Auditing: The Art And Science Of Assurance Engagements, Fourteenth Canadian Edition Class Notes
Auditing: The Art And Science Of Assurance Engagements, Fourteenth Canadian Edition Class Notes provides helpful chapter hints to guide your studying and ensure you focus on the most important concepts.
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INSTRUCTOR’S RESOURCE MANUAL
Bartosz Amerski
York University
Joanne Jones
York University
Auditing
The Art and Science of Assurance Engagements
Fourteenth Canadian Edition
Alvin A. Arens
Former PricewaterhouseCoopers Emeritus Professor, Michigan State University
Randal J. Elder
Syracuse University
Mark S. Beasley
North Carolina State University, Deloitte Professor of Enterprise Risk Management
Chris E. Hogan
Michigan State University
Joanne C. Jones
York University
CLASS NOTES
Bartosz Amerski
York University
Joanne Jones
York University
Auditing
The Art and Science of Assurance Engagements
Fourteenth Canadian Edition
Alvin A. Arens
Former PricewaterhouseCoopers Emeritus Professor, Michigan State University
Randal J. Elder
Syracuse University
Mark S. Beasley
North Carolina State University, Deloitte Professor of Enterprise Risk Management
Chris E. Hogan
Michigan State University
Joanne C. Jones
York University
CLASS NOTES
INSTRUCTOR’S RESOURCE MANUAL
Bartosz Amerski
York University
Joanne Jones
York University
Auditing
The Art and Science of Assurance Engagements
Fourteenth Canadian Edition
Alvin A. Arens
Former PricewaterhouseCoopers Emeritus Professor, Michigan State University
Randal J. Elder
Syracuse University
Mark S. Beasley
North Carolina State University, Deloitte Professor of Enterprise Risk Management
Chris E. Hogan
Michigan State University
Joanne C. Jones
York University
CLASS NOTES
Bartosz Amerski
York University
Joanne Jones
York University
Auditing
The Art and Science of Assurance Engagements
Fourteenth Canadian Edition
Alvin A. Arens
Former PricewaterhouseCoopers Emeritus Professor, Michigan State University
Randal J. Elder
Syracuse University
Mark S. Beasley
North Carolina State University, Deloitte Professor of Enterprise Risk Management
Chris E. Hogan
Michigan State University
Joanne C. Jones
York University
CLASS NOTES
Introduction: An overview of the instructor’s resource manual
ii
Contents
Page
An Overview of the Instructor’s Resource Manual ........................................ iv
Chapters
1 The demand for audit and other assurance services ............................. 1
2 The public accounting profession and audit quality .............................. 10
3 Professional ethics and legal liability .................................................... 16
4 Audit responsibilities and objectives .................................................... 25
5 Audit evidence ..................................................................................... 39
6 Client acceptance, planning, and materiality ........................................ 50
7 Assessing the risk of material misstatement ........................................ 61
8 Internal control and COSO framework ................................................. 69
9 Assessing control risk and designing tests of controls ......................... 74
10 Develop risk response: Audit strategy and audit program .................... 80
11 Audit sampling concepts ...................................................................... 88
12 Audit of the revenue cycle .................................................................... 99
13 Audit of the acquisition and payment cycle ........................................ 108
14 Audit of the inventory and distribution cycle ....................................... 116
15 Audit of the human resources and payroll cycle................................. 124
16 Audit of the capital acquisition and repayment cycle .......................... 130
17 Audit of cash balances ....................................................................... 136
18 Completing the audit .......................................................................... 142
19 Audit reports on financial statements ................................................. 150
20 Other assurance and nonassurance services .................................... 160
ii
Contents
Page
An Overview of the Instructor’s Resource Manual ........................................ iv
Chapters
1 The demand for audit and other assurance services ............................. 1
2 The public accounting profession and audit quality .............................. 10
3 Professional ethics and legal liability .................................................... 16
4 Audit responsibilities and objectives .................................................... 25
5 Audit evidence ..................................................................................... 39
6 Client acceptance, planning, and materiality ........................................ 50
7 Assessing the risk of material misstatement ........................................ 61
8 Internal control and COSO framework ................................................. 69
9 Assessing control risk and designing tests of controls ......................... 74
10 Develop risk response: Audit strategy and audit program .................... 80
11 Audit sampling concepts ...................................................................... 88
12 Audit of the revenue cycle .................................................................... 99
13 Audit of the acquisition and payment cycle ........................................ 108
14 Audit of the inventory and distribution cycle ....................................... 116
15 Audit of the human resources and payroll cycle................................. 124
16 Audit of the capital acquisition and repayment cycle .......................... 130
17 Audit of cash balances ....................................................................... 136
18 Completing the audit .......................................................................... 142
19 Audit reports on financial statements ................................................. 150
20 Other assurance and nonassurance services .................................... 160
Introduction: An overview of the instructor’s resource manual
iv
An Overview of the Instructor’s Resource Manual
The purpose of the Instructor’s Resource Manual is to help you teach auditing
courses more efficiently and, perhaps more importantly, to encourage student
engagement. Naturally, we do not want to interfere with your present approach or
imply that our suggestions are the only good alternatives.
This resource manual has several parts:
An illustrative course outline for a traditional 12-week university
introductory auditing course.
Some resources, from accounting education journals we have used for
group and individual projects.
Some group and individual projects we and other instructors have
successfully used.
Mapping the chapters to the CPA Competency Map’s Fundamental
Assurance Concepts and Related Technical Competencies
Chapter-by-chapter suggestions for teaching the content in each chapter.
The suggestions for each chapter include the following:
Ideas we find useful in teaching introductory auditing.
Discussion and practice questions we have found to be effective in
facilitating student learning and keeping the class interesting.
Additional teaching resources and videos to reinforce and integrate the
learning objectives.
A matrix illustrating how learning objectives correlate with chapter problem
material. The matrix for each chapter is designed to provide a one-page
summary of this information in order to assist you in assigning problem
material.
