs) The new code also expands the “threats and safeguards” approach of the previous code—that is, if the code doesn’t precisely address an area the member must identify, evaluate, and address threats to code compliance and consider available safeguards Chapter of our text presents and describes the reformatted Code of Professional Conduct • Revised Compilation and Review Requirements for Non-Issuers In 2014 the AICPA revised compilation and review standards to be in a clarity format, as is the case with its auditing standards Also, the standards now allow a new “financial statement preparation” service, which does not ordinarily require a CPA to issue a report Other changes include (1) a requirement that a compilation report be issued whenever a compilation is performed, and (2) revised compilation and review reports These requirements are discussed in Chapter 19 • 2013 COSO Revision In 1992 the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released its Internal Control—Integrated Framework That framework gained board acceptance as the leading framework for designing, implementing, and executing internal control, and assessing the effectiveness of internal control It was revised in 2013 Chapters and 18 of the text now emphasize that 2013 COSO revision • Objective Questions Throughout the text we have added objected questions, including task-based simulations These questions address key concepts and are structured in the form students may expect to see on the CPA exam They are also included in Connect, thus making it easy for the instructor to assign as work to be turned in and electronically graded Details on Connect are provided later in this preface Additional Changes include • Analytical Procedures Ratio analysis is an important approach for performing analytical procedures Chapter includes an enhanced discussion of the effects of various transactions upon ratios • Testing Infrequently Applied Controls Certain controls may be expected to operate only weekly (e.g., payroll), or monthly (e.g., the posting of certain adjusting entries) Chapter includes a brief discussion of the testing of such controls • Subsequent Events Chapter 16’s discussion of subsequent events is updated • Brokers and Dealers In 2013, the SEC adopted amendments to the Securities Exchange Act of 1934 to implement a portion of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to brokers and dealers Chapter 21 briefly summarizes auditor responsibilities relating to financial statements filed under the Act viii Features of This Edition Illustrative Cases Actual business and accounting examples are used to illustrate key chapter concepts The cases are boxed and appear throughout the text New cases have been added for recent alleged audit failures They are now subtitled for easy reference Illustrative Case A covered member who owns shares in a mutual fund has a direct financial interest in the mutual fund, and an indirect financial interest in the mutual fund’s investments Thus, a covered member could not be involved in the audit of the mutual fund itself due to the direct financial interest Concerning the mutual fund’s investments in companies potentially audited by the covered member’s firm, the following apply: Ownership of 5% or less of the outstanding shares of a diversified mutual fund by the covered member: the Indirect Financial Interests The following illustrates how to evaluate whether the underlying investment is material to a covered member’s net worth Assume: • Jano Mutual Fund, a diversified fund, has net assets are $10 million, composed of an investment in shares of client Apple and a variety of other investments • The covered member owns percent of the outstanding shares of Jano Mutual Fund (a value of $600,000) • Jano Mutual Fund has percent of its assets invested in Apple (a $200,000 investment) In this situation the covered member’s indirect financial Industry Focus Cases These cases use examples from specific industries to provide students with a detailed, “real world” illustration of points being emphasized in the text These cases show the importance of having a thorough knowledge of the audit client’s business and industry Like the Illustrative Cases, these cases are boxed and appear throughout the text Focus on the Airline Industry Electronic ticketing has become basic to the airline industry Under these systems a passenger may book a flight over the telephone or by computer and be assigned a reservation number rather than being issued a physical ticket Since no ticket is created until the passenger checks in for the flight, the auditor is limited in the extent to which he or she can examine “paper” support for transactions Accordingly, audit procedures should be developed relating to the associated revenues and receivables Auditors often choose to test the computer controls in such situations Auditing Fair Value Information As the accounting profession continues to value more assets and liabilities at their fair values, difficult audit issues often arise The text includes integrated coverage of fair value accounting in Chapters 5, 10, 11, 13, and 16 09/12/14 5:30 PM ix www.downloadslide.net Index Covered members, 79–85 defined, 79–80 independence requirements, 79–85 CPA(s) See Certified public accountants (CPAs) CPA examination, 15, 92–93 CPA firms See Public accounting firms Credibility accounting profession credibility crisis, 9–10 role of audits, 5–6 Credit agencies, 442, 469 Credit Alliance Corp v Arthur Andersen & Co., 119 Credit approval, 442 Credit memoranda, 444, 455 Criminal liability under other statutes, 126 under securities acts of 1933 and 1934, 125–126 Criteria to evaluate subject matter of engagement, 769–771 Cross-sectional analysis, 157 Cruising, 560–561 Current assets, property, plant, and equipment audit contrasted with, 547 Current files, 169–170 Customer deposits, 587 Customer orders, 441–442 Cutoff, 168 assertions, 144 assets, 222, 224, 547 bank statements, 149, 409 cash receipts and cash disbursements, verifying, 410 investment transactions, 418 purchase and sales transactions, 465–466, 467, 528–529 D Damages (losses), 116, 117 Data control, 310 Data encryption, 314, 460 Data entry, 310 Data mining, 305 Data transmission controls, 314 Data warehouses, 305 Database administration, 310 Database administrators, 306 Database storage, 305–306 Database systems, 306, 310 Dates See also Timing “as of,” 282, 713 of auditors’ report, 152 audits of plant, equipment, and intangibles in advance of balance sheet, 561–562 documentation completion date, 166–167 dual-dating auditors’ reports, 646 of financial statements conditions that arose after, 645, 646 conditions that existed at date of, 644–645, 646 report release date, 166–167, 646 time of examination of liabilities, 591 Debenture bonds, 605 Debt capital, 605–613 audit plans (programs), 605–606, 607–613 inherent risks, 606 internal control, 606–607 nature of, 605 source, 605 substantive procedures, 608 time of examination, 613 violations of debt covenants, 611 working papers, 607 Decentralized processing systems, 317 Decision support systems, 305 Decisions, ethical example of making, 69–72 framework for, 69, 70 Defalcations, 209–213 Defendants, 114 Deficiency communication about audit findings of deficiency, 654 internal control, 281–282 Deloitte LLP, 20 Demand for assurance services, 767–768 for attestation services, 8–9 for financial statement audits, 5–7 Depletion, 560–561 Deposits, of customers, 587 Depreciation, 558–562 See also Property, plant, and equipment accumulated, 559–560 audits, 519 in advance of balance sheet date, 561–562 intangible asset amortization, 561–562 natural resources depletion, 560–561 substantive procedures, 559–560 testing client’s provision for depreciation, 555, 560 Depreciation expense, 559–560 Derivatives agreements underlying, review of, 417 auditing transactions involving, 413, 417, 419 employee stock options, 619 transactions classified as hedging activities, 418, 419 Desktop computers, 303n Detection risk, 146, 147, 382–383, 771 831 Detective controls, 251, 721–722 Deviation rate, 343, 348 Difference estimation sampling, 341, 359–362 Digital signature, 460 Direct access drives, 304 Direct financial interest, 81–82 Directional testing, 215 Directors See Boards of directors Disclaimer of opinion, 49–50, 676, 686 adverse opinions, 687 Disclosure(s) adequate, 47, 222–223 assertions, 144 auditors’ reports, 672 compilations of historical financial statements omitting, 754 contingent liabilities, 642 required, 672 substantive tests of, 154–155 Disclosure checklists, 651 Discovery sampling, 341, 351–352 Distributed data processing, 306 Dividend(s), 620 internal control over, 615–616 Dividend record books, 418 Document(s), inspection of, 149–150, 155 Documentation See also Working papers documentation completion date, 166–167 internal control, 710–711 Dodd-Frank (Wall Street Reform and Consumer Protection) Act of 2010, 10, 16, 808, 812 Doty, James, 89 Dual-dating auditors’ reports, 646 Dual-purpose procedures (tests), 217, 341–342 Due diligence, 