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Auditing and Assurance Services, 16th edition

Published by Pearson (January 22, 2016) © 2017

  • Alvin A. Arens Michigan State University
  • Randal J. Elder The University of North Carolina Greensboro
  • Mark S. Beasley North Carolina State University
  • Chris E. Hogan Michigan State University

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About the Book

Comprehensive, Integrated, and Up-to-date

  • UPDATED! Several chapters have been updated to reflect important developments related to auditing, including:
    • Chapter 1, which introduces the importance of considering developments in international auditing standards.
    • Chapter 2, which discusses the role of the International Auditing and Assurance Standards Board (IAASB) in the issuance of international standards on auditing (ISAs) and the Auditing Standards Board’s efforts to converge U.S. standards to international standards.
    • Chapter 3, which highlights implications for auditor reports on companies reporting under International Financial Reporting Standards (IFRS).
    • Several chapters throughout the book include text or mid-chapter vignette coverage of international issues, and international issues are also addressed in homework problems.
  • NEW! Coverage of the AICPA Clarity Project and new PCAOB standards has been added, including Standard No. 18, Related Parties.
  • UPDATED! Coverage of the revised AICPA Code of Professional Conduct, which was recently aligned with international standards,has been added.
  • REVISED! Discussion of auditor judgment and professional skepticism has been expanded, including material in Chapters 6 and 10. The text discusses the importance of a questioning mindset and the need to critically evaluate audit evidence to strengthen awareness of the elements of effective professional skepticism.
  • NEW! Discussion of the requirements of the Sarbanes–Oxley Act of 2002 and the PCAOB Auditing Standard 5 (AS 5) that impact accelerated filer public companies has been added, and the risk assessment standards issued by the Auditing Standards Board are integrated throughout the text.
  • NEW! Chapter 23 addresses issues associated with auditing financial instruments and obtaining sufficient appropriate audit evidence for fair value account estimates.
  • REVISED! Expanded coverage of service organization control (SOC) reports issued by service center auditors is included. Both Chapters 10 and 25 reflect the new guidance for service auditors reporting on internal controls at service organizations, including coverage of the different types of reports provided in SOC 1, SOC 2, and SOC 3 engagements.
  • NEW! Chapter 25 describes a new type of nonattest engagement service and distinguishes it from compilation and review engagement requirements.

Helpful Pedagogical Features and Design Choices

  • NEW! Concept Checks within each chapter highlight short-answer questions to help students recap content covered within different sections of the chapter.
  • REVISED! End-of-chapter homework material for all chapters has been significantly revised. In partnership with Becker CPA Review, new multiple choice problems from their CPA exam preparation materials have been included. These problems, which are included in all 26 chapters, are labeled with the Becker logo. Additionally, each chapter identifies new or revised Discussion Questions and Problems that instructors can use in class to generate discussion about important topics addressed in each chapter. Each chapter also identifies homework problems that require students to research standards and other material using the Internet.
  • NEW! Selected problems using ACL have been included in several chapters. These problems allow students to see how audit software is used to perform specific types of audit tests. Additional guidance for students on the use of ACL is included both on the text website and as an appendix to the text.
  • NEW! The annual report for the Hillsburg Hardware Company is included as a four-color insert to the text. Financial statements and other information included in the annual report are used in examples throughout the text to illustrate chapter concepts.
  • REVISED! The Pinnacle Manufacturing integrated case has been revised and expanded to consist of seven parts included at the end of the chapter to which that part relates. Each part of the case is designed to give students hands-on experience, and is connected to allow students to gain a better understanding of how the parts of the audit are integrated by the audit process.
  • An increased use of bullets and numbering, and a larger font size appeal to visual learners, make the text easier to read, and help students focus on and retain key concepts.
  • Mid-chapter vignettes utilize international examples and emphasize fraud and current auditing issues.

Also available with MyAccountingLab®

MyAccountingLab is an online homework, tutorial, and assessment program designed to work with this text to engage students and improve results. Within its structured environment, students practice what they learn and test their understanding.

