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9 Audit Evidence 247
LEARNING OBJECTIVES 247
Audit Evidence and Associated Decisions: Nature of Evidence 249
Audit Evidence Decisions 249
Persuasiveness of Evidence 251
Reliability 252
Types of Audit Evidence 255
Analytical Procedures 264
Using Analytical Procedures as Substantive Tests 270
Documentation 272
Preparation of Working Papers 275
Effect of Technology on Audit Evidence and Audit Documentation 277
Professional Skepticism, Evidence, and Documentation 278
APPENDIX 9A: Common Financial Ratios 279
Summary 282
Review Questions 283
Multiple Choice Questions 283
Discussion Questions and Problems 284
Professional Judgment Problems and Cases 287
Research Activities 289
10 Audit Strategy and Audit Program 290

Audit Strategy 292
Types of Tests 298
Selecting Which Types of Tests to Perform: The Relationship Between Audit
Strategy and Evidence Mix 303
Designing Further Audit Procedures 304
Events That Change Audit Strategy 313
Summary 315
Integrated Case Application—Pinnacle Manufacturing: Part IV 321
Research Activity 321
Part 3 Application of the Audit Process 322
11 Audit Sampling Concepts 323

The Nature of Sampling 325
Representative Sampling and Its Risks 325
Statistical versus Nonstatistical Sampling 326
Sample Selection Methods 327
The Audit Sampling Process for Tests of Controls and Substantive Tests
of Details 331
Using Sampling for Tests of Controls 333
Nonstatistical Sampling Approach to Testing Controls 342
Nonstatistical Sampling for Substantive Tests of Details 343
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Monetary Unit Sampling 351
Adequate Documentation and Professional Judgment 358
Summary 359
12 Audit of the Revenue Cycle 366

Overview of the Revenue Cycle 368
Business Functions in the Cycle and Related Documents and Records 368
Assessing Inherent Risk and Fraud Risk 373
Design and Perform Preliminary Analytical Procedures 380
Assessing Control Risk and Developing Tests of Controls 382
Design and Perform Substantive Analytical Procedures 390
Substantive Tests of Details for Revenue 392
Substantive Tests for Accounts Receivable 395
Substantive Tests of Details for Accounts Receivable: External
Confirmations 397
Performing Fraud-Related Substantive Procedures 404
Developing a Risk-Based Audit Strategy for Revenue 404
APPENDIX 12A: Understanding Controls and Developing Control Tests and
Substantive Tests for Hillsburg’s Revenue Cycle 406
Tests of Controls Audit Program 415
Design the Audit Program for Tests of Controls and Substantive
Tests of Transactions 415
Design Tests of Details of Accounts Receivable 415
Summary 417
13 Audit of the Acquisition and Payment Cycle 430

An Overview of the Acquisition and Payment Cycle 431
The Four Business Functions and Their Documents and Records 432
Assessing Inherent Risk and Fraud Risk in the Accounts Payable
and Acquisition Cycle 435
Understanding Internal Control and Assessing Control Risk 438
Substantive Testing of Accounts Payable 442
Reliability of Audit Evidence 446
Examining Other Accounts and Related Party Transactions 447
Summary 454
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14 Audit of the Inventory and Distribution Cycle 462
Overview of the Inventory and Distribution Cycle 464
Inventory Cycle Business Functions, Documents, and Records 464
Assessing Inherent Risk and Fraud Risk 466
Understanding and Assessing Control Risk 468
Key Controls 470
Substantive Tests of Details for Inventory Balances 473
Pricing and Compilation 476
Designing Fraud Substantive Procedures for Inventory 477
Developing a Risk-Based Audit Strategy for Inventory 478
Summary 479
15 Audit of the Human Resources and Payroll Cycle 487

An Overview of the Human Resources and Payroll Cycle 488
Functions in the Cycle, and Related Documents and Records 489
Tests of Details of Balances for Payroll Liability and Expense Accounts 498
Summary 500
16 Audit of the Capital Acquisition and Repayment Cycle 507

An Overview of the Capital Acquisition and Repayment Cycle 509
Notes Payable 509
Tests of Details of Balances 513
Owners’ Equity 515
Internal Controls 515
Audit of Share Capital 516
Summary 518
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17 Audit of Cash Balances 524
An Overview of Cash and the Transaction Cycles—Types of
Cash Accounts 525
The Relationship Between Cash in the Bank and Transaction Cycles 526
Audit of the General Cash Account 527
Fraud-Oriented Procedures 534
Other Audit Issues Related to Cash 536
Summary 538
Part 4 Completing the Audit, Reporting, and Other

Assurance Engagements 544
18 Completing the Audit 545

Complete Final Evidence Procedures 547
Perform Additional Tests for Presentation and Disclosure 547
Review for Contingent Liabilities and Commitments 549
Obtain Confirmation From Client’s Law Firms 552
Review for Subsequent Events 554
Accumulate Final Evidence 556
Design and Perform Final Analytical Procedures 557
Evaluate the Going Concern Assumption 557
Obtain a Client Representation Letter 558
Consider Other Information in Annual Reports 560
Evaluate Results 560
Working Paper Review and Engagement Quality Control Review 564
Communicate With the Audit Committee and Managements 565
Summary 568
19 Audit Reports on Financial Statements 575

The Audit Opinion and the Auditors’ Reporting Responsibilities 577
Unqualified Independent Auditor’s Report 577
Parts of the Standard Unqualified Auditor’s Report 579
Modifications to Unqualified Audit Reports 581
Qualified Reports, Adverse Reports, and Disclaimers 584
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Materiality, Pervasiveness, and Modified Reports 584
Qualified Reports 584
Adverse Opinion 588
Disclaimer of Opinion 590
The Audit Reporting Decision Process 591
Does the Audit Report Add Value to the Financial Statements? 592
Upcoming Changes to the Audit Report in Canada 592
Summary 594
20 Other Assurance and Nonassurance Services 601

