Auditing and Assurance Services 15th Edition Arens Solutions Manual

Auditing and Assurance Services 15th Edition Arens Solutions Manual

Product details:

• ISBN-10 ‏ : ‎ 0133125637
• ISBN-13 ‏ : ‎ 978-0133125634
• Author: Chris Hogan

Directed primarily toward Accounting college/university majors, this text also provides practical content to current and aspiring industry professionals.

Auditing and Assurance Services: An Integrated Approach presents an integrated concepts approach that shows readers the auditing process from start to finish. This text prepares readers for real-world audit decision making by using illustrative examples of key audit decisions, with an emphasis on audit planning, risk assessment processes and collecting and evaluating evidence in response to risks.

Table contents:

PART I INTRODUCTION TO FINANCIAL
STATEMENT AUDITING 1
1 An Introduction to Assurance and Financial
Statement Auditing 2
The Study of Auditing 5
The Demand for Auditing and Assurance 6
Principals and Agents 6
The Role of Auditing 7
An Assurance Analogy: The Case of the House Inspector 9
Seller Assertions, Information Asymmetry, and
Inspector Characteristics 9
Desired Characteristics of the House Inspection Service 9
Relating the House Inspection Analogy to Financial
Statement Auditing 10
Management Assertions and Financial Statements 11
Auditing, Attest, and Assurance Services Defined 12
Auditing 13
Attestation 14
Assurance 14
Fundamental Concepts in Conducting a Financial Statement Audit 15
Audit Risk 16
Materiality 17
Evidence Regarding Management Assertions 18
Sampling: Inferences Based on Limited Observations 18
The Audit Process 19
Overview of the Financial Statement Auditing Process 19
Major Phases of the Audit 21
Conclusion 25
Key Terms 26
Review Questions 27
Multiple-Choice Questions 28
Problems 29
Discussion Case 30
Internet Assignments 31
2 The Financial Statement Auditing Environment 34
A Time of Challenge and Change for Auditors 36
Problems and Warning Signs 36
An Explosion of Scandals 36
Government Regulation 37
Back to Basics 38
The Context of Financial Statement Auditing 38
Business as the Primary Context of Auditing 38
A Model of Business 39
Corporate Governance 39
Objectives, Strategies, Processes, Controls, Transactions, and Reports 
39
A Model of Business Processes: Five Components 40
The Financing Process 40
The Purchasing Process 40
The Human Resource Management Process 40
The Inventory Management Process 40
The Revenue Process 40
Relating the Process Components to the Business Model 42
Management Assertions 42
Auditing Standards 43
The Roles of the ASB and the PCAOB 43
The 10 Generally Accepted Auditing Standards 44
Three General Standards 44
Three Standards of Field Work 45
Four Standards of Reporting 46
Statements on Auditing Standards?Interpretations of GAAS 46
Ethics, Independence, and the Code of Professional Conduct 47
The Auditor?s Responsibility for Errors, Fraud, and Illegal Acts 48
Audit Reporting 49
Generally Accepted Accounting Principles as Audit Criteria 50
The Auditor?s Standard Unqualified Audit Report 50
Reasons for Departures from an Unqualified Audit Report 52
Other Types of Audit Reports 52
Public Accounting Firms 53
Organization and Composition 53
Types of Audit, Attest, and Assurance Services 54
Audit Services 55
Attest Services 56
Assurance Services 57
Other Nonaudit Services 58
Types of Auditors 59
External Auditors 59
Internal Auditors 61
Government Auditors 61
Forensic Auditors 62
Organizations That Affect the Public Accounting
Profession 62
American Institute of Certified Public Accountants (AICPA) 64
Securities and Exchange Commission (SEC) 65
Public Company Accounting Oversight Board (PCAOB) 65
Financial Accounting Standards Board (FASB) 66
