1
,• Tableof Contents xf
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
xf xf xf xf xf xf xf xf xf
xf Chapter 2: The Financial StatementfAuditing Environment
xf xf xf xf xf
Chapter3: Audit Planning, Types ofAudit Tests, and Materiality
xf xf xf xf xf xf xf xf xf
xf Chapter 4: Risk Assessment
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Chapter 5: Evidence and Documentation
xf xf xf xf
Chapter 6: Internal Control infa Financial StatementfAudit
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xf Chapter 7: Auditing Internal Control over Financial Reporting
xf xf xf xf xf xf xf
Chapter 8: Audit Sampling: An Overview and ApplicationftofTests of Controls Chapter
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9: Audit Sampling: An Application to Substantive Tests of Account Balances Chapter 10:
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xf Auditingfthe Revenue Process xf xf
Chapter 11: Auditingfthe Purchasing Process
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Chapter 12: Auditing the HumanfResource Management Process
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xf Chapter 13: Auditing the Inventory Management Process
xf xf xf xf xf xf
Chapter 14: Auditing the Financing/Investing Process:Prepaid Expenses, Intangible Assets, and Property, Plant, and Equip me
xf xf xf xf xf xf xf xf xf xf xf xf xf xf
Chapter 15: Auditingfthe Financing/Investing Process:Long-
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Term Liabilities, Stockholders’ Equity, and Income Statement Accounts
xf xf xf xf xf xf xf
xf Chapter 16: Auditing the Financing/Investing Process: Cashand Investments
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xf Chapter 17: Completing thefAuditfEngagement
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Chapter 18: Reports onfAudited Financial Statements
xf xf xf xf xf
Chapter 19: Professional Conduct, Independence, and Quality Management
xf xf xf xf xf xf xf
xf Chapter 20: Legal Liability
xf xf xf
Chapter 21: Assurance, Attestation, and Internal Auditing Services
xf xf xf xf xf xf xf
2
,CHAPTERf1
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
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Answersto ReviewQuestions xf xf xf
1-1 The study of auditing is more conceptual in nature compared to other accounting courses. R
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ather than focusing on learning the rules, techniques, and computations required tofprepare financia
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lstatements, auditing emphasizes learning aframeworkfof analytical andlogicalskillsfto evaluate the
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relevance and reliability ofthe systems and processes responsible for financial information, aswell
x f xf xf xf xf xf xf xf xf xf xf xf xf xf
asfthe information itself. To be successful, students mustflearn the framework and then learn to usefl
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ogicfand common sense in applying auditing concepts tofvariousfcircumstances and situations.
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Understanding auditing canimprovefthedecision making ability ofconsultants, businessma xf xf xf xf xf xf
nagers, and accountants by providing a frameworkffor evaluating the usefulness andreliabil
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ity of information.
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1-2 There is a demand for auditing in a free- xf xf xf xf xf xf xf xf
market economy because the agency relationship between an absentee owner and a manager pro
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duces a natural conflict of interestfdue to thefinformation asymmetry that exists between the owner
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and manager. As a result, theagentfagrees to be monitored asfpart of his/her employmentfcontract.
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Auditing appears to befacost-effective form of monitoring.
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Theempirical evidence suggestsauditing was demandedprior xf xf xf xf
togovernmentfregulationsuc
xf h as statutory auditfrequirements. Additionally, many private x f xf xf xf xf xf xf
companies and other entities not subje ctfto government auditing regulations also demand
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auditing.
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1-3 The agency relationship between an owner and manager produces a natural conflict of inte
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rest because of differencesfin the two parties‘ goals and because of informationfasymmetrythatfexi
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sts between them. That is, the manager generally hasfmore information aboutfthe ‗true‘financial po
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sition and resultsfof operations of thefentity than the absentee owner does. If both parties seek to m
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aximize their own self-
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interest, itfisflikely thatfthe manager will not act in the best interestfof the owner and may manipulate t
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he information provided to the owner accordingly.
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1-4 Independence isfan importantfstandard for auditors. If an auditor is not independent ofthe c xf xf xf xf xf xf xf xf xf xf xf xf
lient, users may losefconfidence in the auditor‘s ability to report truthfully on the financial
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statements
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, and the auditor‘s workfloses its value. From an agency perspective, if the principal (owner) knowsft
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hatftheauditor is notfindependent, the owner will not trust thefauditor‘s work.
