Tài liệu Auditing a risk based approach to conducting a quality audit 9th by johnstone

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NINTH EDITION

AUDITING

A RISK-BASED APPROACH TO CONDUCTING A QUALITY AUDIT

Karla M. Johnstone
University of Wisconsin—Madison

Audrey A. Gramling
Bellarmine University

Larry E. Rittenberg
University of Wisconsin—Madison

Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States

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Auditing: A Risk-Based Approach to
Conducting a Quality Audit, Ninth Edition
Karla M. Johnstone, Audrey A. Gramling, and
Larry E. Rittenberg
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Dedication
We dedicate this book to our families who encourage and support
us through many hours of development, to our students who
inspire us to always improve, to our mentors who guide us, to our
professional friends who continue to educate us, and to our

colleagues who challenge us.
KARLA M. JOHNSTONE
AUDREY A. GRAMLING
LARRY E. RITTENBERG

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


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BRIEF CONTENTS
Preface, xxiii
About the Authors, xxxiii

1
CHAPTER 2
CHAPTER

CHAPTER

3

CHAPTER

4

CHAPTER

5

6
CHAPTER 7

CHAPTER

8

CHAPTER

9
C H A P T E R 10
C H A P T E R 11
CHAPTER

CHAPTER

12

CHAPTER

13

14
C H A P T E R 15
CHAPTER

Auditing: Integral to the Economy, 2

The Risk of Fraud and Mechanisms to Address Fraud:
Regulation, Corporate Governance, and Audit
Quality, 32
Internal Control over Financial Reporting: Management’s
Responsibilities and Importance to the External
Auditors, 72
Professional Liability and the Need for Quality Auditor
Judgments and Ethical Decisions, 114
Professional Auditing Standards and the Audit Opinion
Formulation Process, 156
A Framework for Audit Evidence, 212
Planning the Audit: Identifying and Responding
to the Risks of Material Misstatement, 266
Specialized Audit Tools: Sampling and Generalized Audit
Software, 316
Auditing the Revenue Cycle, 366
Auditing Cash and Marketable Securities, 438
Auditing Inventory, Goods and Services, and Accounts
Payable: The Acquisition and Payment Cycle, 500
Auditing Long-Lived Assets: Acquisition, Use, Impairment,
and Disposal, 560
Auditing Debt Obligations and Stockholders’ Equity
Transactions, 594
Activities Required in Completing a Quality Audit, 620
Audit Reports on Financial Statements, 684

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

v

vi

Brief Contents

CHAPTER

16

CHAPTER

17

Advanced Topics Concerning Complex Auditing
Judgments, 726
Other Services Provided by Audit Firms, 790
ACL Appendix, 841
Case Index, 857
Index, 859

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CONTENTS

PREFACE, xxiii
ABOUT THE AUTHORS,

CHAPTER

xxxiii

1

Auditing: Integral to the Economy,

2

Overview of the External Auditing Profession,

3

Introduction to the External Auditing Profession, 3
External Auditing: A Special Function, 4
The Need for Unbiased Reporting and Independent Assurance, 6
Overall Objectives in Conducting an Audit, 7
Overview of the Audit Opinion Formulation Process, 8
Parties Involved in Preparing and Auditing Financial Statements, 9
Providers of External Auditing Services, 9
Skills and Knowledge Needed to Enter the External Auditing
Profession, 10
Organizations Affecting the External Auditing Profession, 11

Audit Quality,

14

Audit Firm Culture, 15

Skills and Qualities of the Engagement Team, 15
Effectiveness of the Audit Process, 16
Reliability and Usefulness of Audit Reporting, 16
Factors Outside the Control of Auditors That Affect Audit Quality,

Achieving Audit Quality and Minimizing Lawsuits,
Auditor Independence Requirements,
Review Programs, 19
Engagement Letters, 20

16

16

17

vii
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viii

Contents

Client Acceptance/Continuance Decisions,
Audit Firm Limitations, 21
Audit Documentation, 21
Summary and Next Steps, 21
Significant Terms, 21

True-False Questions, 23
Multiple-Choice Questions, 24
Review and Short Case Questions, 26
Contemporary and Historical Cases, 28
Application Activities, 30
Academic Research Case, 31

