List of Illustrations 13
Foreword 17
Preface to the Fourth Edition 20
Acknowledgements 22
SECTION I — HISTORY
1 International Auditing Overview 24
1.1 Learning Objectives 24
1.2 An Audit Defined 24
1.3 History 28
1.4 Auditing Practice Today 34
1.5 User Expectations and Landmark Legislation 39
1.6 Summary 45
1.7 Questions, Exercises and Cases 48
1.8 Notes 51
SECTION II — THE PROFESSION
2 The Institutional Setting: How Is the Audit Profession Organized 56
2.1 Learning Objectives 56
2.2 Introduction 56
2.3 Types of Auditor 56
2.4 Types of Audit 60
2.5 Audit Firms 61
2.6 Standard Setting 70
2.7 Regulation 74
2.8 Audit Firm’s Quality Control System 82
2.9 Audit Firm Oversight 83
2.10 Summary 83
2.11 Questions, Exercises and Cases 87
2.12 Notes 91
SECTION III — ETHICS
3 Ethics for Professional Accountants 94
3.1 Learning Objectives 94
3.2 What Are Ethics? 94
3.3 The International Code of Ethics for Professional Accountants 97
3.4 Part 1 – Complying with the Code, Fundamental Principles and Conceptual Framework 99
3.5 Part 2 – Professional Accountants in Business 106
3.6 Part 3 – Professional Accountants in Public Practice 108
3.7 Part 4 – Independence Standards 115
3.8 Enforcement of Ethical Requirements 127
3.9 Summary 129
3.10 Questions, Exercises and Cases 132
3.11 Notes 136
SECTION IV — FUNDAMENTAL CONCEPTS
4 The Fundamental Concepts of Auditing and Assurance 140
4.1 Learning Objectives 140
4.2 The Objectives of Auditing in an Elevator Pitch 140
4.3 Reasonable Assurance 142
4.4 Sufficient Appropriate Audit Evidence 142
4.5 Materiality 143
4.6 The Importance of Internal Control Measures 143
4.7 The Auditor Behaves Ethically 144
4.8 The Auditor Exercises Professional Skepticism 145
4.9 The Auditor Exercises Professional Judgement 145
4.10 Two Levels of Quality Control 145
4.11 The Auditor Is Accountable with Robust Documentation 146
4.12 Audit Versus Assurance 146
4.13 Summary 146
4.14 Questions and Case 147
4.15 Notes 151
5 Fraud and Other Considerations of Law and Regulation in an Audit (ISA 240, 250) 152
5.1 Learning Objectives 152
5.2 Introduction 152
5.3 Responsibilities of the Board 155
5.4 Auditor’s Responsibility 155
5.5 Fraud Defined 156
5.6 Types of Fraud 158
5.7 Fraud Triangle and Anti-Fraud Measures 159
5.8 Audit Planning and Fraud Risk Assessment 162
5.9 Responses to Fraud Risk Assessment 167
5.10 Communication Related to Fraud with Management, Board and Third Parties 170
5.11 Compliance with Law and Regulation, Corruption and Money Laundering 172
5.12 Summary 179
5.13 Questions, Exercises and Cases 182
5.14 Notes 186
SECTION V — THE 4 PHASES OF EACH AUDIT (‘HOW TO PERFORM AN AUDIT’)
6 Phase 1: Client and Engagement Acceptance / Continuance 190
6.1 Learning Objectives 190
6.2 Client Acceptance and Continuance: The First Step on the Journey to an Opinion 191
6.3 Evaluate the Client’s Background 192
6.4 Corporate Governance 196
6.5 Ability to Meet Ethical and Specific Competence Requirements 209
6.6 Use of Other Professionals in the Audit 212
6.7 Communicating With the Predecessor (Existing) Auditor 216
6.8 Acceptance by the Client – The Engagement Proposal 217
6.9 The Audit Engagement Letter 221
6.10 Summary 225
6.11 Questions, Exercises and Cases 228
6.12 Notes 232
7 Phase II, Part 1: Planning Through Understanding and Risk Analysis 236
7.1 Learning Objectives 236
7.2 Planning Objective and Procedures 236
7.3 Understanding the Entity and its Environment 237
7.4 Audit Risk Model 250
7.5 Materiality 257
7.6 Fraud and Irregularities 262
7.7 Using the Work of Others and Considering Auditee Use of Service Organizations 263
7.8 Other Planning Activities 268
7.9 Summary 270
7.10 Questions, Exercises and Cases 274
7.11 Notes 279
8 Phase II, Part 2: Internal Control and Control Risk 282
8.1 Learning Objectives 282
8.2 Introduction 282
