Description
Assignment: Provide a reflection of at least 500 words (or 2 pages double spaced) of how the knowledge, skills, or theories of this course have been applied, or could be applied, in a practical manner to your current work environment. If you are not currently working, share times when you have or could observe these theories and knowledge could be applied to an employment opportunity in your field of study. Requirements:Provide a 500 word (or 2 pages double spaced) minimum reflection.Use of proper APA formatting and citations. If supporting evidence from outside resources is used those must be properly cited.Share a personal connection that identifies specific knowledge and theories from this course.Demonstrate a connection to your current work environment. If you are not employed, demonstrate a connection to your desired work environment. You should NOT, provide an overview of the assignments assigned in the course. The assignment asks that you reflect how the knowledge and skills obtained through meeting course objectives were applied or could be applied in the workplace.
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Auditing &
Assurance Services
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Auditing &
Assurance Services
Timothy J. Louwers, PhD, CPA,
CISA, CFF
Director of the School of Accounting and
KPMG Eminent Professor in Accounting
Allen D. Blay, PhD, CPA
Associate Professor of Accounting
Florida State University
David H. Sinason, PhD, CPA, CIA,
CFE, CFSA, CRMA
PwC Professor of Accountancy
Northern Illinois University
Jerry R. Strawser, PhD, CPA
KPMG Chair of Accounting
Texas A&M University
Jay C. Thibodeau, PhD, CPA
Rae D. Anderson Professor of Accounting
Bentley University
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AUDITING & ASSURANCE SERVICES, SEVENTH EDITION
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright 2018 by
McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions
2015, 2013, and 2011. No part of this publication may be reproduced or distributed in any form or by
any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill
Education, including, but not limited to, in any network or other electronic storage or transmission, or
broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available to customers outside
the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 LWI 21 20 19 18 17
ISBN 978-1-259-57328-6
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Library of Congress Cataloging-in-Publication Data
Names: Louwers, Timothy J., author.
Title: Auditing & assurance services / Timothy J. Louwers, James Madison
University, David H. Sinason, Northern Illinois University, Jerry R.
Strawser, Texas A&M University, Jay C. Thibodeau, Bentley College, Allen
D. Blay.
Other titles: Auditing and assurance services
Description: Seventh edition. | New York, NY: McGraw-Hill Education, [2018]
Identifiers: LCCN 2016042220 | ISBN 9781259573286 (alk. paper)
Subjects: LCSH: Auditing.
Classification: LCC HF5667 .A815 2018 | DDC 657/.45—dc23
LC record available at https://lccn.loc.gov/2016042220
The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a
website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill
Education does not guarantee the accuracy of the information presented at these sites.
mheducation.com/highered
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Some people come into our lives and quickly go. Some
stay awhile and leave footprints on our hearts and we
are never quite the same.
Anonymous
We dedicate this book to the following educators
whose footprints we try to follow:
Professor Homer Bates
(University of North Florida)
Professor Stanley Biggs
(University of Connecticut)
Professor Lewis C. Buller
(Indiana State University)
Professor Patrick Delaney
(Northern Illinois University)
Professor William Hillison
(Florida State University)
Professor John Ivancevich
(University of Houston)
Professor Richard Kochanek
(University of Connecticut)
Professor John L. “Jack” Kramer
(University of Florida)
Professor Jack Robertson
(University of Texas at Austin)
Professor Robert Strawser
(Texas A&M University)
Professor Sally Webber
(Northern Illinois University)
Professor “IBM Jim” Whitney
(The Citadel)
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Meet the Authors
Timothy J. Louwers
Courtesy James
Madison University
is the Director of the School of Accounting and KPMG
Eminent Professor in Accounting at James Madison University.
Professor Louwers received his undergraduate and master’s degrees from The Citadel and
his PhD from Florida State University. Prior to beginning his academic career, he worked
in public accounting with KPMG, specializing in financial, governmental, and information systems auditing. He is a certified public accountant (South Carolina and Virginia)
and a certified information systems auditor. He is also certified in financial forensics.
