for payroll cycle, 195 in purchasing and disbursement, 182
Accuracy in recording transactions, 13 ACL software, 102 Acquisition and expenditure activities, 232 Acquisition and expenditure cycle; see also Payroll
cycle assertions about transactions and events, 327 audit evidence
internal control questioimaire, 351-353 linked to production cycle, 369-370 professional standards references, 317 PCAOB inspections, 340 substantive procedures
auditing other accounts in, 330-334 completeness assertion, 328-330 other expenses, 334 presentation and disclosure, 334
typical activities basic activities, 320-321 purchasing goods and services,
321-322 receiving goods and services, 322 recording assets, expenses aid
liabilities, 323 WorldCom fraud, 318
Acts discreditable, 612-613 Actual costs vs. standard costs, 372 Actual rate of deviation, 729 Act-utilitarianism, 593 Adelphia Communications, Inc., 124, 319, 634 Adhikari, Anand, C29 Adjusting entries
for audit completion, 467-469 research on, 469 rollover method, 468 uncorrected misstatements, 468
American Accounting Association, 5, 6, 21, 119n, 170 Committee on Basic Auditing Concepts, 4
American Bankers Association, 240 American Bar Association, 461 American depository receipts, C26-C27 American Institute of Certified Public Accountants,
21,47, 119n, 170, 240, C9;see also Assurance Services Executive Committee; Code of Professional Conduct
on assurance services, 8, 570 Attest Engagements on Greenhouse Gas
816,819 Audit Standards Guide, 39 Center for Public Company Audit Firms, 55 on client confidentiality, 146 and codes of conduct, 594 on core competencies, 27 definition of audit sampling, 726 Division for Firms, 566-567 on educational requirements, 24 and generally accepted government auditing
standards, 692 Joint Ethics Enforcement Program, 617-618 Joint Trial Board, 618 on operational auditing, 684 on operational audits, 22 Private Companies Practice Section, 566-567 Professional Ethics Executive Committee, 595,
596-597 on purpose of audit, 5 on purpose of audits, 497 on review and compilation services, 558 rules as moral clause, 612 rules of conduct
accounting principles, 609-610 acts discreditable, 612-613 advertising and solicitafion, 613-614 commissions and referral fees, 614-615 compliance with standards, 609 confidentiality, 610-611 contingent fees, 612 form and organization name, 615-616 genera! standards, 608 integrity and objectivity, 607-608
sampling tables, 760-763 on self-regulation, 36 and state licensing process, 25 WebTrust Service, 573-574 and XBRL reporting, 9
American International Group (AIG), 411,472, 518, 634
American Medical Association, 165 American Stock Exchange, 145 America Online, 273 Amersham, 652 Analytical procedures
for audit completion, 457-458 * for audit planning stage, 136 and audit stages, 458 at beginning of audit, 142 by computer, 103 definition, 97, 136 at end of audit, 142 examples, 142 information sources and form of, 97 for obtaining evidence, 90-98
Auditing Standards Board on, 91 PCAOB on, 91 types of procedures, 92
production cycle, 380-381 revenue and collection cycle, 284 in risk assessment, 136-142
asking what could be wrong, 140-141 cash flow analysis, 141-142
compare expectations with recorded amount, 139
compare results with forecasts, 141 define significant differences, 139 develop expectations, 138 documentation, 140 horizontal analysis of statements, 139 investigate significant differences, 139-140 vertical analysis of statements, 139
for sampling risk, 799-800 and Sarbanes-Oxley Act, 142
Anand, Geeta, C29 Andrews, C. E., C2 Annual report; see Form 10-K Antifraud section
AOL Time Warner, 608 Apollo Group, Inc., 644 Apple Inc., 521 Appropriate evidence, 50
requirements for, 51 and sufficient evidence, 52
Appropriate financial reporting framework, 549 application of requirements, 568-570
standards, 568 written report/oral advice, 570
Approved vendor list, 321 Arm's length transactions, 413 Arredy, James T., 135 Arthur Andersen, 43, 135, 493, 657, C23
dissolution of, 410, C17 and Enron, 77, 117, 589, 598, 604 prosecution of, 655 and PTL Club, C8 and WorldCom, 318,458
Arthur Andersen, case aftermath, C3-C4 codefendant in class action suit, C4 failure to detect fraud, CI overturned by United States Supreme Court, C3 trial for obstruction of justice, C1-C2
Arthur Young & Company, C17 Asare, S. K., 524 Asbury Automotive Group, 514 Ashtom, R. H., 98 Assertion risks for revenue and receivables, 270 Assertions
about payroll cycle, 195 debt and equity accounts, 425 investment accounts, 428 risk level of, 128
Associated with financial statements, 519-520 Association of Certified Fraud Examiners, 698
and codes of conduct, 595 on core competencies, 27 study on revenue recognition, 272
Assurance, 3 definition, 3 reasonable vs. absolute, 46
Assurance services Academy Awards and, 18 audit services, 18-19 consuhing services excluded, 9 definition, 7, 571-572 elements and boundaries of, 8 enhanced business reporting, 572 examples, 8-9
extensible Business Reporting Language, 572 and information technology, 9 and megatrends and business risks, 571 nonaudit attestation engagements, 19 Professional Sports Authenticator, 7 reasons for developing, 570-571 relation to auditing and attestation, 7-9 for sustainability, 574-575 sustainability reporting, 574-575 trust services, 572-574
Assurance Services Executive Committee (AICPA) on new business risks, 571 XBRL Assurance Task Force, 572
applying agreed-upon procedures, 549-550, 551 assumptions on prospective/pro forma financial
information, 442 compared to audit, 549 compliance attestation, 553-554 definition, 6 engagements related to, 549 examination of entity's intemal control, 552 example, 548 examples, 6 financial forecasts and projections, 550-552 governmental auditing, 689-690 introduction to, 548-549 professional standards, 549 professional standards references, 546 pro forma financial information, 550-552 relation to assurance services, 7-9 responsible party, 48 review and compilation as subset of, 558 review of management's discussion and
analysis, 554 and service organizations, 554-557 subject matter, 48 summary of reports, 557 types of
for Wilson Sporting Goods, 7 Attestation engagement reports, 696 Attestation services, 48 Attestation standards, 549
for assurance engagements, 74 and attest fiinction, 74 in compliance attestation, 553 definition, 74 for field work, 75 general, 75 and performance principle, 74 principles, 75 for reporting, 75 reporting under, 74 standards vs. principles, 74
Attest Engagements on Greenhouse Gas Emissions Information, 574
Attest function, 74 Attomey letters
American Bar Association guidelines, 461 attorney's response, 460 client's responsibility, 460 contents, 460 and contingent liabilities, 459-461 pending litigation, claims and assessments, 459-^61 sample, 462 unasserted claims, 461
Attorney's response, 460-461 Attributes sampling
to assess control risk, 727-728 and audit risk model, 726-727 discovery sampling, 773
Index 13
docimientation, 771 evaluation
calculating upper limit rate of deviation, 765-768
evaluation decision, 768-770 qualitative evaluation of deviations, 770-771
block selection, 793 deciding on method, 793 haphazard selection, 793 systematic random selection, 792-793 unrestricted random selection, 792
sample size determination expected population deviation rate, 758-759 population size, 759 and sampling risk, 756-757 tolerable rate of deviation, 757-758 using AICPA tables, 760-763
sampling risks associated with effectiveness loss, 730 efficiency loss, 730 risk of overreliance, 729-730 risk of underreliance, 729 tolerable rate of deviation, 728-729 upper limit rate of deviation, 728-729
sequential sampling, 772-773 seven step procedure, 752 substantive procedures, 728 tests of controls, 728 versus variables sampling, 795
Attribute standards, 685-686 Audit
analytical procedures in planning, 138 appropriate financial reporting framework, 549 compared to review of interim financial
information, 564 of depreciation schedule, 332 differentiated fi-om attestation engagement, 549 of elements, accounts or items in statements,
purpose of, 497 quality audit, 679 sampling use in, 715 stages of, 42, 47, 49, 51, 53 types of work, 21
Audit Analytics database, 502 Audit committee
auditor's meeting with, 476 of board of directors, 145 inquiry in risk assessment, 143-144 for intemal control, 177 Sarbanes-Oxley Act on, 475 skills and composition of, 177
Audit communications of all misstatements, 468 attomey letters, 459-462 client acceptance, 79 engagement letter, 81,82, 550 with individuals charged with govemance,
475^76
intemal control deficiencies, 198-199 management letter, 476 summary of, 475-476 termination letter, 81 written representations, 463-465
Audit completion audit timeline, 456-457 and Dell Inc., 454-^55 fieldwork procedures, 457-470 professional standards references, 453 responsibilities following audit report release date
communications on govemance, 475-476 management letter, 476 omitted procedures, 474 summary of audit commimications, 476-477
arrangement and indexing, 106-108 audit standards for, 105 current files, 105-106 definition, 104 lead schedule, 106 permanent files, 104-105 purpose, 104 software for, 104
prior to and after date of the financial statement, 456
production cycle, 373-375 inventory reports, 374 production plans and reports, 374 sales forecasts, 374
revenue and collection cycle accounts receivable listing and aging, 278 cash receipts listing, 278 credit check files, 277 customer statements, 279 pending order master file, 277 price list master file, 278 sales analysis reports, 278 sales detail (journal) file, 278
in revenue and collection cycle, 270 to test cash
bank reconciliation, 237 bank statements, 239-240 canceled checks, 237-239 cash disbursements joimial, 237 cash receipts joumal, 236-237
Audit failure, 637 potential for, 455
Audit fees definition, C24-C25 paid by Fortune 100 companies, C24 paid by General Electric 2000-2010, C24
Audit files, 859 Auditing
attestation as, 3 definition and fundamental principles, 42 in early America, 6 failure at Madoff Investment Securities, 45 with fraud awareness, 230 and high-profile fraud, 2 issues in acquisition and expenditure cycle,
339-341 long-term liabilities, 425-426 overall approach for revenue and collection
cycle, 269-271 overview, 5 as profession, 37 purpose of, 5 relation to assurance services, 7-9 systematic process
criteria for evaluating evidence, 5 obtaining evidence, 4-5
trouble spots in investments and intangibles, 430 types of, 5 use of specialists, 85
Auditing around the computer, 857 Auditing estimates on taxes, 331 Auditing standards; see also Generally accepted
auditing standards versus audit procedures, 39-40 compared to attestation standards, 549 compliance with, 609 convergence of, 40 definition, 39 direct-effect noncompliance, 146-147 and enterprise risk management, 121 fraud risk assessment, 144 and fundamental principles, 40-42
14 Index
Auditing standards; see also Generally accepted auditing standards—Cont.