CHAPTER

20

2

The Risk of Fraud and Mechanisms to Address Fraud:
Regulation, Corporate Governance, and Audit
Quality, 32
Fraud Defined,

34

Misstatements Arising From Misappropriation of Assets, 34
Misstatements Arising from Fraudulent Financial Reporting, 34

The Fraud Triangle,

35

Incentives or Pressures to Commit Fraud,
Opportunities to Commit Fraud, 37
Rationalizing the Fraud, 38

37

Recent History of Fraudulent Financial Reporting,

38

Examples of Recent Frauds and Implications for External Auditors,
The Third COSO Report, 41
The Enron Fraud: A Key Driver of Regulatory Change, 42

38

An Overview of the Auditor’s Fraud-Related
Responsibilities and Users’ Expectations, 44
The Sarbanes–Oxley Act of 2002 as a Regulatory
Response to Fraud, 45
The Post Sarbanes-Oxley World: A Time of Improved
Corporate Governance, 49
What Is Corporate Governance? 49
Principles of Effective Corporate Governance,
Responsibilities of Audit Committees, 53
Summary and Next Steps, 53
Significant Terms, 54
True-False Questions, 54
Multiple-Choice Questions, 55
Review and Short Case Questions, 58

50

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Contents

Contemporary and Historical Cases,
Application Activities, 67
Academic Research Cases,
Ford and Toyota,

CHAPTER

ix

63

69

70

3

Internal Control over Financial Reporting: Management’s
Responsibilities and Importance to the External
Auditors, 72
Importance of Internal Control Over Financial
Reporting, 74
Importance of Internal Control to the External Audit,

Defining Internal Control,

74

75

Components and Principles of Internal Control,
COSO
COSO
COSO
COSO
COSO

Component:
Component:
Component:
Component:
Component:

Control Environment, 78
Risk Assessment, 81
Control Activities, 83
Information and Communication,
Monitoring, 88

77

87

Management’s Responsibilities Related to Internal

Control Over Financial Reporting, 90
Documentation of Internal Control, 91
Reporting on Internal Control Over Financial Reporting, 91
Evaluating Internal Control Over Financial Reporting, 92
Summary and Next Steps, 97
Significant Terms, 97
True-False Questions, 99
Multiple-Choice Questions, 100
Review and Short Case Questions, 103
Contemporary and Historical Cases, 110
Application Activities, 111
Academic Research Cases, 112
Ford and Toyota, 113

CHAPTER

4

Professional Liability and the Need for Quality
Auditor Judgments and Ethical Decisions, 114
The Legal Environment and the Effects of Lawsuits
on Audit Firms, 116
Liability Doctrines,

116

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x

Contents

Class Action Lawsuits, 117
Contingent-Fee Compensation for Lawyers, 117
Audits Viewed as an Insurance Policy: The Expectations Gap, 117

Applicable Laws and Causes of Legal Action,

117

Laws from Which Auditor Liability Is Derived and
Causes of Legal Action, 117
Parties that May Bring Suit against Auditors, 118

Auditor Liability under Common Law
and Contract Law, 119
Common-Law Liability to Clients: Breach of Contract,
Common-Law Liability to Third Parties, 120

119

Auditor Liability under Statutory Law, 122
Securities Act of 1933, 123
Securities Exchange Act of 1934, 123
Summary of Auditor Liability to Third Parties under
Common and Statutory Law, 125

A Framework for Professional Decision Making,

125

Importance of Professional Skepticism in Making
Professional Judgments, 128

A Framework for Ethical Decision Making,
Resolving Ethical Dilemmas, 130
Applying the Ethical Decision Making Framework,

130

131

Professional Guidance on Decision Making,

134

IESBA’s Code of Ethics, 134
AICPA Code of Professional Conduct, 134
Summary and Next Steps, 139
Significant Terms, 139
True-False Questions, 142
Multiple-Choice Questions, 143
Review and Short Case Questions, 145
Contemporary and Historical Cases, 152
Application Activities, 153
Academic Research Cases, 154
Ford and Toyota, 155

CHAPTER

5

Professional Auditing Standards and the Audit Opinion
Formulation Process, 156
Professional Auditing Standards,

158

Auditing Standards Issued by the AICPA, 158
Auditing Standards Issued by the IAASB, 159