Overview of Other Canadian Standards 603
Reviews and Compilations of Financial Statements 603
The Review Engagement Process 606
Compilation Engagements 611
Review of Interim Financial Statements 614
Audits and Reviews of Other Historical Financial Information 614
Audits and Reviews of Compliance With Agreements and Regulations 616
Specified Procedures Engagements 616
Reports on Supplemental Matters Arising From an Audit or Review
Engagement 617
Audits of Effectiveness of Internal Control Over Financial Reporting 619
Assurance Engagements for Nonfinancial Information 619
The Future of Assurance Services 621
Summary 623
Appendix: Hillsburg Hardware Annual Report 631

Index 647
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Preface
Auditing: The Art and Science of Assurance Engagements is an introduction to auditing

and assurance services. It is intended for use in an introductory auditing course, for
one-semester or two-semester instruction at the undergraduate or graduate level. The
primary emphasis of the book is on the auditors’ decision-making process in a finan-
cial statement audit and, to a lesser degree, other types of assurance engagements. As
the title of book reflects, auditing is an art, as it requires considerable use of profes-
sional judgment and skepticism, but it is also a science, resting upon a solid frame of
technical skills and knowledge of multiple disciplines associated with auditing, such
as accounting, tax, and information systems.
One of the most fundamental concepts in auditing concerns the nature
and amount of evidence the auditor should gather after considering the unique
circumstances of each engagement. If students of auditing understand the risks to
be addressed in a given audit area, the circumstances of the engagement, and the
decisions to be made, they should be able to determine the appropriate evidence to
gather and how to evaluate the evidence obtained. In order to help students develop
these skills, we provide a professional judgment framework to help students reflect
upon common judgment traps and to develop their own judgment and professional
skepticism.
Our objective is to provide up-to-date coverage of globally recognized auditing
concepts with practical examples of the implementation of those concepts in real-life
settings. We integrate the most important concepts in auditing in a logical manner to
assist students in understanding audit decision-making and evidence accumulation in
today’s complex auditing environment. Throughout the book, we emphasize interna-
tional and Canadian developments affecting auditing in a global and economically
volatile environment. Key concepts related to professional judgment and risk assess-
ment are integrated into all the planning chapters, as well as each chapter dealing
with particular transaction cycles and related accounts. We provide numerous real-life
vignettes and examples from actual audit planning documents to enhance students’
understanding of the concepts. We also provide numerous diagrams and visual depic-
tions to help clarify concepts such as materiality and the various substantive tests in
the key transaction cycles.
What’s New to This Edition?

Those of you who are familiar with the Twelfth Edition of this textbook will find that
we have made a significant number of changes to this edition. We highlight the more
substantive changes below.
Current Coverage
New auditing standards are released without regard to textbook revision cycles. As
auditing instructors, we appreciate how critical it is to have the most current content
available. This edition includes coverage of the most recent standards released and
highlights impending changes that have been announced by Canada’s Auditing and
Assurance Board—the most significant one being the changes to the auditors’ report.
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In addition to ensuring that the coverage of audit standards is the most up-to-date
possible, in Chapter 2 we provide an overview and more guidance on the organiza-
tion of CPA Canada’s Assurance Handbook, including the principles that provide the
framework to help auditors fulfill the objectives of the financial statement audit.
Expanded Coverage on Audit Quality and

Expectations Gap
Starting with Chapter 2 and continuing throughout the book, we introduce the var-
ious initiatives introduced to improve audit quality. We highlight the various parties
responsible for audit quality and how individual auditors, teams, processes within
the firms, standard setters, and others all play an important role in contributing to
high-quality audits. Chapter 3, which covers legal liability, now includes an expanded
discussion of the expectations gap.
A Greater Emphasis on Professional

and Ethical Judgment
In Chapter 4, we introduce a professional judgment framework, which is based
upon the various frameworks developed by several national accounting bodies. This
framework provides students with a methodical approach to addressing audit issues.
We elaborate on the framework and introduce judgment traps and biases that can
erode judgment quality. We have also updated ethical decision-making and high-
light the various biases and ethical blind spots that can inhibit the auditors’ decisions.
Throughout the textbook, we revisit and integrate these frameworks into our discus-
sion of the auditing concepts and illustrate their application in various vignettes,
audit studies conducted by the profession and academics, homework problems,
and research activities.
Expanded Coverage on Professional Skepticism

With the profession’s continued focus on the importance of applying appropriate
levels of professional skepticism, we have expanded coverage of this topic starting
with Chapter 1. We discuss the importance of a questioning mindset and the need to
critically evaluate audit evidence to strengthen student awareness of the elements of
effective professional skepticism. We have introduced several vignettes and homework
problems that help students think further about challenges and threats to applying
professional skepticism in the context of an audit.
Risk Assessment and the Audit Process

As in the previous edition, we emphasize and incorporate risk assessment procedures
required by the risk assessment standards throughout the text. Chapter 6 covers cli-
ent acceptance and continuance and planning. Chapter 7 highlights audit risk and
the risk of material misstatement, Chapter 8 emphasizes the importance of internal
control as part of the risk assessment process, and Chapter 10 brings it all together
in its discussion of audit strategy. Subsequent chapters that focus on the transaction
cycles include extensive coverage of fraud risk, inherent risk, and internal control
risk. We have also updated the coverage on three of the transaction cycles (revenue,
acquisition and payment, and inventory) to include discussion of fraud procedures
and to provide real-life examples that compare and contrast the different types of audit
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strategies employed in these three cycles. The revenue cycle is now consolidated into
one chapter and has expanded coverage on the risks associated with revenue recogni-
tion and auditing complex revenue contracts.
Expanded Coverage on Materiality

We have expanded our coverage on materiality and provide actual examples of the
benchmarks used at a variety of client organizations and the policies at different firms.
We clarify the characteristics of overall, performance, and specific materiality, and dis-
cuss the impact on evidence collection. Consistent with our emphasis on professional
judgment, we provide vignettes that help students understand the subjective nature
of materiality. We revisit materiality in Chapter 19, and highlight its importance in
completing the audit and evaluating the results.
Updated Internal Control Guidance

