Index

Page numbers followed by n refer to notes.

A
Abbott, L. J., 60 Ability to continue as going concern, 465-466; see also Going-concern uncertainties Absolute assurance, impossibility of, 46 Academy Awards, 18 Access to programs and data controls automatic terminal logoff, 848 common controls, 848-849 passwords, 847-848 physical security controls, 848 proliferation of hacking, 847 Accountability, 230 Accountants responsibilities in compilation, 560 responsibilities in review, 559 Account balance acquisition and expenditure cycle, 325, 329 analytical procedures for, 138-140 assertions in production cycle, 381 debt and equity accounts, 425 management assertions about, 10 materially misstated, 817 production cycle, 375 revenue and collection cycle, 279,283 Accounting; see also Fraudulent financial accounting for accounts receivable, 276 cash basis framework, 566 complicated topics in, 415 components, 10 and control system flowchart, 188-190 cover-up attempts, 229 equity method, 431432 fraudulent, 123 for investments, 428 for leases, 412-143 modified cash basis framework, 566 other comprehensive bases of, 566 outsourcing of, 100 payroll, 358 problems for inventory, 369 skewed distributions, 716 software for, 99 special purpose frameworks, 566-568 violations at General Electric, 430 Accounting and Review Services Committee, 558, 609 Accounting cycles, 231-232 Accounting estimates, 422 auditing, 135-136 definition, 135 finance and investment cycle examples of estimates, 422 kinds of controls, 422 review of, 458459 subjective, 133 Accounting principles AICPA rule, 609-610 changes in, 512-513 company selection of, 135-136 in India, C26 Accounting Principles Board, 609 Opinion No. 18, 431 Accounting Research Bulletins. 609-610

Accounting Services Executive Committee, Trust Services Data and Integrity, 573 Accounting Standards Board Codification 250, 512 Accounting Standards Codification No. 340, 331 No. 350, 333 Accounting Standards No. 3 on audit documentation, 107-108 Accounting Standards Update, 412 Accounts attention directing, 140 cycles of, 92 factors relating to misstatements, 133 in finance and investment cycle, 415 review for audit completion, 457-458 selected for confirmation, 285 significant, 185 unusual entries, 458 Accounts payable confirms with vendors, 330 finding fraud signs in, 335-336 recording, 323, 325 Accounts payable trial balance, 324 Accoimts receivable accounting for, 276 collectability, 273 computerized process, 277 confirmation of, 285-289 existence assertion, 283 factoring, 290 Accounts receivable aging, 278 Accounts receivable testing, 278 Accruals, 422 Accmed income taxes, substantive procedures, 330-331 Accrued liabilities, substantive procedures, 330, 331 Accuracy assertion for payroll cycle, 195 in purchasing and disbursement, 182 Accuracy in recording transactions, 13 ACL software, 102 Acquisition and expenditure activities, 232 Acquisition and expenditure cycle; see also Payroll cycle assertions about transactions and events, 327 audit evidence accounts payable trial balance, 324 fixed asset reports, 324 open purchases, 323 purchases journal, 324 unmatched receiving reports, 323 unmatched vendor invoices, 323 audit issues, 335-341 audit plans, 354-355 audit risk model, 335 control risk assessment account balances, 325 control activities, 325 custody, 325-326 entity-level controls, 325 periodic reconciliation, 326 summary of, 326-328 tests of controls, 326 Financial Accounting Standards Board on, 318 fraud cases: extended procedures, 336-339 phony doctors, 338-339 printing money, 337-338 fraud signs in accounts payable, 335-336 inherent risks company examples, 319 misstated costs and expenses, 319

noncancelable purchase agreements, 319 relative assertion risks, 320 unrecorded liabilities, 319 internal control questioimaire, 351-353 linked to production cycle, 369-370 professional standards references, 317 PCAOB inspections, 340 substantive procedures auditing other accounts in, 330-334 completeness assertion, 328-330 other expenses, 334 presentation and disclosure, 334 typical activities basic activities, 320-321 purchasing goods and services, 321-322 receiving goods and services, 322 recording assets, expenses aid liabilities, 323 WorldCom fraud, 318 Acts discreditable, 612-613 Actual costs vs. standard costs, 372 Actual rate of deviation, 729 Act-utilitarianism, 593 Adelphia Communications, Inc., 124, 319, 634 Adhikari, Anand, C29 Adjusting entries for audit completion, 467-469 research on, 469 rollover method, 468 uncorrected misstatements, 468 Administrative level controls, 868, 869 Adverse opinion, 201, 501 definition, 54-55 and departures from GAAP, 503, 504505 and departures from GAAS, 503 effect on intemal control, 204 on intemal control, 199 Advertising, AICPA rules, 613-614 Advisory Committee on the Auditing Profession, 635 Advisory services, 20-21 Aged trial bailee, 278 Agreed-upon procedures attestation standards, 550, 551 in compliance attestation, 553 purpose, 549-550 reports, 550,551 Agreed-upon procedures engagement, 549 AICPA; see American Institute of Certified Public Accoimtants AICPA Auditing Statements of Position, 39 Aiding and abetting, 656-657 AIG Credit Facility Trust, 518 Alberta, Timothy J., 717 Albrecht, W. S., 222n, 225n, 228n Alexander Grant & Company, 593 Allen, C.,616 Allocation, 12 Allowance for sampling risk, 724-725, 758, 768 basic, 808-809 incremental, 807-808 in MUS, 802 Allstate Trucking, 50 Alpha errors, 716 Alternative procedures, revenue and collection cycle, 289 Amazon.com, 183 Ambassador Eyewear Group, 290 Amerco, 521, 634

II

12

Index
compare expectations with recorded amount, 139 compare results with forecasts, 141 define significant differences, 139 develop expectations, 138 documentation, 140 horizontal analysis of statements, 139 investigate significant differences, 139-140 vertical analysis of statements, 139 for sampling risk, 799-800 and Sarbanes-Oxley Act, 142 Anand, Geeta, C29 Andrews, C. E., C2 Annual report; see Form 10-K Antifraud section Securities Act, 647 Securities Exchange Act, 648-649 AOL Time Warner, 608 Apollo Group, Inc., 644 Apple Inc., 521 Appropriate evidence, 50 requirements for, 51 and sufficient evidence, 52 Appropriate financial reporting framework, 549 application of requirements, 568-570 standards, 568 written report/oral advice, 570 Approved vendor list, 321 Arm's length transactions, 413 Arredy, James T., 135 Arthur Andersen, 43, 135, 493, 657, C23 dissolution of, 410, C17 and Enron, 77, 117, 589, 598, 604 prosecution of, 655 and PTL Club, C8 and WorldCom, 318,458 Arthur Andersen, case aftermath, C3-C4 codefendant in class action suit, C4 failure to detect fraud, CI overturned by United States Supreme Court, C3 trial for obstruction of justice, C1-C2 conviction, C2-C3 defense argument, C2 prosecution case, C2 Arthur Young & Company, C17 Asare, S. K., 524 Asbury Automotive Group, 514 Ashtom, R. H., 98 Assertion risks for revenue and receivables, 270 Assertions about payroll cycle, 195 debt and equity accounts, 425 investment accounts, 428 risk level of, 128 Assets, 12, 458 custody of, 180 misappropriation, 126 missing or nonexistent, C20 periodic reconciliation, 326 writing of, 414 Associated with financial statements, 519-520 Association of Certified Fraud Examiners, 698 and codes of conduct, 595 on core competencies, 27 study on revenue recognition, 272 Assurance, 3 definition, 3 reasonable vs. absolute, 46 Assurance services Academy Awards and, 18 audit services, 18-19 consuhing services excluded, 9 definition, 7, 571-572 elements and boundaries of, 8 enhanced business reporting, 572 examples, 8-9

Index
extensible Business Reporting Language, 572 and information technology, 9 and megatrends and business risks, 571 nonaudit attestation engagements, 19 Professional Sports Authenticator, 7 reasons for developing, 570-571 relation to auditing and attestation, 7-9 for sustainability, 574-575 sustainability reporting, 574-575 trust services, 572-574 Assurance Services Executive Committee (AICPA) on new business risks, 571 XBRL Assurance Task Force, 572 Astronaut Pen, 689 Attention directing, 140 Attestation, 3, 48 Attestation engagement applying agreed-upon procedures, 549-550, 551 assumptions on prospective/pro forma financial information, 442 compared to audit, 549 compliance attestation, 553-554 definition, 6 engagements related to, 549 examination of entity's intemal control, 552 example, 548 examples, 6 financial forecasts and projections, 550-552 governmental auditing, 689-690 introduction to, 548-549 professional standards, 549 professional standards references, 546 pro forma financial information, 550-552 relation to assurance services, 7-9 responsible party, 48 review and compilation as subset of, 558 review of management's discussion and analysis, 554 and service organizations, 554-557 subject matter, 48 summary of reports, 557 types of agreed-upon procedures, 549 examination, 548 review, 549 for Wilson Sporting Goods, 7 Attestation engagement reports, 696 Attestation services, 48 Attestation standards, 549 for assurance engagements, 74 and attest fiinction, 74 in compliance attestation, 553 definition, 74 for field work, 75 general, 75 and performance principle, 74 principles, 75 for reporting, 75 reporting under, 74 standards vs. principles, 74 Attest Engagements on Greenhouse Gas Emissions Information, 574 Attest function, 74 Attomey letters American Bar Association guidelines, 461 attorney's response, 460 client's responsibility, 460 contents, 460 and contingent liabilities, 459-461 pending litigation, claims and assessments, 459-^61 sample, 462 unasserted claims, 461 Attorney's response, 460-461 Attributes sampling to assess control risk, 727-728 and audit risk model, 726-727 discovery sampling, 773 intemal control deficiencies, 198-199 management letter, 476 summary of, 475-476 termination letter, 81 written representations, 463-465 Audit completion audit timeline, 456-457 and Dell Inc., 454-^55 fieldwork procedures, 457-470 professional standards references, 453 responsibilities following audit report release date communications on govemance, 475-476 management letter, 476 omitted procedures, 474 summary of audit commimications, 476-477 subsequent events, 470-472 subsequently discovered facts, 472-473 Audit completion date, 456 Audit documentation arrangement and indexing, 106-108 audit standards for, 105 current files, 105-106 definition, 104 lead schedule, 106 permanent files, 104-105 purpose, 104 software for, 104 Audit documentation review, 469-470 Audited balance, 730-731 in nonstatistical sampling, 819 Audited financial statements auditors' reports consistency of, 511, 512-513 departures from GAAP, 504-506 emphasis-of-a-matter paragraphs, 512,518 going-concem uncertainties, 511,513-514 group financial statements, 512, 516-517 justified departures from GAAP, 511, 514-516 lack of independence, 510-511 other than standard report, 503 purpose, 497-498 scope limitations, 507-510 standard report, 498-502 future of audit reporting, 523-524 General Motors problems, 495 information accompanying, 522-523 integrated with intemal control on reporting, 552 professional standards references, 493 reporting topics association with financial statements, 518-520 comparative statements, 520-521 miscellaneous information, 522-523 required supplementary information, 523 summary statements, 521-522 review engagement, 496 SEC rule on filing, 454455 Audited value, 730-731, 797 in MUS, 804 Auditee, 498 Audit efficiency, 191 Audit engagement meaning of risk in, 77-78 staffmg, 84 understanding intemal control prior to, 185 Audit evidence; see also Evidence acquisition and expenditure cycle about intangible assets, 332-333 accounts payable trial balance, 324 fixed asset reports, 324 mergers and acquisitions transactions, 334 open purchase orders, 323 physical inspection, 332333 purchases journal, 324 unmatched receiving reports, 323

13

American Accounting Association, 5, 6, 21, 119n, 170 Committee on Basic Auditing Concepts, 4 American Bankers Association, 240 American Bar Association, 461 American depository receipts, C26-C27 American Institute of Certified Public Accountants, 21,47, 119n, 170, 240, C9;see also Assurance Services Executive Committee; Code of Professional Conduct on assurance services, 8, 570 Attest Engagements on Greenhouse Gas Emissions Information, 574 Audit Sampling Guide, 130, 759, 111, 802, 816,819 Audit Standards Guide, 39 Center for Public Company Audit Firms, 55 on client confidentiality, 146 and codes of conduct, 594 on core competencies, 27 definition of audit sampling, 726 Division for Firms, 566-567 on educational requirements, 24 and generally accepted government auditing standards, 692 Joint Ethics Enforcement Program, 617-618 Joint Trial Board, 618 on operational auditing, 684 on operational audits, 22 Private Companies Practice Section, 566-567 Professional Ethics Executive Committee, 595, 596-597 on purpose of audit, 5 on purpose of audits, 497 on review and compilation services, 558 rules as moral clause, 612 rules of conduct accounting principles, 609-610 acts discreditable, 612-613 advertising and solicitafion, 613-614 commissions and referral fees, 614-615 compliance with standards, 609 confidentiality, 610-611 contingent fees, 612 form and organization name, 615-616 genera! standards, 608 integrity and objectivity, 607-608 sampling tables, 760-763 on self-regulation, 36 and state licensing process, 25 WebTrust Service, 573-574 and XBRL reporting, 9 American International Group (AIG), 411,472, 518, 634 American Medical Association, 165 American Stock Exchange, 145 America Online, 273 Amersham, 652 Analytical procedures for audit completion, 457-458 * for audit planning stage, 136 and audit stages, 458 at beginning of audit, 142 by computer, 103 definition, 97, 136 at end of audit, 142 examples, 142 information sources and form of, 97 for obtaining evidence, 90-98 Auditing Standards Board on, 91 PCAOB on, 91 types of procedures, 92 production cycle, 380-381 revenue and collection cycle, 284 in risk assessment, 136-142 asking what could be wrong, 140-141 cash flow analysis, 141-142

docimientation, 771 evaluation calculating upper limit rate of deviation, 765-768 evaluation decision, 768-770 qualitative evaluation of deviations, 770-771 nonstatistical, 773-774 planning defining deviation conditions, 753-754 defining population, 754-755 determining objective, 753 professional standards references, 751 purpose, 752 revenue cycle assertions, 753 sample items measurement, 764765 sample selection, 763-764 block selection, 793 deciding on method, 793 haphazard selection, 793 systematic random selection, 792-793 unrestricted random selection, 792 sample size determination expected population deviation rate, 758-759 population size, 759 and sampling risk, 756-757 tolerable rate of deviation, 757-758 using AICPA tables, 760-763 sampling risks associated with effectiveness loss, 730 efficiency loss, 730 risk of overreliance, 729-730 risk of underreliance, 729 tolerable rate of deviation, 728-729 upper limit rate of deviation, 728-729 sequential sampling, 772-773 seven step procedure, 752 substantive procedures, 728 tests of controls, 728 versus variables sampling, 795 Attribute standards, 685-686 Audit analytical procedures in planning, 138 appropriate financial reporting framework, 549 compared to review of interim financial information, 564 of depreciation schedule, 332 differentiated fi-om attestation engagement, 549 of elements, accounts or items in statements, 565-566 previous, 137-138 PCAOB requirements engagement planning, 197-198 evaluating deficiencies, 198-199 reporting on intemal control, 199200 tests of controls, 198 top-down approach, 198 wrapping up, 199 purpose of, 497 quality audit, 679 sampling use in, 715 stages of, 42, 47, 49, 51, 53 types of work, 21 Audit Analytics database, 502 Audit committee auditor's meeting with, 476 of board of directors, 145 inquiry in risk assessment, 143-144 for intemal control, 177 Sarbanes-Oxley Act on, 475 skills and composition of, 177 Audit communications of all misstatements, 468 attomey letters, 459-462 client acceptance, 79 engagement letter, 81,82, 550 with individuals charged with govemance, 475^76

unmatched vendor invoices, 323 vouching, 333 from client personnel, 463 in fraud cases, 700 on going-concem uncertainties, 465-466 payroll cycle clearing accounts, 360 employee W2 reports, 361 governmental and tax reports, 260 labor cost analysis, 360 payroll register, 359 personnel files, 259 year-to-date earnings records, 360-361 prior to and after date of the financial statement, 456 production cycle, 373-375 inventory reports, 374 production plans and reports, 374 sales forecasts, 374 revenue and collection cycle accounts receivable listing and aging, 278 cash receipts listing, 278 credit check files, 277 customer statements, 279 pending order master file, 277 price list master file, 278 sales analysis reports, 278 sales detail (journal) file, 278 in revenue and collection cycle, 270 to test cash bank reconciliation, 237 bank statements, 239-240 canceled checks, 237-239 cash disbursements joimial, 237 cash receipts joumal, 236-237 Audit failure, 637 potential for, 455 Audit fees definition, C24-C25 paid by Fortune 100 companies, C24 paid by General Electric 2000-2010, C24 Audit files, 859 Auditing attestation as, 3 definition and fundamental principles, 42 in early America, 6 failure at Madoff Investment Securities, 45 with fraud awareness, 230 and high-profile fraud, 2 issues in acquisition and expenditure cycle, 339-341 long-term liabilities, 425-426 overall approach for revenue and collection cycle, 269-271 overview, 5 as profession, 37 purpose of, 5 relation to assurance services, 7-9 systematic process criteria for evaluating evidence, 5 obtaining evidence, 4-5 trouble spots in investments and intangibles, 430 types of, 5 use of specialists, 85 Auditing around the computer, 857 Auditing estimates on taxes, 331 Auditing standards; see also Generally accepted auditing standards versus audit procedures, 39-40 compared to attestation standards, 549 compliance with, 609 convergence of, 40 definition, 39 direct-effect noncompliance, 146-147 and enterprise risk management, 121 fraud risk assessment, 144 and fundamental principles, 40-42

14

Index
effects of Sarbanes-Oxley Act on profession high costs of compliance, 807 reduced revenue, C24 restrictions on nonaudit services, 807 examination, 24 and expectation gap, 636 experience for certification, 25 failure at HealthSouth, 144 fees paid to, C24 focus on relevant assertions, 128 and Generally accepted auditing standards, 37^2 performance, 46-53 reporting, 53-60 responsibilities, 42-45 for HealthSouth, C15 information technology, 85 insider trading, 611 from Intemal Revenue Service, 23 kinds of certification, 23-24 knowledge of production process, 369 legal liability, 89 limited reporting engagement, 500 meeting with audit committee, 476 number of firms, C17-C18 professional skepticism, 15-18, 221 professional standards references, 1 for PTL Club, C7-C9 and registration statements, 645 response to significant risks communicate fraud risk, 145-146 document risk assessment, 146 evaluation of accumulated results of procedures, 144-145 responsibilities after date of the financial statement subsequent events, 470-472 subsequently discovered facts, 472-473 responsibilities for noncompliance with laws and regulations, 146-148 responsibility for internal control, 172-174 responsibility to third-party users, 636 risk assessment audit team discussion, 143 business risk, 121 definitions of fraud, 126 development of standards, 121 fraud risk factors, 122-123 information gathering, 137-138 information risk, 121-122 inquiry, 143-144 and management plans to mitigate risk, 121 preliminary analytical procedures, 138-142 recent examples of fraud, 124 red flags, 123 risk factor assessment, 144 risk factor identification, 137-144 skills and knowledge needed for, 121 types of fraud, 123-125 understanding client's strategies, 121 risks faced by, 118 role in subprime crisis, 635 sanctioned by PCAOB, 60 for Satyam Computer Services, C27 SEC constraints, 16 skepticism in financial and investment cycle, 410 skill sets, 27 state certification and licensing, 25 tips on detecting inventory fraud, 388 understanding client's business client's accounting principles, 135-136 company business risks, 135 company objectives and strategies, 135 company performance measures, 136 economic factors, 133 industry conditions, 133 nature of company, 134-135 regulatory factors, 133 understanding of information systems, 183 understanding of management process, 178 use of management assertions, 10-11 Auditors' defenses, 636 for client claims, 638 under Securities Act, 646-647 causation, 647 due diligence, 647 under Securities Exchange act, 651 in third-party claims, 642-643 Auditors' liability, 635; see also Legal liability changing landscape of aiding and abetting, 656-657 class action suits, 658-659 increased exposure to litigation, 654 liability caps, 649-660 and limited liability partnerships, 657 proportionate liability, 657-658 Racketeer Influenced and Cormpt Organizations Act, 656 recent changes, 660 Sarbanes-Oxley Act, 655-656 under common law, 637-643 to clients, 638 to third parties, 638-643 legal environment, 635-637 significant bases affecting, 654 under statutory law Foreign Cormpt Practices Act, 651-652 legislation involved, 644 Securities Act of 1933, 645-648 Securities Exchange Act of 1934, 648-651 Auditor's liability caps, 659-660 Auditors' report on intemal control over fin^cial reporting components, 200-201 definition, 200 modifications effect of adverse opinion, 204 effect of scope limitation, 204, 205 material weakness, 201-203 other situations, 204-206 standard report, 202 Auditors' reports date of, 456 dual date, 472 on elements, accounts, or items in statements, 565-566 on intemal control over financial reporting, 496 for special purpose frameworks, 567-568 Audit plan acquisition and expenditure cycle, 354355 audit strategy in., 148 considering work of intemal auditors, 84-85 cycle of accounts, 92 definition, 47, 82, 105 engagement partner, 82-83 finance and investment cycle, 451-452 goals of, 83-84 and management assertions, 14 nature and extent of, 83 production cycle, 407-408 physical inventory observation, 407 pricing and compilation, 407-408 professional standards in, 82-83 revenue and collection cycle, 315-316 risk assessment, 83 staffing the engagement, 84 time budget, 86-87 use of information technology auditors, 83 use of specialists, 83 Audit plan sample audit approach, 167 audit strategy, 167 company overview, 165 omitted procedures, 474 customers, supplies, and competitors, 165-166 summary of communications, 476-477 government influences, 165 Audit reports product pricing, 165 Government Accountability Office, 694-696 revenue and collection cycle use of materiality for, 90 controls, 166 Audit risk risks, 166 breakdown of, 127 Audit procedures definition, 118, 127, 212, 726-727 in allowable detection risk, 129 professional standards references, 116 versus auditing standards, 39-40 and sampling risk, 799-800 cautions on conduct of, 98 Audit risk model dealing with management assertions, 14 acquisition and expenditure cycle, 335 definition, 39 assessing components of, 270 and detection risk, 128 and audit sampling, 726-727 evaluating accumulated results of, 145 audit strategy in, 148 extended, 145 control risk, 128 on finding pending litigation, claims, and definition, 269 assessments, 460 definition of audit risk, 127 to gather evidence in acquisition and expenditure detection risk, 128 cycle, 332-334 in engagement planning, 269-270 for governmental audits, 690-691 inherent risk, 127-128 integrated, 172 insights produced by, 130 under lack of independence, 510-511 matrix approach to detection risk, 131 limited, 523 multiplication of risks, 128-129 to obtain evidence planned detection risk, 129-130 analytical procedures, 97-98 production cycle, 389 confirmation, 96-97 qualitative measures of risk, 130 inquiry, 95-96 Audit sampling inspection of documents, 93-95 attributes sampling, 726-730 inspection of tangible assets, 95 compared to sampling, 716 observation, 95 conditions for, 726 recalculation, 97 definition, 726 reperformance, 97 documenting procedures, 736 scanning of documents, 95 dual-purpose tests, 734 omitted, 474 evaluating results, 736 in Parmalat case, C20 for intemal control, 726 purpose of, 90 overview, 733 related to financial reporting, 179 performing reliance on intemal control, 175 determining sample size, 734-735 substantive procedures, 49 sample items measurement, 735 for understanding intemal control, 185 sample items selection, 735 Audit program, 47,149 planning stage, 734 Audit reporting rate of deviation, 726 on consistency, 511,512-513 in substantive procedures, 726 on departures from GAAP, 504506 summary of sampling risks, 733 elements of tolerable misstatement, 726 conformity with GAAS, 497 variables sampling, 730-733 matters affecting audit or client, 498 Audit Sampling Guide (AICPA), 130, 758, 772, 802, unusual aspects of audit examination, 816,819 497^98 Audit services, 18-19 on financial statements and related disclosures, 496 Audit strategy future of, 523-524 basis for preparing audit plan, 149 and General Motors problems, 494495 definition, 148 on going-concem uncertainties, 511,513-514 establishing, 148-149 on intemal control over financial reporting, 496 example, 167 justified departures from GAAP, 511, 514515 Audit strategy memorandum, 148-149 on lack of independence, 510-511 Audit team, 27 miscellaneous information, 522-523 brainstorming by, 143 nonpublic companies, 544-545 collecting and evaluating evidence, 50-53 other than standard report, 503 computerized tests of controls purpose, 497-498 auditing around the computer, 857 reissued report, 520 audit through the computer, 857-858 required supplementary information, 523 benchmarking, 862 Sarbanes-Oxley Act requirements, 496 parallel simulation, 860-861 scope limitation report, 507-510 program-embedded techniques, 858-860 standard report, 498-502 simulated data techniques, 861-862 summary of issues, 526 considerations in computerized processing types, 518 existence of systematic vs. random errors, association with financial statements, 841-842 519-520 inappropriate access to files, 842 comparative statements, 520-521 lack of audit trail, 842 emphasis-of-a-matter paragraphs, 512 output errors, 841 group financial statements, 512,516-517 reduced human involvement, 842 simimary financial statements, 521-522 disagreements in, 47 updated report, 520 effect on intemal control of computerized Audit report release date, responsibilities following systems, 842-843 communications on govemance, 475-476 fi^ud only in financial statements, 125 management letter, 476