on independent audit, 145-146 indirect-effect noncompliance, 147 on materiality, 88 multiple sets of, 40 new, 77-78 on risk of material misstatement, 126 mle-making bodies, 40 for special purpose frameworks, 567
Auditing Standards No. 3 on audit documentation, 104 No. 5 on intemal control, 50, 442 No. 5 on public company audits,
199-200 No. 5 on reporting requirements, 200-201 source of, 38
Auditing Standards Board, 14,40, 524, 609 on audit evidence, 91 development of standards, 38 and fundamental principles, 40-42 on management assertions, 11 origin and functions, 1 In reporting for nonpublic companies, 544 Statement of Position 09-1, 572
Audit marks and explanations, 107 Audit of cash, 231-251
accounting cycles, 231-232 cash disbursements
control activities, 235 risk of material misstatement, 236 tests of controls, 235
cash receipts control activities, 232-234 tests of controls, 234
evidence to test cash bank reconciliation, 237 bank statements, 239-240 canceled checks, 237-239 cash disbursements joumal, 237 cash receipts joumal, 236-237
extended procedures to detect fraud analyze mix of cash and checks, 249 count and recount petty cash, 248 covert surveillance, 249-250 document examination, 249 examine endorsements on checks, 248 expenditure analysis, 250 horizontal and vertical ^alysis, 250 inquiry, 249 marked coins and currency, 248 measure deposit time lag, 249 net worth analysis, 250 reasonableness tests, 250 retrieve customers' checks, 248
procedures bank reconciliation, 240-244 proof of cash, 245-246 schedule of interbank transfers, 244-245
professional standards references, 220 ways to detect fraud
case of missing petty cash, 246-247 laundry money skim, 247
Auditor independence, 589; see also Independence
Auditors; see also Certified public accountants assurances to imderwriters, 645-646 basis for inherent risk assessment, 131 causes of client losses, 636 certification requirements, 26 chartered accountants, 25 companies free to change, 79-80 confidentiality of client information, 146 deceived on inventory, 387-388 decision not to use confirmation, 285 direct personal knowledge as evidence, 51 education requirements, 24
effects of Sarbanes-Oxley Act on profession high costs of compliance, 807 reduced revenue, C24 restrictions on nonaudit services, 807
examination, 24 and expectation gap, 636 experience for certification, 25 failure at HealthSouth, 144 fees paid to, C24 focus on relevant assertions, 128 and Generally accepted auditing standards,
for HealthSouth, C15 information technology, 85 insider trading, 611 from Intemal Revenue Service, 23 kinds of certification, 23-24 knowledge of production process, 369 legal liability, 89 limited reporting engagement, 500 meeting with audit committee, 476 number of firms, C17-C18 professional skepticism, 15-18, 221 professional standards references, 1 for PTL Club, C7-C9 and registration statements, 645 response to significant risks
communicate fraud risk, 145-146 document risk assessment, 146 evaluation of accumulated results of
procedures, 144-145 responsibilities after date of the financial
responsibilities for noncompliance with laws and regulations, 146-148
responsibility for internal control, 172-174 responsibility to third-party users, 636 risk assessment
audit team discussion, 143 business risk, 121 definitions of fraud, 126 development of standards, 121 fraud risk factors, 122-123 information gathering, 137-138 information risk, 121-122 inquiry, 143-144 and management plans to mitigate risk, 121 preliminary analytical procedures, 138-142 recent examples of fraud, 124 red flags, 123 risk factor assessment, 144 risk factor identification, 137-144 skills and knowledge needed for, 121 types of fraud, 123-125 understanding client's strategies, 121
risks faced by, 118 role in subprime crisis, 635 sanctioned by PCAOB, 60 for Satyam Computer Services, C27 SEC constraints, 16 skepticism in financial and investment
cycle, 410 skill sets, 27 state certification and licensing, 25 tips on detecting inventory fraud, 388 understanding client's business
client's accounting principles, 135-136 company business risks, 135 company objectives and strategies, 135 company performance measures, 136 economic factors, 133 industry conditions, 133
nature of company, 134-135 regulatory factors, 133
understanding of information systems, 183 understanding of management process, 178 use of management assertions, 10-11
Auditors' defenses, 636 for client claims, 638 under Securities Act, 646-647
causation, 647 due diligence, 647
under Securities Exchange act, 651 in third-party claims, 642-643
Auditors' liability, 635; see also Legal liability changing landscape of
aiding and abetting, 656-657 class action suits, 658-659 increased exposure to litigation, 654 liability caps, 649-660 and limited liability partnerships, 657 proportionate liability, 657-658 Racketeer Influenced and Cormpt
effect of adverse opinion, 204 effect of scope limitation, 204, 205 material weakness, 201-203 other situations, 204-206
standard report, 202 Auditors' reports
date of, 456 dual date, 472 on elements, accounts, or items in statements,
565-566 on intemal control over financial reporting, 496 for special purpose frameworks, 567-568
Audit plan acquisition and expenditure cycle, 354—355 audit strategy in., 148 considering work of intemal auditors, 84-85 cycle of accounts, 92 definition, 47, 82, 105 engagement partner, 82-83 finance and investment cycle, 451-452 goals of, 83-84 and management assertions, 14 nature and extent of, 83 production cycle, 407-408
physical inventory observation, 407 pricing and compilation, 407-408
professional standards in, 82-83 revenue and collection cycle, 315-316 risk assessment, 83 staffing the engagement, 84 time budget, 86-87 use of information technology auditors, 83 use of specialists, 83
Audit plan sample audit approach, 167 audit strategy, 167 company overview, 165
Index 15
customers, supplies, and competitors, 165-166 government influences, 165 product pricing, 165 revenue and collection cycle
controls, 166 risks, 166
Audit procedures in allowable detection risk, 129 versus auditing standards, 39-40 cautions on conduct of, 98 dealing with management assertions, 14 definition, 39 and detection risk, 128 evaluating accumulated results of, 145 extended, 145 on finding pending litigation, claims, and
assessments, 460 to gather evidence in acquisition and expenditure
cycle, 332-334 for governmental audits, 690-691 integrated, 172 under lack of independence, 510-511 limited, 523 to obtain evidence
analytical procedures, 97-98 confirmation, 96-97 inquiry, 95-96 inspection of documents, 93-95 inspection of tangible assets, 95 observation, 95 recalculation, 97 reperformance, 97 scanning of documents, 95
omitted, 474 in Parmalat case, C20 purpose of, 90 related to financial reporting, 179 reliance on intemal control, 175 substantive procedures, 49 for understanding intemal control, 185
Audit program, 47,149 Audit reporting
on consistency, 511,512-513 on departures from GAAP, 504—506 elements of
conformity with GAAS, 497 matters affecting audit or client, 498 unusual aspects of audit examination,
497^98 on financial statements and related disclosures, 496 future of, 523-524 and General Motors problems, 494—495 on going-concem uncertainties, 511,513-514 on intemal control over financial reporting, 496 justified departures from GAAP, 511, 514—515 on lack of independence, 510-511 miscellaneous information, 522-523 nonpublic companies, 544-545 other than standard report, 503 purpose, 497-498 reissued report, 520 required supplementary information, 523 Sarbanes-Oxley Act requirements, 496 scope limitation report, 507-510 standard report, 498-502 summary of issues, 526 types, 518
basis for preparing audit plan, 149 definition, 148 establishing, 148-149 example, 167
Audit strategy memorandum, 148-149 Audit team, 27
brainstorming by, 143 collecting and evaluating evidence, 50-53 computerized tests of controls
auditing around the computer, 857 audit through the computer, 857-858 benchmarking, 862 parallel simulation, 860-861 program-embedded techniques, 858-860 simulated data techniques, 861-862
considerations in computerized processing existence of systematic vs. random errors,
841-842 inappropriate access to files, 842 lack of audit trail, 842 output errors, 841 reduced human involvement, 842
disagreements in, 47 effect on intemal control of computerized
systems, 842-843 fi^ud only in financial statements, 125
identifying controls to test, 193 inspection of stockholders' equity, 427 intemal control communication, 206-207 management letter, 206 managing identified risks, 178 need for specialized skills, 85 for new clients, 84 performing tests of control, 193-196 preliminary assessment of control risk, 191-193 problems with end-user computing, 864 reasons for evaluating intemal control
assess risk of material misstatement, 174 effectiveness of control, 172-174 identify fi*aud risk, 172
reassessment of control risk, 196 statistical approaches for variables sampling
classical variables sampling, 796 monetary unit sampling, 796
understanding client's intemal controls decision on testing controls, 190-191 documentation of controls, 190-191 focus on significant accounts, 185 identifying controls to test, 185-187 identifying entity-level controls, 185-187 identifying transaction-level confrols,
186-187 intemal control questionnaire, 188-190 prior to engagement, 185
understanding materiality, 48 understanding of control activities, 179-180 use of materiality, 90 walkthrough of computerized transactions,
840-841 work in production cycle, 379 work on bank reconciliation, 234-244
Audit through the computer advantages, 857 evaluate effectiveness of controls, 858 significant controls, 857
Audit timeline audit completion date, 457 audit report release date, 46 date of the auditors' report, 456 date of the fmancial statements, 456 interim testing, 456 schematic for, 456 subsequent events, 473 subsequently discovered facts, 457,473
Audit trail on computer, 102 defmition, 99 in end-user computing, 865 existence of, 857 from information systems, 183 lack of, 842
Audit work date of, 107 interim, 86 tests of controls and timing of, 755 year-end, 86
Aurora Foods, Inc., 319 Authority for intemal control, 176 Authorization
of cash disbursements, 235 of credit, 276 to execute transactions, 180 of expenditures, 325 in finance and investment cycle, 423 of investments, 419 of securities offerings, 416 of transactions, 230
Authorization and approval controls, 851 Automated application controls, 849-851; see also
Computer controls definition, 843 methods of testing, 859
Automatic terminal logoff, 848, 865
16 Index
Automobile industry Car Allowance Rebate Plan, C12 rise and fall of General Motors, CI 1-CI3
Auto Parts & Repair, Inc., 334 Availability of trust services, 573 Available-for-sale securities, 431
receivables, 270 Balance sheet, management assertions on, 12 Balance sheet ratios, 164 Banco Espirito Santo, 634 Bank Administration Institute, 240 Bank confirmation letter, 240-242 Bank examiners, 5,23 Bank of America, 243,414, 717
in Parmalat case, C20 Bank of New England, 634 Bank reconciliation, 230,233
in audit evidence, 237 in audit of cash, 240-244 audit team work, 243-244 cutoff bank statement, 23 dangers of, 240 electronic audit confirmation, 243 procedures, 243 proof of cash, 245-246 vouching deposits in transit, 243
Bank statements, 238-239 Banner Corporation, 424 BarChris Construction Corporation, 646 Bar codes for inventory count, 384 Barrionuevo, Alexi, C2n Barron's, 137 Baseball cards, 7 Baseline, 862 Basic allowance for sampling risk, 808-809 Batch processing, 845-846 Batch totals; 851 Bay Area Laboratory Cooperative, 869 BDO Consulting, 126 BDO Seidman LLP, 619, 633-634 Beazer Homes USA Inc., 122 Beckstead and Watts, LLP, 36-37, 60 Bell, Kristen, 375 Bellman, Eric, C29 Benchmark, for calculating materiality, 88-89 Benchmarking, 862 Bernard L. Madoff Investment Securities, 2,45,411 Berra, Yogi, 453 Berton, Lee, 7 Best Buy, 458, 520-521 Best practices for brainstorming, 143 Beta errors, 716 Big bath, 414 Big Eight accounting firms, C17
Big Four accounting firms, 6 decrease on consulting services, 21 in India, C26 litigation involving, 634 nonaudit services, CI 7-C 18 origin of, 18-19 PCAOB inspections, 455 PCAOB inspections on computer
controls, 840 report on deficiencies, 59-60 revenues in 2010, 19 on use of intemal auditors, 85
Big GAAS/Little GAAS, 39 Bill and hold, 297 Billing, 176 Bill of lading, 276, 322 Bill of materials, 371 BJ's Wholesale Club, Inc., 868 Black, Conrad, 124 Blank form confirmation, 285 Blank purchase order, 325 Blind purchase order, 322 Block selection, 722
in attributes sampling, 793 in nonstatistical attributes sampling, 773 in nonstatistical sampling, 819
Bloomberg Businessweek, 137 Bloomingdale's, 385 Blue sky regulations, 644 Blumenthal, Richard, 688 Board of directors
and intemal control, 176 minutes of meetings, 137,138
Bodner, Martin, 356 Boeing Company, 388 Bologna, G. J., 222n Bond indenture, 425 Bond-linked issue premium stmctures, CI8 Bond payment default, C20 Bonds, 416
recording, 417 Boone, J. P., 660 Borders Group, Inc., 466 Boston Scientific Corporation, 424 Brainstorming, for risk assessment, 143 Bransten, Eileen, 717 Braswell, M., 143 Brazel, J. F., 143 Breach of contract, 637, 638
cause of client losses, 636 definition, 637
Bribery, 322, C26 of employees, 125
Bridge workpaper, 191-192 Bristol-Myers, 273 British Airways, 842, 853 Brown, Cheryl, 684 Bmell, Samuel, CI Bryant, Kobe, 375 Budget comparisons, 141 Budliov, Barry, 290 Buffett, Warren, 116 Burden of proof
in common law liability, 638, 639 recent changes, 654 under Securities Act of 1933,646 under Securities Exchange act, 650
Bush, Loretta Fredy, 135 Business environment, 2 Business expansion, 136 Business magazines, 137 Business reporting, 572 Business risk, 2
Business risk analysis, 682 Business Today, C27, C29
c CAAT; see Computer-assisted auditing techniques Cablevision, 319 Calculated liabilities and credits, 417 Campbell Soup Company, 649 Canadian Institute of Chartered Accountants, 557
Attest Engagements on Greenhouse Gas Emissions Information, 574
examination of endorsements, 248 Capital, raising, 416-417 Capital budget, 416 Capitalizing, 319 Capital leases, 413,414 Capital markets, effects of Sarbanes-Oxley
Act on, C23 Capital stock, 427 Car Allowance Rebate Plan, C12 CardSystems, Inc., 868 Carpenter, T. D., 143 Cash
checks and mix of, 249 controls over, 231 liquidity of, 231 methods of receiving, 232-233
Cash basis framework, 566 Cash disbursements
control activities, 235 intemal control questionnaire, 265-266 tests of controls, 235 vouching, 329
intemal control questionnaire, 265 Caskill, Tyler, C29 Castarella, J. R., 660 Castellena, J. F., 177 Categorical imperative, 592 Causation defense, 638, 647 Cayman Islands account, C20 Celestica Inc., 424 Cendant, 124, 634 Census Bureau, 572 Center for Audit Quality Alert 2009-55, 572 Center for Medicare and Medicaid Services, 166 Central Bank V. First Interstate Bank, 656 Central Bureau of Investigation, India, C27 Central limit theorem, 812 CEOs
