Principles of Auditing - An Introduction to International Standards

GLOSSARY Trend analysis – The analysis of changes in an account balance over time.

680 Trial balance – A listing of the account balances from the general ledger, prepared at the end
of the accounting period.

Triple bottom line – Sustainability reporting in terms of economic, environmental, and social
performance based on Global Reporting Initiative.

Type I error – see Audit sampling.

Type II error – see Audit sampling.

Unadjusted audit differences – These are proposed adjusting entries with accompanying
written justifications suggested by the auditor to bring the account balance on the company
financial statements in line with the audited account balance.

Unasserted claim – A potential legal claim against a client where the condition for a claim
exists but no claim has been filed.

Uncertainty – An uncertainty is a matter whose outcome depends on future actions or events
not under the direct control of the entity but that may affect the financial statements.

Underlying – A specified interest rate, security price, commodity price, foreign exchange rate,
index of prices or rates, or other variable. An underlying may be a price or rate of an asset
or liability, but it is not the asset or liability itself.

Unqualified opinion – see Opinion.

User control procedures – Procedures in audit testing of documentation representing manual
checks of the completeness and accuracy of computer output against source documents
and other input.

Valuation assertion – see Financial statement assertions.

Valuation risk – The risk that the fair value of the derivative is determined incorrectly.

Valuation services – Involve the valuation of matters material to the financial statements and
where the valuation involves a significant degree of subjectivity.

Value at risk (VAR) – A general class of models that provides a probabilistic assessment of the
risk of loss in market-risk-sensitive instruments over a period of time, with a selected
likelihood of occurrences based upon selected confidence intervals.

Volatility – A measure of the variability of the price of an asset or index.

Vostros – Accounts held by the bank in the name of a correspondent bank.

Vouching – The use of documentation to support recorded transactions or amounts. It is an
audit process whereby the auditor starts with an account balance and goes backwards
through the accounting system to the source document.

Walk-through test – Involves tracing a few transactions through the accounting system.

Weakness in internal control – The absence of adequate controls which increases the risk of
misstatement in the financial statements.

Wide area network (WAN) – A communications network that transmits information across an
expanded area such as between plant sites, cities, and nations. WANs allow for online access
to applications from remote terminals. Several LANs can be interconnected in a WAN.

GLOSSARY

Working papers – Also known as work papers these are a record of the auditor’s planning;
nature, timing, and extent of the auditing procedures performed; and results of such
procedures and the conclusions drawn from the evidence obtained. Working papers may
be in the form of data stored on paper, film, electronic media, or other media.

Write-offs – Costs related to loss in value of an asset (non-collection of accounts receivable,
loss in value of equipment, etc.) which are charged to expense or loss.

Written option – The writing, or sale, of an option contract that obligates the writer to fulfill
the contract should the holder choose to exercise the option.

XBRL (Extensible Business Reporting Language) – Based on XML, this is a tagging system for
financial data. It provides taxonomy for US Generally Accepted Accounting Principles and
International Financial Reporting Standards, and can be used on a transactional basis. An
offshoot of XML, XBRL is a freely licensed, open technology standard that makes it possible
to store and or transfer data along with the complex hierarchies, data-processing rules and
descriptions.

XML (eXtensible Markup Language) – A set of rules, guidelines, or conventions for designing
text formats for such data, in a way that produces files that are easy to generate and read (by
a computer), that are unambiguous, and that avoid common pitfalls, such as lack of
extensibility, lack of support for internationalization localization, and platform-
dependency. XML is an extension of the World Wide Web Consortium’s (W3C) Standard
Generalized Markup Language, SGML that allows creation of custom (extensible) data
tags, provides a universal data format, allows data objects to be serialized into text streams,
and can be parsed by all internet browsers.

