Advanced Auditing
Overview of the course
Knechel - Chapter 1 and 2
Building blocks of auditing:
Lecture 1 Jamal and Sunder [2011]
Demand for External Auditing
Jensen and Meckling [1976]
Knechel - Chapter 3
1 Building Blocks of Auditing:
Lecture 2 Houston et al. [1999]
Audit Risk
Low [2004]
Knechel - Chapter 3
Building Blocks of Auditing: Becker [1968]
Lecture 3
Fraud Risk Dorminey et al. [2012]
Free and Murphy [2015]
Knechel - Chapter 3
Building Blocks of Auditing: Zuber et al. [1983]
Lecture 4
Materiality Glover et al. [2008]
Vance [2011]
Knechel - Chapter 3
2 Building Blocks of Auditing:
Lecture 5 Salterio and Koonce [1997]
Evidence
Appelbaum and Nehmer [2017]
Knechel - Chapter 16
Building Blocks of Auditing:
Lecture 6 Nelson and Tan [2005]
Ethics
Litjens et al. [2019]
Coaching Session 1 Case : Risk, Materiality, and Evidence
Knechel - Chapter 4
Audit Process:
Lecture 7 Knechel [2007]
Overview
Peecher et al [2007]
3 Knechel - Chapter 5
Audit Process:
Lecture 8 Kochetova et al [2011]
Understanding the Client (Strategic Analyses)
Knechel et al [2010]
Knechel - Chapter 6
Audit Process:
Lecture 9 Lawrence et al [2017]
Understanding the Client (Business Processes)
van der Aalst [2012]
Coaching Session 2 Case : Risk, Materiality, and Evidence
Knechel - Chapter 7
Audit Process:
Lecture 10 Kinney et al [2013]
4 Internal Control Evidence
Hogan et al [2008]
Knechel - Chapter 8
Audit Process:
Lecture 11 Canada et al [2009]
Internal Control Evidence: IT
Teeter et al [2010]
Coaching Session 3 Case : Risk, Materiality, and Evidence
Knechel - Chapter 9
Audit Process:
Lecture 12 Koonce [1992]
5 Inquiry and Analytical Evidence
Plumlee et al [2015]
Knechel - Chapter 9
Audit Process:
Lecture 13 Appelbaum et al [2018]
Inquiry and Analytical Evidence: Statistical
Zhaokai and Moffitt [2019]
Coaching Session 4 Case : Risk, Materiality, and Evidence
Knechel - Chapter 10
Audit Process:
Lecture 12 Hall et al [2006]
6 Substantive Evidence
Christensen et al [2014]
Knechel - Chapter 11
Audit Process:
Lecture 13 Hoogduin et al [2010]
Substantive Evidence: Statistical Sampling
Hoogduin et al [2015]
Audit Process: Knechel - Chapter 14
Lecture 14
Audit Completion: Aggregating Evidence Brown-Libured et al [2013]
7
Knechel - Chapter 15
Audit Process:
Lecture 15 Church et al [2008]
Audit Completion: Auditor Reporting
Litjens et al [2015]
1
,Inhoudsopgave
Overview of the course.............................................................................................................................................1
Week 1......................................................................................................................................................................3
Lesson 1 Demand for independent auditing...............................................................................................................3
Lesson 2 Audit risk......................................................................................................................................................6
Lesson 3 Fraud risk....................................................................................................................................................10
Week 2....................................................................................................................................................................14
Lesson 1 Materiality..................................................................................................................................................14
Lesson 2 Evidence.....................................................................................................................................................17
Lesson 3 Ethics and biases........................................................................................................................................20
Week 3....................................................................................................................................................................24
Lesson 1 Audit process..............................................................................................................................................24
Lesson 2 Understanding the client (Strategic analyses)............................................................................................27
Lesson 3 Understanding the client (business processes)...........................................................................................30
Week 4....................................................................................................................................................................33
Lesson 1 Internal Control evidence...........................................................................................................................33
Lesson 2 Internal Control Evidence IT........................................................................................................................37
Week 5....................................................................................................................................................................42
Lesson 1 Inquire and analytical evidence..................................................................................................................42
Lesson 2 – Inquiry and analytical evidence (statistical).............................................................................................45
Week 6....................................................................................................................................................................47
Lesson 1 Substantive evidence (non-statistical)........................................................................................................47
Lesson 2 Substantive Evidence (statistical)...............................................................................................................50
Week 7....................................................................................................................................................................54
Lesson 1 Aggregating evidence.................................................................................................................................54
Lesson 2 Auditor reporting........................................................................................................................................56
2
,Week 1
Lesson 1 Demand for independent auditing
What is an audit? Knechel and Salterio, Chapter 1
What is assurance?
