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vi Contents
Further reading 154

Suggested solutions to tasks 154
Self-assessment questions (solutions available to students) 156
Self-assessment questions (solutions available to tutors) 157
Topics for class discussion without solutions 158
5 Corporate governance 161

Learning objectives 161
Introduction to corporate governance 162
Part 1: The need for effective c orporate governance 162
Part 2: Models of corporate governance and the UK
Corporate Governance Code 167
Models of corporate governance 170
The UK Corporate Governance Code 174
Board committees 181
The UK Stewardship Code 186
Audit firm corporate governance 190
Concluding remarks on corporate governance 191
Summary 191
Key points of the chapter 191
References and further reading 192
6 The risk-based approach to audit: audit judgement 197

Why is a risk-based approach to audit an aid to the auditor? 197
Broad approach to minimize audit risk 200
A practical example 211
Case Study 6.1: Edengrove Limited 211
Other practical matters 213
Case Study 6.2: Kemback Limited, Part 1 217
Case Study 6.2: Kemback Limited, Part 2 220
Business risk approach to audit 222
Business risk and inherent risk approaches: similarities
and dissimilarities 227
The business risk approach and smaller clients
and smaller audit firms 230
Analytical review as a risk analysis tool 230
Judgement in accounting and auditing and its relationship to risk 232
Management of the audit process 234
The terms of reference provide the audit framework 236
Case Study 6.3: Hughes Electronics Limited 236
Planning the assignment 240
Case Study 6.4: County Hotel Limited, Part 1 240
Case Study 6.4: County Hotel Limited, Part 2 242
Summary 248
References 249
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Contents vii
Further reading 249

Suggested solutions to tasks 250
7 The search for evidence explained 257

The audit defined as a search for e vidence to enable
an opinion to be formed 257
Forming conclusions on the basis of evidence:
the exercise of judgement 261
Reliability of audit evidence (grades of audit evidence) 265
Case Study 7.1: Ridgewalk plc 269
The business risk approach to gathering audit evidence 271
The stages of the audit process and the evidential requirements
at each stage 274
Limited assurance and compilation engagements and agreed
upon procedures 277
Conclusion 279
Summary 279
Reference 281
Further reading 281
8 Systems work: basic ideas 1 285

Introduction 285
Layers of regulation and control expanded 287
Case Study 8.1: High Quality Limited:
small independent supermarket 299
Case Study 8.2: Caiplie Financial Services: entity in the financial
services sector 301
Accounting and quality assurance/control systems 302
General controls 304
Case Study 8.3: Horton Limited: cash received system 308
Summary 323
References 324
Further reading 324
9 Systems work: basic ideas 2 326

Introduction 326
viii Contents
Application controls 327

Data capture/input controls 327
Processing controls 334
Output controls 336
Database systems 337
E-commerce 339
Audit approaches to systems and controls 345
Summary 364
Further reading 365
10 Testing and evaluation of systems 368

Introduction 368
Sales and receivables system 369
Case Study 10.1: Broomfield plc: sales and trade receivables system 369
Purchases and trade payables system 371
Case Study 10.2: Broomfield plc: part of purchases
and trade payables system 372
Payroll system 374
Case Study 10.3: Troston plc: production payroll 374
General and application controls in a sales system 376
Case Study 10.4: Burbage Limited: sales order processing
and application controls 377
Tests of controls 379
Evaluation of systems and audit conclusions 390
Summary 392
Reference 393
Further reading 393
11 Substantive testing, computer-assisted audit techniques

and audit programmes 396
Introduction 396
Substantive testing of transactions, account balances
and disclosures 396
Case Study 11.1: Powerbase plc: the substantive audit
programme for purchases 398
The use of audit software 402
Directional testing 410
Substantive audit programmes for wages 412
Substantive audit programmes for cash and bank balances 414
Contents ix
Communication of audit matters to those charged with

governance (management letter) 415
Audit management with the computer 420
Summary 422
Reference 424
Further reading 424
12 Sampling and materiality 427

Introduction 427
What is sampling? 428
Designing and selecting the sample for testing 428
Case Study 12.1: Broomfield plc: an example of judgemental
sampling 430
Sample selection methodology 432
Evaluation of test results 436
Monetary unit sampling (MUS) 438
Comparative advantages of statistical and non-statistical
sampling 439
Alternative statistical sampling methods 441
Materiality 442
Summary 454
References 455
Further reading 456
13 Final work: general principles and analytical review

of financial statements and management assertions
on financial statement headings 460
Introduction 460
Prefinal work 461
Balance sheet date work 462
Bridging work between conclusion of interim work
and the balance sheet date 463
Analytical procedures 464
Case Study 13.1: Kothari Limited: analytical review 468
Case Study 13.2: Art Aid Limited: analytical review 473
Detailed final audit work: general matters 477
Summary 485
Further reading 486
x Contents

14 Final work: non-current assets, trade receivables

and financial assets 489
Introduction 489
Tangible non-current assets and depreciation 490
Case Study 14.1: Pykestone plc: non-current assets 490
Trade receivables and sales 506
Case Study 14.2: Sterndale plc: ageing statement 509
Case Study 14.3: Sterndale plc: analytical review of sales
and trade receivables 510
Financial assets 520
Summary 520
Further reading 522
15 Final work: specific problems related to inventories, construction

contracts, trade payables and financial liabilities 524
Introduction 524
Inventories 525
Case Study 15.1: Billbrook Limited: analysis of inventory, Part 1 530
Case Study 15.1: Billbrook Limited: analysis of inventory, Part 2 531
Case Study 15.2: Greenburn Limited: inventory taking instructions 536
Valuation of construction contracts 547
Trade payables and purchases 547
Financial liabilities 557
Summary 557
Further reading 559
16 Final review: post-balance sheet period, provisions, contingencies,

letter of representation 562
Introduction 562
Post-balance sheet events 563
Provisions, contingent liabilities and contingent assets 568
Going concern 577
Audit work to detect post-balance sheet events and contingencies 577
Contents xi
Evaluation of misstatements identified during the audit 580

Management letter of representation 582
Audit documentation 587
Role of the final review 589
Summary 591
Further reading 593
17 Assurance engagements and internal audit 597

Introduction 597
Assurance engagements 598
Case Study 17.1: Protecting the environment in an area
of scenic beauty 615
Case Study 17.2: Gilling Limited 618
Internal audit 622
Case Study 17.3: Greenburn Limited: fleet of vans 624
Case Study 17.4: Photocopying costs in an educational institution 626
Case Study 17.5: Barnton plc 627
How to make the internal audit function effective 629
Reliance on internal audit by the external auditor 632
Outsourcing of internal audit work 636
Case Study 17.6: Internal audit at Troston plc 637
Further reading 640
18 The auditors’ report 644

Introduction 645
The unmodified opinion 646
Specific audit considerations in respect of quoted companies/public
interest entities 664
The modified audit opinion 672
Limitation of scope 675
Disagreement 681
Disclaimer of responsibility 685
Reporting on corporate governance issues 686
Summary 693
Reference 695
Further reading 695
xii Contents
19 Fraud and going concern 700

Introduction to fraud 700
Responsibility for fraud detection 702
Recent debates relating to fraud 714
Case law relating to fraud 718
Auditing scandals 720
Consideration of law and regulations 722
Introduction to going concern 727
Directors’ and auditors’ responsibilities for going concern 729
Reporting on going concern 735
Summary 736
References 738
Further reading 739
20 The audit expectations gap and audit quality 741

The audit expectations gap 741
The causes of the audit expectations gap, possible
developments and solutions 743
Audit quality 756
Summary 766
References 767
Further reading 768
Topic for class discussion without solution 769
21 The auditor and liability under the law 770

Introduction 770
Criminal liability 771
Civil liability 772
Case law 773
Auditing standards 788
Professional conduct 789
Potential ways of reducing auditor liability 790
Summary 797
References 798
Further reading 799
Contents xiii
22 Issues in auditing 804

Introduction 804
The accounting/auditing profession? 805
Regulation 809
IFAC, the accountancy profession and globalization 816
Audit reporting 820
Independence 828
Choice in the UK audit market 832
Audit data analytics 837
Summary 842
References 844
Further reading 847
23 Examination hints and final remarks 849

