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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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CHAPTER XVI
THE STAMPEDE
Jones sent a messenger to his chief with word of Don Black’s threat,
and Merrick at once rode to Elk Creek to consult with the man he
had put in charge.
“Do they mean to attack you? Is that what you gathered from what
he said?” asked the chief engineer of his assistant.
“Don’t know. Prowers smoothed over what Black said. I judge he
didn’t want to go on record as having made any threats. But the last
thing the big fellow yelled at me was that we had till to-night to get
out.”
“Good of him to give you warning. What do you suggest, Jones?”
“Give me half a dozen rifles and I’ll hold the fort,” the younger man
replied, eyes gleaming. “Double the gang and let me rush the work.”
Merrick shook his head. “No, this isn’t a little private war we’re
having. Think I’ll just let you sit tight and see what happens. Prowers
isn’t likely to go far to start with.”
“Suits me, but don’t blame me if they drive us out. I’m rather looking
for a bunch of armed cowboys to descend upon us.”
“In which case you’ll enter a formal protest and retire in good order
without resistance. The law’s with us. I filed our maps and plans with
the Land Office before Black homesteaded. He obviously took up
this quarter section only to hamper us.”
“Will it delay you much?”
Justin Merrick smiled, a rather peculiar smile that suggested a
knowledge of facts not on the surface. “I don’t think so, but there’s no
reason why Prowers shouldn’t.”
“Rather tame surrender, wouldn’t it be? If you’re within your rights,
why not stand our ground and fight them off?”
“For the moral effect, you mean?”
“Yes. Isn’t it a sign of weakness for us to hoist the white flag after the
first brush?”
“That’s a point of view. We’re playing for position. Let Prowers break
the law and get in wrong. If we’re armed and looking for trouble, we
don’t come into court with clean hands ourselves. I’d rather let him
show his plan of campaign. Even though we should be driven out,
we can come back whenever we want to. He can’t keep his men
here and hold the gulch.”
“No. At least he won’t.”
The man who had fought in Flanders was not satisfied. The irrigation
company was in the right. Prowers and the group of men with him
were obstructionists, trying to hold back the progress of the country
for their own selfish ends. They were outside the law, though they
were using it as a cover. The policy to be expected of Merrick would
have been bolder, less opportunistic. Why had the chief marched his
men up the hill, like the King of France in the rhyme, only to march
them down again? This did not seem to go well with his salient,
fighting jaw.
Since it was his business to obey orders and not to ask for reasons,
Tug said no more. He understood that Merrick was holding back
something from him, and he had no desire whatever to force a
confidence.
Merrick rode back to the dam and left his subordinate in charge of
the camp. Throughout the day work went on uninterrupted. At dusk
the surveyors and ditch-diggers returned to the draw where the tents
had been set. At this point of the gorge the wall fell back and a slope
led to the rim above.
At the summit of this rise the engineer posted a sentry with orders to
fire a revolver in case of an attack. Two other guards were set, one
at each mouth of the cañon. At the expiration of four hours, these
were relieved by relays. At midnight, and again in the chill pre-dawn
hours, Jones himself made a round of the posts to see that all was
well.
He had scarcely lain down after the second tour when the crack of a
revolver sounded. Tug leaped to his feet and was drawing on a boot
before the echoes had died away.
As he ducked out from the tent flap, revolver in hand, a glance
showed him scantily clad men spilling from their sleeping quarters.
“What is it? Where are they?” some one yelled.
A light breeze was stirring. On it was borne a faint rumble as of
thunder. It persisted—seemed to be rolling nearer. The sound
deepened to a steady roar. Tug’s startled glance swept the cañon
sword cleft. Could there have been a cloudburst in the hills? The
creek bed was still dry. His eyes swung round to the saddle ridge of
the draw above him.
A living tidal wave was pouring across the rim and down the draw.
Hundreds of backs tossed up and down like the swell of a troubled
sea. Though he had never seen one before, the engineer knew that
the camp was in the path of a cattle stampede.
He shouted a warning and raced for the higher ground at the edge of
the draw. The men scattered to escape from the path of that
charging avalanche. They were in a panic of fear. If any were caught
beneath the impact of those scores of galloping hoofs, they would be
crushed to death instantly. Startled oaths and staccato shouts rang
out. An anguished yell of terror lifted itself shrilly. A running man had
stumbled and gone down.