Index

15

Auditing standards; see also Generally accepted auditing standardsCont. on independent audit, 145-146 indirect-effect noncompliance, 147 on materiality, 88 multiple sets of, 40 new, 77-78 on risk of material misstatement, 126 mle-making bodies, 40 for special purpose frameworks, 567 Auditing Standards No. 3 on audit documentation, 104 No. 5 on intemal control, 50, 442 No. 5 on public company audits, 199-200 No. 5 on reporting requirements, 200-201 source of, 38 Auditing Standards Board, 14,40, 524, 609 on audit evidence, 91 development of standards, 38 and fundamental principles, 40-42 on management assertions, 11 origin and functions, 1 In reporting for nonpublic companies, 544 Statement of Position 09-1, 572 Audit marks and explanations, 107 Audit of cash, 231-251 accounting cycles, 231-232 cash disbursements control activities, 235 risk of material misstatement, 236 tests of controls, 235 cash receipts control activities, 232-234 tests of controls, 234 evidence to test cash bank reconciliation, 237 bank statements, 239-240 canceled checks, 237-239 cash disbursements joumal, 237 cash receipts joumal, 236-237 extended procedures to detect fraud analyze mix of cash and checks, 249 count and recount petty cash, 248 covert surveillance, 249-250 document examination, 249 examine endorsements on checks, 248 expenditure analysis, 250 horizontal and vertical ^alysis, 250 inquiry, 249 marked coins and currency, 248 measure deposit time lag, 249 net worth analysis, 250 reasonableness tests, 250 retrieve customers' checks, 248 procedures bank reconciliation, 240-244 proof of cash, 245-246 schedule of interbank transfers, 244-245 professional standards references, 220 ways to detect fraud case of missing petty cash, 246-247 laundry money skim, 247 Auditor independence, 589; see also Independence Auditors; see also Certified public accountants assurances to imderwriters, 645-646 basis for inherent risk assessment, 131 causes of client losses, 636 certification requirements, 26 chartered accountants, 25 companies free to change, 79-80 confidentiality of client information, 146 deceived on inventory, 387-388 decision not to use confirmation, 285 direct personal knowledge as evidence, 51 education requirements, 24

identifying controls to test, 193 inspection of stockholders' equity, 427 intemal control communication, 206-207 management letter, 206 managing identified risks, 178 need for specialized skills, 85 for new clients, 84 performing tests of control, 193-196 preliminary assessment of control risk, 191-193 problems with end-user computing, 864 reasons for evaluating intemal control assess risk of material misstatement, 174 effectiveness of control, 172-174 identify fi*aud risk, 172 reassessment of control risk, 196 statistical approaches for variables sampling classical variables sampling, 796 monetary unit sampling, 796 understanding client's intemal controls decision on testing controls, 190-191 documentation of controls, 190-191 focus on significant accounts, 185 identifying controls to test, 185-187 identifying entity-level controls, 185-187 identifying transaction-level confrols, 186-187 intemal control questionnaire, 188-190 prior to engagement, 185 understanding materiality, 48 understanding of control activities, 179-180 use of materiality, 90 walkthrough of computerized transactions, 840-841 work in production cycle, 379 work on bank reconciliation, 234-244 Audit through the computer advantages, 857 evaluate effectiveness of controls, 858 significant controls, 857 Audit timeline audit completion date, 457 audit report release date, 46 date of the auditors' report, 456 date of the fmancial statements, 456 interim testing, 456 schematic for, 456 subsequent events, 473 subsequently discovered facts, 457,473 Audit trail on computer, 102 defmition, 99 in end-user computing, 865 existence of, 857 from information systems, 183 lack of, 842 Audit work date of, 107 interim, 86 tests of controls and timing of, 755 year-end, 86 Aurora Foods, Inc., 319 Authority for intemal control, 176 Authorization of cash disbursements, 235 of credit, 276 to execute transactions, 180 of expenditures, 325 in finance and investment cycle, 423 of investments, 419 of securities offerings, 416 of transactions, 230 Authorization and approval controls, 851 Automated application controls, 849-851; see also Computer controls definition, 843 methods of testing, 859 Automatic terminal logoff, 848, 865

16

Index Index

17

Automobile industry Car Allowance Rebate Plan, C12 rise and fall of General Motors, CI1-CI3 Auto Parts & Repair, Inc., 334 Availability of trust services, 573 Available-for-sale securities, 431

B
Background checks, 230-231 Baddeloo, Marlene, 7 Bagger, Stein, 269 Bains, Jaswindes, 357 Baker Hughes Inc., 148 Bakker, Jim, C5-C9 Bakker, Tammy, C5-C8 Balance assertions for revenue and receivables, 270 Balance sheet, management assertions on, 12 Balance sheet ratios, 164 Banco Espirito Santo, 634 Bank Administration Institute, 240 Bank confirmation letter, 240-242 Bank examiners, 5,23 Bank of America, 243,414, 717 in Parmalat case, C20 Bank of New England, 634 Bank reconciliation, 230,233 in audit evidence, 237 in audit of cash, 240-244 audit team work, 243-244 cutoff bank statement, 23 dangers of, 240 electronic audit confirmation, 243 procedures, 243 proof of cash, 245-246 vouching deposits in transit, 243 Bankruptcy General Motors, 495, C12 and going-concem uncertainties, 514 Laventhal & Horwath, C8-C9 Lehman Brothers, 16 Parmalat, C20 PTL Club, C9 Banks Check Clearing for the 21st Century Act, 245 loan covenants, 413 Bank statements, 238-239 Banner Corporation, 424 BarChris Construction Corporation, 646 Bar codes for inventory count, 384 Barrionuevo, Alexi, C2n Barron's, 137 Baseball cards, 7 Baseline, 862 Basic allowance for sampling risk, 808-809 Batch processing, 845-846 Batch totals; 851 Bay Area Laboratory Cooperative, 869 BDO Consulting, 126 BDO Seidman LLP, 619, 633-634 Beazer Homes USA Inc., 122 Beckstead and Watts, LLP, 36-37, 60 Bell, Kristen, 375 Bellman, Eric, C29

Big Four accounting firms, 6 decrease on consulting services, 21 in India, C26 litigation involving, 634 nonaudit services, CI 7-C18 origin of, 18-19 PCAOB inspections, 455 PCAOB inspections on computer controls, 840 report on deficiencies, 59-60 revenues in 2010, 19 on use of intemal auditors, 85 Big GAAS/Little GAAS, 39 Bill and hold, 297 Billing, 176 Bill of lading, 276, 322 Bill of materials, 371 BJ's Wholesale Club, Inc., 868 Black, Conrad, 124 Blank form confirmation, 285 Blank purchase order, 325 Blind purchase order, 322 Block selection, 722 in attributes sampling, 793 in nonstatistical attributes sampling, 773 in nonstatistical sampling, 819 Bloomberg Businessweek, 137 Bloomingdale's, 385 Blue sky regulations, 644 Blumenthal, Richard, 688 Board of directors and intemal control, 176 minutes of meetings, 137,138 Bodner, Martin, 356 Boeing Company, 388 Bologna, G. J., 222n Bond indenture, 425 Bond-linked issue premium stmctures, CI8 Bond payment default, C20 Bonds, 416 recording, 417 Boone, J. P., 660 Borders Group, Inc., 466 Boston Scientific Corporation, 424 Brainstorming, for risk assessment, 143 Bransten, Eileen, 717 Braswell, M., 143 Brazel, J. F., 143 Breach of contract, 637, 638 cause of client losses, 636 definition, 637 Bribery, 322, C26 of employees, 125 Bridge workpaper, 191-192 Bristol-Myers, 273 British Airways, 842, 853 Brown, Cheryl, 684 Bmell, Samuel, CI Bryant, Kobe, 375 Budget comparisons, 141 Budliov, Barry, 290 Buffett, Warren, 116 Burden of proof in common law liability, 638, 639 recent changes, 654 under Securities Act of 1933,646 under Securities Exchange act, 650 Bush, Loretta Fredy, 135 Business environment, 2 Business expansion, 136 Business magazines, 137 Business reporting, 572 Business risk, 2 auditor assessment of, 121 definition, 118 in inherent risk assessment, 136 kinds of, 178

management plans to mitigate, 121 types of, 118 Business risk analysis, 682 Business Today, C27, C29

c
CAAT; see Computer-assisted auditing techniques Cablevision, 319 Calculated liabilities and credits, 417 Campbell Soup Company, 649 Canadian Institute of Chartered Accountants, 557 Attest Engagements on Greenhouse Gas Emissions Information, 574 WebTrast Service, 573-574 Canceled checks, 237-239 examination of endorsements, 248 Capital, raising, 416-417 Capital budget, 416 Capitalizing, 319 Capital leases, 413,414 Capital markets, effects of Sarbanes-Oxley Act on, C23 Capital stock, 427 Car Allowance Rebate Plan, C12 CardSystems, Inc., 868 Carpenter, T. D., 143 Cash checks and mix of, 249 controls over, 231 liquidity of, 231 methods of receiving, 232-233 Cash basis framework, 566 Cash disbursements control activities, 235 intemal control questionnaire, 265-266 tests of controls, 235 vouching, 329 Cash disbursements joumal, 237 Cash flow analysis, 141-142 Cash flow forecast, 415-416 Cash for Clunkers, C12 Cash management fidelity bonds, 233 relevant assertions, 236 Cash receipts control activities, 232-234 recording, 233 tests of controls, 234 Cash receipts joumal, 236-237 Cash receipts listing, 278 Cash receipts processing, 232 intemal control questionnaire, 265 Caskill, Tyler, C29 Castarella, J. R., 660 Castellena, J. F., 177 Categorical imperative, 592 Causation defense, 638, 647 Cayman Islands account, C20 Celestica Inc., 424 Cendant, 124, 634 Census Bureau, 572 Center for Audit Quality Alert 2009-55, 572 Center for Medicare and Medicaid Services, 166 Central Bank V. First Interstate Bank, 656 Central Bureau of Investigation, India, C27 Central limit theorem, 812 CEOs coercing CFOs into fi^ud, 125 examples of fraud by, 124 and strong control environment, 228 CERT Coordination Center, 867 Certification education requirements, 24 examination for, 24-25 experience required, 25

Benchmark, for calculating materiality, 88-89 Benchmarking, 862

Bernard L. Madoff Investment Securities, 2,45,411 Berra, Yogi, 453 Berton, Lee, 7 Best Buy, 458, 520-521

Best practices for brainstorming, 143

Beta errors, 716 Big bath, 414 Big Eight accounting firms, C17

global perspective, 25 by states, 25 summary of requirements, 26 types of, 23-24 Certified forensic accountant, 23 Certified ft^ud examiner, 23 Certified information systems auditor, 23 Certified information systems security professional, 23 Certified information technology professional, 23-24 Certified intemal auditor, 23 Certified management accountant, 23 Certified public accountants, 21, 23 core competencies required, 27 education requirements, 24 independence, 8 services performed by, 8 state certification and licensing, 25 uniform mobility, 25 Certified public accountants exam, 121 Chain of custody, 230 Chain of custody of evidence, 700 Channel stuffing, 273 by Vitesse Semiconductor Corporation, 274 Characteristic of interest, 720 Chartered accountants, 25 Charter International, 514 Chazen, C., 61In Check Clearing for the 21st Century Act, 245 Check digits, 851 Check forgery, 221, 237-238 Check kiting, 244245 Checks, third-party, 360 Check 21, 245 Chief financial officers, coerced into fraud, 125 China Construction Bank, 619 Chiquita Brands International Inc., 148 Chisholm Bierwolf Nelson & Morrill LLC, 517 Chrysler Corporation, 495 Chung Mong-koo, 124 Church, B., 59 Circumstance-imposed scope limitations, 507-508 Citibank, 423 Citigroup, Inc., 414,471, 867 CIT V. Glover, 640 Civil liability Securities Act of 1933, 645-646 Securities Act vs. Securities Exchange act, 650 Securities Exchange Act of 1934,650 Clancy & Company PLC, 517 Class Action Fairness Act of 2005, 658-659 Class action suit, 658-659 co-defendants with Arthur Andersen, C4 Classical variables sampling definition, 731, 796 difference estimation, 817 evaluating sample results if account balance misstated, 817 precision interval construction, 815-816 significance of precision interval, 815 mean-per-unit estimation, 812 methods central limit theorem, 812 normal distribution theory, 812 versus monetary unit sampling, 817-818 planning stages individually significant items, 812 stratification of population, 812 ratio estimation, 817 sample items measurement, 815 sample selection, 815 sample size determination calculating, 814-815 formula, 812 risk of incorrect rejection, 813-814 standard deviation, 814 Classification, 13-14 Classification assertion, for payroll cycle, 195

Clearing accoimt, 360,458 Client acceptance or continuance cases of rejection, 78 changes of auditors, 79-80 contact with predecessor auditor, 79-80 evaluation, 137-138 filings with SEC, 80 policies for, 79 and predecessor auditor, 78 retention reviews, 79 search for potential problems, 79 Client advocate, serving as, 608 Client-imposed scope limitations, 507, 508 Client losses from breach of contract, 636 from fr^ud or misrepresentation, 636 Client relationships, 57 Client representation, 463 Clients auditor liability to, 638 auditor search for problems with, 79 auditor understanding of nature of business, 47 for risk assessment, 49,133-136 confidentiality of information about, 146 documents prepared by, 94 engagement letters for, 82 financial involvement with, 601 going-concem uncertainties, 465--466 integrity of management, 78-79 inventory-taking instructions, 382-383 loans to or from, 601 opinion shopping, 568 mle on confidential information, 610-611 summary of auditors' liability, 652-654 termination letters, 82 whistle-blowing on, 610-611 Clinton, Bill, 869 Cloud computing, 99-100, 866 Clouse, Thomas, 377 Coalition to Advance the Protection of Sports Logos, 419 Code of Ethics for Professional Accountants, 24 Code of Professional Conduct (AICPA), 43, 80, 558 consequences of violating public regulatory discipline, 618-619 self-regulatory discipline, 617-618 independence, 598-603 advocacy, 602-603 familiarity threat, 601 management participation, 602-603 on independence, 589 Rule 203,514-515 Codes of conduct, 230 Codes of ethics, international convergence, 616 Codes of professional conduct, 590 Cohen, J., 476 Collectability of accoimts receivable, 173 review for, 289-290 CoUins, Susan, 688 Collins & Aikman, 319 Collusion, among employees, 222 Colombian terrorist group, 148 Colonial BancGroup, 424 Comfort letters, 646 Commissions, 614 AICPA rules, 514615 definition, 614 as impairment of independence, 615 permitted, 614 Committee of Sponsoring Organizations, 185,501, 502, 552, 771 composition of, 119 definition of intemal control, 170 integrated intemal control framework, 175-184 Internal Control over Financial Reporting, 176

Committee on Accounting Procedures, 609-610 Committee on Capital Markets Regulation, 659-660 Common law, 636 Common law liability audit failures, 637 auditors' defense in client claims, 638 to clients breach of contract, 638 fr^iud, 638 gross negligence, 638 ordinary negligence, 638 legal precedents, 638-641 plaintiffs in, 637 summary of, 65 third-party liability, 638-643 tort actions, 637 Communication in ERM, 120 in intemal control, 183-184 Companies auditor understanding of management personnel, 134 operating characteristics, 134 organizational stmcture, 134 significance of investments, 134 sources of eamings, 134 sources of funding, 134 business risks, 136 employee hotlines, 228 ethics officers, 228 going-concem status, 142 identification of related parties, 134 indicators of noncompliance, 147 intemal control and size of, 177-178 misstatements by, 273 objectives, 118,136 overview of fraud types, 125 performance measures, 136 perils of related-party transactions, 135 risks faced by, 118 selection of accounting principles, 135-136 separation of duties in, 180-181 strategies, 118,136 Comparative financial statements reporting on, 520-521 review and compilation service, 561-562 Comparison program utilization, 860 Compensating control, 193,421 Competence and capabilities and due care, 44-45 from education, 43 of intemal auditors, 84 Competitive bids, 321-322 Competitors, fraud pertaining to, 125 Compilation, 19 Compilation and pricing procedure, 380 Compilation and review services, liability for, 643 Compilation engagement accountants' responsibilities, 560 plain-paper engagements, 561 purpose, 560 types of reports, 560-561 Compilation services, and fraud, 561 Completeness definition, 12-13 of recorded sales, 277 risk level of, 128 Completeness assertion acquisition and expenditure cycle, 328-330 about account balances, 329 search for unrecorded liabilities, 329-330 versus existence assertion, 798 for inventory count, 383 for long-term liabilities, 425 for payroll cycle, 195 production cycle tests of controls, 379,380 in purchasing and disbursement, 182