121–122 Due professional care internal auditor, 800–801 nature of, 115 Dun & Bradstreet, 157, 442 Duty breach of, 116–117 elements of, 116–117 E Echo check, 314 E-commerce, 306 EDI (electronic data interchange) systems, 150, 306, 392–393, 515 Effectiveness, audits for, 11 Efficiency, audits for, 11 EFT (electronic funds transfer) systems, 392–393, 637–638 Electronic commerce, 306 www.downloadslide.net 832 Index Electronic confirmations, of cash and loans, 406 Electronic data interchange (EDI) systems, 150, 306, 392–393, 515 Electronic funds transfer (EFT) systems, 392–393, 637–638 Electronic point-of-sale systems, 391 Electronics industry, environmental contamination issues, 643 1136 Tenants’ Corporation v Rothenberg, 127–129, 747 Emphasis-of-matter paragraphs, 675, 676–682 Employee Retirement Income Security Act (ERISA), 588–589 Employee stock options, 619 Employees accounting firm employee responsibilities, 21–22, 79–85 assistance in audit process, 198 bonus accruals, 589–590 commission accruals, 589–590 information technology roles, 309–311 internal control and, 253–255, 257 payroll, 635–639 accrued, 588 amounts withheld from pay, 586–587 audit plans (programs), 638–639 internal control, 635–638 unclaimed wages, 587 pension plan accruals, 588–589 postemployment benefits other than pensions, 589 reimbursements, 396 segregation of duties, 253–254, 257, 258–259 vacation pay accruals, 589 Employment, with clients, independence and, 84–85 Encryption, 314, 460 End user computing, 307 Engagement letters, 128, 196–197 as contracts, 114, 115 SSARS reviews and, 747 Engagement planning, internal auditing and, 801 Engagement reviews, 53, 173, 652 Engagement risk, 191–193 Enron Corporation, 9–10, 85, 126, 413 Enterprise Risk Management–Integrated Framework (COSO), 260–262 Entertainment independence and, 85 Entity-level controls, 713–715 Environmental issues, as contingent liabilities, 643 Environmental Protection Agency (EPA), 804 Equipment See Property, plant, and equipment Equity capital See Capital stock; Owners’ equity; Stockholders’ equity Equity Funding Corporation of America, 312, 458 Ernst & Ernst v Hochfelder, 123 Ernst & Young LLP, 17, 20, 89, 123 Errors, 42, 116–117 Escott v BarChris Construction Corporation, 122 Estimates, accounting See Accounting estimates Estimation transactions, 146 Ethic(s) See also Professional ethics internal control, 252, 254–255 nature of, 68–72 Ethical conflicts, 68–69, 78 Ethical decisions example of making, 69–72 framework for, 69, 70 Ethical dilemmas, 68–69 Evaluation materiality, 206–207, 648–651 Examinations, in attestation engagements, 771–772 of client compliance with specified requirements, 807–808 Exception reports, 316 Existence assertion, 144, 153, 154, 221, 224 Expectation gap standards, 8–9 Expected population deviation rate, 342 Expenditures capital, 548 revenue, 548 Expenses accrued, 572 on balance sheet, 591 depreciation, 559–560 expense audits, 632–635 relationship to balance sheet accounts, 632 selling, general, and administrative, substantive procedures, 632–635 Experienced auditors, 165 Expert systems, 305 Explanatory paragraphs, 676 eXtensible Business Reporting Language (XBRL), 4, 779–780 External confirmation, receivables and, 458–465 Extranets, 306 Extrapolation differences, 648 F Fair Labor Standards Act, 636 Fair presentation framework, 37n Fair value audit evidence regarding, 162–164 for financial investments, 418–419 valuation techniques to establish, 162n Familiarity as threat to compliance, 77 as threat to independence, 80 Family interests audit evidence regarding related party transactions, 164 independence and, 83–84 FASAB (Federal Accounting Standards Advisory Board), 16, 672 FASB (Financial Accounting Standards Board), 15–16, 672 FASB Codification, 47 FDIC See Federal Deposit Insurance Corporation (FDIC); Federal Deposit Insurance Corporation (FDIC) Improvement Act of 1991 Federal Accounting Standards Advisory Board (FASAB), 16, 672 Federal Deposit Insurance Corporation (FDIC), 11, 163 Federal Deposit Insurance Corporation (FDIC) Improvement Act of 1991, 9, 804 Federal financial assistance programs, major, 813, 814 Fees professional See Professional fees referral, in Code of Professional Conduct, 94 Fiber optics, 306 Fidelity bonds, 115n, 258–259 File labels, 316 File library, 310 Files See Audit file Financial Accounting Standards Board (FASB), 15–16, 672 Financial assistance programs, federal, 813, 814 Financial audits, 10–11 Financial crisis of 2008, 10, 420 Financial forecasts, 774–775 Financial institutions cash audits, 404–412 direct receipt of funds by, internal control of, 392 financial investments audits, 417–418 Financial interest direct and indirect, 81–82 independence and, 81–83 Financial investments, 412–420 audits, 413–414, 415–420 risks of material misstatement, 416 specialized knowledge needed for, 413 substantive procedures, 416–420 internal control, 414–415 www.downloadslide.net Index Financial projections, 774–775 Financial ratios See Ratio analysis Financial reporting frameworks, 2, 37, 673 See also Generally accepted accounting principles (GAAP); Generally accepted auditing standards (GAAS) generally accepted in another country, audits of financial statements prepared in accordance with, 743 special-purpose, 37n, 740–743 Financial Reporting Releases (SEC), 17 Financial statement(s) See also specific statements accounts payable presentation, 586 accrued expense/liability presentation, 591 asset presentation, 222–223, 224 assurance services internal control over reporting, 773–774 prospective statements, 774–775 cash presentation, 412 client approval, 651–652 common-size, 157–159 comparative auditors’ reports, 672, 688 SSARS reviews, 750–751 compilations, 127, 747, 752–755 cost of goods sold presentation, 533 debt and related transaction presentation, 612–613 different opinions on, 689 disclosures, 672 financial investment presentation, 420 fraudulent financial reporting, 209–213 group, opinions and, 675–676, 680–682 historical See Historical financial statements inventory presentation, 533 material misstatements, 272 examples of fraud risk factors, 237–239 modified opinions, 683–685 risk assessment, 207–208 opinions See Opinions personal, audits, 746 plant assets and related revenue and expenses presentation, 558 pro forma, as means of disclosure, 645 receivables presentation, 471 relevant assertions, 273, 716 restatement requirements, 655–656 revenues presentation, 471 review of disclosures, 651 reviews, 127, 744–752 risk assessment at financial statement level, 272, 273 single, audits, 743–745 specific elements, accounts, or items in, audits of, 743–745 standard unmodified auditors’ reports and, 671, 672–675 stockholders’ equity presentation, 620 subsequent events audit plans (programs), 646–647 conditions that arose after date of statements, 645, 646 conditions that existed at date of statements, 644–645, 646 substantive procedures effect on audits of internal controls, 722 effects of tests of controls, 721–722 summary (condensed), 740 supplementary information, 652–654 using financial reporting other than GAAP, 740–743 financial reporting framework generally accepted in another country, 743 prepared in accordance with special-purpose financial reporting frameworks, 740–743 Financial statement assertions, 143–144 Financial statement audits See Audits of financial statements Financial statement close, 714 Financing cycle, 265, 605 First Securities Company of Chicago, 123 Flowcharts internal control, 268–269, 271, 318–319 program, 314 systems, 268–269, 271, 318–319 Forecasts, financial, 774–775 Foreign Corrupt Practices Act of 1977, 251, 790 Foreseeable user approach, 119, 120 Foreseen user approach, 119, 120 Form 8-K, 95, 195, 655–656, 689 Form 10-K, 689, 740, 775 Form 10-Q, 689, 775 Form of Organization and Name Rule, in Code of Professional Conduct, 96–97 Forms S-1 through S-11, 122, 647, 689 Forms SB-1 and SB-2, 689 Fox, Brian, 406 Fraud, 8–10, 42–43 additional information in auditors’ report, 654 antifraud programs and control measures, 7–8, 300–302, 715 833 California Micro Devices Corp., 450 computer-based, 311–312 conditions indicative of, 211 constructive, 115 credibility crisis and, 9–10 defined, 115 discovery of, 213 Enron Corporation, 9–10, 85, 126, 413 Equity Funding Corporation of America, 312, 458 internal auditing, 790–791 inventory misstatement, 526 making inquiries related to, 210 management, 209 McKesson & Robbins, Inc., 509 National Student Marketing Corporation (NSMC), 151 Parmalat, 407 Peregrine Systems, Inc., 450 Phar-Mor, Inc., 523 programmer, 311 revenue recognition, 441, 450 risk factors examples, 237–239 fraudulent financial reporting, 237–239 material misstatement due to fraud, 209–213 misappropriation of assets, 239 Sheraton hotels, 510 unaudited financial statements and, U.S Foodservices, 530 Volkswagen AG, 203 WorldCom, 9, 10, 210, 261 ZZZZ Best Co., 194, 751 Fraud investigation services, 19 Fraud risks examples of fraud risk factors, 237–239 response to, 211–213 Fraudulent financial reporting, 209–213 Friends’ interests, independence and, 83–84 Further audit procedures, 154–155, 213–214, 263, 273–282 See also Substantive procedures communication of control-related matters, 281–282 decision aids for audit program modification, 278 documentation, 275–277 internal auditors, 278–279 outsourced computer processing to service organizations, 279–280 revising risks of material misstatement, 275 substantive procedures, 275 tests of controls, 273–275 www.downloadslide.net 834 Index G GAAP See Generally accepted accounting principles (GAAP) GAAS See Generally accepted auditing standards (GAAS) GAGAS (Generally Accepted Government Auditing Standards), 810–812 GAO (Government Accountability Office) auditors employed by, 12 Government Auditing Standards, 88–89 independence requirements, 88–89 GASB (Governmental Accounting Standards Board), 16, 672 General authorization, 256 General control activities, 258 in IT environment, 312–315, 321–322 General Electric Co., 574 General ledger, reconciling accounts payable with, 581 General risk contingencies, 643–644 General Standards Rule, in Code of Professional Conduct, 90–91 Generalized audit software, 324, 340, 355 Generally accepted accounting principles (GAAP), 2–3, 47–48 departures from compilations of historical financial statements and, 753–754 modified opinions and, 683–685 SSARS reviews, 749–750 not consistently applied, opinion and, 678–679 Generally accepted auditing standards (GAAS), 37–40 compliance auditing in accordance with, 809–817 government entities and organizations receiving federal financial assistance, 809–817 nonpublic companies, 35, 36, 37–40, 44–48 personal financial statement audits, 746 single financial statement audits, 743–745 specific elements, accounts, or items, 743–745 Generally Accepted Government Auditing Standards (GAGAS), 810–812 General-purpose financial reporting frameworks, 37n, 672, 740 General-use reports, 773 Giant Stores Corporation, 119 Gifts, independence and, 85 Global Crossing Ltd., 89 Going-concern status, substantial doubt about, 677–678 Goldman Sachs, 263 Goodwill, 561 Government Accountability Office (GAO) auditors employed by, 12, 802 Government Auditing Standards, 88–89 independence requirements, 88–89 Government Auditing Standards, 88–89 compliance auditing in accordance with, 810–812 Government entities, compliance auditing of, 809–817 generally accepted auditing standards, 809–817 Government Auditing Standards, 810–812 Single Audit Act of 1984, 812–817 Government Management Reform Act of 1994, 16 Governmental Accounting Standards Board (GASB), 16, 672 Grandfather-father-son file retention principle, 315 Grant provisions, noncompliance with, Generally Accepted Government Auditing Standards and, 810 Gross negligence, 114, 118 Group auditors, 680–682, 680n, 726 Group engagement partners, 680n Group engagement teams, 680n Group financial statements, opinions and, 675–676, 680–682 Grouping sheets, 168 H Haphazard selection, 340 Hard-copy source documents, 315 Hardware, for IT systems, 304 Hash totals, 316 Header labels, 316 Health care performance measurement, 780 Hedging activities, 418, 419 Held-to-maturity securities, 418–419 Hermanson, Dana, 209n, 441n Historical financial statements, 746–752 compilations, 747, 752–755 nonpublic companies (nonissuers), 746–751 PCAOB and Auditing Standards Board reviews of interim information, 751–752 preparation, 754–755 public companies (issuers), 751–752 SSARS reviews of nonpublic companies, 746–751 Holders of notes, 458 Horizontal analysis, 157–159 H&R Block, 20, 96 Human resources department antifraud programs and elements, 715 internal control of payroll and, 636 I IAASB (International Auditing and Assurance Standards Board), 17–18, 37, 54–55 IAESB (International Accounting Education Standards Board), 17–18 IASB (International Accounting Standards Board), 54 IASs (International Auditing Standards), 35 IBM, 17, 46, 89 IESBA (International Ethics Standards Board for Accountants), 17–18 IFAC (International Federation of Accountants), 17–18, 54–55, 98 IFRS (International Financial Reporting Standards), 54 IIA (Institute of Internal Auditors), 12, 789 Code of Ethics, 99–100 International Standards for the Professional Practice of Internal Auditing, 791–802 Illegal acts See also Fraud additional information in auditors’ report, 654 report of, 95 Immediate family members, independence and, 83–84 Impairment impaired independence, 79–81 of property, plant, and equipment, 555–556 Income approach to valuation, 162n Income statement for an individual, 746 common-size, 157–159 direct verification, 219 indirect verification, 217–218 Income taxes Acts Discreditable Rule, 92–93, 166 critical expense analysis, 634 estimating liability for, 642 ethical issues related to tax advising, 89, 96 income taxes payable, 590 reporting system, Income taxes payable, 590 Incompatible duties, 258 Incremental allowance, probabilityproportional-to-size sampling and, 378–379 www.downloadslide.net Index Indebtedness guarantees, as contingent liabilities, 642–643 Indenture, 605, 610, 611 Independence, 20, 39, 78–90 in appearance, 78 compilations when CPAs are not independent, 754 covered member, 79–85 financial and other personal interests in attest clients and, 81–83 impaired, 79–81 interests of CPA’s relatives and friends, 83–84 internal auditor, 800 of mind, 78 nonattest service provision, 86–87, 88, 89 in real world, 89–90 requirements for audits of public companies, 87 terminology related to, 78–81 threats to, 76–77, 79–81, 80 Independent trustees, for bond issues, 606 Indirect financial interest, 81–82 Individual accountability, 255, 257, 258–259 Industry Audit and Accounting Guides, 13, 202 Industry averages, 157 Industry characteristics, 201 Industry specialization, 21 Influence, undue as threat to compliance, 77 as threat to independence, 80 Information risk, 6–7 Information systems management, 309–310 Information technology environment, 303–327 application controls, 312–313, 315– 316, 322, 455 batch processing, 305 client/server architecture, 303 control over accounts payable, 580 control over inventory and cost of goods sold, 515 control over receivables, 455 control over revenues, 455 database storage, 305–306 electronic commerce, 306 employee roles, 309–311 end user computing, 307 hardware, 304 impact on audit trail, 307–308 internal control See Internal control, in information technology environment IT networks, 306 online capabilities, 305 purchasing system, 574–575 software, 304 system characteristics, 304–307 Inherent risk, 145–146, 147, 190, 263, 382–383 accounts payable audit, 576–577 in attestation risk, 771 cash audits, 399–400 cost of goods sold audits, 516–517 debt capital audits, 606 inventory audits, 516–517 property, plant, and equipment audits, 551 receivables audits, 449–450 revenue audits, 449–450 Input validation (edit) checks, 315–316 Inspections, 53–54 major acquisitions of plant and equipment, 554 records, 149–150, 155, 581 of tangible assets, 153–154 Institute of Internal Auditors (IIA), 12, 789 Code of Ethics, 99–100 International Standards for the Professional Practice of Internal Auditing, 791–802 Intangible assets, amortization of, 561–562 Integrated audits, 282–285, 707–729 defined, 11 management’s responsibility for internal control, 708–711 for nonpublic companies, 728 overview, 707 regulatory bodies, 36 reporting on internal control, 711–728 auditors’ report modifications, 725–727, 728 design effectiveness of controls, 718 operating effectiveness of controls, 718–722 opinion on effectiveness of controls, 722–725 other communication requirements, 728 planning the engagement, 712–713 top-down approach, 713–718 Integrated test facility, 323 Integrity in Code of Professional Conduct, 90, 115, 128 internal control, 252, 254–255 Interest payments bond, 606–607 notes payable, 607 Interest rate risk, 6n Interim audit work cash, 412 835 receivables and revenue, 471 Interim information reviews, 751–752 Interim period, 223–224 Internal auditing, 789–802 antifraud programs and elements, 715 certification of internal auditors, 12, 802 charter of internal audit function, 791 defined, 789 ethics concerns, 99–100, 791–802 evolution of, 789–791 internal audit function, 260 internal auditors, 11–12, 99–100 internal control and, 278–279 in IT environment, 312 outsourcing, 790, 791 professional standards, 791–802 purpose, 789 Sarbanes-Oxley compliance and, 790, 791 Internal control, 41–42, 202, 249–287 accounting information system and, 259 accounts payable, 573–575, 577, 578–579 accounts receivable, 440–441 assurance services, 773–774 audit plan (program), 216–217, 284– 285, 711–728 auditors’ report modifications, 725–727 design effectiveness, 710, 718 documentation, 710–711 integrated audits for nonpublic companies, 728 operating effectiveness, 718–722 opinion on effectiveness, 722–725 other communication requirements, 728 overview, 711, 712 planning the engagement, 712–713 reporting existence of material weakness, 728 top-down approach to identify controls to test, 713–718 capital stock transactions, 617–619 cash audits of cash, 