The chapters are designed so that their arrangement and selection provide
maximum flexibility in course design.
iv
An Overview of the Instructor’s Resource Manual
The purpose of the Instructor’s Resource Manual is to help you teach auditing
courses more efficiently and, perhaps more importantly, to encourage student
engagement. Naturally, we do not want to interfere with your present approach or
imply that our suggestions are the only good alternatives.
This resource manual has several parts:
An illustrative course outline for a traditional 12-week university
introductory auditing course.
Some resources, from accounting education journals we have used for
group and individual projects.
Some group and individual projects we and other instructors have
successfully used.
Mapping the chapters to the CPA Competency Map’s Fundamental
Assurance Concepts and Related Technical Competencies
Chapter-by-chapter suggestions for teaching the content in each chapter.
The suggestions for each chapter include the following:
Ideas we find useful in teaching introductory auditing.
Discussion and practice questions we have found to be effective in
facilitating student learning and keeping the class interesting.
Additional teaching resources and videos to reinforce and integrate the
learning objectives.
A matrix illustrating how learning objectives correlate with chapter problem
material. The matrix for each chapter is designed to provide a one-page
summary of this information in order to assist you in assigning problem
material.
The chapters are designed so that their arrangement and selection provide
maximum flexibility in course design.
Instructor's Resource Manual for Auditing, 14Ce, by Arens/Elder/Beasley/Hogan/Jones
v
Suggested Syllabi
In this section, we provide a possible schedule for use in a one-semester
university-level introductory-level audit course. We also provide suggested problem
assignments that could easily be presented in your syllabus as well as the course
evaluation scheme. Some of the questions we use for 4 individual graded
assignments.
You will note that we cover the three key cycles (revenue, acquisition and
payment, and inventory and distribution) as well as cash. Some of you may wish to
cover some of the other cycles as well. From the last chapter, which covers special
reports and other assurance engagements, we only cover reviews and compilation
engagements. The remaining material, we cover in our advanced auditing course.
Following our suggested syllabi, we briefly overview other teaching materials
that you might find helpful as you develop your plan for coverage of the course
content.
v
Suggested Syllabi
In this section, we provide a possible schedule for use in a one-semester
university-level introductory-level audit course. We also provide suggested problem
assignments that could easily be presented in your syllabus as well as the course
evaluation scheme. Some of the questions we use for 4 individual graded
assignments.
You will note that we cover the three key cycles (revenue, acquisition and
payment, and inventory and distribution) as well as cash. Some of you may wish to
cover some of the other cycles as well. From the last chapter, which covers special
reports and other assurance engagements, we only cover reviews and compilation
engagements. The remaining material, we cover in our advanced auditing course.
Following our suggested syllabi, we briefly overview other teaching materials
that you might find helpful as you develop your plan for coverage of the course
content.
Introduction: An overview of the instructor’s resource manual
vi
Organization of the Course (assumes two 1 ½ hour classes or one three-hour
class per week)
Week Topics Chapters Practice or Discussion
Questions
1 Introduction, audit and other
assurance services
The public accounting profession and
audit quality
1 and 2 1-19, 1-28, 2-24, 2-26
2 Professional ethics and legal liability
Audit responsibilities and objectives
3 and 4 3-29, 3-32, 4-31, 4-33
3 Audit evidence
Client acceptance, planning, and
materiality
5 and 6 5-33, 5-35, 5-36
6-40, 6-41, 6-44
4 Assessing the risk of material
misstatement
7 7-35, 7-36
5 Internal controls, COSO framework
Assessing control risk and test of
controls
8 and 9 8-27, 8-31, 9-26, 9-32
6 Midterm
7 Audit strategy and program
Sampling concepts
10 and 11 10-27, 10-28, 10-31, 11-34
8 Audit of revenue cycle 12 12-41, 12-42, 12-47, 12-48
9 Audit of acquisition and payment
and inventory and distribution
cycles
13 and 14 13-28, 13-35, 14-26, 14-27
10 Audit of cash and completing the
audit
17 and 18 17-23, 17-25, 18-26,18-33
11 Audit reporting
Group Presentations
19 19-28, 19-32, 19-33
Group Risk Assessment Due
12 Other assurance and non-assurance
services
Group Presentations
20 20-23, 20-25, 20-27, 20-28
vi
Organization of the Course (assumes two 1 ½ hour classes or one three-hour
class per week)
Week Topics Chapters Practice or Discussion
Questions
1 Introduction, audit and other
assurance services
The public accounting profession and
audit quality
1 and 2 1-19, 1-28, 2-24, 2-26
2 Professional ethics and legal liability
Audit responsibilities and objectives
3 and 4 3-29, 3-32, 4-31, 4-33
3 Audit evidence
Client acceptance, planning, and
materiality
5 and 6 5-33, 5-35, 5-36
6-40, 6-41, 6-44
4 Assessing the risk of material
misstatement
7 7-35, 7-36
5 Internal controls, COSO framework
Assessing control risk and test of
controls
8 and 9 8-27, 8-31, 9-26, 9-32
6 Midterm
7 Audit strategy and program
Sampling concepts
10 and 11 10-27, 10-28, 10-31, 11-34
8 Audit of revenue cycle 12 12-41, 12-42, 12-47, 12-48
9 Audit of acquisition and payment
and inventory and distribution
cycles
13 and 14 13-28, 13-35, 14-26, 14-27
10 Audit of cash and completing the
audit
17 and 18 17-23, 17-25, 18-26,18-33
11 Audit reporting
Group Presentations
19 19-28, 19-32, 19-33
Group Risk Assessment Due
12 Other assurance and non-assurance
services
Group Presentations
20 20-23, 20-25, 20-27, 20-28
Loading page 6...
Instructor's Resource Manual for Auditing, 14Ce, by Arens/Elder/Beasley/Hogan/Jones
vii
Chapter Vignettes and Other Chapter Material ― Lessons from Practice
Each chapter begins with a short vignette, the majority of them are based upon
real-life events. In addition, each chapter contains several Auditing in Action
vignettes, related to the chapter content, that highlight real-world issues. Some of
these auditing in actions (and figures) provide a glimpse into the real world of
auditing. Others highlight recent events in Canada and abroad, news articles,
fraud cases, and/or thought papers and academic articles.