The thud of the hoofs died away. The stampede had swept down into
the dry bed of the stream and swung to the right. It left behind it a
devastated camp. Tents had been torn down and ripped to pieces.
Cots were smashed to kindling. From the overturned chuck wagon
scattered food lay trampled into the ground by sharp feet. The
surveying instruments were broken beyond repair.
A huddled mass lay motionless in the track of the avalanche. Tug
knelt beside it and looked into the battered outline of what a few
moments earlier had been a man’s face quick with life. No second
glance was necessary to see that the spirit had passed out of the
crushed body. The engineer recognized him by the clothes. His
name was Coyle. He had been a harmless old fellow of many quips
and jests, one full of the milk of human kindness. He, too, had fought
against his weakness, a fondness for liquor that had all his life kept
him down. Now, in a moment, his smiles and his battles were both
ended.
Jones straightened the twisted body and the sprawling limbs before
he covered the face with a handkerchief. He rose and looked grimly
round at the group of appalled men whose blanched faces made a
gray semi-circle in the faint light of coming dawn. They were a rough-
and-ready lot. Most of them had seen the lives of fellow workmen
snuffed out suddenly. But this had come like a bolt from heaven.
Each of them knew that it might have been he lying there; that if the
boss had not set a watch, the stampede would have destroyed many
of them. The shock of it still chilled the heart.
“They’ve murdered poor Coyle,” the engineer said, and his voice was
a solemn accusation.
“How’s that?” asked one, startled.
“These cattle didn’t gather up there by themselves. They were
rounded up and stampeded over the crest.”
“Jake Prowers!” exclaimed a mule-skinner.
“We’ll name no names yet, boys, not till we’ve put it up to Mr.
Merrick.” The camp boss glanced up the hill. The sound of some one
running had reached his ears. “Here comes Jensen. We’ll hear what
he has to say.”
Jensen confirmed the charge of the engineer. He had heard voices,
shots, the crack of whips, and then the thundering rush of cattle. He
had fired once and fled for the safety of the rocks. The stampede
had stormed past and down the slope. But he had seen and heard
no more of the men who had been exciting the wild hill cattle to a
panic of terror. They had disappeared in the darkness.
The engineer made arrangements for carrying the body of Coyle to
the dam and sent a messenger to notify Merrick of what had taken
place. This done, he climbed to the saddle of the draw with the
intention of investigating the lay of the land where the stampede had
started. He knew that, if he were only expert enough to read it, the
testimony written there would convict those who had done this crime.
At work of this sort he was a child. He was from the East, and he
knew nothing of reading sign. Stamped in mud, with outlines clear-
cut and sharp, he would have known, of course, a pony’s tracks from
those of a steer. But unfortunately the marks imprinted on the short
brittle grass were faint and fragmentary. They told no story to Jones.
He quartered over the ground carefully, giving his whole mind to the
open page which Nature had spread before him and covered with
her handwriting. Concentration was not enough. It was written in a
language of which he had not learned the vocabulary. Reluctantly he
gave up the attempt. Sheriff Daniels was a Westerner, an old
cattleman, skilled at cutting sign. This was a problem for him to solve
if he could.
It was afternoon when the sheriff arrived. He had made one
discovery before reaching the camp. A cow had broken a leg in the
stampede and lay helpless in the bed of Elk Creek. The brand on it
was the Diamond Bar K.
“Fine business,” he commented dryly. “Clint’s enemies try to bust up
the irrigation proposition he’s interested in by stampedin’ his own
cattle down the draw here. Maybe we can find out the hombres that
rounded up a bunch of his stock yesterday. That’d help some.”
If the sheriff discovered anything from his examination of the lane
over which the stampede had swept, he did not confide in either
Jones or Merrick. Like many men who have lived much in the open,
he had a capacity for reticence. He made his observations
unhurriedly and rode away without returning to the camp.
Merrick gave his assistant orders to break camp and return to the
dam. A force was still to continue at work in the cañon, but the men
would be taken up and brought back each day.
CHAPTER XVII
HIS PICTURE IN THE PAPER
Summer had burned to autumn. The first frosts had crisped the
foliage of the quaking asps and the cottonwoods to a golden glory in
tune with the halcyon Indian summer. Faint threats of coming winter
could be read in an atmosphere grown more pale and sharp, in
coloring less rich and warm.