This chapter uses the 2013 COSO framework and its 17 principles of effective control
as the basis of discussion. This framework more closely reflects the current environ-
ment in which businesses operate—in particular, there is much more emphasis and
integration of IT controls. We have included material to help students understand the
different types of controls and how to apply professional judgment in evaluating con-
trol deficiencies. The chapter has been updated to include the role of the IT specialist
on the audit team as well as auditing outsourced controls and the role of the service
centre auditor.
New Coverage on Substantive Analytical Procedures

We have expanded our coverage on analytical procedures and the importance of pro-
fessional judgment and skepticism in developing rigorous substantive analytical pro-
cedures necessary for the level of risk. We have added several problems that focus on
analytical procedures.
Updated Sampling Guidance

The sampling chapter has been rewritten to clarify and simplify the application of
sampling concepts. The restructuring of the chapter to include and update all the
relevant material on sampling from other chapters should improve student under-
standing of core sampling concepts for both nonstatistical and statistical sampling.
Updated Audit Report Guidance

This chapter now includes a decision-making framework to help guide students
through the process of deciding what type of audit report to issue. There is also more
guidance on auditing the going concern assumption and a variety of real-life exam-
ples of the modifications to the audit report. Finally, the chapter concludes with an
overview of the new audit reporting standards, which will be adopted in Canada in
the near future.
Other Assurance Services

Our coverage of other assurance services in Chapters 1 and 20 highlights emerg-
ing opportunities for public accountants to provide assurance about corporate social
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responsibility and sustainability reports. Chapter 20 also reflects the impending stan-
dards for review engagements and reporting on supplemental information. In addi-
tion, numerous actual reports and several new homework questions are provided to
help students focus on the users and their assurance needs.
New Integrated Case—Pinnacle Manufacturing

The Pinnacle Manufacturing integrated case is based on a large multi-division com-
pany. The four parts of the case are included at the end of the chapters to which the
parts relate. Each part of the case is designed to give students hands-on experience,
and the parts of the case are connected so that students will gain a better understand-
ing of how the parts of the audit are integrated by the audit process.
New and Revised Problems and Cases

All chapters include multiple choice questions as well as research activities that
require students to use the Internet to research relevant auditing issues. All chapters
include several new and revised professional judgment problems and cases. Many of
the problems are based upon actual companies.
Organization
This text is divided into four parts. The chapters are relatively brief and designed to be
easily read and comprehended by students.
Part 1: The Auditing Profession (Chapters 1–4)

The book begins with an opening vignette featuring the Government of Canada’s
Sponsorship Scandal and the role of a former auditor general, Sheila Fraser, in inves-
tigating this high profile fraud. Chapter 1 aims to answer the question, “Who are
the auditors and why are they important?” The chapter explains the different types
of auditors and assurance services. Chapter 2 covers the public accounting profes-
sion, with a particular emphasis on the standard setting responsibilities of the Interna-
tional Auditing and Assurance Standards Board (IAASB) and the Canadian Auditing
and Assurance Standards Board (AASB). Chapter 2 provides an overview of the CPA
Canada Assurance Handbook, Canadian auditing standards, and auditors’ responsi-
bilities. It also provides a discussion of audit quality. Chapter 3 is an investigation
of the expectations gap and auditors’ legal liability, with a discussion of some recent
Canadian cases. The final chapter of this part presents professional judgment and
ethical decision-making frameworks as well as discussion of the rules of professional
conduct and how to conduct an independence threat assessment.
Part 2: The Audit Process (Chapters 5–10)

Part 2 presents the strategic audit process. The concepts in this part of the book rep-
resent the foundation of the book. Chapter 5 describes the overall objectives of the
audit, the auditor’s responsibilities in conducting the audit, and the specific objec-
tives the auditor tries to accomplish. We introduce Hillsburg Hardware Limited in
Chapter 5, which is used to illustrate planning and development of an audit strategy
as well as many other concepts throughout the book. Chapter 6 deals with client
acceptance and continuance and planning the engagement, including understanding
the client’s business and environment as part of the auditors’ risk assessment proce-
dures and using analytical procedures as an audit tool. Chapter 7 introduces materi-
ality and risk and how the auditor responds to risks of significant misstatement with
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further audit procedures. Chapter 8 shows how effective internal controls can reduce
planned audit evidence in the audit of financial statements. Chapter 9 links evidence
decisions to assessed risks and includes general concepts of evidence accumulation.
Chapter 10 provides an overall strategic risk-based audit strategy, linking planning to
assertion-based audit programs.
Part 3: Application of the Audit Process: Audit of Cycles

and Accounts (Chapters 11–17)
These chapters apply the concepts from Part 2 to planning a sample and to the spe-
cific transaction cycles. We begin in Chapter 11 with a general discussion of audit
sampling for tests of controls, substantive tests of transactions, and tests of details of
balances. The chapter, which uses the revenue cycle as the basis for its examples,
covers both nonstatistical and statistical sampling. The remaining chapters deal with
a specific transaction cycle or part of a transaction cycle. We start with the most signif-
icant cycle for most organizations—revenue. We provide an overview of the cycle and
then consider the inherent and fraud risks associated with revenue and discuss how to
design and conduct internal control and substantive tests in response to the significant
risks, as well as specific fraud procedures. We conclude the chapter by providing an
illustration of applying professional judgment in the development of the audit strategy
for the revenue cycle of two actual organizations. Throughout the chapter, we provide
numerous real-life examples to illustrate key concepts. The remaining chapters follow
a similar format. Cash is studied late in the text to demonstrate how the audit of cash
is related to most other audit areas.
Part 4: The Audit Process: Completion and Reporting and