Introduction 849
General examination hints 849
Auditing as an examination subject 852
Final remarks 853
Credits 855
Index 857
A C K N O WL E D G E ME NTS
The authors and publishers wish to thank The Institute of Chartered Accoun-
tants in Ireland who have kindly given permission for the use of their past
examination questions in this book. We are grateful to the Association of Char-
tered Certified Accountants (ACCA) for permission to reproduce past exami-
nation questions. The suggested solutions in the exam answer bank have been
prepared by us, unless otherwise stated.
The authors and publishers would also like to thank the following who have
kindly given permission for short verbatim extracts of material for which they
hold copyright, to be reproduced in this book:
The International Federation of Accountants (IFAC®)
The International Auditing and Assurance Standards Board (IAASB®)
Financial Reporting Council (FRC)
International Accounting Standards Board (IASB®)
The authors and publishers would also like to thank Rolls-Royce plc who
has given the publisher permission to reproduce the extracts from Rolls-Royce
plc’s 2017 Annual Report which appear in Chapter 18. However, Rolls-Royce
in no way endorses the content of this book.
In preparing this book the authors benefited from discussions on auditing with
the following individuals: Tony Berry, the late Mary Bowerman, Alex Dunlop,
Pik Liew, Sean McCartney, Michael Sherer, Joanna Stevenson, Mahbub Zaman,
Jamil Ampomah, Emad Awadallah, Ian Dewing, Magda Abou-Seada Obby
Phiri, Mostafa Hussien, Gareth Morgan and Ursula Lucas. Although we would
like to blame these individuals for any errors or inadequacies of expression
remaining in the book we will follow custom and practice and accept the blame
for any such deficiencies. We received many useful comments and feedback
from students we have taught at the Universities of Essex, Sheffield Hallam,
Stirling and Dundee. We also acknowledge the insights we have gained by
discussing the subject of auditing with Diogenis Baboukardos, Ilias Basioudis,
Vivien Beattie, Emer Curtis, Silvia Gaia, Stella Fearnley, Ian Fraser, Catherine
Gowthorpe, the late David Gwilliam, David Hatherly, Christopher Humphrey,
Marjana Johansson, Phil Johnson, Suzanne Kerr, Anastasia Kopita, Azimjon
Kuvandikov, Steve Leonard, Kamran Malikov, Bill McInnes, Pat Mould, Martin
Nolan, Ian Percy, Brenda Porter, Michael Power, Dan Shen, Liya Shen, the
late Jayne Smith, Kim Smith, Stuart Turley, Shahzad Uddin, Andrew Wood,
Zhifang Zhang and participants at the annual Audit and Assurance Conference.
Particular thanks go to Laurie Orgee for his helpful comments on some aspects
of computer systems, and to Martyn Jones of Deloitte for insights into modern
audit approaches. We also had useful discussions with Christine Helliar and
Susan Whittaker on problems faced by students of auditing and how these can
be resolved. We also owe a debt of gratitude for the forbearance of Loraine,
Simon, Josslin, Dorothea and Kevin, Primrose and Abigail. Finally, we are
grateful to the publishers for their encouragement and patience.
xiv
Acknowledgements xv
The author and publishers would like to thank the following reviewers who
provided invaluable commentary for this new edition and previous editions:
Ilias Basioudis (Senior Lecturer, Aston University), Roy Chandler (Professor,
Cardiff University), John Craner (Teaching Fellow, University of Birmingham),
Ian Dennis (Senior Lecturer, Oxford Brookes University), Ian Dewing (Pro-
fessor, University of East Anglia), Julie Drake (Principal Lecturer, University
of Huddersfield), Ellie Franklin (Senior Lecturer in Finance, Middlesex Uni-
versity London), Jan (Sarah) Loughran (Associate Professor in Accounting,
Durham University), Wendy Mazzucco (Lecturer, Glasgow Caledonian Uni-
versity), Astero Michael (Lecturer, Intercollege Limassol), Ian Money (Senior
Lecturer in Accounting and Finance, The University of York) and Susan Whit-
taker (Senior Lecturer, University of West of England).
L ist of C ase S tudies
Chapter 1
CASE STUDY 1.1 Erin and Lee, Part 1 5
Chapter 4
CASE STUDY 4.1 Rosedale Cosmetics plc, Part 1 140
Chapter 6
CASE STUDY 6.1 Edengrove Limited 211
CASE STUDY 6.2 Kemback Limited, Part 1 217
CASE STUDY 6.2 Kemback Limited, Part 2 220
CASE STUDY 6.3 Hughes Electronics Limited 236
CASE STUDY 6.4 County Hotel Limited, Part 1 240
CASE STUDY 6.4 County Hotel Limited, Part 2 242
CASE STUDY 6.5 Cosmetics company: Fine Faces plc 253
Chapter 7
CASE STUDY 7.1 Ridgewalk plc 269
Chapter 8
CASE STUDY 8.1 High Quality Limited: small independent
supermarket299
CASE STUDY 8.2 Caiplie Financial Services:
entity in the financial services sector 301
CASE STUDY 8.3 Horton Limited: cash received system 308
Chapter 10
CASE STUDY 10.1 Broomfield plc: sales and trade
receivables system 369
CASE STUDY 10.2 Broomfield plc: part of purchases and
trade payables system 372
CASE STUDY 10.3 Troston plc: production payroll 374
CASE STUDY 10.4 Burbage Limited: sales order processing
and application controls 377
Chapter 11
CASE STUDY 11.1 Powerbase plc: the substantive audit
programme for purchases 398
xvi
List of Case Studies xvii
Chapter 12
CASE STUDY 12.1 Broomfield plc: an example of
judgemental sampling 430
Chapter 13
CASE STUDY 13.1 Kothari Limited: analytical review 468
CASE STUDY 13.2 Art Aid Limited: analytical review 473
Chapter 14
CASE STUDY 14.1 Pykestone plc: non-current assets 490
CASE STUDY 14.2 Sterndale plc: ageing statement 509
CASE STUDY 14.3 Sterndale plc: analytical review of sales
and trade receivables 510
Chapter 15
CASE STUDY 15.1 Billbrook Limited: analysis of inventory, Part 1 530
CASE STUDY 15.1 Billbrook Limited: analysis of inventory, Part 2 531
CASE STUDY 15.2 Greenburn Limited: inventory taking instructions 536
Chapter 17
CASE STUDY 17.1 Protecting the environment in an area of scenic beauty 615
CASE STUDY 17.2 Gilling Limited 618
CASE STUDY 17.3 Greenburn Limited: fleet of vans 624
CASE STUDY 17.4 Photocopying costs in an educational institution 626
CASE STUDY 17.5 Barnton plc 627
CASE STUDY 17.6 Internal audit at Troston plc 637
INDEX OF LEGAL CASES
ADT Ltd vs BDO Binder Hamlyn [1996] B.C.C. 808 771, 785 and 799
Andrew and others vs Kounnis Freeman [1999] 2 B.C.L.C. 641 786 and 799
Anns vs Merton London Borough Council [1978] A.C. 728 777
AWA Ltd vs Daniels t/a Deloitte Haskins & Sells [1992] 7 A.C.S.R. 759,
[1992] 9 A.C.S.R. 383 793
Bank of Credit and Commerce International (Overseas) Ltd (In Liquidation)
vs Price Waterhouse [No. 2], [1998] B.C.C. 617, [1998] E.C.C. 410 800
Barings plc (In Liquidation) and Another vs Coopers & Lybrand and
Others (No. 8) [2000] All ER [D] 616 793 and 800
Candler vs Crane Christmas & Co. [1951] C.A. [1951] 2K.B. 164 [1951]
1 All E.R. 426 [1951] 1 T.L.R. 371 773 and 797
Caparo Industries plc vs Dickman and Others [1989] Q.B. 653,
[1989] 2 W.L.R. 316, [1989] 1 All E.R. 798, [1989] 5 B.C.C. 105,
B.C.L.C. 154, [1990] 2 A.C. 605, [1990] 2 W.L.R. 358, 1
All E.R. 568, [1990] B.C.C. 164, [1990] B.C.L.C. 273. 776
Coulthard & Orrs vs Neville Russell [1998] 1 B.C.L.C. 143, [1998] B.C.C. 359 800
Donaghue vs Stevenson [1932] S.C. [H.L.] 31 773
Electra Private Equity Partners vs KPMG Peat Marwick [2001] B.C.L.C. 589 800
Galoo Ltd and Others vs Bright Grahame Murray (A Firm) [1994]
B.C.L.C. 492, [1994] 1 W.L.R. 1360, [1995] 1 All E.R. 16, [1994]
B.C.C. 319 783 and 787
Hedley Byrne & Co. vs Heller and Partners Ltd [1963] A.C. 465,
[1963] 2 All E.R. 575, [1963] 3 W.L.R. 101 773 and 797
Irish Woollen Co. Ltd vs Tyson and Others [1900] 26 Acct. L. R. 13 719 and 737
James McNaughton Paper Group Ltd. vs Hicks Anderson & Co. [1991]
2 W.L.R. 641, [1991] 2 Q.B. 113, [1991] 1 All E.R. 134, [1991]
B.C.L.C. 163, [1990] B.C.C. 891 781
Jarvis plc vs PriceWaterhouseCoopers [2000] 2 B.C.L.C. 368 149
JEB Fasteners Ltd vs Marks Bloom & Co. [1981] 3 All E.R. 289 775 and 797
Man Nutzfahrzeuge AG vs Freightliner Ltd and Ernst & Young [2007]
EWCA Civ 910 800
Morgan Crucible Co. vs Hill Samuel Bank Ltd and Others [1991]
Ch 295, [1991] 1 All E.R. 148, [1991] 2 W.L.R. 655, [1991]
B.C.L.C. 178, [1991] B.C.C. 82 782
Re Kingston Cotton Mill Co. (No. 2) [1896] 2 Ch 279 718 & 737
Re Thomas Gerrard & Son Ltd [1967] 2 All E.R. 525, [1967]
3 W.L.R. 84, [1968] Ch 455 719 & 737
Royal Bank of Scotland vs Bannerman Johnstone Maclay and
Others [2002] S.L.T. 181 685 and 786
Sasea Finance Limited [in liquidation] vs KPMG [2000] 1 B.C.L.C. 236,
[2000] 1 All E.R. 676 714
Stone & Rolls Ltd (in Liquidation) vs Moore Stephens (a Firm) [2009]
UKHL39719
Twomax Ltd and Goode vs Dickson, McFarlane and Robinson
[1983] S.L.T. 98 775, 776, 797 and 798
xviii
PR EFACE
Members of the following accounting bodies are permitted by company law

