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Auditing : Text and Cases

by: KNECHEL

Auditing : Text and Cases

by: KNECHEL

ISBN 13:
9780538819343
ISBN 10:
0538819340
Edition: 1st
Format: Paperback
Copyright: 07/25/1997
Publisher: South-Western College Pub
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Summary

The accounting profession has entered a period of rapid and extensive change and accountants are struggling to formulate a strategy of coping with the economic forces confronting the profession in the 1990's and beyond. Auditing: Text and Cases will influence the way that the next generation of professions think about their responsibilities and abilities. Instead of limiting itself to reciting current practices, the unique set of topics and structure of this book will strike an effective balance among the "why it is so" of auditing theory, and the "how it is done" of current auditing practice along with the "what's next" of the profession's future.

1 ACCOUNTING, ATTESTATION AND AUDITING

(18)

INTRODUCTION

(1)

INFORMATION: A VALUABLE COMMODITY

(2)

AN INTERESTING EXAMPLE

(2)

ATTESTATION AND AUDITING: SOME DEFINITIONS Attesting to Compliance with Laws, Regulations and Contractual Obligations Attesting to the Effectiveness and Efficiency of Operations Attesting to the Reliability of Information and Control Systems Financial Statement Auditing

(4)

THE DEMAND FOR AUDITING: AN ECONOMIC EXPLANATION

(2)

AUDITING AS A BUSINESS DECISION PROCESS

(1)

THE PROFESSION OF AUDITING

(2)

CONCLUSION

(4)

2 OVERVIEW OF THE AUDIT PROCESS

(25)

INTRODUCTION

(1)

MANAGEMENT ASSERTIONS

(3)

AUDIT OBJECTIVES

(1)

AUDIT PROCEDURES Procedures to Obtain an Understanding of Internal Control Preliminary Analytical Procedures Tests of Controls Tests of Transactions Substantive Analytical Procedures Direct Tests of Account Balance Details

(2)

AUDIT EVIDENCE

(3)

AUDIT CONCLUSIONS Standard Unqualified Report Modified Unqualified Report Qualified Report Disclaimer Report Adverse Report

(3)

MATERIALITY, RISK AND EVIDENCE

(1)

AN OVERVIEW OF THE AUDIT PROCESS

(2)

PROFESSIONAL STANDARDS RELATED TO AUDITING AND ATTESTATION

(3)

SUMMARY AND CONCLUSION

(7)

3 CLIENT ACCEPTANCE AND PRELIMINARY ENGAGEMENT PLANNING

(32)

INTRODUCTION

(1)

AUDITOR RESPONSIBILITIES Errors and Fraudulent Misstatements Illegal Acts by Clients

(7)

A RISK ORIENTATION TOWARDS AUDITING

(2)

EVALUATION OF PROSPECTIVE CLIENTS

(3)

ENGAGEMENT LETTERS

(2)

PRELIMINARY PLANNING Obtain and Understanding of the Client Identify Problem Areas That May Affect Audit Planning Consider Special Circumstances That May Affect Audit Planning Segmenting the Audit Engagement

(13)

SUMMARY AND CONCLUSION

(5)

4 UNDERSTANDING THE CLIENT'S BUSINESS

(33)

INTRODUCTION

(2)

A MODEL FOR UNDERSTANDING THE CLIENT'S ROLE IN THE INDUSTRY: VALUE SYSTEM ANALYSIS

(4)

A MODEL FOR UNDERSTANDING THE CLIENT'S OPERATIONS AND BUSINESS PROCESSES: VALUE CHAIN ANALYSIS Primary Activities Support Activities

(6)

IDENTIFYING RISKS FACING THE CLIENT: THREAT ANALYSIS Competitors Potential Entrants Substitutes Suppliers Buyers

(3)

ANALYZING MANAGEMENT RESPONSES AND CONTROLS Components of Internal Control Management Controls The Role of Information in Management Controls

(4)

IMPLICATIONS FOR AUDIT PLANNING

(8)

SUMMARY AND CONCLUSION

103

(6)

5 INTERNAL CONTROL AND CONTROL RISK

109

(49)

INTRODUCTION

109

(1)

INTERNAL CONTROL: PURPOSE AND LIMITATIONS

109

(2)

FINANCIAL REPORTING CONTROL OBJECTIVES

111

(2)

ELEMENTS OF INTERNAL CONTROL Control Environment Risk Assessment Control Activities Information and Communication Monitoring Activities

113

(9)