Other Assurance Services (Chapters 18–20)
This part begins with two chapters on the final two phases of the audit process—
completion and reporting. The first chapter deals with performing additional tests
to address presentation and disclosure objectives, summarizing and evaluating the
results of audit tests, reviewing audit documentation, communicating with those
charged with governance, and all other aspects of completing an audit. The next
chapter begins with a discussion of the debate of the upcoming changes to the audi-
tor’s report, which has remained virtually the same for the past sixty years. The chapter
provides a detailed discussion of audit reports, including the recently released inter-
national reporting standards, which Canada will be adopting in the near future. The
chapter emphasizes conditions affecting the type of report the auditor must issue and
the type of audit report application to each condition under varying levels of mate-
riality. The last chapter, on other assurance services, deals with the various types of
engagements and reports, other than the audit of financial statements. Topics covered
include review and compilation services, agreed-upon procedures engagements, and
assurance engagements of nonfinancial information. We conclude by discussing the
future of assurance services and the continued evolution of assurance standards in the
face of changing assurance needs.
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MyAccountingLab for the Canadian Thirteenth Edition of Auditing: The Art and
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can practise select end-of-chapter questions, review key terms with glossary flashcards,
access student PowerPoint slides, and explore integrated case content.
MyAccountingLab can be used by itself or linked to any learning management
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Student Resources
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Instructional Support Materials

INSTRUCTOR’S RESOURCE MANUAL The Instructor’s Resource Manual assists the
instructor in teaching the course more efficiently. The features include instructions
for assignments, practical examples to help the students understand the material, and
helpful suggestions on how to effectively teach each chapter. It also includes a sample
course outline and mapping the chapters’ topics to the CPA Competency Map.
INSTRUCTOR’S SOLUTIONS MANUAL This comprehensive resource provides detailed

solutions to all the end-of-chapter review questions, multiple-choice questions, prob-
lems, and cases.
COMPUTERIZED TESTBANK Pearson’s computerized test banks allow instructors to fil-

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questions or add their own, and may be able to choose print or online options. These
questions are also available in Microsoft Word format.
POWERPOINT SLIDES Electronic colour slides are available in Microsoft PowerPoint.

The slides illuminate and build on key concepts in the text.
IMAGE LIBRARY The Image Library is an impressive resource that helps instructors
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your own original content or mixing and matching Pearson content. Contact your
local Pearson Canada sales representative to get started.
PEARSON ETEXT Pearson eText gives students access to the text whenever and wher-
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offering powerful new functionality for students and instructors. Users can create
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son eText allows for quick navigation to key parts of the eText using a table of contents
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LEARNING SOLUTIONS MANAGERS Pearson’s learning solutions managers work with

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Acknowledgments
I would like to thank the following individuals who contributed their time and energy
in sharing their opinions and best practices, and helped to make this book represen-
tative not only of sound theory but of the actual work done in the field of audit and
assurance:
Jane M. Bowen, FCPA, CPA University of Ontario Institute of Technology
Merridee Bujaki Carleton University
Bailey Church University of Ottawa, Telford School of Business
Yvonne Kwok DeGroote School of Business, McMaster University
Camillo Lento Lakehead University
Susan McCracken McMaster University
Wendy Popowich JR Shaw School of Business, Northern Alberta
Institute of Technology
Fred Pries University of Guelph
In addition, I thank all the editorial and production staff at Pearson Canada for putting
together a high-quality product, including Megan Farrell (acquisitions editor), Paul
Donnelly (developmental editor), and Susan Johnson (project manager).
Joanne C. Jones
We thank our families, who encourage and support us through the many hours of
writing, researching, and rewriting; our students, who also push us to think “out of the
box”; our colleagues, particularly Larry Yarmolinsky; and the numerous practitioners
who continue to keep us up to date with the ever-changing audit environment.
Joanne C. Jones
Bartosz Amerski
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About the New Canadian Authors
Joanne C. Jones, PhD, CPA, CA
This is the first Canadian edition to be authored by Joanne C. Jones, who is an associ-
ate professor of auditing at York University. Joanne teaches auditing and her research
focuses on the accounting profession and explores issues such as professionalism
and ethics, the impact of regulation on audit practice, and the globalization of the
accounting profession. She also investigates academic ethics and accounting educa-
tion and has published several instructional audit cases in academic peer-reviewed
journals. Joanne is an active reviewer for several academic journals, is active with the
education committee of the Canadian Academic Accounting Association (CAAA),
and currently serves as the associate editor at Issues in Accounting Education. Prior to
earning her PhD, she worked for several years as an external auditor with KPMG and
as the associate director of education with the Institute of Chartered Accountants of
Ontario (now CPA Ontario).
Bartosz Amerski, CPA, CA

We are pleased to have Bartosz Amerski as contributing author for the Thirteenth
Edition. Bartosz teaches auditing and accounting at York University, where he has
received recognition and awards for his excellence in teaching and creating a positive
learning environment for his students. Bartosz also teaches in the new CPA Ontario’s
Professional Educational Program (PEP) and the Prerequisite Educational Program
(PREP). He is currently pursuing a Masters of Laws (LL.M.) at Osgoode Hall Law
School and is an audit manager with the office of the auditor general of Ontario. Prior
to that, Bartosz worked at Ernst & Young as an external auditor.
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1
The Auditing Profession
Who are auditors, and why are they important? These first four chapters
provide background for performing strategic financial statement audits,
which is our primary focus. This background will help you understand
why auditors perform audits the way they do.
Our book begins with a who’s who of assurance services and
describes the role of accountants, public accounting firms, and other
organizations in doing audits. The chapters in Part 1 emphasize the
regulation and control of public accounting through auditing and ethical
standards and discuss the legal responsibilities of auditors. We also
talk about audit reports, which are the final products of audits.
M01_AREN5507_13_SE_PT01.indd 1 02/09/15 2:40 PM

The Demand for Audit and Other
1 Assurance Services
T
his chapter aims to answer a question: Who are auditors and why
are they important? Do you think that all auditors are accoun-
tants? Would you be surprised to learn that the answer is “no”?
In reality, auditors do not account for anything. If it is not yet clear what
this means, you will (hopefully) understand after reading this chapter.
You will learn about the purpose of auditing and why there is a demand
for auditing services, the many different kinds of auditors, and the vari-
ety of skills needed to be a good auditor.
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1 Describe auditing.
2 Distinguish between auditing and accounting.
3 Explain the importance of auditing in reducing information risk.
4 List the causes of information risk, and explain how this risk can be reduced.
5 Identify major types of audits and auditors.
6 Describe assurance services provided by public accountants and distinguish the
audit of financial statements from other assurance and nonassurance services.
Auditors Have a Great Responsibility