Conclusion 66
Key Terms 67
Review Questions 68
Multiple-Choice Questions 69
Problems 72
Discussion Case 74
Internet Assignments 75
PART II BASIC AUDITING CONCEPTS: RISK 
ASSESSMENT,
MATERIALITY, AND EVIDENCE 77
3 Risk Assessment and Materiality 78
Audit Risk 80
The Audit Risk Model 80
Use of the Audit Risk Model 82
The Auditor?s Risk Assessment Process 84
Management?s Strategies, Objectives, and Business Risks 84
Business Risks and the Risk of Material Misstatement 84
Understanding the Entity and Its Environment 85
Auditor?s Risk Assessment Procedures 90
Identifying Business Risks 92
Assessing the Risk of Material Misstatement Due
to Error or Fraud 92
Types of Misstatements 93
Conditions Indicative of Material Misstatement Due to Fraud 94
The Fraud Risk Identification Process 95
Discussion among the Audit Team 96
Inquiries of Management and Others 97
Fraud Risk Factors 97
The Auditor?s Response to the Results of the Risk Assessments 102
Evaluation of Audit Test Results 104
Documentation of the Auditor?s Risk Assessment and Response 105
Communications about Fraud to Management,
the Audit Committee, and Others 107
Limitations of the Audit Risk Model 109
Materiality 109
Steps in Applying Materiality 110
An Example 116
Key Terms 118
Review Questions 119
Multiple-Choice Questions 119
Problems 121
Discussion Cases 123
Internet Assignments 125
4 Audit Evidence and Audit Documentation 130
The Relationship of Audit Evidence to the Audit Report 132
Management Assertions 133
Assertions about Classes of Transactions and Events
during the Period 134
Assertions about Account Balances at the Period End 134
Assertions about Presentation and Disclosure 135
Audit Procedures 136
The Concepts of Audit Evidence 137
The Nature of Audit Evidence 138
The Competence of Audit Evidence 138
The Sufficiency of Audit Evidence 140
The Evaluation of Audit Evidence 140
Audit Procedures for Obtaining Audit Evidence 141
Inspection of Records or Documents 141
Inspection of Tangible Assets 142
Reperformance 143
Recalculation 143
Scanning 143
Inquiry 143
Observation 144
Confirmation 145
Analytical Procedures 145
Reliability of the Types of Evidence 146
Audit Documentation 147
Objectives of Audit Documentation 147
Content of Audit Documentation 147
Examples of Audit Documentation 149
Format of Audit Documentation 151
Organization of Audit Documentation 152
Ownership of Audit Documentation 154
Audit Document Archiving and Retention 154
Key Terms 155
Review Questions 157
Multiple-Choice Questions 157
Problems 159
Discussion Cases 161
Internet Assignments 163
PART III PLANNING THE AUDIT, AND UNDERSTANDING
AND AUDITING INTERNAL CONTROL 165
5 Audit Planning and Types of Audit Tests 166
Client Acceptance and Continuance 168
Prospective Client Acceptance 168
Continuing Client Retention 170
Establishing the Terms of the Engagement 170
The Engagement Letter 170
Internal Auditors 170
The Audit Committee 175
Preplanning 176
Determine the Audit Engagement Team Requirements 176
Assess Independence 176
Assess Risks and Establish Materiality 177
Planning the Audit 177
Assess a Preliminary Level for Control Risk by Account
and Assertion 178
Assess the Possibility of Illegal Acts 178
Identify Related Parties 179
Conduct Preliminary Analytical Procedures 180
Develop an Overall Audit Strategy and Prepare Audit Programs 181
Consider Additional Value-Added Services 182
Types of Audit Tests 183
Risk Assessment Procedures 183
Tests of Controls 183
Substantive Procedures 184
Dual Purpose Tests 185
Substantive Analytical Procedures 185
Analytical Procedures 185
Purposes of Analytical Procedures 185
Substantive Analytical Procedures Decision Process 186
Final Analytical Procedures 198
The Audit Testing Hierarchy 199
An ?Assurance Bucket? Analogy 201
