Auditing: A Risk-Based Approach to Conducting a Quality Audit

910 Pages·2013·10.6 MB·English

by  Karla Johnstone

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NINTH EDITION
A U D I T I N G
A RISK-BASED APPROACH TO CONDUCTING A QUALITY AUDIT
Karla M. Johnstone
University ofWisconsin—Madison
Audrey A. Gramling
Bellarmine University
Larry E. Rittenberg
University ofWisconsin—Madison
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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
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).
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B R I E F C O N T E N T S
Preface, xxiii
About the Authors, xxxiii
1
CHAPTER Auditing: Integral to the Economy, 2
2
CHAPTER The Risk of Fraud and Mechanisms to Address Fraud:
Regulation, Corporate Governance, and Audit
Quality, 32
3
’
CHAPTER Internal Control over Financial Reporting: Management s
Responsibilities and Importance to the External
Auditors, 72
4
CHAPTER Professional Liability and the Need for Quality Auditor
Judgments and Ethical Decisions, 114
5
CHAPTER Professional Auditing Standards and the Audit Opinion
Formulation Process, 156
6
CHAPTER A Framework for Audit Evidence, 212
7
CHAPTER Planning the Audit: Identifying and Responding
to the Risks of Material Misstatement, 266
8
CHAPTER Specialized Audit Tools: Sampling and Generalized Audit
Software, 316
9
CHAPTER Auditing the Revenue Cycle, 366
10
CHAPTER Auditing Cash and Marketable Securities, 438
11
CHAPTER Auditing Inventory, Goods and Services, and Accounts
Payable: The Acquisition and Payment Cycle, 500
12
CHAPTER Auditing Long-Lived Assets: Acquisition, Use, Impairment,
and Disposal, 560
13
’
CHAPTER Auditing Debt Obligations and Stockholders Equity
Transactions, 594
14
CHAPTER Activities Required in Completing a Quality Audit, 620
15
CHAPTER Audit Reports on Financial Statements, 684
v
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vi Brief Contents
16
CHAPTER Advanced Topics Concerning Complex Auditing
Judgments, 726
17
CHAPTER Other Services Provided by Audit Firms, 790
ACL Appendix, 841
Case Index, 857
Index, 859
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C O N T E N T S
PREFACE, xxiii
ABOUT THE AUTHORS, xxxiii
1
CHAPTER
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, 16
Achieving Audit Quality and Minimizing Lawsuits, 16
Auditor Independence Requirements, 17
Review Programs, 19
Engagement Letters, 20
vii
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viii Contents
Client Acceptance/Continuance Decisions, 20
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
2
CHAPTER
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, 37
Opportunities to Commit Fraud, 37
Rationalizing the Fraud, 38
Recent History of Fraudulent Financial Reporting, 38
Examples of Recent Frauds and Implications for External Auditors, 38
The Third COSO Report, 41
The Enron Fraud: A Key Driver of Regulatory Change, 42
’
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, 50
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
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).
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