These opening vignettes and Auditing in Action features provide instructors
with some meaningful examples and can be helpful in generating some great class
discussion. One of our colleagues has used them as a “Lesson for the Day” for
students. Each opening vignette illustrates the point implied by its title and is
followed by several questions that students should consider while reading the
chapter. The questions can also be used as concept checks throughout the lecture
or serve as an end of the lecture summary of what was covered.
The vignettes and Auditing in Action can be assigned as pre-reading for
discussion of a particular point or as short cases on a stand-alone basis. The
suggested syllabus includes some end-of-chapter questions that are related to various
chapter vignettes. From our experience, students enjoy “real life” cases and find them
useful in helping them learn the course material. A brief discussion of each of the
vignettes appears in each chapter’s material in this resource guide and many of the
vignettes are related to end-of-chapter questions.
Professional Judgment Problems and Cases
Each chapter has several questions that require students to apply their
professional judgment. In addition, most chapters include Cases that challenge
students beyond what is required in other end of chapter problems. They are
generally more complex than other homework problems. Thus, we sometimes
assign these as individual or group assignments that can be worked outside of
class (we often use them for our individual assignments in the syllabus). W e also
assign them as in-class assignments whereby students work together to develop a
group solution to the case for subsequent class discussion.
Research Activities
Research activities that require students to search for information using a
number of Internet-based resources are included in the end of chapter material for
most of the 20 chapters. These assignments require students to use the Internet
and the CPA Canada Handbook—Assurance to research relevant auditing issues
and they expose students to real-world events, such as CPAB reports, OSC
statement of allegations, as well as SEC enforcement actions related to fraud
investigations, actual audit committee charters that outline the audit committee’s
role in the oversight of the external auditor selection process. We believe these
assignments provide opportunities for students to engage in research activities
outside traditional homework problems to learn about issues affecting the audit
process and the profession. Some of these can be assigned as individual
vii
Chapter Vignettes and Other Chapter Material ― Lessons from Practice
Each chapter begins with a short vignette, the majority of them are based upon
real-life events. In addition, each chapter contains several Auditing in Action
vignettes, related to the chapter content, that highlight real-world issues. Some of
these auditing in actions (and figures) provide a glimpse into the real world of
auditing. Others highlight recent events in Canada and abroad, news articles,
fraud cases, and/or thought papers and academic articles.
These opening vignettes and Auditing in Action features provide instructors
with some meaningful examples and can be helpful in generating some great class
discussion. One of our colleagues has used them as a “Lesson for the Day” for
students. Each opening vignette illustrates the point implied by its title and is
followed by several questions that students should consider while reading the
chapter. The questions can also be used as concept checks throughout the lecture
or serve as an end of the lecture summary of what was covered.
The vignettes and Auditing in Action can be assigned as pre-reading for
discussion of a particular point or as short cases on a stand-alone basis. The
suggested syllabus includes some end-of-chapter questions that are related to various
chapter vignettes. From our experience, students enjoy “real life” cases and find them
useful in helping them learn the course material. A brief discussion of each of the
vignettes appears in each chapter’s material in this resource guide and many of the
vignettes are related to end-of-chapter questions.
Professional Judgment Problems and Cases
Each chapter has several questions that require students to apply their
professional judgment. In addition, most chapters include Cases that challenge
students beyond what is required in other end of chapter problems. They are
generally more complex than other homework problems. Thus, we sometimes
assign these as individual or group assignments that can be worked outside of
class (we often use them for our individual assignments in the syllabus). W e also
assign them as in-class assignments whereby students work together to develop a
group solution to the case for subsequent class discussion.
Research Activities
Research activities that require students to search for information using a
number of Internet-based resources are included in the end of chapter material for
most of the 20 chapters. These assignments require students to use the Internet
and the CPA Canada Handbook—Assurance to research relevant auditing issues
and they expose students to real-world events, such as CPAB reports, OSC
statement of allegations, as well as SEC enforcement actions related to fraud
investigations, actual audit committee charters that outline the audit committee’s
role in the oversight of the external auditor selection process. We believe these
assignments provide opportunities for students to engage in research activities
outside traditional homework problems to learn about issues affecting the audit
process and the profession. Some of these can be assigned as individual
Loading page 7...
Introduction: An overview of the instructor’s resource manual
viii
assignments while others could be assigned to groups for in-class presentation and
discussion.
Applying Professional Judgment to Real Life Events
Some of the end-of-chapter problems and research activities provide
instructors with an opportunity to examine the real-life events discussed in the
chapter in more depth as well as aiding in students’ professional judgment. Below is
a summary:
Chapter Vignette or Auditing in Action Related
Questions
Assurance
Concepts
1 Auditing in Action 1-3 - And the
Oscar goes To…La, La, Opps!
Wrong Envelope!
Question 1-28 Need for
assurance
engagements
2 Vignette - A focus on audit
quality
Question 2-25 Professional
Judgment, Quality
Control, Ethical
Reasoning
3 Auditing in Action 3-2 - The
High Costs of Legal Liability -
Sino Forest
Question 3-35 Evaluation of
evidence,
professional
skepticism,
professional
standards
4 Auditing in Action 4-3 - It’s a
Matter of Professional
Judgment—The Livent Audits
Question 4-34 Professional
Judgment
5 Vignette - CEO Confesses to
Falsifying Documents to Hide
Fraud for Over 20 Years
Question 5-36 Control
deficiencies,
confirmations
6 Vignette - the Fall Of Enron:
Did Anyone Understand Its
Business? and
Auditing in Action 6-1 -
Professional Judgement and
the Client Continuance
Decision at Enron
Question 6-38 Client
Acceptance,
Professional
Judgment
8 Auditing in Action 8-3-
Cyberattacks: a New Reality
Question 8-35 Control
deficiencies,
COSO guidance
9 Auditing in Action 9-3 - Audit
Regulators Identify
Deficiencies in Control Testing
Question 9-33 Control testing,
evidence
12 Auditing in Action 12-5 –
Revenue Recognition at
Tesco: It’s a Matter of Timing
Question 12-50 Inherent risk -
revenue, audit
strategy
13 Auditing in Action 13-4 – Question 13-35 Substantive tests
viii
assignments while others could be assigned to groups for in-class presentation and
discussion.