681

ChapteInr d2ex

account analysis schedule 482 application controls in computer information
accounting issues 554 systems 252
accounting records 353
accounting standards 574 appropriateness of audit evidence 304–5, 358
apriori algorithm 342
see also under names Arabian American Development Company 441–2
accounting system 278–9 asset balances expense of audit program 573–4
accounts receivable turnover ratio 318 assertions 11
accuracy assertion 357
activities incompatible with practice 95–6 accuracy 357
Adelphia Communications 438–9 audit objectives based on 19–22
adjusting journal entry 485–6 auditor’s process 19–20
adverse opinion 27, 128, 445, 499, 502–3 categorized 20–2
advertising 100–1 classification 357–8
advocacy threat 89 completeness 19, 292, 357
agency theory 44, 46–7, 67 cutoff 357
agreed-upon procedures 10, 146–7 existence 19, 357
allowance for undetected misstatement 454 financial statement 260, 292, 355–8
alpha-risk 394 internal controls 614–15
American Institute of Certified Public measurement 357, 358
occurrence 357
Accountants (AICPA) 48, 104, 198 presentation and disclosure 19, 357, 358
analytical procedures 127, 197–8, 206–8 rights and obligations 357
standard 357–8
corroboration 336 understandability 357
disadvantages 336 valuation 357
during phases in audit process 333–5 assurance engagements
examples 336–7 assurance report 123
formulating expectations 324–6 to audit financial statements 126–7
four-phase 322–4 communications with Audit Committee 126
general 326–33 definition 117
overall review 334 elements exhibited by 117–18
payroll 337 evidence 123
planning 334 examination of 129–32
process 319–24 internal control reporting 140–2
relationships among data 318 limited assurance 124
search for unrecorded liabilities 379–80 organisations 114–16
as substantive tests 334, 335–7 practitioner, responsible party and user 118–19
tests of controls over information 334 practitioner’s conclusion 126
vs tests of details 335 procedures 124
types 318 prospective financial information 137–9, 140
unexpected deviations 343 reasonable assurance 124
when to use 318–19 to review financial statements (ISAs 800–899)
analytical review 334
Andersen, Arthur, LLP 54–5, 104, 219–20, 636 127–9
annual reports 447–8 subject matter 119–20
anomalous error 393, 412 subject specific standards 136–7

682

INDEX

suitable criteria 120–3 reports expressing 499–505
sustainability reporting 142–5 see also audit report
see also Sarbanes-Oxley Act audit plan see audit program
assurance report basic elements 124–6 audit planning memorandum 274, 480, 542,
attestation 12
audit adjustment 474 548–9
audit approach 275 client service, important local contacts and
audit client
acceptance 165–6, 179–83 audit team 552
background evaluation 166–70 critical audit objectives 552
continuing clients 168 fees, timetable and client contacts 556–7
monies 96, 97 follow-up 548
new client investigation 168 initial risk analysis 551
topics of discussion 168 insights 548–9
audit committee 424, 612–15 internal controls and control procedures 551
audit engagement letter 165, 183–6 plan part 554–7
audit evidence 304–5, 353, 397–400 preparation 293–6
alternative inventory procedures 371 revenue recognition procedures key 556
appropriateness 304–5, 358 strategy part 548–53
audit procedures for obtaining 368–80, audit process model 195, 423
four phases 23–8
399–400 vs empirical scientific cycle 23
corroboration 370 audit program 274, 294–6, 480, 542, 557–74
cost benefit 362 accounting standards and assumptions 574
evidence gathering techniques 368, 369 asset balances expense 573–4
external internal 361–2 expenses and payables 566–7
inquiry 370 inventory and cost of sales 571–3
inventory not on company premises 372 investments 565–6
inventory procedures in addition to preparation 293–6
revenue and accounts receivables
observation 372
observation 370–1 (confirmations) 567–9
original documentation 362 audit quality 51–2
persuasive 361 audit regulation 47–50
planning attendance at inventory count 371–2 audit report 12
quality of 359
relevance of 359 adverse opinion 502–3
reliability 359, 360–1 circumstances resulting in other than
selecting items for testing 400–1
sufficiency 358 unqualified opinion 511–15
sufficient appropriate 358–64 contents of 493–6
audit expectation gap 64
audit failure 57 addressee 494
audit firms 50–1 auditor’s address 496
audit manager 542–8 date of report 496
audit matters of governance interest 520, 521 opening introductory paragraph 494
audit of financial statements 14, 15 opinion paragraph 495–6
audit opinion 27–8 scope paragraph 494–5
on company’s ability to continue as going signature 496
title 493
concern 58–9 disagreement with management 514–15
on company’s internal control system 59–60 disclaimer of opinion 503–4, 505
disclaimer of opinion 27, 499 expressing audit opinions 499–505
on fairness of financial statements 58 form 497–9
on occurrence of fraud 60–4 inadequate disclosure adverse opinion 504
on occurrence of illegal acts 64 limitation of scope 503, 505, 513–14
modification of 505–11
modified opinion 499
qualified opinion 128, 445, 499, 502, 503

