Test Bank for Auditing A Risk Based Approach 11th Edition by Karla Johnstone Zehms, Audrey Gramling, Larry Rittenberg ISBN 1337619450 978-1337619455

Chapter 1. Quality Auditing: Why It Matters

An Overview of External Auditing

Decision Makers’ Need for Reliable Information and the Role of a Financial Statement Audit

What Is a Financial Statement Audit?

Parties Involved in Preparing and Auditing Financial Statements

Providers of External Auditing Services

Skills and Knowledge Needed by External Auditors

Achieving Audit Quality

Audit Firm Culture

Skills and Qualities of the Engagement Team

Effectiveness of the Audit Process

Reliability and Usefulness of Audit Reporting

Factors Outside the Control of Auditors

Professional Conduct Requirements That Help Auditors Achieve Audit Quality

AICPA Requirements: Code of Professional Conduct

SEC and PCAOB: Other Guidance on Professional Responsibilities

International Professional Requirements That Help Auditors Achieve Audit Quality

Frameworks for Professional and Ethical Decision Making

A Framework for Professional Decision Making

A Framework for Ethical Decision Making

Importance of Client Acceptance and Continuance Decisions to Audit Quality

Risks Considered in Client Acceptance and Continuance Decisions

Other Considerations

Engagement Letters

Significant Terms

Prompt for Critical Thinking

Review Questions and Short Cases

Fraud Focus: Contemporary and Historical Cases

Application Activities

Academic Research Cases

Chapter 2. The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance

Fraud Defined

Misappropriation of Assets

Fraudulent Financial Reporting

The Fraud Triangle

Incentives or Pressures to Commit Fraud

Opportunities to Commit Fraud

Rationalizing the Fraud

History of Fraudulent Financial Reporting

Examples of Recent Frauds and Implications for External Auditors

Insights from COSO Studies

The Enron Fraud

Fraud: Auditors’ Responsibilities and Users’ Expectations

Fraud-Related Requirements in Professional Auditing Standards

The Sarbanes-Oxley Act of 2002 as a Regulatory Response to Fraud

Corporate Governance Defined

Characteristics of Effective Corporate Governance

Responsibilities of Audit Committees

Significant Terms

Prompts for Critical Thinking

Review Questions and Short Cases

Fraud Focus: Contemporary and Historical Cases

Application Activities

Academic Research Cases

Chapter 3. Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditor

Importance of Internal Control Over Financial Reporting

Internal Control Defined

Entity-Wide Controls and Transaction Controls

Control Environment

Commitment to Integrity and Ethical Values (COSO Principle 1)

The Board of Directors Exercises Oversight Responsibility (COSO Principle 2)

Management Establishes Structure, Authority, and Responsibility (COSO Principle 3)

The Organization Demonstrates Commitment to Competence (COSO Principle 4)

The Organization Enforces Accountability (COSO Principle 5)

Risk Assessment

Management Specifies Relevant Objectives (COSO Principle 6)

The Organization Identifies and Analyzes Risk (COSO Principle 7)

The Organization Assesses Fraud Risk (COSO Principle 8)

The Organization Identifies and Analyzes Significant Change (COSO Principle 9)

Control Activities

The Organization Selects and Develops Control Activities (COSO Principle 10)

Management Selects and Develops General Controls Over Technology (COSO Principle 11)

The Organization Deploys Control Activities Through Policies and Procedures (COSO Principle 12)

Information and Communication

The Organization Uses Relevant Information (COSO Principle 13)

The Organization Communicates Internally (COSO Principle 14)

The Organization Communicates Externally (COSO Principle 15)

Monitoring

The Organization Conducts Ongoing and/or Separate Evaluations (COSO Principle 16)

Management Evaluates and Communicates Deficiencies (COSO Principle 17)

Management’s Responsibilities for Internal Control Over Financial Reporting

Management Documentation of Internal Control

Management Reporting on Internal Control Over Financial Reporting

Evaluating Internal Control Over Financial Reporting

Assessing Deficiencies in Internal Control Over Financial Reporting

Importance of Internal Control to the External Audit

Application: Assessing Control Design Effectiveness, Implementation, and Operating Effectiveness