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Thus, theagentwillnot hire theauditor becausethefauditor‘s reportfwillnotfbeeffective inreducing inf
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x ormation riskffrom thefperspective of the owner.
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1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and evaluatin xf xf xf xf xf xf xf xf xf xf xf
gevidence regarding assertions aboutfeconomicfactionsfand eventstoascertain thedegree of cor
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respondence between those assertions and established criteria and communicating the results t
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o interested users.
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Assurancefis engagement in which a practitioner expresses a conclusion designed to enha xf xf xf xf xf xf xf xf xf xf xf
ncethedegreeofconfidence of theintended users other thantheresponsible party aboutthe
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outcom e of the evaluation or measurementfof a subject matter againstfcriteria.
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Examples of assurance services arefassurance (audit) of financial statements, assurance o xf xf xf xf xf xf xf xf xf xf
f prospective financial information, assurance of reporting oninternal control,assurance of
x f xf xf xf xf xf xf xf xf xf
3
, xf sustaina bility reporting, and assurance of electronicfcommerce.
xf xf xf xf xf xf
4
,• Tableof Contents xf
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
xf xf xf xf xf xf xf xf xf
xf Chapter 2: The Financial StatementfAuditing Environment
xf xf xf xf xf
Chapter3: Audit Planning, Types ofAudit Tests, and Materiality
xf xf xf xf xf xf xf xf xf
xf Chapter 4: Risk Assessment
xf xf xf
Chapter 5: Evidence and Documentation
xf xf xf xf
Chapter 6: Internal Control infa Financial StatementfAudit
xf xf xf xf xf xf
xf Chapter 7: Auditing Internal Control over Financial Reporting
xf xf xf xf xf xf xf
Chapter 8: Audit Sampling: An Overview and ApplicationftofTests of Controls Chapter
xf xf xf xf xf xf xf xf xf xf
9: Audit Sampling: An Application to Substantive Tests of Account Balances Chapter 10:
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xf Auditingfthe Revenue Process xf xf
Chapter 11: Auditingfthe Purchasing Process
xf xf xf xf
Chapter 12: Auditing the HumanfResource Management Process
xf xf xf xf xf xf
xf Chapter 13: Auditing the Inventory Management Process
xf xf xf xf xf xf
Chapter 14: Auditing the Financing/Investing Process:Prepaid Expenses, Intangible Assets, and Property, Plant, and Equip me
xf xf xf xf xf xf xf xf xf xf xf xf xf xf
Chapter 15: Auditingfthe Financing/Investing Process:Long-
xf xf xf xf
Term Liabilities, Stockholders’ Equity, and Income Statement Accounts
xf xf xf xf xf xf xf
xf Chapter 16: Auditing the Financing/Investing Process: Cashand Investments
xf xf xf xf xf xf xf
xf Chapter 17: Completing thefAuditfEngagement
xf xf xf
Chapter 18: Reports onfAudited Financial Statements
xf xf xf xf xf
Chapter 19: Professional Conduct, Independence, and Quality Management
xf xf xf xf xf xf xf
xf Chapter 20: Legal Liability
xf xf xf
Chapter 21: Assurance, Attestation, and Internal Auditing Services
xf xf xf xf xf xf xf
2
,CHAPTERf1
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
xf xf xf xf xf xf xf
Answersto ReviewQuestions xf xf xf
1-1 The study of auditing is more conceptual in nature compared to other accounting courses. R
xf xf xf xf xf xf xf xf xf xf xf xf xf xf
ather than focusing on learning the rules, techniques, and computations required tofprepare financia
xf xf xf xf xf xf xf xf xf xf xf xf xf
lstatements, auditing emphasizes learning aframeworkfof analytical andlogicalskillsfto evaluate the
xf xf xf xf xf xf xf xf xf
relevance and reliability ofthe systems and processes responsible for financial information, aswell
x f xf xf xf xf xf xf xf xf xf xf xf xf xf
asfthe information itself. To be successful, students mustflearn the framework and then learn to usefl
xf xf xf xf xf xf xf xf xf xf xf xf xf xf xf
ogicfand common sense in applying auditing concepts tofvariousfcircumstances and situations.
