Introduction: Professional Judgment
Section 1: Client Acceptance
1.1 Ocean Manufacturing, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
The New Client Acceptance Decision
Section 2: Understanding the Client's Business and Assessing Risk
2.1 Your1040Return.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Evaluating eBusiness Revenue Recognition, Information Privacy, and Electronic Evidence Issues
2.2 Apple Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Evaluation of Client Business Risk
2.3 Flash Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Risk Analysis
2.4 Asher Farms Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Understanding of Client's Business Environment
Section 3: Professional and Ethical Issues
3.1 A Day in the Life of Brent Dorsey . . . . . . . . . . . . . . . . . . . . . . . 57
Staff Auditor Professional Pressures
3.2 Nathan Johnson's Rental Car Reimbursement . . . . . . . . . . . . . . . . 61
Should He Pocket the Cash?
3.3 The Anonymous Caller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Recognizing It's a Fraud and Evaluating What to Do
3.4 WorldCom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
The Story of a Whistleblower
3.5 Hollinger International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Realities of Audit-Related Litigation
Section 4: Accounting Fraud and Auditor Legal Liability
4.1 Enron Corporation and Andersen, LLP . . . . . . . . . . . . . . . . . . . 87
Analyzing the Fall of Two Giants
4.2 Comptronix Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Identifying Inherent Risk and Control Risk Factors
4.3 Cendant Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Assessing the Control Environment and Evaluating Risk of Financial Statement Fraud
4.4 Waste Management, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Manipulating Accounting Estimates
4.5 Xerox Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
Evaluating Risk of Financial Statement Fraud
4.6 Phar-Mor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Accounting Fraud, Litigation, and Auditor Liability
4.7 Satyam Computer Services Limited . . . . . . . . . . . . . . . . . . . . . 143
Controlling the Confirmation Process
Section 5: Internal Control over Financial Reporting
5.1 Simply Steam, Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Evaluation of Internal Control Environment
5.2 Easy Clean, Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
Evaluation of Internal Control Environment
5.3 Red Bluff Inn & Cafe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
Establishing Effective Internal Control in a Small Business
5.4 St. James Clothiers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
Evaluation of Manual and IT-Based Sales Accounting System Risks
5.5 Collins Harp Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
Recommending IT Systems Development Controls
5.6 Sarbox Scooter, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
Scoping and Evaluation Judgments in the Audit of Internal Control over Financial Reporting
5.7 Societe Generale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
How a Low-Risk Trading Area Caused a $7.2 Billion Loss
Section 6: The Impact of Information Technology
6.1 Harley-Davidson, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
Identifying eBusiness Risks and Related Assurance Services for the eBusiness Marketplace
6.2 Jacksonville Jaguars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
Evaluating IT Benefits and Risks and Identifying Trust Services Opportunities
Section 7: Planning Materiality
7.1 Anne Aylor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
Determination of Planning Materiality and Tolerable Misstatement
Section 8: Analytical Procedures
8.1 Laramie Wire Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . 233
Using Analytical Procedures in Audit Planning
8.2 Northwest Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
Developing Expectations for Analytical Procedures
8.3 Burlingham Bees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243
Using Analytical Procedures as Substantive Tests
Section 9: Auditing Cash, Fair Value, and Revenues
9.1 Wally's Billboard & Sign Supply . . . . . . . . . . . . . . . . . . . . . . . 249
The Audit of Cash
9.2 Henrico Retail, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265
Understanding the IT Accounting System and Identifying Audit Evidence for Retail Sales
9.3 Longeta Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269
Auditing Revenue Contracts
9.4 Bud's Big Blue Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . 273
Accounts Receivable Confirmations
9.5 Morris Mining Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 285
Auditing Fair Value
9.6 Hooplah, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291
Applying Audit Sampling Concepts to Tests of Controls and Substantive Testing in the Revenue Cycle
9.7 RedPack Beer Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 301
Estimating the Allowance for Bad Debts
Section 10: Planning and Performing Audit Procedures in the Revenue and Expenditure Cycles: An Audit SImulation
10.1 Southeast Shoe Distributor, Inc. . . . . . . . . . . . . . . . . . . . . . . 311
Identification of Tests of Controls for the Revenue Cycle (Sales and Cash Receipts)
10.2 Southeast Shoe Distributor, Inc. . . . . . . . . . . . . . . . . . . . . . . 329
Identification of Substantive Tests for the Revenue Cycle (Sales and Cash Receipts)
10.3 Southeast Shoe Distributor, Inc. . . . . . . . . . . . . . . . . . . . . . . 339
Selection of Audit Tests and Risk Assessment for the Revenue Cycle (Sales and Cash Receipts)
10.4 Southeast Shoe Distributor, Inc. . . . . . . . . . . . . . . . . . . . . . . 347
Performance of Tests of Transactions for the Expenditure Cycle (Acquisitions and Cash Disbursements)
10.5 Southeast Shoe Distributor, Inc. . . . . . . . . . . . . . . . . . . . . . . 367
Performance of Tests of Balances for the Expenditure Cycle (Acquisitions and Cash Disbursements)
Section 11: Developing and Evaluating Audit Documentation
11.1 The Runners Shop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379
Litigation Support Review of Audit Documentation for Notes Payable
Section 12: Completing the Audit, Reporting to Management, and External Reporting
12.1 EyeMax Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395
Evaluation of Audit Differences
12.2 Auto Parts, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401
Considering Materiality When Evaluating Accounting Policies and Footnote Disclosures
12.3 K&K Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403
Leveraging Audit Findings to Provide Value-Added Insights in a Manufacturing Environment
12.4 Surfer Dude Duds, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409
Considering the Going-Concern Assumption
12.5 Murchison Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 413
Evaluating an Attorney's Response and Identifying the Proper Audit Report
12.6 Going Green . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421
Sustainability and External Reporting
