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Multiple Choice Questions From CPA Examinations 42
Multiple Choice Questions From Becker CPA Exam Review* 43
Discussion Questions and Problems 44
CHAPTER
AUDIT REPORTS
3 LEARNING OBJECTIVES 47
Standard Unmodified Opinion Audit Report for Nonpublic Entities 48
Conditions for Standard Unmodified Opinion Audit Report 51
Standard Audit Report and Report on Internal Control Over Financial
Reporting Under PCAOB Auditing Standards 52
Unmodified Opinion Audit Report With Emphasis-of-Matter Explanatory
Paragraph or Nonstandard Report Wording 58
Modifications to the Opinion in the Audit Report 62
Materiality 63
Discussion of Conditions Requiring a Modification of Opinion 67
Auditor’s Decision Process for Audit Reports 71
International Accounting and Auditing Standards 73
Summary 73
Essential Terms 74
Review Questions 74
CHAPTER
PROFESSIONAL ETHICS
What are Ethics? 83
Ethical Dilemmas 84
Special Need for Ethical Conduct in Professions 87
Code of Professional Conduct 89
Independence Rule 94
Sarbanes–Oxley and Related Independence Requirements 98
Other Rules of Conduct 101
Enforcement 108
Summary 110
Essential Terms 111
Review Questions 111
Multiple Choice Questions From Becker CPA Review* 113
Cases 117
CHAPTER
LEGAL LIABILITY
Legal Environment for CPAs 120
Distinguishing Business Failure, Audit Failure, and Audit Risk 121
Legal Concepts Affecting Liability 122
vi CONTENTS
Liability to Clients 124
Liability to Third Parties Under Common Law 127
Civil Liability Under the Federal Securities Laws 129
Criminal Liability 135
The Profession’s Response to Legal Liability 136
Summary 137
Essential Terms 138
Case 146
THE AUDIT PROCESS PART
2
AUDIT RESPONSIBILITIES AND OBJECTIVES CHAPTER
LEARNING OBJECTIVES 148

Objective of Conducting an Audit of Financial Statements 149
6
Management’s Responsibilities 150
Auditor’s Responsibilities 151
Professional Skepticism 155
Professional Judgment 156
Financial Statement Cycles 159
Setting Audit Objectives 163
Management Assertions 164
Transaction-Related Audit Objectives 167
Balance-Related Audit Objectives 169
How Audit Objectives Are Met 172
Summary 175
Essential Terms 175
AUDIT EVIDENCE CHAPTER

Nature of Evidence 186
7
Audit Evidence Decisions 187
Persuasiveness of Evidence 188
Types of Audit Evidence 191
Analytical Procedures 199
Use of Data Analytics and Other Advanced Technologies 202
Common Financial Ratios 206
Audit Documentation 209
Contents and Organization 210
Summary 216
CONTENTS vii
Essential Terms 216
CHAPTER
AUDIT PLANNING AND MATERIALITY
Planning 230
Accept Client and Perform Initial Audit Planning 231
Understand the Client’s Business and Industry 236
Perform Preliminary Analytical Procedures 241
Materiality 244
Materiality for Financial Statements as a Whole 245
Determine Performance Materiality 248
Estimate Misstatement and Compare With Preliminary Judgment 250
Summary 252
Essential Terms 254
Case 266
Integrated Case Application —Pinnacle Manufacturing: Part I 267
CHAPTER
ASSESSING THE RISK OF MATERIAL
9 MISSTATEMENT
Audit Risk 271
Risk Assessment Procedures 272
Considering Fraud Risk 276
Identification of Significant Risks 277
Audit Risk Model 278
Assessing Acceptable Audit Risk 282
Assessing Inherent Risk 285
Relationship of Risks to Evidence and Factors Influencing Risks 288
Relationship of Risk and Materiality to Audit Evidence 292
Summary 293
Essential Terms 294
Case 302
Integrated Case Application—Pinnacle Manufacturing: Part II 302
viii CONTENTS
ASSESSING AND RESPONDING CHAPTER

TO FRAUD RISKS 10
Types of Fraud 305
Conditions for Fraud 306
Assessing the Risk of Fraud 310
Corporate Governance Oversight to Reduce Fraud Risks 314
Responding to the Risk of Fraud 318
Specific Fraud Risk Areas 321
Responsibilities When Fraud is Suspected 326
Documenting the Fraud Assessment 330
Summary 331
Essential Terms 331
Integrated Case Application—Pinnacle Manufacturing: Part III 341
INTERNAL CONTROL AND COSO CHAPTER

FRAMEWORK 11
Internal Control Objectives 343
Management and Auditor Responsibilities for Internal Control 344
COSO Components of Internal Control 347
Internal Controls Specific to Information Technology 356
Impact of IT Infrastructure on Internal Control 363
Summary 365
Essential Terms 365
Case 373
ASSESSING CONTROL RISK AND REPORTING CHAPTER
ON INTERNAL CONTROLS
12
Obtain and Document Understanding of Internal Control 376
Assess Control Risk 379
Tests of Controls 384
Decide Planned Detection Risk and Design Substantive Tests 390
Auditor Reporting on Internal Control 390
CONTENTS ix
Evaluating, Reporting, and Testing Internal Control for Nonpublic and
Smaller Public Companies 393
Impact of IT Environment on Control Risk Assessment and Testing 395
Summary 399
Essential Terms 399
Case 412
Integrated Case Application—Pinnacle Manufacturing: Part IV 413
CHAPTER
OVERALL AUDIT STRATEGY
13 AND AUDIT PROGRAM
Types of Tests 417
Selecting Which Types of Tests to Perform 423
Evidence Mix 426
Design of the Audit Program 428
Summary of Key Evidence-Related Terms 437
Summary of the Audit Process 438
Summary 442
Essential Terms 442
Cases 451
PART
APPLICATION OF THE AUDIT PROCESS TO
3 THE SALES AND COLLECTION CYCLE
CHAPTER
AUDIT OF THE SALES AND COLLECTION
14 CYCLE: TESTS OF CONTROLS AND
SUBSTANTIVE TESTS OF TRANSACTIONS
Accounts and Classes of Transactions in the Sales and Collection Cycle 456
Business Functions in the Cycle and Related Documents and Records 457
Methodology for Designing Tests of Controls and Substantive Tests of
Transactions for Sales 462
Sales Returns and Allowances 474
Transactions for Cash Receipts 474
Audit Tests for Uncollectible Accounts 478
x CONTENTS
Effect of Results of Tests of Controls and Substantive Tests of
Transactions 479
Summary 480
Essential Terms 481
Case 491
Integrated Case Application—Pinnacle Manufacturing: Part V 492
AUDIT SAMPLING FOR TESTS OF CONTROLS CHAPTER
AND SUBSTANTIVE TESTS OF TRANSACTIONS

15
Representative Samples 494
Statistical Versus Nonstatistical Sampling and Probabilistic Versus
Nonprobabilistic Sample Selection 495
Sample Selection Methods 496
Sampling for Exception Rates 499
Application of Nonstatistical Audit Sampling 500
Statistical Audit Sampling 516
Application of Statistical Attributes Sampling 518
Summary 523
Essential Terms 523
Case 533
Integrated Case Application—Pinnacle Manufacturing: Part VI 533
COMPLETING THE TESTS IN THE SALES AND CHAPTER
COLLECTION CYCLE: ACCOUNTS RECEIVABLE

16
Methodology for Designing Tests of Details of Balances 536
Designing Tests of Details of Balances 542
Confirmation of Accounts Receivable 549
Developing Tests of Details Audit Program 555
Summary 558
Essential Terms 558
Case 569
Integrated Case Application—Pinnacle Manufacturing: Part VII 570
CONTENTS xi
CHAPTER
AUDIT SAMPLING FOR TESTS
17 OF DETAILS OF BALANCES
Comparisons of Audit Sampling for Tests of Details of Balances and for Tests
of Controls and Substantive Tests of Transactions 576
Nonstatistical Sampling 577
Monetary Unit Sampling 586
Variables Sampling 595
Illustration Using Difference Estimation 600
Summary 603
Essential Terms 604
Multiple Choice Questions From CPA and CIA Examinations 606
Cases 613
PART
APPLICATION OF THE AUDIT PROCESS
4 TO OTHER CYCLES
CHAPTER
AUDIT OF THE ACQUISITION AND
18 PAYMENT CYCLE: TESTS OF CONTROLS,
SUBSTANTIVE TESTS OF TRANSACTIONS,
AND ACCOUNTS PAYABLE
Accounts and Classes of Transactions in the Acquisition and Payment
Cycle 617
Transactions 621
Methodology for Designing Tests of Details of Balances for Accounts
Payable 628
Summary 637
Essential Terms 637
Case 647
xii CONTENTS
COMPLETING THE TESTS IN THE CHAPTER
ACQUISITION AND PAYMENT CYCLE:

VERIFICATION OF SELECTED ACCOUNTS
19
Types of Other Accounts in the Acquisition and Payment Cycle 650
Audit of Property, Plant, and Equipment 650
Audit of Prepaid Expenses 658
Audit of Accrued Liabilities 661
Audit of Income and Expense Accounts 663
Summary 666
Essential Terms 667
Cases 673
AUDIT OF THE PAYROLL AND CHAPTER

PERSONNEL CYCLE 20
Accounts and Transactions in the Payroll and Personnel Cycle 677
Transactions 680
Methodology for Designing Substantive Analytical Procedures and Tests
of Details of Balances 686
Summary 690
Essential Terms 690
Case 697
AUDIT OF THE INVENTORY AND CHAPTER

WAREHOUSING CYCLE 21
Parts of the Audit of Inventory 702
Audit of Cost Accounting 705
Substantive Analytical Procedures 708
Physical Observation of Inventory 709
Audit of Pricing and Compilation 713
Integration of the Tests 716
CONTENTS xiii
Summary 718
Essential Terms 718
Case 728
CHAPTER
AUDIT OF THE CAPITAL ACQUISITION
22 AND REPAYMENT CYCLE
Accounts in the Cycle 731
Notes Payable 732
Owners’ Equity 736
Summary 743
Essential Terms 743
CHAPTER
AUDIT OF CASH AND FINANCIAL
23 INSTRUMENTS
Types of Cash and Financial Instruments Accounts 752
Cash in the Bank and Transaction Cycles 754
Audit of the General Cash Account 755
Fraud-Oriented Procedures 763
Audit of Financial Instruments Accounts 768
Summary 771
Essential Terms 771
PART
COMPLETING THE AUDIT
5
CHAPTER
COMPLETING THE AUDIT
Perform Additional Tests for Presentation and Disclosure 782
Review for Contingent Liabilities and Commitments 783
Review for Subsequent Events 788
Final Evidence Accumulation 791
xiv CONTENTS
Evaluate Results 797
Issue the Audit Report 801
Communicate With the Audit Committee and Management 801
Subsequent Discovery of Facts 803
Summary 805
Essential Terms 805
Case 813
OTHER ASSURANCE AND PART
NONASSURANCE SERVICES 6
OTHER ASSURANCE SERVICES CHAPTER

Review, Compilation, and Preparation Services 816
25
Review of Interim Financial Information for Public Companies 822
Attestation Engagements 823
Reports on Controls at Service Organizations (SOC Reports) 827
Prospective Financial Statements 829
Agreed-Upon Procedures Engagements 831
Other Audits or Limited Assurance Engagements 831
Summary 834
Essential Terms 834
Multiple Choice Questions from CPA Examinations 836
INTERNAL AND GOVERNMENTAL FINANCIAL CHAPTER
AUDITING AND OPERATIONAL AUDITING

26
Internal Financial Auditing 843
Governmental Financial Auditing 846
Operational Auditing 849
Summary 856
Essential Terms 856
Multiple Choice Questions From CPA, CIA, and CMA Examinations 858
INDEX 864
CREDITS 880
CONTENTS xv
PREFACE
The primary emphasis in this text is on the auditor’s decision-making process in a

financial statement audit, as well as an integrated audit of both financial statements
and internal control over financial reporting required for accelerated filer public
companies. We believe that the most fundamental concepts in auditing concern deter-
mining the nature and amount of evidence the auditor should gather after consider-
ing the unique circumstances of each engagement. If students of auditing understand
the objectives to be accomplished in a given audit area, the risks related to the engage-
ment, and the decisions to be made, they should be able to determine the appropriate
evidence to gather and how to evaluate the evidence obtained.
To improve student results, we recommend pairing the text content with MyLab
Accounting, which is the teaching and learning platform that empowers you to reach
every student. By combining trusted author content with digital tools and a flexible
platform, MyLab personalizes the learning experience and will help your students
learn and retain key course concepts while developing skills that future employers are
seeking in their candidates. Learn more at www.pearson.com/mylab/accounting.
NEW TO THIS EDITION

New auditing standards are released without regard to textbook revision cycles. As
Current Coverage
auditing instructors, we appreciate how critical it is to have the most current con-
tent available. This edition includes guidance in the recently issued SAS No. 133, An
Auditor Involvement with Exempt Offering Documents, and PCAOB standards, including the
new standard auditor’s report contained in AS 3101, The Auditor’s Report on an Audit of
Financial Statements When the Auditor Expresses an Unqualified Opinion and Related Amendments
to PCAOB Standards. In addition, we have included coverage of the AICPA’s Auditing
Standards Board pending revision of the auditor’s standard unmodified opinion audit
report so that our coverage of audit reports is up to date (as discussed further below). It
is important to note that as part of this project, the AICPA also revised the management
assertions. The changes to the assertions are reflected throughout the text.
Now that the AICPA has completed its Clarity Project for auditing, attestation,
and accounting and review services engagements, all chapters of the textbook reflect
the various revisions resulting from the issuance of the Clarity standards, including
coverage up through the issuance of SSARS No. 23, Omnibus Statement on Standards for
Accounting and Review Services—2016 and SSAE No. 18, Attestation Standards: Clarification
and Recodification. We are committed to continually providing you with up-to-date
content in this dynamic global auditing environment and will keep you updated with
highlights posted on our website of major changes in new standards as they are issued.
Both the AICPA’s Auditing Standards Board (ASB) and the PCAOB have recently
New Auditor Reports
revised guidance related to auditor reporting to make the audit report more infor-
mative to users. These changes significantly changed the format and length of con-
tent included in the auditor’s report. Most notably, auditors of public companies must
include in the auditor’s standard unmodified opinion report disclosure of “critical
audit matters” (CAMs), which represent issues that involved especially challenging,
subjective, or complex auditor judgment and how the auditor addressed those mat-
ters. While auditors of nonpublic entities are not required to include those disclosures,
xvi
the new audit reporting standard proposed by the ASB provides reporting guidance
for auditors who are engaged to communicate “key audit matters” (KAMs), which are
similar in nature to CAMs in the PCAOB guidance. Chapter 3 provides extensive cov-
erage of these new auditor report guidelines, including a number of illustrations of
auditor reports for different engagement circumstances.
The Internet and extensive use of technologies and automation by entities to engage in
New Coverage of
all types of business transactions and services have dramatically increased the amount
Data Analytics and
of data available for analysis. The audit profession is rapidly exploring how audit data
Other Advanced
analytics (ADAs) and advanced technologies might allow them to increase both audit
Technologies
quality and efficiency. The 17th edition of this textbook includes new coverage of how
ADAs are being used in all phases of the audit, spanning from initial planning through
the completion of the audit.
We provide an extensive introduction to ADAs in Chapter 7, including cover-
age of best practices related to accessing and preparing the data, evaluating the rel-
evance and reliability of that data, addressing large numbers of exceptions for further
consideration, and documenting the use of ADAs. We also include coverage of differ-
ent types of advanced technologies, including artificial intelligence, robotics, machine
learning, and deep learning. Additionally, many of the remaining chapters of the text-
book include callout “Data Analytics” boxes that highlight different ways auditors are
using ADAs in the various financial statement cycles to perform tests of controls, sub-
stantive tests of transactions, substantive analytical procedures, and tests of details.
These callout boxes help students see how ADAs are transforming the nature, timing,
and extent of audit procedures in all aspects of the audit.
To provide students hands-on experience in using various data analytics tools, we have New Dataset for
developed an entirely new dataset that includes different files of transaction data related Students to Perform
to the sales and collection cycle for a hypothetical company, JA Tire Manufacturing. This Audit Data Analytics
dataset, which students can access from the textbook website, includes different sub-
files that contain transaction data related to JA Tire Manufacturing’s sales orders, bills of
lading, invoices, cash receipts, customer master file, and product master file (an excerpt
of a summary of the sub-files is shown below). We have developed several new home-
work problems included in different chapters that require students to analyze data in the
various sub-files of the dataset for JA Tire Manufacturing. Because the dataset is in Excel,
JA Tires Sales System Description
Process Relevant File Fields included

