Auditing

This text provides a thorough and up-to-date coverage of auditing in a concise and readable style. It is widely used as a course text on professional accountancy and accounting degree courses. Numerous case studies, exercises, self testing questions and recent examination questions are included. This text is aimed predominantly at undergraduate and professional accountancy courses and the ninth edition prepared by John Taylor has been updated to take account of new International Auditing Standards.

Author Notes

John Taylor, a journalist for more than two decades, has been a contributing editor at New York magazine and a senior writer for Esquire. He lives in East Moriches, New York.

Acknowledgements	p. xi
Preface	p. xiii
How To Pass Auditing Examinations	p. xvi
1 Introduction to auditing - the why of auditing	p. 1
Introduction	p. 1
Agency theory	p. 1
Financial statements	p. 2
Why is there a need for an audit?	p. 3
Objectives of auditing	p. 4
The auditors' report	p. 5
Directors' responsibility	p. 6
Auditors' responsibility	p. 6
Organisation of the auditing profession	p. 6
Qualities required of auditors	p. 7
Types of audit	p. 7
2 Corporate governance	p. 11
Introduction	p. 11
Cadbury and after	p. 11
Companies Act 2006	p. 12
Sarbanes Oxley - 2002	p. 12
Combined code on corporate governance - 2003	p. 13
Substance over form	p. 14
Report on the directors' responsibilities for the financial statements	p. 15
Auditors' responsibilities	p. 16
Auditors' duties in respect of compliance with the combined code	p. 16
Directors' report on internal controls	p. 17
Directors' remuneration disclosure	p. 18
Audit committees	p. 18
3 The statutory framework for auditing	p. 22
Introduction	p. 22
The Companies Act 2006	p. 22
Requirement to have auditors	p. 23
Who can be an auditor?	p. 23
The rights and duties of an auditor under the Companies Act 2006	p. 27
Appointment of auditors	p. 27
Remuneration of auditors	p. 28
The removal of an auditor	p. 28
Resignation of auditors	p. 30
Auditors' duties	p. 31
Auditors' rights	p. 32
The Auditors' report	p. 33
Auditors' rights to attend meetings	p. 36
Powers of an auditor	p. 36
4 Accounting requirements of the Companies Act	p. 38
Introduction	p. 38
Accounting and accounting records	p. 38
Statutory books	p. 40
Accounting requirements	p. 41
Accounting principles	p. 43
Content - disclosure requirements	p. 43
True and fair override	p. 44
Procedure on completion of the financial statements	p. 44
Period allowed for filing accounts	p. 45
Abbreviated accounts	p. 45
Publication of accounts	p. 46
Summary accounts	p. 46
Dormant companies	p. 46
5 Auditing and accounting standards and guidelines	p. 50
Introduction	p. 50
International standards on auditing	p. 50
Practice notes	p. 51
Bulletins	p. 52
Accounting standards	p. 53
6 Rules of professional conduct	p. 57
Introduction	p. 57
Fundamental principles	p. 57
Ethics - general rules	p. 58
Threats	p. 59
Independence	p. 59
Commissions and fees	p. 61
Conflicts of interest	p. 62
Advertising and publicity	p. 63
Remuneration	p. 63
Insider dealing	p. 64
Money laundering	p. 64
Suspicious transactions	p. 65
Whistleblowing	p. 66
7 Quality control in audit firms	p. 71
Introduction	p. 71
Audit firm organisation	p. 71
Individual audits	p. 73
Reviews	p. 74
8 Accepting appointment as auditors	p. 78
Introduction	p. 78
Client screening	p. 78
Professional etiquette	p. 79
Letters of Engagement	p. 80
9 Accounting systems and internal controls	p. 85
Accounting systems	p. 85
Internal controls	p. 86
Control procedures	p. 89
Control activities in specific areas of a business	p. 92
Limitations of internal controls	p. 98
10 Audit planning, audit risk and materiality	p. 102
Introduction	p. 102
Objectives	p. 102
Required procedures	p. 103
Influences on an audit	p. 104
Stages in the audit	p. 105
Planning the audit	p. 105
Internal control system review	p. 109
Planning the audit work	p. 116
Audit strategies	p. 120
Analytical review procedures	p. 122
The timing of audit work	p. 122
Audit risk	p. 124
Materiality	p. 127
11 Audit evidence and using the work of an expert	p. 134
Introduction	p. 134
Financial statements and assertions	p. 135
Sources of evidence	p. 136
Basic techniques for collecting evidence	p. 137
Using the work of an expert	p. 139
12 Audit testing, sampling and analytical procedures	p. 145
Introduction	p. 145
Forms of audit testing	p. 145
Audit sampling	p. 147
Analytical procedures	p. 155
13 Systems-based auditing	p. 164
Introduction	p. 164
Testing system components	p. 165
The purchases and expenses system	p. 167
The sales system	p. 171
Cash sales	p. 175
The payroll system	p. 176
14 Business risk approach to auditing	p. 184
Introduction	p. 184
External risks	p. 184
Internal risks	p. 187
The client's approach to risk	p. 188
Actions to mitigate risk	p. 190
Why use a business risk approach to auditing?	p. 191
Understanding the business risk approach	p. 192
The implications of the business risk approach for the audit	p. 193
15 The audit of assets	p. 199
Introduction	p. 199
Aspects to be verified	p. 200
Verification of non-current assets	p. 201
Current assets	p. 205
Stock and work in progress	p. 206
Cut-off	p. 213
Debtors	p. 215
Bank balances	p. 219
Loans	p. 221