400–401 cash disbursements, 393–398 cash receipts, 391–393 cash transactions, 390–398 compensating control, 710 compliance agreed-upon procedures to test effectiveness of, 807 Generally Accepted Government Auditing Standards, 811 control activities, 256–259 control deficiencies, 709 control environment, 252–255 www.downloadslide.net 836 Index Internal control—Cont board of directors, 252–253 commitment to integrity and ethical values, 252, 254–255 employees, 253–255 individual accountability, 255 obtaining understanding of client, 263–271 organizational structure, 253–254, 255, 510 corporate governance related to, 262 cost accounting system, 514 cost of goods sold, 509–515, 517 debt capital, 606–607 dividends, 615–616 enterprise risk management, 260–262 financial investments, 414–415 financial statement audits, 262–263 Foreign Corrupt Practices Act, 251, 790 further audit procedures, 190–191, 213–214, 273–282 communication of control-related matters, 281–282 decision aids for audit program modification, 278 documentation, 275–277 internal auditors, 278–279 outsourced computer processing to service organizations, 279–280 revising risks of material misstatement, 275 substantive procedures, 275 tests of controls, 273–275 illustrative case, 487–500, 601–603 importance, 8–9 information technology environment, 308–327 application control activities, 312– 313, 315–316, 322, 455 assessing risks of material misstatement, 319–324 audit plan (program), 317–324 audit software, 325–326 computer-based fraud, 311–312 decentralized and single workstation environments, 317 internal auditing, 312 monitoring, 317 obtaining an understanding of IT-based system controls, 318–319 organizational structure of information system function, 308–311 outsourcing computer processing to service organizations, 279–280 substantive procedures, 324–326 user control activities, 312–317, 316 integrated audits, 711–728 auditors’ report modifications, 725–727, 728 design effectiveness of controls, 718 operating effectiveness of controls, 718–722 opinion on effectiveness of controls, 722–725 other communication requirements, 728 planning the engagement, 712–713 top-down approach, 713–718 integrity, 252, 254–255 inventories, 509–515, 517, 518 issuing function, 512 limitations of, 260 management’s responsibility for, 708–711 material weaknesses, 281–282, 709, 728 meaning of, 249–252 means of achieving, 251–252 monitoring of controls, 260, 266 notes receivable, 445 obtaining a client understanding, 263–271 areas difficult to control, 266 documenting, 267–271 required components, 264–266 risk assessment procedures, 266–267 owners’ equity, 614–616 payroll, 635–638 production (conversion) function, 513 property, plant, and equipment, 547–548, 551 purchasing function, 511–512 receivables, 441, 450 receiving function, 512 relationship between substantive procedures and, 219, 220, 224, 273–275, 324–326 reporting by public companies, 280, 282–285 revenue, 440–441, 450 risks of material misstatement, 271–273 at financial statement level, 272 at relevant assertion level, 273 selecting controls to test, 717 shipping function, 513–514 significant deficiencies, 281–282, 709 in small businesses, 285–286, 616 storing function, 512 Internal control questionnaires, 267–268, 319, 320, 415 Internal Control–Integrated Framework (COSO), 8–9, 249–250, 259n, 281, 709 Internal labels, 316 Internal Revenue Service (IRS), See also Income taxes auditors employed by, 12 audits conducted by, 11 independence and, 87–88, 89 International Accounting Education Standards Board (IAESB), 17–18 International Accounting Standards Board (IASB), 54 International Auditing and Assurance Standards Board (IAASB), 17–18, 37, 54–55 International Auditing Standards (IASs), 35 International Ethics Standards Board for Accountants (IESBA), 17–18 International Federation of Accountants (IFAC), 17–18, 54–55, 98 International Financial Reporting Standards (IFRS), 54 International Standards for the Professional Practice of Internal Auditing, 791–802 International Standards on Auditing, 55, 66–67 Internet, 306 as information source, 200, 202, 236–237 risk assessment, 200 Interpretations section, of AICPA Code of Professional Conduct, 73 Intranets, 306 Inventory(ies), 508–534 audits, 508–509, 515–534 inherent risks, 516–517 internal control, 509–515, 517, 518 risks of material misstatement, 510–511, 518, 519 substantive procedures, 521–534 tests of controls, 518–521, 522 on consignment, 528 control environment, 510 fraudulent misstatement of, 526 internal control, 509–515, 517, 518 monitoring, 511 nature of, 508 outside inventory taking firms, 527 pledging, 532–533 pricing of, testing, 530–531 in public warehouses, 528 risk assessment, 510–511 sources, 508 verification of, when auditors are engaged after the end of the year, 528 working papers, 515 www.downloadslide.net Index Inventory systems, 509 perpetual, 509, 514–515 physical, 521–530 Investing cycle, 266 Investment committees, 418 Investments, financial See Financial investments Iron curtain approach, 651 IRS (Internal Revenue Service), See also Income taxes auditors employed by, 12 audits conducted by, 11 independence and, 87–88, 89 Issuers, 10n See also Public companies Issuing function, internal control, 512 IT environment See Information technology environment IT operations, 310 IT specialists, 318 Item counts, 316 J JAVA, 304 Job time tickets, 513 Joint and several liability, 118, 124 Joint closely held investments, 82–83 Joint control, 414 Journal entries adjusting (AJEs), 168 effects on financial ratios, 159–160 evidence of material misstatement due to fraud, 212 reclassification (RJEs), 168 Journal of Accountancy, 13 Just-in-time ordering systems, 514 K Key Business Ratios (Dun & Bradstreet), 157 Key position, 83 Keystone Computers & Networks, Inc (audit case) audit planning, 240–247 engagement letter, 196–197 internal control considerations, 487–500, 601–603 substantive tests of accounts receivable and revenue, 501–506 Kickbacks, 510 Kiting, 410–412 Known misstatements, 648 Known user approach, 118–119, 120 KPMG LLP, 17, 20, 89 Krispie Kreme Doughnuts, Inc., 466 L Land and land improvements, 546, 557 See also Property, plant, and equipment LANs (local area networks), 306 Lapping, 402–403 Laws “blue sky,” 115 compliance with, 43–44 Generally Accepted Government Auditing Standards and internal control, 811 Lawyers’ letters, inquiries resulting in, 152 Lead schedules, 168 Leases examining lease agreements on property, plant, and equipment leased from others, 557 rental revenue from land, buildings and equipment owned by client but leased to others, 557 Ledger accounts, analysis of, 169 Ledger, stockholders, 615 Legal liability See Liability of accountants Lehman Brothers Holding, Inc., 10n Letters comfort, 739 engagement, 114, 115, 128, 196–197, 747 of inquiry, 641–642 lawyers’, 152 management, 281–282 representation, 151–152, 647 for underwriters, 739 Liabilities accounts payable See Accounts payable accrued, 572, 587–591 amounts withheld from employee’s pay, 586–587 contingent, 640–644 disclosure, 642 identification, 640–644 unrecorded liabilities, 582, 583– 586, 640 customers’ deposits, 587 product warranty, 589 sales taxes payable, 587 unclaimed wages, 587 unrecorded, search for, 640 Liability of accountants, 113–130 See also Litigation accounting and review services, 127–129 accounting firms, 89 common law, 114, 115–120 clients, 115–118 third parties, 118–120 criminal law other statutes, 126 securities acts of 1933 and 1934, 125–126 joint and several, 118, 124 837 nonattest engagements, 116, 127–129 proportionate, 118, 124 scope, 113–115 sources, 114–115 statutory law, 114, 115, 120–129 third parties common law, 118–120 statutory law, 120–129 working papers, 166–167 Likely misstatements, 648 Limit test, 315 Limited assurance (negative assurance), 18, 747, 772 Limited liability companies (LLCs), 19 Limited liability partnerships (LLPs), 19 Litigation See also Liability of accountants costs of, 114 CPAs’ reaction to, 129 independence, 86 as loss contingency, 641–642 management fraud, 209 in perspective, 113–114 reform, 44n, 95, 124, 126 Litigation support services, 18 LLCs (limited liability companies), 19 LLPs (limited liability partnerships), 19 Loans, electronic confirmations of, 406 Local area networks (LANs), 306 Lockbox systems, 392 Loss contingencies audit plans (programs), 644 identification, 640–644 Losses (damages), 116, 117 Lower-of-cost-or-market test, 531 M Machinery, 546 See also Property, plant, and equipment MACRS (modified accelerated cost recovery system), 558 Maintenance, analyzing expense accounts, 554–555 Major classes of transactions, 710 Major federal financial assistance programs, 813, 814 designing compliance programs, 813–814 Maker of notes, 458 Management letters, 281–282 Management participation as threat to compliance, 77 as threat to independence, 80 Management’s Discussion and Analysis (MD&A), 765 Managers of accounting firms independence requirements, 80–81 responsibilities, 21–22 review of working papers, 173, 652 www.downloadslide.net 