to act as auditors of limited companies in the British Isles, so it is appropriate
that auditing should occupy an important place in their examination schemes:
Association of Chartered Certified Accountants (ACCA)
The Institute of Chartered Accountants in England and Wales (ICAEW)
The Institute of Chartered Accountants in Ireland (ICAI)
The Institute of Chartered Accountants of Scotland (ICAS)
This book provides a sound basis for the study of auditing for the above bodies’
examinations and also for the examinations of the Institute of Internal Auditors
(IIA) and of the Chartered Institute of Public Finance and Accountancy (CIPFA).
The book will be suitable for studies of auditing at degree level and profes-
sional examinations and master’s courses.
This seventh edition of this book contains references to the International Stan-
dards on Auditing (ISAs) and the International Standard on Quality Control
issued by the International Auditing and Assurance Standards Board® (IAASB).
IAASB is one of the independent standard-setting boards of the International
Federation of Accountants® (IFAC). Generally we quote from ISAs issued by
IAASB, but occasionally we refer to ISAs (UK) published by Financial Reporting
Council (FRC) where they contain material with particular reference to the UK.
The ISAs are designed to support the auditor in obtaining reasonable assur-
ance in forming their opinions. They are structured as follows:
1. The first section contains:
• an introduction
• overall objectives of the auditor
• definitions
• requirements.
2. The second section contains:
• application and other explanatory material supporting the require-
ments (in some cases explanatory material is contained in appendices).
The paragraph numbers in the second section are prefixed by ‘A’. We quote
from the first and second sections and the appendices when we believe it is appro-
priate to support our discussion of the audit process. Regarding the ISAs (UK)
it is important to note that the paragraph numbers are identical to the ISAs pub-
lished by IAASB, but that the ISAs (UK) are supplemented by sub-paragraphs.
As far as accounting standards are concerned, International Financial
Reporting Standards® (IFRS Standards), including International Accounting
Standards (IAS Standards), affecting the work of the auditor have also been
adopted in the UK. Currently, standards issued by the Accounting Standards
Board are titled Financial Reporting Standards (FRSs). In this book we shall
quote, where necessary, from IFRS Standards and IAS Standards. Where appro-
priate we also refer to UK GAAP, in particular to FRS102, which is the principal
accounting standard. We would mention at this point that we do not consider all
xix
xx Preface
the detailed requirements of accounting standards in this book (in other words this
book is not about accounting (or indeed auditing standards)). We are concerned
primarily with principles and where these principles have been reflected in official
standards, we quote from those standards.
In Chapter 4 we introduce students to the requirements of the Companies Act
2006, which is in force in Great Britain. Students outside of Great Britain should
refer to company legislation in their own jurisdiction. We also introduce you to new
EU directives and regulations where appropriate. This seventh edition has been
restructured to some extent and contains a new chapter on corporate governance
which we have placed towards the front of the book (see Chapter 5) because of its
importance. We have also reworked the chapter on current issues (Chapter 22).
As in previous editions we have adopted the framework of the audit year
of a firm of auditors auditing the financial statements of a variety of organiza-
tions. Care has been taken to ensure that the practical work of the auditor is
presented as clearly and logically as possible so that the student will have a good
appreciation of what the audit process is about. Students are recommended to
take note of any important developments relating to international accounting
and auditing standards.
One of the strengths of this book, in our view, is the carefully paced tutorial
approach that has been adopted throughout, which means that it can be used
as a tool in the classroom as well as for private study. We have attempted to
make the book as readable and interesting as possible.
Regrettably, auditing is often seen as being deadly boring. This is not our
view, and we would go so far as to say that those who believe it to be boring will
tend to be unimaginative and bad auditors in consequence. Auditing affects most
people in society, either directly or indirectly, and its current role is changing,
and in some important areas is being extended. Our hope is that this book will
prove to be a useful vehicle for providing an understanding of what auditing is
about and that it will be a valuable contribution to the auditing debate.
T H E FRA M EW O R K O F TH E B O O K
The chapters contain detailed study material illustrated by many examples,
case studies and questions. Some of the questions – called tasks or activities –
are within the body of the text and they involve the student in a self-learning
process; they expect students to advance the argument themselves either using
principles discussed in the text or by using their common sense and imagina-
tion. In each case, you should make sure that you try to answer these questions
before proceeding to the next part of the text. In the case of tasks, the suggested
solutions are provided at the end of each chapter, whereas for the activities the
solution is provided immediately following the question.
At the end of each chapter there is a comprehensive range of self-assessment
questions designed to help you decide if the material in the text has been
understood. Auditing in practice requires the exercise of considerable judge-
ment in the context of a particular set of circumstances, and some of the ques-
tions are mini-case studies aimed at giving you experience in analyzing and
interpreting information and forming reasoned conclusions. Suggested solu-
tions to some of these questions have been provided for students on the com-
panion website. Other solutions are only available to recognized tutors on the
same website, for which they need to register.
Preface xxi
Figure 0.1 shows how the audit process flows through the contents of the
study chapters. You will find it useful to look back at this diagram occasionally
when studying individual chapters (right-hand column) to locate the subject you
are studying within a particular stage of the auditing process (left-hand column).
Note that the chapters are not set out in strict numerical sequence. This is
because some chapters are relevant to more than one stage. Some of the chapters
do not fit into the process itself but are useful in that they throw light onto how
auditing is viewed and on possible directions that auditing will take in the future.
FIGURE 0.1 Stages in the auditing process and how they are covered in the chapters
Setting the scene Chapter 1 Why are auditors needed?