Professor Louwers’s research interests include auditors’ reporting decisions and
ethical issues in the accounting profession. He has authored or coauthored more than
60 publications on a wide range of accounting, auditing, and technology-related topics,
including articles in the Journal of Accounting Research, Accounting Horizons, the Journal
of Business Ethics, Behavioral Research in Accounting, Decision Sciences, the Journal of
Forensic Accounting, Issues in Accounting Education, the Journal of Accountancy,
the CPA Journal, and Today’s CPA. Some of his published work has been reprinted in
Russian and Chinese. He is a respected lecturer on auditing and technology-related issues
and has received teaching excellence awards from the University of Houston and Louisiana
State University. He has appeared on both local and national television news broadcasts,
including MSNBC and CNN news programs.
Allen D. Blay
Courtesy Kallen M. Lunt
is an Associate Professor of Accounting at Florida State University.
Professor Blay completed his PhD at the University of Florida in 2000. He teaches auditing
at all levels and teaches a seminar in auditing research in the doctoral program. His research
interests relate to auditor judgment and decision making. Professor Blay has authored or coauthored publications on a wide range of accounting and auditing topics in journals such as
Contemporary Accounting Research, Auditing: A Journal of Practice and Theory, Organizational Behavior and Human Decision Processes, the Journal of Business Ethics, Behavioral
Research in Accounting, Issues in Accounting Education, the International Journal of Auditing, and the Journal of Accounting, Auditing, and Finance. He is currently Associate Editor
for Issues in Accounting Education and serves on several editorial boards.
Professor Blay has been active in the American Accounting Association, serving on
the auditing education committee and the annual meeting committee as Accounting,
Behavior, and Organizations section chair, among other committees. He is also active in
the American Institute of CPAs, serving in various volunteer roles relating to the Uniform
CPA Exam. Prior to entering academics, Professor Blay worked in public accounting
auditing financial institutions. He currently directs the accounting doctoral program at
Florida State University.
David H. Sinason
Courtesy Northern Illinois
University
vi
is the PwC Professor of Accountancy at Northern Illinois
University (NIU) and director of the NIU Internal Audit program.
Professor Sinason received a BS in engineering from the University of Illinois, a BS
in History from Northern Illinois University, a BBA and MAcc in accounting from
the University of North Florida, and a PhD in accounting from Florida State University. He has certifications as a certified public accountant, a certified internal auditor, a certified financial services auditor, and a certified fraud examiner. He also has
certification in risk management assurance. Professor Sinason has written more than
50 articles, mostly in the areas of assurance services, fraud prevention and detection,
and auditor liability.
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Meet the Authors
vii
Professor Sinason has taught in the areas of accounting information systems, auditing
and assurance services, and financial accounting. He has received teaching awards at each
of the universities where he has taught including the 2002–2003 Department of Accountancy and Northern Illinois University Awards for Excellence in Undergraduate Teaching.
Jerry R. Strawser
Courtesy Jerry R. Strawser
is Executive Vice President and Chief Financial Officer at
Texas A&M University and holds the KPMG Chair in Accounting.
Prior to his current appointment, Professor Strawser served as dean of Mays Business
School at Texas A&M University, interim executive vice president and provost at Texas
A&M University, interim dean of the C. T. Bauer College of Business at the University
of Houston, and Arthur Andersen & Co. Alumni Professor of Accounting.
Professor Strawser has coauthored three textbooks and more than 60 journal articles.
In addition to his academic experience, he had prior public accounting experience at two
Big Five accounting firms. He has also developed and delivered numerous executive development programs to organizations such as AT&T, Centerpoint Energy, Continental Airlines,
ConocoPhillips, Halliburton, KBR, KPMG, Minute Maid, PricewaterhouseCoopers,
McDermott International, Shell, Southwest Bank of Texas, and the Texas Society of Certified Public Accountants. Professor Strawser is a certified public accountant in the state of
Texas and earned his BBA and PhD in Accounting from Texas A&M University.