PROFESSIONAL STANDARDS RELATED TO INTERNAL CONTROL

122

(4)

PRACTICAL ISSUES IN ASSESSING CONTROL RISK Obtaining an Understanding of Internal Control Documenting Internal Control The Relationship Between Control Risk and Audit Planning The Interaction Between Client Characteristics and Control Risk Assessment Assessments

126

(9)

AN EXAMPLE OF CONTROL RISK ASSESSMENT AND AUDIT PLANNING

135

(7)

REPORTING REQUIREMENTS RELATED TO INTERNAL CONTROL

142

(1)

SUMMARY AND CONCLUSION

143

(1)

APPENDIX A

143

(6)

APPENDIX B

149

(9)

6 PRELIMINARY ANALYTICAL PROCEDURES

158

(42)

INTRODUCTION

158

(2)

PERCENTAGE ANALYSIS

160

(3)

RATIO ANALYSIS

163

(5)

A SIMPLE EXAMPLE OF INTEGRATED ANALYSIS: ACCOUNTS RECEIVABLE

168

(1)

A STRATEGY FOR PERFORMING PRELIMINARY ANALYTICAL PROCEDURES

169

(1)

AN EXAMPLE OF PRELIMINARY ANALYTICAL PROCEDURES Overall Results Cash and Investments Receivables Inventory Fixed Assets Short-Term Liquidity Long-Term Capital Overall Audit Implications

170

(11)

PITFALLS IN PRELIMINARY ANALYTICAL PROCEDURES

181

(2)

SUMMARY AND CONCLUSION

183

(1)

APPENDIX A

184

(8)

APPENDIX B

192

(8)

7 PLANNING AUDIT TESTING

200

(28)

INTRODUCTION

200

(1)

OBJECTIVES, RISKS AND PROCEDURES REVISITED

201

(1)

THE AUDIT RISK MODEL

202

(3)

MATERIALITY Overall Planning Materiality Tolerable Error: Allocation of Materiality to Accounts

205

(2)

THE DETERMINANTS OF AUDIT RISK Audit Risk Inherent Risk Control Risk Detection Risk

207

(4)

AUDIT PLANNING: DECISIONS TO BE MADE

211

(1)

COMPETENCE OF AUDIT EVIDENCE

212

(2)

THE RELATIONSHIP AMONG AUDIT RISK, MATERIALITY AND AUDIT PLANNING DECISIONS

214

(1)

DEVELOPING THE AUDIT PLAN Decomposition of Detection Risk Trade-Off Among Different Audit Procedures Segmenting the Audit Plan The Audit Program

215

(7)

SUMMARY AND CONCLUSION

222

(6)

8 THE REVENUE PROCESS: AUDIT OF SALES, RECEIVABLES AND CASH

228

(42)

INTRODUCTION

228

(1)

AN OVERVIEW OF ACTIVITIES IN THE REVENUE PROCESS Sales Collections Sales Returns Bad Debt Write-Offs Bad Debt Estimation

229

(5)

INTERNAL CONTROLS RELATED TO SALES AND COLLECTIONS Sales Processing Cash Receipt Processing Other Sales-Related Transactions

234

(5)

PLANNING TESTS OF CONTROLS AND TESTS OF TRANSACTIONS Tests of Controls Tests of Transactions

239

(4)

PLANNING SUBSTANTIVE ANALYTICAL PROCEDURES

243

(1)

PLANNING TESTS OF ACCOUNT BALANCE DETAILS: ACCOUNTS RECEIVABLE General Planning Tests of the Aged Receivables Trial Balance Confirmations Cutoff Tests Tests of Uncollectible Amounts

244

(7)

PLANNING TESTS OF ACCOUNT BALANCE DETAILS: CASH General Planning Bank Confirmations Bank Reconciliations Proof of Cash Tests of Interfund Transfers

251

(8)

SUMMARY AND CONCLUSIONS

259

(2)

APPENDIX

261

(9)

9 THE RESOURCE ACQUISITION PROCESS: AUDIT OF EXPENSES, DISBURSEMENTS, ASSETS AND LIABILITIES

270

(37)

INTRODUCTION

270

(1)

AN OVERVIEW OF ACTIVITIES IN THE RESOURCE ACQUISITION PROCESS Purchasing Disbursements Payroll

270

(8)

INTERNAL CONTROLS RELATED TO ACQUISITIONS AND DISBURSEMENTS Resource Acquisition Disbursement Processing Payroll and Personnel

278

(5)