838 Index Managers of clients acceptance of risks by, resolution of, 801 antifraud programs and elements, 7–8, 300–302, 715 assertion on compliance with laws and regulations, 806 audit evidence regarding related party transactions, 164 communication of misstatements to, 647–648 internal control assessment, 708–711 evaluation process, 708–711 responsibility, 708–711 internal control report, 711 incomplete or improperly presented, auditors’ report modification, 726 management fraud, 209 Management’s Discussion and Analysis (MD&A), 765 refusal to allow external confirmation procedures, 463 reliance on representations of, 150–152 responsibility for financial statements, 44–45 Manual follow-up control activities, 312–313, 316 Manual of accounting policies and procedures, 259 Market approach to valuation, 162n Master file, 305–306 Master production schedule, 513 Material errors, 168 Material misstatement, 207–216 accounts payable audits, 577–579, 580–581 assessing risks of, 207–209, 271–273, 319–324 cash audits, 401–403 cost of goods sold audits, 510–511, 518, 519 in evaluation of audit findings, 648–651 examples of fraud risk factors, 237–239 financial investment audits, 416 at financial statement level, 272 fraud and, 209–213 inventory audits, 510–511, 518, 519 in IT environment, 319–324 modified opinions, 683–685 property, plant, and equipment audits, 552 receivables audits, 441, 450–451, 454–455, 456 at relevant assertion level, 190, 207–213, 273 revenue audits, 441, 450–451, 454–455, 456 revising risk based on results of tests of controls, 275 risk assessment, 207–208 Material weaknesses auditors’ report modifications due to, 725–727, 728 correcting, 725, 728 internal controls, 281–282, 709, 728 Materiality, 46–47, 204–207 attestation risk, 771 cash audits, 390 effects of modified opinions, 676 evaluation, 206–207, 648–651 performance, 205–206, 342 planning, 204–206 prior year uncorrected misstatements, 649–651 qualitative factors, 206–207, 649 quantitative factors, 205, 648–649 Materials requisitions, 513 Mathematical accuracy, recalculation of, 154, 155 McKesson & Robbins, Inc., 509 MD&A (Management’s Discussion and Analysis), assurance on, 775 Mean, sample, 354 Mean-per-unit estimation sampling, 341, 354–359 controlling sampling risk, 354 evaluation of sample results, 355–356, 358–359 illustration of, 356–359 sample size determination, 355, 356–357 Message acknowledgement techniques, 314 MF Global, 263 Microcomputers, 303n Microsoft, 46 Microwave systems, 306 Minicompany approach, 323 Minkow, Barry, 194, 751 Minutes, of meetings, 165, 418, 611, 617, 640 Misappropriation of assets, 209–213, 239 Misstatement communication to client management, 647–648 fraudulent financial reporting, risk factors relating to, 237–239 known, 648 likely, 648 material See Material misstatement misappropriation of assets, risk factors relating to, 239 projected, probability-proportional-tosize sampling, 378–379 tolerable, 342, 354–355 uncorrected, evaluation materiality, 649–651 understanding sources of, 716–717 Modified accelerated cost recovery system (MACRS), 558 Modified opinions, 675, 676, 683–687 Monitoring cost of goods sold, 511 following internal audits, 801 of internal controls, 260, 266 inventories, 511 in IT environment, 317 receivables, 445 revenues, 445 Mortgage-backed securities, crisis involving, 10, 420 Move tickets, 513 N NASBA (National Association of State Boards of Accounting), 15 NASDAQ, audit committee of, 89–90, 193 National Association of State Boards of Accounting (NASBA), 15 National Commission on Fraudulent Financial Reporting (Treadway Commission), 8–9, 249–250 National Student Marketing Corporation (NSMC), 151 Natural resources, depletion of, 560–561 Neal, Terry, 209n, 441n Near-privity approach, 118–119, 120 Negative assurance (limited assurance), 18, 747, 772 Negative confirmation requests, 461, 463 Negligence comparative, 117–118 contributory, 117 gross, 114, 118 ordinary, 118 Networks of computers, 306 of CPA firms, 20, 96, 96n New York Stock Exchange (NYSE), audit committee of, 89–90, 193 No assurance, 18, 653, 654, 738, 753 Nonassurance services, 3–4, 18–19 Nonattest services independence and, 86–87, 88, 89 liability for, 116, 127–129 Noncompliance, 806 acceptable level of risk of noncompliance, 77 with contract and grant provisions, Generally Accepted Government Auditing Standards, 810 www.downloadslide.net Index Nonissuers (nonpublic companies), 10n, 746–751 auditors’ reports, 44–48, 672–674 generally accepted auditing standards (GAAS), 35, 36, 37–40, 44–48 integrated audits, 728 interim reviews, 751 lack of audit committees, 194 SSARS reviews, 746–751 Nonpublic companies See Nonissuers (nonpublic companies) Nonrespondents, follow-up on, 463–464 Nonroutine transactions, 145, 716 internal control, 266 Nonsampling risk, 337 Nonstatistical sampling, 337 attributes sampling as, 352 sample size determination, 362–363 for substantive procedures, 362–363 Notes payable See also Debt capital analysis of accounts, 608 interest payments, 607 paid or renewed after balance sheet date, 611 related party, 611 Notes receivable See also Receivables analyzing, 458 audits, 447–471 confirmation, 458 inspection, 458 internal control, 445 nature of, 439 in settlement of past-due receivable, 470 sources, 439 valuation, 467 write-off of uncollectible, 464–465 NSMC (National Student Marketing Corporation), 151 NYSE (New York Stock Exchange), audit committee of, 89–90, 193 O Object programs, 304 Objectivity in Code of Professional Conduct, 90, 115, 128 of internal auditors, 800 Observation, 509 Occurrence assertion, 144 Office of Management and Budget (OMB), 16 OMB Circular A-133 Compliance Supplement, 11, 814–815 Offline devices, 304 Off-the-shelf software packages, 303 OLAP (online analytical processing), 305 OLRT (online real-time) systems, 305 OLTP (online transaction processing) systems, 305 OMB (Office of Management and Budget), 16 OMB Circular A-133 Compliance Supplement, 11, 814–815 Online analytical processing (OLAP), 305 Online devices, 304 Online real-time (OLRT) systems, 305 Online transaction processing (OLTP) systems, 305 Opening balances, 199, 533–534 Operating system, 304 Operational auditing, 802–806 defined, 11, 802 general approach, 802–806 objectives, 802 Operations controls internal control, 253–254 IT system, 315 Operations manuals, 314, 315 Opinions, 46–48, 675–687 adverse, 49–50, 676, 684, 687 differences of opinion and working papers, 167 different opinions on different statements, 689 disclaimer of, 49–50, 676, 686, 687 emphasis-of-matter paragraphs, 675, 676–682 formulation of, 654 group financial statements, 675–676, 680–682 internal control auditors’ report modifications, 725–727 effectiveness, 722–725 modified, 675, 676, 683–687 materially misstated financial statements, 683–685 scope limitation, 685–687 other-matter paragraphs, 675 qualified, 49–50, 676 shared responsibility, 681 unmodified (unqualified), 48–49, 675–682 Ordinary negligence, 118 Organizational form and name alternative practice structures, 20–21, 96–97 in Code of Professional Conduct, 96–97 organization accounting profession, 19–20 Organizational structure of information system function, 308–311 internal control and, 253–254, 255, 510 839 Other auditors, 680n Other information, 652–655 Other-matter paragraphs, 652, 675 Outsourcing of computer processing to service organizations, 279–280 of internal auditing, 790, 791 Overall audit strategy, 197–198, 198n Owners’ equity capital stock audits, 613–614, 616–619 internal control, 614–616 nature of, 613–614 partnership audits, 621 sole proprietorship audits, 621 sources, 613–614 working papers, 616 Ownership of assets, 221, 224 of property, plant, and equipment, 556–557 of working papers, 166 Oxygenated Gasoline Credit Programs, 804 P Panel on Audit Effectiveness, Parallel simulation, 324 Parity check, 314 Parmalat, 407 Partner equivalents defined, 80n independence requirements, 80–81 Partners of accounting firms independence requirements, 80–81 responsibilities, 21 review of working papers, 173, 652 Partnerships audits, 621 lack of audit committees, 194 limited liability, 19 partnership form of organization, 19 public accounting firms, 19 Passwords, 314 Past due professional fees, independence and, 85–86 Patches, in software programs, 311 Payroll audits, 635–639 accrued payroll, 588 amounts withheld from pay, 586–587 audit plans (programs), 638–639 internal control, 635–638 substantive procedures, 639 working papers, 638 Payroll cycle, 265 “PBC” (prepared by client), 171 PCAOB See Public Company Accounting Oversight Board (PCAOB) Peer review, 14–15, 53, 171 www.downloadslide.net 840 Index Pension plan accruals, 588–589 Peregrine Systems, Inc., 450 Performance materiality, 205–206, 342 Performance reviews, as control activity, 256 Period of the professional engagement, 81, 81n Periodic inventory system, 509 Permanent file, 170–171, 203 Perpetual inventory system, 509, 514–515 Personal computers, 303n Personal financial planning, 19 Personal Financial Specialist, 19 Personal financial statements