Standards, you know it has a certain quality
- The AICPA definition: Independent professional services that improve the quality of information for users
- The IFAC definition: An engagement in which a practitioner aims to obtain sufficient, appropriate, evidence in order to
express a conclusion designed to enhance the degree of confidence of the intended users. Other than the responsible
party about the subject matter information
Assurance engagements
What is an audit?
- Definition: Opinion by an independent auditor on whether financial statements are in all material aspects present fairly
in accordance with GAAP
o GAAP: IFRS, USGAAP, DAS (Dutch accounting standards)
o GAAS: ISAs, COS (controle en overige standarden)
- Reasonable assurance
- Use materiality (not every deviation might be influencing the decisions of users)
- Exercise professional judgment risk, materiality, evidence
- Behavioral requirements
o Independence
o Skepticism
Types of audits
- GAAS audit (use auditing standards to audit financial statements) and Integrated audit
3
, - Integrated audit of financial statements with a report of effectiveness of internal control over financial reporting
o Firms listed at NYSE/NASDAQ
o Municipalities in the Netherlands (2021)
Parties involved
- Example External users: shareholders
- Example Accountable party: management
- Auditor is either appointed by the external users (shareholders) or
management.
- Auditor and accountable party both report to external users. Audit report
and financial statements.
Economics of auditing. Knechel and Salterio, Chapter 1
Economics of audit demand
- Demand by outside intervention (demand exogenous). Economy and there is government outside of economy that
imposes an audit regulation and mendatory audit.
- Demands arises within the economy (arrives endogenously and is driven by supply and demand)
Endogenous audit demand - Stock market demand
- US-based
- Focus of profitability
- Audit role: valuation (of accounting)
Exogenous audit demand - Statutory audit
- British tradition
- Focus on investment protection
- Audit role: stewardship (efficiency of contracts)
Exogenous audit demand
- Examples:
o Government intervention
o Statutory audit
o Environment agency requires audit of pollution reports
o Ministry of health requires audit of health care declarations by hospitals
o Government grant with condition external audit
Endogenous audit demand
- Agency relation: Principle (shareholder) delegates decision-making to agent (manager)
- Agency theory: Conflicts of interests between two parties due to differences in incentives and reflects information
asymmetry between two parties to a transaction
- Adverse selection: principle cannot observe the quality of the firm
- Moral Hazard: agent actions not observed yet incentivized (work hard / shirk)
- Independent audit: high quality report ‘ensures’ truth about agents' hard work (endogenous)
Agency problems, auditing, and theory of the firm (historical overview). Watts and Zimmerman, 1983, JLE
4
Overview of the course
Knechel - Chapter 1 and 2
Building blocks of auditing:
Lecture 1 Jamal and Sunder [2011]
Demand for External Auditing
Jensen and Meckling [1976]
Knechel - Chapter 3
1 Building Blocks of Auditing:
Lecture 2 Houston et al. [1999]
Audit Risk
Low [2004]
Knechel - Chapter 3
Building Blocks of Auditing: Becker [1968]
Lecture 3
Fraud Risk Dorminey et al. [2012]
Free and Murphy [2015]
Knechel - Chapter 3
Building Blocks of Auditing: Zuber et al. [1983]
Lecture 4
Materiality Glover et al. [2008]
Vance [2011]
Knechel - Chapter 3
2 Building Blocks of Auditing:
Lecture 5 Salterio and Koonce [1997]
Evidence
Appelbaum and Nehmer [2017]
Knechel - Chapter 16
Building Blocks of Auditing:
Lecture 6 Nelson and Tan [2005]
Ethics
Litjens et al. [2019]
Coaching Session 1 Case : Risk, Materiality, and Evidence
Knechel - Chapter 4
Audit Process:
Lecture 7 Knechel [2007]
Overview
Peecher et al [2007]
3 Knechel - Chapter 5
Audit Process:
Lecture 8 Kochetova et al [2011]
Understanding the Client (Strategic Analyses)
Knechel et al [2010]
Knechel - Chapter 6
Audit Process:
Lecture 9 Lawrence et al [2017]
Understanding the Client (Business Processes)
van der Aalst [2012]
Coaching Session 2 Case : Risk, Materiality, and Evidence
Knechel - Chapter 7
Audit Process:
Lecture 10 Kinney et al [2013]
4 Internal Control Evidence
Hogan et al [2008]
Knechel - Chapter 8
Audit Process:
Lecture 11 Canada et al [2009]
Internal Control Evidence: IT
Teeter et al [2010]
Coaching Session 3 Case : Risk, Materiality, and Evidence
Knechel - Chapter 9
Audit Process:
Lecture 12 Koonce [1992]
5 Inquiry and Analytical Evidence
Plumlee et al [2015]
Knechel - Chapter 9
Audit Process:
Lecture 13 Appelbaum et al [2018]
Inquiry and Analytical Evidence: Statistical
Zhaokai and Moffitt [2019]
Coaching Session 4 Case : Risk, Materiality, and Evidence
Knechel - Chapter 10
Audit Process:
Lecture 12 Hall et al [2006]
6 Substantive Evidence
Christensen et al [2014]
Knechel - Chapter 11
Audit Process:
Lecture 13 Hoogduin et al [2010]
Substantive Evidence: Statistical Sampling
Hoogduin et al [2015]
Audit Process: Knechel - Chapter 14
Lecture 14
Audit Completion: Aggregating Evidence Brown-Libured et al [2013]
7
Knechel - Chapter 15
Audit Process:
Lecture 15 Church et al [2008]
Audit Completion: Auditor Reporting
Litjens et al [2015]
1
,Inhoudsopgave
Overview of the course.............................................................................................................................................1
Week 1......................................................................................................................................................................3
Lesson 1 Demand for independent auditing...............................................................................................................3
Lesson 2 Audit risk......................................................................................................................................................6
Lesson 3 Fraud risk....................................................................................................................................................10
Week 2....................................................................................................................................................................14