Advanced Module: Selected Financial Ratios 203
Selected Financial Ratios Useful as Analytical
Procedures 203
Short-Term Liquidity Ratios 203
Activity Ratios 204
Profitability Ratios 205
Coverage Ratios 206
Key Terms 206
Review Questions 207
Multiple-Choice Questions 208
Problems 211
Discussion Cases 215
Internet Assignments 217
6 Internal Control in a Financial Statement Audit 218
Introduction 220
Internal Control 220
Definition of Internal Control 220
Controls Relevant to the Audit 220
Components of Internal Control 221
The Effect of Information Technology on Internal Control 222
Planning an Audit Strategy 223
Substantive Strategy 226
Reliance Strategy 226
Obtain an Understanding of Internal Control 228
Overview 228
Control Environment 229
The Entity?s Risk Assessment Process 232
Information Systems and Communication 234
Control Procedures 235
Monitoring of Controls 236
The Effect of Entity Size on Internal Control 237
The Limitations of an Entity?s Internal Control 237
Documenting the Understanding of Internal Control 239
Assessing Control Risk 240
Identifying Specific Controls That Will Be Relied Upon 241
Performing Tests of Controls 241
Concluding on the Achieved Level of Control Risk 242
Documenting the Assessed Level of Control Risk 242
An Example 242
Substantive Procedures 243
Timing of Audit Procedures 244
Interim Tests of Controls 245
Interim Substantive Procedures 245
Auditing Accounting Applications Processed by Service Organizations 246
Communication of Internal Control?Related Matters 247
Advanced Module 1: Types of Controls in an IT Environment 249
General Controls 249
Application Controls 251
Advanced Module 2: Flowcharting Techniques 254
Symbols 254
Organization and Flow 255
Key Terms 256
Review Questions 257
Multiple-Choice Questions 257
Problems 260
Discussion Case 262
Internet Assignments 263
7 Auditing Internal Control over Financial Reporting in
Conjunction with an Audit of Financial Statements 264
Management Responsibilities under Section 404 266
Auditor Responsibilities under Section 404 266
Internal Control over Financial Reporting Defined 267
Internal Control Deficiencies Defined 267
Control Deficiency 267
Significant Deficiency 268
Material Weakness 268
Likelihood and Magnitude 268
Management?s Assessment Process 269
Management?s Documentation 271
Framework Used by Management to Conduct Its Assessment 272
Performing an Audit of Internal Control over Financial Reporting 272
The Audit Process 272
Planning the Engagement 273
Evaluating Management?s Assessment Process 273
Obtaining an Understanding of Internal Control
over Financial Reporting 274
Evaluting Design Effectiveness of Controls 279
Testing and Evaluating Operating Effectiveness of Controls 279
Forming an Opinion on the Effectiveness of Internal Control
over Financial Reporting 284
Written Representations 286
Auditor Documentation Requirements 286
Reporting on Internal Control over Financial Reporting 287
Management?s Report 287
The Auditor?s Report 288
Additional Required Communications in an Audit
of Internal Control over Financial Reporting 294
Integrating the Audits of Internal Control and Financial
Statements 295
Effect of the Audit of Internal Control on the Financial
Statement Audit 295
Effect of the Financial Statement Audit on the Audit
of Internal Control 296
Advanced Module 1: Special Considerations for an Audit
of Internal Control 297
Using the Work of Others 297
Testing Internal Control When a Company Has Multiple
Locations or Business Units 299
Use of Service Organizations 301
Safeguarding of Assets 303
Advanced Module 2: Computer-Assisted Audit Techniques 303
Generalized Audit Software 304
Custom Audit Software 305
Test Data 305
Key Terms 306
Review Questions 307
Multiple-Choice Questions 308