PLANNING TESTS OF CONTROLS AND TESTS OF TRANSACTIONS Tests of Controls Tests of Transactions

283

(5)

PLANNING SUBSTANTIVE ANALYTICAL PROCEDURES Trend Analysis of Expenses Direct Estimation of Expense Balances Ratio Analysis Regression Analysis of Expenses

288

(2)

PLANNING TESTS OF ACCOUNT BALANCE DETAILS: ACCOUNTS PAYABLE General Planning Tests of Accounts Payable Trial Balance Vouching Tests for Unrecorded Liabilities Confirmations

290

(4)

PLANNING TESTS OF ACCOUNT BALANCE DETAILS: PLANT, PROPERTY AND EQUIPMENT General Planning Tests of Mechanical Accuracy Audit of Additions and Disposals

294

(4)

PLANNING TESTS OF ACCOUNT BALANCE DETAILS: OTHER

298

(1)

SUMMARY AND CONCLUSIONS

299

(8)

10 THE CONVERSION, FINANCING AND INVESTING PROCESSES: AUDIT OF INVENTORY, INVESTMENTS, DEBT AND EQUITY

307

(26)

INTRODUCTION

307

(1)

PART A: CONVERSION PROCESS--AUDIT OF INVENTORY Nature of Inventory Operations Internal Controls Related to Inventory Audit Risks, Objectives and Procedures Tests of Controls and Tests of Transactions for Inventory Substantive Analytical Procedures Inventory Tests of Account Balance Details for Inventory

307

(15)

PART B: FINANCING AND INVESTING PROCESSES--AUDIT OF INVESTMENTS, DEBT AND EQUITY Audit of Investments Audit of Borrowed Funds Audit of Equity

322

(6)

SUMMARY AND CONCLUSION

328

(5)

11 COMPLETING THE AUDIT AND COMMUNICATING RESULTS

333

(40)

INTRODUCTION

333

(1)

WRAP-UP PROCEDURES Review of Contingent Losses Review of Subsequent Events Valuation of Potential Going Concern Problems Representation Letters Final Evaluation of Audit Evidence and Preparation of Financial Statements

333

(12)

EXTERNAL COMMUNICATION OF AUDIT RESULTS Standard Unqualified Auditor's Report Modified Unqualified Auditor's Report Departures from Unqualified Reports Special Problems Related to Reports on Comparative Financial Statements

345

(15)

INTERNAL COMMUNICATIONS OF AUDIT RESULTS Reports to Audit Committees Report on Internal Control Management Letters

360

(2)

SUMMARY AND CONCLUSION

362

(1)

APPENDIX

362

(11)

12 STATISTICAL METHODS OF EVIDENCE GATHERING USED IN AUDITING

373

(38)

INTRODUCTION

373

(1)

SELECTING THE SAMPLE TO TEST Population of Prenumbered Documents Other Types of Populations Stratified Sampling

374

(9)

TESTS OF CONTROLS AND TRANSACTIONS: ATTRIBUTE SAMPLING Step 1: Select the Audit Procedure Step 2: Select Attributes to Test and Define the Deviation Conditions Step 3: Define the Population and Sample Unit Step 4: Specify the Tolerable Deviation Rate (TDR) Step 5: Specify the Acceptable Risk of Overreliance (ARO) Step 6: Estimate the Expected Deviation Rate (EDR) Step 7: Determine the Sample Size (n) Step 8: Select the Sample Step 9: Perform the Audit Procedure and Document the Results Step 10: Generalize the Sample Results to the Population Step 11: Analyze Individual Deviations Step 12: Conclude

383

(12)

TESTS OF ACCOUNT BALANCE DETAILS: DOLLAR UNIT SAMPLING Step 1: Identify the Audit Objective and Audit Procedure Step 2: Identify the Population and Sample Unit Step 3: Define the Error Conditions Applicable to the Audit Procedure Step 4: Specify the Tolerable Error Level (TEL) Step 5: Specify the Acceptable Risk of Incorrect Acceptance (ARIA) Step 6: Estimate the Expected Error Level (EEL) Step 7: Estimate the Expected Tainting Factor (ETF) Step 8: Determine the Sample Size (n) Step 9: Select the Sample Step 10: Perform the Audit Procedure and Document the Results Step 11: Generalize the Sample Results to the Population Step 12: Analyze Individual Errors Step 13: Conclude

395

(10)

JUDGEMENTAL APPROACHES TO SAMPLING

405

(1)

SUMMARY AND CONCLUSION

406

(5)