683

INDEX audit report (continued) internal control 614–15
standard unqualified opinion auditor’s report managing 606–7
684 499–502 penalties 611
uncertainties leading to qualification of societal interest 607
opinions 516–19 supervising 611–12
unqualified opinion 27, 58, 128, 179, 497, 498, transparency 615
505–11 beta-risk 394
see also audit opinion Big Four audit firms 28, 34, 50–1, 67
see also Deloitte & Touche; Ernst and Young;
audit responsibility 175–6
audit risk 13, 210–11, 399 KPMG; PricewaterhouseCoopers
Board of Directors 593
components 211, 212
ISAs on 194–7 reports to 458–9
audit sampling 293, 392–3, 401 responsibility for best practice 607–11
design 402–17 training 614
results, evaluation 415–17 breach of contract 52
sample selection 410–11 Bristol-Myers Squibb 210–11
sample size 407–10 business reporting models
sampling risk 394 current and future 616–17
sampling unit 395 business risk 13, 23, 197, 204–5, 206, 209–13,
audit strategy 291
audit scope 546 245–7
audit team 180, 198, 552
audit working papers 176 Cadbury, Sir Adrian 4
auditees, expectations of 58 Cadbury Committee 47, 595, 614
Auditing Standards Board (US) 194 Cadbury Report 66, 68, 604, 625
auditor Caparo Industries, PLC v Dickman and Others 53
expectations of 3–4 capital base accord 639–40
independence of 516–17 capital structure 201
oversight 613 causation issue 57
reports to audit committee 613 Cendant Corporation 511–13
role in corporate governance 617–24 certified designations 18–19
types of 16–19 checklist 280, 284
Australian Accounting Standards Board (AASB) 49 Chinese Accounting Standards (CAS) 6
circumstantial evidence 355
bank banking Citibank Inc. 255–6
board of directors management, classes of transactions 355
responsibilities of 637–8 classification 342
external auditor banking supervisor, role of classification assertion 357–8
638–40 clear and convincing evidence 354
license 639 client acceptance 165–6, 179–83
risks 640 clients’ monies 96, 97
supervision 636–7 cluster analysis 342
supervisor external auditor relationship 640–2 Code of Best Practice 447
Cohen Commission 61
bankruptcies 598 Combined Code 66, 68, 239, 620, 632–4
Barings Bank 60, 254 commissions 94–5
Basel Committee on Banking Supervision 10, 637
benchmarking 546 fees for 183
Benford’s Law 337 commitments 435–7
best practice Committee of Sponsoring Organizations of the

audit committee 612–15 Treadway Commission (COSO) 65, 68, 120,
board responsibility 607–11 230, 231, 232, 261
certification by executives 610 COSO report 625
Code of Best Practice 447 Committee Tabakslat 625
internal audit department 615 common size analysis see ratio analysis
communication

INDEX

audit matters of governance interest 521 contracts 204
banking and 641 control activities see control procedures
communications with audit committee 520 control environment 13, 25, 236–45
to expert 177–8
fraud and non-compliance with laws 522–3 assignment of authority and responsibility 240,
governance structures 520–1 241
with predecessor (existing) auditor 178–9
reportable conditions 521 audit evaluation of those charged with
with those charged with governance 520–3 governance 239
Companies Acts (1845–62) 3
competencies, specific 173 commitment to competence 238–9
compilation engagement 149, 150 cumulative effect of controls 243
completeness assertion 19, 292, 357 elements contributing to success 237
completion memorandum 542, 544, 575–80 factors on which to assess internal control
accounting issues 576
attached schedules 580 243–5
critical audit areas 576 human resource policies and practices 241–3
Financial Investment National Enterprises management’s philosophy and operating style