Problems 310
Internet Assignments 315
PART IV STATISTICAL AND NONSTATISTICAL SAMPLING
TOOLS FOR AUDITING 317
8 Audit Sampling: An Overview and Application
to Tests of Controls 318
Introduction 320
Definitions and Key Concepts 322
Audit Sampling 322
Sampling Risk 322
Confidence Level 323
Tolerable and Expected Error 324
Audit Evidence Choices That Do and Do Not Involve Sampling 324
Types of Audit Sampling 326
Nonstatistical versus Statistical Sampling 326
Types of Statistical Sampling Techniques 327
Attribute Sampling Applied to Tests of Controls 328
Planning 328
Population Size 334
Performance 334
Sample Selection 334
Evaluation 337
An Example of an Attribute-Sampling Plan 339
Determine the Test Objective (Step 1) 339
Define the Population Characteristics (Step 2) 339
Determine the Sample Size (Step 3) 340
Select Sample Items (Step 4) 342
Perform the Audit Procedures (Step 5) 343
Calculate the Sample Deviation and the Computed Upper Deviation
Rates (Step 6) 346
Draw Final Conclusions (Step 7) 347
Nonstatistical Sampling for Tests of Controls 349
Determining the Sample Size 349
Selecting the Sample Items 350
Calculating the Computed Upper Deviation Rate 350
Advanced Module: Considering the Effect of the Population Size 351
Key Terms 352
Review Questions 353
Multiple-Choice Questions 353
Problems 356
Discussion Case 359
9 Audit Sampling: An Application to Substantive Tests
of Account Balances 362
Sampling for Substantive Tests of Details of Account Balances 364
Monetary-Unit Sampling 365
Advantages 366
Disadvantages 366
Applying Monetary-Unit Sampling 367
Planning 367
Computing Sample Sizes Using the Attribute-Sampling Tables 371
Computing Sample Sizes Using ACL 371
Performance 372
Evaluation 374
An Extended Example 374
Basic Precision 375
Misstatements Detected 376
Compute the Upper Misstatement Limit 377
Computing Projected Upper Misstatement Using ACL 379
Nonstatistical Sampling for Tests of Account Balances 384
Identifying Individually Significant Items 384
Determining the Sample Size 385
Selecting Sample Items 385
Calculating the Sample Results 386
An Example of Nonstatistical Sampling 387
The Rise and Fall of Statistical Audit Sampling 388
Advanced Module: Classical Variables Sampling 389
Advantages 392
Disadvantages 392
Applying Classical Variables Sampling 392
Key Terms 397
Review Questions 398
Multiple-Choice Questions 398
Problems 400
Discussion Cases 404
PART V AUDITING BUSINESS PROCESSES 407
10 Auditing the Revenue Process 408
Revenue Recognition 411
Overview of the Revenue Process 412
Types of Transactions and Financial Statement Accounts Affected 413
Types of Documents and Records 416
The Major Functions 420
Key Segregation of Duties 422
Inherent Risk Assessment 423
Industry-Related Factors 423
The Complexity and Contentiousness of Revenue Recognition Issues 424
The Difficulty of Auditing Transactions and Account Balances 424
Misstatements Detected in Prior Audits 424
Control Risk Assessment 424
Understanding and Documenting Internal Control 425
Planning and Performing Tests of Controls 426
Setting and Documenting the Control Risk 427
Control Procedures and Tests of Controls?Revenue Transactions 427
Occurrence of Revenue Transactions 429
Completeness of Revenue Transactions 430
Authorization of Revenue Transactions 431
Accuracy of Revenue Transactions 431
Cutoff of Revenue Transactions 431
Classification of Revenue Transactions 432
Control Procedures and Tests of Controls?Cash Receipts Transactions 432
Occurrence of Cash Receipts Transactions 432
Completeness of Cash Receipts Transactions 432
Authorization of Cash Discounts 434
Accuracy of Cash Transactions 434
Cutoff of Cash Receipts Transactions 435
Classification of Cash Receipts 435
Control Procedures and Tests of Controls?