Betty could count the time in months now since she had sent her
salvaged tramp into the hills to help her lover wrestle with the
problems of the Sweetwater Dam project. It was still a joy to her that
she had been intuitively right about him. He was making good. He
had brains and ability and the power of initiative which marks the
strong man from the subordinate. Justin admitted this generously,
giving her credit for a keener insight than his own.
But that was not the best of it. She knew now, through Merrick, what
the vice was that had dragged him down: and from the same source
she learned that he had so far fought his campaign out to victory. Not
since the day after her father had been shot had she seen the young
man, but she wished she could send him a message of good cheer
and faith.
She thought of him a good deal. She was thinking of him this
morning as she cleaned the pantry shelves and substituted new
papers for the old. Justin had been down the evening before and had
told her of the threat Prowers had made through Don Black in case
the young engineer did not evacuate the cañon. It was in her
character to look for good rather than ill in men, but she had a
conviction that the cackling little cattleman was a sink of iniquity. He
would do evil without ruth. There was, she felt, something demoniac,
unhuman about him.
How far would he go to begin with? She did not know, but she was
glad Justin had given orders to retire from Elk Creek in case of
attack. His reasons she appreciated and approved. He was no
hothead, but a cool, hard-hitting, determined fighter. In the end he
would win, no matter what difficulties were thrown in his way. She
could not think of Justin in any way except as a success. He was the
kind of man who succeeds in whatever he undertakes.
The telephone rang. Her father, at Wild Horse, was on the line.
“There’s been trouble at the cañon,” he explained. “I’ve been talkin’
with Daniels. Merrick has sent for him. A man was killed—some one
working on the job. Haven’t heard any particulars yet. I’ll let you
know if I do.”
“Killed—on purpose, you mean?”
“Yes.”
“You didn’t hear who?”
“Daniels doesn’t know.”
Betty returned to her work very much disturbed in mind. There was
no reason for assuming that the man who had been killed was her
redeemed vagrant, but she could not get this possibility out of her
mind. He would be in the forefront of danger if there was any. She
knew him well enough for that.
She tried to get Merrick on the telephone, but the word that came
down to her from the dam was that he had ridden to Elk Creek. Did
the assistant superintendent know when he would be back? No, he
did not.
Tremulously Betty asked another question. “Have you heard, Mr.
Atchison, who the man is that was killed?”
“His name’s Coyle—a man sent out to us by an employment agency
in Denver.”
Betty leaned against the wall a moment after she had hung up the
receiver. She was greatly relieved, and in the reaction from the strain
under which she had been holding herself tautly felt oddly weak.
“Don’t be a goose!” she told herself with stinging candor. “What does
it matter to you who it was?”
But she knew it mattered a great deal. Nobody had ever stimulated
her imagination as this tramp had. Her liking for Justin was of quite
another sort. It had not in it the quality that set pulses pounding. She
would have denied to herself indignantly that she did not love him. If
not, why was she engaged to him? But her affection was a well-
ordered and not a disturbing force. This was as it should be,
according to her young philosophy. She gave herself with energy
and enthusiasm to the many activities of life. The time had not yet
come when love was for her a racing current sweeping to its goal so
powerfully that there could be no dalliance by the way.
Betty moved the dishes from the last shelf. As she started to gather
the soiled newspaper folded across the plank, her glance fell upon
the picture of a soldier in uniform. The eyes that looked into hers
were those of the man who had called himself Tug Jones.
Her breath caught as she read. The caption beneath the photograph
was, “Captain Thurston K. Hollister, awarded the Distinguished
Service Cross for Gallantry in France.” The story below mentioned
the fact that the man who had been given this recognition had
disappeared and could not be found.
The girl’s blood sang. She had known from that first day he was of
good blood, but she had not been sure that his record was worthy of
him. He had not only fought in France; he had covered himself with
glory. It was almost too good to be true.
She was on the porch to meet her father before he had swung down
from the saddle. He told her details of the affair at Elk Creek as far
as he had heard them.
Betty had cut the Hollister story out of the paper. She handed it to
her father, all but the picture folded under.
“Who is this, Daddy?”
Reed glanced at it and answered promptly. “Looks like that young
fellow Jones.”
Triumphantly she nodded. “That’s who it is. Read what it says about
him.”