Significant Terms

Prompts for Critical Thinking: Additional Examples

Review Questions and Short Cases

Fraud Focus: Contemporary and Historical Cases

Application Activities

Academic Research Cases

Chapter 4. Professional Legal Liability

The Legal Environment and the Effects of Lawsuits on Audit Firms

Liability Doctrines

Class Action Lawsuits

Contingent-Fee Compensation for Lawyers

The Audit Viewed as an Insurance Policy: The Expectations Gap

Applicable Laws and Causes of Legal Action

Types of Law and Legal Actions Relevant to Auditors

Parties that May Bring Suit Against Auditors

Auditor Liability under Contract Law, Common Law, and Statutory Law

Contract Law: Liability to Clients

Common Law: Liability to Third Parties

Statutory Law: Liability to Third Parties

Significant Terms

Review Questions and Short Cases

Fraud Focus: Contemporary and Historical Cases

Application Activities

Academic Research Cases

Chapter 5. Professional Auditing Standards and the Audit Opinion Formulation Process

Professional Auditing Standards

Auditing Standards Issued by the AICPA, IAASB, and PCAOB

Comparing the Auditing Standards

Principles Underlying the Auditing Standards

PCAOB Guidance—Five Topical Categories of Standards

AICPA Guidance: Principles Governing an Audit

IAASB Guidance: Objectives of an Audit

Overview of the Audit Opinion Formulation Process

Audit Opinion Formulation Process: Accounting Cycles

Audit Opinion Formulation Process: Financial Statement Assertions

Existence or Occurrence Assertion

Completeness Assertion

Rights and Obligations Assertion

Valuation or Allocation Assertion

Presentation and Disclosure Assertion

Audit Opinion Formulation Process: Audit Evidence and Audit Procedures

Evidence Example: Substantive Audit Procedures to Obtain Evidence About Management’s Valuation Assertion

Audit Opinion Formulation Process: Audit Documentation

Five Phases of the Audit Opinion Formulation Process

Phase I—Making Client Acceptance and Continuance Decisions

Phase II—Performing Risk Assessment

Risk Assessment Procedures

Responding to Identified Risks of Material Misstatement

Phase III—Obtaining Evidence About Internal Control

Phase IV—Obtaining Substantive Evidence About Accounts, Disclosures, and Assertions

Phase V—Completing the Audit and Making Reporting Decisions

Applying Decision-Making Frameworks

Significant Terms

Prompts for Critical Thinking

Review Questions and Short Cases

Fraud Focus: Contemporary and Historical Cases

Application Activities

Academic Research Cases

Chapter 6. Audit Evidence

Obtaining Sufficient Appropriate Audit Evidence

Sufficiency of Audit Evidence

Appropriateness of Audit Evidence

Audit Procedures

Types of Audit Procedures

Timing of Procedures

Substantive Analytical Procedures

Performing Analytical Procedures

Brief Application of Substantive Analytical Procedures

Additional Evidence Considerations

Auditing Management Estimates

Auditing Related-Party Transactions

Using a Specialist/Expert to Assist with Obtaining Audit Evidence

Documenting Audit Evidence

Documenting Risk Assessment Procedures

Documenting Tests of Controls and Substantive Procedures

Documenting Significant Findings and Their Resolution

Characteristics of Quality Audit Documentation

Audit Programs

Applying Decision-Making Frameworks

Significant Terms

Prompts for Critical Thinking

Review Questions and Short Cases

Fraud Focus: Contemporary and Historical Cases

Application Activities

Academic Research Cases

Data Analytics Using ACL

Chapter 7. Planning the Audit: Identifying, Assessing, and Responding to the Risk of Material Misstatement

Materiality

Materiality Levels

Planning Materiality

Identifying and Assessing the Risk of Material Misstatement

Client Business Risks

The Audit Risk Model

Responding to Identified Risk of Material Misstatement

Determining Evidence Needed in the Audit

Audit Procedures to Respond to the Assessed Risk of Material Misstatement

Applying Decision-Making Frameworks

Significant Terms

Prompts for Critical Thinking

Review Questions and Short Cases

Fraud Focus: Contemporary and Historical Cases

Application Activities

Academic Research Cases

Chapter 8. Specialized Audit Tools: Attributes Sampling, Monetary Unit Sampling, and Data Analytics Tools