8.3 Internal Control Defined 283
8.4 The Importance of Internal Control 285
8.5 IT Risk and Controls 288
8.6 Components of Internal Control 291
8.7 Control Environment 292
8.8 Risk Assessment 299
8.9 Information Systems, Communication and Related Business Processes 302
8.10 Control Activities 306
8.11 Monitoring of Controls 310
8.12 Hard and Soft Control 311
8.13 Design of Internal Controls 314
8.14 Preliminary Assessment of Control Risk 316
8.15 Summary 317
8.16 Questions, Exercises and Cases 321
8.17 Notes 327
9 Phase III, Part1: Building and Execution of the Test Plan and Auditor’s Response to Assessed Risk 330
9.1 Learning Objectives 330
9.2 The Basis of Evidence 330
9.3 Financial Statement Assertions 333
9.4 Audit Procedures for Obtaining Audit Evidence 333
9.5 Sufficient Appropriate Audit Evidence 346
9.6 Tests of Controls 351
9.7 Substantive Procedures 357
9.8 Sampling 362
9.9 Summary 367
9.10 Questions, Exercises and Cases 370
9.11 Notes 382
10 Phase III, Part 2: Building and Execution of the Test Plan – Analytical Review 385
10.1 Learning Objectives 385
10.2 Analytical Procedures during Different Phases in the Audit Process 385
10.3 The Analytical Review Process 387
10.4 Formulating Expectations 390
10.5 General Types of Analytical Procedures 392
10.6 Analytical Procedures as Substantive Tests 395
10.7 Follow-Up in Case of Unexpected Deviations 398
10.8 Evaluation of Misstatements Identified During the Audit (ISA 450) 399
10.9 Summary 400
10.10 Questions, Exercises and Cases 402
10.11 Notes 412
11 Phase IV, Part 1: Evaluation and Completion 414
11.1 Learning Objectives 414
11.2 Introduction 414
11.3 Specific Considerations Gathering Evidence for Selected Items 415
11.4 Written Representations 418
11.5 Review for Contingent Liabilities and Commitments 423
11.6 Review for Discovery of Subsequent Events 424
11.7 Related Parties 427
11.8 Evaluation of Going Concern Assumption 432
11.9 Review of Financial Statements and Other Information 434
11.10 Wrap-up Procedures 437
11.11 Summary 444
11.12 Questions, Exercises and Cases 445
11.13 Notes 453
12 Phase IV, Part 2: Reporting 456
12.1 Learning Objectives 456
12.2 Introduction 456
12.3 Basic Elements of the Auditor’s Report 460
12.4 Key Audit Matters (KAMs) 474
12.5 Emphasis of Matter Paragraph 475
12.6 Type of Audit Report 478
12.7 Opinion on Internal Controls over Financial Reporting 486
12.8 Communications with those Charged with Governance 488
12.9 Long-Form Audit Report 494
12.10 Management Letter 495
12.11 General Meeting of Shareholders 496
12.12 Summary 496
12.13 Questions, Exercises and Cases 500
12.14 Notes 509
SECTION VI — SPECIFIC THEMES AND TOPICS
13 Specific Themes and Special Topics during The Audit 512
13.1 Learning Objectives 512
13.2 Quality Control (ISQC 1, ISA 220, SOX) 512
13.3 Technology in the Audit 516
13.4 Group Audit 519
13.5 Audit of Accounting Estimates (ISA 540) 530
13.6 Summary 533
13.7 Questions, Exercises and Cases 535
13.8 Notes 541
13 A Group Audit Extended Example 544
13A.1 Learning Objectives 544
13A.2 Context of Extended Example of a Group Audit 545
13A.3 The Audit Planning Memorandum – Strategy Part 550
13A.4 The Audit Planning Memorandum – Plan Part 555
13A.5 Audit Programme (Audit Plan) 559
13A.6 Completion Memorandum 576
13A.7 Questions, Exercises and Cases 583
13A.8 Notes 592
SECTION VII — OTHER ASSURANCE AND RELATED SERVICES
14 Other Assurance and Related Services 594
14.1 Learning Objectives 594
14.2 The Concepts 594
14.3 Elements of an Assurance Engagement 597
14.4 Highlights of Various Kinds of Assurance Engagements 608
14.5 Assurance Engagements Other Than Audits or Reviews of Historical Financial Information 613
14.6 Related Services 622
14.7 Summary 627
14.8 Questions, Exercises and Cases 629
14.9 Notes 637
Glossary 642
Index 684