The cattleman read. “Hmp!” he grunted. “An’ I called him a slacker.”
“It doesn’t matter now what you called him, Dad. But I’m awf’ly glad
he wasn’t one.”
“Some li’l’ stunt that—breakin’ up a German machine-gun nest and
sittin’ tight for two days under fire till the boys reached him.” Clint
smiled sardonically, the memory of the tongue-lashing he had given
this man still vividly with him. “I reckon I can be more kinds of a durn
fool in an hour than ’most anybody you know, Bess.”
“I’m so glad he’s making good with Justin. I just knew he was a
splendid fellow.”
“I’m so dawg-goned hot-headed. Can’t wait an’ give myself time to
cool off,” he grumbled.
“He told Justin about it. The doctors gave him a lot of morphine or
something when he was wounded and he got in the habit of using it
to relieve the pain. Before he knew it he couldn’t stop.”
“You’d think I’d learn a lick or two of sense, an’ me ’most fifty.”
“He hasn’t touched the stuff since he went up to the dam. Justin says
it must have been horrible for him. Some nights he kept walking till
morning.”
“What else was it I called him besides a slacker—after I’d beat him
up till he couldn’t stand, an’ him a sick man at that?”
Betty laughed at the way each of them, absorbed in a personal point
of view, was carrying on a one-sided conversation.
“Are you going up to Elk Creek to-day, Dad? If you are, I wish you’d
let me go along.”
“I was thinkin’ about it. Like to go, would you? All right. We might
drive and take Ruthie.”
“That’d be fine. Let’s go.”
Betty flew into the house to get ready.
CHAPTER XVIII
A HOT TRAIL
Sheriff Daniels rode across the hogback above Elk Creek to a

small ranch recently taken up by a homesteader, much to the
annoyance of Jake Prowers. He found the man in a shed that served
temporarily as a barn.
Here a cow was proudly licking a very wobbly calf.
“’Lo, Sheriff. How’re things comin’ with you? Fine an’ dandy?”
“No complaint, Howard. Had an increase in yore herd, looks like.”
“Yessir, though it didn’t look much thataway ’bout three o’clock this
mo’ning a.m.”
“Come near losing her?”
“Bet I did. Both of ’em. But you never can tell, as the old sayin’ is. I
stayed with it, an’ everything’s all right now.”
“I come across the hogback to have a chin with Black. Know whether
he’s home?” the officer asked.
“No, sir, I don’t. He passed down the road whilst I was up with old
bossie here right early.”
The sheriff complimented his humor by repeating it. “At three o’clock
this mo’ning a.m.?”
“Yessir. I figured he must be going somewheres to be settin’ off at
that time o’ day.”
“Alone, was he?”
“Why, no, I reckon there was some one with him.”
Daniels threw a leg across a feed-rack, drew out a knife from his
pocket, and began to sharpen it on the leather of his boot. “Dark as
all git out, wasn’t it? How’d you know it was Don?”
The homesteader grinned. “Every daisy in the dell knows his story
too darned well,” he parodied.
“Singin’ ‘Sweet Marie,’ was he?”
“Yep. Say, what kind of a mash would you feed her? She’s right
feverish yet, I shouldn’t wonder.”
The sheriff gave advice out of his experience before he came back
ten minutes later to a subject that interested him more.
“Don was out rounding-up cattle yesterday, wasn’t he? Seems some
one told me so.”
“Likely enough. He was away from the shack all day. Wasn’t home
by dark. I seen a light up there somewheres about nine-thirty.”
The officer rode up to the cabin Black was using. The door was
hospitably unlatched, but nobody was at home. Daniels walked in
and looked around. It was both dirty and untidy, but it told no tales of
what its occupant had been doing in the past twenty-four hours.
Daniels remounted, skirted the edge of the Government reserve, and
descended a draw which led into a small gorge almost concealed by
a grove of young quaking asps. This received its name from box
elders growing up the sides. If Black and his friends had rounded up
a bunch of cattle during the day, and wanted to keep them
unobserved until they could be stampeded into Elk Creek Cañon,
there was no handier spot to hold them than in this little gulch. The
sheriff had ridden these hills too many years as a cattleman not to
know the country like a familiar book. In his youth, while riding as a
puncher for Prowers, he and a companion had been caught in a
blizzard and reached Box Elder Cañon in time to save themselves by
building a fire. Since then he had been here many times.