  • NEW! Multiple Choice Questions from Becker’s CPA Exam Review. Sample problems, assignable in MyAccountingLab, provide an introduction to the CPA Exam format and an opportunity for early practice for students, with CPA exam–style questions.
  • UPDATED! HTML5 Player. In addition to matching the Flash player’s support of Accessibility requirements, the HTML5 player has a new “Show Work” feature to allow students to enter text either from a keyboard or stylus and to draw freehand on different backgrounds, such as a coordinate graph, with multiple fonts and colors. Students can also continue to upload images such as phone-photos of handwritten work. Printing enhancements include:
    • a more pen-and-paper-friendly layout of exercises
    • the ability for instructors to choose whether to print the header; to include an honor statement; and to print with answers inline, after each question, or on a separate sheet
  • Reporting Dashboard. View, analyze, and report learning outcomes clearly and easily, and get the information you need to keep your students on track throughout the course, with the new Reporting Dashboard. Available via the MyAccountingLab Gradebook and fully mobile-ready, the Reporting Dashboard presents student performance data at the class, section, and program levels in an accessible, visual manner.
  • Learning Catalytics™. Generate class discussion, guide your lecture, and promote peer-to-peer learning with real-time analytics. MyAccountingLab & Mastering with eText now provides Learning Catalytics–an interactive student response tool that uses students’ smartphones, tablets, or laptops to engage them in more sophisticated tasks and thinking. Instructors, you can:
    • Pose a variety of open-ended questions that help your students develop critical thinking skills
    • Monitor responses to find out where students are struggling
    • Use real-time data to adjust your instructional strategy and try other ways of engaging your students during class
    • Manage student interactions by automatically grouping students for discussion, teamwork, and peer-to-peer learning
  • UPDATED! Discussion Board has a new design including a new nested layout and the ability to filter by Read/Unread, Date, and Name.
  • Mobile Player. Students and instructors will be able to access multimedia resources and complete assessments right at their fingertips, on any mobile device. Highlights of Pearson's MyAccountingLab Mobile Player:
    • Works on mobile devices and tablets, as well as laptop and desktop computers
    • Fresh and intuitive design
    • Compatible with browser-based magnification settings

Current Coverage:

New auditing standards are released without regard to textbook revision cycles. As auditing instructors, we appreciate how critical it is to have the most current content available. This edition includes complete coverage of the AICPA Clarity Project, including guidance in the recently issued SAS No. 130 An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements and new PCAOB standards including Standard No. 18, Related Parties. We are committed to continually providing you with up-to-date content in this dynamic global auditing environment and will keep you updated with highlights posted on our Web site of major changes in new standards as they are issued.

AICPA Clarity Projects:

As part of the effort to converge U.S. auditing standards with international standards, the AICPA Auditing Standards Board (ASB) recently completed its Clarity Project to redraft most of the existing GAAS standards to not only align them with the ISAs, but to also make them easier to read, understand, and apply. Chapter 2 provides an overview of the major implications of the clarified standards, including the new principles that provide the framework to help auditors fulfill the objectives of the audit of financial statements in accordance with AICPA auditing standards and the new Codification of Statements on Auditing Standards. Chapter 3 contains examples of the new standard auditor’s report format updated by the Clarified SASs. All remaining chapters of the textbook reflect the various revisions resulting from the issuance of the Clarity standards.


The AICPA’s Accounting and Review Services Committee (ARSC) has largely completed a similar Clarity Project affecting compilation and review standards with the issuance of SSARS No. 21, Statement on Standards for Accounting and Review Services: Clarification and Recodification. In redrafting SSARS, the ARSC used similar redrafting standards as those used by the Auditing Standards Board. Changes resulting from the redrafting of SSARS are addressed in Chapter 25. Additionally, that chapter also highlights forthcoming changes in Statements on Standards for Attestation Engagements (SSAEs) resulting from the AICPA’s Clarity Project affecting attestation standards, which was recently voted for final issuance by the ASB.

Coverage of Revised AICPA Code of Professional Conduct:

The AICPA recently restructured its Code of Professional Conduct to align it with international standards. The organization of the Code now presents the Principles as part of the Preface and then includes Rules for members in public practice separately from Rules for members in business and others. Chapter 4 has been substantially revised to provide an overview of the key elements of the revised Code based on this new structure.


