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Courtesy Jerry R. Strawser
Courtesy Bentley University
Meet the Authors vii
Professor Sinason has taught in the areas of accounting information systems, auditing
and assurance services, and financial accounting. He has received teaching awards at each
of the universities where he has taught including the 2002–2003 Department of Accoun-
tancy and Northern Illinois University Awards for Excellence in Undergraduate Teaching.
Jerry R. Strawser is Executive Vice President and Chief Financial Officer at
Texas A&M University and holds the KPMG Chair in Accounting.
Prior to his current appointment, Professor Strawser served as dean of Mays Business
School at Texas A&M University, interim executive vice president and provost at Texas
A&M University, interim dean of the C. T. Bauer College of Business at the University
of Houston, and Arthur Andersen & Co. Alumni Professor of Accounting.
Professor Strawser has coauthored three textbooks and more than 60 journal articles.
In addition to his academic experience, he had prior public accounting experience at two
Big Five accounting firms. He has also developed and delivered numerous executive devel-
opment programs to organizations such as AT&T, Centerpoint Energy, Continental Airlines,
ConocoPhillips, Halliburton, KBR, KPMG, Minute Maid, PricewaterhouseCoopers,
McDermott International, Shell, Southwest Bank of Texas, and the Texas Society of Certi-
fied Public Accountants. Professor Strawser is a certified public accountant in the state of
Texas and earned his BBA and PhD in Accounting from Texas A&M University.
Jay C. Thibodeau is the Rae D. Anderson Professor of Accounting at Bentley
University.
Professor Thibodeau is a certified public accountant and a former auditor. He received
his bachelor’s degree from the University of Connecticut in 1987 and his PhD from the
University of Connecticut in 1996. He joined the faculty at Bentley in 1996 and has
remained there. At Bentley, he serves as the coordinator for all audit and assurance cur-
riculum matters. His off-campus commitments include consulting with the Audit Learn-
ing and Development group at KPMG.
Professor Thibodeau’s scholarship focuses on audit judgment and decision making
and audit education. He is a coauthor of two textbooks and has written more than 40 book
chapters and articles for academics and practitioners in journals such as Auditing: A Jour-
nal of Practice & Theory, Accounting Horizons, and Issues in Accounting Education.
Professor Thibodeau served as the President of the Auditing Section of the American
Accounting Association for the 2014/2015 academic year. He served on the Executive Com-
mittee for the Auditing Section from 2008 to 2010. He has received national recognition for
his work five times. First, for his thesis, winning the 1996 Outstanding Doctoral Dissertation
Award presented by the ABO section of the AAA. Three other times, for curriculum inno-
vation, winning the 2001 Joint AICPA/AAA Collaboration Award, the 2003 Innovation
in Assurance Education Award, and the 2016 Forensic Accounting Teaching Innova-
tion Award. Finally, for outstanding service, receiving a Special Service Award from
the Auditing Section for his work in helping to create the “Access to Auditors” program
sponsored by the Center for Audit Quality.
Look Beneath the Surface . . .

As auditors, we are trained to investigate beyond appearances to determine the underlying

facts—in other words, to look beneath the surface. From the Enron and WorldCom
scandals of the early 2000s to the financial crisis of 2007–2008 to present-day issues
and challenges related to significant estimation uncertainty, understanding the auditor’s
responsibility related to fraud, maintaining a clear perspective, probing for details, and
understanding the big picture are indispensable to effective auditing. With the avail-
ability of greater levels of qualitative and quantitative information (“big data”), the need
for technical skills and challenges facing today’s auditor is greater than ever. The author
team of Louwers, Blay, Sinason, Strawser, and Thibodeau has dedicated years of expe-
rience in the auditing field to this new edition of Auditing & Assurance Services, sup-
plying the necessary investigative tools for future auditors.