(FINE) 577 239
general 575–6 organizational structure 240
outstanding matters 580 organization’s management 237
compliance audit 11, 15–16 participation of those charged with governance
compliance with contractual agreements, reports
239
on 134, 135 control procedures (control activities) 25, 251–6
components control risk 13, 210, 213, 259, 260, 274, 275

of audit risk 211, 212 assessment 286–90
of internal control 211, 212 level 287–90
management 176 at maximum 290
computer assisted audit techniques (CAATs) 298, relevant controls 286–7
responses to assessed risk 290–3
318, 319, 337–41, 344, 368, 374 top-down approach 286
computer environment 279 weaknesses in 287–90
computer information systems (CIS) 525 co-optation 611
corporate bylaws 478
computer facility controls in 253 corporate charter 478
ComROAD 568–9 corporate governance 4
confidence level 394 audit profession and 620–1
confidentiality 79–80 causes of discussions 597–602
confirmation 374–9 committees and reports 604–6
communications, banking and 641
if audit client does not allow 379 definitions 595–6
in response to a significant risk 378 disclosures 447
of accounts receivable 378 EU proposed directive on statutory audit
of management assertions 375
no response to confirmation letter 379 621–4
positive and negative confirmation 378 nature of 593–7
of revenue and accounts receivables 567–9 stakeholders 596–7
conflict of interest 78 transparency 597
conflict of loyalties 103–4 role of auditor 617–24
conflict resolution 78 structures 602–4
contingency fees 182–3
contingent fees 88 demand for supervision vs. shareholder
contingent liabilities 423, 435–7 rights 604
continuing client 198–9 governance boards market vs. network 603
continuing client audit proposal 180 network-oriented 603
continuous reporting 527 correcting entry 485
cost benefit materiality 362
cost of sales 571–3
Crazy Eddie, Inc. 320–2

685

INDEX cross-border activities 81 environmental sustainability 142–4
CUC 511–13 Ernst & Young (E&Y) 28, 31, 34, 89–90, 121–3,
686 custody of assets 253
customer relationship management (CRM) 341 476, 508
cutoff assertion 357 error

data description 342 anomalous 393, 412
data mining 318, 319, 341–2, 345 definition 393
database 4, 252 nature and cause of 411–13
Davison and Benson Committee 61 projecting 413–15
deadlines 546 reporting to third party 523
decision tree 342 tolerable 394, 397, 407
definition of audit 10–14 Type I 394, 395
Dell 509 Type II 394
Deloitte 28, 30, 34, 79–80 ethics 77–8, 237–8
dependency analysis 342 in accounting profession 75–6
detection risk 13, 210, 213, 274 competence requirements 171–5
developing nations, international auditing conflict resolution 78
definition 75
standards 6 enforcement of requirements 104–5
Dey report 604, 625 objectives of accountancy 76
Dingell Committee 61 quality control 425
direct evidence 354 Sarbanes-Oxley Act 447
directors, role of 29–30 European Commission (EC) 5, 10
disciplinary action 105 European Union (EU) 5
disclaimer of audit opinion 27, 499 Action Plan for Company Law 606
disclosures 445–7, 510–11 Corporate Governance Disclosure 615
Directives 5–6
rights and obligations 19, 357, 358 Eighth Directive 6, 19, 83–4, 626
risk in 13–14 laws 605–6
valuation 19 proposed directive on statutory audit 621–4
discovery of facts after shareholders’ meeting 445 evidence-gathering techniques 297–301, 368, 369
division of responsibility 175–6 evolution analysis 342
documentary evidence 355 existence assertion 19, 357
documentation of internal control expectation gap 64
structure 279–80 expectations
types 280–5 of audit services users 58
double entry bookkeeping, history of 2 of auditors 3–4
dual-purpose test 301 formulating 324–6
due professional care 57, 79 expense of audit program 566–7, 573–4
Dunlop, “Chainsaw Al” 242–3 expert
communications to 177–8
economic sustainability 142 competence, objectivity 177
electronic data interchange (EDI) 353, 358 financial 612–13
electronic evidence 358 reference to 517
electronic fund transfers (EFT) 353 using work of 177–8
embedded audit module (EAM) 527 expertise, auditing 4
emphasis of matter paragraph 445, 448, 499,
fair value 213
506–7 fairness in financial reporting 58
engagement letter 165, 183–6, 480 familiarity threat 89, 425
engagement proposal 166, 179–83 fees 94–5, 556–7
engagement quality control review 426
engagement, terms of 165 for commission 183
Enron 16–17, 49, 58, 60, 62–3, 66, 201, 287–9, 636 contingency 182–3
enterprise resource planning (ERP) 353, 527 contingent 88
Entity Level Business Model 202–4 determination 51–2