In 1996, Allan Cutler, a senior civil servant with the federal Department of Public Works, reported irregularities in
the department’s advertising contracting process. As a result, Ernst & Young was brought in to conduct a compli-
ance audit. Ernst & Young and Public Works’ own internal audit group, in subsequent audits, consistently found
noncompliance to policies and procedures. These were not minor lapses. Auditors found contracts worth millions
of dollars with no documentation or apparent value. For several years, the government ignored Cutler and the
audit reports. Throughout that time period, Cutler was labelled “not a team player” and was forced to move out
of Public Works. That was until 2000, when the media got wind of it and what is now known as the “Sponsorship
Scandal” or “AdScam” began.
The new minister of public works, Don Boudria, called in Sheila Fraser, the auditor general of
Canada, to investigate. Her report found an “appalling lack of documentation” and a “blatant
misuse” of public funds. Fraser went on to say that “the nature of the findings is such that I
have referred the matter to the RCMP” (Canada’s national police).
continued >
M02_AREN5507_13_SE_C01.indd 2 02/09/15 2:45 PM

continued
The next year, Fraser went further, tracking the flow of funds and assisting the RCMP. Foren-
sic auditors Kroll Lindquist Avey were hired as well. All concluded that fraud and corruption had
indeed incurred. There were breaches of the Financial Administration Act, Treasury Board and
departmental policies, overbilling, lack of competitive bidding for contracts, suspicious varia-
tions in hourly rates, and poor record management. In the end, several people were charged
with fraud and went to jail.
In addition to the various audits and investigations, the new prime minister, Paul Martin,
set up a commission to investigate the legal ramifications of the scandal. As a result of the
scandal, the government was toppled. An internet poll reported that 57 percent of Canadians
wanted Sheila Fraser to be the next prime minister! People admired her forthright and candid
manner and liked that she was checking on their behalf.
As you read through the chapter, consider the following questions:
● What is the role of auditing? (LO 1, 3)
● Why do organizations obtain audit and assurance services? (LO 3)
● What are the different types of audits? (LO 5, 6)
● What are the different types of auditors? (LO 5)
Sources: Benoit and Franks, “For want of a nail: The role of internal audit in the Sponsorship Scandal,” Restoring
Accountability Research Studies Volume 2: The Public Service and Transparency (Ottawa: Public Works and Govern-
ment Services Canada, 2006), pp. 233–304. Kenneth Dye, “Corruption and fraud detection by supreme audit institu-
tions,” in Anwar Shah (ed.), Performance Accountability and Combating Corruption (Washington, D.C.: The World Bank,
2007). John Gray, “Auditing the auditor general,” The Walrus (December 2010).
THIS opening vignette about Sheila Fraser and the Sponsorship Scandal illustrates
the importance of internal controls and the role of auditors in detecting fraud and cor-
ruption. It also provides examples of a wide variety of assurance services that auditors
can perform—compliance audits, fraud audits, internal audits, and forensic audits.
Who says that auditors are simply bean counters?
Nature and Relevance of Auditing LO 1 Describe auditing.
Auditing is both an art and a science. It takes a combination of the auditor’s pro-
fessional judgment and skepticism (the art) and knowledge of the rules and proce-
dures (the science) to perform a high-quality audit. The definition of auditing, below, Auditing—the accumulation
includes several key words and phrases (emphasis added). and evaluation of evidence
about information to determine
Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of
and report on the degree of correspondence between the information and established correspondence between the
criteria. Auditing should be done by a competent, independent person. information and established
criteria.
We will now look at each of these key phrases.
3
M02_AREN5507_13_SE_C01.indd 3 02/09/15 2:45 PM

Information and Established Criteria
To do an audit, there must be information in a verifiable form and some standards
(criteria) by which the auditor can evaluate the information. Information can and
does take many forms. Auditors routinely perform audits of quantifiable information,
including companies’ financial statements and individuals’ federal income tax returns.
Auditors also perform audits of more subjective information, such as the effectiveness
of computer systems and the efficiency of manufacturing operations. The focus of
this text is the audit of financial statement information, commonly referred to as the
financial statement audit.
The criteria against which information is evaluated vary depending on the infor-
mation being audited. For example, in the audit of historical financial statements con-
ducted by public accounting firms, the criteria are based on an accounting framework
such as International Financial Reporting Standards (IFRS), Accounting Standards
for Private Enterprises (ASPE), or Accounting Standards for Not-for-Profit Organi-
zations (ASNPO). To illustrate, this means that in the audit of the financial state-
ments of RONA Inc. (www.rona.ca), the public accounting firm Raymond Chabot
Grant Thornton LLP (www.rcgt.com) determines whether the financial statements
have been prepared in accordance with the IFRS accounting standards. In contrast,
Canada Revenue Agency (CRA) Canada Revenue Agency (CRA) auditors use the provisions of the Income Tax Act
auditors—auditors who work for to audit tax returns. In a CRA audit of RONA’s corporate tax return, the CRA auditor
the Canada Revenue Agency uses the provisions of the Income Tax Act as the criteria rather than IFRS, as would be
and conduct examinations of
taxpayers’ returns.
the case with the RONA financial statement audit.
For more subjective information, such as auditing the effectiveness of computer
operations, it is more difficult to establish criteria. Typically, auditors and the entities
being audited agree on the criteria well before the audit starts. For a computer appli-
cation, one of the criteria might be the absence of input or output errors.
Accumulation and Evaluation of Evidence

