,Auditing
A Practical Approach
Third Canadian Edition
ROBYN MORONEY
Monash University, Caulfield East, Australia
FIONA CAMPBELL
EY, Melbourne, Australia
JANE HAMILTON
La Trobe University, Bendigo, Australia
VALERIE WARREN
Kwantlen Polytechnic University, Surrey, British Columbia
Partial Adaptation of Modern Auditing & Assurance Services, Sixth Edition
Philomena Leung, Paul Coram, Barry J. Cooper, Peter Richardson
,VICE PRESIDENT, EDUCATION Tim Stookesberry
DIRECTOR, BUSINESS, ACCOUNTING,
AND FINANCE, Michael McDonald
ACQUISITIONS EDITOR Emily Marcoux
DEVELOPMENT EDITOR Daleara Jamasji Hirjikaka
SENIOR MARKETING MANAGER Anita Osborne
SENIOR CONTENT MANAGER Dorothy Sinclair
PRODUCTION EDITOR AND MEDIA SPECIALIST Meaghan MacDonald
DESIGN Wiley
COVER DESIGN Joanna Vieira/Wiley
COVER PHOTO ® Kahn David D Ficarra / EyeEm / Getty Images
This book was set in 10/12 Stix Regular by Aptara, Inc. Printed and bound by Quadgraphics-Versailles.
Founded in 1807, John Wiley & Sons, Inc. has been a valued source of knowledge and understanding
for more than 200 years, helping people around the world meet their needs and fulfill their aspirations.
Our company is built on a foundation of principles that include responsibility to the communities we
serve and where we live and work. In 2008, we launched a Corporate Citizenship Initiative, a global
effort to address the environmental, social, economic, and ethical challenges we face in our business.
Among the issues we are addressing are carbon impact, paper specifications and procurement, ethical
conduct within our business and among our vendors, and community and charitable support. For more
information, please visit our website: www.wiley.com/go/citizenship.
Copyright ® 2018 John Wiley & Sons Canada, Ltd.
Copyright ® 2017 John Wiley & Sons Australia, Ltd. All rights reserved. No part of this work covered by
the copyrights herein may be reproduced, transmitted, or used in any form or by any means—graphic,
electronic, or mechanical—without the prior written permission of the publisher.
Any request for photocopying, recording, taping, or inclusion in information storage and retrieval
systems of any part of this book shall be directed to The Canadian Copyright Licensing Agency (Access
Copyright). For an Access Copyright Licence, visit www.accesscopyright.ca or call toll-free, 1-800-893-
5777.
Care has been taken to trace ownership of copyright material contained in this text. The publishers will
gladly receive any information that will enable them to rectify any erroneous reference or credit line in
subsequent editions.
Material from CPA Canada has been adapted and/or reprinted with permission of the Chartered
Professional Accountants of Canada, Toronto, Canada. Any changes to the original material are the sole
responsibility of the author (and/or publisher) and have not been reviewed or endorsed by the Chartered
Professional Accountants of Canada.
Auditing: A Practical Approach, Third Canadian Edition, includes extracts from the Handbook of
International Quality Control, Auditing, Review, Other Assurance, and Related Services
Pronouncements, 2016-2017 Edition of the International Auditing and Assurance Standards Board,
published by the International Federation of Accountants (IFAC) in December 2016 and is used with the
permission of IFAC. All rights reserved. Contact for permission to reproduce,
store or transmit, or to make other similar uses of these extracts.
These extracts, as transposed into the CPA Canada Handbook—Assurance, are reproduced in Figures
1.3. 1.5, 2.5, 5.4. 13.3 to 13.7, tables 1.3, 6.3, and 6.4 and on p. 7-4 of this text.
Questions identified in the text as such have been provided courtesy of Chartered Accountants Australia
and New Zealand. Chartered Accountants Australia and New Zealand is a trading name for the Institute
of Chartered Accountants in Australia (ABN 50 084 642 571) and the New Zealand Institute of Chartered
,Accountants—see charteredaccountantsanz.com for further information.
