Test Bank for Auditing: A Practical Approach, 4th Canadian Edition by Robyn Moroney

Test Bank for Auditing: A Practical Approach, 4th Canadian Edition 4ce by Robyn Moroney, Fiona Campbell, Jane Hamilton, Valerie Warren. ISBN-13: 9480 Full Chapters test bank included 1 Introduction and Overview of Audit and Assurance 1-1 1.1 Auditing and Assurance Defined 1-4 1.2 Demand for Audit and Assurance Services 1-6 1.2.1 Financial Statement Users 1-6 1.2.2 Sources of Demand for Audit and Assurance Services 1-7 1.2.3 Theoretical Frameworks 1-8 1.2.4 Demand in a Voluntary Setting 1-9 1.3 Different Assurance Services 1-10 1.3.1 Financial Statement Audits 1-10 1.3.2 Compliance Audits 1-12 1.3.3 Performance Audits 1-12 1.3.4 Comprehensive Audits 1-13 1.3.5 Internal Audits 1-13 1.3.6 Corporate Social Responsibility (CSR) Assurance 1-13 1.4 Different Levels of Assurance 1-14 1.4.1 Reasonable Assurance 1-14 1.4.2 Limited Assurance 1-17 1.4.3 No Assurance 1-17 1.5 Different Audit Opinions 1-20 1.6 Preparers and Auditors 1-22 1.6.1 Preparer Responsibility 1-22 1.6.2 Auditor Responsibility 1-23 1.6.3 Assurance Providers 1-24 1.7 The Role of Regulators and Regulations 1-25 1.7.1 Regulators, Standard Setters, and Other Bodies 1-25 1.7.2 Legislation 1-26 1.7.3 Regulation 1-27 1.8 The Audit Expectation Gap 1-29 2 Ethics, Legal Liability, and Client Acceptance 2-1 2.1 The Fundamental Principles of Professional Ethics 2-3 2.1.1 The Fundamental Ethical Principles 2-4 2.1.2 Specific Rules Incorporating the Principles of Professional Ethics 2-5 2.1.3 Framework for Ethical Dilemmas 2-6 2.2 Professional Judgement and Professional Scepticism 2-7 2.2.1 A Decision-Making Framework for Applying Professional Judgement 2-7 2.2.2 Improving Professional Scepticism 2-8 2.3 Independence 2-9 2.3.1 Threats to Independence 2-10 2.3.2 Safeguards to Independence 2-13 2.4 The Auditor’s Relationships with Others 2-17 2.4.1 Auditors and Shareholders 2-17 2.4.2 Auditors and the Board of Directors 2-17 2.4.3 Auditors and the Audit Committee 2-18 2.4.4 Auditors and Internal Auditors 2-18 2.5 Legal Liability 2-19 2.5.1 Legal Liability to Clients 2-20 2.5.2 Contributory Negligence 2-21 2.5.3 Legal Liability to Third Parties 2-21 2.5.4 Avoidance of Litigation 2-23 2.6 Client Acceptance and Continuance Decisions 2-24 3 Audit Planning I 3-1 3.1 Phases of an Audit 3-4 3.1.1 Risk Assessment Phase 3-4 3.1.2 Risk Response Phase 3-6 3.1.3 Concluding and Reporting on an Audit 3-6 3.2 Gaining an Understanding of the Client 3-6 3.2.1 Entity Level 3-7 3.2.2 Industry Level 3-9 3.2.3 Economy Level 3-10 3.3 Related Parties 3-11 3.4 Fraud Risk 3-13 3.4.1 Incentives and Pressures to Commit a Fraud 3-14 3.4.2 Opportunities to Perpetrate a Fraud 3-14 3.4.3 Attitudes and Rationalizations to Justify a Fraud 3-15 3.4.4 Audit Procedures Relating to Fraud 3-16 3.5 Going Concern 3-17 3.5.1 Going Concern Risk—Indicators 3-17 3.5.2 Going Concern Risk—Mitigating Factors 3-18 3.6 Auditing Estimates and Related Disclosures 3-19 3.6.1 Risk Assessment and Estimation Uncertainty 3-19 3.6.2 Estimates and the Entity Level Risk Assessment 3-20 3.7 Corporate Governance 3-21 3.8 Information Technology 3-22 3.9 Financial Reporting and Closing Procedures 3-24 4 Audit Planning II 4-1 4.1 Audit Risk 4-3 4.1.1 The Audit Risk Model and Its Components 4-5 4.1.2 Quantification of the Audit Risk Model 4-11 4.2 Materiality 4-12 4.2.1 Qualitative and Quantitative Factors 4-12 4.2.2 Materiality and Audit Risk 4-16 4.3 Audit Strategy 4-17 4.4 Client Approaches to Measuring Performance 4-21 4.4.1 Profitability 4-21 4.4.2 Liquidity 4-22 4.5 Analytical Procedures 4-22 4.5.1 Comparisons 4-24 4.5.2 Trend Analysis 4-24 4.5.3 