1 JA Tires has four sales divisions:
Southeast (SE), Southwest (SW),
Midwest (MW) and Northeast (NE)
2 JA Tires sells various tire products Product_Master Product Number

as described in the Product_Master Product Description
file
3 A Customer Master File is Customer_Master Customer Number
maintained by the Regional Customer Name
Manager Delivery Information
Shipping Information
Sales Division Territory
4 Customer submits customer order
electronically via an online portal.
Customers are assigned a customer
number that they use to input order
through a customer portal. Once
logged in, the customer enters the
customer Purchase Order # (PO#),
Product number and Quantities
ordered
5 A Sales Order is automatically Sales Order Sales Order Number
generated in numerical order by Customer Number
the system from the customer Customer Purchase Order Number
order Product Number
Price
Order Quantity
Order Total
Sales Order Date
Shipping Information
Indication of Voided Sales Order
PREFACE xvii
the new homework problems allow students to use any software, such as ACL, Excel,
IDEA, or Tableau, to conduct their data analysis. Thus, instructors have the flexibility
to choose which software tool they would like students to use to perform the analyses.
These problems are indicated by a data analytics icon in the margin next to the problem.
7-38 (OBJECTIVE 7-5) As the in-charge senior auditor on the audit engagement for JA Tire
Manufacturing for the year ended December 31, 2019, you are responsible for perform-
ing risk assessment procedures related to the sales cycle. JA Tire has four sales divisions
Data
Analytics within the U.S. and sells primarily to large tire companies with regional warehouses that
subsequently distribute to local retailers. Based on some of the risk assessment procedures
already performed, you identified risks related to the fact that salespersons receive a com -
mission on sales to distributors and the commission is calculated on a monthly basis. Your
manager has asked you to perform analytical procedures as a part of audit planning to re-
view sales information by sales division and by month to identify potential risk areas that
might warrant further audit procedures related to sales.
Required 1. Visit the textbook website to download the file “JATireSales.xls” provided to your
audit firm by the company. This file contains sales transaction information for the
year ended December 31, 2019. If you have not already done so, read the JA Tire
Manufacturing system description provided on the first tab of the Excel file before
attempting this assignment to familiarize yourself with the sales process and the
relevant worksheets and terminology. Using the “Invoices” and “Sales Order” tabs
in the Excel spreadsheet, perform the procedures in requirements 2 through 4
using either Excel, Tableau, or audit software such as ACL or IDEA.
Additional Data
In addition to the new homework problems using the dataset of JA Tire Manufacturing,
Analysis Problems
we have also included a number of other problems in the text that can be completed
using Excel templates that are available on the text website. These problems are indi-
cated by a spreadsheet icon in the margin next to the problem. In addition, we have
included selected problems using ACL in several chapters in the text, indicated with
a data analytics icon. These problems are related to the topic of the chapter so that
students can see how audit software is used to perform specific types of audit tests.
Guidance for students on the use of ACL is included on the text website.
Research Problems Critical thinking and research skills are becoming increasingly important for stu-
to Develop Critical dents as they enter the accounting profession. To help students further develop those
Thinking Skills skills, we have continued our inclusion of homework problems in the 17th edition that
require students to conduct Internet-based research to address various audit issues.
Some of those research problems have students work with actual SEC filings by com-
panies, which expose students to relevant examples of audit-related decisions. Other
problems require students to conduct research of auditing standards to determine the
relevant guidance applicable to a given audit issue.
With the profession’s continued focus on the importance of applying appropriate lev-
Coverage of
els of professional skepticism, we have continued our coverage of this topic in Chapter
Professional
6, along with integrated coverage in later chapters, including Chapter 10, which
Skepticism and
addresses the auditor’s responsibilities for detecting fraud. We discuss the impor-
Auditor Judgment
tance of a questioning mindset and the need to critically evaluate audit evidence to
strengthen student awareness of the elements of effective professional skepticism.
To assist auditors with maintaining an appropriate level of professional skepticism
when making professional judgments during an audit, this edition features the Center
for Audit Quality’s Professional Judgment Resource, which outlines key elements of a pro-
cess that auditors apply when making professional judgments. Chapter 6 illustrates an
effective decision-making process that guides auditors’ thinking to help them be aware
of their own judgment tendencies, traps, and biases. We include several homework
problems that expose students to this judgment framework and a number of the com-
mon traps and biases.
Coverage on The requirements of the Sarbanes–Oxley Act of 2002 and the PCAOB Auditing
Risk Assessment Standard 5 (now AS 2201) that impact accelerated filer public companies are inte-
Procedures and grated throughout the text and so are the risk assessment standards issued by the
Understanding Internal Auditing Standards Board. Chapter 2 emphasizes the importance of understand-
Control ing the client’s business and its environment, including internal control. Chapter 3
xviii PREFACE
highlights reporting on internal controls over financial reporting for auditors of accel-
erated filer public companies.
We have always emphasized understanding the client’s business and industry in
planning. Chapters 8–12 include coverage of the auditor’s performance of risk assess-
ment procedures, including the identification of significant risks. Chapter 9 addresses
the performance of risk assessment procedures to address the risk of material mis-
statement, followed in Chapter 10 with discussion of assessing and responding to the
risk of fraud.
Our coverage in Chapters 11 and 12 of internal controls, including coverage of IT
general and application controls, reflects key elements of COSO’s 2013 revision of its
Internal Control—Integrated Framework and integrates the auditor’s consideration of both
manual and automated controls. Chapter 11 introduces students to important ele-
ments of effective internal controls, including those related to IT, while Chapter 12
outlines the auditor’s responsibilities to understand the design and operating effec-
tiveness of internal control and also highlights auditor reports on internal control over
financial reporting. Subsequent chapters that focus on the transaction cycles include
extensive coverage of internal controls to help students understand how the auditor’s
consideration of internal controls is integrated for audits of the financial statements
and internal controls over financial reporting.
Chapter 1 introduces the importance of considering international auditing standards

Emphasis on
developments, followed by discussion in Chapter 2 about the role of the International
International Issues
Auditing and Assurance Standards Board (IAASB) in the issuance of International
Standards on Auditing (ISAs) and the Auditing Standards Board’s efforts to converge
U.S. standards to international standards. Chapter 3 highlights implications for audi-
tor reports on companies reporting under International Financial Reporting Standards
(IFRS). Several chapters throughout the book include text or mid-chapter vignette cov-
erage of international issues, and international issues are also addressed in homework
problems.
Given the complexity associated with auditing management’s assessment of the valu-
ation of certain assets, such as property, plant, and equipment and goodwill, we have Expanded Coverage
expanded our coverage of audit issues related to impairment evaluations. Chapter 19 of Auditing Asset
includes expanded coverage of issues surrounding the facts and circumstances of Impairments
auditing management’s method of determining fair value and whether management
has appropriately accounted for and disclosed impairment of those assets. We have
included a new vignette in that chapter that specifically addresses the two-step pro-
cess of conducting a goodwill impairment analysis.
With the increasing volume and complexity of various types of financial instruments Coverage of Financial
and challenges associated with fair value accounting, Chapter 23 addresses issues Instruments
associated with auditing financial instruments and obtaining sufficient appropri-
ate audit evidence for fair value account estimates. We believe this guidance will help
strengthen students’ understanding of the challenges associated with auditing finan-
cial instruments.
With more organizations taking advantage of cloud computing options and third-
Service Organization
party IT service providers, there is a greater need for information about the design
Controls (SOC)
and operating effectiveness of internal controls provided by these external service
Reports
providers. This 17th edition contains coverage of service organization control (SOC)
reports issued by service center auditors. Both Chapters 12 and 25 reflect the guidance
for service auditors reporting on internal controls at service organizations, includ-
ing coverage of the different types of reports provided in SOC 1, SOC 2, and SOC 3
engagements.
PREFACE xix
The issuance of SSARS No. 21 introduced a new type of nonattest engagement service
Coverage of
that allows nonissuers to engage a CPA to help management prepare monthly, quar-
Preparation Service
terly, or annual financial statements without providing any assurance on the financial
Engagements
statements or issuing a report, even if the financial statements are expected to be used
by, or provided to, a third party. Chapter 25 describes this new type of service and dis-
tinguishes it from compilation and review engagement requirements.
To help students connect the important auditing concepts to real-world situations,

