Auditing And AssurAnce services An integrAted ApproACh sixteenth edition gloBAl edition Alvin A. Arens Former PricewaterhouseCoopers Emeritus Professor Michigan State University rAndAl J. elder Syracuse University Professor MArk s. BeAsley North Carolina State University Deloitte Professor of Enterprise Risk Management Chris e.
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Beasley and Chris E. Hogan to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. Authorized adaptation from the United States edition, entitled Auditing and Assurance Services Sixteenth Edition: An Integrated Approach, ISBN 978-0-13-406582-3 by Alvin A. Beasley and Chris E.
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The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. ISBN-10: 1-292-14787-3 ISBN-13: 978-1-292-14787-1 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 9 8 7 6 5 4 3 2 1 Typeset in Albertina MT Pro Regular by Integra Printed and bound by Lego Italy continuing the LegAcy of ALvin A. Arens: The author team of Randy Elder, Mark Beasley, and newest member of the author team, Chris Hogan, are pleased to continue the outstand- ing legacy of our book’s founding author, Al Arens, in this 16th edition of Auditing and Assurance Services: An Integrated Approach. As was done for the 15th edition, we again dedicate this new edition to Al’s memory.
Randy and Mark joined Al as coauthors on this textbook in the 8th edition, and have been honored to continue Al’s leadership in helping shape classroom instruction and student learning about auditing concepts and their practical implementation around the world. Since the first edition was published, this textbook has impacted audit education for over 30 years in the U. and glob- ally, including seven different language translations. Al’s leadership at national and international levels and November 24, 1935 – December 6, 2010 his commitment to expanding knowledge through the development of educational materials, including this textbook, continue to inspire us as we strive to advance his legacy for future generations of auditing professionals.
Al was the PricewaterhouseCoopers Auditing Professor and member of the Account- ing & Information Systems faculty in the Eli Broad College of Business at Michigan State University from 1968 through 2007. Thus, we are especially pleased to have Chris Hogan, Professor at Michigan State University, join the author team on this edition, continuing the Michigan State connection started by Al. Among his many honors, Al was selected as one of five national auditing educators to hold a Price Waterhouse Auditing professorship, was honored as AICPA Educator of the Year, served on the AICPA Auditing Standards Board, and was President of the American Accounting Association. Al taught accounting, mainly auditing, with a passion that is legendary.
He had a heart for sharing his knowledge of auditing with students throughout his career. This 16th edition continues his outstanding legacy in audit education. 3 About the Authors Alvin A. Arens Al Arens, founding author of this textbook, was the PricewaterhouseCoopers Profes- sor 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 account- ing 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.
elder 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 gradu- ate 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 the American Accounting Association Auditing Section PCAOB research synthesis teams on audit confirmations and audit sampling. He has extensive public account- ing experience with a large regional CPA firm, frequently teaches continuing educa- tion for a large international CPA firm, and is a member of the AICPA and Michigan Association of CPAs.
BeAsley Mark 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— Integrated Framework project.
He served over seven years as a member of the COSO Board, representing the AAA. hogAn We are pleased to have Chris hogan join us as a coauthor for this 16th edition. Chris 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 graduate auditing 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 pre- decessor 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. 4 contents prefACe 17 pArt The AudiTing Profession 1 The demAnd for AudiT And oTher ChApter leArning oBJeCtives 27 AssurAnce services 1 Nature of Auditing 28 Distinction Between Auditing and Accounting 30 Economic Demand for Auditing 30 Assurance Services 32 Types of Audits 36 Types of Auditors 38 Certified Public Accountant 40 Summary 41 Essential Terms 41 Review Questions 42 Multiple Choice Questions from CPA Examinations 42 Discussion Questions and Problems 44 The cPA Profession ChApter leArning oBJeCtives 48 Certified Public Accounting Firms 49 2 Structure of CPA Firms 51 Sarbanes–Oxley Act and Public Company Accounting Oversight Board 53 Securities and Exchange Commission 54 American Institute of Certified Public Accountants (AICPA) 55 International and U.
Auditing Standards 56 Organization of U. Auditing Standards 58 Quality Control 62 Summary 64 Essential Terms 65 5 Review Questions 65 Multiple Choice Questions from CPA Examinations 66 Discussion Questions and Problems 68 ChApter AudiT rePorTs 3 leArning oBJeCtives 70 Standard Unmodified Opinion Audit Report for Nonpublic Entities 71 Conditions for Standard Unmodified Opinion Audit Report 74 Standard Audit Report and Report on Internal Control Over Financial Reporting Under PCAOB Auditing Standards 74 Unmodified Opinion Audit Report with Emphasis-of-Matter Explanatory Paragraph or Nonstandard Report Wording 78 Modifications to the Opinion in the Audit Report 82 Materiality 84 Discussion of Conditions Requiring a Modification of Opinion 87 Auditor’s Decision Process for Audit Reports 90 International Accounting and Auditing Standards 92 Summary 93 Essential Terms 93 Review Questions 94 Multiple Choice Questions from CPA Examinations 95 Discussion Questions and Problems 96 ChApter ProfessionAl eThics 4 leArning oBJeCtives 102 What Are Ethics?