The Audit Process PDF
Preview The Audit Process
THE AUDIT PROCESS PRINCIPLES, PRACTICE AND CASES SEVENTH EDITION Iain Gray Former Chair of the Auditing Special Interest Group of the British Accounting and Finance Association Stuart Manson Professor Emeritus, Essex Business School, University of Essex Louise Crawford Professor of Accounting, Newcastle University Business School, Newcastle University Australia • Brazil • Mexico • Singapore • United Kingdom • United States i Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. This is an electronic version of the print textbook. 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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. The Audit Process: Principles, © 2019, Iain Gray, Stuart Manson and Louise Crawford Practice and Cases, Seventh Edition WCN: 02-300 Gray, Manson and Crawford ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced or distributed in any form or by any Publisher: Annabel Ainscow means, except as permitted by U.S. copyright law, without the prior written permission of the copyright owner. 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Cengage Learning products are represented in Canada by Nelson Education, Ltd. For your course and learning solutions, visit www.cengage.co.uk. Purchase any of our products at your local college store or at our preferred online store www.cengagebrain.com. Printed in China by RR Donnelley Print Number: 01 Print Year: 2018 Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. BRIEF CONTENTS Contents iv Acknowledgements xiv List of Case Studies xvi Index of Legal Cases xviii Preface xix 1 Why are auditors needed? 1 2 An overview of the postulates and concepts of auditing 29 3 The meaning and importance of auditor independence: factors affecting independence and measures to attain it 64 4 Audit regulation 112 5 Corporate governance 161 6 The risk-based approach to audit: audit judgement 197 7 The search for evidence explained 257 8 Systems work: basic ideas 1 285 9 Systems work: basic ideas 2 326 10 Testing and evaluation of systems 368 11 Substantive testing, computer-assisted audit techniques and audit programmes 396 12 Sampling and materiality 427 13 Final work: general principles, analytical review of financial statements and management assertions on financial statement headings 460 14 Final work: non-current assets, trade receivables and financial assets 489 15 Final work: specific problems related to inventories, construction contracts, trade payables and financial liabilities 524 16 Final review: post-balance sheet period, provisions, contingencies, letter of representation 562 17 Assurance engagements and internal audit 597 18 The auditors’ report 644 19 Fraud and going concern 700 20 The audit expectations gap and audit quality 741 21 The auditor and liability under the law 770 22 Issues in auditing 804 23 Examination hints and final remarks 849 Credits 855 Index 857 iii Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. CONTENTS Acknowledgements xiv List of Case Studies xvi Index of Legal Cases xviii Preface xix Digital Support Resources xxv 1 Why are auditors needed? 1 Learning objectives 1 Opening remarks 1 Basic principles: introduction through a simple case 5 Case Study 1.1: Erin and Lee, Part 1 5 Case Study 1.1: Erin and Lee, Part 2 6 Case Study 1.1: Erin and Lee, Part 3 8 Case Study 1.1: Erin and Lee, Part 4 10 Justification of audit 10 Introduction to truth and fairness in accounting 13 Basic audit framework 17 Some initial ideas on an extended role for audit 20 Assurance services 22 Summary of principles 23 Definition of an audit of financial and other information 24 Current developments 25 Summary 26 Key points of the chapter 26 References 27 Further reading 27 Self-assessment questions (solutions available to students) 28 Self-assessment questions (solutions available to tutors) 28 Topics for class discussion without solutions 28 2 An overview of the postulates and concepts of auditing 29 Learning objectives 29 The importance of theory and concepts in underpinning auditing practice 29 The postulates of auditing 32 The concepts of auditing: credibility, process, communication, performance 35 Introduction to the audit expectations gap 48 Introduction to audit quality 50 Introduction to corporate governance 53 Public interest 54 The layers of regulation and control 55 Summary 59 Key points of the chapter 60 iv Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Contents v References 61 Further reading 62 Self-assessment questions (solutions available to students) 62 Self-assessment questions (solutions available to tutors) 62 Topics for class discussion without solutions 63 3 The meaning and importance of auditor independence: factors affecting independence and measures to attain it 64 Learning objectives 64 Introduction 64 Independence and the role of audit 65 Definitions of independence 68 Practitioner and profession independence 68 Conflict, power of auditor and client and effect on perceived independence 74 Published codes of ethics 80 Audit firm’s control environment 85 Safeguards to counter threats to integrity, objectivity and independence 92 Small entities 107 Summary 108 Key points of the chapter 108 References and further reading 109 Self-assessment questions (solutions available to students) 110 Self-assessment questions (solutions available to tutors) 110 Topics for class discussion without solutions 111 4 Audit regulation 112 Learning objectives 112 The need for regulation 112 The UK regulatory system 116 The current regulatory system 119 The role of the RSBs and RQBs in the regulation of their members and registered audit firms 129 European Union influence 133 Appointment, resignation and removal of auditors and the Companies Act 2006 135 The statutory and practical relationships 136 Rules on appointment, removal and resignation of the auditor 139 Case Study 4.1: Rosedale Cosmetics plc, Part 1 140 Case Study 4.1: Rosedale Cosmetics plc, Part 