Applying Professional Judgment to Real Life Events
Some of the end-of-chapter problems and research activities provide
instructors with an opportunity to examine the real-life events discussed in the
chapter in more depth as well as aiding in students’ professional judgment. Below is
a summary:
Chapter Vignette or Auditing in Action Related
Questions
Assurance
Concepts
1 Auditing in Action 1-3 - And the
Oscar goes To…La, La, Opps!
Wrong Envelope!
Question 1-28 Need for
assurance
engagements
2 Vignette - A focus on audit
quality
Question 2-25 Professional
Judgment, Quality
Control, Ethical
Reasoning
3 Auditing in Action 3-2 - The
High Costs of Legal Liability -
Sino Forest
Question 3-35 Evaluation of
evidence,
professional
skepticism,
professional
standards
4 Auditing in Action 4-3 - It’s a
Matter of Professional
Judgment—The Livent Audits
Question 4-34 Professional
Judgment
5 Vignette - CEO Confesses to
Falsifying Documents to Hide
Fraud for Over 20 Years
Question 5-36 Control
deficiencies,
confirmations
6 Vignette - the Fall Of Enron:
Did Anyone Understand Its
Business? and
Auditing in Action 6-1 -
Professional Judgement and
the Client Continuance
Decision at Enron
Question 6-38 Client
Acceptance,
Professional
Judgment
8 Auditing in Action 8-3-
Cyberattacks: a New Reality
Question 8-35 Control
deficiencies,
COSO guidance
9 Auditing in Action 9-3 - Audit
Regulators Identify
Deficiencies in Control Testing
Question 9-33 Control testing,
evidence
12 Auditing in Action 12-5 –
Revenue Recognition at
Tesco: It’s a Matter of Timing
Question 12-50 Inherent risk -
revenue, audit
strategy
13 Auditing in Action 13-4 – Question 13-35 Substantive tests
Loading page 8...
Instructor's Resource Manual for Auditing, 14Ce, by Arens/Elder/Beasley/Hogan/Jones
ix
Incorrect Classifications Hide
a Greater Loss
- expenses,
professional
judgment
14 Auditing in Action 14-1 –
Blackberrry’s Inventory
Obsolescence Woes
Question 14-26 Evaluation of
inventory
obsolescence,
inherent risk -
inventory
Hillsburg Hardware
Hillsburg Hardware continues to be the fictional company used to illustrate
many of the concepts – particularly in relation to documentation of key planning
decisions, including: preliminary analytical review (Figures 6-2 and 6-4), preliminary
decisions for overall materiality (Figure 6-7), internal control questionnaire (9-2), the
audit strategy memo (Figure 10-1), Documentation of Understanding of the Entity
(Figure 10-2), and Audit Team Planning Memo (Figure 10-3).
Pinnacle Manufacturing and Hillsburg Hardware Integrated Cases
For instructors who are interested in providing more complex cases that
students can work across multiple chapters, we have included the Pinnacle
Manufacturing Integrated Case on MyLab Accounting. This four-part case gives
students a hands-on experience that begins in Chapter 6 and concludes in Chapter
10. As well, the Appendix in the textbook now includes a new integrated case
based on Hillsburg Hardware. Both of these cases can be worked individually or
in small teams, or assigned as an individual or group project.
Downloadable Instructor Resources
The Pearson Canada eCatalogue offers a number of downloadable
resources prepared to accompany the 14th Canadian edition of Auditing: The
Art and Science of Assurance Engagements, including PowerPoints, Test
Bank, and Instructor’s Solution Manual.
Other Resources That We Use
In addition to the many features included in this 14th edition of Auditing: The Art
and Science of Assurance Engagements, there are several other resources that
you might find useful as complementary materials and assignments. These are
briefly highlighted next.
Use of Auditing Cases
Auditing Cases: An Interactive Learning Approach, Sixth Edition (2015) by
Beasley, Buckless, Glover, and Prawitt is an excellent supplement to the textbook.
ix
Incorrect Classifications Hide
a Greater Loss
- expenses,
professional
judgment
14 Auditing in Action 14-1 –
Blackberrry’s Inventory
Obsolescence Woes
Question 14-26 Evaluation of
inventory
obsolescence,
inherent risk -
inventory
Hillsburg Hardware
Hillsburg Hardware continues to be the fictional company used to illustrate
many of the concepts – particularly in relation to documentation of key planning
decisions, including: preliminary analytical review (Figures 6-2 and 6-4), preliminary
decisions for overall materiality (Figure 6-7), internal control questionnaire (9-2), the
audit strategy memo (Figure 10-1), Documentation of Understanding of the Entity
(Figure 10-2), and Audit Team Planning Memo (Figure 10-3).
Pinnacle Manufacturing and Hillsburg Hardware Integrated Cases
For instructors who are interested in providing more complex cases that
students can work across multiple chapters, we have included the Pinnacle
Manufacturing Integrated Case on MyLab Accounting. This four-part case gives
students a hands-on experience that begins in Chapter 6 and concludes in Chapter
10. As well, the Appendix in the textbook now includes a new integrated case
based on Hillsburg Hardware. Both of these cases can be worked individually or
in small teams, or assigned as an individual or group project.
Downloadable Instructor Resources
The Pearson Canada eCatalogue offers a number of downloadable
resources prepared to accompany the 14th Canadian edition of Auditing: The
Art and Science of Assurance Engagements, including PowerPoints, Test
Bank, and Instructor’s Solution Manual.
Other Resources That We Use
In addition to the many features included in this 14th edition of Auditing: The Art
and Science of Assurance Engagements, there are several other resources that
you might find useful as complementary materials and assignments. These are
briefly highlighted next.