coercing CFOs into fi^ud, 125 examples of fraud by, 124 and strong control environment, 228
CERT Coordination Center, 867 Certification
education requirements, 24 examination for, 24-25 experience required, 25
Index 17
global perspective, 25 by states, 25 summary of requirements, 26 types of, 23-24
Certified forensic accountant, 23 Certified ft^ud examiner, 23 Certified information systems auditor, 23 Certified information systems security professional, 23 Certified information technology professional, 23-24 Certified intemal auditor, 23 Certified management accountant, 23 Certified public accountants, 21, 23
core competencies required, 27 education requirements, 24 independence, 8 services performed by, 8 state certification and licensing, 25 uniform mobility, 25
Certified public accountants exam, 121 Chain of custody, 230 Chain of custody of evidence, 700 Channel stuffing, 273
by Vitesse Semiconductor Corporation, 274 Characteristic of interest, 720 Chartered accountants, 25 Charter International, 514 Chazen, C., 61 In Check Clearing for the 21st Century Act, 245 Check digits, 851 Check forgery, 221, 237-238 Check kiting, 244—245 Checks, third-party, 360 Check 21, 245 Chief financial officers, coerced into fraud, 125 China Construction Bank, 619 Chiquita Brands International Inc., 148 Chisholm Bierwolf Nelson & Morrill LLC, 517 Chrysler Corporation, 495 Chung Mong-koo, 124 Church, B., 59 Circumstance-imposed scope limitations, 507-508 Citibank, 423 Citigroup, Inc., 414,471, 867 CIT V. Glover, 640 Civil liability
Securities Act of 1933, 645-646 Securities Act vs. Securities Exchange act, 650 Securities Exchange Act of 1934,650
Clancy & Company PLC, 517 Class Action Fairness Act of 2005, 658-659 Class action suit, 658-659
co-defendants with Arthur Andersen, C4 Classical variables sampling
calculating, 814-815 formula, 812 risk of incorrect rejection, 813-814 standard deviation, 814
Classification, 13-14 Classification assertion, for payroll cycle, 195
Clearing accoimt, 360,458 Client acceptance or continuance
cases of rejection, 78 changes of auditors, 79-80 contact with predecessor auditor, 79-80 evaluation, 137-138 filings with SEC, 80 policies for, 79 and predecessor auditor, 78 retention reviews, 79 search for potential problems, 79
definition, 12-13 of recorded sales, 277 risk level of, 128
Completeness assertion acquisition and expenditure cycle, 328-330
about account balances, 329 search for unrecorded liabilities, 329-330
versus existence assertion, 798 for inventory count, 383 for long-term liabilities, 425 for payroll cycle, 195 production cycle tests of controls, 379,380 in purchasing and disbursement, 182
18 Index
Completeness assertion—Cont. revenue and collection cycle, 270 for sales, 276
Completeness direction, 195 dual-direction tests of controls, 288-289
with auditing standards, 609 costs of Sarbanes-Oxley Act, 200 with ethical requirements, 80-82 with independence requirements, 80-82 with management directives, 682-683 in management objectives, 170
Compliance attestation conditions for, 553 contractual obligations, 553 federal and state regulatory requirements, 553 major steps, 553 risk considerations, 553 types of reports, 553, 554
Compliance audits fraud in, 697 by intemal auditoi^, 684
Compliance controls, 170 Component auditors, 517
function of, 516-517 Computer abuse; see Computer fraud Computer-assisted auditing techniques, 97,278
for analytical procedures, 103 for confirmation, 103 for document examination, 103 for fraud investigation, 103 for recalculation, 102-103 for scanning, 103 software packages, 101-102
general controls access to programs and data control, 847-849 computer operations controls, 845-847 hardware controls, 843 program change controls, 845 program development controls, 844-845 summary on, 849, 850
implementation of, 857 output controls
control total reports, 853 master file change, 853 ou^ut distribution, 853 review for reasonableness, 853
Computer forensics, 869 Computer fraud
and computer forensics, 869 cybercfimes, 866-867 hackers, 868 key findings on, 867 preventive, detective, and damage-limiting
controls, 868-869 at ProQuest, 867 recent incidents, 867 types of activities, 867
control f\mctions, 362 service organizations for, 362
Computerized processing environment, 181 computer as audit trail, 102 effect on audit plan
computer-assisted techniques, 101-103 data availability, 101
extent of use, 100 need for specialized skills, 101 organizational structure, 100
evaluation criteria cloud computing, 99-100 initiation of transactions, 99 potential for error or fraud, 99 potential management supervision, 99 temporary transaction trails, 99 uniform processing, 99
Computerized processing systems and assessment of intemal control, 840 audit team walkthrough of transactions, 840-841 automated application controls, 843 cloud computing, 866 computer operators, 847 control group, 847 control issues related to, 845 control risk assessment, 855-856 data conversion operators, 846 effect on understanding of intemal control,
842-843 end-user computing, 864—866 existence of systematic vs. random errors,
841-842 general controls, 843 inappropriate access to files, 842 lack of audit trail, 842 librarians, 846-847 objectives of operations controls, 847 outsourcing, 866 points of potential misstatement, 856 possibility of input errors, 841 and processing failures, 847 professional standard references, 838 reduced human involvement, 842 separation of duties, 847 systems analysts, 847 testing controls, 857-862
Computerized sales and accounts receivable, 277 Computer operations controls
batch processing, 845-846 end-user computing
data entry controls, 865 limiting concentration of functions, 864 processing controls, 865 separation of duties, 864 systems development and modification,
Confidentiality of tmst services, 573 Confirmation
of accounts/notes receivable auditor's decision not to use, 285 blank form confirmation, 285 controlling mailing of, 287-288 dealing with misstatements, 288 dual-purpose nature of, 292-293 electronic process, 287-288 evidence of existence, 285 negative confirmation, 285-287 performance date, 289 positive confirmation, 285-287
procedures for interim date, 289 response to positive confirmation, 289
of accounts payable, 330 applications, 96 of capital stock, 427 cautions on, 98 by computer, 103 of evidence, 96-97 for notes and bonds payable, 425-426 revenue and collection cycle, 291
Confirmation letter, 96-97 Conflict of interest, 3
at Ernst & Young, 16 examples of, 607 occasions for, 15-16
Congressional Joint Committee on Taxation, 14 ConocoPhilips, 424 Conrad, Kent, 688 Consequences of business decisions, 3 Consignment goods, 386 Consistency in auditors' report, 511, 512-513 Consolidata, Inc., 593 Consolidated Edison, Inc., 417,418 Constmctive fraud, 637, 639 Consultants, fraud pertaining to, 125 Consulting services, 9
Contingent liabilities, 459-461 Continuing audit files, 104; see also Permanent files Continuing professional education, 24, 43 Contra-assets, 458 Contract, engagement letter as, 82 Contract cost padding, 125 Contractual agreements, 553 Contra-liabilities, 458 Contributory negligence, 638 Control activities
acquisition and expenditure cycle, 325 audit team understanding, 179 for cash disbursement, 235 for cash receipts, 232-234 compensating controls, 193 definition, 178 documentation of, 179 at Enron, 179 in ERM, 120 finance and investment cycle
compensating control, 421 oversight or review, 421 problems with separation of
responsibilities, 421 information processing activities, 181-182 payroll cycle
control checking procedures, 361 intemal control questionnaire, 362 payroll report, 361 separation of responsibilities, 361
performance reviews, 180 physical controls, 181 to prevent and detect errors/fraud, 179-180 preventive controls, 179-180 principles related to, 179 in production cycle
detailed check of activities, 376 separation of responsibilities, 376
revenue and collection cycle, 280 selection and development, 179-180 separation of duties, 180-181 spreadsheet goofs, 182 standards for audit teams, 179
Index
testing, 179 test of operating effectiveness, 191
Control-checking activities, 325 Control environment
audit committee, 177 flmction, 176 and management team, 176-177 principles, 176 and quality of eamings, 176-177 and size of companies, 177-178 survey items for assessing, 177
Control group, 847 Controlled reprocessing, 860 Control risk, 118, 127
attributes risk sampling for, 727-730 definition, 49,128 to determine tests of controls, 198 preliminary assessment, 191-193
in computerized environment audit team understanding, 855 focus on control procedures, 855 steps, 855 test operating effectiveness, 855-856
finance and investment cycle auditors' work on, 421 authorization, 423 control activities, 421 control over accounting estimates, 422 custody, 423 record keeping, 423 summary of, 424
payroll cycle, 361 production cycle
account balances, 375 control activities, 376 custody, 376-377 direction of tests of controls, 379 effect on substantive procedures, 375 entity-level controls, 376 intemal control questionnaire, 377, 405^06 summary, 379 tests of controls, 377-378
revenue and collection cycle, 270 account balances, 279 control activities, 280 control considerations, 279-280 intemal control questionnaire, 280 simmiary of, 282 tests of controls, 280-282
Controls compensating, 193 in computerized processing systems, 845 entity-level, 185-187
acquisition and expenditure cycle, 325 in production cycle, 376 revenue and collection cycle, 275
identified for testing, 193 ongoing evaluation of, 184 physical, 181 tests performed on, 190-196 transaction-level, 186-187
Control system flowchart constmcting, 188-190 definition, 188 illustration of, 190
Control total reports, 852,853 Control totals, 852, 865 Convergence of standards, 40 Cookie jar reserves, 122,126 Cooper, Cynthia, 168, 318, 678 Coopers & Lybrand, 44, 368, C17 Copyrights
auditor questions about, 333 custody of, 419
Coram, P. J., 524 Core competencies, 27 Corporate charters and bylaws, 137 Corporate culture at Enron, 179 Corporate govemance, new focus on, 571 Corporate social responsibility, 574 COSO; see Committee of Sponsoring Organizafions Cosourcing strategy, 680 Cost(s)
comparisons in production cycle, 111 of compliance with Sarbanes-Oxley Act, 200 of inventory, 369 misstated, 319
Cost accounting assumptions of, 134 in production cycle
overhead allocation, 373 records needed for, 372 standard vs. actual costs, 372
Cost accounting department, 360,373 Cost-benefit analysis of intemal control, 171 Coster, F. Donald, 37 Cost of goods sold, manipulation of, 369 Cost of goods sold ratio, 164 Cottrell, D. M., 390n, 715n Countrywide Financial, 124, 634 Covered members, 598 Covert surveillance, 249-250 Cover-up attempts in accounting, 229 Cowan, Alison Leigh, CIO Cox, Christopher, C23 CPA Candidate Bulletin, 25 CPA examination, 24-25 CPA firms
audit services, 18 intemal audit services, 22 involved with PTL Club, C7-C8 as limited liability partnerships, 657 number of firms, CI 7-C 18 mles on form of organization and name,
615-616 CPA Mutual Insurance Company of America, 636 Crawford, Robert M., Jr., 362 Crazy Eddie's, 369 Credit Alliance v. Arthur Andersen, 640, 654 Credit card fraud, 868 Credit check files, 111 Credit granting, 275-276 Creditors, fraud pertaining to, 125 Credit sales, 276 Cressey, D. R., 225n Crime Investigation Department, India, C28 Criminal liability
under Securities Act of 1933, 647 imder Securities Exchange Act, 651
Cross-referencing, 106 Cullison, Kelly, CI5 Cuomo, Andrew, 634 Current assets report; see Form 8-K Current files
and access to blank forms, 326 of assets, 180, 325-326
of blank checks, 235 of cash, 232 in finance and investment cycle, 423 fraud in, 377 of investments, 419 in payroll cycle, 358 in production cycle, 376-377 transfer of, 276
Customer master file, 841 Customer orders, 275-276 Customer order transaction file, 840-841 Customer retums and allowances, 273-274 Customers
authorizafion of credit, 176 billing, 176 delivery of goods/services to, 176 fraud pertaining to, 125
Databases, 137 Data comparisons, 865 Data conversion operators, 847 Data encryption, 868 Data entry and formatting controls, 851 Data entry controls, end-user computing, 865 Data files, revenue and collection cycle, 277-279 Data mining, 101 Data warehousing, 101 Date of audit work, 107 Date of the auditors' report, 456,499
lag between date of financial statements and, 473
and subsequently discovered facts, 472 Date of the financial statement, 47-48,456
lag until date of auditors' report, 473 and subsequent events, 470-472
Daugherty, B., 59n Davidson, Laurence Viele, 124 Days' sales in inventory ratio, 164 Days' sales in receivables ratio, 164 Debt and equity accounts, 425 Debt financing, 415 Debt-to-equity ratio, 164 Decision makers, assurance services for, 8 Decisions
affecting business risk, 2-3 and information risk, 3
and Parmalat, C20 Denise L. Napier et al v. PricewaterhouseCoopers, 649 Denoncourt, Jake, C29 Department of Defense, 22 Department of Human Resources, 22 Department of Justice, 148
in aftermath of Andersen trial, C4 enforcement of Foreign Corrupt Practices
Act, 652 Department of the Interior, 22 Department of the Treasury, 472 Departures from GAAP, 54-55, 503, 504-506
allowable, 129 basic definition of, 732 definition, 52, 128, 730 matrix approach, 131 planned, 129-130 in revenue and collection cycle, 270-271 for significant risks, 145
Detective controls, 180 Development of standards, 38 Deviafion conditions, in attribute sampling, 753-754 Deviations, 753
quantitative evaluation of, 770-771 Difference estimation, 817 Digitized signature, 851 Diligence Inc., 610 Direct Brokerage, 656 Direct-effect illegal acts, 222 Direct-effect'noncompliance, 146-147 Direction of tests of controls
completeness, 194 dual-direction, 195 occurrence, 194-196 in production cycle, 379
Disclaimer of opinion, 501 because of lack of independence, 510-511 definition, 55 and departures from GAAP, 503 on intemal control over financial reporting, 204 on intemal control, 199 and scope limitation reports, 508, 510 and unaudited financial statements, 519-520
Disclosure about fees, 605 for investments, 429-430 for special purpose frameworks, 568
Discount pricing, 368 Discovery sampling, 773
using AICPA tables, 760 Discriminant Z-score, 164 Disraeli, Benjamin, 633, 714 Division of responsibilities, 516-517 Documentary evidence, 51 Documentation
of analytical procedures, 140 of attributes sampling, 771 of audit sampling procedures, 736 in computerized processing, 844-845 of control activities, 179 of intemal control
control system flowchart, 188-190 decision on tests of controls, 190-191 intemal control questionnaire,
188, 189 narrative description, 188
long-term debt and interest expense, 426 of risk assessment, 146 of sampling procedures, 725 of variables sampling, 820
Document examination by computer, 103 to detect fi-aud, 249 in tests of controls, 194