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Contents

Auditing Standards Issued by the PCAOB, 159
Comparison of the Auditing Standards, 159
Principles Underlying the Auditing Standards, 159

The Audit Opinion Formulation Process,

161

An Overview of the Phases in the Audit Opinion Formulation
Process, 162
Important Concepts Affecting the Audit Opinion Formulation

Process, 163
Phase I Making Client Acceptance and Continuance Decisions, 168
Phase II Performing Risk Assessment, 169
Phase III Obtaining Evidence about Internal Control Operating
Effectiveness, 175
Summary of Audit Decisions Prior to Determining Substantive
Procedures, 180
Phase IV Obtaining Substantive Evidence about Accounts,
Disclosures, and Assertions, 182
Phase V Completing the Audit and Making Reporting Decisions, 185

Audit Example: Assessing Control Design
Effectiveness, Implementation, and Operating
Effectiveness, 187
Management Assessment of Controls, 187
Auditor Assessment of Controls, 188
Summary and Next Steps, 189
Significant Terms, 189
True-False Questions, 191
Multiple-Choice Questions, 192
Review and Short Case Questions, 196
Contemporary and Historical Cases, 203
Application Activities, 204
Academic Research Cases, 205
Appendix, 206

CHAPTER

6

A Framework for Audit Evidence,

212

Obtaining Sufficient Appropriate Audit Evidence,
Appropriateness of Audit Evidence,

214

215

Relevance of Audit Evidence, 215
Reliability of Audit Evidence, 218

Type and Timing of Audit Procedures,
Type of Audit Procedures, 221
Timing of Procedures, 227
Performing Substantive Analytical Procedures,

221
228

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xi


xii

Contents

Sufficiency of Audit Evidence,
Sample Sizes,

233

235

Additional Evidence Considerations,

236

Evidence Needed for Auditing Management Estimates, 236
Using a Specialist/Expert to Assist with Obtaining Evidence, 237
Evidence Needed for Related-Party Transactions, 238

Documenting Audit Evidence,

239

Documenting Planning and Risk Assessment Procedures, 240
Documenting Audit Work Performed, 240
Documenting Significant Issues and Their Resolution, 241
Copies of Documents, 241
Auditor-Generated Memos, 242
Characteristics of Quality Audit Documentation, 242
Revisions and Retention of Audit Documentation, 243
Audit Programs, 243
Summary and Next Steps, 244

Significant Terms, 244
True-False Questions, 246
Multiple-Choice Questions, 247
Review and Short Case Questions, 251
Contemporary and Historical Cases, 255
Application Activities, 262
Academic Research Cases, 263
Ford and Toyota, 264
ACL, 264

CHAPTER

7

Planning the Audit: Identifying and Responding
to the Risks of Material Misstatement, 266
Assessing Materiality,

268

Materiality Guidance, 268
SEC Views on Materiality, 270
Changes in Materiality Judgments Throughout
the Audit Opinion Formulation Process, 270

Identifying and Assessing Risks of Material
Misstatement, 271
Assessing Factors Affecting Inherent Risk, 272
Assessing Factors Affecting Control Risk, 279
Analytical Procedures and Brainstorming Activities

to Assess the Risks of Material Misstatement, 282

Responding to Identified Risks of Material
Misstatement, 286
Determining Detection Risk and Audit Risk,

286

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Contents

Planning Audit Procedures to Respond to the Assessed Risks
of Material Misstatement, 289
Summary and Next Steps, 292
Significant Terms, 292
True-False Questions, 293
Multiple-Choice Questions, 294
Review and Short Case Questions, 297
Contemporary and Historical Cases, 305
Application Activities, 312
Academic Research Cases, 313
Ford and Toyota, 315

CHAPTER

8

Specialized Audit Tools: Sampling
and Generalized Audit Software, 316
Overview of Sampling and GAS as Tools
for Gathering Audit Evidence, 318
Objectives of Sampling and Risks Associated with
Sampling, 319
Nonsampling and Sampling Risks,

320

Nonstatistical and Statistical Sampling,
Attributes Sampling,

322

323

Steps in Attributes Sampling, 324
Nonstatistical Sampling Approach to Testing Controls,