We are grateful to the Association of Chartered Certified Accountants (ACCA) for permission to
reproduce past examination questions. The suggested solutions in the exam answer bank have been
prepared by us, unless otherwise stated.
Evaluation copies are provided to qualified academics and professionals for review purposes only, for
use in their courses during the next academic year. These copies are licensed and may not be sold or
transferred to a third party. Upon completion of the review period, please return the evaluation copy to
Wiley. Return instructions and a free of charge return shipping label are available at
www.wiley.com/go/returnlabel. If you have chosen to adopt this textbook for use in your course, please
accept this book as your complimentary desk copy. Outside of the United States, please contact your
local representative.
ISBN 978-1-119-40285-5 (E-Pub); 978-1-119-40276-3 (unbound)
The inside back cover will contain printing identification and country of origin if omitted from this page. In
addition, if the ISBN on the back cover differs from the ISBN on this page, the one on the back cover is
correct.
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
,About the Authors
ROBYN MORONEY, B.Ec. (Hons), M.Com., Ph.D., CA, CPA, is an Associate
Professor in the Department of Accounting and Finance at Monash University,
Australia. Before commencing her academic career, Robyn worked as an
auditor at Arthur Young, now Ernst & Young. With over 25 years' academic
experience, Robyn has previously held positions at the University of
Melbourne, the University of Auckland, the University of New South Wales,
and La Trobe University. As a member of the board of the Accounting and
Finance Association of Australia and New Zealand, which represents the
interests of accounting and finance academics in both countries, Robyn has
taken on a number of roles, including co-chairing the conference technical
committee and the doctoral symposium. Her areas of research are the
behavioural aspects (auditor decision-making processes) and economics of
auditing.
FIONA CAMPBELL, B.Com., FCA, is an Assurance Partner with Ernst &
Young in Melbourne, Australia. Fiona has been serving clients in the
assurance practice since 1991 and has worked on audit clients primarily in the
manufacturing, consumer, and industrial products industries, as well as not-
for-profit sector organizations. She has considerable experience providing
professional services to Australian and foreign-controlled companies,
including large publicly listed and private companies. Fiona is also responsible
for assurance methodology and technology at Ernst & Young in Australia, and
she has been involved in designing the firm's global audit methodology for the
past 14 years, including ensuring compliance with both international and local
auditing standards.
JANE HAMILTON, B.Bus., M.Acc., Ph.D., is Professor of Accounting at the
Bendigo campus of the Regional School of Business, La Trobe University,
Australia, and previously held academic positions at the University of
Technology, Sydney. Jane has 20 years' experience in teaching and has
published the results of her auditing research in several Australian and
international journals.
VALERIE WARREN, B.Comm., MBA, CPA, CA, is the Accounting Department
Chair at the School of Business at Kwantlen Polytechnic University in British
Columbia. Before commencing her academic career, Valerie worked as an
auditor with KPMG. As well as teaching a variety of accounting courses,
including auditing, advanced accounting, and accounting theory, Valerie also
,serves as a Practice Review Officer for the Chartered Professional
Accountants of British Columbia, where she conducts practice reviews of
national, regional, and small CA firms to ensure compliance with current
accounting and assurance standards.
,Preface
Welcome to the third Canadian edition of Auditing: A Practical Approach. This
is not just another auditing text. As the title suggests, the textbook focuses on
how audits are conducted in practice. As authors, we bring our diverse
experiences to this book to provide a very different approach to teaching and
studying auditing. In addition to covering the essential topics of auditing, the
text provides greater insight into how an audit is conducted and the issues
that are of greatest concern to practising auditors.
As each chapter unfolds, students are introduced to the various stages of an
audit. Key auditing concepts are addressed in a succinct manner, making
them easily understandable. To underpin this approach, each chapter begins
with a diagrammatic representation of the stages of an audit, with the current
stage highlighted as we progress through the text. The diagram provides a
useful reference point to ground the discussion in each chapter to the relevant
stage in the audit process. To underpin our discussion of how an audit is
conducted, we use a case study of a hypothetical client, Cloud 9. The
discussion in each chapter is kept general, with our case study providing an
example of how the general principles behind each audit may be applied in
practice. By using this approach, students are provided with a continuing
example of how the concepts discussed may apply in practice.