Documents formal authorization, 94 inspection of
prepared by client, 94 prepared by outside parties, 93-94 scanning, 95 tracing, 94 vouching, 94
ordinary, 94 Dollar Tree Stores, Inc., 868 Dooley, James T., 387 Doran, John P., 414 Dortch, Richard, C7, C9 Doty, James R., 1, 587, 603, C28 Double billing, 125 Doubtful account ratio, 164 Dromm, Kenneth, 362 Dmgstore.com, 381 Dual control, 419 Dual date, 472 Dual-direction tests of controls, 195
of inventory count, 383 revenue and collection cycle, 281-282
difficulties, 227-228 employee monitoring, 228-230 enforcement, 230-231 integrity by example, 230-231 intemal control activities, 228-230 managing people pressures, 228
professional standards references, 220 red flags, 222-223 sources of, 221-222 white-collar criminals, 223-224
Employee hotlines, 228 Employees
collusion among, 222 monitoring to prevent fraud, 228-230
audit team issues lack of documentation and resting, 864 lack of physical security, 864
Index 111
lack of separation of duties, 864 limited computer knowledge, 864
control considerations computer operations controls, 864 data entry controls, 865 processing controls, 865 systems development and modification, 865—866
spreadsheet and data controls, 866 Engagement, unable to complete, 608 Engagement letter, 636
for agreed-upon procedures, 550 definition and purpose, 82 example, 81 intemal control considerations, 82 and termination letters, 82
audit documentation, 104—108 audit plan, 86-87 audit team disagreements, 47 in computerized environment, 99-103
computer as audit tool, 101-103 effect on planning, 100-103
considering work of intemal auditore, 84-85 for Enron, 77 materiality, 87-90 pre-engagement activities, 77-82 procedures for obtaining evidence, 90-98 PCAOB requirements, 197-198 professional standards references, 76 staffing, 84 steps, 47 time budget, 86-87 time for, 47-48 imderstanding client's business, 47 use of information technology auditors, 85 use of specialists, 85
and Arthur Andersen, 43, 77, 117, C4 corporate culture, 179 financial statements, 14 special purpose entities, 410
Enterprise risk management definition, 119 elements of, 119-120 manager use of, 178 paralleling auditing standards, 121
Enterprise risk management assessment, 8 Entity-level control
acquisition and expenditure cycle, 325 and assessment, 187 definition, 185 identifying, 185-187 in production cycle, 376 revenue and collection cycle, 275
Environmental audit, 685 Equity Funding Corporation of America, 867 Equity method of accounting, 431-432 ERM; see Enterprise risk management Ernst & Ernst v. Hochfelder, 649, 654 Emst & Whinney, C17 Ernst & Young, 52, 54, 60, 269, 272,455,466,472,
520-521, 605, 611, 634-635, 659, 798, 839, C17
and HealthSouth, C14, C15 indictment on tax shelters, CI8 litigation against, 16 rejection of client, 78 revenues 2010,19
Error correction and resubmission procedures, 852
Errors, 753 definition, 126, 222 versus fraud, 123 potential for, 99 preventive controls for, 179-180
Escott V. BarChris Construction Corporation, 646, 654
audit trail, 99 chain of custody of, 230 composition of, 4 concerning fraud, 230 criteria for evaluating, 5 criteria for gathering, 51-52 definition, 50 and detection risk, 52 documentary, 51 extemal, 51 extemal-intemal, 51 intemal, 51-52 key characteristics, 53 management assertions, 51 from management assertions, 14 persuasive, 50-51 protection in fraud cases, 700 purpose of obtaining, 4-5 quality hierarchy, 51-52 questionable at Parmalat, C20 relevant and reliable, 51 and risk of material misstatement, 49 substantive procedures to evaluate, 50-51 sufficiency, 52 used by governmental auditors, 5 verbal, 52 verified by computer, 102-103
Examination, 548 in compliance attestation, 553 of management's discussion and analysis, 554
Exception, 753 Existence, 12
altemative procedures to ensure, 289 of investments, 428 provided by confirmation, 285 risk level of, 128 of subsequent events, 471
Existence assertion accounts receivable, 283 for audit of accounts receivable, 270 in classical variables sampling, 812 versus completeness assertion, 798 for inventory count, 383 in nonstatistical sampling, 818
Farrelly, Jim, 340 FASB; see Financial Accounting Standards Board Fastow, Andrew, 135 FastTrak Corporation, 48 Federal Accounting Standards Advisory Board, 609 Federal Bureau of Investigation, 249
on computer forensics, 869 Federal Conspiracy Statute, 644 Federal Deposit Insurance Corporation, 513 Federal Emergency Management Agency, 120 Federal False Statements Statute, 644 Federal Mail Fraud Statute, 644 Federal Mogul, 471 Federal Reserve System, 237-238 Federal Trade Commission, on contingent fees, 612 Fedewa, Mark, 167 Fees, disclosure about, 605 Feinstein, Diane, 688 Ferguson, Ronald E., 124 Fictitious wages, C27 Fidelity bonds, 233 Fieldwork
procedures performed during adjusting entries, 467-468 attomey letters, 459-462 audit documentation review, 469-470 completing substantive procedures, 457-459 financial relationship disclosure, 467-469 going-concem uncertainties, 465-466 written representations, 463-465
standards, 41, 42, 75 File and operator controls, 852 Files, computer operations controls, 847 Finance and investment cycle
audit plan, 451-452 control risk assessment
auditors' work, 421 authorization, 423 control ^tivities, 421 control over accounting estimates, 422 custody, 423 record keeping, 423 summary of, 424
Enron's special purpose entities, 410 example of accounting estimates, 422 examples of shenanigans, 411 fraud cases: extended procedures
off-balance-sheet financing of inventory, 433^34
revenue forecasts, 435-436 shell corporation, 434-435 unregistered sale of securities, 432^33
Financial relationships, 44 Financial reporting; see also Intemal control
appropriate framework, 549 Auditing Standards Board requirements, 11 auditors' report on intemal control over, 200-206 on completeness and cutoff, 12-13 cover-up attempts, 229 at Dei! Inc., 174 effects of Sarbanes-Oxley Act on, C23 end-of-period adjustments, 174 on existence and occurrence, 12 fraudulent, 122-123 function, 10 by intemal auditors, 21 intemational standards, 54 at Krispy Kreme, 172-173 in management objectives, 170 management's annual report on intemal control
over, 199 organizations designed to improve, 170 overview of requirements, 568 PCAOB requirements, 11 presentation and disclosure, 13-14 in real world, 14 reasons for evaluating intemal control over, 172-174 reports on intemal control over, 496 on rights and obligations, 12 Sarbanes-Oxley Act on, 10 with special purpose fr^eworks, 566-568 summary on, 10-11 understandability, 13-14 unqualified opinion on intemal control
Financial statement disclosures, 469 Financial statements; see also Audited financial
statements audit teams and fraud in, 125 comparative, 520-521 date of, 47-48,456 disclosures
contingent liabilities, 459-461 litigation, claims and assessments,
460-461 double set of, C27 elements, accounts or items in, 565-566 of Enron Corporation, 14 errors vs. fraud in, 123 forged, C27 of General Motors, C11-C12 governmental auditing, 689 group, 516-517 horizontal analysis, 139 horizontal and vertical analysis, 250 inaccuracy permitted, 87 including footnote disclosures, 53 interim, 496 management assertions about, 10-14 material information in, 87 and materiality, 87-90 misleading, due to GAAP, 515 penalties for misleading, 171-172 relation to management assertions, 15 summary, 521-522 transparent, 13-14 vertical analysis, 139 as window into operations, 118
Financing requirements, 136 First, Bill, 358 First-in, first-out method, 369, 386 First Securities of Chicago, 649 Fisk,M. C.,7I7 FitzPatrick, R. C., 641n Fixed asset reports, 324 Fixed sampling plan, 772 Fleet National Bank V. Gloucester Company, 641 Flesher, D., 6 Flextronics, 424 Fogarty, J., 468n Foley, Mark, 869 Follow-up, 687 Footnote disclosure, 10,53
long-term liabilities, 426 Forbes, 137 Forbes, Walter, 124 Ford, Henry, 367 Ford Motor Company, 495 Foreign Cormpt Practices Act
as amendment to Securities Exchange Act, 651 examples of infractions, 148 increasing enforcement of, 652 purpose, 651 recent investigations, 651
Form 10-Q (SEC), 648 Fortress Re, 634 Fortune, 137 Fraud; see also Employee fraud
in acquisition and expenditure cycle, 319 Ambassador Eyewear Group, 290 in auto sales, 375 cause of client losses, 636 check forgery, 237-238 check kiting, 244-245 coercion of CFOs into, 125 compliance audit, 697 cookie jar reserves, 122, 126 in custody, 377 at Deerfield College, 684 definition, 122, 222, 637 Global Crossing, 272 inconsequential vs. consequential, 145-146 insurance and tax fraud, 250 with invoices, 324 at Koss Corporation, 284 management rationales for, 122 in payroll cycle, 356
Pay + Plus Payroll, 362 time card forgery, 363-364
percentage increase 2005-2011, 126 potential for, 99 preventive controls for, 179—180 red flags, 123 related parties used in, 413 in revenue and collection cycle, 269 in review and compilation, 561 on rise, 126 signs in accounts payable, 335-336 Sirena Apparel Group, 290 at Societe Generale, 848 types of
art of examination, 697-698 building a case, 700 example, 699 fraud examiner responsibilities, 698-699 identification of fiaud, 696-697 knowledge of applicable laws, 697 obtaining litigation support, 700 performance standards references, 677-678 protecting evidence, 700
Fraud cases in acquisition and expenditure cycle, 336-339
phony doctors, 338-339 printing money, 336-337
finance and investment cycle off-balance-sheet financing of inventory,
433^34 revenue forecasts, 435-436 shell corporation, 434-435 unregistered sale of securities, 432-433
revenue collection cycle, 292-298 canny cashier, 293-294 dating of transactions, 297-298 frequent billing, 296-297 taxman, 294-296
Fraud detection, 696-697 in audit of cash
case of missing petty cash, 246-247 laundry money skim, 247
auditor responsibility, 125 audit team responsibility, 125
extended procedures analyze mix of cash and checks, 249 count and recount petty cash, 248 covert surveillance, 249-250 document examination, 249 examine endorsements on checks, 248 expenditure analysis, 250 horizontal and vertical analysis, 250 inquiry, 249 marked coins or currency, 248 measure deposit time lag, 249 net worth analysis, 250 reasonableness tests, 250 retrieve customers' checks, 248
during inventory inspection, 382 Fraud examinations, 697-698 Fraud examiners
compared to other auditors, 698 main objectives, 698-699 and materiality, 699
Fraud investigation by computer, 103
Fraud prevention program difficulties in building, 227-228 employee monitoring, 228-230 enforcement, 230-231 integrity by example, 230-231 intemal control activities, 228-230 managing people pressures, 228 strong control environment, 228
Fraud risk factors, 123 relation to misstatement, 126
Fraud risks communication of, 145-146 identified in planning stage, 172 key questions for, 229 in purchasing departments, 321 significant risks, 144
Fraudsters building a case against, 700 characteristics, 223-224 generating false payments, 335 personality red flags, 222-223 prosecution of, 231
GAAP; see Generally accepted accounting standards GAAS; see Generally accepted auditing standards GAGAS; see Generally accepted government auditing
standards Galen, M., CIO Gap Inc., 411 Garcia, Michael, 356 Gay, G., 442 Geiger, M. A., 514 Geisler & Oppenheimer, 619 Gemstar, 273 Gemstar>TV Guide Intemational, 124,465 General attestation standards, 75 General authorization, 180 General controls; see also Computer controls
definition, 843 methods of testing, 858
General Electric, 411, 430, 636, 652,654 General Electric, case
effects of Sarbanes-Oxley Act on auditors, C23-C24
fees paid to auditors, C24 SEC disclosure requirements, C24-C25
Generalization argument, 592 Generally accepted accounting principles, 5,549; see
also Departures fix)m GAAP on accoimts receivable, 173 based on going-concem principle, 513 on cost accounting, 372 on face value, 429 Fannie Mae accountmg not in compliance, 839 interim fmancial information, 564 on inventory, 369 misleading financial statements due to, 515 versus special purpose fireworks, 566-568 and types of opinions, 501 unqualified opinion in conformity with, 54-55
Generally accepted auditing standards, 9,39,74 on audit documentation, 470 and Auditing Standards Board, 38 versus audit procedures, 39 and audit report, 497, 498 audits based on, 636 basic vs. fundamental principles, 41 big vs. little, 39 categories of, 40-42 components of, 38 defmition, 38 departures from, 503 for governmental entities, 39-40
1 1 4 I n d e x
Generally accepted auditing standards—Co«r. implications of following, 500 on intemal control, 197 kinds of requirements, 38-39 milestones in history of, 37-38 multiple sets of standards, 40 and PCAOB, 38 performance principle, 46-53 purpose, 38 reporting principle, 53-60 requirement in inventory counting, 380 requirement on modified reports, 512 responsibility principle, 42-45 and sampling methods, 719 and SEC, 38 on verbal evidence, 52
Generally accepted government auditing standards, 689
and AICPA standards, 692 audit documentation, 692 literature on, 692 on performance audits, 693 significant reviews, 693 single audit, 693-694
Generally Accepted Privacy Principles, 573 General Motors, 369, 514, 634
case bankraptcy, C12 Car Allowance Rebate Plan, CI2 financial information 2003-2008, CI I going-concem uncertainties, C11-C12 government bailout, CI 1 profile of company, C12 reorganization in 2009, CI 1-C12 return as public company, C13 stock price performance 2003-2009, CI 1
losses and bailout, 494-495 General Re, 124 General standards, 41,42 General standards of conduct, 608 General use of prospective financial
information, 550 Ghost employees, 356 Giant Stores, 641 Gibbins, M., 469 Gill, John D., 229 Gittelsohn, J., 717 Global Crossing, 272 Globalization, 571 Glover, S. M., 40n, 390n, 715n Going concem, 142 Going-concem principle, 513 Going-concem imcertainties
ability to continue, 465-466 in auditors' report, 511, 513-514 Border Group failure, 466 companies receiving opinions on, 514 definition, 513 General Motors, 495, CI2 mitigating factors, 513 reports and bankruptcy, 514 research and reports, 514 self-fulfilling prophecy, 513
Governmental reports, 360 Government Auditing Standards, 40 Grandfathered loans, 601 Grant Thomton, 284, 388, 660
and Parmalat, C20 Grasslcy, Charles, 688 Gray, G. L., 524 Green, B. P., 561 Green, Raymond, 290 Greene, F. D., 641n Grocer's Spotlight, 137 Gross margin percentage
inflating, 381 and inventory, 380-381
Gross margin ratio, 164 Gross negligence, 637 Gross revenue, 272 Gross revenue benchmark, 89 Group auditors, 516-517 Group engagement team, 516 Group financial statements, in auditors' report 512
516-517 Grover, Robert, 717 Guardado, J. R., 165n Guha, Ramit, C29 Gullapali, D., 413n Gunny, K., 60n
H
Hackers, 847, 868 Hahn, Jessica, C6 Hall, T. W., 722n, 723 Hamilton, L., 642n Hamilton, Nick, 610 Haphazard selection, 722
in attributes sampling, 793 in nonstatistical attributes sampling, 773 in nonstatistical sampling, 819