334

Using Sampling to Gather Evidence about
Misstatements in Account Balances
and Associated Assertions, 335
Steps in Sampling Account Balances and Associated Assertions, 335
Nonstatistical Sampling for Substantive Tests of Account
Balances and Associated Assertions, 339
Statistical Sampling for Substantive Tests of Account Balances
and Associated Assertions: Monetary Unit Sampling (MUS), 340

Using Generalized Audit Software to Obtain
Evidence, 347
Tasks Performed by GAS, 348
Benefits of using GAS, 350
Summary and Next Steps, 351
Significant Terms, 351
True-False Questions, 354
Multiple-Choice Questions, 355
Review and Short Case Questions, 358
Academic Research Case, 365
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xiii


xiv

Contents

CHAPTER

9

Auditing the Revenue Cycle,

366

Significant Accounts, Disclosures, and Relevant

Assertions, 368
Processing Revenue Transactions,

368

Performing Risk Assessment Procedures
in the Revenue Cycle, 372
Identifying Inherent Risks, 372
Identifying Control Risks, 379
Performing Preliminary Analytical Procedures, 384
Responding to Identified Risks of Material Misstatement,

386

Obtaining Evidence about Internal Control Operating
Effectiveness in the Revenue Cycle, 386
Selecting Controls to Test and Performing Tests of Controls,
Considering the Results of Tests of Controls, 389

386

Obtaining Substantive Evidence about Accounts,
Disclosures, and Assertions in the Revenue Cycle,

389

Revenue: Substantive Analytical Procedures, 390
Revenue: Substantive Tests of Details, 391
Accounts Receivable: Substantive Procedures Based on the Aged Trial
Balance, 392

Accounts Receivable: Substantive Tests of Details—Confirmations, 393
Accounts Receivable: Substantive Procedures for the Allowance
Account, 400
Accounts Receivable: Other Substantive Procedures, 401
Performing Substantive Fraud-Related Procedures, 402
Documenting Substantive Procedures, 403
Summary and Next Steps, 404
Significant Terms, 404
True-False Questions, 405
Multiple-Choice Questions, 406
Review and Short Case Questions, 409
Contemporary and Historical Cases, 424
Application Activities, 434
Academic Research Cases, 435
Ford and Toyota, 436
ACL, 436

CHAPTER

10

Auditing Cash and Marketable Securities,
Significant Accounts and Relevant Assertions,

438
440

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Contents

Overview of Cash Accounts, 440
Cash Management Techniques, 441
Relevant Financial Statement Assertions,

442

Performing Risk Assessment Procedures for Cash
Accounts, 442
Identifying Inherent Risks, 442
Identifying Control Risks, 444
Performing Preliminary Analytical Procedures, 452
Responding to Identified Risks of Material Misstatement,

452

Obtaining Evidence about Internal Control Operating
Effectiveness for Cash, 453
Selecting Controls to Test and Performing Tests of Controls,
Considering the Results of Tests of Controls, 457

454

Obtaining Substantive Evidence about Cash Accounts,
Disclosures, and Assertions, 457
Substantive Analytics for Cash Accounts, 458
Substantive Tests of Details for Cash Accounts,

Auditing Marketable Securities,

458

465

Significant Accounts and Relevant Assertions, 465
Identify and Assess Inherent, Fraud, and Control Risks
Relevant to Marketable Securities, 466
Analytical Procedures for Marketable Securities, 467
Tests of Controls and Substantive Tests of Details
for Marketable Securities, 468
Summary and Next Steps, 471
Significant Terms, 471
True-False Questions, 472
Multiple-Choice Questions, 474
Review and Short Case Questions, 477
Contemporary and Historical Cases, 490
Application Activities, 497
Academic Research Cases, 498
Ford and Toyota, 499

CHAPTER

11

Auditing Inventory, Goods and Services,
and Accounts Payable: The Acquisition and
Payment Cycle, 500
Significant Accounts and Relevant Assertions,

502

Activities Involved in the Acquisition and Payment Cycle,
Relevant Financial Statement Assertions, 503

503

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xv


xvi

Contents

Performing Risk Assessment Procedures in the Acquisition
and Payment Cycle, 504
Identifying Inherent Risks, 504
Identifying Control Risks, 506
Performing Preliminary Analytical Procedures, 513
Responding to Identified Risks of Material Misstatement,

515

Obtaining Evidence about Internal Control Operating
Effectiveness in the Acquisition and Payment Cycle, 517
Selecting Controls to Test and Performing Tests of Controls,