Cutting-Edge Coverage
The seventh edition of Auditing & Assurance Services continues its tradition as the most
up-to-date auditing text on the market. All chapters and modules have been revised to
incorporate the latest professional standards, recodifications, and proposals from the Inter-
national Auditing and Assurance Standards Board, Auditing Standards Board, and Public
Company Accounting Oversight Board. To acquaint students with the professional stan-
dards, each chapter or module begins with a list of the relevant professional standards that
are covered in that chapter. Importantly, this text incorporates the reorganized PCAOB
standards effective December 31, 2016.
As a team, we use a variety of contacts and resources to stay informed of ongoing
developments that affect learning objectives in the financial statement auditing
course(s). In fact, changes to key learning goals and objectives are usually prompted by
interactions with colleagues from practice.
In that spirit, since the publication of our sixth edition, we have been working hard
to stay in touch with developments in practice so we can always respond to your needs
in the financial statement auditing classroom. Among our many observations, one trend
has emerged as a potential sea change in the financial statement auditing process, the
“big data” challenge.
Indeed, based on our collective observations, we believe that students should be
prepared to make the best use possible of relevant data using state-of-the art analytical
tools. In fact, the terms big data and data analytics are frequently being used to describe
a growing movement among audit professionals. Our collective view is that students
must be prepared to meet the “big data” challenge.
To help students be prepared, the seventh edition of Auditing & Assurance Services
has been revised deliberately to help students critically think about the use of increased
data and analytical tools in the financial statement audit. In addition, we would like to
help students learn how to effectively document their conclusions in the current “big
data” environment.
In a recent white paper, PwC (2015)1 lists five “new” skills that will be required of
auditors moving forward. Although many of these skills require special statistical or
programming knowledge, the first listed skill is one that is applicable to all auditors:
“Research and identify anomalies and risk factors in underlying data.” Although

1
“Data Driven: What Students Need to Succeed in a Rapidly Changing Business World.” Available at:
http://www.pwc.com/us/en/faculty-resource/assets/PwC-Data-driven-paper-Feb2015.pdf.

viii
extraction and analysis from client accounting data are critical skills for newly minted
auditors, we are unaware of sufficient materials to assist professors in integrating data
analytics into the auditing classroom. Thus, an important goal of the seventh edition is
to provide a clear and implementable method to fully integrate a leading data analysis
tool, the IDEA data analysis software, into the auditing class.
To start, McGraw-Hill Education is excited to announce a partnership with the developers
of the IDEA software. We believe that IDEA provides an outstanding platform to illustrate
the steps that auditors need to take related to data and data analysis while completing the
financial statement audit. Leading auditing professionals have confirmed that using IDEA
is an outstanding way for an entry-level auditing professional to begin the journey into the
world of “big data” and “data analytics.” Simply stated, big data is manifested in the finan-
cial statement auditing process through the use of tools like IDEA.
Overall, our revisions related to the big data challenge were designed to provide
instructors a set of tools and mechanisms to bring data and analytics into the classroom
in a meaningful way. Through the use of these tools, students can be sure they are pre-
pared to enter practice with an appreciation for and knowledge of the increasing impor-
tance of data and analytics in the auditing profession. We hope that everyone enjoys our
attempts to help students get ready for the big data challenge.
Of course, and perhaps most importantly, the seventh edition of Auditing & Assurance
Services also continues to be the most up-to-date auditing text on the market. The book
has fully integrated the reorganized PCAOB Auditing Standards. In addition,
all chapters and modules in the seventh edition have been revised to incorporate the
two new standards (AS 2701 and AS 2410) adopted by the PCAOB that relate to the
auditor’s work on supplementary information provided in the financial statements and
related parties. In addition, all chapters and modules have been revised to incorporate
the latest updates from the international standards of auditing (ISAs) and the Auditing
Standards Board (ASB). With Auditing & Assurance Services, seventh edition, students
are prepared to take on auditing’s latest challenges.
The Louwers author team uses a conversational, yet professional tone­—hailed by
reviewers as a key strength of the book.