Lesson 1 Materiality..................................................................................................................................................14
Lesson 2 Evidence.....................................................................................................................................................17
Lesson 3 Ethics and biases........................................................................................................................................20
Week 3....................................................................................................................................................................24
Lesson 1 Audit process..............................................................................................................................................24
Lesson 2 Understanding the client (Strategic analyses)............................................................................................27
Lesson 3 Understanding the client (business processes)...........................................................................................30
Week 4....................................................................................................................................................................33
Lesson 1 Internal Control evidence...........................................................................................................................33
Lesson 2 Internal Control Evidence IT........................................................................................................................37
Week 5....................................................................................................................................................................42
Lesson 1 Inquire and analytical evidence..................................................................................................................42
Lesson 2 – Inquiry and analytical evidence (statistical).............................................................................................45
Week 6....................................................................................................................................................................47
Lesson 1 Substantive evidence (non-statistical)........................................................................................................47
Lesson 2 Substantive Evidence (statistical)...............................................................................................................50
Week 7....................................................................................................................................................................54
Lesson 1 Aggregating evidence.................................................................................................................................54
Lesson 2 Auditor reporting........................................................................................................................................56
2
,Week 1
Lesson 1 Demand for independent auditing
What is an audit? Knechel and Salterio, Chapter 1
What is assurance?
Standards, you know it has a certain quality
- The AICPA definition: Independent professional services that improve the quality of information for users
- The IFAC definition: An engagement in which a practitioner aims to obtain sufficient, appropriate, evidence in order to
express a conclusion designed to enhance the degree of confidence of the intended users. Other than the responsible
party about the subject matter information
Assurance engagements
What is an audit?
- Definition: Opinion by an independent auditor on whether financial statements are in all material aspects present fairly
in accordance with GAAP
o GAAP: IFRS, USGAAP, DAS (Dutch accounting standards)
o GAAS: ISAs, COS (controle en overige standarden)
- Reasonable assurance
- Use materiality (not every deviation might be influencing the decisions of users)
- Exercise professional judgment risk, materiality, evidence
- Behavioral requirements
o Independence
o Skepticism
Types of audits
- GAAS audit (use auditing standards to audit financial statements) and Integrated audit
3
, - Integrated audit of financial statements with a report of effectiveness of internal control over financial reporting
o Firms listed at NYSE/NASDAQ
o Municipalities in the Netherlands (2021)
Parties involved
- Example External users: shareholders
- Example Accountable party: management
- Auditor is either appointed by the external users (shareholders) or
management.
- Auditor and accountable party both report to external users. Audit report
and financial statements.
Economics of auditing. Knechel and Salterio, Chapter 1
Economics of audit demand
- Demand by outside intervention (demand exogenous). Economy and there is government outside of economy that
imposes an audit regulation and mendatory audit.
- Demands arises within the economy (arrives endogenously and is driven by supply and demand)
Endogenous audit demand - Stock market demand
- US-based
- Focus of profitability
- Audit role: valuation (of accounting)
Exogenous audit demand - Statutory audit
- British tradition
- Focus on investment protection
- Audit role: stewardship (efficiency of contracts)
Exogenous audit demand
- Examples:
o Government intervention
o Statutory audit
o Environment agency requires audit of pollution reports
o Ministry of health requires audit of health care declarations by hospitals
o Government grant with condition external audit
Endogenous audit demand
- Agency relation: Principle (shareholder) delegates decision-making to agent (manager)
- Agency theory: Conflicts of interests between two parties due to differences in incentives and reflects information
asymmetry between two parties to a transaction
- Adverse selection: principle cannot observe the quality of the firm
- Moral Hazard: agent actions not observed yet incentivized (work hard / shirk)
- Independent audit: high quality report ‘ensures’ truth about agents' hard work (endogenous)
Agency problems, auditing, and theory of the firm (historical overview). Watts and Zimmerman, 1983, JLE
4
