Auditing

I. THE AUDITING PROFESSION. 1. The Demand for Audit and Assurance Services. Chapter 1 has been divided into two chapters to provide coverage of assurance services. New chapter-opening vignette on the demand for assurance services, including the demand for audit services. Examples of assurance services, such as CPA WebTrust, ElderCare Plus, and Business Performance Measurement, are presented along with detailed discussion of specific assurance services. Assurance services are distinguished from attestation and other services provided by CPA firms. 2. The CPA Profession. New chapter-opening vignette highlights role of audit staff. New section on the responsibilities and roles of staff within CPA firms. Updated discussion of the activities of the AICPA, including the CPA Vision Project. 3. Audit Reports. Revised chapter introduction relates the reporting process to the demand for audit services. Presentation of categories of reports has been reorganized to help students determine the appropriate report for a given circumstance. New table helps students relate opinion to changes in report wording. 4. Professional Ethics. New chapter-opening vignette on the importance of professional ethics. New discussion of the role of the Independence Standards Board and its pronouncements. Coverage of new interpretations of the Rules of Conduct on alternative practice structures and internal auditing and extended auditing services. 5. Legal Liability. Highlights of continuing efforts to reform auditor's legal liability protections, including the Securities Litigation Uniform Standards Act of 1998. Better explanations of how legal cases summarized in Figures/Tables led to changes in audit practices and procedures. II. THE AUDIT PROCESS. 6. Audit Responsibilities and Objectives. Updated discussion of SAS No. 82 highlights the recent study, Fraudulent Financial Reporting: 1987 - 1997, An Analysis of U.S. Public Companies, issued in March 1999 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Streamlined presentation of auditing in financial statement cycles is centered more closely around the Hillsburg Hardware example case. 7. Audit Evidence. New material highlighting how information technology is changing traditional paper evidence to electronic evidence. Expanded discussion of information technology related tools that auditors currently use to gather audit evidence electronically. New discussion on the use of analytical procedures, including a new mid-chapter vignette describing common judgment problems auditors face when performing analytical procedures. 8. Audit Planning and Documentation. New discussion of how Internet access to numerous databases (such as Lexis/Nexis, Dow Jones News Retrieval, EDGAR) can assist auditors during client screening processes. Highlights of changes to auditor responsibilities resulting from the recently issued SAS No. 83 (obtaining an understanding with the client, including an updated engagement letter example), and SAS No. 84 (communicating with predecessor auditors). In-chapter summary of "top down" audit strategies currently being used by some of the larger accounting firms as a holistic approach to gaining an understanding of the client's business by focusing on client core business strategies and related business risks (frequently referred to as "strategic systems lens approach to auditing" ). Revised discussion about the use of analytical procedures during the planning phase of an audit that walks students through the use of planning analytical procedures to identify audit risk areas for the Hillsburg Hardware in-chapter case. 9. Materiality and Risk. Strengthened link between audit materiality and audit risk considerations. 10. Internal Control and Control Risk. New integration of the impact of current information technologies on internal control throughout the entire chapter. Expanded discussion about the importance of the board of directors and audit committee in establishing an effective "tone at the top" regarding internal controls. New in-chapter vignette highlighting the recently issued Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees currently being considering by the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD). New discussion about the importance of ongoing client-performed risk assessments of the impact economic, industry, regulatory, and operating conditions have on an entity's internal control, which are highlighted in COSO's Internal Control-Integrated Framework. Strengthened integration of the discussion of control activities as described in COSO's Internal Control-Integrated Framework. 11. The Impact of Information Technology on the Audit Process. Chapter is entirely rewritten to highlight effects of information technology developments on the audit process and now follows the initial chapter on internal control. New descriptions of how IT-based accounting systems enhance internal control while at the same time introduce new risks that must be addressed by IT specific internal controls. Extensive discussion about internal controls specific to information technology, including expanded discussion of key general and application controls and their interrelationship. Discussion of how the strength of general controls affects the auditor's testing of application controls, including discussion of how the evaluation and testing of client general controls affects the auditor's testing of application controls used to reduce control risk. New information about the test data, parallel simulation, and embedded audit module techniques for auditing electronic evidence. Overviews of audit issues specific to environments involving microcomputers, networks, database management systems, and outsourced computer service centers. 