Expanded Coverage of Professional Skepticism and Auditor Judgement:

With the profession’s continued focus on the importance of applying appropriate levels of professional skepticism, we have expanded coverage of this topic in Chapter 6, along with integrated coverage in later chapters, including Chapter 10, which addresses the auditor’s responsibilities for detecting fraud. We discuss the importance of a questioning mindset and the need to critically evaluate audit evidence to strengthen student awareness of the elements of effective professional skepticism.

To assist auditors with maintaining an appropriate level of professional skepticism when making professional jud

Part 1: The Auditing Profession

 

Chapter 1: The Demand for Audit and Other Assurance Services

·         Nature of Auditing

·         Distinction Between Auditing and Accounting

·         Economic Demand for Auditing

·         Assurance Services

·         Types of Audits

·         Types of Auditors

·         Certified Public Accountant

Chapter 2: The CPA Profession

·         Certified Public Accounting Firms

·         Structure of CPA Firms

·         Sarbanes—Oxley Act and Public Company Accounting Oversight Board

·         Securities and Exchange Commission

·         American Institute of Certified Public Accountants (AICPA)

·         International and U.S. Auditing Standards

·         Organization of U.S. Auditing Standards

·         Quality Control

Chapter 3: Audit Reports

·         Standard Unmodified Opinion Audit Report for Nonpublic Entities

·         Conditions for Standard Unmodified Opinion Audit Report

·         Standard Audit Report and Report on Internal Control Over Financial Reporting Under PCAOB Auditing Standards

·         Unmodified Opinion Audit Report with Emphasis-of-Matter Explanatory Paragraph or Nonstandard Report Wording

·         Modifications to the Opinion in the Audit Report

·         Materiality

·         Discussion of Conditions Requiring a Modification of Opinion

·         Auditor’s Decision Process for Audit Reports

·         International Accounting and Auditing Standards

Chapter 4: Professional Ethics

·         What Are Ethics?

·         Ethical Dilemmas

·         Special Need for Ethical Conduct in Professions

·         Code of Professional Conduct

·         Independence Rule

·         Sarbanes—Oxley and Related Independence Requirements

·         Other Rules of Conduct

·         Enforcement

Chapter 5: Legal Liability

·         Changed Legal Environment

·         Distinguishing Business Failure, Audit Failure, and Audit Risk

·         Legal Concepts Affecting Liability

·         Liability to Clients

·         Liability to Third Parties Under Common Law

·         Civil Liability Under the Federal Securities Laws

·         Criminal Liability

·         The Profession’s Response to Legal Liability

 

Part 2: The Audit Process

 

Chapter 6: Audit Responsibilities and Objectives

·         Objective of Conducting an Audit of Financial Statements

·         Management’s Responsibilities

·         Auditor’s Responsibilities

·         Professional Skepticism

·         Professional Judgment

·         Financial Statement Cycles

·         Setting Audit Objectives

·         Management Assertions

·         Transaction-Related Audit Objectives

·         Balance-Related and Presentation and Disclosure-Related Audit Objectives