Jay C. Thibodeau
Courtesy Bentley University
is the Rae D. Anderson Professor of Accounting at Bentley
University.
Professor Thibodeau is a certified public accountant and a former auditor. He received
his bachelor’s degree from the University of Connecticut in 1987 and his PhD from the
University of Connecticut in 1996. He joined the faculty at Bentley in 1996 and has
remained there. At Bentley, he serves as the coordinator for all audit and assurance curriculum matters. His off-campus commitments include consulting with the Audit Learning and Development group at KPMG.
Professor Thibodeau’s scholarship focuses on audit judgment and decision making
and audit education. He is a coauthor of two textbooks and has written more than 40 book
chapters and articles for academics and practitioners in journals such as Auditing: A Journal of Practice & Theory, Accounting Horizons, and Issues in Accounting Education.
Professor Thibodeau served as the President of the Auditing Section of the American
Accounting Association for the 2014/2015 academic year. He served on the Executive Committee for the Auditing Section from 2008 to 2010. He has received national recognition for
his work five times. First, for his thesis, winning the 1996 Outstanding Doctoral Dissertation
Award presented by the ABO section of the AAA. Three other times, for curriculum innovation, winning the 2001 Joint AICPA/AAA Collaboration Award, the 2003 Innovation
in Assurance Education Award, and the 2016 Forensic Accounting Teaching Innovation Award. Finally, for outstanding service, receiving a Special Service Award from
the Auditing Section for his work in helping to create the “Access to Auditors” program
sponsored by the Center for Audit Quality.
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Look Beneath the Surface . . .
As auditors, we are trained to investigate beyond appearances to determine the underlying
facts—in other words, to look beneath the surface. From the Enron and WorldCom
scandals of the early 2000s to the financial crisis of 2007–2008 to present-day issues
and challenges related to significant estimation uncertainty, understanding the auditor’s
responsibility related to fraud, maintaining a clear perspective, probing for details, and
understanding the big picture are indispensable to effective auditing. With the availability of greater levels of qualitative and quantitative information (“big data”), the need
for technical skills and challenges facing today’s auditor is greater than ever. The author
team of Louwers, Blay, Sinason, Strawser, and Thibodeau has dedicated years of experience in the auditing field to this new edition of Auditing & Assurance Services, supplying the necessary investigative tools for future auditors.
Cutting-Edge Coverage
The seventh edition of Auditing & Assurance Services continues its tradition as the most
up-to-date auditing text on the market. All chapters and modules have been revised to
incorporate the latest professional standards, recodifications, and proposals from the International Auditing and Assurance Standards Board, Auditing Standards Board, and Public
Company Accounting Oversight Board. To acquaint students with the professional standards, each chapter or module begins with a list of the relevant professional standards that
are covered in that chapter. Importantly, this text incorporates the reorganized PCAOB
standards effective December 31, 2016.
As a team, we use a variety of contacts and resources to stay informed of ongoing
developments that affect learning objectives in the financial statement auditing
course(s). In fact, changes to key learning goals and objectives are usually prompted by
interactions with colleagues from practice.
In that spirit, since the publication of our sixth edition, we have been working hard
to stay in touch with developments in practice so we can always respond to your needs
in the financial statement auditing classroom. Among our many observations, one trend
has emerged as a potential sea change in the financial statement auditing process, the
“big data” challenge.
Indeed, based on our collective observations, we believe that students should be
prepared to make the best use possible of relevant data using state-of-the art analytical
tools. In fact, the terms big data and data analytics are frequently being used to describe
a growing movement among audit professionals. Our collective view is that students
must be prepared to meet the “big data” challenge.