18

Index
extent of use, 100 need for specialized skills, 101 organizational structure, 100 evaluation criteria cloud computing, 99-100 initiation of transactions, 99 potential for error or fraud, 99 potential management supervision, 99 temporary transaction trails, 99 uniform processing, 99 Computerized processing systems and assessment of intemal control, 840 audit team walkthrough of transactions, 840-841 automated application controls, 843 cloud computing, 866 computer operators, 847 control group, 847 control issues related to, 845 control risk assessment, 855-856 data conversion operators, 846 effect on understanding of intemal control, 842-843 end-user computing, 864866 existence of systematic vs. random errors, 841-842 general controls, 843 inappropriate access to files, 842 lack of audit trail, 842 librarians, 846-847 objectives of operations controls, 847 outsourcing, 866 points of potential misstatement, 856 possibility of input errors, 841 and processing failures, 847 professional standard references, 838 reduced human involvement, 842 separation of duties, 847 systems analysts, 847 testing controls, 857-862 Computerized sales and accounts receivable, 277 Computer operations controls batch processing, 845-846 end-user computing data entry controls, 865 limiting concentration of functions, 864 processing controls, 865 separation of duties, 864 systems development and modification, 865-866 objectives, 846 purpose, 846 real-time processing, 846 Computer operators functions, 846 separation of duties, 847 Computer processing complexity, 857 Concurring partner review, 470 Condensed financial statements, 521 Conference Board, 125 Confidence level, 724725 Confidential client information, 146 AICPA mle, 610-611 breach of, 610 privileged information, 610 and whistle-blowing, 610-611 Confidentiality of tmst services, 573 Confirmation of accounts/notes receivable auditor's decision not to use, 285 blank form confirmation, 285 controlling mailing of, 287-288 dealing with misstatements, 288 dual-purpose nature of, 292-293 electronic process, 287-288 evidence of existence, 285 negative confirmation, 285-287 performance date, 289 positive confirmation, 285-287 procedures for interim date, 289 response to positive confirmation, 289 of accounts payable, 330 applications, 96 of capital stock, 427 cautions on, 98 by computer, 103 of evidence, 96-97 for notes and bonds payable, 425-426 revenue and collection cycle, 291 Confirmation letter, 96-97 Conflict of interest, 3 at Ernst & Young, 16 examples of, 607 occasions for, 15-16 Congressional Joint Committee on Taxation, 14 ConocoPhilips, 424 Conrad, Kent, 688 Consequences of business decisions, 3 Consignment goods, 386 Consistency in auditors' report, 511, 512-513 Consolidata, Inc., 593 Consolidated Edison, Inc., 417,418 Constmctive fraud, 637, 639 Consultants, fraud pertaining to, 125 Consulting services, 9 regulation of, 20-21 Consulting Services Executive Committee, 609 Consumer Federation of America, C25 Context, 8 Contingency, 459 Contingency fees, 615 Contingent fees AICAP mles, 612 definition, 612 Contingent liabilities, 459-461 Continuing audit files, 104; see also Permanent files Continuing professional education, 24, 43 Contra-assets, 458 Contract, engagement letter as, 82 Contract cost padding, 125 Contractual agreements, 553 Contra-liabilities, 458 Contributory negligence, 638 Control activities acquisition and expenditure cycle, 325 audit team understanding, 179 for cash disbursement, 235 for cash receipts, 232-234 compensating controls, 193 definition, 178 documentation of, 179 at Enron, 179 in ERM, 120 finance and investment cycle compensating control, 421 oversight or review, 421 problems with separation of responsibilities, 421 information processing activities, 181-182 payroll cycle control checking procedures, 361 intemal control questionnaire, 362 payroll report, 361 separation of responsibilities, 361 performance reviews, 180 physical controls, 181 to prevent and detect errors/fraud, 179-180 preventive controls, 179-180 principles related to, 179 in production cycle detailed check of activities, 376 separation of responsibilities, 376 revenue and collection cycle, 280 selection and development, 179-180 separation of duties, 180-181 spreadsheet goofs, 182 standards for audit teams, 179 testing, 179 test of operating effectiveness, 191 Control-checking activities, 325 Control environment audit committee, 177 flmction, 176 and management team, 176-177 principles, 176 and quality of eamings, 176-177 and size of companies, 177-178 survey items for assessing, 177 Control group, 847 Controlled reprocessing, 860 Control risk, 118, 127 attributes risk sampling for, 727-730 definition, 49,128 to determine tests of controls, 198 preliminary assessment, 191-193 bridge workpaper, 191-192 compensating controls, 192 reassessment, 196 in risk of material misstatement, 174 Control risk assessment, 727-728 acquisition and expenditure cycle account balances, 325 control activities, 325 custody, 325-326 entity-level controls, 325 periodic reconciliation, 326 summary of, 326 tests of controls, 326 in computerized environment audit team understanding, 855 focus on control procedures, 855 steps, 855 test operating effectiveness, 855-856 finance and investment cycle auditors' work on, 421 authorization, 423 control activities, 421 control over accounting estimates, 422 custody, 423 record keeping, 423 summary of, 424 payroll cycle, 361 production cycle account balances, 375 control activities, 376 custody, 376-377 direction of tests of controls, 379 effect on substantive procedures, 375 entity-level controls, 376 intemal control questionnaire, 377, 405^06 summary, 379 tests of controls, 377-378 revenue and collection cycle, 270 account balances, 279 control activities, 280 control considerations, 279-280 intemal control questionnaire, 280 simmiary of, 282 tests of controls, 280-282 Controls compensating, 193 in computerized processing systems, 845 entity-level, 185-187 acquisition and expenditure cycle, 325 in production cycle, 376 revenue and collection cycle, 275 identified for testing, 193 ongoing evaluation of, 184 physical, 181 tests performed on, 190-196 transaction-level, 186-187 Control system flowchart constmcting, 188-190 definition, 188 illustration of, 190 Control total reports, 852,853 Control totals, 852, 865 Convergence of standards, 40 Cookie jar reserves, 122,126 Cooper, Cynthia, 168, 318, 678 Coopers & Lybrand, 44, 368, C17 Copyrights auditor questions about, 333 custody of, 419 Coram, P. J., 524 Core competencies, 27 Corporate charters and bylaws, 137 Corporate culture at Enron, 179 Corporate govemance, new focus on, 571 Corporate social responsibility, 574 COSO; see Committee of Sponsoring Organizafions Cosourcing strategy, 680 Cost(s) comparisons in production cycle, 111 of compliance with Sarbanes-Oxley Act, 200 of inventory, 369 misstated, 319 Cost accounting assumptions of, 134 in production cycle overhead allocation, 373 records needed for, 372 standard vs. actual costs, 372 Cost accounting department, 360,373 Cost-benefit analysis of intemal control, 171 Coster, F. Donald, 37 Cost of goods sold, manipulation of, 369 Cost of goods sold ratio, 164 Cottrell, D. M., 390n, 715n Countrywide Financial, 124, 634 Covered members, 598 Covert surveillance, 249-250 Cover-up attempts in accounting, 229 Cowan, Alison Leigh, CIO Cox, Christopher, C23 CPA Candidate Bulletin, 25 CPA examination, 24-25 CPA firms audit services, 18 intemal audit services, 22 involved with PTL Club, C7-C8 as limited liability partnerships, 657 number of firms, CI 7-C18 mles on form of organization and name, 615-616 CPA Mutual Insurance Company of America, 636 Crawford, Robert M., Jr., 362 Crazy Eddie's, 369 Credit Alliance v. Arthur Andersen, 640, 654 Credit card fraud, 868 Credit check files, 111 Credit granting, 275-276 Creditors, fraud pertaining to, 125 Credit sales, 276 Cressey, D. R., 225n Crime Investigation Department, India, C28 Criminal liability under Securities Act of 1933, 647 imder Securities Exchange Act, 651 Cross-referencing, 106 Cullison, Kelly, CI5 Cuomo, Andrew, 634 Current assets report; see Form 8-K Current files and audit plan, 105 composition of, 105 evidence documentation, 105-106 planning documentation, 105 Current ratio, 164 CUSIP number, 420 Custody, 230 and access to blank forms, 326 of assets, 180, 325-326

Index
of blank checks, 235 of cash, 232 in finance and investment cycle, 423 fraud in, 377 of investments, 419 in payroll cycle, 358 in production cycle, 376-377 transfer of, 276 Customer master file, 841 Customer orders, 275-276 Customer order transaction file, 840-841 Customer retums and allowances, 273-274 Customers authorizafion of credit, 176 billing, 176 delivery of goods/services to, 176 fraud pertaining to, 125 Customers' checks, retrieving, 248 Customer statements, 279 Cutoff definition, 12-13 for payroll cycle, 195 Cutoff bank statement, 243 Cutoff date, 13 Cutoff errors, 12-13, 290 Cutting, R. T., 177 Cybercrimes, 866-867 Cycle counts, 385, 390 Cycles of accounts, 92

Completeness assertionCont. revenue and collection cycle, 270 for sales, 276 Completeness direction, 195 dual-direction tests of controls, 288-289 Complexity, 2 Complex transactions, 414 Compliance with auditing standards, 609 costs of Sarbanes-Oxley Act, 200 with ethical requirements, 80-82 with independence requirements, 80-82 with management directives, 682-683 in management objectives, 170 Compliance attestation conditions for, 553 contractual obligations, 553 federal and state regulatory requirements, 553 major steps, 553 risk considerations, 553 types of reports, 553, 554 Compliance audits fraud in, 697 by intemal auditoi^, 684 Compliance controls, 170 Component auditors, 517 function of, 516-517 Computer abuse; see Computer fraud Computer-assisted auditing techniques, 97,278 for analytical procedures, 103 for confirmation, 103 for document examination, 103 for fraud investigation, 103 for recalculation, 102-103 for scanning, 103 software packages, 101-102 Computer Associates, 273 Computer Associates 28 International Inc., 124 Computer controls automated application controls, 854 definition, 849-851 input controls, 851-852 processing controls, 852 general controls access to programs and data control, 847-849 computer operations controls, 845-847 hardware controls, 843 program change controls, 845 program development controls, 844-845 summary on, 849, 850 implementation of, 857 output controls control total reports, 853 master file change, 853 ou^ut distribution, 853 review for reasonableness, 853 Computer forensics, 869 Computer fraud and computer forensics, 869 cybercfimes, 866-867 hackers, 868 key findings on, 867 preventive, detective, and damage-limiting controls, 868-869 at ProQuest, 867 recent incidents, 867 types of activities, 867 Computer-generated purchase orders, 325 Computer-initiated transactions, 99 Computerized information processing, 181-182 Computerized payroll control f\mctions, 362 service organizations for, 362 Computerized processing environment, 181 computer as audit trail, 102 effect on audit plan computer-assisted techniques, 101-103 data availability, 101

D
Daewoo, 124 Dangling debit theory, 123 Data availability of, 101 computer operations controls, 847 Databases, 137 Data comparisons, 865 Data conversion operators, 847 Data encryption, 868 Data entry and formatting controls, 851 Data entry controls, end-user computing, 865 Data files, revenue and collection cycle, 277-279 Data mining, 101 Data warehousing, 101 Date of audit work, 107 Date of the auditors' report, 456,499 lag between date of financial statements and, 473 and subsequently discovered facts, 472 Date of the financial statement, 47-48,456 lag until date of auditors' report, 473 and subsequent events, 470-472 Daugherty, B., 59n Davidson, Laurence Viele, 124 Days' sales in inventory ratio, 164 Days' sales in receivables ratio, 164 Debt and equity accounts, 425 Debt financing, 415 Debt-to-equity ratio, 164 Decision makers, assurance services for, 8 Decisions affecting business risk, 2-3 and information risk, 3 Deep pockets theory, 636, 657 Deerfield College, 684 Defalcation, 126 Defective products, 125 Deferred items, 458 Deficiencies communication of, 206-207 material weakness, 201 reporting, 184 significant vs. material weakness, 199 types of, 198-199

110

Index
Discount pricing, 368 Discovery sampling, 773 using AICPA tables, 760 Discriminant Z-score, 164 Disraeli, Benjamin, 633, 714 Division of responsibilities, 516-517 Documentary evidence, 51 Documentation of analytical procedures, 140 of attributes sampling, 771 of audit sampling procedures, 736 in computerized processing, 844-845 of control activities, 179 of intemal control control system flowchart, 188-190 decision on tests of controls, 190-191 intemal control questionnaire, 188, 189 narrative description, 188 long-term debt and interest expense, 426 of risk assessment, 146 of sampling procedures, 725 of variables sampling, 820 Document examination by computer, 103 to detect fi-aud, 249 in tests of controls, 194 Documents formal authorization, 94 inspection of prepared by client, 94 prepared by outside parties, 93-94 scanning, 95 tracing, 94 vouching, 94 ordinary, 94 Dollar Tree Stores, Inc., 868 Dooley, James T., 387 Doran, John P., 414 Dortch, Richard, C7, C9 Doty, James R., 1, 587, 603, C28 Double billing, 125 Doubtful account ratio, 164 Dromm, Kenneth, 362 Dmgstore.com, 381 Dual control, 419 Dual date, 472 Dual-direction tests of controls, 195 of inventory count, 383 revenue and collection cycle, 281-282 Dual-purpose procedures, 292-293 Dual-purpose tests, 734 definition, 196 Due care, 43-45, 80 and competencies and capabilities, 44-45 definition, 44 in principles of conduct, 596-597 Due diligence defense, 647 Dun & Bradstreet, 141 Duncan, David, CI, C2 Dupont Corporation, 471 DWS Retail Ventures, Inc., 868 E-commerce growth of, 572-573 lack of security, 572-573 Economic factors, in inherent risk assessment, 134 Economic motivation, 225-226 EDGAR database, 80 Education for competence and capabilities, 43 required for certified public accountants, 24 Effectiveness loss in attributes sampling, 730 in variables sampling, 732 Efficiency loss in attributes sampling, 730 fi-om risk of incorrect rejection, 813 ' ta in variables sampling, 732 ' Egocentric motivation, 225 Ehrlich, Paul, 838 Eining, M. M., 225n Electronic audit confirmation, 243 Electronic confirmation process, 287-288 Electronic data interchange, 276, 321 Electronic product codes, 384 Electronic signatures, 101 Electro Scientific Industires, 387 1136 Tenants' Cooperative v. Max Rothenberg & Company, 643 Elliott, J., 122n Elliott, R. K., 222n, 225n El Paso, 411 Embedded audit modules, 859 Embezzlement, 125 definition, 126, 222 Emmons, D. W., I65n Emphasis-of-a-matter paragraphs, 523 in auditors' report, 512,518 Employee assistance programs, 228 Employee bribery, 125 Employee fraud, 125 collecting evidence of, 230 definition, 126, 222 direct-effect illegal acts, 222 in down economy, 221 at Electro Scientific, 387 embezzlement, 222 and errors, 222 examples, 221,223, 224, 225, 226, 227, 231, 233 financial scope of, 223 fi-audster characteristics, 223-224 fraud triangle motivation, 225-226 opportunity, 226 rationalization, 227 at Kraft Foods, 322 prevention of difficulties, 227-228 employee monitoring, 228-230 enforcement, 230-231 integrity by example, 230-231 intemal control activities, 228-230 managing people pressures, 228 professional standards references, 220 red flags, 222-223 sources of, 221-222 white-collar criminals, 223-224 Employee hotlines, 228 Employees collusion among, 222 monitoring to prevent fraud, 228-230 Employee W2 reports, 358, 361 Ending inventory, overstated, 369 End-of-period adjustments, 174 End-user computing audit team issues lack of documentation and resting, 864 lack of physical security, 864 Errors, 753 lack of separation of duties, 864 definition, 126, 222 limited computer knowledge, 864 versus fraud, 123 control considerations potential for, 99 computer operations controls, 864 preventive controls for, 179-180 data entry controls, 865 Escott V. BarChris Construction Corporation, processing controls, 865 646, 654 systems development and modification, 865866 Ethical behavior, 590 spreadsheet and data controls, 866 Milgram's experiment, 590 Engagement, unable to complete, 608 Ethical codes of conduct, 594595 Engagement letter, 636 Ethical decision process, 590-591 for agreed-upon procedures, 550 Ethical problem, 590 definition and purpose, 82 Ethical requirements example, 81 compliance with, 80-82 intemal control considerations, 82 for quality control, 56 and termination letters, 82 Ethical values, 176 Engagement partner, 82-83 Ethics Engagement performance, in quality control, 57 definition and elements of, 589-590 Engagement planning, 76-107 enforcing agencies, 611 audit documentation, 104108 problem situation, 590 audit plan, 86-87 Ethics officers, 228 audit team disagreements, 47 Evaluation decision in attributes sampling, 768-769 in computerized environment, 99-103 Event identification, in ERM, 120 computer as audit tool, 101-103 Events effect on planning, 100-103 completeness and cutoff, 12-13 considering work of intemal auditore, 84-85 management assertions about, 10 for Enron, 77 production cycle, 379 materiality, 87-90 valuation and allocation, 12 pre-engagement activities, 77-82 Evidence; see also Audit evidence procedures for obtaining evidence, 90-98 appropriate, 50, 51 PCAOB requirements, 197-198 audit procedures for obtaining professional standards references, 76 analytical procedures, 97-98 staffing, 84 confirmation, 96-97 steps, 47 inquiry, 95-96 time budget, 86-87 inspection of documents, 93-95 time for, 47-48 inspection of tangible assets, 95 imderstanding client's business, 47 observation, 95 use of information technology auditors, 85 recalculation, 97 use of specialists, 85 reperformance, 97 Engagement quality reviewer, 470 types of, 92 Engagement quality reviews, 470 audit trail, 99 Enhanced business reporting, 572 chain of custody of, 230 Enright, Guy, 610 composition of, 4 Enron Corporation, 2,3,36,38,56,58,78,124,135, concerning fraud, 230 169,416,493, 514, 521, 589, 594, 598, criteria for evaluating, 5 604, 654, 655, 657, 658, 659, CI, C23 criteria for gathering, 51-52 and Arthur Andersen, 43, 77, 117, C4 definition, 50 corporate culture, 179 and detection risk, 52 financial statements, 14 documentary, 51 special purpose entities, 410 extemal, 51 Enterprise risk management extemal-intemal, 51 definition, 119 intemal, 51-52 elements of, 119-120 key characteristics, 53 manager use of, 178 management assertions, 51 paralleling auditing standards, 121 from management assertions, 14 Enterprise risk management assessment, 8 persuasive, 50-51 Entity-level control protection in fraud cases, 700 acquisition and expenditure cycle, 325 purpose of obtaining, 4-5 and assessment, 187 quality hierarchy, 51-52 definition, 185 questionable at Parmalat, C20 identifying, 185-187 relevant and reliable, 51 in production cycle, 376 and risk of material misstatement, 49 revenue and collection cycle, 275 substantive procedures to evaluate, 50-51 Environmental audit, 685 sufficiency, 52 Equity Funding Corporation of America, 867 used by governmental auditors, 5 Equity method of accounting, 431-432 verbal, 52 ERM; see Enterprise risk management verified by computer, 102-103 Ernst & Ernst v. Hochfelder, 649, 654 Examination, 548 Emst & Whinney, C17 in compliance attestation, 553 Ernst & Young, 52, 54, 60, 269, 272,455,466,472, of management's discussion and analysis, 554 520-521, 605, 611, 634-635, 659, 798, Exception, 753 839, C17 Existence, 12 and HealthSouth, C14, C15 altemative procedures to ensure, 289 indictment on tax shelters, CI8 of investments, 428 litigation against, 16 provided by confirmation, 285 rejection of client, 78 risk level of, 128 revenues 2010,19 of subsequent events, 471 Error correction and resubmission procedures, 852

Index

111

Delivery, 276 Dell, Michael, 454 Dell Inc., 172, 473 investigation by SEC, 174, 454 Deloitte, Heskins & Sells, C7-C8, C17 Deloitte & louche, 60, 299, 455, 495, 512, 514, 619, 634, C9, C17 client rejection, 79 hired by Fannie Mae, 839 rejection of client, 78 revenues 2010, 19 Deloitte Touche SpA, 660 Deloitte Touche Tohmatsu, 660 and Parmalat, C20 Denise L. Napier et al v. PricewaterhouseCoopers, 649 Denoncourt, Jake, C29 Department of Defense, 22 Department of Human Resources, 22 Department of Justice, 148 in aftermath of Andersen trial, C4 enforcement of Foreign Corrupt Practices Act, 652 Department of the Interior, 22 Department of the Treasury, 472 Departures from GAAP, 54-55, 503, 504-506 auditors' reports on adverse opinion, 504-505 materiality, 504 qualified opinion, 504 definition, 504 justified, 511,514-515 Departures fi^om GAAS, 503 Deposits in transit, 243 Deposit slips, 233 Deposit time lag, 249 Depreciation schedule, 332 Derivative securities, 429 for hedging, 120 Design deficiency, 198 Design effectiveness, 187 Destruction certificate, 423 Detection risk, 127, 799 allowable, 129 basic definition of, 732 definition, 52, 128, 730 matrix approach, 131 planned, 129-130 in revenue and collection cycle, 270-271 for significant risks, 145 Detective controls, 180 Development of standards, 38 Deviafion conditions, in attribute sampling, 753-754 Deviations, 753 quantitative evaluation of, 770-771 Difference estimation, 817 Digitized signature, 851 Diligence Inc., 610 Direct Brokerage, 656 Direct-effect illegal acts, 222 Direct-effect'noncompliance, 146-147 Direction of tests of controls completeness, 194 dual-direction, 195 occurrence, 194-196 in production cycle, 379 Disclaimer of opinion, 501 because of lack of independence, 510-511 definition, 55 and departures from GAAP, 503 on intemal control over financial reporting, 204 on intemal control, 199 and scope limitation reports, 508, 510 and unaudited financial statements, 519-520 Disclosure about fees, 605 for investments, 429-430 for special purpose frameworks, 568

Existence assertion accounts receivable, 283 for audit of accounts receivable, 270 in classical variables sampling, 812 versus completeness assertion, 798 for inventory count, 383 in nonstatistical sampling, 818 Exit conference, 687 Expanded-scope governmental auditing, 22, 689 Expectation gap, 636 Expectations, in analytical procedures compared with recorded amount, 139 developing, 138 investigate significant differences, 139-140 Expected misstatement defmition, 801 in nonstatistical sampling, 819 in sample size determination, 801-802 Expected population deviation, 759 in attributes szimpling, 758-759 in nonstatistical attributes sampling, 774 Expected rate of deviation, 734 Expenditure analysis, 250 Expenditures, capitalizing, 319 Expense accounts padding, 125 testing, 334 Expenses misstated, 319 prepaid, 330 recognizing, 318 Experience, 43 required for certification, 25 Explanation paragraphs, 512 Explanatory paragraph, 55 Extended audit procedures, 248; see also Fraud detection defmition, 145 finance and investment cycle fraud off-balance sheet financing of inventory, 433^34 revenue forecasts, 435-436 shell corporation, 434-435 unregistered sale of securities, 432-433 for fraud in acquisition and expenditure cycle, 336-339 phony doctors, 338-339 printing money, 337-338 for fraud in production cycle, 389-391 revenue and collections cycle fraud, 292-298 Extended records, 859 extensible Business Reporting Language, 572; see also XBRL Extent of tests performed, 129 Extemal auditing, 679 Extemal auditors, 21 consideration of woiic of intemal auditors, 84-85 control risk assessment, 128 evaluation of control environment, 228 evidence provided to, 4 financial reporting objectives, 170 Extemal evidence, 51, 243 Extemal-intemal evidence, 51 ExxonMobil, 369

E
E. S. Bankest, 633-634 Eamings channel stuffing, 273 company sources of, 134 Eamings before interest and taxes/total assets ratio, 164 Eamings management, 458 eBay, 7, 183, 377 Ebbers, Bemie, 124, 168 Echo check, 843

F
Factor, accounts receivable, 290 Fair value measurement auditing, 429-432 classification of marketable securities, 431 confmnation, 431 disclosure, 430 with equity method of accounting, 431-432 hierarchy of, 429

