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Contents

Preface xi

Important Note on Auditing Standards Referred to in this Book xv

Chapter 1: What is Auditing? 1

1.1 Introduction 21.2 What is an audit? 31.3 Types of audit 41.4 Auditing vs accounting 81.5 Why are external financial statement audits needed? 91.6 Benefits derived from external financial statement audits 111.7 Summary 18Self-review questions 19References 20Additional reading 21

Chapter 2: The Development of Auditing and Audit Objectives 23

2.1 Introduction 242.2 The development of auditing 242.3 Future developments 502.4 Summary 54Self-review questions 55References 57Additional reading 59

Chapter 3: A Framework of Auditing Concepts 61

3.1 Introduction 623.2 Social purpose, postulates and framework for key concepts

of auditing 633.3 Concepts relating to the credibility of auditors work 653.4 Concepts relating to the audit process 743.5 Concepts relating to auditors communication 893.6 Concepts relating to the standard of auditors performance 933.7 Summary 98Self-review questions 98References 99Additional reading 100


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Chapter 4: Threats to, and Preservation of, Auditors Independence 101

4.1 Introduction 1024.2 Factors that may compromise auditors independence 103

4.3 Steps taken by Parliament, regulators and the profession tosecure auditors independencefrom their audit clients 107

4.4 Other proposals for strengthening auditors independence 1314.5 Summary 154Self-review questions 155References 156Additional reading 159

Chapter 5: Legal and Professional Duties of Auditors 161

5.1 Introduction 1625.2 Audits and auditors duties under statute law 1655.3 Auditors duties under common law 1805.4 Auditors duties under auditing standards 1845.5 Auditors duties under regulatory requirements applying to

companies of specific types or in specific industries 1885.6 Auditorclient relationship 1925.7 Auditors vis--vis directors responsibility for the financial

statements 1945.8 The audit expectationperformance gap 196

5.9 Summary 204Self-review questions 205References 206Additional reading 208

Chapter 6: Auditors Duties with Respect to Fraud and Non-compliance

with Laws and Regulations 209

6.1 Introduction 2106.2 Auditors responsibility to detect and report fraud 2116.3 Aggressive earnings management 2336.4 Auditors responsibility to detect and report non-compliance with

laws and regulations 2366.5 Auditors duty of confidentiality to clients 2436.6 Summary 245Self-review questions 246References 247Additional reading 249

Chapter 7: Overview of the Audit Process, Audit Evidence, Staffing and

Documenting an Audit 2517.1 Introduction 2527.2 Overview of the audit process 252


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7.3 Clarification of some jargon 2557.4 Audit evidence 2577.5 Staffing an audit 2677.6 Documenting an audit 2757.7 Summary 293Self-review questions 294References 295Additional reading 296

Chapter 8: Commencing an Audit: Engagement Procedures,Understanding the Client and Identifying Risks 297

8.1 Introduction 2988.2 Pre-engagement investigation 298

8.3 Audit engagement letters 3078.4 Understanding the client, its business and its industry and

identifying and assessing risks 3138.5 Analytical procedures 3228.6 Summary 325Self-review questions 326References 327Additional reading 328

Chapter 9: Planning the Audit: Materiality and Audit Risk 3299.1 Introduction 3309.2 Phases of planning an audit 3309.3 Impact of materiality on planning an audit 3349.4 Desired level of assurance (desired level of audit risk) 3459.5 Impact of audit risk on planning the audit 3509.6 Summary 359Self-review questions 360References 361Additional reading 362

Chapter 10: Internal Control and the Auditor 363

10.1 Introduction 36410.2 The accounting system 36410.3 Conceptual aspects of internal control 36710.4 Reviewing the accounting system and evaluating its related

controls 38510.5 Developing the audit plan (audit programme) 39410.6 Compliance testing 398

10.7 Reporting internal control deficiencies to management 40310.8 Summary 403Self-review questions 404


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References 405Additional reading 406

Chapter 11: Testing Financial Statement Assertions: Substantive Testing 407

11.1 Introduction 40811.2 Significance of substantive testing in the audit process 40811.3 Objectives of, and approaches to, substantive testing 41111.4 Substantive audit procedures 41511.5 Requirements of auditors with respect to identified

misstatements 42311.6 Introduction to substantive testing of inventory and debtors 42611.7 Significant aspects of auditing inventory (stock) 42611.8 Significant aspects of auditing debtors 434

11.9 Summary 444Self-review questions 444References 445Additional reading 445

Chapter 12: Audit Sampling and Computer-assisted Auditing

Techniques (CAATs) 447

12.1 Introduction 44812.2 Meaning and importance of sampling in auditing 448

12.3 Basic terminology relating to sampling 45012.4 Judgmental sampling vs statistical sampling 45212.5 Designing and selecting samples 45412.6 Judgmental sampling 46112.7 Introduction to statistical sampling 46112.8 Following up sample results 47012.9 Computer-assisted audit techniques 47112.10 Summary 475Self-review questions 476References 476

Additional reading 477

Chapter 13: Completion and Review 479

13.1 Introduction 48013.2 Review for contingent liabilities and commitments 48113.3 Review for subsequent events 48313.4 (Re)assessment of the going concern assumption 48913.5 Written representations and representation letters 50013.6 Final review of audit evidence, conclusion and conference 50513.7 Summary 517

Self-review questions 517References 518Additional reading 519


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Chapter 14: Auditors Reports to Users of Financial Statements andto Management 521

14.1 Introduction 522

14.2 Auditors reporting obligations under the Companies Act 2006 52314.3 Format of audit reports 52814.4 Types of audit report 53514.5 Different forms of modified audit report 53714.6 Emphasis of matter and other matter(s) paragraphs 54714.7 The audit report the auditors chance to communicate 55014.8 Auditors communication with those charged with governance 56014.9 Summary 572Self-review questions 573References 574

Additional reading 576

Chapter 15: Legal Liability of Auditors 577

15.1 Introduction 57815.2 Overview of auditors legal liability 57815.3 Auditors contractual liability to their clients 58115.4 Liability to third parties under Common Law 58615.5 The effect of out-of-court settlements 62615.6 Summary 627Self-review questions 628References 629Additional reading 630Appendix 631

Chapter 16: Avoiding and Limiting Auditors Liability 633

16.1 Introduction 63416.2 Maintaining high quality audits 63616.3 Proposals for limiting auditors liability 66616.4 Summary 680


Chapter 17: Environmental Management Systems and Audits 685

17.1 Introduction 68617.2 Environmental reporting and auditing: clarifying the jargon 68717.3 Development of environmental auditing and environmental

management systems 69017.4 Internal environmental audits 698

17.5 Reasons for companies reporting their environmental performance 70617.6 Advantages and disadvantages of environmental audits 71017.7 Summary 718


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Chapter 18: Corporate Responsibility Assurance Engagements 723

18.1 Introduction 72418.2 Development of, and motivations for, corporate responsibility

(or sustainability) reporting 72518.3 Corporate responsibility assurance engagements 72918.4 Professional requirements to provide assurance services 74318.5 Advantages and disadvantages of corporate responsibility

reporting and assurance 74518.6 Relevance of environmental issues to external financial

statement audits 75118.7 Summary 756Self-review questions 756References 757Additional reading 758Appendix 759

Appendix: Summary of Steps in a Statutory Financial Statement Audit 763

Index 779

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