Evidence—any information used Evidence is defined as any information used by the auditor to assess whether the infor-
by the auditor to assess whether mation being audited is stated in accordance with the established criteria. The quality
the information being audited and amount of evidence collected depends upon the risks of material misstatement,
is stated in accordance with
established criteria.
whether due to error or to fraud. Based upon a risk analysis, which includes the audi-
tor’s assessment of internal controls, the auditor devises an audit strategy to effectively
Audit strategy—a planned
approach to the conduct of audit
plan the evidence-gathering process. Evidence takes many different forms, including
testing based upon assessed oral representation of the auditee (client), written communication with outsiders, and
risks. observations by the auditor. Certain evidence (from a third party) is considered more
reliable than other evidence (from the client). It is important to obtain a sufficient
quality and volume of evidence to mitigate the risks of the audit. The process of deter-
mining the amount of evidence necessary and evaluating whether the information
corresponds to the established criteria in the context of identified risks is a critical part
of every audit. The strategic audit approach is the focus of this text.
Professional judgment— Competent, Independent Person

analytical, systematic, and
objective judgment carried out The auditor must be qualified to understand the engagement risks and the criteria
with integrity and recognition of used, and be competent in selecting the types and amount of evidence to accumulate
responsibility to those affected by and in effectively evaluating evidence to reach the proper conclusion. While having
its consequences.
the appropriate technical knowledge and skills are key to being competent, in order
Integrity—the quality of being to reach the proper conclusion (which means exercising professional judgment), an
honest and courageous.
auditor must act with integrity and with professional skepticism, be independent,
Professional skepticism—an and recognize responsibility to the users of the audit report.
attitude that includes a
Professional skepticism underlies auditors’ professional judgment. It is an attitude
questioning mind, a critical
assessment of audit evidence, and that includes a questioning mind, a critical assessment of audit evidence, and a will-
the willingness to challenge the ingness to challenge the auditee’s assertions. Sound professional judgment requires
auditee’s assertions. the auditor to exercise objectivity (be free of biases, conflicts of interest, or undue
4 PART 1 I THE AUDITING PROFESSION
M02_AREN5507_13_SE_C01.indd 4 02/09/15 2:45 PM

influence). This is referred to as having independence in mind. The competence of Independence in mind—the
the individual performing the audit is of little value if he or she is biased in the accu- auditor’s ability to exercise
objectivity.
mulation and evaluation of evidence. It is likely that a biased auditor will not use the
appropriate level of professional skepticism, which can result in inadequate evidence
and insufficiently critical evaluation of the evidence.
Auditors reporting on company financial statements are independent auditors. Independent auditors—public
Even though an auditor of published financial statements is paid a fee by a company, accountants or accounting firms
he or she is normally sufficiently independent to conduct audits that can be relied that perform audits of commercial
and noncommercial entities.
on by users. Absolute independence is impossible, but auditors strive to maintain a
high level of independence to keep the confidence of users relying on their reports.
Although internal auditors work for the company, to help maintain independence Internal auditors—auditors
from the units being audited, they report directly to top management and the board employed by a company to
of directors. audit for the company’s board of
directors and management.
Report
The final stage in the audit process is the independent auditor’s report—the com- Independent auditor’s report—
munication of the audit findings to users. Reports differ in nature, but in all cases they the communication of audit
must inform readers of the degree of correspondence between the information and findings to users.
established criteria. Reports also differ in form and can vary from the auditor’s stan-
dard opinion usually associated with financial statements to a customized report in
the case of an audit of effectiveness of computer systems or an audit of the efficiency
of manufacturing operations.
Figure 1-1 summarizes the important ideas in the definition of auditing by illus-
trating an audit of an individual’s tax return by a Canada Revenue Agency auditor.
The objective is to determine whether the tax return was prepared in a manner
consistent with the requirements of the Income Tax Act. The auditor first considers
the potential risk of incorrect or fraudulent tax reporting by comparing the statis-
tics of the tax return with other tax returns and by considering factors such as the
taxpayer’s industry and past income. The auditor next examines supporting records
provided by the taxpayer and from other sources, such as the taxpayer’s employer
or bank. After completing the audit, the Canada Revenue Agency (www.cra-arc
.gc.ca) auditor will issue a report to the taxpayer assessing additional taxes, advis-
ing that a refund is due, or stating that there is no change in the status of his or
her return.
Figure 1-1 Audit of a Tax Return
Information
Tax returns
Competent, ﬁled
independent by taxpayer
person Accumulates and
evaluates evidence Reports on results
Canada
Examines bank Report on
Revenue Conducts risk Determines correspondence
statements and other tax overages or
Agency assessment
supporting records deﬁciencies
auditor
Established criteria
Income Tax
Act and
all interpretations
CHAPTER 1 I THE DEMAND FOR AUDIT AND OTHER ASSURANCE SERVICES 5
M02_AREN5507_13_SE_C01.indd 5 02/09/15 2:45 PM

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X. *We reckon a man sufficiently mad that fancies himself a king,
and governing his subjects, at the same time that he is tied on a bed
of straw: now a Christian repeats every day, I believe the forgiveness
of sin, the resurrection of the body, and the life everlasting; he thanks
God for the redemption of Jesus Christ, for the means of grace, and
for the hope of glory. Yet at the same time, in this state of greatness,
he fancies himself in a thousand wants and miseries: he cries and
labours, and toils for a happiness, that has no existence but in his
own imagination; he fancies himself a being that is to be made
happy with sauces and ragous, with painted cloaths and shining
diamonds, he is grieved and fretted like a child at the loss of a
feather; and must be diverted, as they are, with shows and plays,
and imaginary scenes of rant and nonsense. Now is not such a one
mad? Does he not know as little of his state, as the man in straw
who fancies himself a king? But for a Christian, in times of dulness or
vexation, to seek relief in foolish amusements, in the loose, wild
discourses of plays, when he should acquaint himself with God, and
be at peace, is a degree of madness that exceeds all others; it is
acting as contrary to the nature of things, as if a man that had lost
the use of his limbs, should chuse to comfort his lameness with
painted shoes, when he might have the use of his feet restored. For
the consolations of religion relieve uneasiness and trouble, as a
lame man is relieved when his limbs are restored; they conquer grief,
not by cheating and deluding the weakness of our minds, but as the
resurrection conquers death, by restoring us to a new and glorious
life.
XI. From these reflections I hope it sufficiently appears, that the

reading vain and impertinent books is no matter of indifferency; but
that it is justly to be reckoned amongst our greatest corruptions; that
it is as unlawful as malice and evil speaking; and is no more to be
allowed in any part of our life.
Reading, when it is an exercise of the mind, upon wise and pious