New Opening
each chapter begins with an opening vignette that illustrates practice issues relevant
and Mid-Chapter
to that chapter’s content, and each chapter includes several short vignettes spread
Vignettes
throughout the content of that chapter. Many of these vignettes have been updated
to reflect recent real-world events to help students understand the significance of the
content covered.
Concept Checks, introduced in the 16th edition, appear periodically within each
Concept Checks
chapter and highlight short-answer questions to help students recap content covered
within different sections of the chapter. These short in-chapter review questions are
intended to help call students’ attention to key concepts as they read the material in
the chapter.
Linking in the eText will allow students to check their understanding in MyLab
New Interactive
Accounting without interrupting their interaction with the eText. These questions are
Concept Check
also available for assignment in MyLab Accounting.
Questions
xx PREFACE
We are excited about the inclusion of a number of changes to the end-of-chap-
Expanded Homework
ter homework material for all chapters. We have partnered again with Becker CPA
Material
Review to include multiple choice problems from their CPA exam preparation
materials. These problems, which are included in all 26 chapters, are labeled with
the Becker logo. Additionally, each chapter includes new or revised Discussion
Questions and Problems that instructors can use in class to generate discussion
about important topics addressed in each chapter. These problems are high-
lighted by an “in-class” discussion icon in the margin next to the related home-
work problem. Each chapter also identifies homework problems that require
students to research standards and other material using the Internet. While
many of these research problems expose students to standards, such as those on
the PCAOB website, other problems require students to examine recently issued
financial statements or other corporate filings or they expose students to best
practices thought papers as part of the assignment. Sample problems, assignable
in MyAccountingLab, provide an introduction to the CPA Exam format and an
opportunity for early practice with CPA exam-style questions.
The annual report for the Hillsburg Hardware Company is included as an insert to
Hillsburg Hardware
the text. Financial statements and other information included in the annual report are
Annual Report
used in examples throughout the text to illustrate chapter concepts. The annual report
also includes management’s report on internal control as required by the Sarbanes–
Oxley Act Section 404a and the auditor’s report required by Section 404b, consistent
with PCAOB auditing standards.
The Pinnacle Manufacturing integrated case is based on a large, multi-division com- Pinnacle
pany. The case has been revised based on new financial statement data, and it consists Manufacturing
of seven parts distributed at the end of each respectively relevant chapter. Each part Integrated Case
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 understanding of how the parts of the
audit are integrated by the audit process.
INTEGRATED CASE APPLICATION —

PINNACLE MANUFACTURING: PART I
8-39 (OBJECTIVES 8-3, 8-4)
Introduction
This case study is presented in seven parts. Each part deals largely with the material in the
chapter to which that part relates. However, the parts are connected in such a way that in
completing all seven, you will gain a better understanding of how the parts of the audit are
interrelated and integrated by the audit process. The parts of this case appear in the following
textbook chapters:
• Part I—Perform analytical procedures for different phases of the audit, Chapter 8.
• Part II—Understand factors influencing risks and the relationship of risks to audit
evidence, Chapter 9.
• Part III—Conduct fraud brainstorming and assess fraud risks, Chapter 10.
• Part IV—Understand internal control and assess control risk for the acquisition and
payment cycle, Chapter 12.
• Part V—Design tests of controls and substantive tests of transactions, Chapter 14.
• Part VI—Determine sample sizes using audit sampling and evaluate results,
Chapter 15.
• Part VII—Design, perform, and evaluate results for tests of details of balances,
Chapter 16.
SOLVING TEACHING AND LEARNING CHALLENGES

Auditing and Assurance Services: An Integrated Approach is an introduction to auditing and
Integrated Approach
other assurance services. It is intended for either a one-quarter or one-semester course
for Risk Assessment
at the undergraduate or graduate level. This book is also appropriate for introductory
and Audit Decision
professional development courses for CPA firms, internal auditors, and government
Making
auditors.
PREFACE xxi
As the title of this book reflects, our purpose is to integrate the most important
internationally recognized concepts of auditing in a logical manner to assist stu-
dents in understanding audit decision making and evidence accumulation in today’s
complex, global auditing environment. For example, developments related to issues
affecting auditing in a global and economically volatile environment are described
throughout the book and are emphasized in selected mid-chapter vignettes and
homework problems. Key concepts related to risk assessment as emphasized in stan-
dards issued by the Auditing Standards Board (ASB), the International Auditing and
Assurance Standards Board (IAASB), and the Public Company Accounting Oversight
Board (PCAOB), including emphasis on significant risks, are integrated into all of the
planning chapters, as well as each chapter dealing with a particular transaction cycle
and related accounts.
Our coverage of internal control is related to tests of controls and substantive
tests of transactions that are performed in a financial statement audit and an inte-
grated audit of financial statements and internal control over financial reporting,
with an emphasis on the requirements of PCAOB auditing standards. Tests of con-
trols and substantive tests of transactions are, in turn, related to the tests of details
of financial statement balances for the area. Audit sampling is applied to the eval-
uation of audit evidence rather than treated as a separate topic. Risk assessment,
technology, fraud, and auditing of internal control issues are integrated throughout
the chapters.
We believe that the most fundamental concepts in auditing concern deter-
mining the nature and amount of evidence the auditor should gather after con-
sidering the unique circumstances of each engagement. If students of auditing
understand the objectives to be accomplished in a given audit area, the risks
related to 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.
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-
world settings. The collective experience of the author team in the practice of audit-
ing is extensive. We have all worked in the auditing profession involving both large
international audit firms and regional firms. Members of our author team have taught
extensively in continuing education for either large international or small CPA firms
and have been involved in standards setting activities of the Auditing Standards Board
and the PCAOB. One author served over seven years as one of the board members of
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
These experiences provide unique perspectives about the integration of auditing con-
cepts in real-world settings.
TABLE OF CONTENTS OVERVIEW