12. Overall Audit Plan and Audit Program. Revised chapter introduction provides a stronger bridge from material presented in preceding chapters to the process of developing an audit plan and audit program. New series of figures illustrate the relationships between tests of controls, substantive tests of transactions, analytical procedures, and tests of detail balances. New discussions of how computerized accounting systems affect each type of audit test. Expanded discussion of how analytical procedures can be effective at indicating increased likelihood of material misstatements. New discussion of SAS No. 80, which provides guidance for auditors of entities that transmit, process, maintain, or access significant information electronically. III. APPLICATION OF THE AUDIT PROCESS TO THE SALES AND COLLECTION CYCLE. 13. Audit of the Sales and Collection Cycle: test of Controls and Substantive tests of Transactions. Revised chapter introduction provides a stronger link between the opening vignette and the chapter material by highlighting how the assessment of control risk and the design of tests of controls and substantive tests of transactions fit in the overall audit plan. New in-chapter vignette discusses how the use of lockbox systems and electronic funds transfer affects the auditor's assessment of control risk for cash receipts. New in-chapter vignette highlights the realities of sales revenue misstatements using a real company example. 14. Audit Sampling for Tests of Controls and Substantive Tests of Transactions. Revised chapter introduction provides stronger link to Chapter 13 and to the opening vignette. Discussion of probabilistic vs. nonprobabilistic sample selection is expanded. Revised discussion of random number generation reflects the more common use of software applications to select random numbers with less emphasis on the use of random number tables. Updated problem material incorporates computer-generation of random numbers rather than the use of random number tables. 15. Completing the Tests in the Sales and Collection Cycle: Accounts Receivable. Revised chapter introduction links the chapter material to the four phases of the audit process. Reorganized discussion of the methodology for designing tests of details of balances for accounts receivable ties more closely to the four phases of the audit process. Expanded discussion highlights use of analytical procedures in the audit of accounts receivable. New figure illustrates a typical working paper for the audit of the allowance for uncollectible accounts. New in-chapter vignette explores an actual company's problems with estimating uncollectible accounts receivable. 16. Audit Sampling for Tests of Details of Balances. Revised chapter introduction highlights audit sampling issues for tests of details of balances. An in-chapter sampling application example is more thoroughly integrated throughout the chapter material. New table highlights in a more understandable form the calculation of adjusted misstatement bounds when using monetary unit sampling. Better guidance is provided to students for completing problems using a nonstatistical sampling approach. IV. APPLICATION OF THE AUDITING PROCESS TO OTHER CYCLES. 17. Audit of the Payroll and Personnel Cycle. Revised section on internal control in the payroll and personnel cycle emphasizes computer-based controls and reliance on outside processing. Presentation of the cycle has been streamlined and organized consistent with presentation of other transaction cycles. 18. Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable. New chapter-opening vignette on the acquisitions and payment cycle. Revised coverage of internal controls in the cycle includes greater emphasis on computerized controls. 19. Completing the tests in the Acquisition and Payment Cycle. New chapter-opening vignette related to controls over accounts in the acquisitions and payments cycle. Streamlined discussion of accounts, key business functions, and audit techniques for auditing transactions and accounts in this cycle. 20. Audit of the Inventory and Warehousing Cycle. Revised figure on various audit tests in the cycle to help students understand the interrelation of tests in the cycle and relation to other cycles. 21. Audit of the Capital Acquisition and Repayment Cycle. Presentation of cycle has been reorganized consistent with coverage of other cycles, while maintaining emphasis on the unique features of the cycle. 22. Audit of Cash Balances. Clearer figure outlining relationship of all transaction cycles to the cash account. Expanded discussion of the consideration of fraud when auditing cash balances. V. COMPLETING THE AUDIT. 23. Completing the Audit. Revised vignette highlights the importance of careful review of the audit by experienced and knowledgeable personnel. Expanded discussion of the use of analytical procedures during the final review stage of the audit. Updated discussions to highlight new provisions of SAS No. 85 on obtaining a management representation letter. VI. OTHER ASSURANCE AND NON-ASSURANCE SERVICES. 24. Other Audit, Attestation Services, and Compilation Engagements. New section on CPA WebTrust reports. Revised coverage of reports on internal control over financial reporting. New section on reports on internal control for service organizations. 25. Internal and Governmental Financial Auditing and Operational Auditing. Revised opening vignette demonstrates how internal auditors can have a significant impact on a company's operational efficiency and effectiveness, as well as earnings and cash flows. Revised discussion of the responsibility of internal auditors. Substantial revisions to section on governmental financial auditing, including coverage of Single Audit Act Amendments of 1996 and revised OMB Circular A-133.