Hardin, Rusty, C2 Hardware, 843 Hardware controls
definition, 843 echo check, 843
parity check, 843 preventive maintenance, 843
Harkins, Tom, 688 Harmon, Melinda, C2 Harris, Art, CIO Harvard Business Review, 137 Hash totals, 851 Hatfield, T. C., 469 Hawley, Frederick Bamard, 116, 118 Headings, 106 Health Management, 369 HealthSouth, 2,51,52,89,124,144,244,458,634
case auditors and risk factors, C15 conviction of CEO, C16 massive fraud at, C14-CI5 whistle-blowers, C15-C16
fraud at, 798 Hedging investments, 429 Hedging with derivatives, 120 Henderson, Frederick, C12 Henze, Diana, C15 Heritage USA, C5, C6 Hermanson, D. R., 59n Herron, T. L., 722n, 723, 793n Hertz Global holdings, 500 Hewitt, Conrad, 660 Hewlett-Packard, 471, 472, 651 Higher level of precision, 725 High-quality evidence, 51 Hill, W. T., 793n Hillison, W., 225, 696n Hiring, background checks, 230-231 Historical cost accounting, 134 Hoitash, R., 176n Holder of the privilege, 610 Hollinger Intemational Inc., 124 Hong Kong stock exchange, C23 Horizon/CMS, C14 Horizontal analysis, 250
definition, 139 Hospital Corporation of America, 358 Hot checks, 125 Houghton, C., 468n Household Intemational, 273 Houston, R. W., 59n, 469 Hughes, Jennifer, C29 Human relations department, 357-358 Human resources
AICPA rules for all audits, 598 covered members, 598 familiarity threat, 601 identified threats, 599 independence in appearance, 598 independence in fact, 598 management participation and advocacy,
602-603 questionable practices, 599 and SEC definitions, 600 summary, 599
commissions as impairment of, 615 compliance with requirements, 80-82 definition, 598 effects of Sarbanes-Oxley Act, 605 failure at Arthur Andersen, 598 Government Accountability Office rules, 606 of intemal auditors, 680 and nonaudit services, 604-605 PCAOB rules
disclosure about fees, 605 nonaudit services, 604-605 nonindependent relationships, 603
in principles of conduct, 596-597 results of lack of, 80-82 SEC rules
disclosure about fees, 605 nonaudit services, 604-605 nonindependent relationships, 603
violations of, 44 Independence in appearance, 43, 80,598,603 Independence in fact, 43, 80, 598, 603 Independence in mental attitude, 43, 80, 589 Independent auditor, 21 Independent auditors, at start of audit, 4-5 Indexing of audit documentation, 106-108 India
accounting environment, C26 Central Bureau of Investigation, C27
Indirect-effect compliance, 147 Indirect-effect noncompliance, 147 Individuals charged with govemance, 475-476 Industrial age, shift to knowledge age from, 571 Industrial spying, 868 Industry accounting and auditing guides, 137 Industry conditions
fraud risk factors, 123 in inherent risk assessment, 133
Industry developments, 136 Industry risk analysis, 682 Information
control of, 8 improving quality of, 8 in intemal control, 183-184 materially false and misleading, 122 reliable, 2-3 sources for risk assessment, 137-138
Information and communication, in ERM, 120 Information assurors, 9 Information processing control activities,
181-182
Information risk, 2-3, 118 auditor assessment of, 121-122 definition, 121-122
Information risk assessment, 8 Information systems
audit trail left by, 183 definition, 183 in small and medium-sized businesses, 184
Information Systems Audit and Control Association, 27
Information technology, 571 in assurance services, 9 in control activities, 179
Information technology auditors, 85 Inherent risk, 118
acquisition and expenditure cycle company examples, 319 misstated costs and expenses, 319 noncancelable purchase agreements, 319 relative assertion risks, 320 unrecorded liabilities, 319
assertions in revenue and collection cycle, 270 definition, 49,127-128,131 to determine tests of controls, 198 evaluation of, 83 finance and investment cycle, 411-415
in inventory counts, 390 in risk of material misstatement, 174 significant accounts based on, 185
Inherent risk assessment categories of misstatement, 131-133 company accounting principles, 135-136 company business risks, 135 company objectives and strategy, 135 company performance measures, 135 identification of risk factors, 134-135 industry, regulatory, and economic factors,
133-134 nature of the company, 134-135 process, 132 understanding client's business, 133
In-house intemal audit function, 679-680 Initial public offerings, 645
effect of Sarbanes-Oxley Act on, 200, C23 Input controls
authorization and approval, 851 batch totals, 851 check digits, 851 data entry and formatting, 851 error correction and resubmission
procedures, 852 hash totals, 851 limit and reasonableness tests, 852 missing data tests, 852 record counts, 851 sequence tests, 852 valid character tests, 852 valid sign tests, 852
Input errors, 841 Inquiry
by auditors in risk assessment, 143-144 cautions on, 98 to detect fraud, 249 to obtain evidence, 95-96 in tests of controls, 193-194 verbal, 96
Insider trading, 125, 611 Inspection, 59
Inspection of documents cautions on, 98 to obtain evidence, 93-95
Inspection of tangible assets cautions on, 98 to obtain evidence, 95
Institute for Chartered Accountants of India, C28 Institute of Intemal Auditors, 21, 119n, 170
and codes of conduct, 594 on core competencies, 27 definition of intemal auditing, 680 independence standards, 680 intemal auditing standards, 685-696 Intemational Standards for the Professional
Practice of Intemal Auditing, 685 scope of service, 683-685
Institute of Management Accountants, 27, ll9n, 170
and codes of conduct, 595 Insurers, fraud pertaining to, 125 Intangible assets
Intemal audit standards attribute standards, 685-686 certified intemal auditing certification, 686 and GAAS, 686 implementation standards, 685-686 and intemal audit department, 686 performance standards, 685-686 practice advisories, 686
Intemal control to achieve management objectives, 170 attributes risk sampling for, 727-730 auditor responsibility, 172-174 audit procedures and reliance on, 175 audit sampling for, 726 in computerized environment, 840 and control risk, 128 coping with fi-aud schemes, 222 cost-benefit analysis, 171 definition, 49, 170-171 effect of computerized processing, 842-843 in engagement letters, 82 at Fannie Mae, 839 features of effective system, 230 importance in audit engagement, 50 integrated framework, 175
control activities, 178-182 control environment, 176-178 information and communication, 183-184 monitoring, 184 risk assessment, 178
interim review, 564 Krispy Kreme report, 172-173 lapse at Allstate Tmcking, 50 limitations, 170-171 management responsibilities, 171-174 to prevent fraud, 228-230 purpose of, 169-170 reasonable vs. absolute assurance from, 170 reporting on, 199-200 Sarbanes-Oxley Act on, 169-170,171 strong, 228 types of audit opinions, 199
Intemal control communication, 206-207 Intemal control deficiency
Intemal control evaluation assess control risk, 191-193 audit team understanding of, 185-191 components as criteria for, 185 design effectiveness, 187 identify controls to test, 193 ongoing evaluation, 184 operating effectiveness, 187 perform tests of controls
direction of tests, 194-196 methods, 193-194 reassess control risk, 196
phases of, 186 professional standards references, 168
Intemal control letter, 207
Internal Control over Financial Reporting: Guidance for Smaller Public Companies (COSO), 176
Intemal control over financial reporting integrated with audited financial statements, 442
Intemal control paragraph of standard report, 498, 499,501-502
Intemal control questionnaire in acquisition and expenditure cycle, 326,
351-353 advantages, 188 for cash activities, 234 cash disbursements, 265-266 definition and purpose, 188 finance and investment cycle, 449-450 illustration of, 189 inventory, 406 payroll cycle, 362 production cycle, 377, 405-406 revenue and collection cycle, 313-314
361,362 on contingent fees, 612 Examination Report on PTL Club, C8 and PTL Club fraud, C6 on tax shelters, CI8
Intemational Auditing and Assurance Standards Board, 24, 40
Intemational Ethics Standards Board for Accountants, 24
Code, 616 Intemational Federation of Accountants, 24
and accounting standards, 596 and codes of conduct, 594
Intemational Financial Reporting Standards, 55 Intemational financial reporting standards, 5, 54, 549 International Standards for the Professional Practice
of Internal Auditing, 685 Intemational standards on auditing, 24 International Standards on Auditing, 40 Interpretive publications, 39 Interpublic, 273 Interviews, 96 Inventory
accounting problems, 369 analytical procedures, 380-381 auto sales fraud, 375 Boeing company report, 388 consignment goods, 386 fraud at Electric Scientific, 387 fraudulent manipulation of, 368-369 intemal control questionnaire, 406 largest current asset, 369 located away from chent's premises, 386 not on year-end date, 384-385 off-balance-sheet financing, 433-434 output of production cycle, 371 physical observation of, 381-386 potential for fraud, 387-388 tips on detecting fraud, 388
Inventory accounts, 370 Inventory control
just-in-time systems, 371 materials requisition, 372 production orders, 372
Inventory count auditors not present for, 386 client's instmctions, 382-383 cycle counts, 385, 390 under difficult circumstances, 384-385 GAAS requirement, 380 manual, 383 measurement challenges, 383
by professional inventory teams, 385-386 radio frequency identification, 384-385 statistical counting, 385 using bar code scanners, 384 when located away from premises, 386
case admission of tax fraud, CI 8 dismissed by Fannie Mae, C18 nonaudit services, CI 7-C 18 and number of auditing firms, CI 7-C 18 revenues in 2010, C17 tax consulting fees, CI8
dismissed by Fannie Mae, 839 forensic accountants, 174 and General Electric, C24 revenues 2010,19
Lead schedule, 106 Leahy, Joe, C29 Lear Corp., 514 Lease accounts, 412-143 Leases, 422 Legal envirormient, 634-635 Legal liability, 89; see also Common law liability;
Statutory law liability Auditing Advisory Committee on, 635 changing landscape for auditors, 654-660 deep pockets theory, 636 legal envirormient, 635-637 legal terminology, 637 professional standards references, 633 recent settlements with accounting firms, 634 Wells notice, 634-635
outsourcing noncore functions, 554 of people pressures, 228 plans to mitigate business risks, 121 reports on intemal control over financial
reporting, 496 responsibility for intemal control, 171-174 responsibility for risk management
enterprise risk management, 119-120 paradox of risk, 119 sources and types of risk, 118
Management assertions for Auditing Standards Board, 11 on completeness and cutoff, 12-13 as evidence, 4, 51 on existence and occurrence, 12 in financial statements, 10-11 importance of, 14 Miniscribe fraud, 12 presentation and disclosure, 13-14 for PCAOB, 11 relation to financial statements, 15 on rights and obligations, 12 Sarbanes-Oxley Act on, 10 summary on, 10-11 understandability, 13-14 on valuation and allocation, 13 WorldCom fi^ud, 13 worthless at Enron, 14
bill of lading to purchase order, 322 problem in, 319
Material information, 87-88
1 1 8 I n d e x
Materiality in audit plan, 87-89 calculating
benchmark for, 88-89 engagement circumstances, 89 nature of item or issue, 89 possible cumulative effects, 89-90
establishing level of, 87-88 for fraud examiners, 699 inaccuracy permitted, 87 material information, 87-88 performance, 88-90 professional judgment on, 90 related to knowledge of fraud, 145 of uncorrected misstatements, 468 use by audit teams, 90
Materiality concept, 48 Material misstatements, 10-11,48
business risk leading to, 136 detecting, 46 errors vs. fraud, 123 and relevant assertions, 185
Materials requisition, 372 Materials transfer ticket, 372 Material weakness, 197,206-207
effect on opinion, 204 in intemal control, 199 in intemal control over financial reporting,
formula for sample size determination, 812 Medeeros, Emanuel, 324 Medicare taxes, 361 Mehra, Puja, C27n, C28n Meijer, Inc., 853 Members of an unlimited class, 641 Menon, K., 514 Mental attitude, 43, 80, 589 Merck & Company, 456 Mergers and acquisitions transactions, 334 MetricStream, 684 MGM Mirage, 514 Michaels Stores, Inc., 867 Microsoft Access, 864 Microsoft Corporation, 461 Microsoft Excel, 190, 864 Microsoft Excel Service, 866 Milgram, Stanley, 590, 594 Millennium Chemicals, 411 Miller, C. G., 561 Miller, R. L., 61 In Miniscribe, 12 Minutes of board meetings, 137, 138 Misappropriation of assets, 126
definition, 222 Miscellaneous accounts, 458 Misrepresentation, cause of client losses, 636 Misrepresentation of facts, 607 Missing data tests, 852 Misstated costs and expenses, 319 Misstatements
and confirmation process, 288 detecting, 89 general categories of, 131-132 in inventory, 381-382
investigating causes of, 819-820 points of, in computerized environment, 856 in revenue and collection cycle, 273 susceptibility factors, 133 uncorrected, 468
Mitigating factors, 513 Mix of cash and checks, 249 Mock, T. J., 524 Modified cash basis framework, 566 Modified opinions, 501 Monetary unit sampling
NASDAQ, 145, 867 Nateili, Anthony, 651 National Aeronautics and Space
Administration, 689 National Association of State Boards of
Accoimtancy, 25 National Commission on Fraudulent Financial
Reporting, 170; see also Treadway Commission
National Stock Exchange, India, C26 National Student Marketing Association, 651 National Student Marketing case, 651 Nay, Lester, 649 Near privity, 640 Negative assurance, AICPA rule, 609-610 Negative confirmation, 285-286 Nelson, M., I22n Net realizable value, 369 Net revenue, 272 Net sales/total assets ratio, 164 Network, The, 126 Net worth analysis, horizontal and vertical
analysis, 250 New products and services, 136 New social stmctures, 571 New York Stock Exchange, 145, C23
Satyam listing on, C26 Nikko Cordial, 411 Nonaudit attestation engagement, 19 Nonaudit services, CI 7-C 18
effects of Sarbanes-Oxley Act on, C23 independence mle, 604-605
Noncancelable purchase agreements, 319 Noncompliance with laws and regulations
Opinion paragraph of standard report, 498,501 Opinion shopping, 568
Opportunity for employee fraud, 226 Options, 429 Oracle Corporation, 651 Orange County Register, 375 Orbital Sciences Corporation, 319 Ordinary negligence
definition, 637 in Securities Act of 1933, 645
Organizational stmcture, 134 of computerized processing, 100 and intemal control, 176
Ostling, Richard N., CIO Other accounts, 458 Other comprehensive bases of accounting, 566 Other-matter paragraphs, 512 Output controls; see Computer controls Output distribution, 853 Outsourcing
accounting applications, 100 of computer services, 866 intemal audit function, 679-680 of noncore functions, 554
Overhead allocation, 373 Overstatement, in MUS, 797 Overton, David, 656 Overton v. Todman Company CPAs, 656 Owens, William, C14, C15-C16, C16 Ownere, fraud pertaining to, 125 Ownership, 12
computerized system, 362 control activities, 361-362 custody, 358 falsified work hour records, 357
forms of, 356 fraud in, 356 inherent risks, 356 preparation by service organizations, 362 self-policing aspect, 356 tests of controls, 195-197 time card forgeries, 363-364 typical activities