Using Sampling and Data Analytics Tools for Gathering and Evaluating Audit Evidence

Objectives of Sampling and Risks Associated with Sampling

Nonsampling and Sampling Risks

Nonstatistical and Statistical Sampling

Attributes Sampling for Tests of Controls

Steps in Attributes Sampling

Basic Steps in Sampling Account Balances and Assertions: A Nonstatisical Sampling Application

Basic Steps in Sampling Account Balances and Assertions

Nonstatistical Sampling for Substantive Tests of Account Balances and Assertions

Statistical Sampling for Substantive Tests of Account Balances and Assertions: Monetary Unit Sampling (MUS)

Summary of MUS Strengths and Weaknesses

Designing and Selecting a MUS Sample

Evaluating a MUS Sample

Using Data Analytics Tools to Obtain and Evaluate Evidence

Defining Data Analytics and Associated Terms

Using Data Analytics Tools in the Audit

Business Intelligence Platforms

Applying Decision-Making Frameworks

Significant Terms

Prompts for Critical Thinking

Review Questions and Short Cases

Application Activities

Data Analytics: Spreadsheet Modelling and Database Querying

Academic Research Cases

Chapter 9. Auditing the Revenue Cycle

Significant Accounts, Disclosures, and Relevant Assertions

Processing Revenue Transactions

An Overview of the Audit Opinion Formulation Process in the Revenue Cycle

Identifying Inherent Risks

Inherent Risks: Revenue

Inherent Risks: Accounts Receivable

Identifying Fraud Risks

How do Fraudsters Perpetrate their Schemes?

Identifying Fraud Risk Factors

Identifying Control Risks

Controls Related to Existence/Occurrence

Controls Related to Completeness

Controls Related to Valuation

Documenting Controls

Performing Planning Analytical Procedures

Step 1: Identify Suitable Analytical Procedures

Responding to Identified Risks of Material Misstatement

Obtaining Evidence About Internal Control Operating Effectiveness in the Revenue Cycle

Selecting Controls to Test and Performing Tests of Controls

Considering the Results of Tests of Controls

Obtaining Substantive Evidence About Accounts, Disclosures, and Assertions in the Revenue Cycle

Revenue and Accounts Receivable: Performing Substantive Analytical Procedures

Revenue: Substantive Tests of Details

Accounts Receivable: Substantive Procedures

Accounts Receivable: Substantive Tests of Details—Confirmations

Accounts Receivable: Substantive Procedures for the Allowance Account

Accounts Receivable: Other Substantive Procedures

Performing Substantive Fraud-Related Procedures

Documenting Substantive Procedures

Applying Decision-Making Frameworks

Significant Terms

Prompts for Critical Thinking

Review Questions and Short Cases

Fraud Focus: Contemporary and Historical Cases

Application Activities

Data Analytics Using ACL

Data Analytics Using Tableau

Academic Research Cases

Chapter 10. Auditing Cash, Marketable Securities, and Complex Financial Instruments