audits, 746 completeness, 746 Pervasiveness, of effects of modified opinions, 676 Petty cash funds, internal control, 398 Phar-Mor, Inc., 523 Physical controls, 257 Physical inspections, 554 Physical inventory, 521–530 Physical representation of the population, 338 Plaintiffs, 114 Planned assessed level of control risk, 273 Planning audits See Audit plans (programs) Plant See Property, plant, and equipment Pledging inventory, 532–533 receivables, 470 Point-of-sale systems, internal control, 391 Ponzi schemes, 123 Population physical representation of, 338 sampling, 337, 345 Positive confirmation requests, 461, 462 Post-audit responsibilities, 655–656 Postemployment benefits, accrued, 589 PPS sampling See Probabilityproportional-to-size (PPS) sampling Precedent, liabilities and, 118–119 Precision, 342 Predecessor auditors, communication with, 194–195, 533–534 Presentation assertions, 144 fair presentation framework, 37n Preventive controls, 251, 721–722 PricewaterhouseCoopers LLP, 17, 20, 89 Primary benefit approach, 118–119, 120 PrimePlus/ElderCare services, 4, 768, 778–779, 780 Principal auditors, 680n, 726 Principles section, of AICPA Code of Professional Conduct, 73 Prior year, uncorrected misstatements, 649–651 Private companies See Nonissuers (nonpublic companies) Private lines, data transmission over, 314 Private Securities Litigation Reform Act of 1995, 44n, 95, 124, 125 Privileged communications, 95 Privity approach, 118–119, 120 Pro forma financial statements, as means of disclosure, 645 Probability-proportional-to-size (PPS) sampling, 341, 377–382 advantages and disadvantages of using, 381–382 controlling sample risk, 378 evaluation of sample results, 378–379 illustration of, 382 sample selection method, 378 sample size determination, 377–378 Procedures of client observation of, 154 reperformance of, 154, 155 Processes, observation of, 154 Processing controls, 316 Product warranty liabilities, 589 Production cycle, 265 Production function, internal control, 513 Production orders, 513 Profession(s), characteristics of, 72–73 Professional corporations, 19 Professional development, 14, 22–23 Professional engagement, period of, 81, 81n Professional ethics, 68–101 AICPA Code of Professional Conduct and See Code of Professional Conduct (AICPA) enforcement of, 91, 95, 98 Generally Accepted Government Auditing Standards and, 810 internal auditor, 99–100, 791–802 international, 98 need for, 72–73 in public accounting, 73–98 Professional fees accrued, 590 analysis of selected expense accounts, 633–634, 635 arrangements for, 194 contingent, in Code of Professional Conduct, 93 independence and, 85–86 past due, 85–86 Professional skepticism, 37–38, 39, 212 Professional standards See Attestation standards; Auditing standards; Generally accepted auditing standards (GAAS); Standard(s) Proficiency, of internal auditors, 800–801 Program analysis techniques, 323 Program flowcharts, 314 Program library, 310 Programmed control activities, in IT environment, 313, 315–316 Programmer fraud, 311 Projected misstatement, 337 difference and ratio estimation, 360, 361–362 mean-per-unit estimation, 354, 358 probability-proportional-to-size sampling, 378–379 Projections, financial, 774–775 Proofs of cash, 407–409 Property, plant, and equipment, 546–562 audits, 546–558 current assets audit contrasted with, 547 inherent risks, 551 initial audits, 199, 533–534, 550 internal control, 547–558, 551 repeat engagements, 550 risks of material misstatement, 552 substantive procedures, 551, 553–558 tests of controls, 552–553 working papers, 548–549 components, 546 depreciation of See Depreciation internal control, 547–548, 551 ownership, 556–557 Property taxes, accrued, 588 Proportionate liability, 118, 124 Proposals, submitting, 193–194 Prospective financial information, 93 Prospective financial statements, assurance on, 774–775 Prospectus, 16 Proximate cause, of client’s loss, 116, 117–118 Public accounting firms, 1–24 Big 4, 20 liability, 89 multiple, involvement of, 199 organization of, 19–20, 96–97 professional ethics, 73–98 quality control, 14, 51, 52 registered, 53, 54 regulation of, 14–15, 51–54 responsibilities of professional staff of, 21–22, 79–85 Public companies alternative accounting practice structures, 20–21, 96–97 www.downloadslide.net Index auditors’ reports, 48–50, 671–675 independence requirements for audits, 87 integrated audits See Integrated audits interim reviews, 751–752 internal control reporting by, 282–285 as issuers, 10n Public Company Accounting Oversight Board (PCAOB), 10, 13, 14 Auditing Standards, 35, 36, 39–42, 48–49 broker-dealer compliance auditing, 808 ethical standards, 89, 98 functions, 51–53 inspections by PCAOB staff, 53–54 on integrated audits, 690, 707–729 internal control audit guidance from, 282 regulation of public accounting companies by, 127 responsibilities, 16–17 Standard No 5, 11, 707, 714, 716, 728 See also Integrated audits Standard No 16, 655 Public warehouses, inventory in, 528 Purchase commitments, 533 Purchase invoices, 528–529 Purchase orders, 441–442, 511–512 Purchase requisitions, 511, 512 Purchases and disbursements cycle, 265 Purchasing function, internal control, 511–512 Q Qualified opinions, 49–50, 676 Qualitative factors, in materiality, 206–207, 649 Quality assurance and improvement program, internal auditors and, 801 Quality control in CPA firms, 14, 51, 52 working paper review, 173, 652 Quality control standards, 14, 35 Quantitative factors, in materiality, 205, 648–649 Questioned costs, 815 R Racketeer Influenced Corrupt Organizations (RICO) Act, 115, 120, 125 Radio frequency identification (RFID) systems, 515 Random access drives, 304 Random number generators, 339 Random number tables, 338–339 Random sampling, 338–340 Random selection, 338–340 random number generators for, 339 random number tables for, 338–339 systematic selection, 339–340 Ratio analysis effects of journal entries on ratios, 159–160 horizontal, 157–159 information sources, 157 types of ratios, 157 vertical, 157–159 Ratio estimation sampling, 341, 359–362 Reasonable assurance, 39 Reasonableness test, 159, 649 Receivables See also Accounts receivable; Notes receivable adjustments, 444 audits, 440, 447–471 inherent risks, 449–450 interim, 471 internal control, 441, 450 risks of material misstatement, 441, 450–451, 454–455, 456 substantive procedures, 457–471, 501–506 tests of controls, 451–457 collection, 444 control environment, 440–441 illustrative case, 501–506 monitoring, 445 nature of, 439 pledging, 470 from related parties, 470–471 risk assessment, 441 sources, 439 working papers, 446–447 Receiving function, internal control, 512 Receiving reports, 512 Recipients, of federal financial assistance, monitoring compliance of, 815 Reclassification journal entries (RJEs), 168 Reconciliations, 169, 407–409 accounting records and physical assets, 257 cash transactions, 393, 401, 407–409 liabilities with monthly statements of creditors, 581–582 revenue cycle, 455, 458 Record counts, 316 Records, inspection of, 149–150, 155 Redundant controls, 252, 717 Referral fees, in Code of Professional Conduct, 94 Registered bonds, 606–607 Registered public accounting firms, 53, 54 Registration statements, 16, 121–122, 647 Regulation S-X, 17, 690 841 Regulations, compliance with, 43–44, 811 Reimbursements, employee, 396 Related party transactions, 470–471 audit evidence regarding, 164 checks representing large or unusual payments, 412 identifying accounts payable, 586 identifying notes payable, 611 property, plant, and equipment, 554 receivables, 470–471 related party, defined, 164 Relatives’ interests audit evidence regarding related party transactions, 164 independence and, 83–84 Relevant assertions, 144, 148, 199 identifying, 716 risks of material misstatement, 190, 207–213, 273 Reliability, 362–363 of audit evidence, 148 of documentary evidence, 149–150 Remediation, antifraud programs and elements, 300–302, 715 Rental revenue, from land, buildings and equipment owned by client but leased to others, 557 Repairs, analyzing expense accounts, 554–555 Replacement cost, 162n Report(s) annual Form 10-K, 689, 740, 775 summary, 740 of auditor See Auditors’ reports receiving, 512 responsibility accounting, 515 service organization control, assurance services and, 777–778, 779 SSARS reviews, 747, 749–750 Report of the National Commission on Fraudulent Financial Reporting, 790 Report release date, 166–167, 646 Representation letters, 151–152, 647 Representative, defined, 337 Required supplementary information, 652–653 Responsibility accounting reports, 515 Restatement of financial statements, 655–656 Restatement of torts approach, to auditors’ liability to third parties, 119, 120 Restricted-use reports, 773 Retained earnings, 620–621 www.downloadslide.net 842 Index Retirement pension plan accruals, 588–589 postemployment benefits, 589 of property, plant, and equipment, 556 Retrospective analysis, 162 Revenue(s) audits, 447–471, 631–632 inherent risks, 449–450 interim, 471 internal control, 440–441, 450 risks of material misstatement, 441, 450–451, 454–455, 