To help students be prepared, the seventh edition of Auditing & Assurance Services
has been revised deliberately to help students critically think about the use of increased
data and analytical tools in the financial statement audit. In addition, we would like to
help students learn how to effectively document their conclusions in the current “big
data” environment.
In a recent white paper, PwC (2015)1 lists five “new” skills that will be required of
auditors moving forward. Although many of these skills require special statistical or
programming knowledge, the first listed skill is one that is applicable to all auditors:
“Research and identify anomalies and risk factors in underlying data.” Although
1
“Data Driven: What Students Need to Succeed in a Rapidly Changing Business World.” Available at:
http://www.pwc.com/us/en/faculty-resource/assets/PwC-Data-driven-paper-Feb2015.pdf.
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extraction and analysis from client accounting data are critical skills for newly minted
auditors, we are unaware of sufficient materials to assist professors in integrating data
analytics into the auditing classroom. Thus, an important goal of the seventh edition is
to provide a clear and implementable method to fully integrate a leading data analysis
tool, the IDEA data analysis software, into the auditing class.
To start, McGraw-Hill Education is excited to announce a partnership with the developers
of the IDEA software. We believe that IDEA provides an outstanding platform to illustrate
the steps that auditors need to take related to data and data analysis while completing the
financial statement audit. Leading auditing professionals have confirmed that using IDEA
is an outstanding way for an entry-level auditing professional to begin the journey into the
world of “big data” and “data analytics.” Simply stated, big data is manifested in the financial statement auditing process through the use of tools like IDEA.
Overall, our revisions related to the big data challenge were designed to provide
instructors a set of tools and mechanisms to bring data and analytics into the classroom
in a meaningful way. Through the use of these tools, students can be sure they are prepared to enter practice with an appreciation for and knowledge of the increasing importance of data and analytics in the auditing profession. We hope that everyone enjoys our
attempts to help students get ready for the big data challenge.
Of course, and perhaps most importantly, the seventh edition of Auditing & Assurance
Services also continues to be the most up-to-date auditing text on the market. The book
has fully integrated the reorganized PCAOB Auditing Standards. In addition,
all chapters and modules in the seventh edition have been revised to incorporate the
two new standards (AS 2701 and AS 2410) adopted by the PCAOB that relate to the
auditor’s work on supplementary information provided in the financial statements and
related parties. In addition, all chapters and modules have been revised to incorporate
the latest updates from the international standards of auditing (ISAs) and the Auditing
Standards Board (ASB). With Auditing & Assurance Services, seventh edition, students
are prepared to take on auditing’s latest challenges.
The Louwers author team uses a conversational, yet professional tone—hailed by
reviewers as a key strength of the book.
Flexible Organization
Auditing & Assurance Services teaches students auditing
concepts by emphasizing real-life contexts when describing
the auditing process. The authors use chapters and modules to
“The format allows you to integrate the
modules into the chapter material in
any way you would find useful.”
—Frank J. Beil, University of Minnesota
Chapters
Modules
The 12 chapters cover the auditing
process extensively with a multitude of
cases designed to give students a better
understanding of how a best-practice
concept developed from real-world
situations.
Modules A–H provide instructors
additional material that can be used
throughout the course. Topics such as
fraud, ethics, sampling, and technology
are covered in the modules, which are
designed to be taught whenever instructors want to introduce the topic in their
course.
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achieve this goal. Although the chapters follow a logical sequence that we recommend
professors consider for their classes, the modules have been written to be used on a
stand-alone basis. In essence, the modules have been deliberately prepared for entirely
flexible implementation of these topics without excessive reliance on chapter sequencing. We encourage you to integrate these modules into your syllabi in a manner that best
suits your approach to the auditing course.
Engage Your Students with Real
Examples
“The tone of the textbook is
in a conversational manner
that allows for more studentfriendly reading material.”