Sales Returns and Allowances Transactions 435
Relating the Assessed Level of Control Risk to
Substantive Procedures 436
Auditing Accounts Receivable and Related Accounts 436
Substantive Analytical Procedures 437
Tests of Details of Classes of Transactions,
Account Balances, and Disclosures 439
Completeness 439
Cutoff 442
Existence 444
Rights and Obligations 444
Valuation and Allocation 444
Classification and Understandability 445
Other Presentation and Disclosure Assertions 445
The Confirmation Process?Accounts Receivable 446
Types of Confirmations 448
Timing 449
Confirmation Procedures 450
Alternative Procedures 451
Auditing Other Receivables 452
Evaluating the Audit Findings?Accounts Receivable
and Related Accounts 452
Key Terms 453
Review Questions 454
Multiple-Choice Questions 454
Problems 457
Discussion Cases 462
Internet Assignments 463
11 Auditing the Purchasing Process 466
Expense and Liability Recognition 468
Overview of the Purchasing Process 468
Types of Transactions and Financial Statement Accounts Affected 469
Types of Documents and Records 471
The Major Functions 473
The Key Segregation of Duties 475
Inherent Risk Assessment 476
Industry-Related Factors 476
Misstatements Detected in Prior Audits 477
Control Risk Assessment 477
Understanding and Documenting Internal Control 477
Planning and Performing Tests of Controls 479
Setting and Documenting Control Risk 479
Control Procedures and Tests of Controls?
Purchase Transactions 479
Occurrence of Purchase Transactions 480
Completeness of Purchase Transactions 480
Authorization of Purchase Transactions 482
Accuracy of Purchase Transactions 483
Cutoff of Purchase Transactions 483
Classification of Purchase Transactions 483
Control Procedures and Tests of Controls?Cash Disbursement
Transactions 484
Occurrence of Cash Disbursement Transactions 484
Completeness of Cash Disbursement Transactions 484
Authorization of Cash Disbursement Transactions 484
Accuracy of Cash Disbursement Transactions 486
Cutoff of Cash Disbursement Transactions 486
Classification of Cash Disbursement Transactions 486
Control Procedures and Tests of Controls?Purchase
Return Transactions 487
Relating the Assessed Level of Control Risk
to Substantive Procedures 487
Auditing Accounts Payable and Accrued Expenses 488
Substantive Analytical Procedures 489
Tests of Details of Classes of Transactions, Account
Balances, and Disclosures 489
Completeness 489
Existence 492
Cutoff 492
Rights and Obligations 493
Valuation 493
Classification and Understandability 493
Other Presentation Disclosure Assertions 494
Accounts Payable Confirmations 494
Evaluating the Audit Findings?Accounts Payable
and Related Accounts 496
Key Terms 497
Review Questions 497
Multiple-Choice Questions 498
Problems 500
Discussion Case 503
Internet Assignments 504
12 Auditing the Human Resource Management Process 506
Overview of the Human Resource Management Process 508
Types of Transactions and Financial Statement
Accounts Affected 508
Types of Documents and Records 509
The Major Functions 511
The Key Segregation of Duties 512
Inherent Risk Assessment 513
Control Risk Assessment 514
Understanding and Documenting Internal Control 515
Planning and Performing Tests of Controls 515
Setting and Documenting the Control Risk 516
Control Procedures and Tests of Controls?Payroll Transactions 516
Occurrence of Payroll Transactions 516
Authorization of Payroll Transactions 516
Accuracy of Payroll Transactions 518
Classification of Payroll Transactions 518
Relating the Assessed Level of Control Risk
to Substantive Procedures 519
Auditing Payroll-Related Accounts 519
Substantive Analytical Procedures 520
Tests of Details of Classes of Transactions,
Account Balances, and Disclosures 520
Payroll Expense Accounts 522
Accrued Payroll Liabilities 522
Evaluating the Audit Findings?Payroll-Related Accounts 525
Key Terms 525
Review Questions 526
Multiple-Choice Questions 527
Problems 528