·         How Audit Objectives Are Met

Chapter 7: Audit Evidence

·         Nature of Evidence

·         Audit Evidence Decisions

·         Persuasiveness of Evidence

·         Types of Audit Evidence

·         Analytical Procedures

·         Common Financial Ratios

·         Audit Documentation

Chapter 8: Audit Planning and Materiality

·         Planning

·         Accept Client and Perform Initial Audit Planning

·         Understand the Client’s Business and Industry

·         Perform Preliminary Analytical Procedures

·         Materiality

·         Materiality for Financial Statements as a Whole

·         Determine Performance Materiality

·         Estimate Misstatement and Compare with Preliminary Judgment

Chapter 9: Assessing the Risk of Material Misstatement

·         Audit Risk

·         Risk Assessment Procedures

·         Considering Fraud Risk

·         Identification of Significant Risks

·         Audit Risk Model

·         Assessing Acceptable Audit Risk

·         Assessing Inherent Risk

·         Relationship of Risks to Evidence and Factors Influencing Risks

·         Relationship of Risk and Materiality to Audit Evidence

Chapter 10: Assessing and Responding to Fraud Risks

·         Types of Fraud

·         Conditions for Fraud

·         Assessing the Risk of Fraud

·         Corporate Governance Oversight to Reduce Fraud Risks

·         Responding to the Risk of Fraud

·         Specific Fraud Risk Areas

·         Responsibilities When Fraud Is Suspected

·         Documenting the Fraud Assessment

Chapter 11: Internal Control and Coso Framework

·         Internal Control Objectives

·         Management and Auditor Responsibilities for Internal Control

·         COSO Components of Internal Control

·         Internal Controls Specific to Information Technology

·         Impact of IT Infrastructure on Internal Control

Chapter 12: Assessing Control Risk and Reporting on Internal Controls

·         Obtain and Document Understanding of Internal Control

·         Assess Control Risk

·         Tests of Controls

·         Decide Planned Detection Risk and Design Substantive Tests

·         Auditor Reporting on Internal Control

·         Evaluating, Reporting, and Testing Internal Control for Nonpublic and Smaller Public Companies

·         Impact of IT Environment on Control Risk Assessment and Testing

Chapter 13: Overall Audit Strategy and Audit Program

·         Types of Tests

·         Selecting Which Types of Tests to Perform

·         Evidence Mix

·         Design of the Audit Program

·         Summary of Key Evidence-Related Terms

·         Summary of the Audit Process

 

Part 3: Application of the Audit Process to the Sales and Collection Cycle

 

Chapter 14: Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transaction

·         Accounts and Classes of Transactions in the Sales and Collection Cycle

·         Business Functions in the Cycle and Related Documents and Records

·         Methodology for Designing Tests of Controls and Substantive Tests of Transactions for Sales

·         Sales Returns and Allowances

·         Methodology for Designing Tests of Controls and Substantive Tests of Transactions for Cash Receipts

·         Audit Tests for Uncollectible Accounts

·         Effect of Results of Tests of Controls and Substantive Tests of Transactions

Chapter 15: Audit Sampling for Tests of Controls and Substantive Tests of Transactions

·         Representative Samples

·         Statistical Versus Nonstatistical Sampling and Probabilistic Versus Nonprobabilistic Sample Selection

·         Sample Selection Methods

·         Sampling for Exception Rates

·         Application of Nonstatistical Audit Sampling

·         Statistical Audit Sampling

·         Application of Attributes Sampling

Chapter 16: Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

·         Methodology for Designing Tests of Details of Balances

·         Designing Tests of Details of Balances

·         Confirmation of Accounts Receivable

·         Developing Tests of Details Audit Program

Chapter 17: Audit Sampling for Tests of Details of Balances

·         Comparisons of Audit Sampling for Tests of Details of Balances and for Tests of Controls and Substantive Tests of Transactions

·         Nonstatistical Sampling

·         Monetary Unit Sampling

·         Variables Sampling

·         Illustration Using Difference Estimation

 

Part 4: Application of the Audit Process to Other Cycles

 

Chapter 18: Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

·         Accounts and Classes of Transactions in the Acquisition and Payment Cycle

·         Business Functions in the Cycle and Related Documents and Records

·         Methodology for Designing Tests of Controls and Substantive Tests of Transactions

·         Methodology for Designing Tests of Details of Balances for Accounts Payable

Chapter 19: Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

·         Types of Other Accounts in the Acquisition and Payment Cycle

·         Audit of Property, Plant, and Equipment

·         Audit of Prepaid Expenses

·         Audit of Accrued Liabilities

·         Audit of Income and Expense Accounts

Chapter 20: Audit of the Payroll and Personnel Cycle

·         Accounts and Transactions in the Payroll and Personnel Cycle

·         Business Functions in the Cycle and Related Documents and Records

·         Methodology for Designing Tests of Controls and Substantive Tests of Transactions

·         Methodology for Designing Substantive Analytical Procedures and Tests of Details of Balances