Use of Auditing Cases
Auditing Cases: An Interactive Learning Approach, Sixth Edition (2015) by
Beasley, Buckless, Glover, and Prawitt is an excellent supplement to the textbook.
Loading page 9...
Introduction: An overview of the instructor’s resource manual
x
This collection of 48 auditing cases addresses most major activities performed
during the conduct of an audit, from client acceptance to issuance of an audit
report. (Since it is an American textbook, some of the questions may need to
be adapted to refer to relevant CASs). Many of the cases are based on actual
companies, some of which were engaged in financial reporting fraud. Several
cases involve students working with realistic audit evidence and preparing and
evaluating audit documentation. Auditing Cases: An Interactive Learning Approach
provides instructors an easy opportunity to introduce short active learning exercises
to promote in-class discussions of real-world audit issues throughout the
introductory (or advanced) auditing course.
Some cases we have used in the past are:
Asher Farms Inc. (Understanding of Client’s Business Environment)
Ocean Manufacturing Inc. (New Client Acceptance Decision)
EyeMax Corporation (Evaluation of Audit Differences)
Longeta Corporation (Auditing Revenue Contracts)
Burlingham Bees (Using Analytical Procedures as Substantive Tests)
Use of Peer-Reviewed Published Cases
Over the years, we have used several cases published in accounting education
journals, below is a list of some that we have found to be effective:
Phillips, F., & Martin, R. D. (1998). Instructional case: Northern Frontier Park. Issues
in Accounting Education, 13(4), 1005.
We find that this case serves as a great foundation to help students understand audit
risk and risk assessment. We assign it as a pre-class reading when we cover the
topics of client acceptance and materiality and risk and discuss it in the weeks that
we cover client acceptance, and materiality and risk.
Sanchez, M. H., Brown, K. F., & Agoglia, C. P. (2007). Consideration of control
environment and fraud risk: A set of instructional exercises. Journal of Accounting
Education, 25(4), 207-221.
We have used this case as a group assignment several times and find it very
effective in helping students perform an integrated analysis of control risk. It provides
the students with a completed internal control environment questionnaire which they
must evaluate and assess the risk of misappropriation of assets and/or financial
reporting fraud. There are four different versions of the questionnaire and different
case facts, which will change the students’ assessment (and enable instructors to
use the assignment multiple times).
Peaden, D. and Stephens, N. (2013) Old Main Manufacturing: The Case of
Unrecorded Sales Discounts. Issues in Accounting Education.
x
This collection of 48 auditing cases addresses most major activities performed
during the conduct of an audit, from client acceptance to issuance of an audit
report. (Since it is an American textbook, some of the questions may need to
be adapted to refer to relevant CASs). Many of the cases are based on actual
companies, some of which were engaged in financial reporting fraud. Several
cases involve students working with realistic audit evidence and preparing and
evaluating audit documentation. Auditing Cases: An Interactive Learning Approach
provides instructors an easy opportunity to introduce short active learning exercises
to promote in-class discussions of real-world audit issues throughout the
introductory (or advanced) auditing course.
Some cases we have used in the past are:
Asher Farms Inc. (Understanding of Client’s Business Environment)
Ocean Manufacturing Inc. (New Client Acceptance Decision)
EyeMax Corporation (Evaluation of Audit Differences)
Longeta Corporation (Auditing Revenue Contracts)
Burlingham Bees (Using Analytical Procedures as Substantive Tests)
Use of Peer-Reviewed Published Cases
Over the years, we have used several cases published in accounting education
journals, below is a list of some that we have found to be effective:
Phillips, F., & Martin, R. D. (1998). Instructional case: Northern Frontier Park. Issues
in Accounting Education, 13(4), 1005.
We find that this case serves as a great foundation to help students understand audit
risk and risk assessment. We assign it as a pre-class reading when we cover the
topics of client acceptance and materiality and risk and discuss it in the weeks that
we cover client acceptance, and materiality and risk.
Sanchez, M. H., Brown, K. F., & Agoglia, C. P. (2007). Consideration of control
environment and fraud risk: A set of instructional exercises. Journal of Accounting
Education, 25(4), 207-221.
We have used this case as a group assignment several times and find it very
effective in helping students perform an integrated analysis of control risk. It provides
the students with a completed internal control environment questionnaire which they
must evaluate and assess the risk of misappropriation of assets and/or financial
reporting fraud. There are four different versions of the questionnaire and different
case facts, which will change the students’ assessment (and enable instructors to
use the assignment multiple times).
Peaden, D. and Stephens, N. (2013) Old Main Manufacturing: The Case of
Unrecorded Sales Discounts. Issues in Accounting Education.
Loading page 10...
Instructor's Resource Manual for Auditing, 14Ce, by Arens/Elder/Beasley/Hogan/Jones
xi
We have used this case as an individual assignment. It is fairly straightforward;
however, it requires the students to refer to the relevant auditing standards (which
they often have limited exposure to) regarding audit sampling. Note: Instructors will
need to modify the case requirements to make reference to the relevant CASs.
Student feedback has been overwhelmingly positive since they feel that they have
had an opportunity to perform some “real” audit work - vouching, preparing a
working paper and evaluating and concluding on the results of their testing.
Suggested Term Projects
1. Have students teams obtain the annual report of a public company through
SEDAR and prepare an analysis of business risks which impact financial
reporting risk, perform some preliminary planning activities and develop an
audit strategy for the revenue cycle for the company selected.
2. Have students go through the audit process for the acquisition and payment
cycle of a small manufacturing company from flowcharting the system to
designing the audit program.
3. Have students evaluate the sampling approach used by an auditor for sales
and cash receipts for a small business. The case can be used with
nonstatistical sampling, difference estimation, or monetary unit sampling.
The requirements should be modified depending on the alternative you
select.
Student guidelines for each project follow.
xi
We have used this case as an individual assignment. It is fairly straightforward;
however, it requires the students to refer to the relevant auditing standards (which
they often have limited exposure to) regarding audit sampling. Note: Instructors will
need to modify the case requirements to make reference to the relevant CASs.
Student feedback has been overwhelmingly positive since they feel that they have
had an opportunity to perform some “real” audit work - vouching, preparing a
working paper and evaluating and concluding on the results of their testing.