Chapter 2 An overview of the postulates and concepts of auditing
Chapter 3 The meaning and importance of auditor independence:
factors affecting independence and measures to attain it
Chapter 4 Audit regulation
Chapter 5 Corporate governance (Part 1)
Chapter 6 The risk-based approach to audit: audit judgement
Chapter 7 The search for evidence explained
Starting the audit Chapter 6 The risk-based approach to audit: audit judgement
process Chapter 12 Sampling and materiality
Systems work and Chapter 8 Systems work: basic ideas 1
transactions testing Chapter 9 Systems work: basic ideas 2
Chapter 17 Assurance engagements and internal audit
Chapter 10 Testing and evaluation of systems
Chapter 11 Substantive testing, computer-assisted audit techniques and audit programmes
Chapter 12 Sampling and materiality
Pre-final and balance Chapter 11 Substantive testing, computer-assisted audit techniques and audit programmes
sheet date work and Chapter 13 Final work: general principles, analytical review of financial statements and
final work management assertions on financial statement headings
Chapter 14 Final work: non-current assets, trade receivables and financial assets
Chapter 15 Final work: specific problems related to inventories, construction contracts,
trade payables and financial liabilities
Chapter 16 Final review: post-balance sheet period, provisions, contingencies, letter of
representation
Analytical review of Chapter 13 Final work: general principles, analytical review of financial statements and
accounts management assertions on financial statement headings
Audit reporting Chapter 18 The auditors’ report
Chapter 19 Fraud and going concern
Chapter 17 Assurance engagements and internal audit
The auditor’s liability Chapter 21 The auditor and liability under the law
under law Chapter 20 The audit expectations gap and audit quality
Critical examination Chapter 5 Corporate governance (Part 2)
of auditing and new
Chapter 22 Issues in auditing
developments
xxii Preface
NO T E
Please note that official Examination Questions, together with suggested s olutions,
can be found on the companion website for the book.
These contain two sets of questions. The first set has been presented in
the form of two examination papers, each containing six questions. Suggested
solutions have been provided for the questions on these papers but of course
you should first attempt to answer them by yourself. The second set contains
selected questions which you can use as additional exercises to test your knowl-
edge and understanding for yourself. Your tutors may wish to set some of
these questions as a formal exercise, so check with them before attempting any.
Suggested solutions to the second set of questions are available on the website
mentioned above.
H OW T O U S E TH I S B O O K
NO T E FO R T UT O R S
The authors have prepared guidance notes for tutors to accompany this book. This
guidance is available in the lecturers’ section of the companion website of this title.
To use the book intelligently you need to plan your work and set aside regular
time each week for study. If you have no prior knowledge of auditing, you will
probably need about 150 hours of study to cover the material in this book to
examination standard – say about 4.5 hours per week of concentrated study over
a period of eight to nine months. Time for additional reading and for practice
questions is included in this total and it is absolutely essential for you to devote
time to these. Auditing as a subject requires both literacy and to some extent
numeracy – particularly the former in the examination context – and it is vital
that you gain experience in expressing yourself and writing up your solutions to
the selected questions. You should not look at the suggested solutions until you
have worked the questions yourself. Don’t forget that frequently there may be
no single ‘correct’ solution. If this is the case our suggested solution will make
it clear.
Your approach to using the book should be something like this:
• Read the learning objectives at the beginning of the chapter then briefly
skim through the chapter page by page to get a feel for the length and
complexity of the subjects it covers. It might also be useful at this stage to
have a brief look through the summary at the end of the chapter.
• Begin reading the chapter, following up where necessary the occasional
suggestions for further reading, references to source material or cross-
references to other parts of the text, and make sure you understand each
section before moving on. The marginal notes are usually brief explanatory
notes that have been devised to carry information or advice which is not
essential to your understanding of the subject or your mastery of your own
particular syllabus. Make notes in the remaining marginal space as you go
along, especially on those topics featured in the learning objectives.
Preface xxiii
• When you come to each task or activity you should attempt to answer
it before moving on. Check your own answers against the suggested
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experimental and hypothetical method with which he is already
familiar in the physical sciences.
In this version of the work of the three leading pragmatists it is
assumed, of course, that the pragmatist philosophy is the only
philosophy that can show to the average man that philosophy can
really do something useful—can “bake bread,” if you will, can give to
a man the food of a man. It is assumed, too, that it is the only
philosophy which proceeds scientifically, that is to say, by means of
observation and of hypotheses that “work,” and by subsequent
deduction and by “verification.” And again, that it is the only
philosophy that gives to man the realities upon which he can base
his aspirations or his faith in distinction, that is to say, from the mere
abstractions of Rationalism in any form.
By way of a few quotations illustrative of the fundamental
contentions of the pragmatists, we may select the following: “Ideas
become true just in so far as they help us to get into satisfactory
relation with other parts of our experience, to summarise them and
get about among them by conceptional short-cuts instead of
following the interminable succession of particular phenomena. Any
idea upon which we can ride, so to speak; any idea that will carry us
prosperously from any one part of our experience to any other part,
linking things satisfactorily, working securely, simplifying, saving
labour—is true for just so much, true in so far forth, true
29
instrumentally.” “The true is the name of whatever proves itself to
be good in the way of belief, and good for definite and assignable
30
reasons.” From Professor Dewey: “Thinking is a kind of activity
which we perform at specific need, just as at other times we engage
in other sorts of activity, as converse with a friend, draw a plan for a
house, take a walk, eat a dinner, purchase a suit of clothes, etc. etc.
The measure of its success, the standard of its validity is precisely
the degree in which thinking disposes of the difficulty and allows us
to proceed with the more direct modes of experiencing, that are
31
henceforth possessed of more assured and deepened value.”
From Dr. Schiller’s book, Studies in Humanism: “Pragmatism is the
doctrine that when an assertion claims truth, its consequences are
always used to test its claims; that (2) the truth of an assertion
depends on its application; that (3) the meaning of a rule lies in its
application; that (4) all meaning depends on purpose; that (5) all
mental life is purposive. It [Pragmatism] must constitute itself into (6)
a systematic protest against all ignoring of the purposiveness of
actual knowing, alike whether it is abstracted from for the sake of the
imaginary, pure, or absolute reason of the rationalists, or eliminated
for the sake of an equally imaginary or pure mechanism of the
naturalists. So conceived, we may describe it as (7) a conscious
application to logic of a teleological psychology which implies
ultimately a voluntaristic metaphysics.”
From these citations, and from the descriptive remarks of the
preceding two paragraphs, we may perhaps be enabled to infer that
our Anglo-American Pragmatism has progressed from the stage of
(1) a mere method of discussing truth and thinking in relation to the
problem of philosophy as a whole, (2) that of a more or less definite
and detailed criticism of the rationalism that overlooks the practical,
or purposive, character of most of our knowledge, to that of (3) a
humanistic or “voluntaristic” or “personalistic” philosophy, with its
32
many different associations and affiliations. One of the last
developments, for example, of this pragmatist humanism is Dr.
Schiller’s association of philosophy with the metaphysics of
evolution, with the attempt to find the goal of the world-process and
of human history in a changeless society of perfected individuals.
We shall immediately see, however, that this summary
description of the growth of Pragmatism has to be supplemented by
a recognition of (1) some of the different phases Pragmatism has
assumed on the continent of Europe, (2) the different phases that
may be detected in the reception or criticism accorded to it in
different countries, and (3) some of the results of the pragmatist
movement upon contemporary philosophy. All these things have to
do with the making of the complex thing that we think of as
Pragmatism and the pragmatist movement.
A NOTE ON THE MEANING OF
“PRAGMATISM”
(1) “The opinion that metaphysics is to be largely cleared up by the application of
the following maxim for obtaining clearness of apprehension: ‘Consider what
effects that might conceivably have practical bearings, we conceive the object of
our conception to have. Then, our conception of these effects is the whole of our
conception of the object’” (Baldwin’s Philosophical Dictionary, vol. ii. p. 321). [We
can see from this citation that the application of its formulæ about “consequences”
to metaphysics, or philosophy generally, must be considered as a part, or aspect,
of the pragmatist philosophy.]
(2) “The doctrine that the whole meaning of a conception expresses itself in
practical consequences; consequences either in the shape of conduct to be
recommended, or in that of experiences to be expected, if the conception be true;
which consequences would be different, if it were untrue, and must be different
from the consequences by which the meaning of other conceptions is in turn
expressed. If a second conception should not appear to have other consequence,
then it must be really only the first conception under a different name. In
methodology, it is certain that to trace and compare their respective consequences
is an admirable way of establishing the different meanings of different conceptions”
(ibid., from Professor James).
(3) “A widely current opinion during the last quarter of a century has been that
‘reasonableness’ is not a good in itself, but only for the sake of something.
Whether it be so or not seems to be a synthetical question [i.e. a question that is
not merely a verbal question, a question of words], not to be settled by an appeal
to the Principle of Contradiction [the principle hitherto relied upon by Rationalism
or Intellectualism].... Almost everybody will now agree that the ultimate good lies in
the evolutionary process in some way. If so, it is not in individual reactions in their
segregation, but in something general or continuous. Synechism is founded on the
notion that the coalescence, the becoming continuous, the becoming governed by
laws, the becoming instinct with general ideas, are but phases of one and the
same process of the growth of reasonableness” (ibid. p. 322. From Dr. Peirce, the
bracket clauses being the author’s).
(4) “It is the belief that ideas invariably strive after practical expression, and
that our whole life is teleological. Putting the matter logically, logic formulates
theoretically what is of regulative importance for life—for our ‘experience’ in view of
practical ends. Its philosophical meaning is the conviction that all facts of nature,
physically and spiritually, find their expressions in ‘will’; will and energy are
identical. This tendency is in agreement with the practical tendencies of American
thought and American life in so far as they both set a definite end before Idealism”
(Ueberweg-Heinze, Geschichte der Philosophie, vol. iv., written and contributed by
Professor Matoon Monroe Curtis, Professor of Philosophy in Western Reserve
University, Cleveland, U.S.A.).
(5) See also an article in Mind for October 1900, vol. ix. N.S., upon
“Pragmatism” by the author of this book on Pragmatism and Idealism, referred to
as one of the early sources in Baldwin’s Philosophical Dictionary (New York and
London) and in Ueberweg-Heinze’s Geschichte, Vierter Teil (Berlin, 1906).
The conclusion that I am inclined to draw from the foregoing official statements
(and also, say, from another official article like that of M. Lalande in the Revue
Philosophique, 1906, on “Pragmatisme et Pragmaticisme”) is that the term
“Pragmatism” is not of itself a matter of great importance, and that there is no
separate, intelligible, independent, self-consistent system of philosophy that may
be called Pragmatism. It is a general name for the Practicalism or Voluntarism or
Humanism or the Philosophy of the Practical Reason, or the Activism, or the
Instrumentalism, or the Philosophy of Hypotheses, or the Dynamic Philosophy of
life and things that is discussed in different ways in this book upon Pragmatism
and Idealism. And it is not and cannot be independent of the traditional body of
philosophical truth in relation to which it can alone be defined.
CHAPTER II
PRAGMATISM AND THE PRAGMATIST
MOVEMENT
In considering some of the results of pragmatist and voluntarist