112

Index
lease accounting, 412-413 loan covenants, 413 not disclosing information, 415 presentation and disclosure, 414 related-party transactions, 413 intemal control questionnaire, 448-450 PCAOB inspections, 437 professional standards references, 409 recent fmancial restatements, 410-411 substantive procedures financing activities, 425-427 investing activities, 428-432 typical activities debt and stockholders' equity, 415 financial planning, 415-416 investing transactions, 417-420 major fiinctions, 415 number of accounts, 415 periodic reconciliation, 417 raising capital, 416-417 record keeping for long-term liabilities, 417 Financial Accounting Standards Board, 515, 523, 609-610 on disclosure for investments, 429 on expense recognition, 318 Financial crisis, auditor's' role in, 635 Financial disclosure, 414 Financial distress ratios, 164 Financial Executives Institute, 170 Financial Executives magazine, 413 Financial forecasts, 550-552 Financial instruments, complicated, 428 Financial instruments, valuation of, 422 Financial literacy, 177 Financial planning, 415-416 Financial projections, 550-552 Financial ratios balance sheet ratios, 164 financial distress ratios, 164 operations ratios, 164 Financial relationships, 44 Financial reporting; see also Intemal control appropriate framework, 549 Auditing Standards Board requirements, 11 auditors' report on intemal control over, 200-206 on completeness and cutoff, 12-13 cover-up attempts, 229 at Dei! Inc., 174 effects of Sarbanes-Oxley Act on, C23 end-of-period adjustments, 174 on existence and occurrence, 12 fraudulent, 122-123 function, 10 by intemal auditors, 21 intemational standards, 54 at Krispy Kreme, 172-173 in management objectives, 170 management's annual report on intemal control over, 199 organizations designed to improve, 170 overview of requirements, 568 PCAOB requirements, 11 presentation and disclosure, 13-14 in real world, 14 reasons for evaluating intemal control over, 172-174 reports on intemal control over, 496 on rights and obligations, 12 Sarbanes-Oxley Act on, 10 with special purpose fr^eworks, 566-568 summary on, 10-11 understandability, 13-14 unqualified opinion on intemal control over, 201 on valuation and allocation, 13 Financial reporting competencies, 176 Financial reporting framework, 9, 54 Financial Reporting Releases (SEC), 648 extended procedures analyze mix of cash and checks, 249 count and recount petty cash, 248 covert surveillance, 249-250 document examination, 249 examine endorsements on checks, 248 expenditure analysis, 250 horizontal and vertical analysis, 250 inquiry, 249 marked coins or currency, 248 measure deposit time lag, 249 net worth analysis, 250 reasonableness tests, 250 retrieve customers' checks, 248 during inventory inspection, 382 Fraud examinations, 697-698 Fraud examiners compared to other auditors, 698 main objectives, 698-699 and materiality, 699 Fraud investigation by computer, 103 Fraud prevention program difficulties in building, 227-228 employee monitoring, 228-230 enforcement, 230-231 integrity by example, 230-231 intemal control activities, 228-230 managing people pressures, 228 strong control environment, 228 Fraud risk factors, 123 relation to misstatement, 126 Fraud risks communication of, 145-146 identified in planning stage, 172 key questions for, 229 in purchasing departments, 321 significant risks, 144 Fraudsters building a case against, 700 characteristics, 223-224 generating false payments, 335 personality red flags, 222-223 prosecution of, 231 Fraud triangle motivation, 225-226 opportunity, 226 rationalization, 227 Fraudulent accounting, 123 Fraudulent financial accoimting Arthur Andersen, 589 Bernard L. Madoff Investment Securities, 3 cases Arthur Andersen, CI-C4 HealthSouth, C14-C16 Parmalat, C20-C22 PTL Club, C5-C10 Satyam Computer Services, Ltd., C26-C28 and consulting service regulation, 20-21 effect on analytical procedures, 142 Enron Corporation, 77,117,135, 410,589 examples, 2 and failure of self-regulation, 36 Gemstar-TV Guide, 465 HealthSouth, 52, 89, 144, 244, 798 McKesson & Robbii^, 37-38 at NutraCea, 280 and passage of Sarbanes-Oxley Act, 169 at Phar-Mor, 368369, 390-391 recent examples, 38, 124 Satyam Computer Services, 240 through year-end adjustments, 144 WorldCom, 318, 589, 678 Xinhua Finance Ltd., 135

Index

113

Fair value measurementCont. income accounts, 431 nature of investments, 431 vouching investment costs, 431 Fake credit checks, 125 Fakunle, Olaronke, 335 False advertising, 125 False benefit claims, 125 False invoices, 125 False loss claims, 125 False refunds, 125 Falwell, Jerry, C8 Familiarity threat cooperative relationship with client, 601 defmition, 599 family members, 601 financial relationship with client, 601 loans to or from clients, 601 Family members, 601 Fannie Mae, 2, 182, 411, 512, 518, 866 accounting problems, 839 dismissal of KPMG, CI8 Farrelly, Jim, 340 FASB; see Financial Accounting Standards Board Fastow, Andrew, 135 FastTrak Corporation, 48 Federal Accounting Standards Advisory Board, 609 Federal Bureau of Investigation, 249 on computer forensics, 869 Federal Conspiracy Statute, 644 Federal Deposit Insurance Corporation, 513 Federal Emergency Management Agency, 120 Federal False Statements Statute, 644 Federal Mail Fraud Statute, 644 Federal Mogul, 471 Federal Reserve System, 237-238 Federal Trade Commission, on contingent fees, 612 Fedewa, Mark, 167 Fees, disclosure about, 605 Feinstein, Diane, 688 Ferguson, Ronald E., 124 Fictitious wages, C27 Fidelity bonds, 233 Fieldwork procedures performed during adjusting entries, 467-468 attomey letters, 459-462 audit documentation review, 469-470 completing substantive procedures, 457-459 financial relationship disclosure, 467-469 going-concem uncertainties, 465-466 written representations, 463-465 standards, 41, 42, 75 File and operator controls, 852 Files, computer operations controls, 847 Finance and investment cycle audit plan, 451-452 control risk assessment auditors' work, 421 authorization, 423 control ^tivities, 421 control over accounting estimates, 422 custody, 423 record keeping, 423 summary of, 424 Enron's special purpose entities, 410 example of accounting estimates, 422 examples of shenanigans, 411 fraud cases: extended procedures off-balance-sheet financing of inventory, 433^34 revenue forecasts, 435-436 shell corporation, 434-435 unregistered sale of securities, 432^33 inherent risks complex transactions, 414 impairments, 414

Financial reporting standards, 41, 42 Financial results, compared to forecasts, 141 Financial statement assertions, 83 Financial statement audits by intemal auditors, 684 overview, 5 Financial statement disclosures, 469 Financial statements; see also Audited financial statements audit teams and fraud in, 125 comparative, 520-521 date of, 47-48,456 disclosures contingent liabilities, 459-461 litigation, claims and assessments, 460-461 double set of, C27 elements, accounts or items in, 565-566 of Enron Corporation, 14 errors vs. fraud in, 123 forged, C27 of General Motors, C11-C12 governmental auditing, 689 group, 516-517 horizontal analysis, 139 horizontal and vertical analysis, 250 inaccuracy permitted, 87 including footnote disclosures, 53 interim, 496 management assertions about, 10-14 material information in, 87 and materiality, 87-90 misleading, due to GAAP, 515 penalties for misleading, 171-172 relation to management assertions, 15 summary, 521-522 transparent, 13-14 vertical analysis, 139 as window into operations, 118 Financing requirements, 136 First, Bill, 358 First-in, first-out method, 369, 386 First Securities of Chicago, 649 Fisk,M. C.,7I7 FitzPatrick, R. C., 641n Fixed asset reports, 324 Fixed sampling plan, 772 Fleet National Bank V. Gloucester Company, 641 Flesher, D., 6 Flextronics, 424 Fogarty, J., 468n Foley, Mark, 869 Follow-up, 687 Footnote disclosure, 10,53 long-term liabilities, 426 Forbes, 137 Forbes, Walter, 124 Ford, Henry, 367 Ford Motor Company, 495 Foreign Cormpt Practices Act as amendment to Securities Exchange Act, 651 examples of infractions, 148 increasing enforcement of, 652 purpose, 651 recent investigations, 651 Foreign currency options, 429 Forensic accountants, 174 Forensic auditing, 700 Foreseeable party, 637, 641 Foreseen party, 640 definition, 637 Forgery on blank documents, 326 of financial statements, C27 of time cards, 363-364 Fomi 8-K (SEC), 80, 146, 648 Form 10-K (SEC), 496, 565, 648

Form 10-Q (SEC), 648 Fortress Re, 634 Fortune, 137 Fraud; see also Employee fraud in acquisition and expenditure cycle, 319 Ambassador Eyewear Group, 290 in auto sales, 375 cause of client losses, 636 check forgery, 237-238 check kiting, 244-245 coercion of CFOs into, 125 compliance audit, 697 cookie jar reserves, 122, 126 in custody, 377 at Deerfield College, 684 definition, 122, 222, 637 Global Crossing, 272 inconsequential vs. consequential, 145-146 insurance and tax fraud, 250 with invoices, 324 at Koss Corporation, 284 management rationales for, 122 in payroll cycle, 356 Pay + Plus Payroll, 362 time card forgery, 363-364 percentage increase 2005-2011, 126 potential for, 99 preventive controls for, 179180 red flags, 123 related parties used in, 413 in revenue and collection cycle, 269 in review and compilation, 561 on rise, 126 signs in accounts payable, 335-336 Sirena Apparel Group, 290 at Societe Generale, 848 types of defalcation, 126 embezzlement, 126 employee fraud, 126 fraudulent financial reporting, 123 larceny, 126 management fraud, 123 overview of, 125 white-collar crime, 125 Fraud audit questioning, 249 Fraud audits art of examination, 697-698 building a case, 700 example, 699 fraud examiner responsibilities, 698-699 identification of fiaud, 696-697 knowledge of applicable laws, 697 obtaining litigation support, 700 performance standards references, 677-678 protecting evidence, 700 Fraud cases in acquisition and expenditure cycle, 336-339 phony doctors, 338-339 printing money, 336-337 finance and investment cycle off-balance-sheet financing of inventory, 433^34 revenue forecasts, 435-436 shell corporation, 434-435 unregistered sale of securities, 432-433 revenue collection cycle, 292-298 canny cashier, 293-294 dating of transactions, 297-298 frequent billing, 296-297 taxman, 294-296 Fraud detection, 696-697 in audit of cash case of missing petty cash, 246-247 laundry money skim, 247 auditor responsibility, 125 audit team responsibility, 125

Fraudulent financial reporting defmition, 122 examples, 122 related party transactions, 413 Freddie Mac, 411, C18 Fred Stem & Company, 639 Free Enterprise Fund, 37 Free Enterprise Fund v. Public Company Accounting Oversight Board, 37 Friedman, Thomas L., 571n Friehling, David, 45 Frieswick, K., 330n Fundamental principles compared to standards, 41 and definition of auditing, 42 performance, 46-53 purpose, 40-4-1 reporting, 53-60 responsibility, 42-45 Funding, company sources, 134 Fung, Michael, 677, 682 Futures contracts, 429

G
GAAP; see Generally accepted accounting standards GAAS; see Generally accepted auditing standards GAGAS; see Generally accepted government auditing standards Galen, M., CIO Gap Inc., 411 Garcia, Michael, 356 Gay, G., 442 Geiger, M. A., 514 Geisler & Oppenheimer, 619 Gemstar, 273 Gemstar>TV Guide Intemational, 124,465 General attestation standards, 75 General authorization, 180 General controls; see also Computer controls definition, 843 methods of testing, 858 General Electric, 411, 430, 636, 652,654 General Electric, case effects of Sarbanes-Oxley Act on auditors, C23-C24 fees paid to auditors, C24 SEC disclosure requirements, C24-C25 Generalization argument, 592 Generally accepted accounting principles, 5,549; see also Departures fix)m GAAP on accoimts receivable, 173 based on going-concem principle, 513 on cost accounting, 372 on face value, 429 Fannie Mae accountmg not in compliance, 839 interim fmancial information, 564 on inventory, 369 misleading financial statements due to, 515 versus special purpose fireworks, 566-568 and types of opinions, 501 unqualified opinion in conformity with, 54-55 Generally accepted auditing standards, 9,39,74 on audit documentation, 470 and Auditing Standards Board, 38 versus audit procedures, 39 and audit report, 497, 498 audits based on, 636 basic vs. fundamental principles, 41 big vs. little, 39 categories of, 40-42 components of, 38 defmition, 38 departures from, 503 for governmental entities, 39-40

114

Index Index 11

Generally accepted auditing standardsCor. implications of following, 500 on intemal control, 197 kinds of requirements, 38-39 milestones in history of, 37-38 multiple sets of standards, 40 and PCAOB, 38 performance principle, 46-53 purpose, 38 reporting principle, 53-60 requirement in inventory counting, 380 requirement on modified reports, 512 responsibility principle, 42-45 and sampling methods, 719 and SEC, 38 on verbal evidence, 52 Generally accepted government auditing standards, 689 and AICPA standards, 692 audit documentation, 692 literature on, 692 on performance audits, 693 significant reviews, 693 single audit, 693-694 Generally Accepted Privacy Principles, 573 General Motors, 369, 514, 634 case bankraptcy, C12 Car Allowance Rebate Plan, CI2 financial information 2003-2008, CI I going-concem uncertainties, C11-C12 government bailout, CI 1 profile of company, C12 reorganization in 2009, CI 1-C12 return as public company, C13 stock price performance 2003-2009, CI 1 losses and bailout, 494-495 General Re, 124 General standards, 41,42 General standards of conduct, 608 General use of prospective financial information, 550 Ghost employees, 356 Giant Stores, 641 Gibbins, M., 469 Gill, John D., 229 Gittelsohn, J., 717 Global Crossing, 272 Globalization, 571 Glover, S. M., 40n, 390n, 715n Going concem, 142 Going-concem principle, 513 Going-concem imcertainties ability to continue, 465-466 in auditors' report, 511, 513-514 Border Group failure, 466 companies receiving opinions on, 514 definition, 513 General Motors, 495, CI2 mitigating factors, 513 reports and bankruptcy, 514 research and reports, 514 self-fulfilling prophecy, 513 Going green, 8 Goldman Sachs, 651 Gold mining claims, 434-435 Gold Peacock Awards, C26 Golf Magazine, 720 Gonzalez, Albert, 868 Goods delivery of, 276 purchasing, 321-322 receiving, 322 Goodwill example of impairment, 424 impairment of, 332, 414 test of, 333

Goodyear Tire Company, 411 Google, Inc., 867 Gorbachev, Mikhail, 17 Govemance audits, 684-685 Government, fraud pertaining to, 125 Government Accountability Office, 25, 40 examples, 23 fimctions, 22, 688 membership, 689 reliance of Congress on, 688 Governmental Accounting Standards Board, 515, 609 Governmental auditing attestation engagements, 689-690 audit procedures, 690-691 audit reports, 694-696 compliance audit fraud, 697 definition and functions, 22-23 expanded scope, 689 federal agencies, 688-689 financial statements, 689 and Government Accountability Office, 688-689 performance audits, 22-23, 690, 691 performance standards references, 677-678 Single Audit Act of 1984 and Amendments, 693-694 standards, 692-693 state agencies, 689 Yellow Book standards, 689 Governmental auditing standards, 39-40 Governmental auditors, 21 evidence used by, 5 tasks performed by, 679 Governmental reports, 360 Government Auditing Standards, 40 Grandfathered loans, 601 Grant Thomton, 284, 388, 660 and Parmalat, C20 Grasslcy, Charles, 688 Gray, G. L., 524 Green, B. P., 561 Green, Raymond, 290 Greene, F. D., 641n Grocer's Spotlight, 137 Gross margin percentage inflating, 381 and inventory, 380-381 Gross margin ratio, 164 Gross negligence, 637 Gross revenue, 272 Gross revenue benchmark, 89 Group auditors, 516-517 Group engagement team, 516 Group financial statements, in auditors' report 512 516-517 Grover, Robert, 717 Guardado, J. R., 165n Guha, Ramit, C29 Gullapali, D., 413n Gunny, K., 60n

parity check, 843 preventive maintenance, 843 Harkins, Tom, 688 Harmon, Melinda, C2 Harris, Art, CIO Harvard Business Review, 137 Hash totals, 851 Hatfield, T. C., 469 Hawley, Frederick Bamard, 116, 118 Headings, 106 Health Management, 369 HealthSouth, 2,51,52,89,124,144,244,458,634 case auditors and risk factors, C15 conviction of CEO, C16 massive fraud at, C14-CI5 whistle-blowers, C15-C16 fraud at, 798 Hedging investments, 429 Hedging with derivatives, 120 Henderson, Frederick, C12 Henze, Diana, C15 Heritage USA, C5, C6 Hermanson, D. R., 59n Herron, T. L., 722n, 723, 793n Hertz Global holdings, 500 Hewitt, Conrad, 660 Hewlett-Packard, 471, 472, 651 Higher level of precision, 725 High-quality evidence, 51 Hill, W. T., 793n Hillison, W., 225, 696n Hiring, background checks, 230-231 Historical cost accounting, 134 Hoitash, R., 176n Holder of the privilege, 610 Hollinger Intemational Inc., 124 Hong Kong stock exchange, C23 Horizon/CMS, C14 Horizontal analysis, 250 definition, 139 Hospital Corporation of America, 358 Hot checks, 125 Houghton, C., 468n Household Intemational, 273 Houston, R. W., 59n, 469 Hughes, Jennifer, C29 Human relations department, 357-358 Human resources and intemal control, 176 and quality control, 57 Hunton, J., 176n Hurricane Katrina, Walmart's response, 120 Hurtt, Kathy, 17 Hum skepticism scale, 17 Hylas, R. E., 98 Hyundai, 124

I H
Hackers, 847, 868 Hahn, Jessica, C6 Hall, T. W., 722n, 723 Hamilton, L., 642n Hamilton, Nick, 610 Haphazard selection, 722 in attributes sampling, 793 in nonstatistical attributes sampling, 773 in nonstatistical sampling, 819 Hardin, Rusty, C2 Hardware, 843 Hardware controls definition, 843 echo check, 843 IBM, 369 IDEA software, 102 Ideological motivation, 225 lEC, 5 Imhofe, James, 688 Immelt, Jeffrey, C23 Impairments, 414 Imperative principle, 592 Implementation standards, 685 Imprest bank account, 359 Income, manipulation of, 172, 174 Income accounts, 431 Income statement, management assertions on, 12 Income taxes, accmed, 330-331 Income tax expense, 330-331 Incompatible responsibilities, 180-181

Inconspicuous location control, 868 Incremental allowance for sampling risk, 807-808 Incremental confidence factor, 807-808 Indenture, 425 Independence, 43-45 AICPA rules for all audits, 598 covered members, 598 familiarity threat, 601 identified threats, 599 independence in appearance, 598 independence in fact, 598 management participation and advocacy, 602-603 questionable practices, 599 and SEC definitions, 600 summary, 599 commissions as impairment of, 615 compliance with requirements, 80-82 definition, 598 effects of Sarbanes-Oxley Act, 605 failure at Arthur Andersen, 598 Government Accountability Office rules, 606 of intemal auditors, 680 and nonaudit services, 604-605 PCAOB rules disclosure about fees, 605 nonaudit services, 604-605 nonindependent relationships, 603 in principles of conduct, 596-597 results of lack of, 80-82 SEC rules disclosure about fees, 605 nonaudit services, 604-605 nonindependent relationships, 603 versus service, 594 threats to, 44 adverse interest, 599 advocacy threat, 599, 602-603 familiarity threat, 599, 601 financial self-interest, 599 management participation, 599, 602-603 self-review, 599 undue influence, 599 violations of, 44 Independence in appearance, 43, 80,598,603 Independence in fact, 43, 80, 598, 603 Independence in mental attitude, 43, 80, 589 Independent auditor, 21 Independent auditors, at start of audit, 4-5 Indexing of audit documentation, 106-108 India accounting environment, C26 Central Bureau of Investigation, C27 Indirect-effect compliance, 147 Indirect-effect noncompliance, 147 Individuals charged with govemance, 475-476 Industrial age, shift to knowledge age from, 571 Industrial spying, 868 Industry accounting and auditing guides, 137 Industry conditions fraud risk factors, 123 in inherent risk assessment, 133 Industry developments, 136 Industry risk analysis, 682 Information control of, 8 improving quality of, 8 in intemal control, 183-184 materially false and misleading, 122 reliable, 2-3 sources for risk assessment, 137-138 Information and communication, in ERM, 120 Information assurors, 9 Information processing control activities, 181-182

Information risk, 2-3, 118 auditor assessment of, 121-122 definition, 121-122 Information risk assessment, 8 Information systems audit trail left by, 183 definition, 183 in small and medium-sized businesses, 184 Information Systems Audit and Control Association, 27 Information technology, 571 in assurance services, 9 in control activities, 179 Information technology auditors, 85 Inherent risk, 118 acquisition and expenditure cycle company examples, 319 misstated costs and expenses, 319 noncancelable purchase agreements, 319 relative assertion risks, 320 unrecorded liabilities, 319 assertions in revenue and collection cycle, 270 definition, 49,127-128,131 to determine tests of controls, 198 evaluation of, 83 finance and investment cycle, 411-415 complex transactions, 414 impairments, 414 lease accounts, 412-413 loan covenants, 413 not disclosing information, 415 presentation and disclosure, 414 related-party transactions, 413 payroll cycle, 356 production cycle, 369,370 in inventory counts, 390 in risk of material misstatement, 174 significant accounts based on, 185 Inherent risk assessment categories of misstatement, 131-133 company accounting principles, 135-136 company business risks, 135 company objectives and strategy, 135 company performance measures, 135 identification of risk factors, 134-135 industry, regulatory, and economic factors, 133-134 nature of the company, 134-135 process, 132 understanding client's business, 133 In-house intemal audit function, 679-680 Initial public offerings, 645 effect of Sarbanes-Oxley Act on, 200, C23 Input controls authorization and approval, 851 batch totals, 851 check digits, 851 data entry and formatting, 851 error correction and resubmission procedures, 852 hash totals, 851 limit and reasonableness tests, 852 missing data tests, 852 record counts, 851 sequence tests, 852 valid character tests, 852 valid sign tests, 852 Input errors, 841 Inquiry by auditors in risk assessment, 143-144 cautions on, 98 to detect fraud, 249 to obtain evidence, 95-96 in tests of controls, 193-194 verbal, 96 Insider trading, 125, 611 Inspection, 59

Inspection of documents cautions on, 98 to obtain evidence, 93-95 Inspection of tangible assets cautions on, 98 to obtain evidence, 95 Institute for Chartered Accountants of India, C28 Institute of Intemal Auditors, 21, 119n, 170 and codes of conduct, 594 on core competencies, 27 definition of intemal auditing, 680 independence standards, 680 intemal auditing standards, 685-696 Intemational Standards for the Professional Practice of Intemal Auditing, 685 scope of service, 683-685 Institute of Management Accountants, 27, ll9n, 170 and codes of conduct, 595 Insurers, fraud pertaining to, 125 Intangible assets assertions about, 331-333 audit evidence about, 332-333 custody of, 419 record keeping, 420 Integrated audit procedures, 172 Integrated report, 501 Integrated test facility, 862 Integrity AICPA rules conflicts of interest, 607 misrepresentation, 607 serving as client advocate, 608 in control environment, 176 in principles of conduct, 596-597 Integrity by example, 230-231 Integrity of management, 78-79 Intel Corporation, CI 7-C18 Interactive date, 9 Interbank transfers, 244-245 Interest expense, 426 Interest rates, 422 Interest rate swaps, 429 Interim Auditing Standards, 38 Interim audit work, 86 Interim date, 47 for perfomiing confirmation, 289 Interim financial information defmition, 563 report on, 565 responsibilities for reporting on, 563-564 SEC on, 563 Interim financial statements, 496 Interim review of intemal controls, 564 Interim testing, 456 limitations, 755 Intemal audit charter, 680 Intemal auditing cosourcing strategy, 680 definition, 21, 680 independence, 680 outsourced or in-house, 679-680 performance standards references, 677-678 and public accounting firms, 679 scope of services compliance audits, 683 environmental audits, 685 financial audits, 683 govemance audits, 684-685 operational audits, 684 quality control audits, 685 stated objectives, 683 value-added elements, 682-683 Intemal auditor certification program, 686 Intemal auditors, 21 changing nature of work, 679 competence, 84