Significant Accounts, Disclosures, and Relevant Assertions

Common Cash Accounts: Checking, Cash Management, and Petty Cash Accounts

Relevant Financial Statement Assertions

Disclosures for Cash Accounts

An Overview of the Audit Opinion Formulation Process for Cash Accounts

Identifying Inherent Risks

Identifying Fraud Risks

Identifying Control Risks

Typical Controls Over Cash

Implications of Ineffective Controls

Controls for Petty Cash

Controls for Cash Management Techniques

Documenting Controls

Performing Planning Analytical Procedures

Responding to Identified Risks of Material Misstatement

Obtaining Evidence about Internal Control Operating Effectiveness for Cash

Selecting Controls to Test and Performing Tests of Controls

Considering the Results of Tests of Controls

Obtaining Substantive Evidence about Cash Accounts, Disclosures, and Assertions

Cash Accounts: Performing Substantive Analytical Procedures

Cash Accounts: Performing Substantive Tests of Details

Performing Substantive Fraud-Related Procedures for Cash Accounts

Documenting Substantive Procedures

Auditing Marketable Securities

Significant Accounts, Disclosures, and Relevant Assertions

An Overview of the Audit Opinion Formulation Process for Marketable Securities

Identifying Inherent, Fraud, and Control Risks Relevant to Marketable Securities

Performing Planning Analytical Procedures for Marketable Securities

Responding to Identified Risks of Material Misstatement

Obtaining Evidence about Internal Control Operating Effectiveness for Marketable Securities

Obtaining Substantive Evidence about Marketable Securities

Auditing Complex Financial Instruments

Overview of Complex Financial Instruments

Audit Considerations for Complex Financial Instruments

Applying Decision-Making Frameworks

Let’s Review

Significant Terms

Prompts for Critical Thinking

Review Questions and Short Cases

Fraud Focus: Contemporary and Historical Cases

Application Activities

Data Analytics: Spreadsheet Modelling and Database Querying

Chapter 11. Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle

Significant Accounts, Disclosures, and Relevant Assertions

Processing Transactions in the Acquisition and Payment Cycle

Assertions Relevant to Inventory

Assertions Relevant to Accounts Payable

An Overview of the Audit Opinion Formulation Process in the Revenue Cycle

Identifying Inherent Risks

Identifying Fraud Risks

Identifying Control Risks

Overview of Internal Controls in the Acquisition and Payment Cycle

Documenting Controls

Performing Planning Analytical Procedures

Step 1: Identify Suitable Analytical Procedures

Responding to Identified Risks of Material Misstatement

Obtaining Evidence about Internal Control Operating Effectiveness in the Acquisition and Payment Cycle

Selecting Controls to Test and Performing Tests of Controls

Considering the Results of Tests of Controls

Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions in the Acquisition and Payment Cycle

Substantive Tests of Inventory and Cost of Goods Sold

Substantive Tests of Accounts Payable and Related Expense Accounts

Documenting Substantive Procedures

Applying Decision-Making Frameworks

Significant Terms

Prompts for Critical Thinking

Review Questions and Short Cases

Fraud Focus: Contemporary and Historical Cases

Application Activities

Data Analytics Using Excel: A Case in the Context of the Pharmaceutical Industry

Academic Research Cases

ACL

Chapter 12. Auditing Long-Lived Assets and Merger and Acquisition Activity

Significant Accounts, Disclosures, and Relevant Assertions

Activities in the Long-Lived Asset Acquisition and Payment Cycle

Relevant Financial Statement Assertions

An Overview of the Audit Opinion Formulation Process in the Revenue Cycle

Identifying Inherent Risks

Inherent Risks Associated with Natural Resources

Identifying Fraud Risks

Identifying Control Risks

Internal Controls for Long-lived Assets

Documenting Controls

Performing Planning Analytical Procedures

Ratio and Trend Analyses

Responding to Identified Risks of Material Misstatement

Obtaining Evidence About Internal Control Operating Effectiveness for Long-Lived Asset Accounts and Related Expenses

Selecting Controls to Test and Performing Tests of Controls

Considering the Results of Tests of Controls

Obtaining Substantive Evidence About Accounts, Disclosures, and Assertions for Long-Lived Asset Accounts and Related Expenses

Performing Substantive Analytical Procedures

Substantive Tests of Details for Tangible Assets

Substantive Tests of Details for Natural Resources and the Related Expense Accounts

Substantive Tests of Details for Intangible Assets and the Related Expense Accounts

Substantive Procedures Related to Asset Impairment

Substantive Procedures Related to Leases

Performing Substantive Fraud-Related Procedures

Documenting Substantive Procedures

Auditing Merger and Acquisition Activities

Valuing the Assets and Liabilities of an Acquisition

Audit Considerations for Valuing Identifiable Assets and Liabilities

Audit Considerations for Restructuring Charges Related to an Acquisition

Audit Considerations for Valuing Goodwill

Applying Decision-Making Frameworks

Significant Terms

Prompts for Critical Thinking

Review Questions and Short Cases

Fraud Focus: Contemporary and Historical Cases

Application Activities

Academic Research Cases

Chapter 13. Auditing Debt, Equity, and Long-Term Liabilities Requiring Management Estimates

