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Preface xi

Professional Responsibilities 1

Financial Statements, an Audit, and Audited Financial Statements 1

Code of Professional Conduct 5

Conceptual Frameworks 8

Independence Rule 11

Integrity and Objectivity—Members in Business 19

Responsibilities to Clients 20

Other Responsibilities and Practices 21

Quality Control 22

Tax Preparer 23

Standards for Consulting Services 24

GAO—GAGAS Ethical Principles 25

Department of Labor Independence Requirements for Employee Benefit Plans 26

Assessing Risk and Developing a Planned Response 27

Financial Statement Assertions 27

Audit Risk (AR) 28

Materiality 32

Evaluation of Misstatements 34

Consideration of Fraud in a Financial Statement Audit 35

Fraud Risk Factors Overall 37

Assessing Risk of Fraud 43

Effects of Fraud Assessment 44

Fraud-Related Documentation 45

Actions Resulting from Evidence of Fraud 46

Laws and Regulations—Responsibility to Detect and Report Illegal Acts 47

Summary of Assurance Provided by Auditor 49

Audit Planning: Communication with Predecessor Auditor 50

Audit Planning: Engagement Letter 51

Planning Considerations 53

Communication of Certain Information to Those Charged with Governance 58

Understanding Internal Control and Assessing Control Risk 60

Consideration of Internal Control 60

Components of Internal Control 61

Obtaining an Understanding of Internal Control during Risk Assessment 67

Relationship of Control Risk to Tests of Controls, Detection Risk, and Substantive Procedures 75

Further Reducing the Assessed Level of Control Risk 76

Documentation of Internal Control 77

Accounting Cycles 79

Other Considerations 88

Performing Further Procedures and Obtaining Evidence 93

Sufficient Appropriate Audit Evidence 93

Basic Types of Audit Procedures 97

Issues Related to Substantive Testing 107

Audit Documentation 121

Auditing Specific Accounts 125

Using Management Assertions to Develop Audit Programs 125

Test of Balances Approach versus Test of Transactions Approach 126

Auditing Accounts 129

Audit Sampling 155

Sampling Risk 155

Types of Statistical Sampling 159

Attribute Sampling 160

Variables Sampling 164

Probability Proportional to Size (PPS) Sampling 167

Auditing with Technology 171

Responsibilities in an Information Technology Environment 171

Controls in an IT Environment 172

Auditing through the Computer 173

Testing General Control Activities 174

Testing Application Control Activities 176

Auditing with the Computer 178

Audit Reports 179

Audit Reports 179

Standard Report 180

Group Financial Statement Audit Reports 187

Unmodified Opinion with Emphasis-of-Matter Paragraphs 192

Unmodified Opinions with Other-Matter Paragraphs 203

Modified Opinions—Two Circumstances 211

Financial Statements Prepared Using Another Country’s Framework 217

Summary Financial Statements 218

Reviews of Quarterly (Interim) Information 219

Other Types of Reports 220

Reports on Application of Framework Requirements 220

Financial Statements with Special Purpose Frameworks 221

Audits of Single Financial Statements and Specific Elements, Accounts, or Items 223

Reporting on Compliance 224

Service Organization Control (SOC) Reports 225

Governmental Auditing and Compliance Audits 227

Accounting and Review Services 237

Financial Statement Preparation 238

Compilations 241

Reviews 245

Other Compilation and Review Considerations 253

Other Professional Services 257

Reporting on Internal Control in an Integrated Audit 257

PCAOB Reporting on Whether Material Weaknesses Still Exist 265

Employee Benefit Plans 266

Attestation Engagements—General 267

Attestation Standards 268

Financial Forecasts and Projections 270

Pro Forma Financial Information 273

Management Discussion and Analysis 273

Compliance Attestation Engagements 274

Index 275

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