persoimel, 357-358 record keeping, 358 supervision, 358 timekeeping, 358
Payroll distribution, 361 Payroll expense testing, 334 Payroll register, 359 Payroll report, 361-362 Payroll taxes, 360 PCAOB; see Public Company Accoimting Oversight
changes in auditors, 79-80 client acceptance of continuance policies, 79 compliance with independence and ethical
requirements, 80-82 dumping clients, 78 engagement letters, 81, 82 and integrity of management, 78-79 new standards for, 77-78 and predecessor auditors, 79-80 as risk assessment, 77-78 search for potential problems, 79
Preliminary audit procedures, 136-142 Prentice, Robert A., C5 Prepaid expenses, 330,331 Prescribed forms, 562 Presentation and disclosure, 10, 13-14
acquisition and expenditure cycle, 334 finance and investment cycle, 414 production cycle, 388 revenue and collecfion cycle, 291 for revenue and receivables, 270 WorldCom fraud, 13
Presumptively mandatory requirements, 38-39 Preventive, detective, and damage-limiting controls
administrative controls, 868 physical controls, 868 programmed range and reasonableness checks,
500, 521, 611, 634, 649, 839, C17, C18 Academy Awards and, 18 disclaimer of opinion, 205 failure at Satyam, 240 independence violations, 44 rejection of client, 78 revenues 2010, 19 and Satyam Computer Services fraud,
C26-C28 Price Waterhouse India, 474 Pricing and compilation tests, 386-387
audit plan, 407-408 Primary beneficiaries, 637, 640 Principle of utilitarianism, 593 Principles of attestation, 75 Privacy of trust services, 573 Private Securities Litigation Reform Act of 1995,
147-148,611,657-658 Privileged information, 610 Privity of contract, 637, 638 Probabilistic selection techniques, 819 Probability proportionate to size selection, 796 Problem situation, 590 Processing controls
audit trail, 865 control total reports, 852 control totals, 865 data comparisons, 865 error correction and resubmission
procedures, 852 file and operator controls, 852 function of, 852 limit and reasonableness test, 852
run-to-run totals, 852 transaction logs, 865
Processing errors, 841-842 Processing integrity of trust services, 573 Procurement, relative assertion risks, 320 Production cycle
account balance assertions, 381 assertion risks for inventory accounts, 372 assertions about transactions/events, 379 audit evidence, 373-375
inventory reports, 374 production plans and reports, 374 sales forecast, 374
audit plan, 407-408 audit risk model, 389 control risk assessment
account balances, 375 control activities, 376 custody, 376-377 direction of tests of control, 379 entity-level controls, 376 intemal control questionnaire, 377,405-406 summary of, 380 tests of controls, 377-378
fraud at Phar-Mor, 368-369 fraud case: extended procedures, 389-391 inherent risks, 369, 370 inventory as output of, 371 nature of transactions in, 371 PCAOB inspections, 392 professional standards references, 367 substantive procedures
analytical procedures, 380-381 fraud potential in inventory, 387-388 GAAS requirements, 380 physical inventory observation, 381-386 presentation and disclosure, 388 pricing and compilation tests, 386-387
typical activities cost accounting, 372-373 inventory control, 372 link to acquisition and expenditure cycle,
369-370 production planning, 370-372 production sign-off, 372 sales forecast, 370
Production order, 372 Production plan, 370-371
as audit evidence, 374 results of errors in, 372 shared with other departments, 372
Production planning costs associated with, 370-371 critical to manufacturing, 371-372 just-in-time management, 371
Production reports, as audit evidence, 374 Production sign-off, 372 Products, with radio frequency identification tags
chips, 384, 385 Professional ethics
AICPA rules of conduct, 607-616 auditor independence, 599 codes of conduct, 594-597
Intemational Federation of Accountants, 596-597
Professional Ethics Executive Committee, 596-597
Public Company Accounting Oversight Board, 595-596
Securities and Exchange Commission, 595 consequences of violating, 617-619 decision process, 590-591 definition of ethics, 589-590 emphasis on independence
AICPA mles, 598-603 effect of Sarbanes-Oxley Act, 605-606 Government Accountability Office, 606
Index 121
PCAOB, 603-605 SEC mles, 600, 603
Enron collapse, 589 International Ethics Standards Board for
Accountants, 616 philosophical principles
act-utilitarianism, 593 generalization argimient, 593-594 imperative principle, 592-593 reliance on weight of opinion, 591-592 mle-utilitarianism, 593 utilitarianism, 593
problem situations, 590 professional standards references, 587-588
Professional Ethics Executive Committee (AIPCA), 595
mles of conduct, 596-597 Professional Golfers Association, 720 Professional inventory teams, 385-386 Professional judgment, 52
defmition, 45 on materiality, 90
Professional service firms, 18 Professional services, 8 Professional skepticism, 410
and conflicts of interest, 15-16 definition, 15 and employee fraud, 221 evidence gathering, 16 and former colleagues, 16 Hurtt skepticism scale, 17 and objectivity, 16 requirement for auditors, 45 time pressure, 16
Professional Sports Authenticator, 7 Professional sports logos, 419 Professional standards
auditor performance, 46-63 basic GAAS, 37-42 evaluation of CPA firms, 55—60 and PCAOB controversy, 36-37 recent audit failures, 36 reporting, 53-55 responsibilities, 42-45 self-regulation, 36 topics and references, 35
Professions, characteristics of, 37 Profit, phony, 368-369 Profit before taxes benchmark, 88-89 Pro forma fmancial information, 550-552 Program analysis techniques, 859 Program change controls
emergency change requests, 845 function, 845 program modifications, 845 and systems development life cycle, 845
Program development controls docimientation, 845 objectives, 844 systems development life cycle, 844-845
Program documentation and testing, 864 Program-embedded techniques
audit files, 859 extended records, 859 monitoring systems activity, 859 program analysis techniques, 859 snapshot, 859 tagging ttansactions, 858
Programmed range and reasonableness checks, 868-869
Programmers functions, 846 separation of duties, 847
Projected misstatement, 807 in nonstatistical sampling, 819
consulting and advisory services, 20-21 CPA firms, 18 and failure of self-regulation, 36 number of businesses in, 18 professional service firms, 18 revenues of Big Four firms, 19 tax services, 20
Public accounting firms; see also Big Four accounting firms; CPA firms
communication with predecessor auditors, 79-80 deficiencies found, 59-60 evaluation of
peer review, 58-59 PCAOB inspections, 59-60 regulatory bodies, 44—45 system of quality control, 56-58
.and intemal audits, 679 reporting disagreements with firm's auditors, 80 time budget, 86-87 tips on detecting inventory fraud, 388
Public Broadcasting Services, 867 Public Company Accounting Oversight Board, 9,
14, 39,40, 55, 272, 499, 679; see also Auditing standards
and accounting standards, 595-596 and acquisition and expenditure cycle, 340 and audit completion, 455 on audit evidence, 91 changes to auditors' report, 524 and codes of conduct, 594 on contingent fees, 612 on controls in computerized environment, 839 controversy over, 36-37 creation of, 36 description, lln disciplinary actions, 618-619 on engagement letters, 82 on engagement planning, 77 and finance and investment cycle, 437 functions, 36 on identifying controls, 185-186 implications of following, 500 inspections, 474
on computer controls, 840 of firms, 59-60 in production cycle, 392
on intemal auditing, 680 on intemal audit services, 22 on justified departures from GAAP, 515 on management assertions, 11
on materiality, 87-88 peer review by, 59 penalties for Satyam case, C28 reason for, 38 reporting for nonpublic companies, 544 and revenue collection cycle, 300 review of tests for controls, 752 on sampling deficiencies, 795 sanctioning of auditors, 60 on tax services, 20 on uncorrected misstatements, 468
Public company audits, PCAOB requirements, 197-200 Public entity, 36 Public interest, in principles of conduct, 596-597 Public offerings, 645 Public Oversight Bo^d, 58 Public regulatory discipline, 618-619 Pull-down menus, 851 Pulliam, S, 318n Purchase cutoff, 330 Purchase lead time, 372 Purchase order, 321
Purchase requisition, 321 Purchases joumal, 324 Purchases of goods and services, 321-322 Purchasing and disbursement cycle, 181-182 Purchasing departments, fraud in, 321
Q Qualified opinion, 501
definition, 55 and departures from GAAP, 503, 504 and departures from GAAS, 503 and scope limitation reports, 508,510
Qualitative evaluation of misstatements, 811 Qualitative materiality, 48 Quality assurance partner, 84 Quality audit, 679 Quality control audits, 685 Quarterly Corporate Fraud Index Network, 126 Qwest Communications, 273
R
Racketeer Influenced and Cormpt Organizations Act, 656
Radio frequency identification, 384,385 Raghunandan, K., 514 Raising capital, 416—417 Raju, Ramalinga, C26-C28 Rama,D. v., 514 Ramon, K. K., 660 Random selection, 792-793
Range, Jackie, C27n, C29 Ratio estimation, 817 Rationalization of employee fraud, 227 Raw material inventory status report, 371-372 Reagan, Ronald W., 17, C5 Real Clear Politics, 718 Real-time processing, 846 Reasonable assurance
versus absolute assurance, 170 concept, 171 definition, 46 on detecting errors and fraud, 122 on financial controls, 279
122 Index
Reasonable assurance—Cont. in fraud detection, 125 SEC on, 197
Reasonableness of accounting estimates, 459 of sales forecast, 374
Reporting standards, 75 Research and development, vouching, 333 Responsibilities
incompatible, 180-181 for intemal control, 176 in principles of conduct, 596-597
Responsibility principle, 41, 42 competence and capabilities, 43 independence and due care, 43-45, 80 kinds of auditor responsibilities, 42 and Madoff scandal, 45 professional judgment, 45 professional skepticism, 45
Responsible party, 548 Restatement
examples of, 411 of financial results, 203 of financial statements, 454 reasons for, 319
Restatement of torts doctrine, 640 Retained earnings/total assets ratio, 164 Retention reviews, 79 Retum on beginning equity ratio, 164 Revenue
assertion risks for, 270 ofBig Four firms in 2010, 19 effect of Sarbanes-Oxley Act on, C24 net vs. gross, 272
Revenue and collection cycle, 231-232 audit approach
assessing assertions, 270 calculating detection risk, 270 consideration of inherent risk, 270 determining evidence collection, 270 identifying control activities, 270 tests of controls, 270-271 using audit risks model, 270 walkthrough, 271
audit plan, 315-316 control risk assessment
account balances, 279 control activities, 279-280 summary of, 282 tests of controls, 280-282
fraud at IT factory, 269-270 fraud cases: extended procedures
intemal control questionnaire, 313-314 professional standards references, 268 PCAOB inspections, 300
substantive procedures altemative procedures, 289 analytical procedures, 284 assertions on account balances, 283 confirmation of accounts/notes receivable
285-289 cutoff and sales retums, 290 discerning population of assets to audit, 283 dual-purpose procedure, 292 presentation and disclosure, 291 review for collectability, 289-290 rights and obligations, 290
typical activities accounting for accounts receivable, 276-277 audit evidence, 277-279 basic activities, 274 billing customers, 276-277 delivery of goods or services, 276 entity-level controls, 275 receiving and processing orders, 275-276
and channel stuffing, 273, 274 criteria, 271-272 examples of company misstatements, 273 improper, 272 net vs. gross revenue, 272 reasons for importance of, 272 requirements, 271
Reverse mergers, and component auditors, 517 Review, 558
of accounting estimates for audit completion, 458^59
of audit documentation, 469-470 for collectability, 289-290 definition, 19 of management's discussion and analysis, 554
Review and compilation appropriate accounting framework, 558 Code of Conduct, 558 compilation services, 560-561 interim financial information
report on, 565 responsibilities for reporting on, 563-564
professional standards references, 546 review services, 558-559 standards, 558 summary, 562-563 topics under
additional paragraphs, 562 communication with predecessor
Risk management activities, 77-78 Risk of assessing control risk too high, 729-730,
756-757 Risk of assessing control risk too low, 729-730,
756-757 Risk of incorrect acceptance, 732-733, 809, 816 Risk of incorrect rejection, 732-733, 809-810
in classical variables sampling, 813-814 Risk of material misstatement, 799
assessment, 174 auditing standards on, 126 control activities, 179 and control risk, 196 definition, 49, 127 and impairments, 414 primary purpose of assessing, 49 at relevant assertions level, 236 revenue and collection cycle, 270 tests of controls, 179
Risk of overreliance, 719-730, 759 in attributes sampling, 756-757 evaluation table, 766-767
Risk of underreliance, 729 in attributes sampling, 756-757
Risk response, in ERM, 120 Risks »
faced by companies and auditors, 118 of improper revenue recognition, 272 multiplication of, 128-129 unavoidability of, 118
Rizzo, Tom, 866 RMM; see Risk of material misstatement Roberti, Mark, 385 Roberts, D. M., 81 In Roberts, Eric, 375 Roll-forward procedures, 457 Rollover method, 468 Roosevelt, Theodore, 587 Roper, Barbara, C25 Rosenblum, Inc. v. Adler, 641, 654 Rosen Canada Ltd., 335 Royal Ahold, 273 RSM/McGladrey & Pullen, C17
Sample size determination, 720-721 in attributes sampling, 760-763
expected rate of deviation, 758—759 population size, 759 and sampling risk, 756-757 summary of size factors, 759 tolerable rate of deviation, 757-758
for audit sampling expected rate of deviation, 734 key factors in, 734 sampling risk, 735 size of population, 734 standard deviation, 735 tolerable rate of deviation, 734
in classical variables sampling calculating, 814-815 formula, 812 risk of incorrect rejection, 813-814 standard deviation, 814
for MUS, 802 expected misstatement, 801-802 factors influencing, 798 population size, 802-803 sampling risk, 799-800 tolerable misstatement, 800-801
in nonstatistical attiibutes sampling, 774 in nonstatistical sampling, 819
Sampling; see also Attributes sampling; Audit sampling; Variables sampling
compared to audit sampling, 716 defmition, 715 examples, 717 nonrepresentative sample, 717 nonstatistical, 773-774 objective in attributes sampling, 753 performing, 720-723 planning, 720 polling problems, 618 population for, 715 professional standards references, 714 statistical vs. nonstatistical, 719 for tests of controls, 752 when to use
exact information not important, 716 large number of items in population, 716
Sampling error vs. sampling risk, 717
124 Index
Sampling interval, 721, 792 in MUS, 804
Sampling plans, 719 Sampling risk
allowance for, 724-725, 758, 768 associated with attributes sampling
efficiency loss, 730 exposure to effectiveness loss, 730 risk of overreliance, 729-730 risk of underreliance, 729 tolerable rate of deviation, 728-729 upper limit rate of deviation, 728-729