The text is divided into six parts. The chapters are relatively brief and designed to be
easily read and comprehended by students.
Part 1, The Auditing Profession (Chapters 1–5) The book begins with
an opening vignette, featuring a Big 4 public accounting firm’s assurance report
contained in the Corporate Sustainability Report issued by United Parcel Service (UPS),
to help students see the increasingly important role of auditors in providing assur-
ance on a broad range of information important to key stakeholders. Chapter 1 intro-
duces key provisions of the Sarbanes–Oxley Act, including the creation of the PCAOB
xxii PREFACE
and Section 404 internal control reporting requirements. Chapter 2 covers the CPA
profession, with particular emphasis on the standards setting responsibilities of the
International Auditing and Assurance Standards Board (IAASB) and the PCAOB and
how those responsibilities differ from those of the AICPA Auditing Standards Board
(ASB). Chapter 3 provides a detailed discussion of the newly revised audit reports
issued under AICPA and PCAOB standards, including communications in the audit
report about critical audit matters or key audit matters. Chapter 3 also includes a sepa-
rate section on the report on internal control over financial reporting for an acceler-
ated filer public company. The chapter also emphasizes conditions affecting the type
of report the auditor must issue and the type of audit report applicable to each con-
dition under varying levels of materiality. Chapter 4 explains ethical dilemmas, pro-
fessional ethics, and independence, and it features the recently revised AICPA Code
of Professional Conduct. Chapter 5 ends this part with an investigation of auditors’ legal
liability.
Part 2, The Audit Process (Chapters 6–13) The first two of these chapters
deal with auditor and management responsibilities, professional skepticism, a pro-
fessional judgment framework for auditor decision-making, audit objectives, general
concepts of evidence accumulation, and audit documentation, including the manage-
ment assertions and evidence concepts in the risk assessment standards. Chapter 7
includes extensive coverage of the growing use of audit data analytics (ADAs) and
provides best practice guidance to help auditors prepare data for analysis. Chapter 8
deals with planning the engagement, including understanding the company’s busi-
ness and its industry as part of the auditor’s risk assessment procedures, using analyti-
cal procedures as an audit tool, and making preliminary judgments about materiality.
Chapter 9 provides expanded coverage of the auditor’s performance of risk assess-
ment procedures used to assess the risk of material misstatement due to fraud or
error and how the auditor responds to risks of significant misstatement with further
audit procedures. Fraud auditing is the focus of Chapter 10, which builds upon risk
assessment concepts covered in the previous chapter to illustrate how risk assess-
ment includes the assessment of fraud risk. The chapter also includes specific exam-
ples of fraud and discusses warning signs and procedures performed in response to
heightened fraud risk. Chapter 11 outlines the key components of an effective sys-
tem of internal controls over financial reporting, consistent with the 2013 revision of
COSO’s Internal Control—Integrated Framework. Because most internal control systems
are heavily dependent on information technologies, this chapter integrates coverage
of IT general controls and application controls. Chapter 12 shows how effective inter-
nal controls can reduce planned audit evidence in the audit of financial statements,
and it outlines procedures auditors perform as tests of those controls to support a low
control risk assessment. The chapter also describes how auditors of accelerated filer
public companies integrate evidence to provide a basis for their report on the effec-
tiveness of internal control over financial reporting with the assessment of control
risk in the financial statement audit. Chapter 13 summarizes Chapters 6 through 12
and integrates them with the remainder of the text. Several of these chapters include
Data Analytics callout boxes that highlight how auditors are incorporating ADAs in
all aspects of the audit.
Part 3, Application of the Audit Process to the Sales and Collection
Cycle (Chapters 14–17) These chapters apply the concepts from Part 2 to the audit
of sales, cash receipts, and the related income statement and balance sheet accounts.
The appropriate audit procedures for accounts in the sales and collection cycle are
related to internal control and audit objectives for tests of controls, substantive tests of
transactions, and tests of details of balances in the context of both the audit of finan-
cial statements and the audit of internal control over financial reporting.
PREFACE xxiii
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“It was a close shave, girl,” he said, looking at the avenger, whom he
now encountered for the first time. “I owe the preservation of my life
to the fact that you fired downward; had I been on a level with you
there were no need of my talking now.”
“No,” answered the She-wolf. “I would have sworn that you were an
Indian—Wacomet.”
“You are not the first person who has recognized Wacomet in me
within the last twenty-four hours, and I had better counterfeit another
red gentleman than he. But, girl, we must seek shelter; there may be
sharp eyes nearing us, and then here’s one who needs rest, to live.”
As he finished, the spy glanced at the Briton, and a minute later the
boat was moored to the bank.
It was no child’s play for the quartette, though Effie could lend but
little assistance, to bear the helpless major up the loose and ragged
rocks to Nanette’s cave home. But the Herculean task was bravely
undertaken and accomplished, and the wounded man found himself
almost buried in a pile of soft skins, that seemed to him a bed of
down.
Then his wounds were more carefully examined, and found to be of
a less serious nature than was at first supposed; but still he was far
from safety. The irritation caused by the journey up the rocks might
speedily prove fatal, and terminate a life not without guilt.
The day passed quickly to the inmates of the cave, and when night
came again, Mark Morgan announced his intention of carrying out
the wishes of his commander before dawn—viz: to enter the Indian
village and ascertain the numbers, etc., of the red-men and their
white allies who were to meet Wayne on the banks of the Maumee.
He knew almost to a certainty that the conflict would take place near
Nanette’s cave, and he resolved to leave Effie under the protection
of the young avenger, until he returned from the American forces.
She would be safer there than while being conducted through
forests, swarming with red and white foes.
The young spy now doffed the dress peculiar to Wacomet, which he
had worn, and adopted that of an Ottawa sub-chief, in which he
would be more likely to carry out his plans satisfactorily, both to
himself and Mad Anthony.
Nanette resolved to accompany the scout to the suburbs of the
“town,” and there await his return, leaving Effie and the Briton under
the watchful eye of Kenowatha.
While the boy—for boy Kenowatha may well be called—inwardly
chafed at being left to play an inactive part in the red drama that was
being enacted, he submitted with good grace when Nanette told him
that soon he should tread with her the path of vengeance, from dawn
till dawn.
Disguised as an Indian girl, yet bearing her rifle, the young She-wolf
—as the Girl Avenger had been styled by the savages—left the cave
with the scout, and, after a rapid walk of two hours, parted with him
on the suburbs of the Ottawa village, he promising to return against
midnight.
The girl had chosen a position a short distance from the river, and
within thirty feet of Turkey-foot’s lodge, the entrance of which she
faced.
The curtains of skins that formed the door were raised, thus
exposing the well-lighted interior of the spacious wigwam to the girl.
Presently six dark figures, gliding as noiseless as serpents over the
meadow, passed Nanette and entered the lodge.
After awhile a solitary figure, which she recognized as Joe Girty,
approached and walked among the warriors. Then followed the
drawing of the totems, and when the face of Stomah, the red artist,
was revealed to the avenger, her rifle flew to her shoulder, and,
before the gust of revenge left the girl, Stomah was ebbing out his
life-blood, as the reader has seen, over the totems. Stomah had paid
the penalty he had incurred upon a certain stormy November night,
years prior to the inauguration of our romance.
After the fatal shot, the avenger crept nearer the bank of the stream
and noiselessly reloaded her rifle. Then gliding back she listened to
the oath of the Death League, and saw its members leave the
Ottawa’s lodge.
She knew that she would not be followed that night, for Turkey-foot
had said as much, and suddenly, while she waited for the spy’s
return, Joe Girty’s whoop, indicating an important capture, rent the
air.
The cry seemed to have alarmed the entire village, for the lodges
near her poured forth their human contents, that hurried toward the
center of the “town.” With almost throbless heart, and rifle at half-
cock, the disguised avenger darted forward with natural caution, and
presently her worst fears were confirmed.
A multitude of torches illuminated a large space, that might be
termed a well-defined square, and around one man, secure in the
grip of the renegade, howled fully four hundred mad representatives
of six red nations.
Eager to witness what would follow, and confident of the
trustworthiness of her disguise, the Indian’s enemy placed her gun
against a wigwam and boldly joined the assembly.
In a few words Girty described the spy’s capture, and calmly Mark
Morgan awaited his doom.
“To the stake at once!” cried the loud voice of Wacomet, who saw in
the young scout the accepted lover of the girl he admired. “At once
to the tree! and we’ll send the white dog’s ashes to his master.”
This was greeted with shouts of approval, which still echoed down
the Maumee, when a pale-face sprung from the crowd and paused
before the prisoner.
It was Mitre St. Pierre!
“Mark Morgan,” he shrieked, with flashing eyes, as his bony fingers
closed on the spy’s throat, “where’s my gal? Tell me where she is
this minute, or, by the God that created us I’ll scatter your brains over
these braves.”
“Ye’ve axed the chap a question which he can’t answer while you
continner to choke his wind off,” said Girty, clutching the exasperated
trader’s arm. “Take yer fingers away, an’ we’ll see what he sez to yer
question.”
Sullenly the Frenchman complied, for he saw Girty’s hand touch the
ornamented hilt of a huge Spanish dirk that glistened in his girdle.
“Now answer my question, white dog!” he cried, stepping a pace
from the prisoner, who eyed him with something of a look of triumph
mingled with defiance. “Where’s Effie—my gal!”
“Where I left her, Mitre St. Pierre!”
The scout’s answer drove a yell of rage from the trader’s throat; he
shot forward, and before Joe Girty could interpose his hand, again
griped Mark’s throat, and a pistol-barrel glittered in the starlight.
There was murder in St. Pierre’s eyes.
To prevent the deed, several braves and Simon Girty darted forward;
but their assistance was not needed for the White Ottawa had
knocked the weapon from the Frenchman’s hand, and hurled its
frenzied owner to the earth. And when he rose again, looks told him
that his personal safety depended on quietude.
“Now what shall we do with the spy?” demanded Joe Girty.
A majority of the Indians cried aloud for immediate execution by the
terrible ordeal of fire; but the whites, exclusive of Joe Girty, overruled
them.
“Wait until the braves return with May and M’Lellan,” said Captain
McKee, addressing the savages. “Our men are sure to catch the two
spies who were prowling around Fort Miami, and when they return
we’ll burn all together.”
This speech was seconded by Simon Girty, Elliott and others, and
Nanette saw the spy dragged to a strong log cabin in the center of
the village, there to await the capture of May and M’Lellan, two
brother scouts, upon whose trail a band of savages had been for
several days, and whose capture, by the sanguine enemies of
Wayne, was regarded certain.
The crowd that accompanied Mark Morgan to the prison was
immense, and the cries that soared starward proclaimed the true
wishes of the Indians.
“I’ll wring her whereabouts from you yet,” Nanette heard Mitre St.
Pierre howl, “and if you give me any more such answers as you did
awhile ago I’ll tear your heart out and cram it into your mouth.”
The spy said nothing, but smiled faintly at the Frenchman, which
exasperated him the more.
All at once Nanette began to force herself through the crowd toward
the scout, and at last she found herself at his side.
“To-morrow night!” she whispered in his ears, while the crowd
greeted an outburst of anger from St. Pierre with hideous cries.
“We’ll come for you then—Kenowatha and I. They won’t catch May
and M’Lellan.”
He did not betray the avenger’s presence, and when the door closed
on him, and a triple guard was thrown around the cabin, the young
She-wolf hurried toward her home in the rocks, which she reached
an hour or more before dawn.
After telling Effie that her lover was on his journey to Wayne—for she
did not wish to inform the girl of the scout’s peril, she drew
Kenowatha aside and communicated the true state of affairs.
“I told him that we would come to-morrow night,” she said.
“We will come!” cried Kenowatha, eager for action. “We will enter the
village, and if any red-men cross our paths we’ll mark them to the
terror of their brothers. Kai Ja Manitou shall look down upon a new
mark—soon to be as terrible as the bloody half-moon. I have chosen
