Auditing Theory and Practice, 1st Australasian Edition
By Mike Pratt, Karen Van Peursem and Mukesh Garg
Contents:
Guide to the text ix
Guide to the online resources xii
Preface xiv
About the authors xv
Acknowledgements xvi
PART 1
The auditor’s role in society 3
1 Introduction to audit 4
Introduction 4
Professional engagements 4
Level of assurance 6
Scope 6
Users of audit report 7
Concept of audit 7
What is a financial statement audit? 7
Theoretical explanations 8
Conditions calling for an audit 13
Audit practice in Australia and
New Zealand 14
Audit professionals 15
Audit guidance 15
Auditing standards 15
Standards for financial statement audit 15
International standards 17
Study tools 18
2 Audit concepts, role and history 23
Introduction 23
The history of audit 23
Industrial Revolution, 18–19th centuries 24
Early 20th century 26
Post-World Wars to present 27
Conceptual framework for audit 28
Postulates in audit 28
Concept: Credibility through ethics 31
Concept: Credibility through process 32
Concept: Credibility through disclosure 35
Credibility through accountability 35
A conceptual framework for audit:
Summary and considerations 36
The role of the external auditor 36
Role senders 37
Role conflict: The expectation gap 38
Study tools 43
3 Statutory law 49
Introduction 49
Statutory law and the auditor 50
Auditor–client relationship in statute 51
Auditor’s appointment 52
Audit firm: Legal form 53
Working with the auditor 54
Audit committees 55
Audit report 55
Auditor ethics 55
Audit and Indigenous tradition 56
Statutory law: Applications in Australia 56
Corporations Act 2001 (Cth)
(Corporations Act) 57
Financial Reporting Council (FRC) 57
Australian Securities and Investments
Commission Act 2001 (ASIC Act) 57
Corporate Law Economic Reform
Program (Audit Reform & Corporate
Disclosure) Act 2004 (CLERP 9 Act) 58
Australian Prudential Regulation
Authority (APRA) 58
Auditor and the client: Requirements
in Australia 58
Lodging requirements: Australia 59
Statutory law: Applications in New Zealand 60
Companies Act 1993 (Cos Act) 60
Financial Markets Conduct Act 2013
(FMCA) 60
Financial Markets Authority Act 2011
(FMA Act) 61
Financial Reporting Act 2013 (FRA) 61
Auditor Regulation Act 2011 (ARA) 62
Auditor and the client: Requirements in
New Zealand 62
Lodging requirements: New Zealand 62
Study tools 63
4 Auditor professionalism and
audit firms 66
Introduction 66
History of auditing profession 66
Professional history 67
Professions’ roles in standard-setting 68
Code of ethics for assurance services 69
Independence 71
Financial interests and conflicts 73
Fee dependence and lowballing 74
Incompatible services 75
Auditor rotation 75
Management advisory services (MAS) 76
Personal relationships and conflicts 77
Confidentiality 77
Credibility through accountability 78
Peer review 78
Quality management 78
Managing a firm’s accountability 80
Arguments for and against 80
Firm structure options 80
Legislated restrictions 80
Large firm benefits 81
National practices 81
Study tools 82
5 The courts: The legal liability
of auditors 87
Introduction 87
‘To whom’: The auditor’s duty of care 87
Duty of care under contract 89
Duty to third parties 90
‘For what’: Reasonable skill and care 95
What the courts expect 95
Principles tested: 1970 96
Principles in the modern era 97
Contributory negligence 100
When auditors are complicit 101
Study tools 101
PART 2
Audit planning 107
6 Audit risk 108
Introduction 108
A risk approach 108
Overall audit risk 110
Audit risk models 111
Applying an audit risk model 113
Quantitative aspects 113
Qualitative aspects 114
Misstatement sources and risk 118
Errors 119
Employee fraud 119
Distortion 119
Misstatement characteristics 120
Study tools 121
7 Audit judgement, materiality
and evidence 126
Introduction 126
Audit judgement 126
Influences on audit decisions 127
Summary of audit judgement 130
Materiality 131
Accounting versus audit materiality 131
Determining audit materiality 132
Audit evidence 136
Sufficiency of evidence 137
Appropriateness: Assertions 137
Reliability of evidence 140
Study tools 142
8 Audit testing and working papers 147
Introduction 147
Audit testing 147
‘To analyse the validity’ 148
‘A premise’ 150
Examine or subject to a process 151
‘All or a portion of that claim’ 152
Testing strategies 155
Working papers 155
Working paper structures 157
Audit working paper principles 158
IT and computerised testing support 160
Automated working papers 160
Audit software routines 162
Data-extraction software for substantive
testing 163
AI and expert systems 164
Study tools 166
9 Audit process and analytical
procedures 173
Introduction 173
Audit approaches 174
Audit process steps 175
Initial planning: Steps 1–4 175
Detailed planning: Steps 5–7 177
Audit test responses: Steps 8–10 178
Completion: Steps 11–13 180
Analytical procedures 184
AP and the audit process 185
Specific analytical procedures 185
Variations 189
Study tools 192
10 Audit planning 198
Introduction 198
Initial planning process 199
Initial planning: Preliminary activities 199