—Aretha Hill, Florida A&M
University
An effective accounting textbook integrates real-world scenarios
with theoretical discussion. Auditing & Assurance Services places the
student in the role of a decision maker, by illustrating the application
of auditing concepts using actual situations experienced by accounting firms and companies such as:
Each chapter or module opens with a “real-world” example that draws upon concepts
discussed within that chapter or module. Finally, a series of mini-cases have been developed for use by instructors to further bring text material to life. These mini-cases feature
real situations experienced by the following companies, individuals, or accounting firms
[new cases to the seventh edition are noted with an asterisk (*)].
∙
∙
∙
∙
∙
∙
∙
∙
∙
∙
∙
∙
Arthur Andersen (failure of auditors to detect fraud at Enron)
Bernie Madoff Investment Securities (failure of auditors and regulators to detect fraud)*
Crazy Eddie’s (failure of auditors to detect fraud)*
Daily Journal Corporation (auditor changes and reporting on internal control)*
General Electric (audit fees and services provided by auditors)
General Motors (going-concern report by auditors)
HealthSouth Corporation (failure of auditors to detect fraud)
KPMG (competition in the audit marketplace)
Lehman Brothers (estimation uncertainties in the audit and disclosure concerns)*
Parmalat (failure of auditors to detect fraud)
Satyam Computer Services Ltd. (failure of auditors to detect fraud)
Scott London, KPMG partner (failure of auditor to follow the AICPA Code of Conduct)*
Confirming Pages
Fraud Awareness
CHAPTER 4
The fraud coverage in Auditing & Assurance Services
is the most extensive available and is complemented by
real-world examples chosen to engage students through
the following tools:
Management Fraud
and Audit Risk
∙ Auditing Insights integrated throughout the text.
∙ Mini-cases that may be assigned to supplement
text chapters and modules that expose students to
Profit is the result of risks wisely selected.
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Frederick Barnard Hawley, American economist (1843–1929)
Risk comes from not knowing what you’re doing.
Warren Buffett, widely regarded as one of the most successful investors in
the world
Professional Standards References
AU-C/ISA
Section
AS Section
Overall Objectives of the Independent Auditor
200
1001, 1005, 1010, 1015
Consideration of Fraud in a Financial Statement Audit
240
2401
Consideration of Laws and Regulations
250
2405
Communications with Audit Committees
260
1301
Consideration of Internal Control in an Integrated Audit
265
2201
Topic
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landmark fraud cases at Bernie Madoff Investment Securities, Enron, HealthSouth,
Parmalat, PTL Club, and Satyam Computer Services.
∙ Specific discussion of management fraud (Chapter 4), employee fraud (Chapter 6),
and the Certified Fraud Examiner Exam (Module D).
∙ Apollo Shoes Case, the only stand-alone fraud audit case on the market (available
online).
Create a State-of-the-Art Learning Environment:
Instructor Resources
The author team and McGraw-Hill are dedicated to providing instructors with the
best teaching resources available. In addition to the solutions manual, test bank, and
PowerPoint Presentations, and the Apollo Shoe Case, the following resources are also
available.
The Updated Auditor
The author team scrutinizes leading business and academic publications for relevant
issues and research that sheds light on auditing and the audit process. Recent findings
from academic research and discussions from professional literature are drawn from the
following publications:
∙
∙
∙
∙
∙
∙
∙
∙
∙
∙
∙
Accounting Horizons
Accounting Today
Auditing: A Journal of Practice & Theory
Behavioral Research in Accounting
Bloomberg Businessweek
CFO.com
CPA Journal
Journal of Accountancy
Journal of Accounting and Economics
The Accounting Review
The Wall Street Journal
These excerpts are highlighted throughout the text as Auditing Insights to allow for
easy identification and review by instructors and students.
In addition to the use of Auditing Insights, on a monthly basis, the author team provides an Updated Auditor briefing, which summarizes the content of relevant business
and academic publications on a chapter-by-chapter basis, to allow students to apply current developments in the profession with material discussed in class. The Updated Auditor briefing is available in Connect. With the Updated Auditor, instructors will always
be at the cutting edge of auditing practice!
