INSTRUCTOR’S RESOURCE MANUAL Bartosz Amerski York University Joanne C. Jones York University
Auditing The Art and Science of Assurance Engagements Canadian Thirteenth Edition Alvin A. Arens PricewaterhouseCoopers Emeritus Professor, Michigan State University Randal J. Elder Syracuse University Mark S. Beasley North Carolina State University, Deloitte Professor of Enterprise Risk Management Joanne C. Jones York University
Contents Page An Overview of the Instructor’s Resource Manual ........................................ iv
Chapters
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1
The demand for an auditing and other assurance services.................... 1
2
The public accounting profession and audit quality ................................ 8
3
Legal liability ........................................................................................ 14
4
Professional judgment and ethics ........................................................ 18
5
Audit responsibilities and objectives..................................................... 28
6
Client acceptance and planning the audit ............................................ 38
7
Materiality and risk ............................................................................... 46
8
Internal control and control risk ............................................................ 55
9
Audit evidence...................................................................................... 64
10
Audit strategy and audit program ......................................................... 74
11
Audit sampling concepts ...................................................................... 81
12
Audit of the revenue cycle .................................................................... 91
13
Audit of the acquisition and payment cycle .......................................... 99
14
Audit of the inventory and distribution cycle ....................................... 105
15
Audit of the human resources and payroll cycle ................................. 112
16
Audit of the capital acquisition and payment cycle ............................. 116
17
Audit of cash balances ....................................................................... 121
18
Completing the audit .......................................................................... 125
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Audit reports on financial statements ................................................. 132
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Other assurance and nonassurance services .................................... 142
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Chapter 1 The Demand for Audit and Other Assurance Services Overview Usually students will not have read Chapter 1 before the material in this chapter is covered. Most students are also not familiar with the concept of “audit” and we also need to keep in mind that the vocabulary used in this course is also new for most students. Accordingly we spend more time taking up this material, and explaining the fundamental concept of audit, which usually requires the majority of the scheduled time of the first day of class (assuming 1 ½ hour class). In addition to reviewing the detailed course outline for the course, we attempt to cover the opening vignette and learning objectives.
Learning objectives 1. 2. 3. 4. 5. 6.
Describe auditing. Distinguish between auditing and accounting. Explain the importance of auditing and reducing information risk. List the causes of information risk, and explain how this risk can be reduced. Identify major types of audits and auditors. Describe assurance services provided by public accountants and distinguish the audit of financial statements from other assurance and nonassurance services.
Chapter opening vignette: ”Auditors Have a Great Responsibility” This vignette first explores the events leading up to the “Sponsorship Scandal” that occurred in 2000. It then outlines the actions undertaken by the minister of public works who called in Sheila Fraser, the auditor general to investigate Department of Public Works advertising contract irregularities. The vignette then goes on to describe the key audit findings made by the Auditor General. It also provides some insight into what users expect from auditors – being forthright and candid (acting with integrity) and checking on their behalf (acting in the public interest). Information from the opening vignette can be used as a lecture review and used to link concepts introduced during the lecture to real-life situations. (Since most students have not read the textbook prior to class, you may want to set aside a few minutes for them to read the vignette).
LO 1 Describe auditing Three concepts to highlight: •
Evidence (define the term)
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Instructor's Resource Manual for Auditing, C13e, by Arens/Elder/Beasley/Jones
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Quantifiable information Determining degree of correspondence
We start by asking students to discuss in small groups what auditors do and why is auditing important. The feedback from the groups usually provides lots of material to generate class discussion. (A common response is that auditors are like policemen – so students tend to see a financial statement audit more in line with a compliance audit). An easy means by which to help students understand the basic premise of auditing is to describe it as “checking” – students are usually able to grasp this simple term much easier. We can facilitate this discussion by asking students how they would audit “check” if all students present in class are actually registered in the course. For instance the following could be part of the discussion: • • •
How would you audit “check” if all students that are currently sitting in the classroom are actually registered in the course? What evidence would you need to check this? o Each student can be asked to verbally confirm their registration in the course. o Each student may be required to show identification. Why would you need this evidence? – This part of the discussion can be used to show students the difference in evidence strength. Verbal evidence (inquiry) – less reliable versus documentation (such as students’ identification cards and the class list) more reliable evidence.
Students tend to think of auditing as the auditing of financial statements by public accounting firms in accordance with GAAS. It is therefore helpful to use Figure 1-1 (“Audit of a Tax Return”) to discuss the definition and inform the students that audit financial statements is just one type of information that can be audited. Refer to the opening vignette to show other type of information that can also be audited that is not related to financial statements. As a part of this discussion, students are briefly introduced to CRA auditors. Be sure to identify this as a tax compliance (tax returned is checked against the tax Act) audit rather than a financial statement audit. After you have gone over this information, refer students to the definition of auditing and ensure they comprehend that auditing is simply “checking” of information. Briefly talk about the importance of: •
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Competence of auditor For example, auditors who audit financial statements must have a strong knowledge of financial accounting, (they must be competent) otherwise how would they know what and how to “check” if transactions were accounted for correctly in accordance to applicable financial accounting framework? Professional Judgment Competence is more than having a technical knowledge – the auditor must act with integrity and apply professional scepticism (a critical assessment of audit evidence and a willingness to challenge the auditee’s assertions) Independence of the auditor A key characteristic which the public values is the auditor’s independence and objectivity. This is closely related to professional scepticism (it would be hard to sceptical if the auditor was biased).
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