doctrines in the case of European writers, to whom the American-
English triumvirate used to look somewhat sympathetically, we may
begin with Italy, which boasted, according to Dr. Schiller (writing in
1907), of a youthful band of avowed pragmatists with a militant
33
organ, the Leonardo. “Fundamentally,” declares Papini, the leader
of this movement, “Pragmatism means an unstiffening of all our
theories and beliefs, by attending to their instrumental value. It
incorporates and harmonizes various ancient tendencies, such as
Nominalism, with its protest against the use of general terms,
Utilitarianism, with its emphasis upon particular aspects and
problems, Positivism, with its disdain of verbal and useless
questions, Kantism, with its doctrine of the primacy of practical
reason, Voluntarism, with its treatment of the intellect as the tool of
the will, and Freedom, and a positive attitude towards religious
questions. It is the tendency of taking all these, and other theories,
for what they are worth, being chiefly a corridor-theory, with doors
and avenues into various theories, and a central rallying-ground for
them all.” These words are valuable as one of the many confessions
of the affiliations of Pragmatism to several other more or less
experiential, or practical, views of philosophy. It is perfectly obvious
from them that Pragmatism stands, in the main, for the apprehension
of all truth as subservient to practice, as but a device for the
“economy” of thought, for the grasping of the multiplicity and the
complexity of phenomena. It looks upon man as made, in the main,
for action, and not for speculation—a doctrine which even Mr. Peirce,
by the way, now speaks of as “a stoical maxim which to me, at the
age of sixty, does not recommend itself so forcibly as it did at
34
thirty.”
“The various ideal worlds are here,” continues Papini, according
35
to the version of James, “because the real world fails to satisfy us.
All our ideal instruments are certainly imperfect. But philosophy can
be regenerated ... it can become pragmatic in the general sense of
the word, a general theory of human action ... so that philosophic
thought will resolve itself into a comparative discussion of all the
possible programmes for man’s life, when man is once for all
regarded as a creative being.... As such, man becomes a kind of
god, and where are we to draw the limits?” In an article called “From
Man to God,” Papini, in the Leonardo, lets his imagination work in
stretching the limits of this way of thinking.
These prophetic, or Promethean, utterances—and we must
never forget that even to the Greeks philosophy was always
something of a religion or a life—may be paralleled by some of the
more enthusiastic and unguarded, early utterances of Dr. Schiller
about “voluntarism” or “metaphysical personalism” as the one
“courageous,” and the only potent, philosophy; or about the
“storming of the Jericho of rationalism” by the “jeers” and the
“trumpetings” of the confident humanists and their pragmatic
confrères. The underlying element of truth in them, and, for that part
of it, in many of the similar utterances of many of our modern
humanists, from Rabelais to Voltaire and from Shelley to Marx and
Nietzsche, is, as we may see, that a true metaphysic must serve, not
36
only as a rational system for the intellect, but as a “dynamic” or
motive for action and achievement, for the conscious activity of
rational, self-conscious beings.
37
As for the matter of any further developments of the free,
creative religion hinted by Papini, we had, in 1903, the solemn
declaration of Professor James that “the programme of the man-god
is one of the great type programmes of philosophy,” and that he
himself had been “slow” in coming to a perception of the full
inwardness of the idea. Then it led evidently in Italy itself to a new
doctrine which was trumpeted there a year or two ago in the public
38
press as “Futurism,” in which “courage, audacity and rebellion”
were the essential elements, and which could not “abide” the mere
mention of such things as “priests” and “ideals” and “professors” and
“moralism.” The extravagances of Prezzolini, who thinks of man as a
“sentimental gorilla,” were apparently the latest outcome of this
anarchical individualism and practicalism. Pragmatism was
converted by him into a sophisticated opportunism and a modern
Machiavellism, a method of attaining contentment in one’s life and of
dominating one’s fellow-creatures by playing upon their fancies and
prejudices as does the religious charlatan or the quack doctor or the
rhetorician.
The reader who may care to contemplate all this radical,
pragmatist enthusiasm for the New Reformation in a more
accessible, and a less exaggerated, form had better perhaps consult
the recent work of Mr. Sturt of Oxford on the Idea of a Free Church.
In this work the principles of Pragmatism are applied, first, critically
and in the main negatively, to the moral dogmas of traditional
Christianity, and then positively to the new conception of religion he
would substitute for all this—the development of personality in
accordance with the claims of family and of national life. A fair-
minded criticism of this book would, I think, lead to the conclusion
that the changes contemplated by Mr. Sturt are already part and
parcel of the programme of liberal Christianity, whether we study this
in the form of the many more or less philosophical presentations of
the same in modern German theology, or in the form of the free,
moral and social efforts of the voluntary religion of America and
England. In America many of the younger thinkers in theology and
philosophy are already writing in a more or less popular manner
upon Pragmatism as a philosophy that bids fair to harmonize
“traditional” and “radical” conceptions of religion. One of these
39
writers, for example, in a recent important commemorative volume,
tries to show how this may be done by interpreting the
“supernatural,” not as the “trans-experimental,” but as the “ethical” in
experience, and by turning “dogmatic” into “historical theology.” And
it would not be difficult to find many books and addresses in which
the same idea is expressed. The more practical wing of this same
party endeavours to connect Pragmatism with the whole philosophy
and psychology of religious conversion, as this has been worked
40 41
over by recent investigators like Stanley Hall, Starbuck, and
others, and, above all, by James in his striking volume The Varieties
42
of Religious Experience.
The fact, of course—and I shall immediately refer to it—that
Pragmatism has been hailed in France as a salutary doctrine, not
merely by Liberals and Evangelicals, but by devout Catholics and
Anti-modernists, is perhaps enough to give us some pause in the
matter of its application in the sphere of theoretical and practical
religion. It is useful, it would seem, sometimes to “liberate” the spirit
of man, and useful, too, at other times to connect the strivings of the
individual with the more or less organized experiences of past ages.
Turning, then, to France, it is, judging from the claims of the
pragmatists, and from some of the literature bearing upon this entire
43
subject, fairly evident that there has been a kind of association or
relationship between Pragmatism and the following tendencies in
recent French philosophy: (1) the “freedom” and “indeterminism”
44
philosophy of Renouvier and other members of the Neo-Critical
school, and of Boutroux and Bergson, who, “although differing from
each other in many important respects,” all “belong to the same
movement of thought, the reaction against Hegelianism and the cult
of science which has dominated France since the decline of the
45
metaphysics of the school of Cousin”; (2) the philosophy of
science and scientific hypotheses represented by writers like
46 47 48
Poincaré, Brunschvicg, Le Roy, Milhaud, Abel Rey, and
others; (3) the religious philosophy and the fideism of the followers of
the spiritualistic metaphysic of Bergson, many of whom go further
than he does, and “make every effort to bring him to the confessional
49
faith”; and (4) the French philosophy of to-day that definitely bears
50
the name of Pragmatism, that of M. Blondel, who in 1893 wrote a
suggestive work entitled L’Action, and who claims to have coined the
word Pragmatism, after much careful consideration and
discrimination, as early as 1888—many years before the California
pamphlet of James.
The first of these points of correspondence or relationship we
can pass over with the remark that we shall have a good deal to say
about the advantage enjoyed by Pragmatism over Rationalism in the
treatment of “freedom” and the “volitional” side of human nature, and
also about the general pragmatist reaction against Rationalism.
And as for the philosophy of science, it has been shown that our
English-speaking pragmatists cannot exactly pride themselves in the
somewhat indiscriminate manner of James and Schiller upon the
supposed support for their “hypothetical” conception of science and
philosophy to be found in the work of their French associates upon
the logic of science. “The men of great learning who were named as
sponsors of this new philosophy have more and more testified what
reservations they make, and how greatly their conclusions differ from
51
those which are currently attributed to them.” Both Brunschvicg
and Poincaré, in fact, take the greatest pains in their books to
dissociate themselves from anything like the appearance of an
acceptance of the doctrine of the relativity of knowledge, from the
signs of any lack of faith in the idea that science, as far as it goes,
gives us a true revelation of the nature of reality.
Then in regard to (3) the French pragmatist philosophy or
religion we have only to read the reports and the quotations of M.
Lalande to see in this philosophy the operation of an uncritical
dogmatism or a blind “fideism” to which very few other philosophers,
either in France or in any other country, would care to subscribe. “La
Revue de Philosophie, which is directed by ecclesiastics, recently
extolled pragmatism as a means of proving orthodox beliefs.” ...
“This system solves a great many difficulties in philosophy; it
explains the necessity of principles marvellously.” ... “The existence
of God, Providence and Immortality are demonstrated by their happy
effects upon our terrestrial life.” ... “If we can consider the matter
carefully, it will be seen that the Good is the useful; for not to be
good in anything is synonymous with being bad, and everywhere the
52
true is the useful. It is in this assertion that Pragmatism consists.”
And as to the fourth tendency, there is, at its outset, according to
M. Lalande, a more rational or ethical basis for the fideism of M.
Blondel’s book upon action, which starts off with a criticism of
philosophic dilettantism quite analogous with that which Mr. Peirce
follows in How to Make Our Ideas Clear. But M. Blondel “does not
continue in the same manner, and his conclusion is very different.
Rejecting all philosophical formalism, he puts his trust in moral
experience, and consults it directly. He thinks that moral experience
shows that action is not wholly self-contained, but that it
presupposes a reality which transcends the world in which we
53
participate.”
Finally, maintains M. Blondel, “we are unable, as Pascal already
said, either to live, or to understand ourselves, by ourselves alone.
So that, unless we mutilate our nature by renouncing all earnestness
of life, we are necessarily led to recognize in ourselves the presence
of God. Our problem, therefore, can only be solved by an act of
absolute faith in a positive religion [Catholicism in his case]. This
completes the series of acts of faith, without which no action, not
even our daily acts, could be accomplished, and without which we
should fall into absolute barrenness, both practical and
54
intellectual.”
Now again these words about our being unable to understand
ourselves “by ourselves alone” contain an element of truth which we
may associate with the pragmatist tendency to believe in a socialized
55
(as distinguished from an individualistic) interpretation of our
common moral life, to believe, that is to say, in a society of persons
as the truth (or the reality) of the universe, rather than in an
interpretation of the universe as the thinking experience of a single
absolute intelligence. This, however, is also a point which we are
56
obliged to defer until we take up the general subject of the
relations between Pragmatism and Rationalism. The other words of
the paragraph, in respect of our absolute need of faith in some
positive religion, are, of course, expressive again of the uncritical
fideism to which reference has already been made. As an offset or
alternative to the “free” religion of Papini and James and to the
experimental or practical religion of different Protestant bodies, it is
57
enough of itself to give us pause in estimating the real drift of
Pragmatism in regard to religious faith and the philosophy of
58
religion.
59
We shall meantime take leave of French Pragmatism with the
reflection that it is thus obviously as complex and as confusing and
confused a thing as is the Pragmatism of other countries. It is now
almost a generation since we began to hear of a renascence of
60
spiritualism and idealism in France in connexion not merely with
61
the work of philosophers like Renouvier and Lachelier and Fouillée
and Boutroux, but with men of letters like De Vogué, Lavisse,
62
Faguet, Desjardins and the rest, and some of the French
Pragmatism of to-day is but one of the more specialized phases of
the broader movement.
And as for the special question of the influence of James and his
philosophy upon Bergson, and of that of the possible return influence
63
of Bergson upon James, the evidence produced by Lalande from
Bergson himself is certainly all to the effect that both men have
worked very largely independently of each other, although perfectly
cognisant now and then of each other’s publications. Both men,
along with their followers (and this is all that needs interest us), have
obviously been under the influence of ideas that have long been in
64
the air about the need of a philosophy that is “more truly empirical”
than the traditional philosophy, and more truly inclined to “discover
what is involved in our actions in the ultimate recess, when,
unconsciously and in spite of ourselves, we support existence and
65
cling to it whether we completely understand it or not.”
As for Pragmatism and pragmatist achievements in Germany,
there is, as might well be supposed, little need of saying much. The
genius of the country is against both; and if there is any Pragmatism