Significant Accounts, Disclosures, and Relevant Assertions

Debt

Equity

An Overview of the Audit Opinion Formulation Process for Debt and Equity

Identifying Inherent Risks

Inherent Risks—Debt

Inherent Risks—Equity

Identifying Fraud Risks

Identifying Control Risks

Controls—Debt

Controls—Equity

Documenting Controls

Performing Planning Analytical Procedures

Responding to Identified Risks of Material Misstatement

Obtaining Evidence about Internal Control Operating Effectiveness for Debt and Equity

Selecting Controls to Test and Performing Tests of Controls

Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions for Debt and Equity

Substantive Analytical Procedures—Debt

Substantive Tests of Details—Debt

Substantive Tests of Details—Equity

Performing Substantive Fraud-Related Procedures for Debt and Equity

Documenting Substantive Procedures

Long-Term Liabilities Requiring Management Estimates

Warranty Reserves

Pension Obligations and Other Postemployment Benefits

Applying Decision-Making Frameworks

Significant Terms

Prompts for Critical Thinking

Review Questions and Short Cases

Fraud Focus: Contemporary and Historical Cases

Application Activities

Data Analytics Using Excel: A Case in the Context of the Pharmaceutical Industry

Academic Research Case

Chapter 14. Completing a Quality Audit

Obtain Remaining Audit Evidence

Detected Misstatements

Loss Contingencies

Adequacy of Disclosures

Noncompliance with Laws and Regulations

Review Analytical Procedures

The Going-Concern Assumption

Subsequent Events

Management Representation Letter versus a Management Letter

Management Representation Letter

Management Letter

Engagement Quality Review

Audit Committee Communications

Significant Terms

Prompts for Critical Thinking

Review Questions and Short Cases

Fraud Focus: Contemporary and Historical Cases

Application Activities

Using ACL to Perform Benford Analysis

Using ACL to Perform Benford Analysis

Academic Research Cases

Chapter 15. Audit Reports for Financial Statement Audits

Audit Reporting Principles

Unqualified/Unmodified Audit Reports on Financial Statements

Unqualified Audit Reports: U.S. Public Companies

Unmodified Audit Reports: U.S. Nonpublic Companies

Unmodified Audit Reports: Non-U.S. Companies

Unqualified/Unmodified Audit Opinions with Report Modifications

Emphasis-of-Matter

Information about Certain Audit Participants

Reference to Other Auditors

Inconsistent Application of GAAP

Justified Departure from GAAP

Substantial Doubt about the Client Being a Going Concern

Client Correction of a Material Misstatement in Previously Issued Financial Statements

Qualified Opinions, Adverse Opinions, and Disclaimers of Opinion

Qualified Opinions

Adverse Opinions

Disclaimers of Opinion

Critical Audit Matters and Key Audit Matters

Key Audit Matters (KAMs)

Critical Audit Matters (CAMs)

KAMs or CAMs?

Audit Reports on Internal Control Over Financial Reporting for U.S. Public Companies

Omitted Audit Procedures

Applying Decision-Making Frameworks

Significant Terms

Prompts for Critical Thinking

Review Questions and Short Cases

Fraud Focus: Contemporary and Historical Cases

Application Activities

Academic Research Cases

Knapp Cases

Enron Corporation

Madoff Securities

Avon Products, Inc.

Fred Stern & Company, Inc. (Ultramares Corporation v. Touche et al.)

Tommy O’Connell, Audit Senior

Longtop Financial Technologies Limited

ZZZZ Best Company, Inc.

Take-Two Interactive Software, Inc.

Howard Street Jewelers, Inc.

Parker-Halsey Corporation

Freescale Semiconductor, Inc.

General Motors Company

Madison Wells, Audit Manager

LocatePlus Holdings Corporation

ACL Appendix. ACL Tutorial

Auditing Standards

References