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IDEA Software and Workbook
With the availability of unprecedented amounts of quantitative and qualitative information and tools available to access and process that information, it is imperative that
students learn and utilize the latest technologies used by auditing professionals. As
previously stated, McGraw-Hill Education has forged a partnership with Caseware
Analytics for the use of the IDEA data analysis tool. Chapters 3 (audit planning), 4 (risk
assessment), 5 (internal control), 7–9 (operating cycle chapters), Module F (attributes
sampling), and Module G (variables sampling) have been revised to reference the use of
IDEA within the chapter or module.
In addition, the seventh edition includes end-of-chapter exercises utilizing authordeveloped databases exclusively for use with Auditing & Assurance Services as well
as supplemental materials available in Connect to complement the IDEA workbook and
provide hands-on instructions on using the IDEA software. The authors also provide
implementation guidance to instructors and detailed solutions and explanations on this
new content. Overall, the author team has provided significant resources to prepare students for the auditing environment in 2017 and beyond.
Roger CPA Review
McGraw-Hill Education has partnered with Roger CPA Review, a global leader in CPA
Exam preparation, to provide students a smooth transition from the accounting classroom to successful completion of the CPA Exam. While many aspiring accountants
wait until they have completed their academic studies to begin preparing for the CPA
Exam, research shows that those who become familiar with exam content earlier in the
process have a stronger chance of successfully passing the CPA Exam. Accordingly,
students using these McGraw-Hill materials will have access to sample CPA Exam
Multiple-Choice questions and Task-based Simulations from Roger CPA Review, with
expert-written explanations and solutions. All questions are either directly from the
AICPA or are modeled on AICPA questions that appear in the exam. Task-based Simulations are delivered via the Roger CPA Review platform, which mirrors the look, feel
and functionality of the actual exam. McGraw-Hill Education and Roger CPA Review
are dedicated to supporting every accounting student along their journey, ultimately
helping them achieve career success in the accounting profession. For more information
about the full Roger CPA Review program, exam requirements and exam content, visit
www.rogercpareview.com.
TestGen
TestGen is a complete, state-of-the-art test generator and editing application software
that allows instructors to quickly and easily select test items from McGraw Hill’s TestGen testbank content and to organize, edit and customize the questions and answers to
rapidly generate paper tests. Questions can include stylized text, symbols, graphics, and
equations that are inserted directly into questions using built-in mathematical templates.
With both quick-and-simple test creation and flexible and robust editing tools, TestGen
is a test generator system for today’s educators.
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Association to Advance Collegiate Schools of
Business (AACSB) Statement
McGraw-Hill Education is a proud corporate member of AACSB International. Understanding the importance and value of AACSB accreditation, Auditing & Assurance
Services, 7e, recognizes the curricula guidelines detailed in the AACSB standards for
business accreditation by connecting selected questions in the text and test bank to the
eight general knowledge and skill guidelines in the AACSB standards. The statements
contained in Auditing & Assurance Services, 7e, are provided only as a guide for the
users of this textbook. The AACSB leaves content coverage and assessment within the
purview of individual schools, their mission, and their faculty. Although Auditing &
Assurance Services, 7e, and the teaching package make no claim of any specific
AACSB qualification or evaluation, we have within Auditing & Assurance Services, 7e,
labeled selected questions according to the eight general knowledge and skills areas.
MCGRAW-HILL CUSTOMER EXPERIENCE GROUP
CONTACT INFORMATION
At McGraw-Hill Education, we understand that getting the most from new technology
can be challenging. That’s why our services don’t stop after you purchase our products.
You can contact our Product Specialists 24 hours a day to get product training online.
Or you can search the knowledge bank of Frequently Asked Questions on our support
website. For Customer Support, call 800-331-5094 or visit www.mhhe.com/support.
One of our Technical Support Analysts will be able to assist you in a timely fashion.