Common-Size Analysis 4-25 4.5.4 Ratio Analysis 4-25 4.5.5 Analysis with Technology 4-28 4.5.6 Factors to Consider when Conducting Analytical Procedures 4-29 5 Audit Evidence 5-1 5.1 Assertions 5-4 5.2 Types of Audit Evidence 5-7 5.2.1 Sufficient Appropriate Audit Evidence 5-7 5.2.2 External Confirmations 5-9 5.2.3 Documentary Evidence 5-13 5.2.4 Representations 5-14 5.2.5 Verbal Evidence 5-17 5.2.6 Computational Evidence 5-17 5.2.7 Physical Evidence 5-18 5.2.8 Electronic Evidence 5-18 5.3 Persuasiveness of Audit Evidence 5-19 5.3.1 Internally Generated Evidence 5-19 5.3.2 Externally Generated Evidence Held by the Client 5-20 5.3.3 Externally Generated Evidence Sent Directly to the Auditor 5-20 5.4 Using the Work of an Expert 5-21 5.4.1 Assessing the Need to Use an Expert 5-21 5.4.2 Determining the Scope of the Work to Be Carried Out 5-21 5.4.3 Assessing the Competence and Capability of the Expert 5-22 5.4.4 Assessing the Objectivity of the Expert 5-22 5.4.5 Assessing the Expert’s Report 5-22 5.4.6 Responsibility for the Conclusion 5-22 5.5 Using the Work of Another Auditor 5-23 5.6 Evidence-Gathering Procedures 5-24 5.7 Drawing Conclusions 5-26 5.8 Documentation—Audit Working Papers 5-27 5.8.1 Permanent File 5-28 5.8.2 Current File 5-29 6 Sampling and Overview of the Risk Response Phase of the Audit 6-1 6.1 Audit Sampling 6-3 6.2 Sampling and Non-Sampling Risk 6-4 6.2.1 Sampling Risk and Tests of Controls 6-4 6.2.2 Sampling Risk and Substantive Procedures 6-5 6.2.3 Non-Sampling Risk 6-6 6.3 Statistical and Non-Statistical Sampling 6-7 6.4 Sampling Techniques and Factors Affecting Sampling 6-8 6.4.1 Sampling Techniques 6-8 6.4.2 Factors to Consider when Selecting a Sample 6-10 6.5 Factors that Influence the Sample Size—Testing Controls 6-12 6.6 Factors that Influence the Sample Size—Substantive Testing 6-13 6.6.1 Factors that Influence Sample Size when Performing Substantive Tests 6-13 6.6.2 Techniques for Performing Substantive Tests 6-14 6.7 Evaluating Sample Test Results 6-16 6.8 Tests of Controls and Substantive Procedures 6-18 6.8.1 Tests of Controls 6-19 6.8.2 Substantive Procedures 6-20 6.9 Nature, Timing, and Extent of Audit Testing 6-22 6.9.1 Nature of Audit Testing 6-22 6.9.2 Timing of Audit Testing 6-23 6.9.3 Extent of Audit Testing 6-24 7 Understanding and Testing the Client’s System of Internal Controls 7-1 7.1 The System of Internal Control Defined 7-4 7.2 Objectives of Internal Controls 7-5 7.3 System of Internal Controls 7-6 7.3.1 The Control Environment 7-7 7.3.2 The Entity’s Risk Assessment Process 7-10 7.3.3 Information Systems and Communication 7-11 7.3.4 Control Activities 7-12 7.3.5 Monitoring of Controls 7-14 7.3.6 Internal Control in Small Entities 7-15 7.4 Types of Controls 7-16 7.4.1 Preventive and Detective Controls 7-17 7.4.2 Manual and Automated Controls 7-20 7.5 Selecting and Designing Tests of Controls 7-24 7.5.1 Which Controls Should Be Selected for Testing? 7-24 7.5.2 How Much Testing Does the Auditor Need to Do? 7-25 7.6 Documenting and Testing Internal Controls 7-29 7.6.1 Documenting Internal Controls 7-29 7.6.2 Testing Internal Controls 7-30 7.7 Results of the Auditor’s Testing 7-33 7.8 Documenting Conclusions 7-35 7.9 Identifying Strengths and Weaknesses in a System of Internal Controls 7-37 7.10 Management Letters 7-38 8 Execution of the Audit—Performing Substantive Procedures 8-1 8.1 Overview of Substantive Procedures 8-3 8.1.1 Substantive Procedures and Assertions 8-3 8.1.2 Definition of Substantive Procedures 8-6 8.2 Relationship Between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures 8-8 8.3 Substantive Audit Procedures 8-10 8.3.1 Tests of Details 8-10 8.3.2 Analytical Procedures 8-12 8.3.3 Performing Substantive Testing Using Technology 8-15 8.4 Levels of Evidence 8-16 8.4.1 Persuasive 8-16 8.4.2 Corroborative 8-17 8.4.3 Minimal 8-18 8.4.4 General 8-19 8.5 Auditing Accounting Estimates 8-19 8.6 Evaluating and Documenting Substantive Analytical Procedures’ Results 8-21 8.6.1 Evaluating Errors Identified in Testing 8-22 8.6.2 Concluding and Documenting the Results of Substantive Procedures 8-22 9 Audit Data Analytics 9-1 9.1 What Are Data Analytics? 