Discussion Cases 533
Internet Assignment 534
13 Auditing the Inventory Management Process 536
Overview of the Inventory Management Process 538
Types of Documents and Records 538
The Major Functions 541
The Key Segregation of Duties 543
Inherent Risk Assessment 543
Industry-Related Factors 544
Engagement and Operating Characteristics 544
Control Risk Assessment 546
Understanding and Documenting Internal Control 546
Planning and Performing Tests of Controls 547
Setting and Documenting the Control Risk 547
Control Procedures and Tests of Controls?Inventory Transactions 547
Occurrence of Inventory Transactions 547
Completeness of Inventory Transactions 549
Authorization of Inventory Transactions 549
Accuracy of Inventory Transactions 549
Classification of Inventory Transactions 550
Relating the Assessed Level of Control Risk to Substantive Procedures 
550
Auditing Inventory 551
Substantive Analytical Procedures 551
Auditing Standard Costs 552
Materials 552
Labor 552
Overhead 552
Observing Physical Inventory 553
Tests of Details of Classes of Transactions,
Account Balances, and Disclosures 554
Accuracy 554
Cutoff 556
Existence 556
Completeness 556
Rights and Obligations 556
Valuation and Allocation 557
Classification and Understandability 557
Other Presentation and Disclosure Assertions 557
Evaluating the Audit Findings?Inventory 558
Key Terms 559
Review Questions 559
Multiple-Choice Questions 560
Problems 562
Discussion Case 567
Internet Assignments 567
14 Auditing Financing Process: Prepaid Expenses and
Property, Plant, and Equipment 568
Auditing Prepaid Expenses 570
Inherent Risk Assessment?Prepaid Expenses 570
Control Risk Assessment?Prepaid Expenses 571
Substantive Procedures?Prepaid Insurance 571
Substantive Analytical Procedures 571
Tests of Details of the Prepaid Insurance Account 571
Auditing the Property Management Process 573
Types of Transactions 574
Overview of the Property Management Process 575
Inherent Risk Assessment?Property Management Process 575
Complex Accounting Issues 575
Difficult-to-Audit Transactions 575
Misstatements Detected in Prior Audits 577
Control Risk Assessment?Property Management Process 577
Occurrence and Authorization 577
Completeness 578
Segregation of Duties 579
Substantive Procedures?Property, Plant, and Equipment 579
Substantive Analytical Procedures?Property, Plant,
and Equipment 579
Tests of Details of Transactions, Account Balances,
and Disclosures?Property, Plant, and Equipment 580
Completeness 580
Cutoff 581
Classification 581
Existence 581
Rights and Obligations 583
Valuation and Allocation 583
Disclosure Issues 583
Evaluating the Audit Findings?Property, Plant, and
Equipment 584
Key Terms 584
Review Questions 585
Multiple-Choice Questions 585
Problems 588
Discussion Case 590
Internet Assignments 591
15 Auditing Financing Process: Long-Term Liabilities,
Stockholders? Equity, and Income Statement Accounts 592
Auditing Long-Term Debt 594
Control Risk Assessment?Long-Term Debt 595
Assertions and Related Control Procedures 595
Substantive Procedures of Long-Term Debt 596
Auditing Stockholders? Equity 599
Control Risk Assessment?Stockholders? Equity 599
Assertions and Related Control Procedures 600
Segregation of Duties 601
Auditing Capital-Stock Accounts 601
Occurrence and Completeness 601
Valuation 601
Completeness of Disclosures 602
Auditing Dividends 602
Auditing Retained Earnings 602
Auditing Income Statement Accounts 603
Assessing Control Risk for Business Processes 603
Direct Tests of Balance Sheet Accounts 604
Substantive Analytical Procedures 604
Tests of Selected Account Balances 605
Key Terms 606
Review Questions 606
Multiple-Choice Questions 607
Problems 608
Discussion Case 610
Internet Assignment 612
16 Auditing Financing Process: Cash and Investments 614
Cash and the Effect of Other Business Processes 616
Types of Bank Accounts 617
General Cash Account 617
Imprest Cash Accounts 617
Branch Accounts 618