in Germany, it must have contrived somehow to have been “born
66
again” of the “spirit” before obtaining official recognition. So much
even might be inferred from the otherwise generous recognition
accorded to the work of James by scholars and thinkers like Eucken
67
and Stein and the rest. Those men cannot see Pragmatism save in
the broad light of the “humanism” that has always characterised
philosophy, when properly appreciated, and understood in the light of
its true genesis. Pragmatism has in fact been long known in
Germany under the older names of “Voluntarism” and “Humanism,”
although it may doubtless be associated there with some of the more
pronounced tendencies of the hour, such as the recent insistence of
the “Göttingen Fries School” upon the importance of the “genetic”
and the “descriptive” point of view in regard even to the matter of the
supposed first principles of knowledge, the hypothetical and
methodological conception of philosophy taken by philosophical
68
scientists like Mach and Ostwald and their followers, the
69
“empiricism” and “realism” of thinkers like the late Dr. Avenarius of
Zurich.
Then the so-called “teleological,” or “practical,” character of our
human thinking has also been recognized in modern German
thought long before the days of Peirce and Dewey, even by such
strictly academic thinkers as Lotze and Sigwart. The work of the
latter thinker upon Logic, by the way, was translated into English
under distinctly Neo-Hegelian influences. In the second portion of
this work the universal presuppositions of knowledge are considered,
not merely as a priori truths, but as akin in some important respects
“to the ethical principles by which we are wont to determine and
70
guide our free conscious activity.” But even apart from this matter
of the natural association of Pragmatism with the Voluntarism that
71
has long existed in German philosophy, we may undoubtedly pass
to the following things in contemporary and recent German thought
as sympathetic, in the main, to the pragmatist tendencies of James
and Dewey and Schiller: (1) the practical conception of science and
philosophy, as both of them a kind of “economy of the attention,” a
72
sort of “conceptual shorthand” (for the purposes of the
“description” of our environment) that we have referred to in the case
of Mach and Ostwald; (2) the close association between the
73
“metaphysical” and the “cultural” in books like those of Jerusalem
74
and Eleutheropulos; (3) the sharp criticism of the Rationalism of
the Critical Idealism by the two last-mentioned thinkers, and by some
75
of the members of the new Fichte School like Schellwien; and last
76
but not least, (4) the tendency to take a psychological and a
77
sociological (instead of a merely logical) view of the functions of
thought and philosophy, that is just as accentuated in Germany at
the present time as it is elsewhere.
James and Schiller have both been fond of referring to the work
of many of these last-mentioned men as favourable to a conception
of philosophy less as a “theory of knowledge” (or a “theory of being”)
in the old sense than as a Weltanschauungslehre (a view of the
world as whole), a “discussion of the various possible programmes
for man’s life” to which reference has already been made in the case
of Papini and others. And we might associate with their predilections
and persuasions in this regard the apparent Pragmatism also of a
78
great scholar like Harnack in reference to the subordination of
religious dogma to the realities of the religious life, or the
79
Pragmatism of Ritschl himself, in regard to the subordinate place
in living religion of mere intellectual theory, or even some of the
tendencies of the celebrated value-philosophy of Rickert and
80 81
Windelband and Münsterberg and the rest. But again the main
trouble about all this quasi-German support for the pragmatists is
that most of these contemporary thinkers have taken pains to trace
the roots of their teaching back into the great systems of the past.
The pragmatists, on the other hand, have been notoriously careless
about the matter of the various affiliations of their “corridor-like” and
eclectic theory.
There are many reasons, however, against regarding even the
philosophical expression of many of the practical and scientific
tendencies of Germany as at all favourable to the acceptance of
Pragmatism as a satisfactory philosophy from the German point of
view. Among these reasons are: (1) The fact that it is naturally
impossible to find any real support in past or present German
philosophy for the impossible breach that exists in Pragmatism
between the “theoretical” and the “practical,” and (2) the fact that
Germany has only recently passed through a period of sharp conflict
between the psychological (or the “genetic”) and the logical point of
view regarding knowledge, resulting in a confessed victory for the
latter. And then again (3) even if there is a partial correspondence
between Pragmatism and the quasi economic (or “practical”)
conception taken of philosophy by some of the younger men in
Germany who have not altogether outlived their reaction against
Rationalism, there are other tendencies there that are far more
characteristic of the spirit and of the traditions of the country. Among
these are the New Idealism generally, the strong Neo-Kantian
82
movement of the Marburg school and their followers in different
83
places, the revived interest in Hegel and in Schelling, the Neo-
Romanticism of Jena, with its booklets upon such topics as The
84
Culture of the Soul, Life with Nature, German Idealism, and so on.
And then (4) there are just as many difficulties in the way of
regarding the psychological and sociological philosophy of men like
Jerusalem and Eleutheropulos as anything like a final philosophy of
knowledge, as there is in attempting to do the same thing with the
merely preliminary and tentative philosophy of James and his
associates.
Returning now to America and England, although Pragmatism is
85
eminently an American doctrine, it would, of course, be absurd to
imagine that Pragmatism has carried the entire thought of the United
86
States with it. It encountered there, even at the outset, at least
something of the contempt and the incredulity and the hostility that it
met with elsewhere, and also much of the American shrewd
indifference to a much-advertised new article. The message of
James as a philosopher, too, was doubtless discounted (at least by
the well-informed) in the light of his previous brilliant work as a
descriptive psychologist, and also, perhaps, in the light of his
87
wonderfully suggestive personality.
What actually happened in America in respect of the pragmatist
movement was, first of all, the sudden emergence of a magazine
88
literature in connexion with the Will-to-Believe philosophy of James
and the California address, and in connexion (according to the
generous testimony of James) with Deweyism or “Instrumentalism.”
Much of this tiresome and hair-splitting magazine discussion of
“ideas as instruments of thought,” and of the “consequences”
(“theoretical” or “practical” or what not) by which ideas were to be
“tested,” was pronounced by James, in 1906, to be largely crude and
superficial. It had the indirect merit, however, of yielding one or two
valuable estimates of the many inconsistencies in Pragmatism, and
of the many different kinds of Pragmatism or instrumentalism that
there seemed to be, and of the value of Pragmatism as a “theory of
knowledge,” and as a “philosophical generalization.” The upshot of
the whole preliminary discussion was (1) the discovery that,
Pragmatism having arisen (as Dewey himself put it) out of a
multitude of conflicting tendencies in regard to what we might call the
“approach” to philosophy, would probably soon “dissolve itself” back
89
again into some of the streams out of which it had arisen, and (2)
the discovery that all that this early “methodological” pragmatism
amounted to was the harmless doctrine that the meaning of any
conception expressed itself in the past or future conduct or
experience of actual, or possible, sentient creatures.
90
We shall again take occasion to refer to this comparative
failure of Pragmatism to give any systematic or unified account of the
consequences by which it would seek to test the truth of
propositions. Its failure, however, in this connexion is a matter of
91
secondary importance in comparison with the great lesson to be
drawn from its idea that there can be for man no objective truth
92
about the universe, apart from the idea of its meaning or
significance to his experience and to his conscious activity.
What is now taking place in America in this second decade [i.e.
in the years after 1908] of the pragmatist movement is apparently (1)
the sharpest kind of official rationalist condemnation of Pragmatism
as an imperfectly proved and a merely “subjective” and a highly
unsystematic philosophy; (2) the appearance of a number of
93
instructive booklets upon Pragmatism and the pragmatist
movement, some of them expository and critical, some of them in the
main sympathetic, some of them condemnatory and even
contemptuous, and some of them attempts at further constructive
work along pragmatist lines; (3) indications here and there of the
acceptance and the promulgation of older and newer doctrines
antithetic and hostile to Pragmatism—some of them possibly as
typically American as Pragmatism itself.
As a single illustration of the partly constructive work that is
being attempted in the name and the spirit of pragmatism, we may
94
instance the line of reflection entered upon by Professor Moore in
consequence of his claim that to Pragmatism the fundamental thing
in any judgment or proposition is not so much its consequences, but
its “value.” This claim may, no doubt, be supported by the many
declarations of James and Schiller that the “true,” like the “good” and
the “beautiful,” is simply a “valuation,” and not the fetish that the
rationalists make it out to be. It is doubtful, however, as we may try to
indicate, whether this “value” interpretation of Pragmatism can be
carried out independently of the more systematic attempts at a
general philosophy of value that are being made to-day in Germany
and America and elsewhere. And then it would be a matter of no
ordinary difficulty to clear up the inconsistency that doubtless exists
between Pragmatism as a value philosophy and Pragmatism as a
mere philosophy of “consequences.” It is “immediate,” and
“verifiable,” and “definitely appreciated” consequences, rather than
the higher values of our experience that (up to the present time)
seem to have bulked largely in the argumentations of the
pragmatists.
And as an illustration of a doctrine that is both American and
95
hostile to pragmatism, we may instance the New Realism that was
recently launched in a collective manifesto in The Journal of
Philosophy and Scientific Methods. This realism is, to be sure,
hostile to every form of “subjectivism” or personalism, and may in a
certain sense be regarded as the emergence into full daylight of the
96
realism or dualism that we found to be lurking in James’s “radical
empiricism.” It is, therefore, as it were, one of the signs that
Pragmatism is perhaps breaking up in America into some of the
more elemental tendencies out of which it developed—in this case
the American desire for operative (or effective) realism and for a
97
“direct” contact with reality instead of the indirect contact of so
many metaphysical systems.
It is only necessary to add here that it is to the credit of American
rationalism of the Neo-Hegelian type that it has shown itself, notably
98
in the writings of Professor Royce, capable, not only of criticising
Pragmatism, but of seeking to incorporate, in a constructive
philosophy of the present, some of the features of the pragmatist
emphasis upon “will” and “achievement” and “purpose.” It is,
therefore, in this respect at least in line with some of the best
tendencies in contemporary European philosophy.
Lastly, there are certain tendencies of recent English philosophy
with which Pragmatism has special affinities. Among these may be
99
mentioned: (1) the various general and specific criticisms that have
been made there for at least two generations on the more or less
formal and abstract character of the metaphysic of our Neo-Kantians
and our Neo-Hegelians; (2) the concessions that have recently been
made by prominent rationalists to the undoubtedly purposive, or
“teleological,” character of our human thinking, and to the connexion
of our mental life with our entire practical and spiritual activity. Many
of these concessions are now regarded as the merest
commonplaces of speculation, and we shall probably refer to them in
our next chapter. Then there is (3) the well-known insistence of some
100
of our foremost psychologists, like Ward and Stout, upon the
reality of activity and “purpose” in mental process, and upon the part
played by them in the evolution of our intellectual life, and of our
adjustment to the world in which we find ourselves. And (4) the
ethical and social idealism of such well-known members of our Neo-
Hegelian school as Professors Jones, Mackenzie, and Muirhead.
These scholars and thinkers are just as insistent as the pragmatists
upon the idea that philosophy and thought are, and should be, a
practical social “dynamic”—that is to say, “forces” and “motives”
making for the perfection of the common life. (5) A great deal of the
philosophy of science and of the philosophy of axioms and
postulates to be found in British writers, from Mill and Jevons to Karl
101
Pearson and Mr. A. Sidgwick and many others.
Apart from all this, however, or rather, in addition to it, it may be
truly said that one of the striking things about recent British
102
philosophical literature is the stir and the activity that have been
excited in the rationalist camp by the writings of the pragmatists and
the “personal idealists,” and by the critics of these newer modes of
thought. All this has led to many such re-statements of the problems
of philosophy as are to be found in the books of men like
103 104 105 106
Joachim, Henry Jones, A. E. Taylor, Boyce-Gibson,
107 108 109
Henry H. Sturt, S. H. Mellone, J. H. B. Joseph, and others,
and even, say, in such a representative book as that of Professor
Stewart upon the classical theme of Plato’s Theory of Ideas. In this
work an attempt is made to interpret Plato’s “Ideas” in the light of
pragmatist considerations as but “categories” or “points of view”
which we find it convenient to use in dealing with our sense
experience.
CHAPTER III
SOME FUNDAMENTAL CHARACTERISTICS
We shall now attempt a somewhat detailed treatment of a few of the