2 141 Case Study 4.1: Rosedale Cosmetics plc, Part 3 143 Case Study 4.1: Rosedale Cosmetics plc, Part 4 146 Case Study 4.1: Rosedale Cosmetics plc, Part 5 146 Small companies 150 Case Study 4.1: Rosedale Cosmetics plc, Part 6 150 Audit tendering 151 Summary 152 Key points of the chapter 152 References 153 Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. vi Contents Further reading 154 Suggested solutions to tasks 154 Self-assessment questions (solutions available to students) 156 Self-assessment questions (solutions available to tutors) 157 Topics for class discussion without solutions 158 5 Corporate governance 161 Learning objectives 161 Introduction to corporate governance 162 Part 1: The need for effective c orporate governance 162 Part 2: Models of corporate governance and the UK Corporate Governance Code 167 Models of corporate governance 170 The UK Corporate Governance Code 174 Board committees 181 The UK Stewardship Code 186 Audit firm corporate governance 190 Concluding remarks on corporate governance 191 Summary 191 Key points of the chapter 191 References and further reading 192 Self-assessment questions (solutions available to students) 194 Self-assessment questions (solutions available to tutors) 194 Topics for class discussion without solutions 196 6 The risk-based approach to audit: audit judgement 197 Learning objectives 197 Why is a risk-based approach to audit an aid to the auditor? 197 Broad approach to minimize audit risk 200 A practical example 211 Case Study 6.1: Edengrove Limited 211 Other practical matters 213 Case Study 6.2: Kemback Limited, Part 1 217 Case Study 6.2: Kemback Limited, Part 2 220 Business risk approach to audit 222 Business risk and inherent risk approaches: similarities and dissimilarities 227 The business risk approach and smaller clients and smaller audit firms 230 Analytical review as a risk analysis tool 230 Judgement in accounting and auditing and its relationship to risk 232 Management of the audit process 234 The terms of reference provide the audit framework 236 Case Study 6.3: Hughes Electronics Limited 236 Planning the assignment 240 Case Study 6.4: County Hotel Limited, Part 1 240 Case Study 6.4: County Hotel Limited, Part 2 242 Summary 248 Key points of the chapter 248 References 249 Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Contents vii Further reading 249 Suggested solutions to tasks 250 Self-assessment questions (solutions available to students) 253 Self-assessment questions (solutions available to tutors) 256 Topics for class discussion without solutions 256 7 The search for evidence explained 257 Learning objectives 257 The audit defined as a search for e vidence to enable an opinion to be formed 257 Forming conclusions on the basis of evidence: the exercise of judgement 261 Reliability of audit evidence (grades of audit evidence) 265 Case Study 7.1: Ridgewalk plc 269 The business risk approach to gathering audit evidence 271 The stages of the audit process and the evidential requirements at each stage 274 Limited assurance and compilation engagements and agreed upon procedures 277 Conclusion 279 Summary 279 Key points of the chapter 280 Reference 281 Further reading 281 Self-assessment questions (solutions available to students) 281 Self-assessment questions (solutions available to tutors) 283 Topics for class discussion without solutions 284 8 Systems work: basic ideas 1 285 Learning objectives 285 Introduction 285 Layers of regulation and control expanded 287 Case Study 8.1: High Quality Limited: small independent supermarket 299 Case Study 8.2: Caiplie Financial Services: entity in the financial services sector 301 Accounting and quality assurance/control systems 302 General controls 304 Case Study 8.3: Horton Limited: cash received system 308 Summary 323 Key points of the chapter 323 References 324 Further reading 324 Self-assessment questions (solutions available to students) 325 Self-assessment questions (solutions available to tutors) 325 Topics for class discussion without solutions 325 9 Systems work: basic ideas 2 326 Learning objectives 326 Introduction 326 Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. viii Contents Application controls 327 Data capture/input controls 327 Processing controls 334 Output controls 336 Database systems 337 E-commerce 339 Audit approaches to systems and controls 345 Summary 364 Key points of the chapter 364 Further reading 365 Self-assessment questions (solutions available to students) 365 Self-assessment questions (solutions available to tutors) 366 Topics for class discussion without solutions 367 10 Testing and evaluation of systems 368 Learning objectives 368 Introduction 368 Sales and receivables system 369 Case Study 10.1: Broomfield plc: sales and trade receivables system 369 Purchases and trade payables system 371 Case Study 10.2: Broomfield plc: part of purchases and trade payables system 372 Payroll system 374 Case Study 10.3: Troston plc: production payroll 374 General and application controls in a sales system 376 Case Study 10.4: Burbage Limited: sales order processing and application controls 377 Tests of controls 379 Evaluation of systems and audit conclusions 390 Summary 392 Key points of the chapter 392 Reference 393 Further reading 393 Self-assessment questions (solutions available to students) 393 Self-assessment questions (solutions available to tutors) 395 Topics for class discussion without solutions 395 11 Substantive testing, computer-assisted audit techniques and audit programmes 396 Learning objectives 396 Introduction 396 Substantive testing of transactions, account balances and disclosures 396 Case Study 11.1: Powerbase plc: the substantive audit programme for purchases 398 The use of audit software 402 Directional testing 410 Substantive audit programmes for wages 412 Substantive audit programmes for cash and bank balances 414 Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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