my mark, Nanette—a cross!”
“Oh, may the cross become as terrible as the crescent!” said
Nanette.
“It shall! it shall!” and Kenowatha’s hand stole to Nanette’s, and then
they returned to the fire.
When another day had faded, the two avengers glided from the
cavern, by an entrance seldom used, and started toward the Ottawa
village—intent upon the rescue of Wayne’s intrepid spy.
Effie St. Pierre, than whom woman never possessed a braver heart,
was content to remain with the wounded major until their return.
The two avengers fell confident of crowning their extremely
hazardous enterprise with success; but could they have foreseen the
events which transpired in the cave before dawn, it is doubtful
whether they would have went forth.
CHAPTER IX.
THE DEATH LEAGUE AT WORK.
A trio of phantom figures gliding cautiously up iron-gray rocks,
wearing a ghastly hue in the dim light of the stars. Now and then
they pause in the shade of a crag, and listen with upturned faces.
But, not a sound comes to their ears; the night overhead is as silent
as that which sleeps upon the bosom of the stream a hundred feet
below.
At last, when within perhaps thirty feet of the top of the cliff, they halt
at the mouth of a cave which seems to nestle far within the rocks,
and whose gloomy aspect, now relieved by the song of a nightingale
perched over the aperture, is as foreboding as such a spot can well
be.
Now the trio place their heads together, and this is what their lips
say:
“Who shall lead the way?”
The question is quickly answered.
“Wacomet.”
“It is well,” was the whispered answer. “Let Wacomet lead the way
into the She-wolf’s den, and Leather-lips and the Speckled Snake
will crawl at his heels.”
“Wacomet is sure that we have found the She-wolf’s lair, and our
brothers will do nothing but frighten lizards, owls and bats from their
holes. The red-man’s Terror, dreaming not of a foe, sleeps beside
the White Fox, and they will wake in the Ottawa’s arms.”
Again, but with Wacomet in the van, the trio move forward. The
Death League was at work.
Below the trio whom we have seen enter the Girl Avenger’s home,
the remainder of the band, headed by Joe Girty and Turkey-foot,
were exploring other cavernous openings, leading inward from the
cliff, for, to a certainty, Nanette’s cave was not known to her
enemies. Time and again she had been pursued by the Indians, but
she had in the end eluded them by darting down the precipice, and
disappearing in one of the openings I have described.
The place of Stomah had been filled by the bloodthirsty Speckled
Snake, one of the braves who accompanied Wacomet, and a savage
who had lost three brothers by the delicate hand of the girl demon.
He entered the League with a zest born of the grossest revenge, and
took the terrible oath with a vindictiveness that sent a shudder to his
co-swearers’ hearts.
The low stone roof of the passage in which the trio found themselves
compelled them to crawl forward, slowly groping their way like the
blind. Every now and then Wacomet would halt, and the three would
listen intently for several minutes, and, hearing nothing, glide forward
again.
Not a word was uttered by the trio, for the worn surface of the ground
over which they crawled told them that the cave at the termination of
the labyrinthine corridor was or had been inhabited.
All at once, as Wacomet groped his way around a gigantic rock,
which lay in the passage, the murmur of voices brought the Ottawa
to a sudden halt.
He had recognized a tone which had sent a thrill to his heart.
Wacomet knew all regarding the tragedy beneath the cottonwood—
he had listened to the narrative from the lips of Mitre St. Pierre,
scarce six hours before, and he had wished, from the depths of his
heart, that he might get possession of the girl his passions yearned
to possess. Then, and the Ottawa’s heart throbbed exultingly at the
thought, the trader would see her no more, until she had become his
pale-faced squaw—his slave. Ah! he knew a spot along the very
stream that sung its way to the Miami of the Lake, far below them,
which no feet save but one other’s than his had ever pressed—a
spot as difficult to find as the Holy Grail or the heart of Byron. Yes, he
rejoiced in the knowledge of such a spot as this, and thither, yet that
night, he would convey the owner of the dulcet tones he had first and
was still listening to, while he crouched beside the loose rock.
When Leather-lips and Speckled Snake reached Wacomet’s side,
and before they could hear the murmurs far ahead, the young
Ottawa turned suddenly upon them, and in low tones commanded
them to retrace their reptatory movements.
Wondering, yet not daring to seek by questions the cause the
strange command, they obeyed, and when they had reached an
acute angle, lately passed, Wacomet, full of plots and artifices,
spoke:
“Not far ahead,” he said, in the lowest of whispers, while the trio’s
heads touched in the almost palpable gloom, “is the She-wolf’s den;
but other animals surround her.”
A grunt of surprise escaped the listeners’ lips.
“While Leather-lips and Speckled Snake tarried behind, Wacomet
heard the voice of a pale-face for whose scalp Blue-Jacket would
give his own—Wells, the Black Snake’s big spy. And not only does
he sit at the She-wolf’s fire, but with him sit the two spies for whom
our braves now hunt.”
The two red auditors uttered ejaculations of astonishment that told
how welcome the intelligence was to them.
“Then let us glide forward and spring upon the white snakes,” said
Leather-lips, to whom fear was a stranger. “They watch not for the
red-man to-night, and when the Black Snake crawls down the
Maumee, we’ll throw their scalps into his teeth.”
These words found favor in the eyes of Speckled Snake, and when
the sorcerer finished, the twain drew their knives and made a motion
to resume their work; but Wacomet’s hand gently checked their
progress.
“We are not strong enough,” he said. “Think! the She-wolf,
Kenowatha, and the three pale snakes. There are but three of us—
Leather-lips, Speckled Snake and Wacomet. They will fight—fight to
the door of Manitou’s lodge. They possess the little guns (i. e.,
pistols); we the long shooting-irons and our knives. Brothers, there
must be more of us—the other members of our dread band must be
with us, and then—then, we keep the words we have given to the
Great Spirit. Go and seek them—our brothers. Wacomet will squat
here like the toad until you return, with other tomahawks that glitter in
girdles not our own. Go, hasten, before the darkness flies. Our
brothers will not be hard to find.”
While the two chiefs would fain have signalized themselves by a
conflict with the hated spies whom they believed to be in the cave,
they concluded to obey Wacomet, a chief superior to them in
appointment; so they glided away, and the Ottawa was left alone in
the darkness.
By adroit lying he had gained his ends, and prepared to carry his
plans into execution. The wily Ottawa knew that the three spies were
not in the cave, which also he knew to be tenanted by but two
persons—Effie St. Pierre and a man whose voice he could not
recognize, though he felt certain that he had heard it before. He
knew, too, that his brother chiefs would experience trouble in beating
up the other members of the Death League, and prided himself that
ere they could return to the cave with the help sent for, he would be
far on his journey to the “secret spot,” with the young white girl.
Again the Ottawa crept forward, and at length the turning of an angle
brought him in full view of the inmates of the cave.
In the center of the underground apartment a bright fire leaped
ceilingward, and bathed the entire chamber in a ruddy light. Upon a
couch of skins lay the form of a man, whose face the Ottawa at once
recognized, and an ejaculation of surprise and triumph, entirely
unexpected, bubbled to his lips.
“Not only will Wacomet take the girl,” muttered the Indian, as he
shrunk from the glare of the fire, “but he will take the skins, rifles and
gold-pieces, that the great red-coat at the fort offers for the pale-
face, who struck his young soldier. Ha! how came the pale soldier
here? for the trader shot him, and he fell into the stream.”
Then the lips grew still, and for several minutes the Ottawa watched
the inmates of the cave, himself as motionless as a statue. Frequent
companionship with the whites had made Wacomet, to a great
extent, a master of the English language, and every word that fell
from the lips of those whom he watched was intelligible to him. Effie
St. Pierre sat on the floor of the cave, near the British major’s couch,
braiding the wealth of hair which she had drawn over her shoulders.
With upturned face, Rudolph Runnion was breathing into her ears
the story of his twice-told passion, to which the girl was listening
calmly and in silence. Still there lurked around her lips a sneer, for
the tale to which she was listening; no doubt her mind flitted back to
the scene beneath the cottonwood, and her narrow escape from the
brutal lusts of the minion of an imbecile king who spoke.
By and by Wacomet ceased to listen to the conversation which had
informed him that Major Runnion’s wound was healing rapidly, and
turned his dark orbs upon the beautiful girl.
Yes, yes, she should be his; of her three lovers—two white, the third
red—he should be successful, and unable to restrain himself longer,
he crept forward.
Unsuspicious of the red serpent and wolf combined that approached
them, the twain remained motionless until—when Wacomet was very
near the mouth of the corridor—Effie suddenly darted to her feet,
and faced the intruder. Cursing in his bitter tongue, the alarm which
his foot had sprung, the Ottawa darted forward with a tiger-like
spring, and a moment later the cave was filled with smoke and a
deafening report.
A cry, half-shriek, half-groan, burst from Wacomet’s lips, and he
staggered like a drunken man, then sunk upon his knees.
Still clutching the smoking double-barreled pistol, Effie St. Pierre
waited for the smoke to clear away that she might witness the result
of her shot. She knew that it had not been without effect, for she had
seen the savage sink to the stones; but yet he might not be dead—
only wounded, and, like the bear, a greater terror when wounded
than before.
Despite his wounds the pistol-shot had forced Rudolph Runnion from
his couch, and now he looked around for something with which to
defend himself, for he believed that other braves had followed the
stricken chief into the cave. And for him to be taken prisoner by the
red-men now, was death, not at their hands, but by those of his
countrymen—his comrades in arms.
The smoke had not begun to clear away when a form, bleeding from
a frightful wound in the cheek, rushed through the thick volumes, and
knocked the pistol from Effie’s hand, before she could bring it to bear
upon him, so unexpected was the wounded Indian’s recovery.
A shriek escaped her when she found herself in the grasp of the
devil, who dashed the Briton to earth with a blow with his tomahawk,
as he advanced, for his own as well as the girl’s safety.
“Wacomet’s squaw at last!” hissed the savage, a brutal expression of
long-sought triumph lighting up his swarthy face. “The White Star is
Wacomet’s now! He thought to find She-wolf and White Fox here,
but ah! he has discovered better prizes than they. Where they
gone?”
Effie returned no answer which might furnish the savages with a clue
to the whereabouts of her young friends, and cause them to fall into
the hands of the red avengers.
The Ottawa did not press the question, but quickly bound the girl’s
hands, the while gloating over his triumph, and taunting her with the
poor result of her shot.
“When next I shoot I will take better aim,” said Effie, looking into the
Indian’s eyes, “and Wacomet must watch the white girl close that she
gets not another shot.”
“When she is Wacomet’s squaw she will not think of using the little
gun,” said the red victor, turning to bind Runnion’s hands. “Yes, in the
hidden hole, when the White Star sings songs to Wacomet’s
pappooses, she will forget how to use the little guns, and build the
Ottawa’s fire when the sun comes over the hill.”
In a short space of time Rudolph Runnion’s arms were pinioned at
his side, and a blow drew him to his feet. His face wore the ghastly
pallor that belongs to the dead, for while securing him, the Indian
had told him that a price was set upon his head, and that he
intended to deliver him up to the insatiate hounds of justice. For late
investigation had proved to the British at Fort Miami that St. Pierre’s
shot had not immediately proved fatal, if at all, and it was generally
believed that the slayer of Firman Campbell yet lived.
While Wacomet bound the Briton, Effie St. Pierre had obtained a
piece of keil, and, as well as her pinioned hands would permit, traced
these words upon the gray limestone wall of the cave:
“We are the prisoners of Wacomet the Ottawa, destined
for a hidden place somewhere.
Effie.”
The chief did not notice the “handwriting on the wall,” when he
turned to the girl, and pointed to the corridor with his tomahawk.
“We go to Wacomet’s home under the ground,” he said. “Come!”
The prisoners had stepped forward, when the Ottawa glanced
overhead and espied the long string of scalps taken from his red
brethren by the hands of the Terror of the Maumee. Beside them
hung rifles, tomahawks, and richly ornamented wampums—the
trophies of the Girl Avenger’s battles. A cry of indignation burst from
his lips, when his eye fell upon all these, and a minute later they
composed a confused heap at his feet. He caught up the wampums,
and threw them on the fire, the scalps quickly followed, and the rifles
and other weapons of Indian warfare crowned the crackling heap.
“Won’t the She-wolf howl when she returns to her den!” he cried,
with fiendish anticipation, as he gazed upon the work of his
revengeful hands.
Effie St. Pierre and Rudolph Runnion looked upon the Indian’s
