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Principles of Auditing: An Introduction to International Standards on Auditing (2nd Edition) PDF

713 Pages·2004·11.69 MB·English
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Hayes_ppr 30/01/2006 12:04 PM Page 1 Second “Very accessible, especially for non-native English speaking students.” Rick Hayes Roger Dassen Arnold Schilder Philip Wallage Ron Crijns, Haagse Hogeschool, The Netherlands Edition “I found the book extremely easy to follow. In general I believe all the features of the book are very well AP done. It seems to me there is a good balance in the difficulty of the student assignments: they range from n R PRINCIPLES OF AUDITING simple ‘repeat-the-book’ questions to more complex questions, requiring research and judgement. As an I n all-purpose introduction to auditing with an international perspective, I believe the book is outstanding.” trIN o Marcia Halvorsen, Göteborg University, Sweden d uC An Introduction to International c “The book is easy to navigate and easy to handle. I think the questions, exercises and cases are excellent. tI ioP The glossary is really excellent. This is the best glossary I have ever seen in an auditing textbook.” n Standards on Auditing Stellan Nilsson, Umeå School of Business and Economics, Sweden L t oE I nS t e Second Edition r nO a tF i The first text fully based upon International Standards on Principles of Auditing: An Introduction to International o n Auditing (ISAs), this revised and updated new edition presents Standards on Auditing is suitable for those studying aA a structured approach to auditing principles using ISAs as its courses in auditing at undergraduate or postgraduate l U basis. More and more, the International Standards on levels. It will also be of interest to accounting S t Auditing are regarded as the global benchmark for auditing professionals looking for practical guidance on aD n standards. This book describes the development and practical International Standards on Auditing and recent dI use of all ISAs, as well as significant national standards in developments in the profession. aT different countries. rd I Dr Rick Hayes is Professor of Accounting at California s N In addition to dealing with these new standards, the authors State University at Los Angeles, and is the author of o n explain important new developments from a regulatory point of numerous books in accounting. G view. Emerging conceptual developments such as strategic A Dr Roger Dassen is a Partner at Deloitte & Touche, u auditing and business risk are covered, as well as cutting-edge d Amsterdam and Professor of Auditing at the Free audit techniques. i University of Amsterdam and the University of ti n Maastricht. He serves as a member on the International Features: g Auditing and Assurance Standards Board (IAASB). • The ONLY principles of auditing textbook fully based on ISAs. Dr Arnold Schilder is an Executive Director of the Netherlands Central Bank and Chairman of the Basel • Presents the latest auditing standards from a truly Committee of Banking Supervision’s Accounting Task international perspective. Force, as well as Professor of Auditing at the University • All audit concepts are illustrated with case study examples of Amsterdam. S H from famous companies, such as Enron, Xerox, and Dr Philip Wallage is a Partner at KPMG, Amsterdam ch ay WorldCom, bringing the subject to life. and Professor of Auditing at the University of i e l • The authors bring a broad and in-depth range of auditing Amsterdam. d s experience as: practising professionals in auditing, a e r D regulation setter, an auditing standards setter, as well as a considerable teaching experience as university professors. W s This provides students with a real-world perspective as s a close to current auditing practice and thinking as possible. l e l n a g e www.pearson-books.com An imprint of PRINCIPLES OF AUDITING We work with leading authors to develop the strongest educational materials in business and finance, bringing cutting-edge thinking and best learning practice to a global market. Under a range of well-known imprints, including Financial Times Prentice Hall, we craft high quality print and electronic publications which help readers to understand and apply their content, whether studying or at work. To find out more about the complete range of our publishing please visit us on the World Wide Web at: www.pearsoned.co.uk Companion Website resources Visit the Companion Website at www.booksites.net/hayes For lecturers (cid:1) Complete, downloadable