456 substantive procedures, 457–471, 501–506 tests of controls, 451–457 control environment, 440–441, 450 fraudulent recognition, 441, 450 illustrative case, 501–506 internal control, 440–441, 450 miscellaneous, 631–632 monitoring, 445 relationship to balance sheet accounts, 631 risk assessment, 441 substantive tests, 457–471, 501–506 working papers, 446–447 Revenue cycle, 265 accounting system and control activities, 441–444, 446–447 documents and accounts, 452–453 illustrative case, 488–491 reconciliations, 455, 458 Revenue expenditures, 548 Reves v Ernst & Young, 125 Review(s), agreed-upon procedures engagements, 3, 744–745, 773 attestation engagements, 772–773 of financial statements, 127, 744–745 of historical financial statements, 746–752 nonpublic companies (nonissuers), 746–751 public companies (issuers), 751–752 Review reports, SSARS reviews, 747, 749–750 RFID (radio frequency identification) systems, 515 RICO (Racketeer Influenced Corrupt Organizations) Act, 115, 120, 125 Right of subrogation, 115n Rights and obligations, assertions, 144 Risk See also Risk assessment procedures attestation, 771 audit See Audit risk business, 6–7, 7n, 190, 201 control, 146, 147, 190, 263, 382–383 assessed level, 273 assessing, illustrative case, 491–500 in attestation risk, 771 planned assessed level, 273 detection, 146, 147, 382–383 engagement, 191–193 enterprise risk management, 260–262 fraud, 211–213, 237–239 general risk contingencies, 643–644 of incorrect acceptance, 354 of incorrect rejection, 354 information, 6–7 inherent See Inherent risk interest rate, 6n of material misstatement, assessing, 207–209, 271–273, 319–324 noncompliance, 77 nonsampling, 337 sampling See Sampling risk significant, 208–209 Risk assessment procedures, 148, 190, 200–202, 263 cost of goods sold, 510–511 to identify fraud risks, 210 internal control, 255–256, 266–267 inventories, 510–511 obtaining an understanding of client’s process for, 264, 266–267 receivables, 441 revenue, 441 Risk of assessing control risk too high, 343, 345–346 Risk of assessing control risk too low, 344, 345–346 Risk tolerance, 255–256 RJEs (reclassification journal entries), 168 Robert Morris Associates, 157 Rollover approach, 651 Rosenblum v Adler, 119, 120 Routine transactions, 145, 716 Rules section, of AICPA Code of Professional Conduct, 73, 75, 76 Rusch Factors, Inc v Levin, 119 S S-1 review, 647 Safeguards (to independence), 77–78 Sales adjustments, 444 cash, internal control, 391 significant and unusual transactions, 471 tests of controls, 451–452 Sales and collections cycle, 265 Sales commitments, 533 Sales invoices, 443, 444 Sales journals, 455 Sales orders, 441–442 Sales taxes payable, 587 Sales tickets, 455 Sample size for attribute sampling, 346–347 for audit sampling, 342 for confirmation requests, 462–463 for mean-per-unit estimation sampling, 355, 356–357 for nonstatistical sampling, 362–363 for probability-proportional-to-size (PPS) sampling, 377–378 Sampling See Audit sampling Sampling error, 342 Sampling risk, 337 allowance for, 342 of assessing control risk too high, 343, 345–346 of assessing control risk too low, 344, 345–346 controlling mean-per-unit estimation sampling, 354 probability-proportional-to-size sampling, 378 for tests of controls, 343–344 Sarbanes-Oxley Act of 2002, 10, 14 audit committees, 90, 193–194 employment with clients, 85 independence, 87, 88–90 integrated audits required by, 11 internal auditors’ roles in compliance with, 790, 791 internal control reporting required, 282 Sections 404(a) and 404(b), 249, 282, 707, 708 See also Integrated audits working paper retention, 166, 167 SASs (Statements on Auditing Standards), 13, 37–40 International Standards on Auditing compared with, 66–67 numbering system for, 37 Savings and loan industry accounting estimates, 163 “bailouts” of 1990s, Scanning, 154, 155 Scienter, 123 Scope limitations, 681 auditors’ report modifications, 725 external confirmations, 463 manager refusal to allow external confirmation, 463 modified opinions, 685–687 uncertainties versus, 686–687 Seasonal fluctuations in public accounting, 23 SEC See Securities and Exchange Commission (SEC) Second partner review, 173, 652 Second Restatement of the Law of Torts, 119, 120 www.downloadslide.net Index Sections 404(a) and 404(b) of SarbanesOxley Act of 2002, 249, 282, 707, 708 Securities Act of 1933, 16, 115, 120, 121–122, 647, 739 auditors’ criminal liability under, 125–126 auditors’ defenses under, 121–122 plaintiff’s rights under, 121 Securities Exchange Act of 1934 compared with, 124–125 Securities and Exchange Commission (SEC), 9, 16–17 Accounting and Auditing Enforcement Releases, 17 Accounting Series Releases, 17 auditors’ reports to, 689–690, 708 complaint filed against WorldCom, 261 disclosure requirements, 672 enforcement of professional ethics, 95, 98 Financial Reporting Releases, 17 independence and, 87, 89–90 internal auditing requirements, 790 regulation of public accounting companies by, 126–127 Regulation S-X, 17, 690 Rule 10b-5, 123 S-1 review and, 647 whistleblowing/reporting illegal acts, 95 Securities Exchange Act of 1934, 16, 95, 115, 120, 122–125 auditors’ criminal liability under, 125–126 auditors’ defenses under, 123 plaintiff’s rights under, 123 proportionate liability under, 124 Securities Act of 1933 compared with, 124–125 Securities Litigation Uniform Standards Act of 1998, 124 Segregation of duties, 253–254, 257, 258–259 Seidman & Seidman, 117 Self-checking numbers, 316 Self-interest as threat to compliance, 77 as threat to independence, 80 Self-review as threat to compliance, 77 as threat to independence, 80 Selling, general, and administrative expenses, substantive procedures, 632–635 Sequential access drives, 304 Sequential sampling, 352 Service auditors, 279–280 Service organization control (SOC) reports, assurance services, 777– 778, 779 Service organizations, providing processing services, internal control, 279–280 Shared responsibility opinion, 681 Sheraton hotels, 510 Shipping, 442–443 documents, 513–514 internal control, 513–514 tests of controls, 452–453 Shopping for accounting principles, 195 Side agreements, 468 Significant accounts, 715–716 Significant deficiencies, 654 in internal control, 281–282, 709 Significant influence, independence and, 84 Significant risks, 208–209 Single Audit Act of 1984, 11, 95, 809n compliance auditing in accordance with, 812–817 Single financial statement audits, 743–745 Sinking fund, 609 Small business See also Partnerships; Sole proprietorships internal control, 285–286, 616 lack of audit committees, 194 SOC (service organization control) reports, assurance services, 777– 778, 779 Software access control, 304 application, 304 client-developed, 303 off-the-shelf, 303 operating system, 304 security, 304 system, 304 Software viruses, 317 Sole proprietorships audits, 621 lack of audit committees, 194 public accounting firms, 19 Solicitation, in Code of Professional Conduct, 94 Source-language programs, 304 Specialists, 199 industry specialization by accounting firms, 21 inquiries of, 152–153, 154 inventory audits, 524 need for, 152, 413 Specialized security software, 304 Special-purpose financial reporting frameworks, 37n, 740–743 Specific authorization, 256–257 843 Specific requirements, under Single Audit Act, 814–815 Sprint Corp., 89 SSAEs (Statements on Standards for Attestation Engagements), 13 No 1, 50 No 10, 806 SSARs See Statements on Standards for Accounting and Review Services (SSARs) Standard(s), 2, 35–56 attestation See Attestation standards auditing See Auditing standards; Generally accepted auditing standards (GAAS) establishing AICPA role, 13 Federal Accounting Standards Advisory Board (FASAB), 16, 672 Financial Accounting Standards Board (FASB), 15–16, 672 Governmental Accounting Standards Board (GASB), 16, 672 International Federation of Accountants (IFAC), 17–18, 98 Securities and Exchange Commission (SEC), 16–17 expectation gap, 8–9 professional See Attestation standards; Auditing standards; Generally accepted auditing standards (GAAS) quality control, 35, 51 Standard confirmation form, 404–407 Standard deviation, 355 Standard reports, 44–49, 671, 672–675 See also Auditors’ reports financial statements, 671, 672–675 nonpublic company, 44–48, 672–674 public company, 671, 674–675 State boards of accountancy, 15, 36 Statement of cash flows, 203 audits, 639 Statement of changes in net worth, 746 Statement of financial condition, 746 Statements of Position (AICPA), 14 Statements on Auditing Standards (SASs), 8, 13, 37–40 International Standards on Auditing compared with, 66–67 numbering system for, 37 Statements on Standards for Accounting and Review Services (SSARS), 13 compilations and, 752–755 reviews of nonpublic companies, 746–751 www.downloadslide.net 844 Index Statements on Standards for Attestation Engagements (SSAEs), 13 No 1, 50 No 10, 806 Statements on Standards for Attestation Services, 768 Statistical audit sampling, 337–344 sampling plans, 341–342 Statutory law liability, 114, 115 criminal, 126 to third parties, 120–129 Stock, capital See