Considering the Results of Tests of Controls, 517

517

Obtaining Substantive Evidence about Accounts,
Disclosures, and Assertions in the Acquisition and
Payment Cycle, 518
Substantive Tests of Inventory and Cost of Goods Sold, 518
Substantive Tests of Accounts Payable and Related Expense Accounts,
Summary and Next Steps, 535
Significant Terms, 536
True-False Questions, 537
Multiple-Choice Questions, 538
Review and Short Case Questions, 541
Contemporary and Historical Cases, 550
Application Activities, 555
Academic Research Cases, 556
Ford and Toyota, 558
ACL, 558

CHAPTER

529

12

Auditing Long-Lived Assets: Acquisition, Use,
Impairment, and Disposal, 560
Significant Accounts, Disclosures, and Relevant
Assertions, 561

Activities in the Long-Lived Asset Acquisition and Payment Cycle,
Relevant Financial Statement Assertions, 563

562

Performing Risk Assessment Procedures for Long-Lived
Assets, 563
Identifying Inherent Risks, 563
Identifying Control Risks, 565
Performing Preliminary Analytical Procedures, 567
Responding to Identified Risks of Material Misstatement,

569

Obtaining Evidence about Internal Control Operating
Effectiveness for Long-Lived Asset Accounts
and Related Expenses, 571
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Contents

Selecting Controls to Test and Performing Tests of Controls,
Considering the Results of Tests of Controls, 571

xvii

571

Obtaining Substantive Evidence about Accounts,
Disclosures, and Assertions for Long-Lived Asset Accounts
and Related Expenses, 572
Substantive Analytical Procedures, 572
Substantive Tests of Details for Tangible Assets—Testing
Current Period Additions, 572
Substantive Tests of Details for Tangible Assets—Testing
Current Period Deletions, 574
Substantive Procedures Related to Depreciation Expense and
Accumulated Depreciation for Tangible Assets, 574
Substantive Tests of Details for Natural Resources and the Related
Expense Accounts, 576
Substantive Tests of Details for Intangible Assets, 577
Substantive Procedures Related to Asset Impairment, 577
Substantive Procedures Related to Leases, 578
Performing Substantive Fraud-Related Procedures, 579
Documenting Substantive Procedures, 579
Summary and Next Steps, 579
Significant Terms, 580
True-False Questions, 580
Multiple-Choice Questions, 581
Review and Short Case Questions, 583
Contemporary and Historical Cases, 590
Application Activities, 591
Academic Research Case, 592
Ford and Toyota, 593

CHAPTER

13

Auditing Debt Obligations and Stockholders’
Equity Transactions, 594
Significant Accounts, Disclosures, and Relevant
Assertions, 596
Debt Obligations, 596
Stockholders’ Equity, 597

Performing Risk Assessment Procedures for Debt
Obligations and Stockholders’ Equity Transactions,
Identifying Inherent Risks, 599
Identifying Fraud Risk Factors, 599
Identifying Control Risks, 601
Performing Preliminary Analytical Procedures, 602
Responding to Identified Risks of Material Misstatement,

602

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

598


xviii Contents

Obtaining Evidence about Internal Control Operating
Effectiveness for Debt Obligations and Stockholders’
Equity Transactions, 603
Obtaining Substantive Evidence in Auditing

Debt Obligations and Stockholders’ Equity
Transactions, 603
Substantive Analytical Procedures—Debt Obligations, 603
Substantive Tests of Details—Debt Obligations, 605
Substantive Tests of Details—Stockholders’ Equity Transactions,
Performing Substantive Fraud-Related Procedures, 608
Documenting Substantive Procedures, 609
Summary and Next Steps, 609
Significant Terms, 609
True-False Questions, 610
Multiple-Choice Questions, 611
Review and Short Case Questions, 613
Contemporary and Historical Cases, 616
Application Activities, 618
Academic Research Case, 619

CHAPTER

606

14

Activities Required in Completing a Quality
Audit, 620
Review Activities,

622

Reviewing, Summarizing, and Resolving Detected Misstatements, 622
Reviewing Contingencies, 625