Suggested Term Projects
1. Have students teams obtain the annual report of a public company through
SEDAR and prepare an analysis of business risks which impact financial
reporting risk, perform some preliminary planning activities and develop an
audit strategy for the revenue cycle for the company selected.
2. Have students go through the audit process for the acquisition and payment
cycle of a small manufacturing company from flowcharting the system to
designing the audit program.
3. Have students evaluate the sampling approach used by an auditor for sales
and cash receipts for a small business. The case can be used with
nonstatistical sampling, difference estimation, or monetary unit sampling.
The requirements should be modified depending on the alternative you
select.
Student guidelines for each project follow.
Loading page 11...
Introduction: An overview of the instructor’s resource manual
xii
SAMPLE TERM PROJECT
Developing an Audit Strategy Based upon Analysis of Business
Risks and Financial Reporting Risk
The group term project is a hands-on exercise in planning a financial statement audit.
The project will give you an opportunity to consider how the concepts and techniques
discussed in the course apply in auditing an actual business.
Your team will take on the role of the audit engagement team for a publicly-traded
Canadian company. Assume that your audit firm has already conducted its client
retention procedures (this is not the first year that you are auditors), independence
analysis, and has determined that the members of your team are the best people for
the job. Now that has been done, your team is required to develop the client risk
profile and plan the audit of the ‘client company’ (with a focus on the revenue cycle)
for its upcoming year-end.
Your team is expected to provide two deliverables – A Planning Memo (more details
on each part are provided below) and Group Presentation:
Description Allocation
Planning Memo
Part 1 - Assess Client Business Risk 25
Part 2 - Perform Preliminary Analytical
Review Determine Audit Risk, Materiality
45
Part 3 - Audit Strategy for Revenue Cycle 30
100
Group Presentation 50
Total 150
You are expected to use the company’s most recent quarterly results, the most
recent annual report, and other publicly-available information. State any assumptions
you find it necessary to make. You should not contact the organization or interview
people for this project. You should not contact the actual auditors as they will need to
keep all the client information confidential. Please feel free to ask the instructor for
further guidance if any of the requirements are not clear.
Assess Client Business Risk (limit of 3-4 pages, including appendices)
The aim of this part of your assignment is to prepare a detailed industry and business
risk analysis for the company you have been assigned:
In preparing the analysis, be sure to include the following:
Business objectives & strategies (explain how the organization makes money)
Industry and External Environment (Include Key competitors and industry
trends)
xii
SAMPLE TERM PROJECT
Developing an Audit Strategy Based upon Analysis of Business
Risks and Financial Reporting Risk
The group term project is a hands-on exercise in planning a financial statement audit.
The project will give you an opportunity to consider how the concepts and techniques
discussed in the course apply in auditing an actual business.
Your team will take on the role of the audit engagement team for a publicly-traded
Canadian company. Assume that your audit firm has already conducted its client
retention procedures (this is not the first year that you are auditors), independence
analysis, and has determined that the members of your team are the best people for
the job. Now that has been done, your team is required to develop the client risk
profile and plan the audit of the ‘client company’ (with a focus on the revenue cycle)
for its upcoming year-end.
Your team is expected to provide two deliverables – A Planning Memo (more details
on each part are provided below) and Group Presentation:
Description Allocation
Planning Memo
Part 1 - Assess Client Business Risk 25
Part 2 - Perform Preliminary Analytical
Review Determine Audit Risk, Materiality
45
Part 3 - Audit Strategy for Revenue Cycle 30
100
Group Presentation 50
Total 150
You are expected to use the company’s most recent quarterly results, the most
recent annual report, and other publicly-available information. State any assumptions
you find it necessary to make. You should not contact the organization or interview
people for this project. You should not contact the actual auditors as they will need to
keep all the client information confidential. Please feel free to ask the instructor for
further guidance if any of the requirements are not clear.
Assess Client Business Risk (limit of 3-4 pages, including appendices)
The aim of this part of your assignment is to prepare a detailed industry and business
risk analysis for the company you have been assigned:
In preparing the analysis, be sure to include the following:
Business objectives & strategies (explain how the organization makes money)
Industry and External Environment (Include Key competitors and industry
trends)
Loading page 12...
Instructor's Resource Manual for Auditing, 14Ce, by Arens/Elder/Beasley/Hogan/Jones
xiii
Key Business Operations & Processes
Financial Resources and Availability
Management & Governance
Measurement & Performance (ensure to consider what are some of the key
non-financial performance indicators for the industry)
In your analysis, you need to make a conclusion on the company’s risk and its
implications for financial reporting risk.
You are expected to perform a thorough search, using a variety of electronic sources
such as:
The company’s annual report (ensure you look at management’s discussion
and analysis along with the financial statements)
The company’s website
Sources of industry data
Stock broker or investment analyses
Business press
CPA Canada Handbook – Assurance and Accounting Standards
CPA Canada Risk Alerts
* Note – You may find that the industry guides prepared by many of the Big Four
Firms (PWC, Deloitte, KPMG, and E&Y) to be useful for your industry.
Part 2 – Preliminary Analytical Review & Implications for the Audit (limit of 3-4
pages, not including appendices)
Preliminary Analytical Review
In this part of your assignment, you are expected to conduct an analytical analysis of
your company that includes: (1) common-size financial statements for the past three
years (you will need to decide what expectations you have regarding the interim
statements for your company) and (2) financial ratios that are commonly used for that
particular industry
Your financial ratio analysis should include: (1) a three-year ratio comparison by year
(for the company), relevant comparisons to (2) industry and (3) a relevant competitor.
Categories (more details on the various categories have been posted to the course
website in Assignments folder) for your ratios should be:
Stock valuation
Growth
Financial Strength
Profitability
Management Effectiveness
Efficiency
xiii
Key Business Operations & Processes
Financial Resources and Availability
Management & Governance
Measurement & Performance (ensure to consider what are some of the key
non-financial performance indicators for the industry)
In your analysis, you need to make a conclusion on the company’s risk and its
implications for financial reporting risk.
