Table of Contents
1 Introduction and Overview of Audit and Assurance 1-1
Assurance, Attestation, and Audit Services 1-3
Different Assurance Services 1-6
Demand for Audit and Assurance Services 1-8
Preparers and Auditors 1-11
The Role of Regulators and Regulations 1-13
Audit Report on Financial Statements 1-19
Audit Report on Internal Controls over Financial Reporting 1-25
The Audit Expectation Gap 1-28
2 Professionalism and Professional Responsibilities 2-1
Professionalism and Accounting 2-3
The Structure of the AICPA Code of Professional Conduct 2-5
Conceptual Framework for Members in Public Practice 2-7
Integrity and Objectivity 2-11
Independence 2-12
General Standards 2-23
Other Rules of Conduct for Members in Public Practice 2-24
Auditor Liability Under Common Law 2-26
Auditor Liability Under Statutory Law 2-33
3 Risk Assessment Part I: Audit Risk and Audit Strategy 3-1
Client Acceptance and Continuance Decisions 3-3
Phases of an Audit 3-8
Materiality 3-10
Professional Skepticism and Audit Risk 3-14
Audit Strategy 3-21
Fraud Risk 3-25
4 Risk Assessment Part II: Understanding the Client 4-1
Understanding the Client 4-3
Client Approaches to Measuring Performance 4-12
Analytical Procedures 4-14
Related Parties 4-22
Corporate Governance 4-23
Internal Control and Information Technology 4-26
Closing Procedures 4-27
5 Audit Evidence 5-1
Management Assertions 5-3
Characteristics of Audit Evidence 5-7
Procedures for Gathering Audit Evidence 5-10
Using the Work of Others 5-18
Documentation—Audit Working Papers 5-24
6 Gaining an Understanding of the Client’s System of Internal Control 6-1
Internal Control Defined 6-3
Entity-Level Internal Controls 6-7
Transaction-Level Internal Controls 6-19
Information Technology (IT) Controls 6-23
Documenting Internal Controls 6-29
Identifying Strengths and Weaknesses in a System of Internal Controls 6-31
Management Letters 6-33
7 Audit Data Analytics 7-1
Steps in Performing Audit Data Analytics 7-3
Steps Associated with Accessing and Preparing Data for Audit Data Analytics 7-11
Using Audit Data Analytics as a Risk Assessment Procedure 7-13
Applying Audit Data Analytics as a Risk Assessment Procedure 7-17
Using Audit Data Analytics as a Substantive Test 7-37
Applying Audit Data Analytics as a Substantive Test 7-38
Validating Sales Revenue and Accounts Receivable with Subsequent Cash Receipts 7-38
8 Risk Response: Performing Tests of Controls 8-1
Steps in Assessing Control Risk 8-3
Types of Controls 8-7
Procedures for Testing Controls 8-13
Selecting and Designing Tests of Controls 8-15
Results of the Auditor’s Testing 8-26
Documenting Conclusions 8-29
9 Risk Response: Performing Substantive Procedures 9-1
Audit Risk and Substantive Procedures 9-3
Risk Response at the Financial Statement Level 9-5
Nature of Substantive Procedures 9-7
Timing of Substantive Procedures 9-14
Extent of Substantive Procedures 9-16
Auditing Accounting Estimates 9-19
Documenting Results of Substantive Procedures 9-26
10 Risk Response: Evaluating Audit Data Analytics and Audit Sampling for Substantive Tests 10-1
Using Audit Data Analytics versus Audit Sampling 10-3
Audit Sampling Defined 10-5
Sampling Risk and Nonsampling Risk 10-6
Statistical and Nonstatistical Sampling 10-8
Sampling Methods 10-9
Factors That Influence the Sample Size—Substantive Testing 10-11
A Basic Framework for Audit Sampling 10-14
Applying Probability-Proportionate-to-Size Sampling for Substantive Testing 10-16
Applying Nonstatistical Sampling for Substantive Testing 10-28
Appendix 10A: Applying Classical Variables Sampling for Substantive Testing 10-33
11 Auditing the Revenue Process 11-1
Nature of the Revenue Process 11-3
Understanding the Entity and Its Environment 11-4
Inherent Risks in the Revenue Process 11-9
Control Activities for Credit Sales 11-12
Control Activities for Cash Receipts 11-18
Control Activities for Sales Adjustments and Revenue Process Disclosures 11-23
Tests of Controls in the Revenue Process and Audit Strategy 11-25
Substantive Tests for the Revenue Process 11-28
12 Auditing the Purchasing and Payroll Processes 12-1
Nature of Purchase Transactions and Balances 12-3
Understanding the Entity and Its Environment 12-4
Inherent Risks in the Purchasing Process 12-8
Control Activities for Purchases 12-11
Control Activities for Cash Disbursements 12-18
Evaluated Receipt Settlement (ERS) 12-21
Control Activities for Purchase Adjustments and Purchasing Process Disclosures 12-24
Tests of Controls in the Purchasing Process and Audit Strategy 12-26
Substantive Procedures for the Purchasing Process 12-28
Appendix 12A: Auditing Payroll 12-34
Explain the Nature of Payroll Transactions and Balances 12-34
Understanding the Entity and Its Environment 12-35
Inherent Risks Related to Payroll 12-37
Control Activities for Payroll 12-38
Tests of Controls in the Payroll Process and Audit Strategy 12-42
Substantive Tests for the Payroll Process 12-45
13 Auditing Various Balance Sheet Accounts (and Related Income Statement Accounts) 13-1
Auditing Cash and Cash Equivalents 13-3
Auditing Inventory on the Balance Sheet 13-11
Auditing Property, Plant, and Equipment 13-28
Auditing Financing Activities 13-37
14 Completing the Audit 14-1
Audit Procedures for Loss Contingencies 14-3
Subsequent Events 14-7
Engagement Wrap-Up 14-10
Going Concern 14-18
Management Representation and Communication with Those Charged with Governance 14-21
15 Reporting on the Audit 15-1
Standard Unmodified/Unqualified Audit Report 15-3
Additional Paragraph for the Standard Unmodified Report 15-7
Opinion Based in Part on the Report of Another Auditor 15-12
Modifying the Audit Opinion 15-14
Subsequently Discovered Facts 15-22
Reports on the Audit of ICFR 15-26
Compilation and Review Engagements 15-30
Appendix A Cloud 9 Inc. Audit A-1
Cloud 9 Inc. Company Background A-1
Transcript of Meeting with David Collier A-4
Glossary G-1
Index I-1