116

Index

Index

117

Internal auditorsCont. evidence provided to, 4 extemal auditor consideration of work of, 84-85 functions, 21-22 independence, 680 objectivity, 84 outsourcing or in-house, 679-680 tasks performed by, 679 Intemal audit reports elements of, 686-687 exit conference, 687 reported findings, 687 senior management oversight, 687 Intemal audit standards attribute standards, 685-686 certified intemal auditing certification, 686 and GAAS, 686 implementation standards, 685-686 and intemal audit department, 686 performance standards, 685-686 practice advisories, 686 Intemal control to achieve management objectives, 170 attributes risk sampling for, 727-730 auditor responsibility, 172-174 audit procedures and reliance on, 175 audit sampling for, 726 in computerized environment, 840 and control risk, 128 coping with fi-aud schemes, 222 cost-benefit analysis, 171 definition, 49, 170-171 effect of computerized processing, 842-843 in engagement letters, 82 at Fannie Mae, 839 features of effective system, 230 importance in audit engagement, 50 integrated framework, 175 control activities, 178-182 control environment, 176-178 information and communication, 183-184 monitoring, 184 risk assessment, 178 interim review, 564 Krispy Kreme report, 172-173 lapse at Allstate Tmcking, 50 limitations, 170-171 management responsibilities, 171-174 to prevent fraud, 228-230 purpose of, 169-170 reasonable vs. absolute assurance from, 170 reporting on, 199-200 Sarbanes-Oxley Act on, 169-170,171 strong, 228 types of audit opinions, 199 Intemal control communication, 206-207 Intemal control deficiency definition, 198 design deficiency, 198 material weakness, 199 operating deficiency, 198 significant deficiency, 199 Intemal control evaluation assess control risk, 191-193 audit team understanding of, 185-191 components as criteria for, 185 design effectiveness, 187 identify controls to test, 193 ongoing evaluation, 184 operating effectiveness, 187 perform tests of controls direction of tests, 194-196 methods, 193-194 reassess control risk, 196 phases of, 186 professional standards references, 168 Intemal control letter, 207

Internal Control over Financial Reporting: Guidance for Smaller Public Companies (COSO), 176 Intemal control over financial reporting integrated with audited financial statements, 442 Intemal control paragraph of standard report, 498, 499,501-502 Intemal control questionnaire in acquisition and expenditure cycle, 326, 351-353 advantages, 188 for cash activities, 234 cash disbursements, 265-266 definition and purpose, 188 finance and investment cycle, 449-450 illustration of, 189 inventory, 406 payroll cycle, 362 production cycle, 377, 405-406 revenue and collection cycle, 313-314 Internal control tests, 83 Intemal envirormient, in ERM, 119 Intemal evidence, 51-52 Intemal Revenue Code, 23 Internal Revenue Service, 5, 20, 23, 25, 249, 360, 361,362 on contingent fees, 612 Examination Report on PTL Club, C8 and PTL Club fraud, C6 on tax shelters, CI8 Intemational Auditing and Assurance Standards Board, 24, 40 Intemational Ethics Standards Board for Accountants, 24 Code, 616 Intemational Federation of Accountants, 24 and accounting standards, 596 and codes of conduct, 594 Intemational Financial Reporting Standards, 55 Intemational financial reporting standards, 5, 54, 549 International Standards for the Professional Practice of Internal Auditing, 685 Intemational standards on auditing, 24 International Standards on Auditing, 40 Interpretive publications, 39 Interpublic, 273 Interviews, 96 Inventory accounting problems, 369 analytical procedures, 380-381 auto sales fraud, 375 Boeing company report, 388 consignment goods, 386 fraud at Electric Scientific, 387 fraudulent manipulation of, 368-369 intemal control questionnaire, 406 largest current asset, 369 located away from chent's premises, 386 not on year-end date, 384-385 off-balance-sheet financing, 433-434 output of production cycle, 371 physical observation of, 381-386 potential for fraud, 387-388 tips on detecting fraud, 388 Inventory accounts, 370 Inventory control just-in-time systems, 371 materials requisition, 372 production orders, 372 Inventory count auditors not present for, 386 client's instmctions, 382-383 cycle counts, 385, 390 under difficult circumstances, 384-385 GAAS requirement, 380 manual, 383 measurement challenges, 383

by professional inventory teams, 385-386 radio frequency identification, 384-385 statistical counting, 385 using bar code scanners, 384 when located away from premises, 386 Inventory count sheet, 382 Inventory master file, 841 Inventory reports, 374 Inventory roll-forward, 385 Inventory-taking instmctions, 382-383 Investing transactions authorization, 419 custody, 419 forms of, 417419 periodic reconciliation, 420 record keeping, 420 Investment accounting, 428 Investment costs, 431 Investments by companies, 134 Investors, need for reliable information, 2-3 Ionics, 652 IPOC Intemational Growth Fund Ltd., 610 Iron curtain method, 468 Iselin V . Landau, 643 Isikoff, Michael, CIO Islanders Bank, 424 ITFactory, 269

Koss, Michael, 284 Koss Corporation, 284 Kozlowski, Dennis, 124 KPMG, 332, 387, 455,465, 521, 574, 610, 634, C4 case admission of tax fraud, CI 8 dismissed by Fannie Mae, C18 nonaudit services, CI 7-C18 and number of auditing firms, CI 7-C18 revenues in 2010, C17 tax consulting fees, CI8 dismissed by Fannie Mae, 839 forensic accountants, 174 and General Electric, C24 revenues 2010,19 Kraft Foods, 322 Krishna, R. Jai, C29 Krishnamurthy, G., 476 Krispy Kreme, 190-191, 205 report on intemal control, 172-173 Kroger, 411 Kumar, John Satish, C29 Kumar, Sanjay, 124

L
L.B. Smith, Inc., 640 Labor cost analysis, 360 Labor distribution, 360 Lack of independence report, 510-511 Lakshman, Nandini, C29 Lamborghini, 375 Lamphron, Jim, CI 5 Landis, M., 143 Lapping, 233, 282 Larceny, 126 La Spada, Anthony, 362 Last-in, first-out method, 369,386 Laundry money skim, 247 Laventhal & Horwath, 656 auditors for PTL Club, C6-C8 bankmptcy of, C8-C9 Law enforcement agencies, 611 Laws; see Common law; Legal liability; Noncompliance with laws and regulations; Statutory law Lawsuits, auditor questions about, 333 Lay, Kenneth, 124 Leadership by example, 56 responsibility for quality, 56 Lead schedule, 106 Leahy, Joe, C29 Lear Corp., 514 Lease accounts, 412-143 Leases, 422 Legal envirormient, 634-635 Legal liability, 89; see also Common law liability; Statutory law liability Auditing Advisory Committee on, 635 changing landscape for auditors, 654-660 deep pockets theory, 636 legal envirormient, 635-637 legal terminology, 637 professional standards references, 633 recent settlements with accounting firms, 634 Wells notice, 634-635 Legal terminology, 637 Lehman Brothers Holdings, Inc., 381,458, 634-635 bankmptcy, 16 Lending of credibility, 3 Lennox, C., 58 Leslie Fay, 369 Letterman, David, 546, 794 Leung, Elsie, 465

J
J.D. Power & Associates, C17 J.M. Smucker Company, 429 Jenkins, J. G., 143 Jensen, K. L., 660 Jerris, S., 143 Joe, J., 468n,514 Joint and several liability, 657-658 Joint custody, 419 Joint Ethics Enforcement Program (AICPA), 617-618 Jolly, Bobby L., 414 JPMorgan Chase, 243, 414 Justified departures from generally accepted accounting principles in auditors' report, 511,514-515 definition, 515 Just-in-time systems, 371

K
Kane, C. K., 165n Kane, Joseph J., CIO Kant, Immanuel, 592 Kaplan, Lewis, C18 Kaplan CPA Review, 25 Katrina Housing Tax Relief Act, 688 Katz, David M., 126 Keeton, Morris, 591-592 Kellogg Company, 471 Kerviel, Jerome, 848 Keulian, Viken, 375 Khurana, I. K., 660 Kickbacks, 125, 321 Kieslowski, Krzysztof, 493 Kilpatrick, Kwame, 869 Kim Woo Choong, 124 Klafte, Cary, CI8 Klott, Gary, CIO Kmart, 169 Knechel, W. R., 660 Knight, Frank, 119 Knowledge-based economy, 571 Knowledge needed for risk assessment, 121 Koppikor, Rachna, C28n

Lewinsky, Monica, 869 Liabilities, 12, 458 accmed, 330 contingent, 459-461 for known rights of retum, 273-274 long-run, 417 recording, 323 unrecorded, 243, 319, 324 Liability caps, 659-660 Librarians, 846-847 Library of Congress E-Resources Online Catalog, 137 License Raj, C26 Licensing of certified public accoimtants, 25 substantial equivalency, 25 Lieberman, Joe, 688 Life Partners Holdings, Inc., 473 Ligand Pharmaceuficals, 60, 299, 619 Lightle, S. S., 177 Limit and reasonableness tests, 852 Limited computer knowledge, 864 Limited liability partnerships, 637, 657 Limited procedures, 523 Limited reporting engagement, 500 Limited use of prospective fmancial information, 550 Lincoln Savings and Loan, 658 Lindquist, R. J., 222n Liptak, Adam, 124 Liquidity, and fraud, 133 Litan, Awat, 276 Litigation class action suits, 658-659 against Emst & Young, 16 factors influencing, 660 increased exposure to, 654 against PCAOB, i7 Litigation, claims, and assessments, pending, 459^61 Litigation support, 700 Livingstone, Bmce, 684 Loan covenants, 413 Loans grandfathered, 601 to or from clients, 601 permitted, 601 Lockbox arrangement, 232 Lockheed Martin, 867 Loebbecke, J. K., 225n Logical unit, 796 London/AIM stock exchange, C23 London Assurance Corporation, 639 Lone Moon Brewing, 323 Longo, Peter, 385 Long-term liabilities, 425-426 record keeping for, 417 Lorenz, James E., 387 Lower-of-cost-or-market testing, 387 Lower-of-cost-or-market valuation, 369, 377 Lublin, Joann S., C29

M
Machado, Kenan, C29 Macy's, Inc., 385 Madoff, Bernard L., 3, 35, 36, 78, 124 Madoff Investment Securities, 124 Mahadeo, Sagarmo, 237 Mailroom fi^ud, 223 Maines, Natalie, 375 Management identifying business risks, 178 inquiry in risk assessment, 143-144 integrity of, 78-79 intemal auditors as representatives of, 683

intemal audit reports sent to, 687 objective setting by, 120 objectives in intemal control compliance, 170 financial reporting, 170 operations, 170 outsourcing noncore functions, 554 of people pressures, 228 plans to mitigate business risks, 121 reports on intemal control over financial reporting, 496 responsibility for intemal control, 171-174 responsibility for risk management enterprise risk management, 119-120 paradox of risk, 119 sources and types of risk, 118 Management assertions for Auditing Standards Board, 11 on completeness and cutoff, 12-13 as evidence, 4, 51 on existence and occurrence, 12 in financial statements, 10-11 importance of, 14 Miniscribe fraud, 12 presentation and disclosure, 13-14 for PCAOB, 11 relation to financial statements, 15 on rights and obligations, 12 Sarbanes-Oxley Act on, 10 summary on, 10-11 understandability, 13-14 on valuation and allocation, 13 WorldCom fi^ud, 13 worthless at Enron, 14 Management directives, ensuring compliance with, 682-683 Management fraud definition, 123 at Enron Corporation, 117 professional standards references, 116 rationales for, 122 risk factors, 123 Management letter, 206, 476 Management objectives, obstacles to achieving, 170-171 Management personnel, 134 Management reports, revenue and collection cycle, 277-279 Management representation, 463 inquiry into, 95-96 Management's annual report on intemal control over financial reporting, 199 Management's discussion and analysis, 19,522 examination and review, 554 Management's philosophy and operating style, 176 Management supervision, 99 Managerial relationships, threat to independence, 44 Managers, fraud pertaining to, 125 Mann Judd Landau, 643 Manual physical inventory count, 383 Marked coins or currency, 248 Marketable securities, 420 classification of, 431 Market of inventory, 369 Market value of equity/total debt ratio, 164 of securities, 431 Marshalls, 276, 868 Martin, M. J., 642n Martin, Michael, C15 MasterCard, 273 Master file changes, 853 Matching, 318 bill of lading to purchase order, 322 problem in, 319 Material information, 87-88

118

Index
investigating causes of, 819-820 points of, in computerized environment, 856 in revenue and collection cycle, 273 susceptibility factors, 133 uncorrected, 468 Mitigating factors, 513 Mix of cash and checks, 249 Mock, T. J., 524 Modified cash basis framework, 566 Modified opinions, 501 Monetary unit sampling advantages, 796-797 versus classical variables sampling, 817-818 definition, 731, 796 definition of population, 796 disadvantages, 797 distinguishing feature, 796 evaluating sample results, 806-811 basic allowance for sampling risk, 808-809 incremental allowance for sampling risk, 807-808 projected misstatement, 807 qualitative evaluation of misstatements, 811 understatements, 810-811 upper limit on misstatements, 809-810 existence assertions, 797 plarming stages defining attribute of interest, 797 defining population, 798 determining objective, 797 probability proportionate to size selection, 796 sample items measurement, 805-806 sample selection, 804-805 sample size, 802 sample size determination expected misstatement, 801-802 factors influencing, 798 population size, 802-803 sampling risk, 799-800 tolerable misstatement, 800-801 value and allocation assertions, 797 Monitoring in ERM, 120 of intemal control common controls, 184 fiindamenta! principles, 184 in small and medium-sized businesses, 184 by PCAOB, 59 for quality control examples, 57-58 purpose, 57 Monitoring systems activity, 859 Monus, Mickey, 368-369, 390 Moral clause of AICPA rules, 612 Morgenson, Gretchen, 124 Morse, Gene, 860 Motivations for employee fraud economic, 225-226 egocentric, 225 ideological, 225 psychotic, 225 ideological, 225 Motive, 225 Motors Liquidation Company, C12 Mozilo, Angelo R., 124 Murphy, Leif, CI5 MUS; see Monetary unit sampling

Index
NASDAQ, 145, 867 Nateili, Anthony, 651 National Aeronautics and Space Administration, 689 National Association of State Boards of Accoimtancy, 25 National Commission on Fraudulent Financial Reporting, 170; see also Treadway Commission National Stock Exchange, India, C26 National Student Marketing Association, 651 National Student Marketing case, 651 Nay, Lester, 649 Near privity, 640 Negative assurance, AICPA rule, 609-610 Negative confirmation, 285-286 Nelson, M., I22n Net realizable value, 369 Net revenue, 272 Net sales/total assets ratio, 164 Network, The, 126 Net worth analysis, horizontal and vertical analysis, 250 New products and services, 136 New social stmctures, 571 New York Stock Exchange, 145, C23 Satyam listing on, C26 Nikko Cordial, 411 Nonaudit attestation engagement, 19 Nonaudit services, CI 7-C18 effects of Sarbanes-Oxley Act on, C23 independence mle, 604-605 Noncancelable purchase agreements, 319 Noncompliance with laws and regulations auditor response to, 147 companies involved in, 148 direct-effect noncompliance, 146-147 indicators of, 147 indirect-effect noncompliance, 147 Private Securities Litigation Reform Act, 147-148 Nonprobabilistic selection techniques, 819 Nonpublic companies, Auditing Standards Board report, 544 Nonrepresentative sample, 717 Nonsampling error, 718 Nonsampling risk, 764-765, 805 definition, 618 versus sampling risk, 716-718 Nonstatistical attributes sampling difference from statistical method, 774 sample items measurement, 774 sample rate of deviation, 774 sample selection block selection, 773 haphazard selection, 773 sample size determination, 774 steps in., 773-774 testing accuracy assertions, 774 tolerable rate of deviation, 774 Nonstatistical sampling definition, 719 versus statistical sampling, 719 for variables sampling, 731 Nonstatistical sampling methods audited balance estimate, 819 causes of misstatements, 819-820 example, 818 expected misstatement, 819 projected misstatement, 819 sample selection block selection, 819 haphazard selection, 819 nonprobabilistic techniques, 819 sample size determination, 819 tolerable misstatement, 819 for variables sampling, 796 Normal distribution theory, 812 Nortel, 273 Northmp Grumman, 333 Notes payable, recording, 417 Notes receivable, confirmation of, 285-289 Opportunity for employee fraud, 226 Options, 429 Oracle Corporation, 651 Orange County Register, 375 Orbital Sciences Corporation, 319 Ordinary negligence definition, 637 in Securities Act of 1933, 645 Organizational stmcture, 134 of computerized processing, 100 and intemal control, 176 Ostling, Richard N., CIO Other accounts, 458 Other comprehensive bases of accounting, 566 Other-matter paragraphs, 512 Output controls; see Computer controls Output distribution, 853 Outsourcing accounting applications, 100 of computer services, 866 intemal audit function, 679-680 of noncore functions, 554 Overhead allocation, 373 Overstatement, in MUS, 797 Overton, David, 656 Overton v. Todman Company CPAs, 656 Owens, William, C14, C15-C16, C16 Ownere, fraud pertaining to, 125 Ownership, 12

119

Materiality in audit plan, 87-89 calculating benchmark for, 88-89 engagement circumstances, 89 nature of item or issue, 89 possible cumulative effects, 89-90 establishing level of, 87-88 for fraud examiners, 699 inaccuracy permitted, 87 material information, 87-88 performance, 88-90 professional judgment on, 90 related to knowledge of fraud, 145 of uncorrected misstatements, 468 use by audit teams, 90 Materiality concept, 48 Material misstatements, 10-11,48 business risk leading to, 136 detecting, 46 errors vs. fraud, 123 and relevant assertions, 185 Materials requisition, 372 Materials transfer ticket, 372 Material weakness, 197,206-207 effect on opinion, 204 in intemal control, 199 in intemal control over financial reporting, 201-203 at Krispy Kreme, 205 Mathematical computations, 51 Matrix approach to detection risk, 130-131 Maximum rate of deviation, 728-729 MBIA Inc., 717 McCracken, S., 469 McDonald's Corporation, 54, 55 McEwen, Toni, 684 MCI, 319 Mclntyre, John, 718 McKesson & Robbins, 37-38 McNeal, A., 233 Mean-per-unit estimation, 812 formula for sample size determination, 812 Medeeros, Emanuel, 324 Medicare taxes, 361 Mehra, Puja, C27n, C28n Meijer, Inc., 853 Members of an unlimited class, 641 Menon, K., 514 Mental attitude, 43, 80, 589 Merck & Company, 456 Mergers and acquisitions transactions, 334 MetricStream, 684 MGM Mirage, 514 Michaels Stores, Inc., 867 Microsoft Access, 864 Microsoft Corporation, 461 Microsoft Excel, 190, 864 Microsoft Excel Service, 866 Milgram, Stanley, 590, 594 Millennium Chemicals, 411 Miller, C. G., 561 Miller, R. L., 61 In Miniscribe, 12 Minutes of board meetings, 137, 138 Misappropriation of assets, 126 definition, 222 Miscellaneous accounts, 458 Misrepresentation, cause of client losses, 636 Misrepresentation of facts, 607 Missing data tests, 852 Misstated costs and expenses, 319 Misstatements and confirmation process, 288 detecting, 89 general categories of, 131-132 in inventory, 381-382

o
OAO Yukos, 474 Obama, Barack, 495, 717, CI1 Objective auditor awareness of, 121 definition, 118 in inherent risk assessment, 136 of management on intemal control, 170 of MUS, 797 of sampling, 720 Objective setting, in ERM, 120 Objectivity AICPA mles confiicts of interest, 607 misrepresentation, 607 serving as client advocate, 608 of intemal auditors, 84 in principles of conduct, 596-597 Obligations on liabilities, 12 O'Bryan, Emily, 167 Observation, 95 cautions on, 98 in tests of controls, 194 Occurrence, 12,141, 753 for sales, 270 Occurrence assertion for payroll cycle, 195 production cycle tests of controls, 379,380 in purchasing and disbursement, 182 Occurrence direction, dual-direction tests of controls, 288-289 Occurrence test, 191-196 Ocean World Seafood, 249 Off-balance-sheet assets, 414 Off-balance-sheet fmancing of inventory, 433-434 Off-balance-sheet information, 426,427 Off-balance-sheet leases, 414 Off-balance-sheet transactions, 416-417 Omitted procedures, 474 Online editing and sight verification, 851, 865 Open purchase file, 329 Open purchase orders, 323 Operating deficiency, 198 Operating effectiveness of control activities, 191 definition, 187 tests of, 198 tests of controls, 764 Operating leases, 413,414 Operational auditors, 21 Operational audits, 21, 684 definition and goal, 21 definition of AICPA, 22 by intemal auditors, 684 Operational efficiency, 682 Operational risk analysis, 682 Operations company characteristics, 134 fraud risk factors, 123 indirect-effect compliance, 147 in management objectives, 170 Operations controls, 170 Operations ratios, 164 Opinion AICPA mle, 609-610 on comparative financial statements, 521 types of, 501 Opinion paragraph of standard report, 498,501 Opinion shopping, 568

p
Pacini, C., 225, 642n, 696n Packing slip, 276 Padded payroll, 125 Paine, Thomas, 268 Pajazetovic, Amela, 167 Palbaum, Brian, 465 Paradox of risk, 119 Parallel simulation, 860-861 Parity check, 843 Parmalat, 2, 98, 124, 634, 660 case audit approach, C20 bankmptcy, C20 bond payment default, C20 Cayman Islands accoimt, C20 CEO awareness of fraud, C21 discovery, C20--C21 hidden losses, C20 indictments and convictions, C21-C22 missing assets, C20 red flags missed, C20 Paseo Hernando Early Learning Coalition, 340 Passwords, 847-848 Password software, 868 Patents auditor questions about, 333 custody of, 419 Patterson, Scott, C27n Payables, relative assertion risks, 320 Pay + Plus Payroll Administrators, 362 Payroll accounting, 358 Payroll cycle audit evidence clearing accounts, 360 employee W2 reports, 361 governmental and tax reports, 360 labor cost analysis, 360 payroll register, 259 personnel files, 259 year-to-date eamings records, 360-361 computerized system, 362 control activities, 361-362 custody, 358 falsified work hour records, 357