You are expected to perform a thorough search, using a variety of electronic sources
such as:
The company’s annual report (ensure you look at management’s discussion
and analysis along with the financial statements)
The company’s website
Sources of industry data
Stock broker or investment analyses
Business press
CPA Canada Handbook – Assurance and Accounting Standards
CPA Canada Risk Alerts
* Note – You may find that the industry guides prepared by many of the Big Four
Firms (PWC, Deloitte, KPMG, and E&Y) to be useful for your industry.
Part 2 – Preliminary Analytical Review & Implications for the Audit (limit of 3-4
pages, not including appendices)
Preliminary Analytical Review
In this part of your assignment, you are expected to conduct an analytical analysis of
your company that includes: (1) common-size financial statements for the past three
years (you will need to decide what expectations you have regarding the interim
statements for your company) and (2) financial ratios that are commonly used for that
particular industry
Your financial ratio analysis should include: (1) a three-year ratio comparison by year
(for the company), relevant comparisons to (2) industry and (3) a relevant competitor.
Categories (more details on the various categories have been posted to the course
website in Assignments folder) for your ratios should be:
Stock valuation
Growth
Financial Strength
Profitability
Management Effectiveness
Efficiency
Loading page 13...
Introduction: An overview of the instructor’s resource manual
xiv
All of the above ratios should be presented in an appendix (2 page max).
Your analysis should relate to your client business risk analysis and highlight which
account balances warrant further concern/attention in terms of audit planning. You
should not comment on all ratios and changes. Only comment on changes that
warrant further attention. Please ensure you relate your concerns to management
assertions for the particular accounts.
Inherent Risk
In this report you need to include a discussion of what your conclusions in your
business risk analysis and your analytical analysis means for the conduct of the
audit. In particular, you should discuss what accounts/cycles you feel are high
inherent risk and which are at lower levels of risk. In making these decisions, you
should consider factors such as unusual or unexpected fluctuations, audit complexity,
and risk of material misstatement due to management bias. Refer to your textbook
and Audit Standards for further guidance.
As in Part 1, you are expected to perform a thorough search, using a variety of
electronic sources. This is necessary in order to obtain explanations for fluctuations,
deviations, etc…
Acceptable Audit risk
Now that you have familiarized yourself with your client, you should have enough
information to set acceptable audit risk. Ensure that you consider the relevant factors
that would heighten the risk of the engagement to the auditor (refer to your textbook,
and audit standards regarding how to set acceptable audit risk).
Materiality
Another important decision is determination of overall and performance materiality. In
order to determine overall and performance materiality you should refer to the Audit
Standards, and the textbook, and any other relevant professional materials.
Part 3– Audit Strategy of Revenue Cycle– (limit 4 pages, including appendices)
Using your previous analyses, your team is expected to prepare an audit strategy for
the revenue cycle. In this section, you are expected to discuss:
What are your company’s key revenue cycle accounts? What are the critical
accounting policies and estimates for these accounts?
What does your company say in its footnotes about its use of estimates
related to the revenue cycle? How informative are these footnotes?
What risk do the revenue estimates pose for your audit?
Using your analytical analysis you conducted in Part 2, discuss the key
findings that are relevant to the revenue cycle.
xiv
All of the above ratios should be presented in an appendix (2 page max).
Your analysis should relate to your client business risk analysis and highlight which
account balances warrant further concern/attention in terms of audit planning. You
should not comment on all ratios and changes. Only comment on changes that
warrant further attention. Please ensure you relate your concerns to management
assertions for the particular accounts.
Inherent Risk
In this report you need to include a discussion of what your conclusions in your
business risk analysis and your analytical analysis means for the conduct of the
audit. In particular, you should discuss what accounts/cycles you feel are high
inherent risk and which are at lower levels of risk. In making these decisions, you
should consider factors such as unusual or unexpected fluctuations, audit complexity,
and risk of material misstatement due to management bias. Refer to your textbook
and Audit Standards for further guidance.
As in Part 1, you are expected to perform a thorough search, using a variety of
electronic sources. This is necessary in order to obtain explanations for fluctuations,
deviations, etc…
Acceptable Audit risk
Now that you have familiarized yourself with your client, you should have enough
information to set acceptable audit risk. Ensure that you consider the relevant factors
that would heighten the risk of the engagement to the auditor (refer to your textbook,
and audit standards regarding how to set acceptable audit risk).
Materiality
Another important decision is determination of overall and performance materiality. In
order to determine overall and performance materiality you should refer to the Audit
Standards, and the textbook, and any other relevant professional materials.
Part 3– Audit Strategy of Revenue Cycle– (limit 4 pages, including appendices)
Using your previous analyses, your team is expected to prepare an audit strategy for
the revenue cycle. In this section, you are expected to discuss:
What are your company’s key revenue cycle accounts? What are the critical
accounting policies and estimates for these accounts?
What does your company say in its footnotes about its use of estimates
related to the revenue cycle? How informative are these footnotes?
What risk do the revenue estimates pose for your audit?
Using your analytical analysis you conducted in Part 2, discuss the key
findings that are relevant to the revenue cycle.
Loading page 14...
Instructor's Resource Manual for Auditing, 14Ce, by Arens/Elder/Beasley/Hogan/Jones
xv
o Outline what inquiries and follow-up procedures might be performed
understand unusual fluctuations, trends, etc...
Based upon your risk analysis conducted in Part 1, discuss those risks that are
most relevant to the revenue cycle.
o Outline what inquires and follow-up procedures to you need to make in
order to understand the risk
Assuming you have developed a good understanding of the components of
internal control, you assessed control risk at medium and your tests were
consistent with your planned assessment, outline your audit strategy for the
revenue cycle using the following format:
Balance –
Related
Assertions
Audit
Objectives
Assessment
of Inherent
Risk
Assessment
of Control
Risk
Planned Substantive
Testing (Timing, Nature,
& Extent)
Medium
Transaction–
Related
Assertions
Audit
Objectives
Assessment
of Inherent
Risk
Assessment
of Control
Risk
Planned Substantive
Testing (Timing, Nature,
& Extent)
Medium
Part 4– Group Presentation
Video
Your group will be expected to prepare a 5-minute video related to your client
company:
PART I: Overview of Client Business Risk
PART II: Summary of Key Findings and Identification of High Risk Accounts,
Audit Risk and Materiality
Question Period
Class members will act as the audit committee and will ask your group questions on
your video. All group members are expected to be at the presentation and to answer
the questions. You will be assessed on the quality of your responses and
understanding of the material.
xv
o Outline what inquiries and follow-up procedures might be performed
understand unusual fluctuations, trends, etc...