Initial planning: Review the business 202
Initial planning: Perform risk analysis 202
Initial planning: Form audit strategy 212
Detailed planning process 213
Detailed planning: Study the accounting
system 213
Detailed planning: Evaluate internal
controls 214
Detailed planning: The audit plan 214
Study tools 215
PART 3
Audit testing 221
11 Principles of internal control 222
Introduction 222
Control systems: Levels 223
Organisational layer 223
Management level 224
Systems level 224
Accounting level 225
Control system: Objectives 226
Establishment 226
Maintenance 228
Verification 229
Computer information systems (CIS) 230
Components in CIS 231
Characteristics of a CIS 232
Internal controls: Audit implications 235
Audit benefits of control systems 235
Audit challenges from control
systems 237
Study tools 238
12 Internal control and the auditor 242
Introduction 242
Audit strategy and the client’s system 242
Controls and auditability 243
Controls and process 243
Controls and timing 245
Documentation: Studying the system 246
Flowcharts 247
Data flow diagrams (DFDs) 250
Audit response: Tests of controls 256
Governance: Testing and evidence 256
Segregation of duties: Tests of controls 256
Systems development: Tests of controls 257
External services: Tests of controls 257
Accounting process: Tests of controls 258
Study tools 261
13 Audit sampling 266
Introduction 266
Sampling: Audit applications 266
Sampling for compliance and substantive
tests 267
Sampling and materiality 268
Statistical and non-statistical sampling 269
Sampling and judgement 270
The objective 270
The population 271
The confidence level 272
Tolerable misstatement 272
Expected error 272
Sampling procedures 273
Determine sample size 274
Select the sample 274
Perform the test 276
Analyse individual errors 277
Generalise (extrapolate) sample results
to the population 278
Accept or reject the hypothesis 279
Examples for audit sampling 280
Test of control example 280
Substantive test example using PPS 282
Study tools 286
14 Systems testing I: Sales, purchases
and payroll 292
Introduction 292
Systems and structure 292
Sales cycle 293
Sales cycle risks 294
Sales cycle controls 295
Sales department 296
Sales cycle: Substantive tests 298
Purchases cycle 302
Purchases cycle risks 302
Purchases cycle controls 303
Purchases cycle: Substantive procedures 305
Payroll cycle 307
Payroll cycle risks 309
Payroll cycle controls 310
Payroll cycle: Substantive procedures 311
Study tools 314
15 Systems II: Warehousing, financing
and fixed assets 323
Introduction 323
Warehousing (inventory) subsystem 324
Risks in warehousing 324
Warehousing controls 325
Warehousing substantive procedures 327
Finance subsystem 330
Cash and liquid assets 331
Traditional investments 334
Derivatives and financial instruments 335
Equity and liability accounts 335
Fixed assets and intangibles 337
Fraud 338
Distortion 338
Audit of fixed assets 339
Intangible assets 340
Study tools 342
PART 4
Audit communication and report 349
16 Completion and review 350
Introduction 350
Letter of representation 351
Going concern 352
Subsequent events 355
Disclosure (presentation) review 356
Stock exchange disclosures 357
Legal and regulatory disclosures 357
Overseas disclosure mandates 358
Other disclosure requirements 358
Related party transactions 358
Management letter 359
The final review 360
Study tools 362
17 Audit report and opinion 367
Introduction 367
Audit communications 368
Audit report 369
Purpose and history 370
Structure and content 370
Audit opinion 374
Unqualified audit opinions 375
Qualified audit opinions 375
Other engagements 379
Study tools 381
PART 5
Specific types of audit 387
18 Internal audit 388
Introduction 388
‘Other’ assurance engagements 388
Internal audit role 391
Internal audit profession 391
Regulation and authority 392
Internal audit functions 394
Developing effective control systems 394
Transforming role 395
Risk management 396
Oversight and testing processes 397
Communication 397
Fraud deterrence 397
External auditor relationship 398
Cloud and virtual system audits 399
Study tools 404
19 Social audit 407
Introduction 407
Public sector audit 409
Government auditors 410
Public sector reporting requirements 412
Value for money 414
Consolidated accounts audit for the
public sector 415
Non-profit and small business (SMEs) 417
Non-profit charities 418
Small and medium enterprises (SMEs) 418
Audit challenges 419
Environmental audits 420
Study tools 423
20 Fraud audit 426
Introduction 426
Fraud defined 426
Fraud types 427
Incentives for committing fraud and
fraud indicators 431
Incentives for committing fraud 431
Fraud indicators 432
Fraud audit purpose 433
Financial (statutory) audit 433
Fraud audit (non-statutory) 434
Forensic audit 434
Fraud audit process 435
Investigation types 436
Fraud audit approaches 437
Sampling for fraud audit 438
Fraud audit: Regulatory environment 439
Professional associations 439
Legislation 440
Study tools 441
Conclusion 445
Glossary 446
References 451
Index 469