associated with variables sampling risk of incorrect acceptance, 732-733 risk of incorrect rejection, 732-733 sample estimate of misstatement, 731 upper limit of misstatement, 731-732
in attributes sampling risk of overrehance, 756-757 risk of underreliance, 756-757 summary of, 757
basic allowance for, 808-809 controlling, 718 definition, 717 incremental allowance for, 807-808 versus nonsampling risk, 716-718 and number of sample items, 720-721 in sample size determination, 735 versus sampling error, 717 summary for audit sampling, 733 for variables sampling
risk of incorrect acceptance, 799-800 risk of incorrect rejection, 799-800 substantive procedures for, 799-800
Sampling unit, MUS vs. classical vmables sampling, 815
Sam's Club, 384 Samson, W., 6 San Diego city officials, 415 SAP software, 99 Sarbanes-Oxley Act, 126, 203, 644, 679,
840, C16 and analytical procedures, 142 on audit committees, 475 on audit communications, 475 on audit of intemal control system, 197 and auditors' liability, 655-656 on changes in intemal control, 564 constraints on accounting firms, C17 on consulting services, 20-21, 589 controversy over, C23 costs of compliance with, 200 creation of PCAOB, 36 definition of intemal control, 171 effect on accounting for revenues, C24 and employee hotlines, 228 extension of statute of limitations, 647 high costs of compliance, C23 impact on capital markets, 807 on independence, 605 independence requirement, 43 on inspection of firms, 59 on intemal auditing, 680 on intemal control, 169-170 on management's financial reporting, 10 nonaudit service restrictions, C23 occasion for passage of, C4 on peer review, 58-59 penalties for misleading financial statements,
171-172 on PCAOB inspections, 474 quality control standards, 56 reason for, 38 reasons for passage of, 169 on reports for SEC registrants, 496 on responsibilities for intemal control, 172 result of corporate scandals, 589
Satyam subject to, C26 on service organizations reporting, 555 Supreme Court mUng, 37 on tax accounting weakness, 330 on 10-K filings, 463 on 10-Q filings, 463 on tests of controls, 752
Securities and Exchange Commission, 9, 43, 125, 135, 839, CI
and accounting standards, 595 in aftermath of Andersen trial, C4 and Ambassador Eyewear Group, 290 approval of Auditing Standards, 38 on changing auditors, C18 charges against Beazer Homes USA Inc., 122 and codes of conduct, 594 on comparative financial statements, 520 constraints on auditors, 16 on consulting services, 20 disciplinary actions, 618-619
EDGAR database, 80 filings on change of auditors, 80 Financial Reporting Releases, 648 Form 8-K, 146 Forms, 648 Form 10-K, 496 on interim financial information, 563 on intemal auditing, 680 on intemal audit services, 22 investigation of Dell Inc., 174, 454 investigation of General Electric, 430 investigation of McKesson & Robbins, 37-38 investigation of Satyam, 240 on lease accounting, 414 and NutraCea, 280 penalties for Satyam case, C28 and Private Securities Litigation Reform Act of
1995, 147-148 and PCAOB, 1 In on reasonable assurance, 197 registration requirement, 645 Regulation S-K, 648 Regulation S-X, 511, 648 reporting requirements, 496 required disclosures, C24-C25 on revenue recognition, 271-272 mles on filing audited financial statements,
454-455 and San Diego city officials, 415 and Sirena Apparel Group, Inc., 290 Staff Accounting Bulletin
Self-regulatory discipline, 617-618 Separation of duties
in cash disbursements, 230, 235 in computerized processing systems, 847 in internal control, 180-181 lacking in end-user computing, 864 in production cycle, 376
Sequence tests, 852 Sequential sampling
definition, 772 operation of, 772-773 population deviation rate, 772
Service organization control reports, 555,557
Index 125
Service organizations attestation engagements for
reports, 555-556 service organization control reports,
555, 557 for computer processing, 866 definition and examples, 554 for payroll preparation, 362
Simulated data, techniques using integrated test facility, 862 purpose, 861 test data, 861-862
Sinason, D., 225, 696n Singer, Marcus G., 593n Single audit, 693, 694 Single Audit Act of 1984 and Amendments,
693-694 Sirena Apparel Group, Inc., 290 Skewed accounting distributions, 716 SK Foods, 322 Skilling, Jeffrey, 124,179 Skills needed for risk assessment, 121 Small and medium-sized businesses
information systems in, 184 intemal control environment, 177-178 monitoring activities, 184
Smith V. London Assurance Corporation, 638, 654 Snapshot, 859 Snyder, Steve, 182 Social Security Administration, 361 Social Security taxes, 361 Societe Generale, 848 Socioeconomic stmctures, 571 Software
for audit documentation, 104 for computer-assisted audit techniques,
101-102 Software services firm, C26-C28 Solicitation, AICPA rule'^, 613-614 Solomon, D., 318n Solomon, K. I., 61 In Sonal, Joshi, C29 Sonic Automotive, Inc., 514 Sony Corporation, 867 Sophocles, 220 Source documents, 183 Special and restiicted-use reports
reports on application of requirements of appropriate framework, 568-570
special-purpose frameworks, 566-568 specified elements, accounts, or items, 565-566 types of reports, 565
Specialists in audit plarming, 85 in computers, lOI definition, 85 information technology auditors, 85
Special purpose entities, 410, 521 Special purpose frameworks
definition, 566 disclosures, 568 versus GAAP, 567 modifications of auditors' reports, 567-568 reasons for, 566-567 standards for auditors, 567 types of, 566
Special report, 547 Specific authorization, 180 Spreadsheet and data controls, 866 Spreadsheet goofs, 182 SRSR Holdings, C27 Staff Accounting Bulletins; see Securities and
Exchange Commission Standard and Poor's, 141 Standard and Poor's 500 companies, 135 Standard costs, 372 Standard deviation, 735
definition, 814 relation to sample size, 814
Standard error of the mean, 735 Standardized formats and screens, 851 Standard report
basic components, 498 features, 498-499 intemal control paragraph, 501-502 introductory paragraph, 500 opinion paragraph, 501 reasons for issuing, 498 scope paragraph, 500 as unqualified opinion, 501
Star Air Ambulance Service, 335 Starbucks Corporation, 411, 575 Statement on Quality Control Standards No. 8, 56, 57 Statements of Auditing Procedures, 38 Statements of Financial Concepts
No. 5, on expense recognition, 318 No. 2 on imderstandability, 13
Statements of Financial Standards No. 149, 182 Statements on Auditing Standards, 38,40, 549
definition, 5n Statements on Quality Control Standards
(AICPA), 558 Statements on Responsibilities in Tax Practices, 20 Statements on Standards for Accounting Review
Services, 549, 558, 561 Statements on Standards for Attestation
Engagements, 5n, 598 State of mind, 43 States
audit agencies, 22, 689 boards of accountancy, 618 certification and licensing by, 25 insurance board auditors, 5
State Street Trust v. Emst, 640 State Supreme Court of China, 619 Statistical sampling
definition, 719 to determine sufficiency, 52 versus nonstatistical sampling, 719 probabilistic selection techniques, 819
Statute of limitations extended by Sarbanes-Oxley Act, 647,655 in Securities Act, 647
Statutory law definition, 637 summary of auditors' liability, 654
for investment activities auditing fair value measurement, 429-432 control deficiencies, 428 derivative instruments, 429 investments with affiliates, 428 nature of work, 428-429
monetary unit sampling, 796-811 nature, timing, and extent of, 174 prior to year-end spread, 456 production cycle
analytical procedures, 379-380 fraud potential in inventory, 387-388 GAAS requirement, 380 physical inventory inspection, 381-386 presentation and disclosure, 388 pricing and compilation tests, 386-387 tips for detecting fraud, 388
126 Index
Substantive procedures—Cont. revenue and collection cycle
altemative procedures, 289 analytical procedures, 284 assertions about account balances, 283 confirmation of accounts/notes receivable,
285-289 cutoff and sales retums, 290 extended procedures for fraud cases, 292-298 notes about confirmations, 291 presentation and disclosure, 291 review for collectability, 289-290 rights and obligations, 290
for sampling risk analytical procedures, 799-800 tests of details, 799-800
versus tests of controls, 292 use of materiality for, 90
Substantive tests determining nature and timing of, 83 of transactions, 334
Successor accountants, 562 Sufficiency, 52 Sufficient evidence, 52 Summary financial statements, 521-522 Sunbeam Corporation, 458, CI Supervision, in payroll cycle, 358 Supplementary information, 523 Suppliers, fraud pertaining to, 125 Sureparts Manufacturing Company, 285 Sustainability, 8, 574 Sustainability reporting, 574-575 Systematic random selection, 721-722
in attributes sampling limitation, 793 selection interval, 792
in MUS, 804 Systematic selection, 721-722 System of quality control
Sarbanes-Oxley Act on, 463 10-Q filings (SEC), Sarbanes-Oxley Act on, 463 Termination letters, 82 Terrorists, illegal payments to, 148 Tervo, W., 59n Test data approach, 861-862 Tests of controls, 90; see also Attributes sampling
accounting estimates, 422 in acquisition and expenditure cycle, 326
direction of tests, 328 revealing weaknesses, 328
attributes sampling, 728, 752, 753 for audit plan, 351 and audit team, 190-191 bridge workpaper, 191-192 for cash disbursement, 235 for cash receipts, 234 for computerized environment
assertions about classes of transactions, 281 dual-direction, 281-282
in revenue and collection cycle, 271 throughout period of audit, 193
Tests of details, for sampling risk, 799-800,801 Theft of assets, 222 Theft of cash or property, 125 Thibodeau, J., 176n Third-party checks, 360 Third-party liability
auditor's defenses, 642-643 classification as third party, 642 classification of jurisdictions, 642 Credit Alliance case, 640 failure to exercise professional care, 638-639 Fleet National Bank case, 640-641 foreseeable parties, 641 foreseen parties, 641
near privity, 640 primary beneficiaries, 640 privity or near-privity jurisdictions, 642 reasonable foreseeability jurisdictions, 641 restatement of torts doctrine, 640 restatement of torts jurisdictions, 642 Rosenblum, Inc. case, 641-642 Rusch Factors, 640 summary of auditors' liability, 652-654 third-party complaints, 639 Ultramares case, 639-640
calculating, 801 definition, 800 in nonstatistical sampling, 819 in sample size determination, 800-801
Tolerable rate of deviation, 728-729, 759 in attributes sampling, 757-758 and audit sample size, 734 compared to upper limit rate of deviation, 768-769 definition, 757 in nonstatistical attributes sampling, 774
classification, 13-14 completeness and cutoff, 12-13 complex, 414 complexity of, 133 computer-initiated, 99 custody of assets involved in, 180 existence and occurrence, 12 in finance and investment cycle, 410 fi-aud and volume of, 133 management assertions about, 10 occurrence and completeness, 183 in production cycle, 371 record counts, 851 recording, 180 related-party, 413 in sales
authorization of credit, 276 billing, 276 delivery of goods/services, 276 initiating, 275-276
definition, 573 and growth of e-commerce, 572-573 principles for engagements, 573 SysTmst Service, 573 WebTmst Service, 573-574
Tmst Services Data and Integrity, 573 Tmst Services Principles and Criteria, 573 Tmth-in-securities law, 644 TRW Automotive Holdings Corporation, 514 Turner, Lynn E., 44, 635 TV Guide, 273 Twain, Mark, 587 Tyco Intemational, 2, 124,411, 634 Type I errors, 716 Type II errors, 716 Type 1 service organization report, 555 Type 2 service organization report, 555, 556 Tyson Foods, 369
Underfunded pension obligations, 415 Understandability, lacking in Enron
statements, 14 Understatements, in MUS, 810-811 Underwriters, auditor assurances to, 645-646 Uniform CPA Examination, 24-25 Uniform mobility, 25 Uniform processing of transactions, 99 United Airlines, 853 United Auto Workers, C12 United Parcel Service, 571 United Rental, 659 United States Comptroller General, 689 United States Public Company Reform and Investor
Protection Act of 2002, 655 United States Secret Service, 867 United States Senate Banking Committee, 657 United States Supreme Court, 410
on materiality, 87-88 overtums Arthur Andersen verdict, C3, C17 mling on Sarbanes-Oxley Act, 37 on solicitation, 614
United States v. Benjamin. 647 United States v. Nateili, 651 Univer, Scott, 633-634 University of Phoenix, 644 University of Tennessee intemal audit charter, 680,
681,686 University of Texas, 419 Unmatched invoice file, 323 Unmatched receiving report file, 323 Unmatched receiving reports, 323, 329 Unmatched vendor invoice, 323-324, 329 Unqualified auditors' report on intemal control over
financial reporting, 201 Unqualified opinion, 501
definition, 54 and departures from GAAP, 503, 504 and departures from GAAS, 503 example, 54 going-concem uncertainties, 513-514 on intemal control, 199 justified departures from GAAP, 514—515 and scope limitation reports, 508
Unrecorded liabilities, 243, 319 search for, 324
Unrestricted random sampling, 792 Unrestricted random selection, 721 Updated report, 520 Update report, 561-562 Upper limit of misstatement, 731-732 Upper limit on misstatement
definition, 809 in MUS, 810-811
Upper limit rate of deviation in attributes sampling
calculating, 766-767 compared to tolerable rate of deviation,
768-769 components, 768 information provided by, 766
definition, 728-729 U.S Airways, 424 User demand
and financial accounting frauds, 2-3 for reliable information, 2-3
User entity, 866 Usrey, S., 469 Utilitarianism, 593
V
Vadlamani, Srinivas, C27 Valero Energy Corporation, 424 Valid character tests, 852 Valid sign tests, 852
Valuation, 12,141 of inventory, 386 of investments, 428 lower-of-cost-or market, 369 by lower-of-cost-or-market testing, 387 provided by confirmation, 285 risk level of, 128
World Council for Corporate Govemance, C26n World Electronics, 390 World Poker Tour, 79 Worthington Industries, 387 WPT Enterprises, Inc., 79 Wright, A., 142n, 468n, 476, 524 Wright, S., 468n Written representations
contents, 463 definition, 52 form and purpose, 463 sample, 464 Sarbanes-Oxley Act on, 463
to support auditor opinion, 465 tmstworthiness, 465
1 2004 References in Auditors' Reports to the Standards of the Public Company Accounting (. Kersi'.'ht Ivi.ird
3 2004 Audit Documentation
4 2005 Reporting on Whether a Previously Reported Material Weakness Continues to Exist
5 2007 An Audit of Intemal Control over Financial Reporting That is Integrated with an Audit of Financial Statements
6 2008 Evaluating Consistency of Financial Statements
7 2009 Engagement Quality Review
8 2010 Audit Risk
9 2010 Audit Planning
10 2010 Supervision of the Audit Engagement
11 2010 Consideration of Materiality in Planning and Performing an Audit
12 2010 Identifying and Assessing Risks of Material Misstatement
13 2010 The Auditor's Responses to the Risks of Material Misstatement
14 2010 Evaluating Audit Results
15 2010 Audit Evidence
Code of Professional Conduct (AICPA) 1
Article I—^Resj»nsibilities Article IV—Objectivity and Independence 1 Article II—The Public Interest Article V-—Due Care 1 Article III—Integrity ArticleVI—Scope and Nature of Services |