subjects, is, next to prayer, the best improvement of our hearts; it
enlightens our minds, collects our thoughts, calms and allays our
passions, and begets in us wise and pious resolutions; it is a labour
that does so much good to our minds, that it ought never to be
employed amiss; it enters so far into our souls that it cannot have a
little effect upon us. Reading and meditation is that to our souls,
which food and nourishment is to our bodies; so that we cannot do
ourselves either a little good, or little harm, by the books that we
read.
XII. But perhaps you think it is a dull task to read only religious
and moral books: but when God is your happiness; when you are not
afraid of the joys of eternity, you will think it a dull task to read any
other books. Don’t fancy therefore that your heart is right, tho’ you
had rather read books upon other subjects; for it is there that you are
to charge your dullness: religion has no hold of you; the things of
eternity are not the concerns of your mind; it is dull and tiresome to
you to be wise and pious; and that makes it a dull task to read only
books that treat upon such subjects. When it is the care of your soul
to be humble, holy, pious, and heavenly minded; when you know any
thing of the guilt and misery of sin, or feel a real desire of salvation,
you will find religious books to be the greatest feast and joy of your
mind.
XIII. You perhaps will say that you have so much spare time for
reading, that you think you need not employ it at all in reading good
books. It may be so; you may have also more time than you need
devote to offices of charity; but will you thence conclude, that you
may then do things contrary to charity, and indulge yourself in spight
and mischief?
*If you have every day more time than you can employ in
reading, meditation and prayer; if this time hangs upon your hands,
and cannot be turned to any advantage; let me desire you to go to
sleep or pick straws; for it is much better to do this, than to have
recourse to corrupt and impertinent books. Time lost in sleep, or in
picking straws, is better lost than in such exercises of the mind.
Consider farther, that idle and spare time calls for the greatest care
and watchfulness; so that to have recourse then to evil and
impertinent books, is like inviting the devil because you are alone. If
you could read ill books when you are in haste, or in a hurry of other
matters, it would do you much less harm than to read them because
your time hangs upon your hands. That very season which you take
to be an excuse for such reading, is the strongest argument against
it, because evil thoughts and vain subjects have twice the effect, and
make double impressions when they are admitted at times of leisure
and idleness.
XIV. Consider again to what a miserable state you are reduced,

when you are forced to have recourse to foolish books to get rid of
your time. Your fortune perhaps has removed you from the necessity
of labouring for your bread; you have been politely educated in
softness; you have no trade or employment to take up your time; and
so are left to be devoured by corrupt passions and pleasures. Whilst
poor people are at hard labour; whilst your servants are drudging in
the meanest offices of life; you, oppressed with idleness and
indulgence, are relieving yourself with foolish and impertinent books;
feeding and delighting a disordered mind with romantic nonsense,
and poetic follies. If this be the effect of riches and fortune, only to
expose people to the power of disordered passions, and give them
time to corrupt their hearts with madness and folly, well might our
Lord say, Woe unto you that are rich!
*When you see a poor creature drudging in the meanest offices

of life, and glad of the dirtiest work to get his bread, you are apt to
look upon him as a miserable wretch; it raises a mixture of pity and
contempt in you; but remember, that every time you see such a
person, you see a more reasonable creature than yourself, and one
that is much more nobly employed than you are. He is acting
conformably to the state of human life, and bearing a hard part with
patience; he is doing a work which, mean as it is, will be looked upon
as done unto the Lord; whilst you, idling in softness and pleasures,
are unable to bear your time, unless it be stolen away from you by
folly and impertinence. Fancy that you saw a patient Christian, old,
broken and crooked, with carrying burthens all his life; fancy that you
saw another Christian lolling in state and softness, and making every
day a day of vanity and foolish reading; which of them do you think is
most likely to die in the hands of good angels, and be carried into
Abraham’s bosom?
XV. *But, after all, what a vain imagination is it to think that you
have any such thing as spare time? Is there any time for which you
are not accountable to God? Is there any time which God has so left
to your own disposal that you may sacrifice it to the indulgence of
vain tempers, and the corruption of your heart? You can no more
shew this than you can shew, that all your time is your own. To talk,
therefore of spare time, is to talk of something that never did nor
ever will belong to any Christian. You may have a spare time from
this or that labour, or necessity, you may abate or change any
particular exercise, you may take this or that refreshment; you have
all these spare times from particular actions, but you have no spare
time that releases you from the laws of Christianity, or that leaves
you at liberty not to act by the principles of religion and piety.
*You have spare time to refresh yourself: but this is to be

governed by the same wisdom, as the time that is spent in cares and
labours. For your recreations and pleasures are only lawful as far as
they are directed by the same wisdom with your cares and labours. If
therefore the providence of God has placed you above the necessity
of labouring for your livelihood, you must not think that you have so
much spare time to spend, as you please, but that you are certainly
called to some other labour. Great part of the world is doomed to toil
and slavery; they have it not in their power to chuse any other way of
life, and their labour is therefore an acceptable service to God,
because it is such as their state requires. Happy are you therefore, if
you knew your happiness, who have it in your power to be always
doing the best things; who, free from labour and hardships, are at
liberty to chuse the best ways of life, to study all the arts of self-
improvement, to practise all the ways of doing good, and to spend
your time in all the noblest instances of piety, humility, charity and
devotion! Bless God then, not because you have spare time, for that
you have none, but that you have time to employ in the best ways
that you can find; that whilst others are oppressed with burdens, and
worn out with slavery, you have time to think upon the greatest and
best of things; to enlighten your mind, to correct the disorder of your
heart, to study the laws of God, to contemplate the wonders of his
providence, to convince yourself of the vanity of the world, and to
delight your soul with the great and glorious things which God has
prepared for those that love him. This is the happiness of being free
from labour and want, not to have spare time to squander away in
vanity and impertinence, but to have spare time to spend in the study
of wisdom, in the exercise of devotion, in the practice of piety, in all
the ways and means of doing good and exalting our souls to a state
of Christian perfection.
XVI. *It is a doctrine of scripture, and highly agreeable to reason,