revenge with different thoughts. They knew that the red tribes would
suffer terribly for that night’s work—that the Girl Avenger would not
rest until every dried scalp was replaced by a fresh one.
Suddenly Wacomet turned toward the corridor again, and presently
he was conducting his prisoners down the gloomy passage. He
forced them near his half-naked body by a rope of sinews attached
to their wrists, and secured to his girdle, and accompanied his
commands for silence by threats of a death too horrible to be
mentioned here.
At length the cool night-air fanned the faces of the trio, and looking
over Wacomet’s broad shoulders Effie saw the scintillating celestial
worlds. But a moment later the current of air was interrupted, and
Wacomet forced his prisoners into a natural niche before which he
had paused. In the deeper gloom of the niche the trio remained as
motionless as rocks, and presently they felt six figures,
undistinguishable in the blackness, move past, like giant animals. No
noise accompanied the new-comers to indicate their identity, but
Wacomet knew each one as he passed. They were the members of
the Death League, and Joe Girty crept at their head.
When the sounds died away in the gloomy distance, Wacomet drew
a breath of relief and again glided toward the opening. Soon the
three stood upon the flat rock just beyond the corridor, and faster
than was requisite for safety the red chief hurried the two whites
down the rocks.
In safety, however, the base of the cliff was reached, and along the
bank, toward the head of the little stream, the Indian bounded,
compelling his captives to keep pace with him.
He would seek the hidden place with his captives, and then return to
the Death League with a mouth full of lies.
Already he had planned a deceptive story, and his wounded cheek
would lend confirmation to his words.
Wacomet was a wily dog.
CHAPTER X.
THE RESCUE AND WHAT FOLLOWED.
The night was not far advanced when Kenowatha and the Girl
Avenger reached the vicinity of the Indian village, and concealed
themselves in the tall weeds that flourished there on the banks of the
Maumee. Beside the flambeaus, they had borne disguises down
from the cave, which they now proceeded to don. Kenowatha had
laid aside the gray fox-tails that had formed a portion of his fantastic
head-dress, divested himself of all the characteristic ornaments that
were wont to distinguish him as the renegade’s young protege, and
disguised himself as a common Indian boy—one of the many little
red vagabonds that run about the Indian villages deep in mischief,
long after their staider parents had yielded to the wooings of the
somnolent god. He realized the peril attached to the expedition he
had undertaken, he knew that a decree of outlawry had been passed
against him, that the common warrior who took his scalp should
forthwith be promoted to a full chief, and lead three hundred braves
against the Black Snake, who at that hour was marching from
Defiance to Victory.
Never before had he inaugurated action so perilous as the present
one, and it seemed the pinnacle of rashness for two children—for in
stature and years the avengers might be styled thus—to attempt to
rescue a white spy from the midst of a tribe that could muster five
thousand warriors.
The young twain felt no fear, and prepared for work as calmly as
though getting ready for a great festival. They resolved before
entering the woods to submit to no captivity.
“Better,” said Nanette, “to fall striking dead those who spared not our
own parents, than to undergo the terrible tortures inflicted by the
Indians and their scarlet queen.”
“Ay, ay,” returned Kenowatha, “we will not fall into their hands alive. If
they get us at all, it will be bereft of life. But they will not capture us,
girl. As yet I have not struck a single blow of vengeance. I am not to
die thus, no! no! It is decreed by high Heaven that my chosen mark
—the red cross—shall become as terrible as your bloody crescent.”
When the twain rejoined each other in the woods—for they had
separated to don their disguises—a silent pressure of hands,
followed, accompanied by a look that told how inseparably their fates
were linked together, by the strangest circumstances that ever
existed in the untraveled forest wilds.
Their guns were concealed in the grass, and armed but with their
knives, concealed but ready for use, about their persons, they stood
erect, listened a moment, then marched boldly forward. The most
careful observer would have proclaimed the couple what they
seemed to be—what they counterfeited—an Indian boy and girl—for
though they kept together they roamed about the village with a
nonchalance that would deceive the most suspicious. Still, as a
precautionary measure, they kept in the shadows as much as
possible, yet did not shrink from walking into the glare of the ground
fires whenever necessary. No suspicion seemed to attach itself to
the young would-be-rescuers, and the lazy savages little dreamed
that their deadliest foes were in their very midst.
By-and-by in their seemingly aimless saunterings they approached
the prison cabin wherein a noble man waited for them—waited
behind strong logs and a guard of stalwart braves, whose eyes noted
every thing that came near in the fitful starlight.
The avengers were prepared to find the prison strongly guarded, and
knew that to rescue the young spy they must have recourse to a
strategy seldom if ever used in red villages. The strategy, as perilous
and startling in its character as it was unique, found birth in the Girl
Avenger’s brain, and Kenowatha joined in the scheme. Crouching in
the gloomy shadow of a lodge, the twain remained silent until the
opaque clouds that crept over the western horizon had completely
clothed the sky in blackness, and vailed the shining faces of the
stars.
The prison-hut was built of strong beech logs, dove-tailed, after the
usual mode of constructing cabins in the West, and the roof was
composed of three layers of bark, each two inches thick, and
secured by strong wooden pins. The hut had been built for the
express purpose of securing prisoners, under the eye of the Girty
brothers, and other renegades, and many a noble red and white
captive had marched, in the noon of life, from its gloomy recesses to
the fatal stake, beneath a pellucid sky. The inmates of the prison-hut
were secured to a stake in the center of the structure, thus
preventing them from self-escape.
Kenowatha and the Girl Avenger crept to the rear of the hut without
attracting the attention of the guards who stood at the door, and with
the noiseless and ghostly movements of the lizard, as it ascends the
slimy wall, Nanette began to ascend the cabin to its roof. Breathless,
and with drawn knife Kenowatha waited below, ready to give the
signal of danger or drive the keen blade into the heart of the first red-
man who approached.
The rough exterior of the logs aided the young She-wolf in her
perilous undertaking, and presently she found herself grasping the
bark coverings of the hut.
For a moment she paused, but no signal or sound coming up from
below, she went to work. Bracing herself against the jutting logs at
the corner of the structure, her hands, by dint of toil, withdrew
several of the wooden pins, which she thrust into her bosom, and a
strip of bark was laid aside. Another and another noiselessly followed
it, and then, like a cat, the girl dropped from the roof into the interior
of the hut. The blackness of palpable darkness surrounded her, and
in the lowest of whispers she whispered a name:
“Mark Morgan!”
A noise—no voice—guided her to the captive, and a moment later
her knife noiselessly severed his bonds.
“I thought you never were coming,” whispered the young spy; “but
better late than never, you know, girl. The guards are dead? You
found the door too well secured for your little hands, eh?”
“The guards are as watchful as ever,” was the response. “We’ve
stolen a march on them—Kenowatha and I.”
Mark Morgan could scarcely repress an exclamation of astonishment
at the daring feat.
“Come!” whispered the Girl Avenger, “our work is but half-done. You
are not free yet. Go up first; I’ll follow.”
In silence Morgan groped his way to the corner, and clambered
toward the opening in the rock. While he was performing this action,
Nanette crept back to the post, upon whose worn surface she hastily
cut her dreaded crescent which she reddened with her own blood,
drawn with the point of her knife.
“They will know who’s been here when they open the door,” she
murmured, as she completed her work. “In my native country—La
Belle France—visiting people leave their card, and this is mine.
They’ve seen it before,” she added, with an inaudible chuckle, “for I
am a frequent, though not very welcome, visitor in these parts.”
The rescued spy reached the ground in safety; but as Nanette was
about to descend, a signal of danger came up from Kenowatha. She
paused on the roof, and awaited developments. Vainly she tried to
pierce the gloom, as she listened attentively. Suddenly, just the
slightest noise floated up to her, and then followed Kenowatha’s
signal for her to recommence her descent. The danger was passed.
A moment later, she stood on terra firma, and Kenowatha grasped
her hand.
“Stoop!” he whispered in her ear, while he drew the little stained
hand nearer the earth.
She obeyed.
Lower and lower the boy thrust her hand, until it touched a man’s
face, still warm, and covered with what she well knew to be blood.
Kenowatha allowed the girl’s hand to rest on the dead face for a
moment: then he took her finger and ran it through two deep gashes
on the bloody forehead, which formed his red mark—the cross.
“He came from the lodges, no doubt, to assassinate our spy,”
whispered Kenowatha, proud of his work. “But his work is ended.
They who wear my cross never admire it. Let us go; the guards may
scent their brother’s gore.”
The Girl Avenger rose to her feet, and a moment later the trio were
speeding toward the hidden guns, which reached, they resumed
their journey until they paused on the banks of the Maumee several
miles below the Ottawa town.
“You may tell her all now,” said Mark Morgan, as he took his
rescuer’s hands to say farewell. “I owe you a life, and if you guard
the girl—my white flower—well, I shall owe you another. I will not be
gone long. I will meet my General marching this way, and you shall
receive his thanks for what you have done to-night. Now mind you,
watch the girl well; keep sleepless eyes on these persons—
Wacomet the trader and Rudolph Runnion. When his wound permits,
unless watched, that red-coat will attempt something desperate, for I
tell you he has sworn that Effie shall not become my bride—before
that happens he will take her life, or worse.”
“We will watch those whom you mention as we watch over our own
lives against the Death League,” said Kenowatha. “Have no fears on
that score; the first hand that is raised against the girl drops in
death.”
Again Mark Morgan wrung the hands of the hunted twain, promised
to return in a few days with Wayne, with whom they yearned to fight,
and was gone.
“Now for the She-wolf’s den,” said Kenowatha, looking into Nanette’s
face. “We have not broken our word. We told Effie that we were
going deer-hunting, and if we haven’t hunted and saved one dear, to
her, then I’ve no judgment. Won’t the girl open her eyes when we tell
her all about her lover, and won’t that red-coat wish that the red-
skins had scalped him before we found him? Yes, yes, girl, that man
must be watched. Mark was right; he’s a dog. I’ve a mind to give him
over to them who want him. I’ll warrant you that he shot young
Campbell in cool blood, for I’ve seen the very devil in his black eyes.
I tell you, girl—Nanette—I’m in for giving him up. I can get to the fort
before dawn; the English will not give me over to those who seek my
heart’s blood. I will appoint a place for a small portion of the garrison
to meet me, say, to-morrow night, and then we will deliver the
murderer over to justice.”
The White Fox’s proposition found favor in Nanette’s eyes. She felt
that Rudolph Runnion was a murderer, deserving a murderer’s
reward, and then he was the enemy of those who were her friends.
Under these circumstances she believed that they would be justified
in delivering him over to the avengers of youthful blood, and thus
spoke to Kenowatha.
They were nearer the fort now than they would be when at the
hidden home, and intent upon accomplishing the work they had
resolved upon, Kenowatha glided from his companion’s side, and a
moment later was lost in the gloom. He promised to meet her in the
cave some time during the coming day.
Freed from the renegade’s protege, the young She-wolf resumed her
journey to her home, and at length crept into the gloomy opening
from whence they had executed their exit a few hours before. She
never dreamed of the thrilling events that had transpired during her
absence, and glided along the underground corridor entirely
unsuspicious of danger. When near the cave proper, she noted a
smoldering fire ahead, and very naturally concluded that Effie and
the British criminal had fallen asleep.
On, on, she glided, and at length entered the large apartment
wrapped in demi-gloom, despite the efforts of the dying blaze to the
contrary. The walls, in which a score of natural niches or holes
remained, were shrouded in almost impenetrable gloom, while the
deathlike silence boded ill for the hunted beauty. When she crossed
the threshold, she turned to the couches; but before her eyes could
greet them, a terrific yell broke the stillness, and the niches poured
forth the members of the Death League!
For hours Joe Girty and his band had waited for the coming of the
hunted ones, nor had they darted from their concealment until they
were satisfied that Kenowatha was not with the Girl Avenger. The
bloodthirsty band hemmed her in on all sides save one, for with the