Chapter 21: Audit of the Inventory and Warehouse Cycle

·         Business Functions in the Cycle and Related Documents and Records

·         Parts of the Audit of Inventory

·         Audit of Cost Accounting

·         Substantive Analytical Procedures

·         Physical Observation of Inventory

·         Audit of Pricing and Compilation

·         Integration of the Tests

Chapter 22: Audit of the Capital Acquisition and Repayment Cycle

·         Accounts in the Cycle

·         Notes Payable

·         Owners’ Equity

Chapter 23: Audit of Cash and Financial Instruments

·         Types of Cash and Financial Instruments Accounts

·         Cash in the Bank and Transaction Cycles

·         Audit of the General Cash Account

·         Fraud-Oriented Procedures

·         Audit of Financial Instruments Accounts

 

Part 5: Completing the Audit

 

Chapter 24: Completing the Audit

·         Perform Additional Tests for Presentation and Disclosure

·         Review for Contingent Liabilities and Commitments

·         Review for Subsequent Events

·         Final Evidence Accumulation

·         Evaluate Results

·         Issue the Audit Report

·         Communicate with the Audit Committee and Management

·         Subsequent Discovery of Facts

 

Part 6: Other Assurance and Nonassurance Services

 

Chapter 25: Other Assurance Services

·         Review, Compilation, and Preparation Services

·         Review of Interim Financial Information for Public Companies

·         Attestation Engagements

·         Reports on Controls at Service Organizations (SOC Reports)

·         Prospective Financial Statements

·         Agreed-Upon Procedures Engagements

·         Other Audits or Limited Assurance Engagements

Chapter 26: Internal and Governmental Financial Auditing and Operational Auditing

·         Internal Financial Auditing

·         Governmental Financial Auditing

Operational Auditing 

Al Arens, founding author of this textbook, was the PricewaterhouseCoopers Professor of Accounting Emeritus at Michigan State University. In addition to writing books on auditing, he was a coauthor of computerized accounting supplements and he was actively involved in the continuing education of practitioners with local and regional CPA firms. Al was a past president of the American Accounting Association and a former member of the AICPA Auditing Standards Board. He practiced public accounting with both a local CPA firm and the predecessor firm to Ernst & Young. He received many awards including the AAA Auditing Section Outstanding Educator award, the AICPA Outstanding Educator award, the national Beta Alpha Psi Professor of the Year award, and many teaching and other awards at Michigan State.

Randy Elder, who has served as a coauthor of this textbook since the 8th edition, is Professor of Accounting at Syracuse University. He teaches undergraduate and graduate auditing courses, and has received several teaching awards. His research focuses on audit quality and current audit firm practices and he served as the team leader for American Accounting Association Auditing Section PCAOB research synthesis teams on audit confirmations and audit sampling. He has extensive public accounting experience with a large regional CPA firm, frequently teaches continuing education for a large international CPA firm, and is a member of the AICPA and Michigan Association of CPAs.

Mark S. Beasley, who has also served as a coauthor of this textbook since the 8th edition, is the Deloitte Professor of Enterprise Risk Management and Professor of Accounting at North Carolina State University. He has taught undergraduate and graduate auditing courses, and has received several teaching awards including membership in NC State’s Academy of Outstanding Teachers. He has extensive professional audit experience with the predecessor firm to Ernst & Young and has extensive standards-setting experience working with the Auditing Standards Board as a Technical Manager in the Audit and Assurance Division of the AICPA. He served on the ASB Fraud Standard Task Force responsible for developing SAS 99, the ASB Antifraud Programs and Controls Task Force, and the Advisory Council overseeing the COSO Enterprise Risk Management Framework project. He recently completed over seven years of service as a member of the COSO Board, representing the AAA.

Chris Hogan is a Professor of Accounting in the Eli Broad College of Business at Michigan State University. We are thrilled to continue the Michigan State connection started by Al Arens. Chris teaches a graduate auditing course and her research focuses on internal controls and integrated audits, audit firm client portfolios, and the impact of regulation on audit markets. Chris has auditing experience with Price Waterhouse, one of the predecessor firms to PricewaterhouseCoopers, LLP. She has served in multiple leadership roles within the American Accounting Association, including serving as President of the Auditing Section and on the Audit Committee of the AAA.

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