more characteristic tendencies of Pragmatism. The following have
already been mentioned in our general sketch of its development
and of the appearance of the pragmatist philosophy in Europe and
America: (1) the attempted modification by Pragmatism of the
extremes of Rationalism, and its dissatisfaction with the rationalism
of both science and philosophy; (2) its progress from the stage of a
mere practical and experimental theory of truth to a broad humanism
in which philosophy itself becomes (like art, say) merely an important
“dynamic” element in human culture; (3) its preference in the matter
of first principles for “faith” and “experience” and a trust in our
instinctive “beliefs”; (4) its readiness to affiliate itself with the various
liberal and humanistic tendencies in human thought, such as the
philosophy of “freedom,” and the “hypothetical method” of science,
modern ethical and social idealism, the religious reaction of recent
years, the voluntaristic trend in German post-Kantian philosophy,
and so on. Our subject in this chapter, however, is rather that of the
three or four more or less characteristic assumptions and
contentions upon which all these and the many other pragmatist
tendencies may be said to rest.
The first and foremost of these assumptions is the position that
all truth is “made” truth, “human” truth, truth related to human
attitudes and purposes, and that there is no “objective” or
“independent” truth, no truth “in whose establishment the function of
giving human satisfaction, in marrying previous parts of experience
with newer parts, has played no rôle.” Truths were “nothing,” as it
were, before they were “discovered,” and the most ancient truths
were once “plastic,” or merely susceptible of proof or disproof. Truth
is “made” just like “health,” or “wealth,” or “value,” and so on.
Insistence, we might say, upon this one note, along with the entire
line of reflection that it awakens in him, is really, as Dewey reminds
us, the main burden of James’s book upon Pragmatism. Equally
characteristic is it too of Dewey himself who is for ever reverting to
his doctrine of the factitious character of truth. There is no “fixed
distinction,” he tells us, “between the empirical values of the
unreflective life and the most abstract process of rational thought.”
And to Schiller, again, this same thought is the beginning of
everything in philosophy, for with an outspoken acceptance of this
doctrine of the “formation” of all truth, Pragmatism, he thinks, can do
at least two things that Rationalism is for ever debarred from doing:
(1) distinguish adequately “truth” from “fact,” and (2) distinguish
adequately truth from error. Whether these two things be, or be not,
110
the consequences of the doctrine in question [and we shall return
to the point] we may perhaps accept it as, on the whole, harmonious
with the teaching of psychology about the nature of our ideas as
mental habits, or about thinking as a restrained, or a guided, activity.
It is in harmony, too, with the palpable truism that all “truth” must be
truth that some beings or other who have once “sought” truth (for
some reasons or other) have at last come to regard as satisfying
their search and their purposes. And this truism, it would seem, must
remain such in spite of, or even along with, any meaning that there
may be in the idea of what we call “God’s truth.” By this expression
men understand, it would seem, merely God’s knowledge of truths or
facts of which we as men may happen to be ignorant. But then there
can have been no time in which God can be imagined to have been
ignorant of these or any other matters. It is therefore not for Him truth
as opposed to falsehood.
And then, again, this pragmatist position about all truth being
111
“made” truth would seem to be valid in view of the difficulty (Plato
spoke of it) of reconciling God’s supposed absolute knowledge of
112
reality with our finite and limited apprehension of the same.