INDEX

establishing and negotiating 182–3 governance evidence, evaluation 430–41
proposal 180 contingent liabilities and commitments
file interrogation 337, 338 435–7
financial expert 612–13 field procedures 430
financial reporting legal letter 430–1, 432
framework 186 letter from client’s legal counsel 431–3
policies 202 litigation, claims and assessments 430–3
requirements 544 management representation letter 433–5, 436–7
Financial Reporting Council (FRC) (Australia) related parties 437–41
see also corporate governance
48, 49, 67
financial statements group auditor 175
group management 176
assertions 260, 292, 355–8
audits 10 Hampel Committee 596
disclosures 445–6 HealthSouth 121–3
fairness of 58 HIH Insurance Board 618–19
Forward Rate Notes (FRNs) 577 historical financial information see assurance
fraud 598, 60–4
auditor withdrawal 522 engagements
communication 522 history of auditing 2–3, 33
famous cases 60–1 Hollinger International 608–10
matters communicated to those charged with homogeneity 397
human resources
governance 522–3
opinion on occurrence of 60–4 policies and practices 241–3
in planning, evaluating and reporting 63 quality control 427
reporting to third party 523
responsibility for 61 illegal acts, opinion on 64
US standard 63 importance of auditing 3
see also Enron; WorldCom independence 172–3
functional audit quality 51
future of auditing 5 of auditor 516–17
as defined in Code 85
general controls in computer information independence in fact and independence in
systems 252–3
appearance 85, 106
generalized audit software (GAS) 319, 337–41, 344 litigation and 173
analysis of data 339 non-audit services to audit clients in IOFAC
audit tasks 339–40
compare sets of data 339–40 code 93–4
convert data into a common format 339 principles based (conceptual) approach 85
file interrogation procedures using 338 requirements 83–94
four-phase analytical review process using 340 safeguards 91–3
structured approach 340–1 threats to 86–91
independent directors 611
generally accepted accounting principles (GAAP) independent external auditor 18–19, 516–17
14, 120, 516 indexing of working papers 483, 485
information asymmetry 46–7, 636
Generally Accepted Audit Standards (GAAS) 7, information processing 252–3
10, 48 information systems 278
accounting system 250
Global Reporting Initiative (GRI) 116 communications and 247–50
Sustainability Reporting Guidelines 144 financial reporting 249, 250
input risks 250
globalization of capital markets 601 input, subsystems and output 248
going concern 4, 5, 58–9, 201, 329–30, 455–7 information technology 4, 601–2
risks 249
disclosure 510–11 transaction procedures 249
emphasis of matter 508–9 inherent risk 13, 210, 213, 274
opinion on company’s ability to continue as

58–9, 457
procedures to gather audit evidence 457

687

INDEX inquiry 127, 370 International Auditing and Assurance Standards
of client’s attorney letter 430 Board (IAASB) 6–7, 33, 104, 622
688 of management 197
as test of control 297–8 assurance framework 114
code of ethics 114
inspection (of tangible assets, records or engagement 114–16
documents) 127, 372–3 International Standards on Quality Control

observation and 198 (ISQC) 114
as test of control 298 related services framework 114, 115
Inspired Confidence, theory of 46, 67 International Auditing Practice Statements
Institute of Chartered Accountants in England
(IAPS) 116
and Wales 2 IAPS 1004: 637–9
integrity see ethics IAPS 1014: 495, 496
Intel 508 on group audit 174–5
internal auditors 16–17 International Auditing Practices Committee
internal control
(IAPC) 637
best practice 614 international auditing standards 6, 8–9
components 231–2, 235–6, 286 International Federation of Accountants (IFAC)
controls over transactions 234
definition 230–2 12, 33, 104, 637
design of 234–5, 259–61 new reform proposals 7
effectiveness of, reporting on 60 Code of Ethics for Professional Accountants
evaluation 257, 258
financial reporting controls 233–4 76–82, 101–4
fraud surveys 233 Leadership Group (ILG) 7, 10
implementation 234–5 International Financial Reporting Standards
importance 232–5
management control objectives 233 (IFRS) 5–6, 14, 200, 601
management information system, operations International Framework for Assurance