Instructor’s Manual (cid:1) PowerPoint slides that can be do wnloaded and used as OHTs Second Edition PRINCIPLES OF AUDITING An Introduction to International Standards on Auditing Rick Hayes California State University, Los Angeles Roger Dassen Deloitte Touche, Amsterdam International Auditing and Assurance Standards Board (IAASB) Free University of Amsterdam, University of Maastrict Arnold Schilder The Netherlands Central Bank Basel Committee of Banking Supervisions Accounting Task Force University of Amsterdam Philip Walla ge KPMG, Amsterdam University of Amsterdam Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk First published by McGraw-Hill Publishing Company 1999 Second edition published by Pearson Education Limited 2005 Copyright © 1999 by McGraw-Hill International (UK) Limited © Pearson Education Limited 2005 The rights of Rick Hayes, Roger Dassen, Arnold Schilder and Philip Wallage to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs, and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without either the prior written permission of the Publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP. The programs in this book have been included for their instructional value. They have been tested with care but are not guaranteed for any particular purpose. The publisher does not offer any warranties or representations nor does it accept any liabilities with respect to the programs. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. ISBN 0 273 68410 8 British Library Cataloging-in-Publication Data A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress. 10 9 8 7 6 5 4 3 2 1 08 07 06 05 Typeset in 10.5/12.5 pt Minion by 25. Printed and bound in Great Britain by Ashford Colour Press Ltd. Gosport. The publisher’s policy is to use paper manufactured from sustainable forests. Contents List of illustrations xi Foreword by xv Preface xvii Acknowledgements xix 1 International Auditing Overview 1 1.1 Learning Objectives 1 1.2 Auditing through World History 2 1.3 The Auditor, Corporations and Financial Information 3 1.4 International Accounting and Auditing Standards 5 1.5 An Audit Defined 10 1.6 Types of Audits 14 1.7 Types of Auditors 16 1.8 Setting Audit Objectives Based on Management Assertions 19 1.9 The Audit Process Model 23 1.10 International Public Accountancy Firms 28 1.11 Summary 33 1.12 Answers to Certification Exam Questions 35 1.13 Notes 35 1.14 Questions, Exercises and Cases 38 2 The Audit M arket 43 2.1 Learning Objectives 43 2.2 Introduction 44 2.3 Theories on the Demand and Supply of Audit Services 44 2.4 Audit Regulation 47 2.5 Audit Firms 50 2.6 Audit Quality and Audit Fee Determination 51 2.7 Legal Liability 52 2.8 Some Developments in the Audit Market 57 2.9 Examples of Landmark Studies and Legislation that Influenced the International Audit Market 64 2.10 Summary 67 2.11 Answers to Certification Exam Questions 68 v CONTENTS 2.12 Notes 69 2.13 Questions, Exercises and Cases 71 3 Ethics for Professional Accountants 74 3.1 Learning Objectives 74 3.2 What Are Ethics? 75 3.3 The IFAC Code of Ethics for Professional Accountants 76 3.4 Ethics Guidelines Applicable to All Accountants (Part A) 76 3.5 Ethics Applicable to Professional Accountants in Public Practice (Part B) 82 3.6 Independence Requirements 83 3.7 Other Topics Applicable To Professional Accountants in Public Practice 94 3.8 Applicable To Employed Professional Accountants (Part C) 101 3.9 Enforcement of Ethical Requirements 104 3.10 Future Developments 105 3.11 Summary 106 3.12 Answers to Certification Exam Questions 107 3.13 Notes 108 3.14 Questions, Exercises and Cases 110 4 An Auditor’s Services 113 4.1 Learning Objectives 113 4.2 International Framework for Auditor Services 114 4.3 Elements of an Assurance Engagement 117 4.4 General Considerations in An Assurance Engagement 124 4.5 Audits and Reviews of Historical Financial Information 126 4.6 Assurance Engagements Other than Historical Financial Information 136 4.7 Related Services 146 4.8 Summary 151 4.9 Answers to Certification Exam Questions 153 4.10 Notes 155 4.11 Questions, Exercises and Cases 160 5 Client Acceptance 164 5.1 Learning Objectives 164 5.2 Client Acceptance: the First Step on the Journey to an Opinion 165 5.3 Evaluate the Client’s Background 166 5.4 Ability to Meet Ethical and Specific Competence Requirements 171 5.5 Use of Other Professionals in the Audit 175 5.6 Communicating With the Predecessor (Existing) Auditor 178 5.7 Acceptance by the Client – The Engagement Proposal 179 5.8 The Audit Engagement Letter 183 vi CONTENTS 5.9 