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New to the Seventh Edition of
In response to feedback and guidance from numerous auditing accounting faculty, the authors have made many
important changes to the seventh edition of Auditing & Assurance Services, including the following:
Highlights of Auditing &
Assurance Services, 7e
∙ The seventh edition of Auditing & Assurance Services features Connect and SmartBook.
∙ All chapter and modules have been revised to incorporate professional standards adopted through May 2016.
In addition, the reorganized PCAOB framework (which
becomes effective December 31, 2016) has been utilized
throughout the text.
∙ Auditing Insight boxes have been added and updated
throughout the textbook to place issues discussed within
the text into a real-world context. These boxes incorporate
numerous examples from business and academic publications as well as actual company annual reports and audit
reports.
∙ Examples using the Caseware IDEA software have been
added in Chapters 3, 4, 5, 7, 8, 9, Module F, and Module
G. In addition, end-of-chapter exercises using authordeveloped databases exclusively for use with Auditing &
Assurance Services as well as supplemental materials to
complement the IDEA workbook are provided.
∙ Coverage in the cycle chapters has been standardized to focus
on the risk assessment process for each relevant assertion.
In addition, the chapters provide a consistent focus on how
auditors respond to assessed risk of material misstatement,
through the incorporation of easy-to-read tables throughout
Chapters 6 through 10 to highlight the key issues and risks
faced by auditors in the examination of different accounts.
These tables take the students through the risk assessment
process for each cycle on a step-by-step basis to mirror the
methodology used in current audit practice.
∙ Five new Mini-cases have been added that feature
Bernie Madoff Investment Securities (failure of auditors
and regulators to detect fraud); Crazy Eddie’s (failure of
auditors to detect fraud); Daily Journal Corporation (auditor changes and internal control reporting); Lehman Brothers (estimation uncertainties in the audit and failure to
make informative disclosures); and Scott London, KPMG
Partner (failure of auditor to follow the AICPA Code of
Conduct).
Part I: The Contemporary Auditing Environment
CHAPTER 1: Auditing and Assurance Services
CHAPTER 2: Professional Standards
∙ Our discussion about the CPA exam has been revised to
fully reflect the substantial changes being made to the
exam as of April 1, 2017. Due primarily to the outsourcing of routine tasks and significant advances in information technology, the job of a newly licensed CPA has
changed. The AICPA responded with a revised exam
that has an increased emphasis on higher-order skills like
problem solving, critical thinking, and analytical ability.
The changes are fully described in the text.
∙ Increased our emphasis about the importance of audit quality in the current environment and added an Auditing Insight
that describes the audit quality indicators project recently
completed by the PCAOB in 2015.
∙ Added a new exhibit that provides an example of the
2014/2015 Sustainability Report for the Coca-Cola Company. We also added a new exhibit that features Mickey
Mantle’s baseball card from 1961.
∙ Increased our emphasis on the emergence of big data in
the auditing environment and added an Auditing Insight
that describes what students need to succeed in a world
characterized by big data.
∙ Summarized recent academic research related to the
impact of PCAOB inspections and results of inspections on audit quality, client attraction and retention, and audit fee growth rates (including research
specifically related to the Deloitte vignette in the introduction of this chapter).
∙ Summarized recent independence issues encountered by
EY and KPMG.
∙ McDonald’s 2016 audit report, which demonstrates the
contents of an actual audit report and how this report
reflects the guidance in the reporting principle.
∙ Included an Auditing Insight regarding controversy over
PCAOB inspection of audits of Alibaba Group Holding
Limited, which have been impacted by China’s ban of
PCAOB inspections.
∙ Summarized PCAOB inspections of 2012, 2013, and 2014
audits conducted by Big Four firms and expanded analysis
to summarize the number of audits in which the client’s
report on internal control was revised as a result of the
inspection.
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Auditing & Assurance Services
Part II: The Financial Statement Audit
CHAPTER 3: Engagement Plannin