xf xf xf xf xf xf xf xf xf xf
Understanding auditing canimprovefthedecision making ability ofconsultants, businessma xf xf xf xf xf xf
nagers, and accountants by providing a frameworkffor evaluating the usefulness andreliabil
xf xf xf xf xf xf xf xf xf xf xf
ity of information.
xf xf xf
1-2 There is a demand for auditing in a free- xf xf xf xf xf xf xf xf
market economy because the agency relationship between an absentee owner and a manager pro
xf xf xf xf xf xf xf xf xf xf xf xf xf
duces a natural conflict of interestfdue to thefinformation asymmetry that exists between the owner
xf xf xf xf xf xf xf xf xf xf xf xf xf xf
and manager. As a result, theagentfagrees to be monitored asfpart of his/her employmentfcontract.
xf xf xf xf xf xf xf xf xf xf xf xf xf
Auditing appears to befacost-effective form of monitoring.
xf xf xf xf xf xf xf
Theempirical evidence suggestsauditing was demandedprior xf xf xf xf
togovernmentfregulationsuc
xf h as statutory auditfrequirements. Additionally, many private x f xf xf xf xf xf xf
companies and other entities not subje ctfto government auditing regulations also demand
xf xf xf xf xf xf xf xf xf xf xf xf
auditing.
xf
1-3 The agency relationship between an owner and manager produces a natural conflict of inte
xf xf xf xf xf xf xf xf xf xf xf xf xf
rest because of differencesfin the two parties‘ goals and because of informationfasymmetrythatfexi
xf xf xf xf xf xf xf xf xf xf xf xf
sts between them. That is, the manager generally hasfmore information aboutfthe ‗true‘financial po
xf xf xf xf xf xf xf xf xf xf xf xf xf
sition and resultsfof operations of thefentity than the absentee owner does. If both parties seek to m
xf xf xf xf xf xf xf xf xf xf xf xf xf xf xf xf xf
aximize their own self-
xf xf xf xf
interest, itfisflikely thatfthe manager will not act in the best interestfof the owner and may manipulate t
xf xf xf xf xf xf xf xf xf xf xf xf xf xf xf xf
he information provided to the owner accordingly.
xf xf xf xf xf xf xf
1-4 Independence isfan importantfstandard for auditors. If an auditor is not independent ofthe c xf xf xf xf xf xf xf xf xf xf xf xf
lient, users may losefconfidence in the auditor‘s ability to report truthfully on the financial
xf xf xf xf xf xf xf xf xf xf xf xf xf xf
statements
xf
, and the auditor‘s workfloses its value. From an agency perspective, if the principal (owner) knowsft
xf xf xf xf xf xf xf xf xf xf xf xf xf xf xf
hatftheauditor is notfindependent, the owner will not trust thefauditor‘s work.
xf xf xf xf xf xf xf xf xf xf
Thus, theagentwillnot hire theauditor becausethefauditor‘s reportfwillnotfbeeffective inreducing inf
xf xf xf xf xf xf xf
x ormation riskffrom thefperspective of the owner.
f xf xf xf xf xf
1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and evaluatin xf xf xf xf xf xf xf xf xf xf xf
gevidence regarding assertions aboutfeconomicfactionsfand eventstoascertain thedegree of cor
xf xf xf xf xf xf xf xf
respondence between those assertions and established criteria and communicating the results t
xf xf xf xf xf xf xf xf xf xf xf xf
o interested users.
xf xf xf
Assurancefis engagement in which a practitioner expresses a conclusion designed to enha xf xf xf xf xf xf xf xf xf xf xf
ncethedegreeofconfidence of theintended users other thantheresponsible party aboutthe
xf xf xf x f xf xf xf xf
outcom e of the evaluation or measurementfof a subject matter againstfcriteria.
xf xf xf xf xf xf xf xf xf xf xf
Examples of assurance services arefassurance (audit) of financial statements, assurance o xf xf xf xf xf xf xf xf xf xf
f prospective financial information, assurance of reporting oninternal control,assurance of
x f xf xf xf xf xf xf xf xf xf
3
, xf sustaina bility reporting, and assurance of electronicfcommerce.
xf xf xf xf xf xf
4