N
Nally, Dermis, C27n Napier, Denise L., 649 Narrative description, 188

forms of, 356 fraud in, 356 inherent risks, 356 preparation by service organizations, 362 self-policing aspect, 356 tests of controls, 195-197 time card forgeries, 363-364 typical activities persoimel, 357-358 record keeping, 358 supervision, 358 timekeeping, 358 Payroll distribution, 361 Payroll expense testing, 334 Payroll register, 359 Payroll report, 361-362 Payroll taxes, 360 PCAOB; see Public Company Accoimting Oversight Board Peachtree software, 99 Peat, Marwick, Mitchell & Company, 646 Peer review conduct of, 59 criticisms of, 58-59 definition, 58 Pelino, Dermis S., 135 Pending order master file, 277 Pensions, underfunding, 415 People pressures, management of, 228 PeopleSoft, 605 Performance audit reports, 696 Performance audits, 22-23 criteria, 691 definition, 690 examples, 690 and GAAS, 693 govemmental audit, 690 Performance materiality, 801 definition, 88 use of materiality for, 90 Performance measures, for companies, 136 Performance principle, 41,42 and attestation standards, 74 audit evidence, 50-53 components for quality control, 57 definition and elements, 46 materiality, 48 planning and supervision, 47-48 reasonable assurance, 46 risk assessment, 49-50 Performance review committee at Enron, 179 in intemal control, 180 Performance standards, 685-686 Perini Corporation, 226 Period-end joumal entries, 172,174 Periodic reconciliation, 326 of assets and recorded Mnounts, 180 of investments, 420 of share outstanding, 417 Permanent files definition, 104 kinds of, 104-105 Permitted loans, 601 Perry, Luke, 375 Personal financial plarming, 562 Personality red flags, 222-223 Personnel, 357-358 Personnel files, 359 Persuasive evidence, 50-51 Petrocine, A. R., 641n Petty cash count and recount, 248 missing, 246-247 Petty theft, 221 Phar-Mor fraud, 368-369, 390-391 Phelps, Martin, 390

120

Index
Predecessor auditors communication with, 78-79, 562 definition, 78 reporting disagreements with, 80 Predication, 698 Pre-engagement activities changes in auditors, 79-80 client acceptance of continuance policies, 79 compliance with independence and ethical requirements, 80-82 dumping clients, 78 engagement letters, 81, 82 and integrity of management, 78-79 new standards for, 77-78 and predecessor auditors, 79-80 as risk assessment, 77-78 search for potential problems, 79 Preliminary audit procedures, 136-142 Prentice, Robert A., C5 Prepaid expenses, 330,331 Prescribed forms, 562 Presentation and disclosure, 10, 13-14 acquisition and expenditure cycle, 334 finance and investment cycle, 414 production cycle, 388 revenue and collecfion cycle, 291 for revenue and receivables, 270 WorldCom fraud, 13 Presumptively mandatory requirements, 38-39 Preventive, detective, and damage-limiting controls administrative controls, 868 physical controls, 868 programmed range and reasonableness checks, 868-869 technical controls, 868-869 Preventive controls, 180 Preventive maintenance, 843 Previts, G., 6 Prewitt, D. F., 40n Price fixing, 125 Priceline.com, 272 Price list master file, 277 Price Waterhouse Company, CI7 PricewaterhouseCoopers, 37-38, 454-455, 474, 495, 500, 521, 611, 634, 649, 839, C17, C18 Academy Awards and, 18 disclaimer of opinion, 205 failure at Satyam, 240 independence violations, 44 rejection of client, 78 revenues 2010, 19 and Satyam Computer Services fraud, C26-C28 Price Waterhouse India, 474 Pricing and compilation tests, 386-387 audit plan, 407-408 Primary beneficiaries, 637, 640 Principle of utilitarianism, 593 Principles of attestation, 75 Privacy of trust services, 573 Private Securities Litigation Reform Act of 1995, 147-148,611,657-658 Privileged information, 610 Privity of contract, 637, 638 Probabilistic selection techniques, 819 Probability proportionate to size selection, 796 Problem situation, 590 Processing controls audit trail, 865 control total reports, 852 control totals, 865 data comparisons, 865 error correction and resubmission procedures, 852 file and operator controls, 852 function of, 852 limit and reasonableness test, 852 run-to-run totals, 852 transaction logs, 865 Processing errors, 841-842 Processing integrity of trust services, 573 Procurement, relative assertion risks, 320 Production cycle account balance assertions, 381 assertion risks for inventory accounts, 372 assertions about transactions/events, 379 audit evidence, 373-375 inventory reports, 374 production plans and reports, 374 sales forecast, 374 audit plan, 407-408 audit risk model, 389 control risk assessment account balances, 375 control activities, 376 custody, 376-377 direction of tests of control, 379 entity-level controls, 376 intemal control questionnaire, 377,405-406 summary of, 380 tests of controls, 377-378 fraud at Phar-Mor, 368-369 fraud case: extended procedures, 389-391 inherent risks, 369, 370 inventory as output of, 371 nature of transactions in, 371 PCAOB inspections, 392 professional standards references, 367 substantive procedures analytical procedures, 380-381 fraud potential in inventory, 387-388 GAAS requirements, 380 physical inventory observation, 381-386 presentation and disclosure, 388 pricing and compilation tests, 386-387 typical activities cost accounting, 372-373 inventory control, 372 link to acquisition and expenditure cycle, 369-370 production planning, 370-372 production sign-off, 372 sales forecast, 370 Production order, 372 Production plan, 370-371 as audit evidence, 374 results of errors in, 372 shared with other departments, 372 Production planning costs associated with, 370-371 critical to manufacturing, 371-372 just-in-time management, 371 Production reports, as audit evidence, 374 Production sign-off, 372 Products, with radio frequency identification tags chips, 384, 385 Professional ethics AICPA rules of conduct, 607-616 auditor independence, 599 codes of conduct, 594-597 Intemational Federation of Accountants, 596-597 Professional Ethics Executive Committee, 596-597 Public Company Accounting Oversight Board, 595-596 Securities and Exchange Commission, 595 consequences of violating, 617-619 decision process, 590-591 definition of ethics, 589-590 emphasis on independence AICPA mles, 598-603 effect of Sarbanes-Oxley Act, 605-606 Government Accountability Office, 606

Index

121

Philosophical principles of ethics, 591-594 categorical imperative, 592-593 flmction of, 592 generalization argument, 593 utilitarianism, 593 weight of opinion, 591-592 Phony profits, 368-369 Physical controls, 275, 868, 869 in intemal control, 181 Physical inspection to gather audit evidence, 332-333 Physical inventory count, 382 Physical inventory inspection, 381-386 Physical inventory observation audit plan, 407 client's instructions, 382-383 defmition, 382 difficult circumstances auditors not present, 386 cycle counts, 385 located away from premises, 386 not on year-end date, 384-385 professional inventory teams, 385-386 manual inspection, 383 physical count, 382 radio frequency identification, 384 using bar codes, 384 Physical observation, 51 Physical representation of population, 755 Physical security, 864 Physical security controls, 848 Pierce, B. J., 722n, 723, 793n Pilgrim's Pride Corporation, 514 Pittman, J., 58 Plain-paper engagements, 561 Plaintiffs, 637 Planning audit sampling attributes sampling, 734 dual-purpose tests, 734 variables sampling, 734 classical variables sampling, 812 for MUS, 797-798 Planning memorandum, 105 Planning precision, 802 Planning precision, in MUS, 802 Plant and equipment depreciation, 422 Policies related to financial reporting, 179 Poilster.com, 718 Ponzi scheme, 3 Population and audit sample size, 734 defined for attributes sampling, 754-755 defining, 720 definition, 715 definition in MUS, 796, 798 physical representation of, 755 sample item selection, 721 size in attributes sampling, 758 size in sample size determination, 802 Population deviation rate, 758-759 advantage, 773 disadvantage, 112> in sequential sampling, 773 Positive confirmation definition, 285-286 response to, 289 Potomac Company, 6 Power buying, 368 PowerPoint, 189 Practitioner, 6 Precision, 758-759, 816 higher level of, 725 in MUS, 802 in sampling, 724-725 Precision interval, 724-725 construction of, 816 significance of, 816

PCAOB, 603-605 SEC mles, 600, 603 Enron collapse, 589 International Ethics Standards Board for Accountants, 616 philosophical principles act-utilitarianism, 593 generalization argimient, 593-594 imperative principle, 592-593 reliance on weight of opinion, 591-592 mle-utilitarianism, 593 utilitarianism, 593 problem situations, 590 professional standards references, 587-588 Professional Ethics Executive Committee (AIPCA), 595 mles of conduct, 596-597 Professional Golfers Association, 720 Professional inventory teams, 385-386 Professional judgment, 52 defmition, 45 on materiality, 90 Professional service firms, 18 Professional services, 8 Professional skepticism, 410 and conflicts of interest, 15-16 definition, 15 and employee fraud, 221 evidence gathering, 16 and former colleagues, 16 Hurtt skepticism scale, 17 and objectivity, 16 requirement for auditors, 45 time pressure, 16 Professional Sports Authenticator, 7 Professional sports logos, 419 Professional standards auditor performance, 46-63 basic GAAS, 37-42 evaluation of CPA firms, 5560 and PCAOB controversy, 36-37 recent audit failures, 36 reporting, 53-55 responsibilities, 42-45 self-regulation, 36 topics and references, 35 Professions, characteristics of, 37 Profit, phony, 368-369 Profit before taxes benchmark, 88-89 Pro forma fmancial information, 550-552 Program analysis techniques, 859 Program change controls emergency change requests, 845 function, 845 program modifications, 845 and systems development life cycle, 845 Program development controls docimientation, 845 objectives, 844 systems development life cycle, 844-845 Program documentation and testing, 864 Program-embedded techniques audit files, 859 extended records, 859 monitoring systems activity, 859 program analysis techniques, 859 snapshot, 859 tagging ttansactions, 858 Programmed range and reasonableness checks, 868-869 Programmers functions, 846 separation of duties, 847 Projected misstatement, 807 in nonstatistical sampling, 819 Proof of cash, 245-246 Proper period, 12-13

on materiality, 87-88 Property, plant, and equipment peer review by, 59 assertions about, 331-332 penalties for Satyam case, C28 audit evidence about, 332, 333 reason for, 38 Proportionate liability, 657, 658 reporting for nonpublic companies, 544 ProQuest Company, 867 and revenue collection cycle, 300 Prospective fmancial information, 550-552 review of tests for controls, 752 general use, 550 on sampling deficiencies, 795 limited use, 550 sanctioning of auditors, 60 Prospectus, 645 on tax services, 20 Protiviti Inc., 679 on uncorrected misstatements, 468 Provident Financial Group, 411 Public company audits, PCAOB requirements, 197-200 Psychotic motivation, 225 Public entity, 36 PTL Club, case Public interest, in principles of conduct, 596-597 auditors' knowledge of fraud, C7-C8 Public offerings, 645 background, C5 Public Oversight Bo^d, 58 collapse, C6 Public regulatory discipline, 618-619 demise of Laventhal & Horwath, C8- C9 Pull-down menus, 851 effect on accounting profession, C9 Pulliam, S, 318n finding new auditors, C8 Purchase cutoff, 330 lack of oversight, C6-C7 Purchase lead time, 372 perceived excesses, C5C6 Purchase order, 321 scale of cormption, C6-C7 blank, 325 trial, C9 blind, 322 Public accoimting computer-generated, 325 assurance services open, 323 audit services, 18-19 Purchase requisition, 321 nonaudit attestation engagements, 19 Purchases joumal, 324 consulting and advisory services, 20-21 Purchases of goods and services, 321-322 CPA firms, 18 Purchasing and disbursement cycle, 181-182 and failure of self-regulation, 36 Purchasing departments, fraud in, 321 number of businesses in, 18 professional service firms, 18 revenues of Big Four firms, 19 tax services, 20 Public accounting firms; see also Big Four accounting firms; CPA firms Qualified opinion, 501 communication with predecessor auditors, 79-80 definition, 55 deficiencies found, 59-60 and departures from GAAP, 503, 504 and departures from GAAS, 503 evaluation of peer review, 58-59 and scope limitation reports, 508,510 PCAOB inspections, 59-60 Qualitative evaluation of misstatements, 811 regulatory bodies, 4445 Qualitative materiality, 48 system of quality control, 56-58 Quality assurance partner, 84 .and intemal audits, 679 Quality audit, 679 reporting disagreements with firm's auditors, 80 Quality control audits, 685 Quarterly Corporate Fraud Index Network, 126 time budget, 86-87 tips on detecting inventory fraud, 388 Qwest Communications, 273 Public Broadcasting Services, 867 Public Company Accounting Oversight Board, 9, 14, 39,40, 55, 272, 499, 679; see also R Auditing standards and accounting standards, 595-596 Racketeer Influenced and Cormpt Organizations and acquisition and expenditure cycle, 340 Act, 656 and audit completion, 455 Radio frequency identification, 384,385 on audit evidence, 91 Raghunandan, K., 514 changes to auditors' report, 524 Raising capital, 416417 and codes of conduct, 594 Raju, Ramalinga, C26-C28 on contingent fees, 612 Rama,D. v., 514 on controls in computerized environment, 839 Ramon, K. K., 660 controversy over, 36-37 Random selection, 792-793 creation of, 36 definition, 721 description, lln systematic, 721-722 disciplinary actions, 618-619 unrestricted, 721 on engagement letters, 82 Range, Jackie, C27n, C29 on engagement planning, 77 Ratio estimation, 817 and finance and investment cycle, 437 Rationalization of employee fraud, 227 functions, 36 Raw material inventory status report, 371-372 on identifying controls, 185-186 Reagan, Ronald W., 17, C5 implications of following, 500 Real Clear Politics, 718 inspections, 474 Real-time processing, 846 on computer controls, 840 Reasonable assurance of firms, 59-60 versus absolute assurance, 170 in production cycle, 392 concept, 171 on intemal auditing, 680 definition, 46 on intemal audit services, 22 on detecting errors and fraud, 122 on justified departures from GAAP, 515 on financial controls, 279 on management assertions, 11

122

Index
Remoteness, 3 Reorganization, at General Motors, C12 Reperformance, 97 in tests of controls, 194 Replacement costs, 369 Report on compiled financial statements, 560-561 on financial statements and related disclosures, 496 on internal control over financial reporting, 496 Reporting, under attestation standards, 74 Reporting principles, 41, 42, 55 adverse opinion, 54-55 definition, 53 departures from GAAP, 54-55 financial reporting framework, 54 materiality concept, 55 qualified principle, 55 requirements, 54 unqualified opinion example, 54 Reporting standards, 75 Research and development, vouching, 333 Responsibilities incompatible, 180-181 for intemal control, 176 in principles of conduct, 596-597 Responsibility principle, 41, 42 competence and capabilities, 43 independence and due care, 43-45, 80 kinds of auditor responsibilities, 42 and Madoff scandal, 45 professional judgment, 45 professional skepticism, 45 Responsible party, 548 Restatement examples of, 411 of financial results, 203 of financial statements, 454 reasons for, 319 Restatement of torts doctrine, 640 Retained earnings/total assets ratio, 164 Retention reviews, 79 Retum on beginning equity ratio, 164 Revenue assertion risks for, 270 ofBig Four firms in 2010, 19 effect of Sarbanes-Oxley Act on, C24 net vs. gross, 272 Revenue and collection cycle, 231-232 audit approach assessing assertions, 270 calculating detection risk, 270 consideration of inherent risk, 270 determining evidence collection, 270 identifying control activities, 270 tests of controls, 270-271 using audit risks model, 270 walkthrough, 271 audit plan, 315-316 control risk assessment account balances, 279 control activities, 279-280 summary of, 282 tests of controls, 280-282 fraud at IT factory, 269-270 fraud cases: extended procedures canny cashier, 293-294 closing accounts, 297-298 dual-purpose procedures, 292 frequent billing, 296-297 taxman, 294-296 inherent risks collectabilty, 273 customer retums and allowances, 273-274 revenue recognition, 271-273 intemal control questionnaire, 313-314 professional standards references, 268 PCAOB inspections, 300 substantive procedures altemative procedures, 289 analytical procedures, 284 assertions on account balances, 283 confirmation of accounts/notes receivable 285-289 cutoff and sales retums, 290 discerning population of assets to audit, 283 dual-purpose procedure, 292 presentation and disclosure, 291 review for collectability, 289-290 rights and obligations, 290 typical activities accounting for accounts receivable, 276-277 audit evidence, 277-279 basic activities, 274 billing customers, 276-277 delivery of goods or services, 276 entity-level controls, 275 receiving and processing orders, 275-276 Revenue cycle assertions, 753 Revenue forecasts, 435-436 Revenue recognition and channel stuffing, 273, 274 criteria, 271-272 examples of company misstatements, 273 improper, 272 net vs. gross revenue, 272 reasons for importance of, 272 requirements, 271 Reverse mergers, and component auditors, 517 Review, 558 of accounting estimates for audit completion, 458^59 of audit documentation, 469-470 for collectability, 289-290 definition, 19 of management's discussion and analysis, 554 Review and compilation appropriate accounting framework, 558 Code of Conduct, 558 compilation services, 560-561 interim financial information report on, 565 responsibilities for reporting on, 563-564 professional standards references, 546 review services, 558-559 standards, 558 summary, 562-563 topics under additional paragraphs, 562 communication with predecessor auditors, 562 comparative financial statements, 561-562 fraud, 561 personal financial planning, 562 prescribed forms, 562 Review engagement, 496, 549 Review evidence, obtaining, 558-559 Review notes, 469 Review of accounts, 457-458 Review of output for reasonableness, 853 Review services and fraud, 561 negative assurance, 559 obtaining evidence, 558-559 professional standards, 559 purpose, 558 RFIDJournal, 385 Rice, J. C., 59n Richards, Gregory, CIO Rigas, John, 124 Rights and obligations, 290 Rights to assets, 12 Risk in audit engagement, 77-78 qualitative measures of, 130 Ruff, Kevi Lee, 377 Rule-making bodies, 40 Rules for ethical behavior, 593 Rule-utilitarianism, 593 Rimiman, Ahmed, C29 Run-to-run totals, 852 Rusch Factors, 640 Rusch Factors v. Levin, 654

Index

123

Reasonable assuranceCont. in fraud detection, 125 SEC on, 197 Reasonableness of accounting estimates, 459 of sales forecast, 374 Reasonableness tests, 138,250 Reasonably foreseeable persons, 646 Recalculation of audit, 97 cautions on, 98 by computer, 102-103 Receivables, assertion risks for, 270 Receivables turnover ratio, 164 Receiving report, 322 unmatched, 323 Reconciliation, 233; see also Bank reconciliation of disbursements, 235 periodic, 326 Record counts, 851 Recording accounts payable, 323 of accounts payable, 325 of cash disbursements, 235 liabilities, 323 of transactions, 180 Record keeping, 230 in finance and investment cycle, 423 of investments, 420 for long-term liabilities, 417 payroll cycle, 358 Records; see Documents Red flags, 123 for employee fraud, 222-223 for fraud in revenue and collection cycle, 269 at HealthSouth, C15 missed at Parmalat, C20 white collar criminals, 224 Reece, Andrew, C29 Reeves v. Arthur Young, 656 Referral fees, 615 AICPA rules, 614615 definition, 615 Reflective choice, 590 Registrars, 416,417 Registration statement, 645 Regulations; see Noncompliance with laws and regulations Regulation S-K (SEC), 648 Regulation S-X (SEC), 511, 648 Regulatory auditors, 23 Regulatory bodies, 9 for public accounting firms, 55-56 Regulatory factors, in inherent risk assessment, 133 Rehnquist, William, C2n, C3 Reinstein, A., 561 Reissued report, 520 Related party, 134, 413 Related-party transactions, 125, 413 perils f, 135 valuation of, 134 Relevance of evidence, 230 Relevant assertions auditor focus on, 128 in cash management, 236 definition, 127 and material misstatement, 185 Relevant evidence, 51 Reliability, in sampling, 724-725 Reliable evidence, 51 Reliable information conditions calling for complexity, 2 consequences of decisions, 3 remoteness, 3 time-sensitivity, 3 investor need for, 2-3

