Instructor’s Manual Auditing: An International Approach
Bahram Soltani
Contents Chapters
Pages
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.
6 14 23 34 43 52 63 75 86 97 106 118 137 146 156 163 173 181 190
An introduction to auditing and assurance Demand for and supply of external audit services Auditing, organization and governance The audit committee, internal and external auditing International auditing and assurance services Auditing in the European context Auditor independence and professional ethics: international issues Audit risk, materiality and business risk management Audit sampling techniques Evidence and decision making in auditing Internal control over financial reporting and IT environment Audit reporting Information technology and auditing Continuous auditing and continuous reporting Quality control and oversight systems in auditing: international issues Auditor liability in a changing environment The independent auditor, stock markets and lending decisions Corporate fraud, corporate scandals and external auditing Auditing: looking ahead
3 .
Bahram Soltani, Auditing: An International Approach, Instructor’s Manual
INSTRUCTOR GUIDANCE AND SUGGESTIONS This book discusses auditing concepts for a changing environment and how auditing responds to public expectations. It analyzes the role of external auditors today as a vital part of decision making in the market economy and the need to expand their role beyond traditional financial statement audits. It treats auditing as a whole discipline – the theory and the practice – rather than discussing only auditing techniques. This approach raises the essential question of what auditing ‘ought to be’ and how it should keep pace with change. This book is organized around four fundamental areas in auditing: international issues including international standards, theoretical as well as practical aspects of auditing, major research work in auditing and multidisciplinary topics. It views the audit process in a changing environment, and in this respect, it concerns the examination of the financial statements information relating also to an organization’s ability to effectively manage strategic and business process risks. This textbook is different from many others available in the market in a number of ways. Firstly, the book reflects on auditing as a discipline emphasizing its theoretical foundation and issues as a basis, rather than discussing only the practices of auditing. It presents auditing as a complex judgement and decision process affected by real-world behavioural and environmental factors, rather than just as a mechanical, standard-driven process. Second, Auditing: An International Approach emphasizes the international aspects of auditing covering the International Standards on Auditing (ISA) issued by IFAC and IAASB as well as the US auditing standards and regulations. This is a significant feature of this textbook compared with the other major textbooks in auditing, which cover mainly the US approach to auditing and financial reporting. Thirdly, this book differs significantly from other texts in terms of philosophical approaches, as it presents auditing as a field of knowledge. This difference is reflected in the discussions in several chapters focusing on the expectation gap in auditing, audit judgement, decision making, bounded rationality and heuristic in auditing, personal ethics, professional ethics, legal liability etc. This innovative approach, which considers the audit process as judgement-based rather than a standards-driven process, provides a much broader vision than the merely technical aspects of this field discussed in most auditing textbooks. Moreover, the multidisciplinary approach taken in this book provides a significant difference when compared to other texts. In several chapters, the relationships between auditing and organization, auditing and finance with regard to corporate governance and financial market, and auditing and information technology systems have been highlighted. This does not seek to undermine the importance of practical aspects of auditing – indeed they are extensively covered in the book – but to understand and explain them better, and even to look ahead into the future. However, in a changing world, the move away from the traditional role of an auditor as simply an attestor of historical financial statements reflects the shift in the audit process from a detail-driven substantive approach to a strategic risk approach to audit planning and execution. Although the detailed discussion on audit planning and execution is not the major objective of this book, it provides extensive coverage of major topics in audit practices. These include the discussions on auditing standards, evidence gathering, audit committee, internal control, auditor independence, audit reporting, strategic and business process risks, audit testing, auditing and IT, quality control and legal liability.
4 .
Bahram Soltani, Auditing: An International Approach, Instructor’s Manual
Special note to instructors The questions at the end of the chapters in this book are designed to promote deeper thought about the auditing issues. The answers given in this instructor’s manual are provided in a summarized form. They are intended to provide the highlights and major elements related to the review and discussion questions. Since the questions are general and are not always related to a specific point, the answers can be found not only in the related chapter but in other chapters also. Instructors are encouraged to provide their own opinions and perceptions when discussing the questions. As the instructors may notice, there are not always specific answers to the questions, and this opens the door to further discussions around the topics raised in the chapters. The students should be encouraged to express their opinions on the topics raised in the questions even if their points of view are not specifically related to the chapter under discussion.
5 .
CHAPTER 1
AN INTRODUCTION TO AUDITING AND ASSURANCE Instructor guidance This chapter discusses the conceptual development of auditing and some fundamental theoretical aspects of auditing as a field of knowledge, and its philosophical background. It is desirable that the instructors put sufficient emphasis on the questions on p. 3. As indicated in the introduction of the chapter, the major objective here is ‘to adopt a critical approach to auditing’ and try to build up an appropriate framework for the fundamental areas of auditing that will be discussed in the following chapters. The following is the suggested outline for the instructors when teaching this introductory chapter. Most of the learning objectives include the major topics that need to be emphasized by the instructors when teaching this introductory chapter. •
Reflections on the core questions indicated on p. 3 about the critical role of auditors;
•
Discussion about the demand for assurance services (pp. 14–18). It is desirable to provide a brief definition of an audit of financial statements and how recent changes affect the audit environment and its framework (pp. 4–7), including the changes in auditors’ evaluation of companies’ internal control systems (pp. 20–22);
•
Emphasis on the theoretical approach to auditing by discussing the philosophy of auditing (pp. 7–14). Reference should be made to the seminal works of Limperg (1930s), Mautz and Sharaf (1961), Flint (1988) and Power (1990).
6 .