Reviewing Significant Estimates, 627
Reviewing the Adequacy of Disclosures, 629
Auditors’ Responsibilities Regarding Clients’ Noncompliance
with Laws and Regulations, 630
Evaluating the Going-Concern Assumption, 632
Performing Analytical Review of the Financial Statements, 635
Evaluating Management Representations, 637
Reviewing Subsequent Events and Subsequently Discovered Facts, 640
Consideration of Omitted Procedures Discovered after the Report
Date, 644
Performing an Engagement Quality Review, 644

Communicating with Management and the Audit
Committee (And Those Charged with Governance),
Responsibilities of External Auditors to Communicate
with the Audit Committee, 645
Communicating with Management via the Management Letter,

645
647

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Contents

xix

Issues Relating to Audit Firm Portfolio Management, Audit

Partner Rotation, and Audit Firm Rotation, 649
Client Acceptance and Continuance Decisions, 649
Partner Rotation and Audit Firm Rotation, 653
Summary and Next Steps, 656
Significant Terms, 656
True-False Questions, 658
Multiple-Choice Questions, 660
Review and Short Case Questions, 666
Contemporary and Historical Cases, 674
Application Activities, 679
Academic Research Case, 682
Ford and Toyota, 683

CHAPTER

15

Audit Reports on Financial Statements,
Principles Underlying Audit Reporting,

684
686

Standard Unqualified Audit Reports on Financial
Statements, 686
Standard Unqualified Audit Reports: U.S. Public Companies, 686
Standard Unqualified Audit Reports: U.S. Nonpublic Companies
and Non-U.S. Companies, 690

Unqualified Audit Reports with Explanatory

Language, 691
Explanatory Language: Justified Departure from GAAP, 691
Explanatory Language: Inconsistent Application of GAAP, 691
Explanatory Language: Substantial Doubt About the Client
Being a Going Concern, 692
Explanatory Language: Emphasis of a Matter, 693
Explanatory Language: Reference to Other Auditors, 695

Qualified Reports, Adverse Reports, and
Disclaimers, 697
Qualified Audit Reports, 698
Adverse Audit Reports, 700
Audit Reports with a Disclaimer of Opinion,

701

Comparisons of Modifications to the Standard
Unqualified Audit Report, 704
Audit Reports on Internal Control Over Financial
Reporting, 704
Elements of Management’s Annual Report on Internal Control
Are Incomplete or Improperly Presented, 705

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xx

Contents

Restriction on the Scope of the Engagement, 705
Auditor Refers to the Report of Other Auditors as the Basis, in Part,
for the Auditor’s Own Report, 705
Other Information Contained in Management’s Annual Report on
ICFR, 705
Management’s Annual Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act Is Misstated, 705
Summary and Next Steps, 708
Significant Terms, 708
True-False Questions, 709
Multiple-Choice Questions, 710
Review and Short Case Questions, 712
Contemporary and Historical Cases, 721
Application Activities, 723
Academic Research Cases, 724
Ford and Toyota, 725

CHAPTER

16

Advanced Topics Concerning Complex
Auditing Judgments, 726
Complex Auditing Judgments,

728

Identifying Complex Judgments in the Financial Statements,

Making Materiality Judgments,

728

729

Purpose of Materiality Judgments and Common Benchmarks and
Thresholds, 730
Common Difficulties in Making Materiality Judgments, 733

Evaluating Misstatements,

734

Subjective Differences between the Auditor and the Client, 735
Aggregating and Netting Misstatements, 736
Intentional Misstatements, 736
Considerations Regarding Selective Correction of Misstatements, 736
Considering Misstatements in the Statement of Cash Flows, 737
Regulatory Guidance Concerning Materiality Judgments, 737

Assessing Long-Term Liabilities Involving Significant
Subjective Judgment, 737
Warranty Reserves, 738
Pension Obligations and Other Postemployment Benefits,

Auditing Merger and Acquisition Activities,
Valuing the Assets and Liabilities of an Acquisition,
Measuring Restructuring Charges, 742

739

740

740

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Contents

xxi

Auditing Management’s Fair Value Estimates
and Related Impairment Judgments, 743
The Accounting Model for Fair Value Estimates,
Audit Considerations for Fair Market Estimates
and Related Impairments, 747

Auditing Financial Instruments,

743

751

Overview of Financial Instruments, 751
Audit Considerations for Financial Instruments,