Risk assessment by auditors, 121-127 in audit plan inherent risk, 83 timing of intemal control tests, 83 timing of substantive tests, 83 understand client's business, 83 audit team action, 179 communicate fraud risks, 145-146 documentation of, 146 in ERM, 120 evaluate results of audit procedures, 145 and intemal control, 50 in intemal control, 178 and management assertions, 10-11 necessary relationships, 49-50 preparation for assessing risk factors, 144 audit team brainstorming, 143 information sources, 137-138 inquiry of audit committee and management, 143-144 preliminary analytical procedures, 137-142 primary purpose, 49 professional standards references, 116 reasonable assurance from, 46 requirements for, 49 respond to significant risks, 144-145 and substantive procedures, 49 Risk assessment procedures, 90 Risk assessment process, 132 Risk factors assessing, 144 identifying, 138-144 Risk management activities, 77-78 Risk of assessing control risk too high, 729-730, 756-757 Risk of assessing control risk too low, 729-730, 756-757 Risk of incorrect acceptance, 732-733, 809, 816 Risk of incorrect rejection, 732-733, 809-810 in classical variables sampling, 813-814 Risk of material misstatement, 799 assessment, 174 auditing standards on, 126 control activities, 179 and control risk, 196 definition, 49, 127 and impairments, 414 primary purpose of assessing, 49 at relevant assertions level, 236 revenue and collection cycle, 270 tests of controls, 179 Risk of overreliance, 719-730, 759 in attributes sampling, 756-757 evaluation table, 766-767 Risk of underreliance, 729 in attributes sampling, 756-757 Risk response, in ERM, 120 Risks faced by companies and auditors, 118 of improper revenue recognition, 272 multiplication of, 128-129 unavoidability of, 118 Rizzo, Tom, 866 RMM; see Risk of material misstatement Roberti, Mark, 385 Roberts, D. M., 81 In Roberts, Eric, 375 Roll-forward procedures, 457 Rollover method, 468 Roosevelt, Theodore, 587 Roper, Barbara, C25 Rosenblum, Inc. v. Adler, 641, 654 Rosen Canada Ltd., 335 Royal Ahold, 273 RSM/McGladrey & Pullen, C17

steps performed, 806-807 understatements, 810-811 upper limit on misstatements, 809-810 precision, 724-725 precision interval, 724-725 reliability, 724-725 source of, 724 Sample selection for attributes sampling, 763-764 in classical variables sampling, 815 danger in systematic selection, 764 in MUS example, 804805 Sachdiva, Sujata, 284 sampling interval, 804 Sacred Heart Medical Center, 377 systematic random selection, 804 Safan, Ronald, 469 in nonstatistical sampling Safety-Kleen Corporation, 273, 634 block selection, 819 Sales haphazard selection, 819 channel stuffing, 273 nonprobabilistic techniques, 819 computerized process, 277 Sample size determination, 720-721 recorded in proper period, 290 in attributes sampling, 760-763 Sales cutoff tests, 290 expected rate of deviation, 758759 Sales detail (joumal) file, 278 population size, 759 Sales forecast, 370 and sampling risk, 756-757 as audit evidence, 374 summary of size factors, 759 basis for production, 374 tolerable rate of deviation, 757-758 Sales invoice, 276, 841 for audit sampling Sales orders, 275-276 expected rate of deviation, 734 Sales retums, 290 key factors in, 734 Sales transaction file, 841 sampling risk, 735 Sales transactions, pending order master file, 277 size of population, 734 Salterio, S., 469 standard deviation, 735 SALY (same as last year) forecast, 374 tolerable rate of deviation, 734 Sample estimate of misstatement, 731 in classical variables sampling Sample evaluation tables, 766-767 calculating, 814-815 Sample items formula, 812 measurement risk of incorrect rejection, 813-814 for attributes sampling, 764 standard deviation, 814 for audit sampling, 735 for MUS, 802 for classical variables sampling, 815 expected misstatement, 801-802 in MUS factors influencing, 798 audited value, 805 population size, 802-803 and nonsampling risk, 806 sampling risk, 799-800 tainting percentage, 806 tolerable misstatement, 800-801 in nonstatistical attributes sampling, 774 in nonstatistical attiibutes sampling, 774 measurement of, 723 in nonstatistical sampling, 819 sampling risk and number of, 720-721 Sampling; see also Attributes sampling; Audit selection sampling; Variables sampling block selection, 722 in audit examination, 715 computer software for, 723 audit use haphazard selection, 722 attributes sampling, 726-730 systematic random selection, 721-722 variables sampling, 730-738 selection decision on method, 722-723 basic stages selection for audit sampling define characteristic of interest, 720 block selection, 735 define population, 720 haphazard selection, 735 determine objective, 720 systematic random selection, 735 documenting procedures, 725 unrestricted random selection, 735 evaluation of results, 724725 survey of selection methods, 723 sample items selection, 721-723 unrestricted random selection, 721 sample size determination, 720-721 Sample rate of deviation, 728-729 compared to audit sampling, 716 in attributes sampling, 765-766 defmition, 715 in nonstatistical attributes sampling, 774 examples, 717 Sample results evaluation nonrepresentative sample, 717 in classical variables sampling nonstatistical, 773-774 actions when accoimt balance objective in attributes sampling, 753 misstated, 817 performing, 720-723 audited balance estimate, 815-816 planning, 720 precision interval construction, 816 polling problems, 618 significance of precision interval, 816 population for, 715 confidence level, 724725 professional standards references, 714 in MUS statistical vs. nonstatistical, 719 basic allowance for sampling risk, for tests of controls, 752 808-809 when to use incremental allowance for sampling risk, exact information not important, 716 807-808 large number of items in population, 716 projected misstatement, 807 Sampling error vs. sampling risk, 717 qualitative evaluation of misstatements, 811

124

Index
Satyam subject to, C26 on service organizations reporting, 555 Supreme Court mUng, 37 on tax accounting weakness, 330 on 10-K filings, 463 on 10-Q filings, 463 on tests of controls, 752 Satyam Computer Services, Ltd., 2, 240, 474 Satyam Computer Services, Ltd., case arrests and convictions, C28 auditors, C27 company history, C26 fictitious wages, C27 fraud committed, C26-C27 India accounting standards, C26 inflated balance sheet, C26 overstated receivables, C26 penalties, C28 two sets of statements, C26-C27 understated liabilities, C26 unrecorded liabilities, C27 Scanning, 94 cautions on, 98 by computer, 103 Schedule of interbank transfers, 244245 Schelluch, P., 442 Schmidt, J., 660 Schmidt, Mike, 7 Schmidt, Susan, 167 Schnitzer Steel Industries, 148 Scientific-Atlanta, Inc., 273, 465 Scope and nature of services, 596-597 Scope limitation circumstance-imposed, 507, 508 client-imposed, 507,508 definition, 55 effect on auditor's report, 204,205 Scope limitation reports disclaimer of opinion, 508, 510 qualified opinion, 508, 510 standard report, 508 types of limitations, 507 unqualified opinion, 508 Scope paragraph of standard report, 498, 500 Scrushy, Richard, 124, C14-C16 Search for unrecorded liabilities, 324 definition, 329 procedures, 329-330 Sears, 682, 683, 685 SeaView Video Technology, 273 Second-partner review, 470 Securities destmction certificate, 423 market valuation, 431 unregistered sale of, 432-433 Securities Act of 1933, 637, 644, 652 antifraud section, 647 auditors' defenses, 646-467 civil liability, 645-646 criminal liability, 647 legal precedents, 646, 647 provisions, 645 statute of limitations, 647 summary of auditors' liability, 654 Securities and Exchange Commission, 9, 43, 125, 135, 839, CI and accounting standards, 595 in aftermath of Andersen trial, C4 and Ambassador Eyewear Group, 290 approval of Auditing Standards, 38 on changing auditors, C18 charges against Beazer Homes USA Inc., 122 and codes of conduct, 594 on comparative financial statements, 520 constraints on auditors, 16 on consulting services, 20 disciplinary actions, 618-619 EDGAR database, 80 filings on change of auditors, 80 Financial Reporting Releases, 648 Form 8-K, 146 Forms, 648 Form 10-K, 496 on interim financial information, 563 on intemal auditing, 680 on intemal audit services, 22 investigation of Dell Inc., 174, 454 investigation of General Electric, 430 investigation of McKesson & Robbins, 37-38 investigation of Satyam, 240 on lease accounting, 414 and NutraCea, 280 penalties for Satyam case, C28 and Private Securities Litigation Reform Act of 1995, 147-148 and PCAOB, 1 In on reasonable assurance, 197 registration requirement, 645 Regulation S-K, 648 Regulation S-X, 511, 648 reporting requirements, 496 required disclosures, C24-C25 on revenue recognition, 271-272 mles on filing audited financial statements, 454-455 and San Diego city officials, 415 and Sirena Apparel Group, Inc., 290 Staff Accounting Bulletin No. 99, 468 No. 108, 468 Staff Accounting Bulletins, 648 suit against KPMG, 469 10-K filings (SEC), 463 lO-K reports, 37 10-Q filings (SEC), 463 on XBRL, 572 Securities and Exchange Commission Practice Section, 58 Securities Exchange Act of 1934, 637, 644, 652 antifraud section, 648-649 auditors' defenses, 650 civil liability, 650 criminal liability, 651 on employment of manipulative and deceptive devices, 649 and Foreign Cormpt Practices Act, 651-652 legal precedents, 649, 651 purpose, 648 registration requirement, 648 summary of auditors' liability, 654 Securities fraud, 125 Securities issuance, 645 Securities Litigation Reform Act, 660 Securities Litigation Uniform Standards Act of 1998,659 Securities offerings, 416-417 Security of computers, 181 of tmst services, 573 Self-regulation, 617 failure of, 36 Self-regulatory discipline, 617-618 Separation of duties in cash disbursements, 230, 235 in computerized processing systems, 847 in internal control, 180-181 lacking in end-user computing, 864 in production cycle, 376 Sequence tests, 852 Sequential sampling definition, 772 operation of, 772-773 population deviation rate, 772 Service organization control reports, 555,557 Service organizations attestation engagements for reports, 555-556 service organization control reports, 555, 557 for computer processing, 866 definition and examples, 554 for payroll preparation, 362 Services delivery of, 276 purchasing, 321-322 receiving, 322 Services Fraud Investigation Office, India, C28 Settlement offer procedure, 617-618 SharePoint Technology, 866 Shefchik, L., 59 Shell company, 321 Shipping document, 841 Shockey, L. Jackson, 595 Shoplifting, 125 Short shipment, 125 Siegelman, Don, C16 Siemens AG, 148, 651 Signatures and initials, 107 Significant accounts, 185 Significant accounts disclosure, 127 Significant deficiency communication of, 206-207 definifion, 199 Significant risks definition, 144 performing extended procedures, 145 responding to, 144-145 Simulated data, techniques using integrated test facility, 862 purpose, 861 test data, 861-862 Sinason, D., 225, 696n Singer, Marcus G., 593n Single audit, 693, 694 Single Audit Act of 1984 and Amendments, 693-694 Sirena Apparel Group, Inc., 290 Skewed accounting distributions, 716 SK Foods, 322 Skilling, Jeffrey, 124,179 Skills needed for risk assessment, 121 Small and medium-sized businesses information systems in, 184 intemal control environment, 177-178 monitoring activities, 184 Smith V. London Assurance Corporation, 638, 654 Snapshot, 859 Snyder, Steve, 182 Social Security Administration, 361 Social Security taxes, 361 Societe Generale, 848 Socioeconomic stmctures, 571 Software for audit documentation, 104 for computer-assisted audit techniques, 101-102 Software services firm, C26-C28 Solicitation, AICPA rule'^, 613-614 Solomon, D., 318n Solomon, K. I., 61 In Sonal, Joshi, C29 Sonic Automotive, Inc., 514 Sony Corporation, 867 Sophocles, 220 Source documents, 183 Special and restiicted-use reports reports on application of requirements of appropriate framework, 568-570 special-purpose frameworks, 566-568 specified elements, accounts, or items, 565-566 types of reports, 565 Specialists in audit plarming, 85 in computers, lOI definition, 85 information technology auditors, 85 Special purpose entities, 410, 521 Special purpose frameworks definition, 566 disclosures, 568 versus GAAP, 567 modifications of auditors' reports, 567-568 reasons for, 566-567 standards for auditors, 567 types of, 566 Special report, 547 Specific authorization, 180 Spreadsheet and data controls, 866 Spreadsheet goofs, 182 SRSR Holdings, C27 Staff Accounting Bulletins; see Securities and Exchange Commission Standard and Poor's, 141 Standard and Poor's 500 companies, 135 Standard costs, 372 Standard deviation, 735 definition, 814 relation to sample size, 814 Standard error of the mean, 735 Standardized formats and screens, 851 Standard report basic components, 498 features, 498-499 intemal control paragraph, 501-502 introductory paragraph, 500 opinion paragraph, 501 reasons for issuing, 498 scope paragraph, 500 as unqualified opinion, 501 Star Air Ambulance Service, 335 Starbucks Corporation, 411, 575 Statement on Quality Control Standards No. 8, 56, 57 Statements of Auditing Procedures, 38 Statements of Financial Concepts No. 5, on expense recognition, 318 No. 2 on imderstandability, 13 Statements of Financial Standards No. 149, 182 Statements on Auditing Standards, 38,40, 549 definition, 5n Statements on Quality Control Standards (AICPA), 558 Statements on Responsibilities in Tax Practices, 20 Statements on Standards for Accounting Review Services, 549, 558, 561 Statements on Standards for Attestation Engagements, 5n, 598 State of mind, 43 States audit agencies, 22, 689 boards of accountancy, 618 certification and licensing by, 25 insurance board auditors, 5 State Street Trust v. Emst, 640 State Supreme Court of China, 619 Statistical sampling definition, 719 to determine sufficiency, 52 versus nonstatistical sampling, 719 probabilistic selection techniques, 819 Statute of limitations extended by Sarbanes-Oxley Act, 647,655 in Securities Act, 647 Statutory law definition, 637 summary of auditors' liability, 654 Statutory liability Foreign Cormpt Practices Act, 651-652 legislation involved, 644

Index

125

Sampling interval, 721, 792 in MUS, 804 Sampling plans, 719 Sampling risk allowance for, 724-725, 758, 768 associated with attributes sampling efficiency loss, 730 exposure to effectiveness loss, 730 risk of overreliance, 729-730 risk of underreliance, 729 tolerable rate of deviation, 728-729 upper limit rate of deviation, 728-729 associated with variables sampling risk of incorrect acceptance, 732-733 risk of incorrect rejection, 732-733 sample estimate of misstatement, 731 upper limit of misstatement, 731-732 in attributes sampling risk of overrehance, 756-757 risk of underreliance, 756-757 summary of, 757 basic allowance for, 808-809 controlling, 718 definition, 717 incremental allowance for, 807-808 versus nonsampling risk, 716-718 and number of sample items, 720-721 in sample size determination, 735 versus sampling error, 717 summary for audit sampling, 733 for variables sampling risk of incorrect acceptance, 799-800 risk of incorrect rejection, 799-800 substantive procedures for, 799-800 Sampling unit, MUS vs. classical vmables sampling, 815 Sam's Club, 384 Samson, W., 6 San Diego city officials, 415 SAP software, 99 Sarbanes-Oxley Act, 126, 203, 644, 679, 840, C16 and analytical procedures, 142 on audit committees, 475 on audit communications, 475 on audit of intemal control system, 197 and auditors' liability, 655-656 on changes in intemal control, 564 constraints on accounting firms, C17 on consulting services, 20-21, 589 controversy over, C23 costs of compliance with, 200 creation of PCAOB, 36 definition of intemal control, 171 effect on accounting for revenues, C24 and employee hotlines, 228 extension of statute of limitations, 647 high costs of compliance, C23 impact on capital markets, 807 on independence, 605 independence requirement, 43 on inspection of firms, 59 on intemal auditing, 680 on intemal control, 169-170 on management's financial reporting, 10 nonaudit service restrictions, C23 occasion for passage of, C4 on peer review, 58-59 penalties for misleading financial statements, 171-172 on PCAOB inspections, 474 quality control standards, 56 reason for, 38 reasons for passage of, 169 on reports for SEC registrants, 496 on responsibilities for intemal control, 172 result of corporate scandals, 589

Securities Act of 1933, 645-646 Securities Exchange Act of 1934, 648-649 Stefaniak, C. M., 469 Stevens, Ray, C6 Stevenson, Robert Louis, 435 Stock certificate books, 423 Stockholders, fraud pertaining to, 125 Stockholders' equity, 415,427 Stock price performance, of Fannie Mae, 839 Stocks, 416 Stolper, Andrew, 375 Stone Ridge Investment Partners v. Scientific Atlanta, 656-657 Stop-or-go sampling, 772 Strata, 812 Strategies auditor awareness of, 121 definition, 118 effects of implementing, 136 in inherent risk assessment, 136 Stratification of population, 812 Strong, George, C15 Subjective estimates of accoimts, 133 Subprime crisis, 635 Subsequent events, 470-472, 518 Subsequently discovered facts, 472-473 Substantial equivalency, 25 Substantive procedures, 90 acquisition and expenditure cycle, 328-334 accmed income taxes, 330-331 accmed liabilities, 330 analytical procedures, 330 assertions about account balances, 329 completeness assertion, 328-329 gathering evidence, 332-334 intangible assets, 331-332 other expenses, 334 prepaid expenses, 330 presentation and disclosure, 334 property, plant, and equipment, 331-332 purchase cutoff, 330 search for unrecorded liabilities, 329-330 assessment of control risk, 196 in attributes sampling, 728 in audit completion analytical procedures, 457-458 review of accounting estimates, 458-459 review of accounts, 457-458 roll-forward procedures, 457 audit sampling, 726 categories of, 128 deficiencies noted by PCAOB, 795 definition, 49, 292 detection risk, 730 dual-purpose procedures, 292-293 to evaluate evidence, 50 evidence gathered by, 270 for financing activities long-term liabilities/related accounts, 425-426 stockholders' equity, 427 for investment activities auditing fair value measurement, 429-432 control deficiencies, 428 derivative instruments, 429 investments with affiliates, 428 nature of work, 428-429 monetary unit sampling, 796-811 nature, timing, and extent of, 174 prior to year-end spread, 456 production cycle analytical procedures, 379-380 fraud potential in inventory, 387-388 GAAS requirement, 380 physical inventory inspection, 381-386 presentation and disclosure, 388 pricing and compilation tests, 386-387 tips for detecting fraud, 388

126

Index
Tax fi^ud, C18 Tax laws, 20 Tax reports, 360 Tax services, scope and role of, 19 Tax shelters, C18 Taylor, M. H., 40n Technical controls, 868-869 Tellabs, Inc. v. Makor Issues and Rights, Ltd., 652 Temple, Nancy, C2 Temporary transaction trails, 99 10-K reports (SEC), 37 Sarbanes-Oxley Act on, 463 10-Q filings (SEC), Sarbanes-Oxley Act on, 463 Termination letters, 82 Terrorists, illegal payments to, 148 Tervo, W., 59n Test data approach, 861-862 Tests of controls, 90; see also Attributes sampling accounting estimates, 422 in acquisition and expenditure cycle, 326 direction of tests, 328 revealing weaknesses, 328 attributes sampling, 728, 752, 753 for audit plan, 351 and audit team, 190-191 bridge workpaper, 191-192 for cash disbursement, 235 for cash receipts, 234 for computerized environment benchmarking, 862 parallel simulation, 860-861 program-embedded techniques, 858-860 simulated data techniques, 861-862 in computerized environment auditing around the computer, 857 audit through the computer, 857-858 direction of completeness, 194 dual-direction, 195 occurrence, 194-196 dual-purpose, 196 for entire audit period, 755 for operating effectiveness, 764 performance methods audit team choice, 194 document examination, 194 inquiry, 193-194 observation, 194 reperformance, 194 prior to year-end spread, 456 production cycle assertions about transactions, 379 direction of, 379 intemal documentation, 378 personnel, 377 PCAOB requirements, 198 PCAOB review, 752 revenue and collection cycle, 281-282 assertions about classes of transactions, 281 dual-direction, 281-282 in revenue and collection cycle, 271 throughout period of audit, 193 Tests of details, for sampling risk, 799-800,801 Theft of assets, 222 Theft of cash or property, 125 Thibodeau, J., 176n Third-party checks, 360 Third-party liability auditor's defenses, 642-643 classification as third party, 642 classification of jurisdictions, 642 Credit Alliance case, 640 failure to exercise professional care, 638-639 Fleet National Bank case, 640-641 foreseeable parties, 641 foreseen parties, 641 near privity, 640 primary beneficiaries, 640 privity or near-privity jurisdictions, 642 reasonable foreseeability jurisdictions, 641 restatement of torts doctrine, 640 restatement of torts jurisdictions, 642 Rosenblum, Inc. case, 641-642 Rusch Factors, 640 summary of auditors' liability, 652-654 third-party complaints, 639 Ultramares case, 639-640 Third-party reimbursement maximization, 8 Third-party users auditor responsibility, 636 losses, 636 Thompson, Bill, 636 Tick marks, 107 Tidwell, Gary L.,C10 Time budget in first-time audit, 86 illustration of, 86 interim work, 86 purpose, 86 recording time reports, 87 year-end work, 86 Time card forgery, 363-364 Timekeeping, 358 Time-sensitivity, 3 Time to plan audit, 47-48 Time Warner, 273 Timing of intemal control tests, 83 of substantive tests, 83 Titanic, 178 Titus, Harold H., 591-592 TJX Corporation, 276, 867, 868 Todman Company, 656 Tolerable misstatement, 726 calculating, 801 definition, 800 in nonstatistical sampling, 819 in sample size determination, 800-801 Tolerable rate of deviation, 728-729, 759 in attributes sampling, 757-758 and audit sample size, 734 compared to upper limit rate of deviation, 768-769 definition, 757 in nonstatistical attributes sampling, 774 Tommy Hilfiger, 356 Top-down approach, 198 Topps baseball cards, 7 Tort action definition, 637 fi"aud, 638 gross neghgence, 638 ordinary negligence, 638 Total revenue benchmark, 88-89 Touche, Niven & Company, 639 Touche Ross & Company, CI7 Tracing, 94 for payroll cycle, 195 Trade magazines, 137 Trademarks, custody of, 419 Trade secrets, theft of, 125 Trading securities, 431 Transaction assertion in acquisition and expenditure cycle, 327 production cycle, 379 for revenue and receivables, 270 Transaction-level controls definition, 186 identiiying, 186-187 Transaction logs, 865 Transactions arm's length, 413 authorization of, 230 authorization to execute, 180 automated, 181 classification, 13-14 completeness and cutoff, 12-13 complex, 414 complexity of, 133 computer-initiated, 99 custody of assets involved in, 180 existence and occurrence, 12 in finance and investment cycle, 410 fi-aud and volume of, 133 management assertions about, 10 occurrence and completeness, 183 in production cycle, 371 record counts, 851 recording, 180 related-party, 413 in sales authorization of credit, 276 billing, 276 delivery of goods/services, 276 initiating, 275-276 stockholders' equity, 427 uniform processing, 99 valuation and allocation, 12 walkthrough, 187 Transaction trails, 99 TransAlta Corporation, 182 Transfer agent, 416,417 Transparency, 13-14 demand for, 571 Treadway, James, 170 Treadway Commission, 119n, 170, 501, 502, 771 Treasury Department, 20 Trial balance accounts payable, 324 aged, 278 for confirmation of accounts, 278 Tricontinental Industries v. PricewaterhouseCoopers, 651 Tripathi, Salil, C29 Triple-bottom line, 574 Trompeter, G., I42n Tme balance, 795 Tmstee, 417 Trust services definition, 573 and growth of e-commerce, 572-573 principles for engagements, 573 SysTmst Service, 573 WebTmst Service, 573-574 Tmst Services Data and Integrity, 573 Tmst Services Principles and Criteria, 573 Tmth-in-securities law, 644 TRW Automotive Holdings Corporation, 514 Turner, Lynn E., 44, 635 TV Guide, 273 Twain, Mark, 587 Tyco Intemational, 2, 124,411, 634 Type I errors, 716 Type II errors, 716 Type 1 service organization report, 555 Type 2 service organization report, 555, 556 Tyson Foods, 369 Underfunded pension obligations, 415 Understandability, lacking in Enron statements, 14 Understatements, in MUS, 810-811 Underwriters, auditor assurances to, 645-646 Uniform CPA Examination, 24-25 Uniform mobility, 25 Uniform processing of transactions, 99 United Airlines, 853 United Auto Workers, C12 United Parcel Service, 571 United Rental, 659 United States Comptroller General, 689 United States Public Company Reform and Investor Protection Act of 2002, 655 United States Secret Service, 867 United States Senate Banking Committee, 657 United States Supreme Court, 410 on materiality, 87-88 overtums Arthur Andersen verdict, C3, C17 mling on Sarbanes-Oxley Act, 37 on solicitation, 614 United States v. Benjamin. 647 United States v. Nateili, 651 Univer, Scott, 633-634 University of Phoenix, 644 University of Tennessee intemal audit charter, 680,
681,686