The Cloud 9 case study provides a flexible learning tool to be used within an
auditing and assurance course. Details about Cloud 9 and its audit are
provided in each chapter to give an insight into how an audit is conducted, the
issues that auditors face at each stage of an audit, and the processes used to
gather evidence and arrive at conclusions. The Cloud 9 case materials can
form the basis of class discussions, student role plays, or online exchanges
between students. At the end of each chapter, a case-study problem is
provided using Cloud 9 as a basis.
To reinforce the practical approach of the text, students can conduct audit
procedures using the Cloud 9 case, which is now available in WileyPLUS.
Assignments include documentation of the knowledge of the entity, materiality,
and tests of controls. Where applicable, Excel-based working papers are
included. The Excel-based working papers can be created with different
numbers and business documents, so no two assignments are the same.
These problems can be used as part of a weekly tutorial or as an assignment
for students to work on individually or in groups (or some combination of the
,two).
This updated edition of the text includes many new professional environment
boxes to ensure they continue to focus on relevant trends in the profession.
New professional environment topics include enhancing professional
scepticism, data analytics, and the impact robotics may have on audits in the
future, to name a few. The text also reflects recent changes to assurance
standards, including the new auditor reporting requirements, enhanced focus
on disclosures, and the new terminology and standards for review
engagements. New visuals have been added as well; for example, audit risk
now includes a table of conditions and events that give rise to material
misstatement.
The product offers instructors superior content coupled with a unique and
comprehensive set of technology tools to aid in instruction and learning. The
whole course package has been carefully developed to expand the
educational experience. Features included in the digital WileyPLUS course
include:
a complete version of the e-text
a new feature incorporated in the e-text called “Material Matters,” which
leads students to various topical videos that provide more depth in the
related content area
ORION is a personalized, adaptive learning experience that gives students
the practice they need to build proficiency on topics while using their study
time more effectively. The adaptive engine is powered by hundreds of
unique questions per chapter, giving students endless opportunities for
practice throughout the course.
new multi-solution multiple-choice questions based on chapter content and
adapted professional application questions to allow students to test their
understanding outside of the classroom
a new interactive technical question type requiring students to select the
correct response from drop-down boxes augmented with a robust bank of
multiple-choice questions
Cloud 9 case assignments and, where applicable, Excel based working
papers with randomization, so instructors can create unique assignments
chapter PowerPoint slides
for instructors, the solutions manual and the test bank in Word and
computerized formats
,Overview of the text
Chapter 1: Introduction and overview of audit and assurance.
This chapter begins with a definition of assurance engagements, which leads
into a discussion of the source of the historical and ongoing demand for audit
services. This is then followed by assurance services, an explanation of how
they can differ, and the different levels of assurance and opinions that can be
provided by auditors. The role of the financial statement preparer is also
contrasted with that of the auditor. The regulations surrounding the provision
of assurance services are outlined and the expectation gap is explained. This
chapter provides the background that underpins the remainder of the text.
Chapter 2: Ethics, legal liability, and client acceptance.
This chapter provides an overview of the fundamental principles of
professional ethics that apply to all accountants. Particular attention is given to
auditor independence, including threats and safeguards. The auditor's legal
liability to their client and third parties is explained, together with the concept
of contributory negligence. This chapter ends with a discussion of the factors
to consider in the client acceptance or continuance decision, which marks the
commencement of our discussion of how an audit is conducted.
Chapter 3: Audit planning I.
The first stage of every audit involves planning. This important topic is
covered in two chapters. Chapter 3 begins with a discussion of the different
phases of an audit. The key components of the risk assessment phase are
gaining an understanding of a client, identifying the risk of fraud, assessing
the extent of related party transactions, evaluating the client's going concern
assumption, gaining an understanding of the client's corporate governance
structure, and evaluating how a client's information technology can affect risk.
These components of audit planning are described in detail in this chapter,
along with a discussion of how client closing procedures can impact reported
results.
Chapter 4: Audit planning II.