and compliance controls 234 Engagements 117–18
monitoring of 256–9 International Organization of Securities
reevaluation of initial assessment 305
structure 25 Commissions 10
weaknesses in 261, 290 international public accountancy firms 28–33
internal control flow chart 280, 285, 480 International Related Services Practice Statements
internal control narrative 280, 282
internal control questionnaire 280, 283, 480 (IRSPSs) 116
internal control system 5 International Standards for Related Services
opinion on 59–60
Internal Revenue Service (IRS) 15 (ISRSs) 116
International Accounting Standards (IAS) International Standards on Assurance
IAS 1: 455
IAS 10: 442 Engagements (ISAEs) 7, 34, 114, 116, 123,
IAS 24: 437 124–5, 427
IAS 39: 556 ISAE 300R 136
see also International Financial Reporting International Standards on Auditing (ISAs) 6,
7–10, 8–9, 33, 114
Standards (IFRS) as harmonization standards 10
International Accounting Standards Board ISA 1 see ISA 200
ISA 200: 10–11, 12–13, 34, 63, 183, 186
(IASB) 5, 33 ISA 210: 179
International Accounting Standards Committee ISA 210A: 63
ISA 220: 427, 460
(IASC) 5, 622 ISA 230: 473–87
International Association of Insurance ISA 240: 61, 63, 183, 522, 544
ISA 250: 64, 520, 544
Supervisors 10 ISA 260: 183, 520
International Assurance Engagement Practice ISA 300: 194, 294, 520
ISA 315: 194, 196, 197–9, 231, 234, 279
Statements (IAEPs) 116 ISA 320: 216
ISA 330: 194, 196
ISA 400: 59, 524

INDEX

ISA 500: 20, 194 Li & Fung 593–5
ISA 505: 378 likely misstatement 454
ISA 510: 178 limitation of scope 435, 503, 505, 513–14
ISA 520: 206 limitations of the audit 13
ISA 530: 391–417 Limited Liability Partnership (LLP) 28
ISA 550: 440 Lincoln Savings and Loan Association 82–3
ISA 560: 441, 460 liquidity 329–30
ISA 570: 58, 329, 461, 508 list schedule 482
ISA 580: 184, 433 Livent 500–2
ISA 600: 175 London Stock Exchange 447
ISA 620: 177 long-form audit report 459
ISA 700: 58, 493, 511, 513 long-term audit form 523–5
ISA 720: 447 long-term debt work paper 484
International Standards on Quality Control
management
(ISQCs) 7, 34, 427, 460 responsibility for audit report 491–3
ISQC 1: 424, 477 role of 29
International Standards on Related Services
management assertions see assertions
(ISRSs) 7, 34, 114, 427 management letter 27, 287, 423, 433–7, 480, 521,
ISRS 4400: 116, 146–7
ISRS 4410: 116 546
International Standards on Review Engagements management report 5
material inconsistency 448
(ISREs) 114 material misstatement of fact 13, 448
intimidation threat 91 material weakness 290
inventory, audit program 371–2, 571–3 materiality 215–20, 516

count 403–6 circumstances of occurrence 216
investments, audit procedures 565–6 cost benefit 362
ISO 9001: 179 inverse relationship between audit risk and

King Report 604, 625 217–18
Kmart Corporation 366–7 level 215
knowledge discovery in databases (KDD) see data misstatement 218
nature of the item 215–16
mining reliability, precision and amount of evidence 216
known misstatement 454 setting 218–19
Kohlberg Kravis & Roberts (KKR) 79–80 size of the item 215
KPMG 28, 31–2, 34, 233 threshold 323
Mattel, Inc 362–4
lead schedules 480 matters for attention of partners (MAPs) 423,
leadership 425
legal evidence 354–5 457–8, 461
legal letter 430–1, 432 measurement assertion 357, 358
legal liability 52–7 Metallgesellschaft 201
mismanagement 598
civil, under statutory law 53 misstatement 323, 454
common law 52–3 modified auditor’s report 445
criminal, under statutory law 54 modified opinion 499
German 53 monetary misstatements 454
joint and several liability 57 monetary unit sampling 395
members of professional accounting monitoring 424, 426
Monitoring Group (MG) 7, 10
organizations 56–7
proportionate liability 57 negligence 52, 57
solutions to auditor liability 57 neural network 342
to clients 52 new client audit proposal 180–2
to third parties 53 non-Big Four audit firms 51, 67
Lending Credibility Theory 44, 45–6, 67
Lernout & Hauspie 64