9-3 9.1.1 How Audit Data Analytics Are Used 9-4 9.1.2 When Audit Data Analytics Are Used 9-5 9.1.3 Techniques Used for Audit Data Analytics 9-6 9.2 Data Considerations 9-8 9.2.1 Types of Data 9-9 9.2.2 Data Access 9-9 9.2.3 Data Quality 9-9 9.2.4 Data Relevance and Reliability 9-10 9.2.5 Documentation 9-12 9.2.6 The Data Life Cycle 9-12 9.3 The Audit Data Analytic (ADA) Five-Step Process 9-13 9.3.1 Plan the ADA 9-14 9.3.2 Access and Prepare the Data 9-15 9.3.3 Consider the Data’s Relevance and Reliability 9-16 9.3.4 Perform the ADA 9-16 9.3.5 Evaluate the Results 9-17 9.3.6 Additional Issues to Consider when Performing an ADA as a Risk Assessment Procedure 9-18 9.4 Audit Data Analytics as a Substantive Analytical Procedure 9-24 9.4.1 Regression Analysis 9-24 9.5 Audit Data Analytics as a Substantive Test 9-27 9.5.1 Substantive Testing 9-27 9.5.2 ADA Example of Accounts Receivable and Revenue 9-28 9.5.3 ADA Example of Payroll 9-30 9.6 Features of a Good Visualization 9-33 10 Auditing Sales and Receivables 10-1 10.1 Audit Objectives 10-3 10.2 The Process for Credit Sales Transactions 10-6 10.2.1 Credit Sales Transactions 10-6 10.2.2 Cash Receipts Transactions 10-9 10.2.3 Sales Adjustment Transactions 10-11 10.3 Audit Strategy 10-12 10.3.1 Understanding the Entity and Its Environment 10-12 10.3.2 Analytical Review 10-13 10.3.3 Inherent Risk Assessment 10-13 10.3.4 Internal Controls 10-15 10.3.5 Final Assessment 10-20 10.4 Determining an Acceptable Level of Detection Risk 10-21 10.5 Designing Substantive Procedures 10-23 10.5.1 Initial Procedures 10-25 10.5.2 Analytical Procedures 10-25 10.5.3 Tests of Details of Transactions 10-26 10.5.4 Tests of Details of Balances 10-27 10.5.5 Evaluating Adequacy of the Allowance for Doubtful Accounts 10-31 10.5.6 Disclosure 10-31 11 Auditing Purchases, Payables, and Payroll 11-1 11.1 Audit Objectives 11-3 11.2 The Process for Purchase Transactions 11-6 11.2.1 Purchase Transactions 11-6 11.2.2 Payment Transactions 11-10 11.3 The Process for Payroll Transactions 11-11 11.3.1 Hiring Employees 11-12 11.3.2 Authorizing Payroll Changes 11-13 11.3.3 Preparing Attendance and Timekeeping Data 11-13 11.3.4 Preparing the Payroll 11-13 11.3.5 Recording the Payroll 11-13 11.3.6 Paying the Payroll and Protecting Unclaimed Wages 11-14 11.4 Audit Strategy 11-15 11.4.1 Understanding the Entity and Its Environment 11-15 11.4.2 Analytical Review 11-16 11.4.3 Inherent Risk Assessment 11-16 11.4.4 Internal Controls 11-17 11.4.5 Final Assessment 11-23 11.5 Determining an Acceptable Level of Detection Risk 11-24 11.6 Designing Substantive Procedures 11-26 11.6.1 Initial Procedures 11-27 11.6.2 Analytical Procedures 11-28 11.6.3 Tests of Details of Transactions 11-28 11.6.4 Tests of Details of Balances 11-29 11.6.5 Disclosure 11-31 12 Auditing Inventories and Property, Plant, and Equipment 12-1 12.1 Audit Objectives: Inventory 12-4 12.2 Custody of Inventory and Maintenance of Inventory Records 12-5 12.2.1 Maintaining Inventory Records 12-6 12.2.2 Physical Comparison of Inventory with Inventory Records 12-7 12.2.3 Determining and Recording Inventory Costs 12-9 12.3 Audit Strategy: Inventory 12-10 12.3.1 Inherent Risk Assessment 12-10 12.3.2 