Substantive Analytical Procedures?Cash 618
Substantive Tests of Details of Transactions and Balances 618
The Effects of Controls 618
Balance-Related Assertions 619
Auditing the General Cash Account 620
Fraud-Related Audit Procedures 624
Auditing a Payroll or Branch Imprest Account 627
Auditing a Petty Cash Fund 627
Disclosure Issues for Cash 628
Investments 630
Control Risk Assessment?Investments 630
Assertions and Related Control Procedures 630
Segregation of Duties 632
Substantive Procedures for Testing Investments 632
Existence 633
Valuation and Allocation 634
Disclosure Assertions 634
Key Terms 635
Review Questions 635
Multiple-Choice Questions 636
Problems 638
Internet Assignment 643
PART VI COMPLETING THE AUDIT AND REPORTING
RESPONSIBILITIES 645
17 Completing the Engagement 646
Review for Contingent Liabilities 648
Audit Procedures for Identifying Contingent Liabilities 649
Legal Letters 650
Commitments 652
Review for Subsequent Events for Audit of Financial
Statements 653
Dual Dating 654
Audit Procedures for Subsequent Events 655
Review of Subsequent Events for Audit of Internal
Control over Financial Reporting 655
Final Evidential Evaluation Processes 656
Final Analytical Procedures 656
Going-Concern Considerations 657
Representation Letter 659
Working Paper Review 660
Evaluating Financial Audit Results 660
Evaluating Financial Statement Presentation and Disclosure 664
Independent Partner Review 664
Archiving and Retention 664
Communications with the Audit Committee and Management 665
Audit of Internal Control over Financial Reporting 665
Subsequent Discovery of Facts Existing at the Date
of the Auditor?s Report 666
Key Terms 667
Review Questions 668
Multiple-Choice Questions 669
Problems 671
Discussion Cases 676
Internet Assignments 679
18 Reports on Audited Financial Statements and on
Internal Control over Financial Reporting 680
Reporting on the Financial Statement Audit: The Standard
Unqualified Audit Report 682
Explanatory Language Added to the Standard Unqualified Financial
Statement Audit Report 683
Opinion Based in Part on the Report of Another Auditor 683
Going Concern 685
Auditor Agrees with a Departure from Promulgated
Accounting Principles 686
Lack of Consistency 686
Emphasis of a Matter 687
Departures from an Unqualified Financial Statement
Audit Report 687
Conditions for Departure 688
Other Types of Financial Statement Audit Reports 689
The Effect of Materiality on Financial Statement Audit
Reporting 689
Discussion of Conditions Requiring Other Types
of Financial Statement Audit Reports 690
Scope Limitation 690
Statements Not in Conformity with GAAP 691
Auditor Not Independent 693
Special Reporting Issues 694
Reports on Comparative Financial Statements 694
Different Reports on Comparative Financial Statements 694
A Change in Report on the Prior-Period Financial
Statements 695
Report by a Predecessor Auditor 696
Other Information in Documents Containing
Audited Financial Statements 697
Special Reports Relating to Financial Statements 697
Financial Statements Prepared on a Comprehensive Basis of
Accounting Other Than GAAP 698
Specified Elements, Accounts, or Items of a Financial
Statement 699
Compliance Reports Related to Audited Financial Statements 701
Reporting on the Audit of Internal Control over Financial
Reporting 702
The Auditor?s Opinion on Management?s Assessment 702
The Auditor?s Opinion on the Effectiveness of Internal Control
over Financial Reporting 703
Unqualified Report 704
Modifications to the Unqualified Report on the Effectiveness
of Internal Control 704
Key Terms 710
Review Questions 710
Multiple-Choice Questions 711
Problems 715
Discussion Cases 719
PART VII PROFESSIONAL RESPONSIBILITIES 725
19 Professional Conduct, Independence,
and Quality Control 726
Ethics and Professional Conduct 728
Ethics and Professionalism Defined 728
Theories of Ethical Behavior 729
Example?An Ethical Dilemma 730
Development of Moral Judgment 733