689

INDEX non-compliance with laws, communication 522 Public Interest Oversight Board (PIOB) 7, 10, 33
non-executive members of the board 611 Public Oversight Board 48–50
690 non-sampling risk 395 publicity 81
non-statistical sampling 401–2
qualified opinion 128, 445, 499, 502, 503
objective of an audit 10, 11–12, 61 quality control 424–30
objectivity 11, 77–8
observation 198, 298, 370–2 acceptance continuance of client
occurrence assertion 357 relationships engagements 425–6
operational audit 11, 14–15
Orange County, California 201 elements of 424
organization charts 480 engagement quality control review 426
organizational hierarchy 28 ethical and independence requirements 425
other comprehensive basis of accounting human resources 427
leadership 425
(OCBOA) 125, 131, 132 monitoring 426
quantum issue 57
Parmalat 58, 376–7
partner ratio analysis 318, 327–8, 329
reasonable assurance 124
role of 29–30 reasonable doubt 354
rotation 173–4 reasonable schedule 482
PCAOB Audit Standard #1 60 reasonableness testing 318, 328–9
PCAOB Audit Standard #2 60, 140, 153 recalculation 374
Penn State Bank 171–2 reconciliation 482
PeopleSoft 89–90 Regina Company 299–300
Peregrine Systems 331–3 regression analysis 338
performance review 251 related parties 423
permanent audit file 198 related party transaction 437
permission of client, requesting 178–9 related services 146–50
Peters Committee 596 Related Services Framework 116
Peters Report 604, 625 relational database management systems (DBMS)
physical controls 253
planning in audit process model 194–7 527
Policeman Theory 44–5, 67 relations with other professional accountants
population 393
power of the test 394 96–100
preponderance of evidence 354 Reliance Insurance Co. 79–80
presentation and disclosure assertion 19, 357, 358 reperformance 374
presentation of information 104 reportable conditions 287
PricewaterhouseCoopers 28, 32–3, 34 representativeness 396
principal–agent relationship 636 reputational risk 607
privity 52, 67 research and development costs 547
probable cause 354 Resona 169–70
procedures to obtain an understanding 275–7 revenue recognition procedures 546
professional behavior 80 Review Board (UK) 48, 49, 67
professional competence 12, 79, 104 rights and obligations assertions 357
commitment to 238–9 rights and obligations disclosure 19, 357, 358
responsibilities regarding use of non- risk

accountants 94 assessment 245–7
professional standards 427 banking 640
professionals, other, use in audit 175–8 business 13, 23, 197, 204–5, 206, 209–13, 245–7
profit maximization, history of 2–3 detection 13, 210, 213, 274
Public Company Accounting Oversight Board in disclosures 13–14
in financial statements, transactions, account
(PCAOB) 7, 33, 48, 67, 84, 140, 427, 428–9,
477, 620–1, 626 balances and disclosures 13–14
inherent 13, 210, 213, 274
IS IT 249, 250