A one-room log cabin clung to the slope at the edge of the quaking
asps. It had been built by a hermit prospector thirty years before, and
had many times in the intervening years been the refuge of belated
punchers.
The officer walked in through the sagging door. On the floor was a
roll of soiled blankets. Greasy dishes and remnants of food were on
the home-made table. Three persons had eaten here as late as this
morning. He could tell that by the live coals among the charred ends
of wood in the fireplace. Also, the lard left in the frying-pan had not
yet hardened.
Daniels made deductions. Of the three, one had spent the night here
to keep an eye on the cattle, assuming that his guess about the herd
was a correct one. The other two had ridden up to Black’s cabin and
slept there, returning in the early morning for the drive to Elk Creek.
From the cabin the sheriff walked down into the bottom of the gulch.
There was plenty of evidence to show that a large number of cattle
had been here very recently. He followed the trail they made out of
the cañon to the mesa and saw that it headed toward Elk Creek. He
could not be quite sure, but he believed that three horsemen rode
after them. The character of the ground made certainty impossible.
The tracks were all faint and blurred. Daniels followed them for two
or three miles to the rim of the draw down which the frightened herd
had been stampeded.
The sheriff rode across the hills to the Circle J P ranch. He found
Jake Prowers and Don Black greasing a wagon.
Black looked up as the officer came around the corner of the house
and thrust his hand beneath the belt of his trousers. Prowers said
something to him in a low voice and the hand came out empty.
Daniels rode up and looked down at them. He gave a little nod of
greeting.
“How do, Jake—Don? I dropped over to talk with you about that
business in Elk Creek Cañon,” he said.
“What about it?” asked Black suspiciously.
“I’d like to hear all you know about it.”
Prowers answered promptly and smoothly. “I don’t know a thing
about it, if you’re meanin’ me, except what I’ve heard over the
’phone. The story is, some cattle stampeded an’ a fellow got in their
way—”
“Yes, I know the story, Jake,” the sheriff interrupted quietly. “I’m
askin’ you what you can tell me about that stampede.”
“Me! Why pick on me?” the wrinkled little man piped. “Didn’t I tell you
I didn’t know a thing about it?”
“How about you, Don?” asked Daniels.
“Don don’ know a thing—”
“Talk for himself, can’t he, Jake?” the sheriff wanted to know.
“Don’t get on the prod, Frank,” advised the owner of the Circle J P.
Voice and manner were still mild and harmless.
“No,” agreed Daniels, smiling. “How about it, Don?”
Black met his steady gaze sulkily. “Didn’t know there was a
stampede till Jake told me so after he’d been at the ’phone.”
“I expect you’ll have a chance to prove that, Don. I got to arrest you.”
“What for?” demanded the dark man.
“For causing the death of that fellow in the cañon this mo’ning by
stampeding cattle down the draw.”
“Any evidence, Frank?” This from Prowers, on whose face a thin lip
smile rested.
“Some. Don made threats yesterday. He spent the day rounding-up
cattle and drove ’em into Box Elder Cañon for the night. About nine
in the evening he reached home an’ ate supper there, him and
another fellow. They took the road back to the cañon before
daybreak this mo’ning—not later than three o’clock. A friend of theirs
stayed in the old Thorwaldson cabin to watch the stock. They ate
breakfast with him.”
A flicker of fire burned in the skim-milk eyes. “My, Frank, you know a
lot. Anything more?”
“Some things I don’t know, I only guess, Jake. I know Don an’ his
friends had ham and cornbread and coffee for breakfast, but I don’t
know yet who his two friends are.”
“Only guess that, eh?”
“That’s right, Jake.”
“You’ll know that soon,” jeered Prowers. “Any one with an
imagination active as yore’s won’t let a li’l’ thing like facts stand in his
way.”
“I’ll have to take Don down to Wild Horse with me,” Daniels replied
impassively.
“That’s yore business,” the old cattleman said. “You’re makin’ a
mistake. Don spent the night with me, if you want to know.”
“Sure you didn’t spend it with him?”
“You arrestin’ me, too, Frank?”
“No.”
“Only guessin’ at me?”
“I’m not doing my guessin’ out loud—not all of it.” Prowers’s splenetic
laugh cackled. “You’d ought to get one o’ these brass stars from a
detective agency, by jiminy by jinks. A fellow that can mind-read Don
here an’ tell what he had for breakfast is a sure-enough sleuth and
no ornery sheriff.”