This chapter continues our discussion of audit planning. Specifically, this
chapter includes a definition of audit risk and describes its components. The
concept of materiality, the development of planning materiality, and how it is
used when conducting an audit is then described. The process used by
auditors in arriving at their audit strategy, which provides a blueprint for the
, remainder of the audit, is explained. The chapter concludes with an overview
of the use of analytical procedures during the risk assessment phase of an
audit.
Chapter 5: Audit evidence.
This chapter contains an overview of the different types of audit evidence and
the processes used by auditors to gather that evidence throughout the audit.
The audit assertions, which aid in risk identification and the design of audit
procedures, are defined. The concept of sufficient appropriate audit evidence
is explained. The procedures when using the work of an expert or another
auditor are described. This chapter concludes with a discussion of how
auditors document the details of evidence gathered in their working papers.
Chapter 6: Sampling and overview of the risk response phase of the audit.
This chapter begins with a discussion of audit sampling. Sampling and non-
sampling risk are explained and contrasted and then followed by a discussion
of the difference between statistical and non-statistical sampling. Various
sampling methods used in practice are then described. The factors that
impact sample sizes when testing controls and conducting substantive tests
are then outlined. Tests of controls and substantive procedures are then
described. A description of the difference between tests of controls and
substantive procedures and the factors that impact the nature, timing, and
extent of audit testing are explained.
Chapter 7: Understanding and testing the client's system of internal controls.
This chapter provides an overview of internal controls. Internal control is
defined and the seven generally accepted objectives of internal control
activities are outlined. Internal controls at the entity level are explained and
contrasted. This chapter discusses how an auditor determines when to
conduct their tests, how they identify different types of controls, how they
select the techniques to use when testing controls, how they select controls to
test, and how they design their tests of controls. The chapter demonstrates
that once controls testing is completed, an auditor must interpret the results of
their testing and the implications of the findings for the remainder of the audit.
A description is provided of how an auditor documents their understanding of
their client's system of internal controls. Based upon that understanding, an
auditor will then identify strengths and weaknesses in their client's system of
internal controls and communicate their findings to those charged with
governance in the organization.
A Practical Approach
Third Canadian Edition
ROBYN MORONEY
Monash University, Caulfield East, Australia
FIONA CAMPBELL
EY, Melbourne, Australia
JANE HAMILTON
La Trobe University, Bendigo, Australia
VALERIE WARREN
Kwantlen Polytechnic University, Surrey, British Columbia
Partial Adaptation of Modern Auditing & Assurance Services, Sixth Edition
Philomena Leung, Paul Coram, Barry J. Cooper, Peter Richardson
,VICE PRESIDENT, EDUCATION Tim Stookesberry
DIRECTOR, BUSINESS, ACCOUNTING,
AND FINANCE, Michael McDonald
ACQUISITIONS EDITOR Emily Marcoux
DEVELOPMENT EDITOR Daleara Jamasji Hirjikaka
SENIOR MARKETING MANAGER Anita Osborne
SENIOR CONTENT MANAGER Dorothy Sinclair
PRODUCTION EDITOR AND MEDIA SPECIALIST Meaghan MacDonald
DESIGN Wiley
COVER DESIGN Joanna Vieira/Wiley
COVER PHOTO ® Kahn David D Ficarra / EyeEm / Getty Images
This book was set in 10/12 Stix Regular by Aptara, Inc. Printed and bound by Quadgraphics-Versailles.
Founded in 1807, John Wiley & Sons, Inc. has been a valued source of knowledge and understanding
for more than 200 years, helping people around the world meet their needs and fulfill their aspirations.
Our company is built on a foundation of principles that include responsibility to the communities we
serve and where we live and work. In 2008, we launched a Corporate Citizenship Initiative, a global
effort to address the environmental, social, economic, and ethical challenges we face in our business.
Among the issues we are addressing are carbon impact, paper specifications and procurement, ethical
conduct within our business and among our vendors, and community and charitable support. For more
information, please visit our website: www.wiley.com/go/citizenship.
Copyright ® 2018 John Wiley & Sons Canada, Ltd.