An Overview of Ethics and Professionalism in Public
Accounting 734
A Tale of Two Companies 734
Standards for Auditor Professionalism 735
The AICPA Code of Professional Conduct:
A Comprehensive Framework for Auditors 737
Principles of Professional Conduct 737
Rules of Conduct 739
Independence, Integrity, and Objectivity 742
Independence 742
Integrity and Objectivity 756
General Standards and Accounting Principles 757
General Standards and Compliance with Standards 757
Accounting Principles 758
Responsibilities to Clients 759
Confidential Client Information 759
Contingent Fees 760
Other Responsibilities and Practices 760
Acts Discreditable 760
Advertising and Other Forms of Solicitation 761
Commissions and Referral Fees 762
Form of Organization and Name 762
Disciplinary Actions 763
Don?t Lose Sight of the Forest for the Trees 763
Quality Control Standards 763
System of Quality Control 764
Elements of Quality Control 764
Monitoring Quality Control 765
PCAOB Inspections of Registered Public Accounting
Firms 766
Key Terms 767
Review Questions 768
Multiple-Choice Questions 769
Problems 772
Discussion Cases 775
Internet Assignments 776
20 Legal Liability 778
Introduction 780
Historical Perspective 780
Overview 780
Common Law?Clients 782
Breach of Contract 783
Negligence 784
Fraud 786
Common Law?Third Parties 786
Negligence 787
Example 1 790
Example 2 790
Example 3 791
Fraud 792
Damages under Common Law 793
Statutory Liability 794
Securities Act of 1933 794
Securities Exchange Act of 1934 796
Private Securities Litigation Reform Act of 1995 and the Securities
Litigation Uniform Standards Act of 1998 799
Sarbanes-Oxley Act of 2002 800
SEC and PCAOB Sanctions 801
Foreign Corrupt Practices Act 802
Racketeer Influenced and Corrupt Organizations Act 802
Criminal Liability 803
Approaches to Minimizing Legal Liability 805
At the Profession Level 805
At the Firm Level 806
Advanced Module: A View of an Accounting Fraud and Litigation from
inside the Courtroom 807
What the Jury Heard in the Phar-Mor Case 807
What Can Be Learned? 814
Key Terms 814
Review Questions 815
Multiple-Choice Questions 816
Problems 819
Discussion Cases 823
PART VIII ASSURANCE, ATTESTATION, AND
INTERNAL AUDITING SERVICES 825
21 Assurance, Attestation, and Internal Auditing Services 
826
Assurance Services 828
Types of Assurance Services 829
Attest Engagements 830
Types of Attest Engagements 831
Attestation Standards 832
General Standards 832
Standards of Field Work 834
Standards of Reporting 834
Reporting on an Entity?s Internal Control over Financial
Reporting 834
Conditions for Conducting an Engagement 834
Examination Engagement 835
Reporting on Management?s Assertion about Internal
Control 836
Financial Forecasts and Projections 836
Types of Prospective Financial Statements 836
Examination of Prospective Financial Statements 837
Agreed-Upon Procedures for Prospective Financial Statements 839
Compilation of Prospective Financial Statements 839
Accounting and Review Services 841
Compilation of Financial Statements 842
Compilation with Full Disclosure 842
Compilation That Omits Substantially All Disclosures 843
Compilation When the Accountant Is Not Independent 843
Review of Financial Statements 843
Review Report 844
Conditions That May Result in Modification of a Compilation
or Review Report 845
Internal Auditing 846
Internal Auditing Defined 846
The Institute of Internal Auditors 846
IIA Standards 847
Code of Ethics 847
Internal Auditors? Roles 847
Internal Audit Product Offerings 852
Interactions between Internal and External Auditors 853
Advanced Module: Examples of Assurance Services?Trust Services
and PrimePlus Services 854
Trust Services 854
CPA WebTrust 855
SysTrust 857
CPA PrimePlus Services 857
Key Terms 860
Review Questions 861
Multiple-Choice Questions 862
Problems 864
Discussion Case 869
Internet Assignments 869
Index 871

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