754

Assessing Deficiencies in Internal Control over
Financial Reporting, 756
Assessing Likelihood and Magnitude of Potential Misstatements,

Evaluating a Client’s Internal Audit Function,

759

An Overview of Internal Auditing, 759
Evaluating the Quality of the Client’s Internal Audit Function,
Summary and Next Steps, 766
Significant Terms, 766
True-False Questions, 768
Multiple-Choice Questions, 769
Contemporary and Historical Cases, 783
Application Activities, 785
Academic Research Cases, 787
Ford and Toyota, 788
ACL, 788
Using ACL to Perform Benford Analysis, 789

CHAPTER

757

763

17

Other Services Provided by Audit Firms,

790

Attestation Services Provided by Audit Firms,

791

Subject Matter of an Attestation Engagement, 791
Components of Attestation Services and Parties
Involved in Attestation Services, 792
Levels of Assurance Provided in an Attestation Engagement,
Professional Standards for Attestation Engagements, 793

Reviews and Compilations,

792

794

Reviews, 794
Compilations, 798

Reviews of Interim Financial Information
for Public Companies, 800
Review Procedures for Interim Financial Information,
Reporting on Interim Financial Statements, 801

800

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xxii

Contents

Special Considerations for Reporting,

801

AU-C Section 800: Special Considerations—Audits of Financial
Statements Prepared in Accordance with Special-Purpose
Frameworks, 803
AU-C Section 805: Special Considerations—Audits of Single Financial
Statements and Specific Elements, Accounts, or Items of a Financial
Statement, 805
AU-C Section 806: Reporting on Compliance with Aspects of
Contractual Agreements or Regulatory Requirements in Connection
with Audited Financial Statements, 807

Attestation on Agreed-Upon Procedures, Financial
Forecasts and Projections, and Pro Forma Financial
Information, 809
SSAEs No. 10 and 11, AT Section 201: Agreed-Upon Procedures
Engagements, 809
SSAEs No. 10 and 17, AT Section 301: Financial Forecasts and
Projections, 812
SSAE No. 10, AT Section 401: Reporting on Pro Forma Financial

Information, 816

Forensic Accounting,

818

Sustainability Reporting and Assurance,

819

Reporting on Sustainability Activities and Outcomes, 820
Providing Assurance on Sustainability Reporting, 825
Summary, 828
Significant Terms, 829
True-False Questions, 831
Multiple-Choice Questions, 832
Review and Short Case Questions, 835
Application Activities, 838
Academic Research Case, 839
ACL APPENDIX,

841

CASE INDEX, 857
INDEX,

859

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PREFACE

The auditing environment continues to change in dramatic ways, and university
graduates entering the profession must be prepared for a high standard of
responsibility. Here are only three examples of these changes:
●

●

●

The American Institute of Certified Public Accountants (AICPA) and the
International Auditing and Assurance Standards Board (IAASB) have issued
clarifications that harmonize auditing standards in the United States (for
nonpublic entities) and internationally.
The Committee of Sponsoring Organizations (COSO) of the Treadway
Commission has issued an updated Internal Control–Integrated
Framework.
The AICPA recently issued new audit sampling guidance.

The ninth edition of Auditing: A Risk-Based Approach to Conducting a Quality Audit represents the most up-to-date professional guidance available, and
reflects the clarified auditing standards and the newest PCAOB standards. It discusses COSO’s updated Internal Control–Integrated Framework and integrates
discussions of fraud risk throughout the textbook. In short, the ninth edition
helps students understand the full range of auditing issues in the evolving global
environment.
Just as significantly, the ninth edition features entirely new and significantly
revised end-of-chapter materials that have been developed to help students prepare for exams and understand real-life auditing scenarios. This material is
updated, streamlined, and user friendly, with each problem linked to a specific

learning objective. In addition, students will gain valuable experience by using the
professional ACL auditing software that is packaged with each new textbook.

Revision Themes of the Ninth Edition
1. Enhance and integrate discussion of audit quality and the importance of
fraud detection throughout all chapters. Many instructors indicate that they
support an increased focus of the ninth edition on audit quality. And fraud
detection is a recurring theme of importance among auditing instructors.
Accordingly, the authors thoroughly revised Chapter 2 to focus on audit
quality and the importance of fraud detection. Significant fraud-related
xxiii
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