Capital stock; Owners’ equity Stock certificate books, 615 Stock options, 619 Stock registrar, 614–615, 618–619 Stock transfer agents, 614–615, 618–619 Stockholder meetings, review of minutes, 640 Stockholders’ equity financial statement presentation of capital stock, 620 time of examination of, 621 Stockholders ledger, 615 Stop-or-go sampling, 352 Storing function, internal control, 512 Stratification, audit sampling and, 340–341 Subject matter, of attestation engagements, 768–769 Subrecipients, of federal financial assistance, monitoring compliance of, 815 Subrogation, right of, 115n Subsequent events, 644–647 audit plans (programs), 646–647 auditors’ report modification, 726 subsequent discovery of facts existing at date of auditors’ report, 655 subsequent discovery of omitted audit procedures, 656 type 1, 644–645, 646 type 2, 645, 646 Subsequent period, 584 Subsequently discovered facts existing at date of auditors’ report, 655 omitted audit procedures as, 656 Subsidiary ledger accounts payable, 580 property, plant, and equipment, 547 Substantive procedures, 148, 154–161, 190–191, 263 accounts payable audits, 577, 581–586 analytical, 156–161 audit plans (programs), 217–220 audit sampling, 353 classical variables sampling, 341, 354–362 nonstatistical sampling, 362–363 cash transactions and balances, 404–406 cost of goods sold audits, 521–534 debt capital audits, 608 depreciation audits, 559–560 extent of, 156 financial investment audits, 416–420 financial statement effect on audits internal control, 722 effects of tests of controls, 721–722 inventory audits, 521–534 in IT systems, 324–326 payroll audits, 639 property, plant, and equipment audits, 551, 553–558 receivables audits, 457–471, 501–506 revenue audits, 457–471, 501–506 selling, general, and administrative expenses, 632–635 tests of controls, 219, 220, 224, 273–275 timing of, 156 types of, 154–155 Successor auditors, 194–195, 533–534 Sufficient appropriate audit evidence, 147–148 Suitable criteria, 2, 282–283, 766–767, 768 Summary annual reports, 740 Summary financial statements, 740 Summary schedules, 168 Supplementary information, 652–654 in relation to financial statements as a whole, 653–654 required, 652–653 Supporting schedules, 168 System reviews, 53 System software, 304 Systematic selection, 339–340 Systems analysis, 310 Systems flowcharts, 268–269, 271, 318–319 Systems programmers, 311 SysTrust, 776–777 T Tagging and tracing transactions, 324 Tainting, 379 Tangible assets, inspection of, 153–154 The Tax Advisor, 13 Tax services, 18 ethical issues related to, 89, 96 independence and, 87–88, 89 Taxes income See Income taxes property taxes accrued, 588 sales taxes payable, 587 Telecommunications, 306, 311 Test data, 311–312 in IT environment, 322–323 Tests of controls, 148, 190–191, 263, 273–275 accounts payable audit, 579–581 audit procedures, 274 audit sampling, 343–344 cash audit, 401–404 cost of goods sold audit, 518–521, 522 effects on financial statement audit substantive procedures, 721–722 extent of, 274–275, 719–720 identifying controls to test, 713–718 illustrative case, 491–500 internal control audits versus financial statement audits, 721, 722 inventory audits, 518–521, 522 in IT environment, 321–323, 324 nature of, 274 from prior audits, 275 property, plant, and equipment audits, 552–553 receivables audits, 451–457 relationship among audit objectives, material misstatement and, 219, 220, 224 revenue audits, 451–457 revising risks of material misstatement based on results of, 275 substantive procedures, 275 timing of, 274, 719, 720 Third parties CPAs’ liability under common law, 118–120 CPAs’ liability under statutory law, 120–129 Third-party beneficiaries, 118–120 Threats to compliance, 76–77 to independence, 79–81, 80 Tick marks, 171–172 Time budgets, 198 Timekeeping, payroll audit, 636–637 Timing See also Dates analytical procedures, 160–161 of audit, 223–224 examination of debt, 613 examination of liabilities, 591 examination of stockholders’ equity, 621 period of professional engagement, 81, 81n substantive audit procedures, 156 tests of controls, 274, 719, 720 Tolerable deviation rate, 344, 345–346 Tolerable misstatement, 342, 354–355 Top-down approach, to identify controls to test, 713–718 Torts, 114, 114n restatement of, 119, 120 www.downloadslide.net Index Tours of plants and offices, 202–203 Tracing transactions, 221, 324 Trade accounts payable, 591 Trading securities, 418–419 Transaction(s) control activities, 256–258 estimation, 146 major classes of, 710 nonroutine, 145, 716 related party, audit evidence regarding, 164 routine, 145, 716 tagging and tracing, 324 understanding sources of misstatement, 716–717 Transaction cycles, 215–216, 265–266 walk-through of, 269–270, 400, 717–718 Treadway Commission (National Commission on Fraudulent Financial Reporting), 8–9, 249–250 Treasurer, internal control and, 253 Treasury stock, 617, 620 Trend analysis, 157 Trial balances accounts payable, 581 aged, 444, 457–458 working, 167–168 Truncating, 409 Trust indenture, 605, 610, 611 Trust Services, 775–777 Trustees bond issue, 606 U Ultramares v Touche & Co., 118–119, 120 Unasserted claims, 642 Uncertainties emphasis-of-matter paragraphs, 680 scope limitations versus, 686–687 Uncollectible accounts, 469–470 Underwriters “blue sky” laws, 115 comfort letters, 739 Undue influence as threat to compliance, 77 as threat to independence, 80 Uniform Accounting Act, 15 United States v Simon, 125–126 Universal product code, 391 Unmodified (unqualified) opinions, 44–49, 675–682 Unrecorded liabilities contingent liabilities, 582, 583–586, 640–644 search for, 640 Upper limit on misstatement, probability-proportional-to-size sampling and, 378–379 U.S Foodservices, 530 User auditors, 280 User control activities, in IT environment, 312–313, 316 User departments, 303 User entities, internal control and, 279–280 User operated computers, 303n, 317 Utility programs, 304 V Vacation pay, accrued, 589 Validity test, 316 Valuation assertions, 144, 153 of assets, 222, 224 audit evidence regarding fair values, 162–164 cost approach, 162n income approach, 162n market approach, 162n Variables sampling, 341, 354–362 advantages and disadvantages, 382 difference and ratio estimation, 341, 359–362 mean-per-unit, 341, 354–359 for substantive procedures, 354–362 Vendors’ statements, 396, 575 Vertical analysis, 157–159 Viruses, software, 317 Voided checks, 393 Volkswagen AG, 203 Voucher(s), 340, 394–395, 397, 573–574 Voucher registers, 394–395, 397, 579–580 Vouchers payable, 572 Vouching, 215 accounts payable, 579–580, 584 additions to property, plant, and equipment, 553–554 assets, 221 debt, 609 W Wages See also Income taxes accrued payroll, 588 amounts withheld from pay, 586–587 payroll audits, 635–639 unclaimed, 587 Walk-throughs, 717–718 physical inspection of acquisitions of plant and equipment, 554 tours of plants and offices, 202–203 of transaction cycles, 269–270, 400, 717–718 Wall Street Reform and Consumer Protection (Dodd-Frank) Act of 2010, 10, 16, 808, 812 WANs (wide area networks), 306 845 WebTrust, 776–777 Whistleblowing, 95, 715 Wide area networks (WANs), 306 Williams Controls v Parente, Randolph, Orlando & Associates, 119 Window dressing, 410, 465–466 Work orders, 548 Working papers, 165–173 accounts payable audit, 575 Acts Discreditable Rule, 92–93 administrative, 167 auditors’ liability, 166–167 cash audit, 398 comments by auditors, 172–173 computational, 169 computer-generated, 173 confidential nature, 165–166 cost of goods sold audit, 515 debt audit, 607 deficiencies, 171 defined, 165 differences of opinion, 167 documenting understanding of internal control, 267–271 under Generally Accepted Government Auditing Standards (GAGAS), 810–811 internal control and, 275–277 inventory audit, 515 for IT-based system controls, 312–313 liability, 166–167 organization of, 169–171 current files, 169–170 permanent files, 170–171, 203 owners’ equity audit, 616 ownership, 166 payroll audit, 638 peer review findings, 171 preparation guidelines for, 171–173 property, plant, and equipment audit, 548–549 receivables audit, 446–447 retention guidelines, 166, 167 revenue audit, 446–447 review, 173, 652 risk assessment and, 214 types of, 167–169 Working trial balance, 167–168 Workpapers See Working papers Workstation systems, 303n, 317 WorldCom, 9, 10, 210, 261 Written narratives of internal control, 268–269, 318 X XBRL (eXtensible Business Reporting Language), 4, 779–780 Z ZZZZ Best Co., 194, 751 ... notion of assurance of learning, an important element of some accreditation standards Principles of Auditing & Other Assurance Services, 20e, is designed specifically to support your assurance of learning... www.mhhe.com /whittington2 0e We are confident that the 20th edition of Principles of Auditing & Other Assurance Services will provide students with a clear perspective of today’s auditing environment.. .Principles of Auditing & Other Assurance Services Twentieth Edition O Ray Whittington CIA, CMA, CPA DePaul University Kurt Pany CFE, CPA Arizona State University PRINCIPLES OF AUDITING & OTHER