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THE AUDIT PROCESS PART

LEARNING OBJECTIVES 148

AUDIT EVIDENCE CHAPTER

LEARNING OBJECTIVES 185

LEARNING OBJECTIVES 304

INTERNAL CONTROL AND COSO CHAPTER

LEARNING OBJECTIVES 342

ASSESSING CONTROL RISK AND REPORTING CHAPTER

AUDIT SAMPLING FOR TESTS OF CONTROLS CHAPTER

AND SUBSTANTIVE TESTS OF TRANSACTIONS

COMPLETING THE TESTS IN THE SALES AND CHAPTER

COLLECTION CYCLE: ACCOUNTS RECEIVABLE

ACQUISITION AND PAYMENT CYCLE:

AUDIT OF THE PAYROLL AND CHAPTER

LEARNING OBJECTIVES 676

AUDIT OF THE INVENTORY AND CHAPTER

LEARNING OBJECTIVES 699

OTHER ASSURANCE AND PART

LEARNING OBJECTIVES 815

INTERNAL AND GOVERNMENTAL FINANCIAL CHAPTER

AUDITING AND OPERATIONAL AUDITING

The primary emphasis in this text is on the auditor’s decision-making process in a

NEW TO THIS EDITION

JA Tires Sales System Description

Process Relevant File Fields included

2 JA Tires sells various tire products Product_Master Product Number

Chapter 1 introduces the importance of considering international auditing standards

To help students connect the important auditing concepts to real-world situations,

INTEGRATED CASE APPLICATION —

SOLVING TEACHING AND LEARNING CHALLENGES

TABLE OF CONTENTS OVERVIEW

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