Cash	p. 222
16 The audit of liabilities	p. 228
Introduction	p. 228
Verification procedures	p. 228
Trade creditors	p. 229
Accruals	p. 229
Provisions	p. 230
Bank overdrafts and short-term loans	p. 230
Amounts due to group and related companies	p. 231
Long-term liabilities	p. 231
Share capital and reserves	p. 231
Inclusion of all liabilities	p. 232
Contingent liabilities	p. 233
Accounting estimates	p. 235
17 Auditing and computers	p. 240
Introduction	p. 240
Audit risk and the CIS	p. 241
The control environment	p. 241
The audit approach to computerised systems	p. 242
18 Audit working papers	p. 247
Introduction	p. 247
Purposes	p. 248
Evidence of work carried out	p. 248
Nature and content of working papers	p. 249
Departure from basic principles	p. 250
Content of working papers	p. 250
Sample working papers	p. 250
Standardisation of working papers	p. 256
Finalisation	p. 256
Ownership of books and papers	p. 256
Accountant's lien	p. 257
Retention of working papers	p. 257
19 Internal audit	p. 262
Introduction	p. 262
Role of internal audit	p. 262
Differences between internal and external audit	p. 263
Public sector	p. 264
External auditors and internal audit	p. 264
Outsourcing internal audit services	p. 265
20 Errors, frauds and unlawful acts	p. 270
Introduction	p. 270
Errors	p. 270
Fraud and other irregularities	p. 271
The audit approach	p. 274
Audit tests and fraud	p. 275
Unlawful acts of clients and their staff	p. 278
Audit issues arising from non-compliance	p. 280
21 Related parties	p. 288
Introduction	p. 288
Disclosure	p. 288
The auditor's duties re related parties	p. 289
Audit procedures	p. 290
Control of the entity	p. 291
Qualified audit reports	p. 291
22 Service organisations	p. 294
Introduction	p. 294
Why do firms outsource?	p. 294
Audit planning issues	p. 295
Accounting records	p. 297
Audit evidence	p. 297
Reports by service organisation's auditors	p. 298
23 Evaluation and review	p. 301
Opening balances and comparatives	p. 301
The auditors' interest	p. 302
Subsequent events review	p. 303
Adjusting and non-adjusting events	p. 304
24 Going concern	p. 312
Introduction	p. 312
Indicators of problems	p. 312
Consequences of going concern	p. 313
Directors' duties	p. 314
The auditors' procedures	p. 314
If events are identified	p. 315
Effect on audit reports	p. 316
25 Management representations	p. 320
Introduction	p. 320
Contents of a letter	p. 320
Reliance on letter of representation	p. 321
Example of a management representation letter	p. 321
Refusal to co-operate	p. 323
26 The final review stage of the audit	p. 327
Introduction	p. 327
Final accounts	p. 327
Procedures	p. 328
27 Auditors' reports to shareholders	p. 333
Introduction	p. 333
Contents of an auditors' report	p. 333
When is an unqualified report appropriate?	p. 336
Qualified audit reports	p. 336
Effect of a qualified audit report	p. 337
Issuing modified audit reports	p. 337
Wording modified auditors' reports	p. 339
'Except for' qualifications	p. 340
Listed companies - special provisions	p. 344
Emphasis of matter	p. 345
Audit reporting - special circumstances	p. 346
Auditors' liability in respect of audit reports	p. 346
Third parties - disclaimers of liability	p. 347
28 Auditors' reports to directors and management	p. 351
Introduction	p. 351
Those charged with governance	p. 351
Formal and informal communication	p. 351
The management letter	p. 352
Response by management	p. 355
The report and third parties	p. 356
Example of a management letter	p. 356
29 Group accounts	p. 362
Introduction	p. 362
Audit considerations	p. 363
Reliance on other auditors	p. 364
Auditing investments in subsidiaries and other undertakings	p. 365
Auditing the consolidation	p. 365
Modified auditors' reports	p. 366
Foreign subsidiaries	p. 366
Joint audits	p. 367
Support letters to subsidiaries	p. 368
30 Small company audits	p. 372
Introduction	p. 372
Small company audit exemption	p. 372
Advantages and disadvantages of an audit	p. 373
Ethical standards	p. 373
The audit of small businesses	p. 374
Specific audit considerations	p. 376
31 Auditors' liability	p. 380
Introduction	p. 380
Criminal law	p. 381
Civil liability under the common law	p. 383
Liability under contract law	p. 384
Liability in tort	p. 385
Minimising risk to audit firms	p. 389
Limited liability partnerships (LLPs)	p. 389
Limiting auditors' liability	p. 390
The future	p. 391
32 Non-audit assurance services	p. 394
Review engagements	p. 394
Negative assurance	p. 400
Prospective financial information	p. 405
Assurance engagements	p. 411
Levels of assurance	p. 416
33 Value for money, performance evaluation, environmental reporting and corporate social responsibility reporting assignments	p. 423
Introduction	p. 423
Value for money	p. 423
Economy, efficiency and effectiveness	p. 424
Performance evaluation	p. 426
Environmental reporting	p. 427
Environmental reporting assignment	p. 429
Corporate social responsibility	p. 433
34 Current issues	p. 438
Introduction	p. 438
Auditing issues	p. 438
Audit challenges	p. 439
Independence	p. 440
Ethics and quality issues	p. 440
Corporate governance	p. 441
New opportunities, new problems	p. 441
Appendix 1	p. 445
Appendix 2	p. 447
Index	p. 449

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