Based upon your risk analysis conducted in Part 1, discuss those risks that are
most relevant to the revenue cycle.
o Outline what inquires and follow-up procedures to you need to make in
order to understand the risk
Assuming you have developed a good understanding of the components of
internal control, you assessed control risk at medium and your tests were
consistent with your planned assessment, outline your audit strategy for the
revenue cycle using the following format:
Balance –
Related
Assertions
Audit
Objectives
Assessment
of Inherent
Risk
Assessment
of Control
Risk
Planned Substantive
Testing (Timing, Nature,
& Extent)
Medium
Transaction–
Related
Assertions
Audit
Objectives
Assessment
of Inherent
Risk
Assessment
of Control
Risk
Planned Substantive
Testing (Timing, Nature,
& Extent)
Medium
Part 4– Group Presentation
Video
Your group will be expected to prepare a 5-minute video related to your client
company:
PART I: Overview of Client Business Risk
PART II: Summary of Key Findings and Identification of High Risk Accounts,
Audit Risk and Materiality
Question Period
Class members will act as the audit committee and will ask your group questions on
your video. All group members are expected to be at the presentation and to answer
the questions. You will be assessed on the quality of your responses and
understanding of the material.
Loading page 15...
Introduction: An overview of the instructor’s resource manual
xvi
SAMPLE TERM PROJECT
Internal Control and Audit Program Case
You are provided with the following description of the accounting system and internal
controls for materials purchases by the Johnson Machinery Company, a medium -
sized firm that builds special machinery to order.
Materials purchase requisitions are first approved by the plant foreman, who
then sends them to the purchasing department. Purchasing department employees
enter the purchase requisition information into the computer, which automatically
generates a purchase order in sequential order. The system automatically generates
a paper copy of the purchase order, which is sent by purchasing department employees
to the vendor. The receiving department electronically accesses a copy of the purchase
order, which is printed to serve as a receiving report.
Delivered materials are immediately sent to the storeroom. The completed
receiving report, which is a printed copy of the purchase order, is sent to the purchasing
department. A copy of the receiving report is sent to the storeroom. Materials are
issued to factory employees subsequent to the verbal request by one of the foremen.
When the mailroom clerk receives vendors’ invoices, he or she forwards them
to the purchasing department employee who placed the order. The invoice is compared
with the electronic copy of the purchase order for price and terms by the employee.
The invoice quantity is compared with the receiving department’s report. After checking
footings, extensions, and discounts on the vendor invoice, the employee indicates
approval for payment by initialing the invoice. The invoice is then forwarded to the
accounting department (voucher section) where it is coded for account distribution,
assigned a voucher number, and entered into the accounting system for recording in
the voucher register. The system tracks invoices due by payment date due. The
purchase order and receiving report are filed in the purchasing department.
On payment dates, the system automatically generates a request for payment.
The system automatically prepares cheques and a transaction list for preparation of a
cash disbursements journal, updates the accounts payable master file, and indicates
the payment date for the voucher register. Prenumbered cheques are sent to the
cashier, who puts them through the check-signing machine. The cheques are then
sent to the voucher section that makes sure that the checks were correctly prepared.
The cheques are placed in envelopes and sent to the mailroom. The vouchers
are subsequently filed in numerical order. At the end of each month, a computer
listing of voucher and cash disbursement transactions, and an outstanding accounts
payable list is prepared.
xvi
SAMPLE TERM PROJECT
Internal Control and Audit Program Case
You are provided with the following description of the accounting system and internal
controls for materials purchases by the Johnson Machinery Company, a medium -
sized firm that builds special machinery to order.
Materials purchase requisitions are first approved by the plant foreman, who
then sends them to the purchasing department. Purchasing department employees
enter the purchase requisition information into the computer, which automatically
generates a purchase order in sequential order. The system automatically generates
a paper copy of the purchase order, which is sent by purchasing department employees
to the vendor. The receiving department electronically accesses a copy of the purchase
order, which is printed to serve as a receiving report.
Delivered materials are immediately sent to the storeroom. The completed
receiving report, which is a printed copy of the purchase order, is sent to the purchasing
department. A copy of the receiving report is sent to the storeroom. Materials are
issued to factory employees subsequent to the verbal request by one of the foremen.
When the mailroom clerk receives vendors’ invoices, he or she forwards them
to the purchasing department employee who placed the order. The invoice is compared
with the electronic copy of the purchase order for price and terms by the employee.
The invoice quantity is compared with the receiving department’s report. After checking
footings, extensions, and discounts on the vendor invoice, the employee indicates
approval for payment by initialing the invoice. The invoice is then forwarded to the
accounting department (voucher section) where it is coded for account distribution,
assigned a voucher number, and entered into the accounting system for recording in
the voucher register. The system tracks invoices due by payment date due. The
purchase order and receiving report are filed in the purchasing department.
On payment dates, the system automatically generates a request for payment.
The system automatically prepares cheques and a transaction list for preparation of a
cash disbursements journal, updates the accounts payable master file, and indicates
the payment date for the voucher register. Prenumbered cheques are sent to the
cashier, who puts them through the check-signing machine. The cheques are then
sent to the voucher section that makes sure that the checks were correctly prepared.
The cheques are placed in envelopes and sent to the mailroom. The vouchers
are subsequently filed in numerical order. At the end of each month, a computer
listing of voucher and cash disbursement transactions, and an outstanding accounts
payable list is prepared.
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Auditing