The old cattleman’s irony did not disturb Daniels. “I know what he
had for breakfast because I saw the fry-pan an’ the dishes.”
“Better go slap a saddle on yore horse, Don,” jeered Prowers.
“Frank’s arrestin’ you because you had ham an’ cornbread an’ coffee
for breakfast.”
“You know why I’m arrestin’ him. He’ll have plenty of chances to
show he’s not guilty if he ain’t,” the sheriff answered, not unamiably.
The owner of the Circle J P spoke to Black. “Saddle old Baldy for
me. I’ll ride down to Wild Horse with you. Reckon I’ll have to go on
yore bond. No use us gettin’ annoyed. Election ain’t so fur away now.
Frank has got to make a showing. We hadn’t ought to grudge him
some grandstandin’.”
Daniels smiled. “That’s the way to look at it, Jake.”
CHAPTER XIX
CAPTAIN THURSTON K. HOLLISTER
Ruth squealed with delight and clapped her hands when Betty told
her of the approaching drive to Elk Creek.
“Oh, goody, goody! An’ we’ll take Prince ’n’ Baby Fifi ’n’ Rover.
They’ll enjoy the ride too.”
With a smile that took the sting out of her refusal, Betty vetoed this
wholesale transportation of puppies. “There isn’t room, dear.”
The child’s face registered disappointment. “I could take ’em on my
lap,” she proposed.
Betty reflected a moment, then decided briskly. “We’ll take one to-
day, and the others next time.”
“Umpha!” Ruth nodded approbation vigorously, all animation again.
“I’ll ’splain it to ’em so’s they won’t have their feelin’s hurted.”
The blue eyes of the little girl inspected judicially the small creatures
whose tilted heads and wagging tails appealed to her. To decide
which one to take was a matter of grave consideration. Their
mistress wanted to do exact justice. She changed her mind several
times, but voted at last for Baby Fifi.
“She’s the teentiest, ’n’ o’ course the baby must go,” she told the
other two.
They accepted without protest the verdict of the super-goddess who
was mistress of their destinies. Apparently they took the occasion as
seriously as she did.
“’N’ the delicatest,” she went on. “But if you’re good, ’n’ bee-have, ’n’
everyfing, Mamma’ll bring you somefing awful nice. So you be the
goodest children.”
Thus it chanced that Baby Fifi, a clean blue ribbon tied round her
neck in honor of the event, looked out from the tonneau of the car
upon a panorama of blue sky and bluer mountain and sunbathed
foothill moving past in a glory of splendor satisfying to both eye and
soul.
They drove to the lower mouth of the cañon. A man with pick and
shovel was clearing rocks and débris away from what was evidently
to be the line of the ditch. Reed guessed that he was really posted at
this point as a sentinel to guard against another possible attack.
The boss of the gang, the man said, was doing some surveying from
the top of the wall above the rim of the gorge. A steep and rough
road led to the upper mesa.
“Don’t know as you can make it with your car,” the man with the pick
added. “It’s a mighty stiff grade when you get past the dugway, ’most
all a team can do to get up.”
“We’ll go far as we can,” Reed answered.
He had to go into low long before they reached the dugway. Just
beyond it was a stretch of road so precipitous that the car balked.
The cowman became convinced that the machine could go no
farther.
“Have to walk the rest of the way,” he said.
Betty looked at her little sister dubiously. “It’ll be a hard climb for
those little legs, and she’s too heavy to carry far. We’d better leave
her in the car.”
“Maybe we had,” assented her father, and added, in a low voice: “If
she’ll stay alone.”
“Oh, Ruthie doesn’t mind that. Do you, dearest, a big girl like you?
You’ll have Baby Fifi, and we’ll not be gone half an hour.”
Ruth accepted her sister’s judgment without demur. She would
rather play with Baby Fifi than tire herself climbing the long hill.
“Stay right in the car, dear. Daddy and Betty won’t be long,” the
young woman said, waving a hand as she started.
Betty breasted the slope with the light, free step of a mountaineer.
Though slender, she was far from frail. Tested muscles moved with
perfect coördination beneath the smooth satiny skin.