Control Risk Assessment 12-12 12.4 Substantive Procedures for Inventories 12-14 12.4.1 Initial Procedures 12-16 12.4.2 Analytical Procedures 12-16 12.4.3 Tests of Details of Transactions 12-17 12.4.4 Tests of Details of Balances 12-17 12.4.5 Testing Inventory Pricing 12-20 12.4.6 Confirming Inventories at Locations Outside the Entity 12-21 12.4.7 Examining Consignment Agreements and Contracts 12-22 12.4.8 Disclosure 12-22 12.5 Audit Objectives: Property, Plant, and Equipment 12-23 12.6 Audit Strategy 12-25 12.7 Designing Substantive Procedures for Property, Plant, and Equipment 12-26 12.7.1 Initial Procedures 12-28 12.7.2 Analytical Procedures 12-29 12.7.3 Tests of Details of Transactions 12-29 12.7.4 Tests of Details of Balances 12-30 12.7.5 Disclosure 12-31 13 Auditing Cash and Investments 13-1 13.1 Audit Objectives for Cash 13-4 13.2 Audit Strategy for Cash 13-5 13.2.1 Bank Reconciliations 13-6 13.2.2 Imprest Accounts 13-6 13.3 Substantive Procedures for Cash Balances 13-9 13.3.1 Initial Procedures 13-9 13.3.2 Analytical Procedures 13-9 13.3.3 Tests of Details of Transactions 13-9 13.3.4 Tests of Balances 13-12 13.3.5 Disclosure 13-16 13.4 Special Considerations for Cash Balances 13-17 13.4.1 Detecting Lapping 13-17 13.4.2 Auditing Imprest Petty Cash Funds 13-19 13.4.3 Auditing Imprest Bank Accounts 13-19 13.5 Audit Objectives for Investments 13-20 13.6 Audit Strategy for Investments 13-21 13.6.1 Control Environment 13-22 13.6.2 Functions and Related Controls 13-22 13.7 Substantive Procedures for Investments 13-23 13.7.1 Initial Procedures 13-24 13.7.2 Analytical Procedures 13-25 13.7.3 Tests of Details of Transactions 13-25 13.7.4 Tests of Details of Balances 13-25 13.7.5 Disclosure 13-26 13.8 Auditing Consolidated Financial Statements 13-27 13.8.1 Audit Strategy for Consolidated Financial Statements 13-28 13.8.2 Substantive Procedures 13-28 14 Completing and Reporting on the Audit 14-1 14.1 Engagement Wrap-Up 14-5 14.1.1 Sufficient Appropriate Audit Evidence 14-7 14.1.2 Evaluating Audit Evidence 14-7 14.2 Going Concern 14-8 14.3 Contingent Liabilities 14-10 14.4 Subsequent Events 14-11 14.4.1 Type 1 Subsequent Events 14-12 14.4.2 Type 2 Subsequent Events 14-12 14.4.3 Procedures Used When Conducting a Subsequent Events Review 14-12 14.4.4 Auditor Responsibility for Subsequent Events 14-14 14.5 Misstatements 14-15 14.5.1 Current-Year Misstatements 14-16 14.5.2 Prior-Year Misstatements 14-17 14.5.3 Qualitative Considerations 14-18 14.6 Evaluating the Conclusions and Forming an Opinion 14-19 14.7 Components of the Audit Report 14-20 14.8 Identification of the Types of Modifications to an Audit Report 14-22 14.8.1 Emphasis of Matter and Other Matters 14-23 14.8.2 Inability to Obtain Appropriate Audit Evidence 14-24 14.8.3 Material Misstatement of Financial Statements 14-27 14.9 Communication with Those Charged with Governance 14-30 14.9.1 Audit Matters of Governance Interest to Be Communicated 14-30 14.9.2 Documentation Considerations 14-31 14.10 Other Engagements 14-32 14.10.1 Reports Prepared in Accordance with a Special Purpose Framework 14-32 14.10.2 Reports on a Component of the Financial Statements 14-33 14.10.3 Review Engagements 14-33 14.10.4 Review Engagements on Interim Financial Statements 14-34 14.10.5 Assurance Engagements 14-35 14.10.6 Compliance Engagements 14-36 14.10.7 Reporting on Controls 14-37 14.10.8 Reports on Supplementary Matters 14-37 14.10.9 Reports on the Results of Applying Specified Procedures to Financial Information Other Than Financial Statements 14-37 14.10.10 Reports on the Application of Accounting Principles 14-38 14.10.11 Reports Used in an Offering Document or Designated Document 14-38