That unto whomsoever much is given, of him shall much be required.
Consider therefore that a life of leisure and freedom from want and
hardships is as much as can well be given you in this world, as it is
giving you an opportunity of living wholly to God, and making all the
parts of your life useful to the best purposes. As sure therefore as it
is a state, that has so many advantages that furnishes you with so
many means of being eminent in piety, so sure it is, that it is a state
from which God expects fruits that are worthy of it. Had it been your
lot to labour in a mine, or serve under some cruel master, you must
have served as unto God; and in so doing you had finished the work
which God had given you. But as you are free from all this, you must
look upon yourself as God’s servant, as called to chuse that way of
labouring and spending your time, which may most promote that
which God desires to be promoted. God has given you liberty to
chuse, but it is only that you may have the blessedness of chusing
the best ways of spending your time. Though therefore you are at
liberty from servile and mean labour, yet you are under a necessity
of labouring in all good works, and making all your time, and fortune,
and abilities serviceable to the best ends of life. You have no more
time that is your own, than he has that is to live by constant labour;
the only difference betwixt you and him is this, that he is to be
diligent in a poor, slavish labour, that oppresses the body, and
dejects the mind; but you in a service that is perfect freedom, that
renders your body a fit temple for the Holy Ghost, and fills your soul
with such light, and peace, and joy, as is not to be found in any other
way of life.
XVII. Do you think that a poor slave would displease God by

refusing to act in that painful drudgery that is fallen to his share? And
do you think that God will not be more displeased with you, if you
refuse to act your full part in the best of labours, or neglect that
happy business of doing good, which your state of life has called you
to? ♦Is it expected that poor people should make a right use of their
condition, and turn all their labour into a service unto God? And do
you think you are not obliged to make a proper improvement of your
condition, and turn all your rest, and ease, and freedom from labour,
into service unto God? Tell me therefore no more that you indulge
yourself in idle amusements, in vain, corrupt, and unedifying books,
because you have spare time? For it is absolutely false to say that
you have any such thing; it is saying, that because God has given
you spare time from servile labour, time for all the instances of a holy
and heavenly life; therefore you presume to throw it away in idleness
and impertinence.
♦ ‘It is’ replaced with ‘Is it’
The End of the Fourth Volume.

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Full Download PDF of (Ebook PDF) Auditing: The Art and Science of Assurance Engagements, 13th Canadian Edition All Chapter

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(eBook PDF) Auditing: The Art and

Science of Assurance Engagements,

(Original PDF) Auditing The Art and Science of

(eBook PDF) Auditing: The Art and Science of Assurance

(eBook PDF) Fundamentals: Perspectives on the Art and

Auditing and Assurance Services 16th Edition (eBook

(eBook PDF) Principles of Auditing Other Assurance

(eBook PDF) The Art and Science of Leadership 7th

(eBook PDF) Auditing and Assurance Services Global

(eBook PDF) Principles of Auditing & Other Assurance

10 Audit Strategy and Audit Program 290

Part 3 Application of the Audit Process 322

11 Audit Sampling Concepts 323

A01_AREN5507_13_SE_FM.indd vi 04/09/15 6:25 PM

12 Audit of the Revenue Cycle 366

13 Audit of the Acquisition and Payment Cycle 430

A01_AREN5507_13_SE_FM.indd vii 04/09/15 6:25 PM

15 Audit of the Human Resources and Payroll Cycle 487

16 Audit of the Capital Acquisition and Repayment Cycle 507

A01_AREN5507_13_SE_FM.indd viii 04/09/15 6:25 PM

Part 4 Completing the Audit, Reporting, and Other

18 Completing the Audit 545

19 Audit Reports on Financial Statements 575

A01_AREN5507_13_SE_FM.indd ix 04/09/15 6:25 PM

20 Other Assurance and Nonassurance Services 601

Appendix: Hillsburg Hardware Annual Report 631

A01_AREN5507_13_SE_FM.indd x 04/09/15 6:25 PM

Auditing: The Art and Science of Assurance Engagements is an introduction to auditing

What’s New to This Edition?

A01_AREN5507_13_SE_FM.indd xi 04/09/15 6:25 PM

Expanded Coverage on Audit Quality and

A Greater Emphasis on Professional

Expanded Coverage on Professional Skepticism

Risk Assessment and the Audit Process

A01_AREN5507_13_SE_FM.indd xii 04/09/15 6:25 PM

Expanded Coverage on Materiality

Updated Internal Control Guidance

New Coverage on Substantive Analytical Procedures

Updated Sampling Guidance

Updated Audit Report Guidance

Other Assurance Services

A01_AREN5507_13_SE_FM.indd xiii 04/09/15 6:25 PM

New Integrated Case—Pinnacle Manufacturing

New and Revised Problems and Cases

Part 1: The Auditing Profession (Chapters 1–4)

Part 2: The Audit Process (Chapters 5–10)

A01_AREN5507_13_SE_FM.indd xiv 04/09/15 6:25 PM

Part 3: Application of the Audit Process: Audit of Cycles

Part 4: The Audit Process: Completion and Reporting and

A01_AREN5507_13_SE_FM.indd xv 04/09/15 6:25 PM

Instructional Support Materials

INSTRUCTOR’S SOLUTIONS MANUAL This comprehensive resource provides detailed

COMPUTERIZED TESTBANK Pearson’s computerized test banks allow instructors to fil-

POWERPOINT SLIDES Electronic colour slides are available in Microsoft PowerPoint.

COURSESMART FOR INSTRUCTORS CourseSmart goes beyond traditional expecta-

A01_AREN5507_13_SE_FM.indd xvi 04/09/15 6:25 PM

LEARNING SOLUTIONS MANAGERS Pearson’s learning solutions managers work with

A01_AREN5507_13_SE_FM.indd xvii 04/09/15 6:25 PM

Bartosz Amerski, CPA, CA

A01_AREN5507_13_SE_FM.indd xviii 04/09/15 6:25 PM

M01_AREN5507_13_SE_PT01.indd 1 02/09/15 2:40 PM

Auditors Have a Great Responsibility

M02_AREN5507_13_SE_C01.indd 2 02/09/15 2:45 PM