Summary 186 5.10 Answers to Certification Exam Questions 187 5.11 Notes 188 5.12 Questions, Exercises and Cases 190 6 Understanding the Entity, Risk Assessment and Materiality 193 6.1 Learning Objectives 193 6.2 Planning – Phase II of the Audit Process Model 194 6.3 Understanding the Entity and its Environment 197 6.4 Based on the Evidence, Assess Risk; Types of Risk 208 6.5 Planning Materiality 215 6.6 Summary 220 6.7 Answers to Certification Exam Questions 222 6.8 Notes 223 6.9 Questions, Exercises and Cases 225 7 Internal Control and Control Risk 229 7.1 Learning Objectives 229 7.2 Introduction 230 7.3 Internal Control Defined 230 7.4 The Importance of Internal Control 232 7.5 Components of Internal Control 235 7.6 Control Environment 236 7.7 Risk Assessment 245 7.8 Information Systems, Communication, and Related Business Processes 247 7.9 Control Activities (Control Procedures) 251 7.10 Monitoring of Controls 256 7.11 Design of Internal Controls 259 7.12 Summary 261 7.13 Answers to Certification Exam Questions 263 7.14 Notes 264 7.15 Questions, Exercises and Cases 267 8 Control Risk, Audit Planning and Test of Controls 272 8.1 Learning Objectives 272 8.2 Understanding, Assessing and Testing Internal Controls 274 8.3 Understanding of Internal Controls and Documentation 274 8.4 Assessing Control Risk 286 8.5 Overall Responses to Assessed Risk 290 8.6 Prepare Planning Memorandum and Audit Plan 293 8.7 Tests of Controls 296 vii CONTENTS 8.8 Evaluate Sufficiency and Appropriateness of Audit Evidence 304 8.9 Summary 305 8.10 Answers to Certification Exam Questions 307 8.11 Notes 309 8.12 Questions, Exercises and Cases 310 9 Analytical Procedures 317 9.1 Learning Objectives 317 9.2 Introduction 318 9.3 The Analytical Review Process 319 9.4 Formulating Expectations 324 9.5 General Analytical Procedures 326 9.6 Analytical Procedures During Different Phases In The Audit Process 333 9.7 Analytical Procedures As Substantive Tests 335 9.8 Computer Assisted Audit Techniques (CAATs) and Generalized Audit Software (GAS) 337 9.9 Analytical Procedures Using Data Mining Techniques 341 9.10 Follow-Up In Case Of Unexpected Deviations 343 9.11 Summary 343 9.12 Answers to Certification Exam Questions 345 9.13 Notes 346 9.14 Questions, Exercises and Cases 348 10 Substantive Testing and Evidence 352 10.1 Learning Objectives 352 10.2 Introduction 353 10.3 The Basis of Evidence 354 10.4 Sufficient Appropriate Audit Evidence 358 10.5 Substantive Audit Procedures 364 10.6 Audit Proced ures for Obtaining Audit Evidence 368 10.7 Summary 380 10.8 Answers to Certification Exam Questions 382 10.9 Notes 384 10.10 Questions, Exercises and Cases 385 Appendix to Chapter 10 Audit Sampling and Other Selective Testing Procedures 391 10.A.1 Preface 391 10.A.2 Introduction 392 10.A.3 Definitions 392 10.A.4 Audit Evidence 397 10.A.5 Selecting Items for Testing to Gather Audit Evidence 400 10.A.6 Statistical versus Non-Statistical Sampling Approaches 401 viii CONTENTS 10.A.7 Design of the Sample 402 10.A.8 Answers to Certification Exam Questions 417 10.A.9 Notes 418 10.A.10 Questions, Exercises and Cases 419 11 Completing the Audit 421 11.1 Learning Objectives 421 11.2 Introduction 423 11.3 Quality Control 424 11.4 Evaluate Governance Evidence 430 11.5 Review for Discovery of Subsequent Events 441 11.6 Review Financial Statements and Other Report Material 445 11.7 Wrap-Up Procedures 448 11.8 Going Concern Issues 455 11.9 Matters for Attention of Partners (MAPs) 457 11.10 Reports to The Board of Directors 458 11.11 Summary 460 11.12 Answers to Certification Exam Questions 461 11.13 Notes 463 11.14 Questions, Exercises and Cases 466 Appendix to Chapter 11 Audit Documentation and Working Papers 473 11.A.1 Introduction 473 11.A.2 Form and Content of the Working Papers 475 11.A.3 Document Retention 477 11.A.4 Permanent and Current Files 478 11.A.5 Preparation of Working Papers 483 11.A.6 Adjusting Entry 485 11.A.7 Summary 486 11.A.8 Notes 487 11.A.9 Questions, Exercises and Cases 489 12 Audit Reports and Communication 490 12.1 Learning Objectives 490 12.2 Introduction 491 12.3 Basic Elements of the Auditor’s Report 493 12.4 Types of Reports Expressing Audit Opinions 499 12.5 Matters that Do Not Affect the Auditor’s Opinion (Modification of an Auditor’sReport Containing an Unqualified Opinion) 505 12.6 Circumstances That May Result in Other Than an Unqualified Opinion 511 12.7 Uncertainties Leading to Qualification of Opinions 516 12.8 Communications with those Charged with Governance 520 ix

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