102 Integrity and Objectivity j 501 1 Acts Discreditable
201 General Standards | 502 1 Advertising and Other Forms of Solicitation
202 Compliance with Standards 503 Commissions and Referral Fees
203 Accounting Principles 505 Form of Practice and Name
301 Confidential Client Information
Government Auditing Standards (U.S. General Accounting Office) 1
2011 Internet Version of Govemmental Auditing Standards (the "Yellow Book") www.gao.gov/yellowbook |
International Standards for the Professional Practice of Internal Auditing (MA)
Title Number
1 Attribute Standards Purpose, Authority, and Responsibility 1000
Independence and Objectivity 1100
Proficiency and Due Professional Care 1200
Quality Assurance and Improvement Program 1300
1 Performance Standards | Managing the Intemal Audit Activity 2000
Nature of Work 2100
Engagement Planning 2200
Performing the Engagement 2300
Communicating Results 2400
Monitoring Progress 2500
Resolution of Senior Management's Acceptance of Risks 2600
Auditing Standards Board Clarity Project-Previous AU Sections Mapped to Clarity Standards
Previous AU Section New AU Section AU/ISA
Statements on Auditing Standards-introduction
110 Responsibilities and Functions of the Independent Auditor
Overall Objectives of the Independent Auditor and the Conduct of an Audit 200
120 Defining Professional Requirements in Statements on Auditing Standards
150 Generally Accepted Auditing Standards 161 TTie Relationship of Generally Accepted Auditing
Standards to Quality Control Standards Quality Control for an Engagement Conducted in Accordance With Generally Accepted Auditing Standards
220
The General Standards 201 Nature of the General Standards Overall Objectives of the Independent Auditor and the Conduct of an Audit 200 210 Training and Proficiency of the Independent Auditor in Accordance With Generally Accepted Auditing Standards
200
220 Independence 230 Due Professional Care in the Performance of Work
The Standards of Field Woric 311 Planning and Supervision Planning an Audit 300
Terms of Engagement 210 312 Audit Risk and Materiality in Conducting an Audit Materiality in Planning and Performing the Audit 320
Evaluation of Misstatements Identified During an Audit 450 314 Understanding the Entity and Its Environment and
Assessing the Risks of Material Missratement Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (Redrafted)
315
315 Communications Between Predecessor and Successor Auditors
Opening Balances—Initial Audit Engagements, Including Reaudit Engagements
510
Terms of Engagement 210 316 Consideration of Fraud in a Financial Statement Audit Consideration of Fraud in a Financial Statement Audit (Redrafted) 240 317 Illegal Acts by Clients Consideration of Laws and Regulations in an Audit of Financial Statements 250 318 Performing Audit Procedures in Response to Assessed
Risks and Evaluating the Audit Evidence Obtained Performing Audit Procedures in Response to Asse^d Risb and Evaluating the Audit Evidence Obtained (Redrafted)
330
322 The Auditor's CotKideration of the Intemal Audit Function in an Audit of Financial Statements
Using the Work of Intemal Auditors (working tide) 610
324 Service Organizations Audit Considerations Relating to an Entity Using a Service Organization 402 325 Communicating Intemal Control Related Matters
Identified in an Audit Communicating Intemal Control Related Matters Identified in an Audit (Redrafted)
265
326 Audit Evidence Audit Evidence (Redrafted) 500 328 Auditing Fair Value Measurements and Disclosures Auditing Accounting Estimates, Including Fair Value Accounting Estimates
and Related Disclosures (Redrafted) 540
329 Analytical Procedures Analytical Procedures (Redrafted) 520 330 The Confirmation Process Extemal Confirmations 505 331 Inventories Audit Evidence—Specific Considerations for Selected Items 501 332 Auditing Derivative Instmments, Hedging Activities,
and Investments in Securities Audit Evidence—Specific Considerations for Selected Items 501
333 Management Representations Written Represenatiorrs 580 334 Related Parties Related Parties (Redrafted) 550 336 Using the Work of a Specialist Using the Work of an Auditor's Specialist 620 337 Inquiry of a Client's Lawyer Conceming Litigation,
Claims, and Assessments Audit Evidence—Specific Considerations for Selected Items 501
339 Audit Documentation Audit Documentation (Redrafted) 230 341 The Auditor's Consideration of an Entity's Ability to
Continue as a Going Concem Going Concem (working title) 570
342 Auditing Accounting Estimates Auditing Accounting Estimates, Including Fair Value Accounting Estnates and Related Disclosures
540
350 Audit Sampling Audit Sampling (Redrafted) 530 380 The Auditor's Communication With Those Charged
With Govemance The Auditor's Communication With Those Charged With Govemance (Redrafted)
260
390 Consideration of Omitted Procedures After the Report Date
Consideration of Omitted Procedures After the Report Release Date - 585
Previous AU Section New AU Section New
AU/ISA
The First, Second, and Third Standards of Reporting
410 Adherence to Generally Accepted Accounting Principles Forming an C^inion and Reporting on Financial Statements 700
420 Consistency of Application of Generally Accepted Acccmnting Principles
Consistency of Financial Statements 708
431 Adequacy of Disclosure in Financial Statements Modifications to the Opinion in the Independent Auditor's Report 705
The Fourth Standard of Reporting 504 A^ociation With Financial Stat«nenK Withdrawn N/A
508 Refwrts <m Aiwiited Fmancial Statement Forming an C^inion aiwi Reporting on Financial Statements 700 508 Modifications to the Opinion in the Independent Auditcw's Report 705 Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor's Report
706
Special Considerations—Audits of GrfMip Financial Statements (Including the Work of Component Auditors)
600
Consistency of Firancial Statements 708
Special Considerations—Aixlits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial StateiMnt
805
Subsequent Events and Subsequently Discovered Facts 560
530 Dating of the Independent Auditor's Report Forming an Opinion and Reporting on Financial Statements 700 530 Dating of the Independent Auditor's Report Subs^uent Events and Subsequently Discovered Facts 560
532 Restricting the Use of an Auditor's Report Alert as to the Intended Use of the Auditor's Written Communication 905 !
534 Reporting on Financial Stetements Prepared for Use In Otlier Countri^
Financial Statements Prepared in Accordance With a Financial Reportii^ Framework Generally Accepted in Anodier Country
910
543 Part of Audit Performed by Od\er Independent Auditors
Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors)
600
544 Lack of Conformity With Generally Accepted Accounting Principles
Special Corwiderations—^Audits of Financial Statements Prepared in Accordance with Special FHirpose fiamewoiks
800
550 Other Information in Documents Containing Audited Financial Statement
Other Informatics in Documents Containing Audited Financial Statements 1 720
551 Siqjplementary Information in Relation to the Financial Statements as a Whole 1
Supplementary Information in Relation to the Financial Statements as a Whole
725
552 Reporting on Condensed Financial Statements and Selected Financial Data
foigagements to Report on Summary Financial Statements 810 J
558 Requited Supplementary Information Requir^ Supplementary Information 730 i
llo 2001 Financial Forecasts and Projections 301 10 2001 Reporting on ProForma Financial Information 401 10 2001 Reporting on an Entity's Intemal Control Over Financial Reporting 501 10 2001 Compliance Attestation 601 10 2001 Management's Discussion and Analysis 701 10 2001 Attestation Standards: Revision and Recodification Various 11 2002 Attest Documentation Various 12 2002 Amendment to Statement on Standards for Attestation Eng^ements No. 10, Attestation Standards:
Revision and Recodificatim 20 13 2035 Defining Professional Requirements in Statements on Standards for Attestation Engagements Various 14 2006 SSAE Hierarchy 50
. :i5 . 2008 An Examination of an Entity's Intemal Control Over Financial Reporting that is integrated With an Audit of Its Financial Statements 501
16 2010 Reporting on Controls at a Service Organization 80! 17 2010 Reporting on Compiled Prospective Financial Statements When the Practitioner's Independence Is Impaired 301
Statements on Standards for Accounting and Reviev^ Services (AICPA) SSAR No.
Date Issued Title
AR Section
i 1978 Compilation and Review of Financial Statements 100 • 2 1979 Reporting on Comparative Financial Statements 200
3 1981 Compilation Reports on Financial Statements Included in Certain Prescribed Forms 300 4 1981 Communicatiotw Between Predecessor and Successor Accountants 4£X? 6 1986 Reporting on Personal Fmancial Statements Included in Written Personal Financial Plans 600 7 1992 Omnibus Statement on Standards for Accounting and Review Services—1992 Various 8 2000 Amendment to Statement on Standards for Accounting and Review Services No. 1, Compilation and
Review of Finondoi Statements Various 9 2002 Omnibus Statement on Standards for Accounting and Review Services—2002 Various
10 2064 Performance of Review Engagements i Various 11 2004 Standards for Accountmg and Review Services Various 12 2005 Omnibus Statement on Standards for Accounting and Review Services—^2005 Various 13 2005 Compilation of Specified Elements Accounts, or Items of a Financial Statement Various 14 2005 Compilation of Pro Forma Financial Information Various 15 2007 Elimination of Certain References to Statements on Auditing Standards and Incorporation of
Appropriate Guidance Into Statements on Standards for Accounting and Review Services Various 16 2CX)7 : Defining Professional Requirements in Statements on Standards for Accounting and Review Services 20 17 2008 Omnibus Statement on Standards for Accounting and Review Services—2008 Various 18 2009 Applicability of Statements on Standards for Accounting and Review Services 100 19 2010 Compilation and Review Engagements Various 20 2011 Revised Applicability of Statements on Standards for Accounting and Review Services 90
ift
Abbreviations
AAA American Accountmg Association
AICPA American Institute of Certified Public Accountants
AS PCAOB Auditing Standard
AXJ AICPA Generally Accepted Auditing Standard
AU 9XXX AICPA Interpretation of Generally Accepted Auditing Standards
AT AICPA Standard for Attestation Engagements
BL AICPA Bylaw
ED Exposure draft
ET AICPA Coiie of Professional Conduct
FASB Financial Accounting Standards Board
GAO U S. Government Accountability Office
HA Institute of Intemal Auditors
ISA International Standard on Auditing
PCAOB Public Company Accounting Oversight Board
PR AICPA Standard for Performing and Reporting on Peer Reviews
QC AICPA Qualify Control Standard
SAS AICPA Statement on Auditing Standards
SFAS FASB Statement on Financial Accounting Standards
SI AS IIA Statement on Intemal Auditing Standards
SQCS AICPA Statement on Quality Control Standards
SSAE AICPA Statement on Standards for Attestation Engagements
SSARS AICPA Statement on Standards for Accounting and Review SfiviMS
Auditing and Investigation Organizations
American Institute of CPAs (AICPA) 220 Leigh Farm Road Durham, NC 27707-8110 (919) 402-4500 www.aicpa.org
AssocUtion of Certified Fraud Examiners (ACFE) The Gregor Building 716 West Avenue
, Austin, TX 78701-2727 (800) 245-3321 www.cfenet.com Information Systems Audit and Control AssocUtion (ISACA) 3701 Al^nquin Road, Suite 1010 Rolling Meadows, IL 60008 (847) 660-5512 www.isaca.otg
Institute of IntemaJ Auditors (IIA) 247 Maitland Ave. Altamonte Springs, FL 32701 (407)937-1100 www.theiia.org International Auditing and Assurance Standards Board (lAASB) 545 Fifth Avenue, 14"' Floor New York, NY 10017 (212) 286-9344 wrww.iaasb.org
Public Company Accounting Oversight Board (PCAOB) 1666 K Street, NW Washington, DC 20006-2803 (202) 207-9100 www.pcaobus.org
I- c
t Tt
!# LOOK BENEATH THE SURFACE Auditing & Assurance Services, 5le, is the most up-to-date auditing textbook on the market, covering all of the latest pronouncements as of Fall 2011.The book's unique organization presents the auditing process in twelve concise chapters, with eight flexible, independent modules designed to be integrated into the course at the instructor's discretion. Louwers also remains the leader in fraud coverage with the updated Apollo Shoes Casebook, the only stand-alone fraud audit case on the market (available on the book's website. wvyw.mhhe.com/ln.n«Ar»'fo)
THE MOST UP-TO-DATE AUDITING BOOK ON THE MARKET The Louwers author team has updated each chapter to include the latest pronouncements, technology and case material for your class:
• This edition has fully integrated the eight new standards adopted by the PCAOB. In addition, the book has fully integrated the latest updates from the international standards of auditing (ISAs) and the auditing standards board (ASB).
• Each chapter now begins with a list of the AU/ISA Sections that are covered from the Codification of Statements on Auditing Standards published by the AICPA and the list of PCAOB Auditing Standards covered in that chapter.
. The education version of ACL software is included free with the book Exercises for use with the ACL software are available on the book's website.
• Kaplan CPA Simulations are included in the text problem material and are also accessible at www.mhhe. com/louwersSe.These simulations allow the student to gain skills and pick up additional knowledge for success on the CPA Examination.
WANT STUDYING TO BE AS SIMPLE, INTERACTIVE AND ECO-FRIENDLY AS KEEPING UP WITH YOUR FRIENDS ONLINE? WE CAN HELP!
^ oonncctr MCGRAW-HILL'S CONNECT® ACCOUNTING IACCOUNTINC T-u ^ I
I he next evolution in online homework management and assessment, McGraw-Hill's Connecf Accounting is an online assignment and assessment solution that connects you with the tools and resources you'll need to achieve success:
• Assignable study guide, end-of-chapter material, interactive applications (drag & drop and comprehension cases), and test bank questions that provide immediate feedback and report directly to your instructor's reports.
• Access to lectures and study tools like PowerPoint?® slides.
With McGraw-Hill's Connect^ Plus Accounting, you also receive access to a searchable, integrated online version of the textbook in which you can highlight and save notes, helping you to successfully complete your work whenever and wherever you choose. If your instructor chooses to use McGraw-Hill's Conned Accounting with your course, you can purchase access from the Online Learning Center at www.mhhe.com/louwers5e.
^ i i
coverag®
nartty
411
N Learn more about Auditing & Assurance Services, 5le, by visiting www.mhhe.com/louwers5e today!
![Registrar’S office23.5 F, Fa, Fe U 23.1 23.2 23.3 24 Audit 24.1 Audit Audit 23.1 Audit 24.3 Audit Audit Audit Aud. 24.6 Audit 80 Audit 80 25 25.1 C 80 25.2 26 26.1 3.5 îlLt_Jðth]](https://static.documents.pub/doc/80x56/60922293f5299d6df61fd513/registraras-office-235-f-fa-fe-u-231-232-233-24-audit-241-audit-audit-231.jpg)