Copyright ® 2017 John Wiley & Sons Australia, Ltd. All rights reserved. No part of this work covered by
the copyrights herein may be reproduced, transmitted, or used in any form or by any means—graphic,
electronic, or mechanical—without the prior written permission of the publisher.
Any request for photocopying, recording, taping, or inclusion in information storage and retrieval
systems of any part of this book shall be directed to The Canadian Copyright Licensing Agency (Access
Copyright). For an Access Copyright Licence, visit www.accesscopyright.ca or call toll-free, 1-800-893-
5777.
Care has been taken to trace ownership of copyright material contained in this text. The publishers will
gladly receive any information that will enable them to rectify any erroneous reference or credit line in
subsequent editions.
Material from CPA Canada has been adapted and/or reprinted with permission of the Chartered
Professional Accountants of Canada, Toronto, Canada. Any changes to the original material are the sole
responsibility of the author (and/or publisher) and have not been reviewed or endorsed by the Chartered
Professional Accountants of Canada.
Auditing: A Practical Approach, Third Canadian Edition, includes extracts from the Handbook of
International Quality Control, Auditing, Review, Other Assurance, and Related Services
Pronouncements, 2016-2017 Edition of the International Auditing and Assurance Standards Board,
published by the International Federation of Accountants (IFAC) in December 2016 and is used with the
permission of IFAC. All rights reserved. Contact for permission to reproduce,
store or transmit, or to make other similar uses of these extracts.
These extracts, as transposed into the CPA Canada Handbook—Assurance, are reproduced in Figures
1.3. 1.5, 2.5, 5.4. 13.3 to 13.7, tables 1.3, 6.3, and 6.4 and on p. 7-4 of this text.
Questions identified in the text as such have been provided courtesy of Chartered Accountants Australia
and New Zealand. Chartered Accountants Australia and New Zealand is a trading name for the Institute
of Chartered Accountants in Australia (ABN 50 084 642 571) and the New Zealand Institute of Chartered
,Accountants—see charteredaccountantsanz.com for further information.
We are grateful to the Association of Chartered Certified Accountants (ACCA) for permission to
reproduce past examination questions. The suggested solutions in the exam answer bank have been
prepared by us, unless otherwise stated.
Evaluation copies are provided to qualified academics and professionals for review purposes only, for
use in their courses during the next academic year. These copies are licensed and may not be sold or
transferred to a third party. Upon completion of the review period, please return the evaluation copy to
Wiley. Return instructions and a free of charge return shipping label are available at
www.wiley.com/go/returnlabel. If you have chosen to adopt this textbook for use in your course, please
accept this book as your complimentary desk copy. Outside of the United States, please contact your
local representative.
ISBN 978-1-119-40285-5 (E-Pub); 978-1-119-40276-3 (unbound)
The inside back cover will contain printing identification and country of origin if omitted from this page. In
addition, if the ISBN on the back cover differs from the ISBN on this page, the one on the back cover is
correct.
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
,About the Authors
ROBYN MORONEY, B.Ec. (Hons), M.Com., Ph.D., CA, CPA, is an Associate
Professor in the Department of Accounting and Finance at Monash University,
Australia. Before commencing her academic career, Robyn worked as an
auditor at Arthur Young, now Ernst & Young. With over 25 years' academic
experience, Robyn has previously held positions at the University of
Melbourne, the University of Auckland, the University of New South Wales,
and La Trobe University. As a member of the board of the Accounting and
Finance Association of Australia and New Zealand, which represents the
interests of accounting and finance academics in both countries, Robyn has
taken on a number of roles, including co-chairing the conference technical
committee and the doctoral symposium. Her areas of research are the
behavioural aspects (auditor decision-making processes) and economics of
auditing.
FIONA CAMPBELL, B.Com., FCA, is an Assurance Partner with Ernst &
Young in Melbourne, Australia. Fiona has been serving clients in the
assurance practice since 1991 and has worked on audit clients primarily in the
manufacturing, consumer, and industrial products industries, as well as not-
for-profit sector organizations. She has considerable experience providing
professional services to Australian and foreign-controlled companies,
including large publicly listed and private companies. Fiona is also responsible
for assurance methodology and technology at Ernst & Young in Australia, and
she has been involved in designing the firm's global audit methodology for the
past 14 years, including ensuring compliance with both international and local
auditing standards.