13 AUDITOR JUDGMENT AND PROFESSIONAL DECISION MAKING

411

(43)

INTRODUCTION

411

(1)

MODELS OF DECISION MAKING: BEHAVIORAL CONSIDERATIONS Auditing as a Decision Process Sources of Errors in Judgment Overcoming Judgment Errors in Decision Making

411

(9)

ETHICAL DECISION MAKING The Nature of Ethical Decisions The Process of Ethical Decision Making: An Example

420

(5)

CODE OF PROFESSIONAL CONDUCT Overview Rules of Conduct Enforcement

425

(9)

IMPACT OF LEGAL LIABILITY ON AUDITING Overview of Professional Liability of Auditors Legal Theories Applicable to Auditor's Liability Profession's Response and Current Initiatives

434

(13)

SUMMARY AND CONCLUSION

447

(7)

14 OTHER ATTESTATION ENGAGEMENTS

454

INTRODUCTION

454

(1)

GENERAL CHARACTERISTICS OF ATTESTATION ENGAGEMENTS

454

(3)

STANDARDS APPLICABLE TO ALL ATTESTATION ENGAGEMENTS

457

(2)

ASSURANCE SERVICES RELATED TO FINANCIAL STATEMENTS Compilation of Annual Financial Statements Review of Annual Financial Statements Review of Interim Financial Statements Engagements Applying Agreed-Upon Procedures to Specific Financial Items or Elements Letters to Underwriters Examination of Prospective Data and Forecasts

459

(10)

ASSURANCE SERVICES RELATED TO COMPLIANCE Debt Letters Other Compliance Engagements

469

(3)

ASSURANCE SERVICES RELATED TO QUALITY OF PROCESSES Engagements to Evaluate Internal Controls Operational Auditing

472

(5)

PUBLIC ACCOUNTING AND THE FUTURE OF ASSURANCE SERVICES

477

(2)

SUMMARY AND CONCLUSION

479

CASES

C-1

CASE 1: CRYPTOSYNTHESIS, INC.

C-1

CASE 2: PREFAB SPROUT CONSTRUCTION COMPANY

C-4

CASE 3: MURPHY TYMSHARE, INC.

C-6

CASE 4: APPETIZING ALLIGATOR FARMS, INC.

C-10

CASE 5: PERSONAL COMPUTING CONCEPTS

C-14

CASE 6: SOUTH FLORIDA GENERAL HOSPITAL

C-16

CASE 7: STRATEGIC ANALYSIS AND BUSINESS PROCESSES

C-17

CASE 8: RUBBERMAID CORPORATION

C-18

CASE 9: DURIA'S INC.

C-21

CASE 10: THE CITY OF SMALLVILLE

C-24

CASE 11: FIRST LENDER'S NATIONAL BANK

C-35

CASE 12: DISKTRON CORPORATION

C-47

CASE 13: RUBBA-DUB-DUB TUB AND COMMODE COMPANY

C-63

CASE 14: THE CITY OF STARKVILLE

C-67

CASE 15: IOU A-LOT, INC.

C-69

CASE 16: MONEYLENDER NATIONAL BANK

C-83

CASE 17: STRIPENBURN CONSTRUCTION COMPANY

C-87

CASE 18: ABS AUTOPARTS, INC.

C-89

CASE 19: HACKER HOSPITAL

C-94

CASE 20: VIDEO REPLAY, INC.

C-98

CASE 21: ALACHUA COUNTY FARM COOPERATIVE

C-100

CASE 22: BUTCHER HOSPITAL

C-102

CASE 23: OPM LEASING, INC.

C-105

CASE 24: MEDTECH CORPORATION

C-107

CASE 25: UDUB LIMITED

C-114

CASE 26: FIRST SECURITIES

C-118

CASE 27: DR. WHO RENTAL PROPERTIES

C-121

CASE 28: JOHNSON ELECTRONICS, INC.

C-123

CASE 29: PENCIL PUSHERS, INC.

C-132

CASE 30: COMPUVILLE COMPUTERS, INC.

C-140

CASE 31: UCANTRUSTUS BUILDERS, INC.

C-157

Amazon no longer offers textbook rentals. We do!

Auditing : Text and Cases

Auditing : Text and Cases

9780538819343

0538819340

Summary

Table of Contents

Supplemental Materials

Write a Review

Amazon no longer offers textbook rentals. We do!

Auditing : Text and Cases

Auditing : Text and Cases

9780538819343

0538819340

Summary

Table of Contents

Supplemental Materials

Write a Review

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