non-sampling 395 INDEX
obtaining evidence 398–9
process 208–9 social sustainability 144
reputational 607 Society of Accountants 2
sampling 394 solicitation 100–1
significant 197, 213–14 Special Purpose Audit Engagements (ISA
tasks 208–9
see also audit risk; control risk 900–999) 129–32
risk assessment blank evaluation tool 246 special purpose entities 201
staff accountants, role of 29
sample design 402–17 staff, professional 28–30
sample results, evaluation 415–17 stakeholders 44, 45
sample selection 410–11 standard assertions 357–8
sample size 407–10 standard audit process model
sampling risk 394
sampling unit 395 client acceptance 165
Sarbanes-Oxley Act (2002) (USA) 48, 49, 60, client-audit firm relationship 166
four phases 23–8
66–7, 239, 605, 626 steps in 166
SEC 103: 429 standard client and industry ratios 328, 329
SEC 301: 429 standards of proof 353
SEC 303: 429 Statement on Auditing Standards SAS (AICPA)
SEC 404: 140–2, 445, 614
audit committee review of auditors 429–30 99 63
document retention 477 statistical sampling 395, 401–2
ex-employee conflicts of interest 429 statutory audits 47, 84
governance disclosures 447 stratification 397
independence in 83, 84 subsequent events 127, 423
partnership review and rotation 429
PCAOB inspections 428–9 after the balance sheet date 442–3
quality control 427–30 between balance sheet date and issuance of
requirements for audit firms and audit
statements 444–5
committees 66–7 not affecting conditions at period end 443
schedule of accounts receivable 133 relating to conditions that existed at period
Schlumberger Limited 492, 493
scope of an audit 13 end 443
scope paragraph 494–5 up to the date of the auditor’s report 443
Securities Act (1933) (USA) 53 review for discovery of 441–5
Securities and Exchange Act (1934) (USA) 54 subsidiaries 545
Securities and Exchange Commission (SEC) substantive procedures 27, 214, 353, 364–8, 398
nature 365–7
(USA) 48, 53, 55–6, 105 reliability and cost of 379–80
segregation of duties 253–6, 286 timing and extent 367–8
substantive tests of balances 301–2, 365
custody and recording 254–5 direction of testing 367
IT 255 effect of control assessment on 303–4
self-interest threat 87–8 tests of accounts receivable 365–7
self-review threat 88–9 sufficient appropriate audit evidence 124, 304–5,
senior accountants, role of 29
shareholder rights 604 360
Shell Summarized Financial Statements, reports on
sustainability report 145
year at a glance 143 135–6
significant audit areas 554 summary of procedures description schedules 480
significant findings or issues documented 474 Sunbeam 242–3
significant risks 197, 213–14 supervision 604
skepticism, professional 13, 324 support for professional colleagues 104
SureBeam Corporation 174–5
suspense file 249
sustainability 607

tax practice 81
tax returns, misleading 81

691

INDEX

technical audit quality 51 objectives, strategies and related business risks
technical standards 82 204–5, 206
tenure, quality and length of 51
tests of control 27, 296–304, 398 procedures to obtain 197–8
strategic framework 205
direct vs. inferred evidence 301 Universal Health Services, Inc. 434–5
effect on substantive tests 303–4 unqualified opinion 27, 58, 128, 179, 497, 498,
extent of 303
inquiry as 297–8 505–11
inspection as 298 USA 200 495
observation as 298
reperformance as 298–301 airline bankruptcies 59
tests for operating effectiveness 297 history of auditing 2–3
timing of 302–3 unqualified audit 498
types of 297–301 user controls 551
theories, auditing 44–7
Theory of Inspired Confidence 44 valuation assertions 357
third parties 46 valuation disclosure 19
tick marks on working papers 483 value added 180
timing Vivendi 598–600
of audit procedures 292, 546 vouching 373
of tests of control 302–3
tolerable error 20, 397, 407 whistle-blower communications 613
tort 52 working papers 473–4
transaction records
in computer information systems 252 account analysis schedule 482
examination 278 adjusting entry 485–6
Treadway Commission 61, 625 current file 480, 481
trend analysis 318, 326, 329 document retention 477–8
trial balances 480 extent of contents 475–6
triple bottom line 117 form and content 475–6
true and fair view 11 indexing 483, 485
Turnbull Report 66, 68 interest and long-term debt work paper 484
Tyco International Ltd 517–19 lead schedules 480–3
Type I error 394, 395 permanent file 478–9
Type II error 394 preparation 483–5
significant matters 475
Ultramares Corporation v Touche et al. (1931) 53 tick marks 483
Ultramares doctrine 53 World Bank 10
unasserted claims 430 WorldCom (MCI) 16–17, 49, 55–6, 58, 66,
understandability assertion 357
understanding of internal control 101–3
wrap-up procedures 424, 448–55, 461
audit team discussion 198
continuing client 198–9 government review of publicly trade
environment 199–200 companies 455
industry, regulatory and other external factors
independent review 454
199–200 review law and regulation 454–5
internal control 208 supervisory review 448–53
measurement review of financial performance working paper review 453–4

205–8 XBRL 525–6
nature of the entity 201–4 Xerox 237–8
XML 526–7

year at a glance (Shell) 143

692