JANE HAMILTON, B.Bus., M.Acc., Ph.D., is Professor of Accounting at the
Bendigo campus of the Regional School of Business, La Trobe University,
Australia, and previously held academic positions at the University of
Technology, Sydney. Jane has 20 years' experience in teaching and has
published the results of her auditing research in several Australian and
international journals.
VALERIE WARREN, B.Comm., MBA, CPA, CA, is the Accounting Department
Chair at the School of Business at Kwantlen Polytechnic University in British
Columbia. Before commencing her academic career, Valerie worked as an
auditor with KPMG. As well as teaching a variety of accounting courses,
including auditing, advanced accounting, and accounting theory, Valerie also
,serves as a Practice Review Officer for the Chartered Professional
Accountants of British Columbia, where she conducts practice reviews of
national, regional, and small CA firms to ensure compliance with current
accounting and assurance standards.
,Preface
Welcome to the third Canadian edition of Auditing: A Practical Approach. This
is not just another auditing text. As the title suggests, the textbook focuses on
how audits are conducted in practice. As authors, we bring our diverse
experiences to this book to provide a very different approach to teaching and
studying auditing. In addition to covering the essential topics of auditing, the
text provides greater insight into how an audit is conducted and the issues
that are of greatest concern to practising auditors.
As each chapter unfolds, students are introduced to the various stages of an
audit. Key auditing concepts are addressed in a succinct manner, making
them easily understandable. To underpin this approach, each chapter begins
with a diagrammatic representation of the stages of an audit, with the current
stage highlighted as we progress through the text. The diagram provides a
useful reference point to ground the discussion in each chapter to the relevant
stage in the audit process. To underpin our discussion of how an audit is
conducted, we use a case study of a hypothetical client, Cloud 9. The
discussion in each chapter is kept general, with our case study providing an
example of how the general principles behind each audit may be applied in
practice. By using this approach, students are provided with a continuing
example of how the concepts discussed may apply in practice.
The Cloud 9 case study provides a flexible learning tool to be used within an
auditing and assurance course. Details about Cloud 9 and its audit are
provided in each chapter to give an insight into how an audit is conducted, the
issues that auditors face at each stage of an audit, and the processes used to
gather evidence and arrive at conclusions. The Cloud 9 case materials can
form the basis of class discussions, student role plays, or online exchanges
between students. At the end of each chapter, a case-study problem is
provided using Cloud 9 as a basis.
To reinforce the practical approach of the text, students can conduct audit
procedures using the Cloud 9 case, which is now available in WileyPLUS.
Assignments include documentation of the knowledge of the entity, materiality,
and tests of controls. Where applicable, Excel-based working papers are
included. The Excel-based working papers can be created with different
numbers and business documents, so no two assignments are the same.
These problems can be used as part of a weekly tutorial or as an assignment
for students to work on individually or in groups (or some combination of the
,two).
This updated edition of the text includes many new professional environment
boxes to ensure they continue to focus on relevant trends in the profession.
New professional environment topics include enhancing professional
scepticism, data analytics, and the impact robotics may have on audits in the
future, to name a few. The text also reflects recent changes to assurance
standards, including the new auditor reporting requirements, enhanced focus
on disclosures, and the new terminology and standards for review
engagements. New visuals have been added as well; for example, audit risk
now includes a table of conditions and events that give rise to material
misstatement.
The product offers instructors superior content coupled with a unique and
comprehensive set of technology tools to aid in instruction and learning. The
whole course package has been carefully developed to expand the
educational experience. Features included in the digital WileyPLUS course
include:
a complete version of the e-text
a new feature incorporated in the e-text called “Material Matters,” which
leads students to various topical videos that provide more depth in the
related content area
ORION is a personalized, adaptive learning experience that gives students
the practice they need to build proficiency on topics while using their study
time more effectively. The adaptive engine is powered by hundreds of
unique questions per chapter, giving students endless opportunities for
practice throughout the course.
new multi-solution multiple-choice questions based on chapter content and
adapted professional application questions to allow students to test their
understanding outside of the classroom
a new interactive technical question type requiring students to select the
correct response from drop-down boxes augmented with a robust bank of
multiple-choice questions
Cloud 9 case assignments and, where applicable, Excel based working
papers with randomization, so instructors can create unique assignments
chapter PowerPoint slides
for instructors, the solutions manual and the test bank in Word and
computerized formats
,Overview of the text
Chapter 1: Introduction and overview of audit and assurance.