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(eBook PDF) The Audit Process:

Principles, Practice and Cases 7th

Further reading 154

5 Corporate governance 161

6 The risk-based approach to audit: audit judgement 197

Further reading 249

7 The search for evidence explained 257

8 Systems work: basic ideas 1 285

9 Systems work: basic ideas 2 326

Application controls 327

10 Testing and evaluation of systems 368

11 Substantive testing, computer-assisted audit techniques

Communication of audit matters to those charged with

12 Sampling and materiality 427

13 Final work: general principles and analytical review

Self-assessment questions (solutions available to students) 486

14 Final work: non-current assets, trade receivables

15 Final work: specific ­problems related to inventories, ­construction

16 Final review: post-balance sheet period, provisions, contingencies,

Evaluation of misstatements identified during the audit 580

17 Assurance engagements and internal audit 597

18 The auditors’ report 644

19 Fraud and going concern 700

20 The audit expectations gap and audit quality 741

21 The auditor and liability under the law 770

22 Issues in auditing 804

23 Examination hints and final remarks 849

Members of the following accounting bodies are permitted by company law

Setting the scene Chapter 1 Why are auditors needed?

In considering some of the results of pragmatist and voluntarist

We shall now attempt a somewhat detailed treatment of a few of the

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Communication of audit matters to those charged with

15 Final work: specific problems related to inventories, construction