Index
Valuation, 12,141 of inventory, 386 of investments, 428 lower-of-cost-or market, 369 by lower-of-cost-or-market testing, 387 provided by confirmation, 285 risk level of, 128 Valuation assertion and collectability, 289-290 Value-added audit ensuring compliance, 682-683 improving efficiency, 682 recognizing risks, 682 serving as management representation, 683 Value and allocation assertions in classical variables sampling, 812 in nonstatistical sampling, 818 Variables sampling; see also Classical variables sampling; Monetary unit sampling versus attributes sampling, 795 audited value/balance, 730-731 classical, 731 defmition, 730, 795 for detection risk, 730 documentation, 820 and misstatements, 795 monetary unit sampling, 731 MUS vs. classical, 817-818 nonstatistical, 818-820 nonstatistical methods, 731 professional standards references, 794 sampling risks, 799 sampling risks associated with effectiveness loss, 732 efficiency loss, 732 risk of incorrect acceptance, 732-733 risk of incorrect rejection, 732 sample estimate of misstatement, 731 tolerable misstatement, 731 and upper limit of misstatement, 731-732 seven-step procedure, 795 substantive procedures, 730 and tme balance, 795 Venable, Carol T., CIO Vendor invoices, 323 immatched, 323 Vendors approved list of, 321-322 confirm accounts payable with, 330 fraud pertaining to, 125 Ventimiglia, Milo, 375 Verbal evidence, 52 Verbal inquiry, 96 Vertical analysis, 139, 250 Vines, Michael, 144, CI5 Visa, 273 Vitesse Semiconductor Corporation, 274 Volkswagen Credit Inc., 375 Von Borstal, Octavo Garcia, 322 Voucher, 323 Voucher package, 323 Voucher system, in purchase of investments, 420 Vouching, 94 cash disbursements, 329 cautions on, 98 deposits in transit, 243 to gather audit evidence, 333 investment costs, 431 for payroll cycle, 195

Substantive proceduresCont. revenue and collection cycle altemative procedures, 289 analytical procedures, 284 assertions about account balances, 283 confirmation of accounts/notes receivable, 285-289 cutoff and sales retums, 290 extended procedures for fraud cases, 292-298 notes about confirmations, 291 presentation and disclosure, 291 review for collectability, 289-290 rights and obligations, 290 for sampling risk analytical procedures, 799-800 tests of details, 799-800 versus tests of controls, 292 use of materiality for, 90 Substantive tests determining nature and timing of, 83 of transactions, 334 Successor accountants, 562 Sufficiency, 52 Sufficient evidence, 52 Summary financial statements, 521-522 Sunbeam Corporation, 458, CI Supervision, in payroll cycle, 358 Supplementary information, 523 Suppliers, fraud pertaining to, 125 Sureparts Manufacturing Company, 285 Sustainability, 8, 574 Sustainability reporting, 574-575 Systematic random selection, 721-722 in attributes sampling limitation, 793 selection interval, 792 in MUS, 804 Systematic selection, 721-722 System of quality control continuance of client relationship, 57 deficiencies, 58 definition, 56 ethical requirements, 56 human resources, 57 leadership responsibility, 56 monitoring, 57-58 PCAOB inspections, 59 purpose, 56 Systems analysts fiinctions, 846 separation of duties, 847 Systems development and modification controls, 865-866 Systems development life cycle, 844-845 SysTmst Service, 573

T
T. J. Maxx, 276, 868 Tagg, Stephen K., 751 Taggart, David, C7, C93 Taggart, James, C93 Tagging transactions, 858 Tainting percentage, 805 Tangible assets caution on inspection of, 98 inspection of, 95 Tanner, Torry, C15 Tanzi, Calisto, 124, C21-C22 Tarpley, R., 122n Tax accounting weaknesses, 330 Tax actions, in third-party liability, 639 Tax consulting, 20 Tax consulting fees, C18 Tax evasion, 125 Tax Executive Committee, 609

u
UBS, 470 U-Haul Intemational, 521 Uisten, Ola, C26 Ultramares Corporation v. Touche, 639, 654 Unasserted claims, 461 Unaudited financial information, 643 Unconditional obligation, 592 Unconditional requirements, 38 Uncorrected misstatements, 469 iron curtain method, 468 rollover method, 468

University of Texas, 419 Unmatched invoice file, 323 Unmatched receiving report file, 323 Unmatched receiving reports, 323, 329 Unmatched vendor invoice, 323-324, 329 Unqualified auditors' report on intemal control over financial reporting, 201 Unqualified opinion, 501 definition, 54 and departures from GAAP, 503, 504 and departures from GAAS, 503 example, 54 going-concem uncertainties, 513-514 on intemal control, 199 justified departures from GAAP, 514515 and scope limitation reports, 508 Unrecorded liabilities, 243, 319 search for, 324 Unrestricted random sampling, 792 Unrestricted random selection, 721 Updated report, 520 Update report, 561-562 Upper limit of misstatement, 731-732 Upper limit on misstatement definition, 809 in MUS, 810-811 Upper limit rate of deviation in attributes sampling calculating, 766-767 compared to tolerable rate of deviation, 768-769 components, 768 information provided by, 766 definition, 728-729 U.S Airways, 424 User demand and financial accounting frauds, 2-3 for reliable information, 2-3 User entity, 866 Usrey, S., 469 Utilitarianism, 593

V
Vadlamani, Srinivas, C27 Valero Energy Corporation, 424 Valid character tests, 852 Valid sign tests, 852

w
Wabtec Corporation, C17 Wagoner, Rick, 495, Cll, C12 Walking D Ranch Adventures, 414

128

Index
White-collar criminals, 223-224 Whitehouse, Sheldon, 688 Whitehouse, Tammy, 125, 319n, 430 White Star Line, 178 Wilkie Farr & Gallagher, 635 William Iselin and Company, 643 Williams, D. D., 514 Willingham, J. J., 222n, 225n Wilson Sporting Goods Company, 7, 716 Winchester Crown Court, England, 357 Winkler, Stephan, 233 Woodruff, Wardlow, Nelson, and Cash, 340 Working capital/total assets ratio, 164 Work-in-process, 377 Workpapers, 104; see also Audit documentation Workplace, managing people pressures, 228 World Basketball League, 368 WorldCom, 2, 3, 13, 36, 38, 56, 58, 78, 124, 144, 168, 169, 172,317,318,458,514, 589, 594, 598, 654, 655, 658, 659, 678, 860, C1,C4 World Council for Corporate Govemance, C26n World Electronics, 390 World Poker Tour, 79 Worthington Industries, 387 WPT Enterprises, Inc., 79 Wright, A., 142n, 468n, 476, 524 Wright, S., 468n Written representations contents, 463 definition, 52 form and purpose, 463 sample, 464 Sarbanes-Oxley Act on, 463 to support auditor opinion, 465 tmstworthiness, 465 W2; see Employee W2 reports

Audit Standards (PCAOB) AS No.

1 3 4 5 6 7 8 9 10 11 12 13 14 15

Walkthrough for cash activities, 234 of computerized transactions customer master file, 841 customer order transaction file, 840-841 inventory master file, 841 sales invoice, 841 sales transaction file, 841 shipping document, 841 definition, 187 revenue and collection cycle, 280 of transactions, 187 fVa/l Street Journal, 137, 200, 318 Walmart, 48, 120, 170, 183, 384, 682 Walt Disney Company, 435-436 War Fighting Center, 414 Washington, George, 6 Waste Management, Inc., 78, 319, CI, C2 Watson, Robert, 322 Webb, A., 469 Weber, J., CIO Webster, Daniel, 409, 587 WebTrust Service, 573-574 Weidbaum, Jack, 634 Weil, Jonathan, C2n Wells, Joseph T., 229, 249n, 369n, 715n Wells Fargo, 243, 414 Wells notice, 634635 Wheelwright Philip, 589n Whistle-blowing on clients, 610-611 at HealthSouth, C15-C16 Whitcher, Craig, C29 White-collar crime, 125

Date Issued
2004 2004 2005 2007 2008 2009 2010 2010 2010 2010 2010 2010 2010 2010

Title
References in Auditors' Reports to the Standards of the Public Company Accounting (. Kersi'.'ht Ivi.ird Audit Documentation Reporting on Whether a Previously Reported Material Weakness Continues to Exist An Audit of Intemal Control over Financial Reporting That is Integrated with an Audit of Financial Statements Evaluating Consistency of Financial Statements Engagement Quality Review Audit Risk Audit Planning Supervision of the Audit Engagement Consideration of Materiality in Planning and Performing an Audit Identifying and Assessing Risksof Material Misstatement The Auditor's Responses to the Risks of Material Misstatement Evaluating Audit Results Audit Evidence

X
XBRL, 8, 9, 572 XBRL Assurance Task Force, 572 Xerox Corporation, 169, 273, 411,469, 634 Xinhua Finance Ltd., 135

Y
Yahoo!, 141 Yates, Buddy, 317 Year-end adjustments, 144 Year-end audit work, 86 Year-end date, 456 inventory not on, 384-385 roll-forward procedures, 457 Year-to-date eamings records, 360-361 Yellow Book, 689, 694, 696 Young, Michael, 634, 635 YRC Worldwide, 514 Yuen, Henry, 124, 465

z
Zhang, T., 60n Zhou Limin, 619 ZZZ Best, 98

Code of Professional Conduct (AICPA)

Article I^Resjnsibilities Article IIThe Public Interest Article IIIIntegrity Article IVObjectivity and Independence Article V-Due Care ArticleVIScope and Nature of Services

1 1 1
|

Rule No.
101 102 201 202 203 301

Rule No.
Independence Integrity and Objectivity General Standards Compliance with Standards Accounting Principles Confidential Client Information
302

i 1

Contingent Fees Acts Discreditable Advertising and Other Forms of Solicitation Commissions and Referral Fees Form of Practice and Name

j
|

501 502 503 505

Government Auditing Standards (U.S. General Accounting Office)

2011 Internet Version of Govemmental Auditing Standards (the "Yellow Book") www.gao.gov/yellowbook

1
|

International Standards for the Professional Practice of Internal Auditing (MA)

I.

Title

Number
1000 1100 1200 1300

Attribute Standards
Purpose, Authority, and Responsibility Independence and Objectivity Proficiency and Due Professional Care Quality Assurance and Improvement Program

Performance Standards
Managing the Intemal Audit Activity Nature of Work Engagement Planning Performing the Engagement Communicating Results Monitoring Progress Resolution of Senior Management's Acceptance of Risks

|
2000 2100 2200 2300 2400 2500 2600

Auditing Standards Board Clarity Project-Previous AU Sections Mapped to Clarity Standards Previous AU Section Previous AU Section
Statements on Auditing Standardsintroduction
110 120 150 161 Responsibilities and Functions of the Independent Auditor Defining Professional Requirements in Statements on Auditing Standards Generally Accepted Auditing Standards TTie Relationship of Generally Accepted Auditing Standards to Quality Control Standards Quality Control for an Engagement Conducted in Accordance With Gener ally Accepted Auditing Standards Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards 220 Overall Objectives of the Independent Auditor and the Conduct of an Audit 200

New AU Section

New AU/ISA

New AU Section

AU/ISA
410 420 431 504 508

The First, Second, and Third Standards of Reporting

Adherence to Generally Accepted Accounting Principles Forming an C^inion and Reporting on Financial Statements Consistency of Application of Generally Accepted Acccmnting Principles Adequacy of Disclosure in Financial Statements Consistency of Financial Statements Modifications to the Opinion in the Independent Auditor's Report

700
708 705

The Fourth Standard of Reporting

A^ociation With Financial StatnenK Refwrts <m Aiwiited Fmancial Statement Withdrawn Forming an C^inion aiwi Reporting on Financial Statements Modifications to the Opinion in the Independent Auditcw's Report 200 Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Inde pendent Auditor's Report Special ConsiderationsAudits of GrfMip Financial Statements (Including the Work of Component Auditors) Consistency of Firancial Statements Planning an Audit Terms of Engagement Materiality in Planning and Performing the Audit Evaluation of Misstatements Identified During an Audit Understanding the Entity and Its Environment and Assessing the Risksof Material Misstatement (Redrafted) Opening BalancesInitial Audit Engagements, Including Reaudit Engagements Terms of Engagement Consideration of Fraud in a Financial Statement Audit (Redrafted) Consideration of Laws and Regulations in an Audit of Financial Statements Performing Audit Procedures in Response to Asse^d Risb and Evaluating the Audit Evidence Obtained (Redrafted) Using the Work of Intemal Auditors (working tide) Audit Considerations Relating to an Entity Using a Service Organization Communicating Intemal Control Related Matters Identified in an Audit
(Redrafted)

N/A 700 705 706 600 708 805 560 700 560 905 910 600 800
1

The General Standards

201 210 220 230 311 312 314 315 Nature of the General Standards Training and Proficiency of the Independent Auditor Independence Due Professional Care in the Performance of Work

The Standards of Field Woric

Planning and Supervision Audit Risk and Materiality in Conducting an Audit Understanding the Entity and Its Environment and Assessing the Risks of Material Missratement Communications Between Predecessor and Successor Auditors Consideration of Fraud in a Financial Statement Audit Illegal Acts by Clients Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained The Auditor's CotKideration of the Intemal Audit Function in an Audit of Financial Statements Service Organizations Communicating Intemal Control Related Matters Identified in an Audit Audit Evidence Auditing Fair Value Measurements and Disclosures Analytical Procedures The Confirmation Process Inventories Auditing Derivative Instmments, Hedging Activities, and Investments in Securities Management Representations Related Parties Using the Work of a Specialist Inquiry of a Client's Lawyer Conceming Litigation, Claims, and Assessments Audit Documentation The Auditor's Consideration of an Entity's Ability to Continue as a Going Concem Auditing Accounting Estimates Audit Sampling The Auditor's Communication With Those Charged With Govemance Consideration of Omitted Procedures After the Report Date 300 210 320 450 315 510 210 240 250 330 610 402 265 500 540 520 505 501 501 580 550 620 501 230 570 540 530 260 - 585

Special ConsiderationsAixlits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial StateiMnt Subsequent Events and Subsequently Discovered Facts

530 532 534 543 544 550 551 552 558 560 561

Dating of the Independent Auditor's Report Restricting the Use of an Auditor's Report Reporting on Financial Stetements Prepared for Use In Otlier Countri^ Part of Audit Performed by Od\er Independent Auditors Lack of Conformity With Generally Accepted Ac counting Principles Other Information in Documents Containing Audited Financial Statement Siqjplementary Information in Relation to the Finan cial Statements as a Whole Reporting on Condensed Financial Statements and Selected Financial Data Requited Supplementary Information Subsequent Events Subsequent Discovery of Facts Existing at the Date of the Auditor's Report
1

Forming an Opinion and Reporting on Financial Statements Subs^uent Events and Subsequently Discovered Facts Alert as to the Intended Use of the Auditor's Written Communication Financial Statements Prepared in Accordance With a Financial Reportii^ Framework Generally Accepted in Anodier Country Special ConsiderationsAudits of Group Financial Statements (Including the Work of Component Auditors) Special Corwiderations^Audits of Financial Statements Prepared in Ac cordance with Special FHirpose fiamewoiks Other Informatics in Documents Containing Audited Financial Statements Supplementary Information in Relation to the Financial Statements as a Whole foigagements to Report on Summary Financial Statements Requir^ Supplementary Information Subsequent Events arkd Subsequently Di:vered Facts

316 317 318 322 324 325 326 328 329 330 331 332 333 334 336 337 339 341 342 350 380 390

720 725 810 730 560

J
i

Audit Evidence (Redrafted) Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures (Redrafted) Analytical Procedures (Redrafted) Extemal Confirmations Audit EvidenceSpecific Considerations for Selected Items Audit EvidenceSpecific Considerations for Selected Items Written Represenatiorrs Related Parties (Redrafted) Using the Work of an Auditor's Specialist Audit EvidenceSpecific Considerations for Selected Items Audit Documentation (Redrafted) Going Concem (working title) Auditing Accounting Estimates, Including Fair Value Accounting Estnates and Related Disclosures Audit Sampling (Redrafted) The Auditor's Communication With Those Charged With Govemance
(Redrafted)

Other Types of Reports

623
Sp^ial Reports Reporting on Compliance With A^>ect8 of Contractual Agreements or Regulatory Requirements in Connection With Audited Financial Statements Special ConsiderationsAudits of Financial Statements Prepared in Acc^ance with Special Purpose Frameworks Special ConsiderationsAudits of Single Financial Statements and Specific Elemene, Accounts, or Items of a Financial Statement

806 800 805 915 920

625 634

Reports on the Application of Accounting Princif^es Letters for Underwriters and Certain Oilier Requesting Parties

Reports on Application of Requirements of an i^ppUcable Financial Report' ing Framework Letters for Underwriters and Certain Other Requesting Parties (Redrafted)

Special Topics
711 722 801A
Filings Under Federal Securities Statutes Interim Financial Information Filings With tlie U.S. ^uriti and Exd^nge Commi^ion Under llie Securities Act of 1933 Interim Financial Informaticm (Redrafted) Compliance Audits

925 930 935

Compliance Auditing
Compliance Audits

Special Reports of the Committee on Auditing Procedure

901
Public WarehousesOmtrols and Auditing Procedures for Goods Held Audit EvidenceSpecific Considerations for Selected Items

Consideration of Omitted Procedures After the Report Release Date

501

ift

Statements on Standards for Attestation Engagements (AICPA) SSAE Date No. Issued
10 10 2001 2001 2001 2001 2001 2001 2001 2001 2002 2002 2035 2006 2008 2010 2010 Attest Engagements Agreed-Upon Procedures Engagements Financial Forecasts and Projections Reporting on ProForma Financial Information Reporting on an Entity's Intemal Control Over Financial Reporting Compliance Attestation Management's Discussion and Analysis Attestation Standards: Revision and Recodification Attest Documentation Amendment to Statement on Standards for Attestation Eng^ements No. 10, Attestation Standards: Revision and Recodificatim Defining Professional Requirements in Statements on Standards for Attestation Engagements SSAE Hierarchy An Examination of an Entity's Intemal Control Over Financial Reporting that is integrated With an Audit of Its Financial Statements Reporting on Controls at a Service Organization Reporting on Compiled Prospective Financial Statements When the Practitioner's Independence Is Impaired

Abbreviations AT Section
101 201 301
AAA AICPA AS AXJ AU 9XXX AT BL

Title

American Accountmg Association American Institute of Certified Public Accountants PCAOB Auditing Standard AICPA Generally Accepted Auditing Standard AICPA Interpretation of Generally Accepted Auditing Standards AICPA Standard for Attestation Engagements AICPA Bylaw Exposure draft AICPA Coiie of Professional Conduct Financial Accounting Standards Board U S. Government Accountability Office Institute of Intemal Auditors International Standard on Auditing Public Company Accounting Oversight Board AICPA Standard for Performing and Reporting on Peer Reviews AICPA Qualify Control Standard AICPA Statement on Auditing Standards FASB Statement on Financial Accounting Standards IIA Statement on Intemal Auditing Standards AICPA Statement on Quality Control Standards AICPA Statement on Standards for Attestation Engagements AICPA Statement on Standards for Accounting and Review SfiviMS

llo
10 10 10 10 10 11 12 13 14 . :i5 . 16 17

401
501 601 701 Various Various 20 Various 50 501 80! 301

ED
ET FASB GAO

HA ISA
PCAOB

PR
QC SAS SFAS SI AS SQCS SSAE

Statements on Standards for Accounting and Reviev^ Services (AICPA) SSAR Date No. Issued
i 2 3 4 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1978 1979 1981 1981 1986 1992 2000 2002 2064 2004 2005 2005 2005 2007 2CX)7 2008 2009 2010 2011 Compilation and Review of Financial Statements Reporting on Comparative Financial Statements Compilation Reports on Financial Statements Included in Certain Prescribed Forms Communicatiotw Between Predecessor and Successor Accountants Reporting on Personal Fmancial Statements Included in Written Personal Financial Plans Omnibus Statement on Standards for Accounting and Review Services1992 Amendment to Statement on Standards for Accounting and Review Services No. 1, Compilation and Review of Finondoi Statements Omnibus Statement on Standards for Accounting and Review Services2002 Performance of Review Engagements Standards for Accountmg and Review Services Omnibus Statement on Standards for Accounting and Review Services^2005 Compilation of Specified Elements Accounts, or Items of a Financial Statement Compilation of Pro Forma Financial Information Elimination of Certain References to Statements on Auditing Standards and Incorporation of Appropriate Guidance IntoStatements on Standards for Accounting and Review Services : Defining Professional Requirements in Statements on Standards for Accounting and Review Services Omnibus Statement on Standards for Accounting and Review Services2008 Applicability of Statements on Standards for Accounting and Review Services Compilation and Review Engagements Revised Applicability of Statements on Standards for Accounting and Review Services

SSARS

Title

AR Section
100 200 300 4X? 600 Various Various Various i Various Various Various Various Various Various 20 Various 100 Various 90

Auditing and Investigation Organizations

American Institute of CPAs (AICPA) Institute of IntemaJ Auditors (IIA)

220 Leigh Farm Road Durham, NC 27707-8110 (919) 402-4500 www.aicpa.org

AssocUtion of Certified Fraud Examiners (ACFE)

247 Maitland Ave. Altamonte Springs, FL 32701 (407)937-1100 www.theiia.org

International Auditing and Assurance Standards Board (lAASB)

I-

The Gregor Building 716 West Avenue , Austin, TX 78701-2727 (800) 245-3321 www.cfenet.com
Information Systems Audit and Control AssocUtion (ISACA)

545 Fifth Avenue, 14"' Floor New York, NY 10017 (212) 286-9344 wrww.iaasb.org
Public Company Accounting Oversight Board (PCAOB)

3701 Al^nquin Road, Suite 1010 Rolling Meadows, IL 60008 (847) 660-5512 www.isaca.otg

1666 K Street, NW Washington, DC 20006-2803 (202) 207-9100 www.pcaobus.org

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