This chapter begins with a definition of assurance engagements, which leads
into a discussion of the source of the historical and ongoing demand for audit
services. This is then followed by assurance services, an explanation of how
they can differ, and the different levels of assurance and opinions that can be
provided by auditors. The role of the financial statement preparer is also
contrasted with that of the auditor. The regulations surrounding the provision
of assurance services are outlined and the expectation gap is explained. This
chapter provides the background that underpins the remainder of the text.
Chapter 2: Ethics, legal liability, and client acceptance.
This chapter provides an overview of the fundamental principles of
professional ethics that apply to all accountants. Particular attention is given to
auditor independence, including threats and safeguards. The auditor's legal
liability to their client and third parties is explained, together with the concept
of contributory negligence. This chapter ends with a discussion of the factors
to consider in the client acceptance or continuance decision, which marks the
commencement of our discussion of how an audit is conducted.
Chapter 3: Audit planning I.
The first stage of every audit involves planning. This important topic is
covered in two chapters. Chapter 3 begins with a discussion of the different
phases of an audit. The key components of the risk assessment phase are
gaining an understanding of a client, identifying the risk of fraud, assessing
the extent of related party transactions, evaluating the client's going concern
assumption, gaining an understanding of the client's corporate governance
structure, and evaluating how a client's information technology can affect risk.
These components of audit planning are described in detail in this chapter,
along with a discussion of how client closing procedures can impact reported
results.
Chapter 4: Audit planning II.
This chapter continues our discussion of audit planning. Specifically, this
chapter includes a definition of audit risk and describes its components. The
concept of materiality, the development of planning materiality, and how it is
used when conducting an audit is then described. The process used by
auditors in arriving at their audit strategy, which provides a blueprint for the
, remainder of the audit, is explained. The chapter concludes with an overview
of the use of analytical procedures during the risk assessment phase of an
audit.
Chapter 5: Audit evidence.
This chapter contains an overview of the different types of audit evidence and
the processes used by auditors to gather that evidence throughout the audit.
The audit assertions, which aid in risk identification and the design of audit
procedures, are defined. The concept of sufficient appropriate audit evidence
is explained. The procedures when using the work of an expert or another
auditor are described. This chapter concludes with a discussion of how
auditors document the details of evidence gathered in their working papers.
Chapter 6: Sampling and overview of the risk response phase of the audit.
This chapter begins with a discussion of audit sampling. Sampling and non-
sampling risk are explained and contrasted and then followed by a discussion
of the difference between statistical and non-statistical sampling. Various
sampling methods used in practice are then described. The factors that
impact sample sizes when testing controls and conducting substantive tests
are then outlined. Tests of controls and substantive procedures are then
described. A description of the difference between tests of controls and
substantive procedures and the factors that impact the nature, timing, and
extent of audit testing are explained.
Chapter 7: Understanding and testing the client's system of internal controls.
This chapter provides an overview of internal controls. Internal control is
defined and the seven generally accepted objectives of internal control
activities are outlined. Internal controls at the entity level are explained and
contrasted. This chapter discusses how an auditor determines when to
conduct their tests, how they identify different types of controls, how they
select the techniques to use when testing controls, how they select controls to
test, and how they design their tests of controls. The chapter demonstrates
that once controls testing is completed, an auditor must interpret the results of
their testing and the implications of the findings for the remainder of the audit.
A description is provided of how an auditor documents their understanding of
their client's system of internal controls. Based upon that understanding, an
auditor will then identify strengths and weaknesses in their client's system of
internal controls and communicate their findings to those charged with
governance in the organization.