At sight of her an eye leveled behind a surveyor’s transit became
instantly alive. The man caught his breath and watched eagerly. In
her grace was something fawnlike, a suggestion of sylvan innocence
and naïveté. Was it the quality of which this was an expression that
distinguished her from a score of other nice girls he knew? Did she
still retain from the childhood of the race a primal simplicity the
others had lost by reason of their environment? What was it
Wordsworth had written?—
“... trailing clouds of glory do we come
From God, who is our home.”
The glory still haloed her dusky head. It glowed in her warm eyes
and sparkled in her smile.
He strode through the kinnikinnick to meet them.
As they approached, Betty was conscious of a sharp stab of joy. This
clean-cut, light-footed man was not the shuffling, slouchy tramp she
had first met two months earlier. The skin had taken on the bronzed
hue of health. The eyes were no longer dull and heavy, but quick
with life. The unpleasant, bitter expression had gone from the good-
looking face.
Betty knew what had transformed him. He had found again the self-
reliance of which he had been robbed. There burned in him once
more a bright light of manhood strong and unwavering.
He shook hands with Clint Reed so frankly that she knew he
cherished no grudge. There flashed into her mind the hesitant
prophecy she had once made, that he might look back on that first
day on the Diamond Bar K as a red-letter one. It had come true.
Then he had reached the turning of the ways and had been led into
the long hard uphill climb toward self-respect.
“Glad to see you,” he said as his fingers met firmly those of the girl.
“You’ve come to see how Mr. Merrick is getting along with the
project, I suppose.”
“We heard about the trouble here and came to find out the facts first-
hand,” Reed answered.
The engineer told what he knew. One of his assistants standing near
was drawn into the conversation. The cattleman asked him
questions. Betty and the man who called himself Tug Jones found
themselves momentarily alone.
“Fortunate I was here when you came,” the young man said.
“Another man is taking charge. Mr. Merrick is putting me somewhere
else. I don’t know where, but I report for duty at once.”
Betty took from her handbag a clipping from a newspaper. She had
written the date of publication on the headlines. It was about nine
months before that time.
She handed the slip of paper to him.
“Did you ever hear of Captain Thurston K. Hollister?” the girl asked,
on a note of tremulousness.
He looked during what seemed a long silence at the picture of the
officer in uniform and the caption beneath it.
“Where did you get this?” he asked at last.
“I found it covering our pantry shelf, where it had been ever since
spring.”
“And you’ve brought it to me because you think I’m Hollister?”
“Aren’t you?”
“Yes.”
“I’m glad,” she said.
“I don’t know quite what you mean. Why are you glad?”
“From that first day I knew you were—somebody. Can’t I be glad to
learn I was right?”
He read the clipping, and as his eyes moved down the column there
came over his face a touch of the sardonic bitterness she knew of
old.
“I deserve a cross, don’t I?”
“Two of them!” she cried impetuously.
He looked into her ardent, generous eyes. “Oh, half a dozen,” he
mocked.
But she noticed the mordant flash was gone. What she did not know
was that her faith had exorcised it.
“Two,” the girl insisted, an underlying flush of color in the dark
cheeks. “One for this.” She touched the paper he was holding.
“And the other?” he asked, not yet caught up with her leaping
thought.
A qualm of fear shook her courage. Ought she to speak of it? Was
she one of those who “rush in”? It was his personal business, and he
had a right to resent any mention of it by her. But the desire was
strong in her to say just a word and then close the subject for
always.
“For that braver thing you’ve been doing every day since I saw you
last,” she said in a low voice.
He, too, flushed beneath the tan of the cheeks. Their eyes held fast
an instant.
When he spoke, it was to say with studied lightness, “You and your
father didn’t walk up, did you?”
Betty was relieved. It is an embarrassing thing to talk with a man
about those hidden things of his life that are important to him. She
felt almost as though she had escaped from some peril.
“No, the car’s on the road halfway up the hill. We couldn’t make it.
Ruth’s waiting for us there,” she answered, hurrying to follow the
lead he had given. “She has her favorite little puppy in the car with
her. We thought the climb up might be a little too much for her.”
Hollister walked back with them to the car. He talked with her father
about the outrage that had resulted in the death of poor Coyle. Betty
walked beside the men, saying nothing. She was acutely conscious
of the presence of the sunburnt young fellow beside her. His rags

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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

Sheriff Daniels rode across the hogback above Elk Creek to a

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