Flexible Organization “The format allows you to integrate the

modules into the chapter material in
Auditing & Assurance Services teaches students auditing
any way you would find useful.”
concepts by emphasizing real-life contexts when describing
—Frank J. Beil, University of Minnesota
the auditing process. The authors use chapters and modules to

Chapters
The 12 chapters cover the auditing
process extensively with a multitude of
cases designed to give students a better
understanding of how a best-practice
concept developed from real-world
situations.
Modules
Modules A–H provide instructors
additional material that can be used
throughout the course. Topics such as
fraud, ethics, sampling, and technology
are covered in the modules, which are
designed to be taught whenever instruc-
tors want to introduce the topic in their
course.

ix
achieve this goal. Although the chapters follow a logical sequence that we recommend
professors consider for their classes, the modules have been written to be used on a
stand-alone basis. In essence, the modules have been deliberately prepared for entirely
flexible implementation of these topics without excessive reliance on chapter sequenc-
ing. We encourage you to integrate these modules into your syllabi in a manner that best
suits your approach to the auditing course.

Engage Your Students with Real “The tone of the textbook is

Examples in a conversational manner
that allows for more student-
An effective accounting textbook integrates real-world scenarios friendly reading material.”
with theoretical discussion. Auditing & Assurance Services places the —Aretha Hill, Florida A&M
student in the role of a decision maker, by illustrating the application University
of auditing concepts using actual situations experienced by account-
ing firms and companies such as:
Each chapter or module opens with a “real-world” example that draws upon concepts
discussed within that chapter or module. Finally, a series of mini-cases have been devel-
oped for use by instructors to further bring text material to life. These mini-cases feature
real situations experienced by the following companies, individuals, or accounting firms
[new cases to the seventh edition are noted with an asterisk (*)].
∙ Arthur Andersen (failure of auditors to detect fraud at Enron)
∙ Bernie Madoff Investment Securities (failure of auditors and regulators to detect fraud)*
∙ Crazy Eddie’s (failure of auditors to detect fraud)*
∙ Daily Journal Corporation (auditor changes and reporting on internal control)*
∙ General Electric (audit fees and services provided by auditors)
∙ General Motors (going-concern report by auditors)
∙ HealthSouth Corporation (failure of auditors to detect fraud)
∙ KPMG (competition in the audit marketplace)
∙ Lehman Brothers (estimation uncertainties in the audit and disclosure concerns)*
∙ Parmalat (failure of auditors to detect fraud)
∙ Satyam Computer Services Ltd. (failure of auditors to detect fraud)
∙ Scott London, KPMG partner (failure of auditor to follow the AICPA Code of Conduct)*
Confirming Pages

Fraud Awareness CHAPTER 4

The fraud coverage in Auditing & Assurance Services Management Fraud

is the most extensive available and is complemented by and Audit Risk
real-world examples chosen to engage students through
the following tools:
∙ Auditing Insights integrated throughout the text.
Profit is the result of risks wisely selected.
Frederick Barnard Hawley, American economist (1843–1929)

∙ Mini-cases that may be assigned to supplement Risk comes from not knowing what you’re doing.

text chapters and modules that expose students to Warren Buffett, widely regarded as one of the most successful investors in
the world

Professional Standards References

x AU-C/ISA
Topic Section AS Section
Overall Objectives of the Independent Auditor 200 1001, 1005, 1010, 1015
Consideration of Fraud in a Financial Statement Audit 240 2401
Consideration of Laws and Regulations 250 2405
Communications with Audit Committees 260 1301
Consideration of Internal Control in an Integrated Audit 265 2201
 landmark fraud cases at Bernie Madoff Investment Securities, Enron, HealthSouth,
Parmalat, PTL Club, and Satyam Computer Services.
∙ Specific discussion of management fraud (Chapter 4), employee fraud (Chapter 6),
and the Certified Fraud Examiner Exam (Module D).
∙ Apollo Shoes Case, the only stand-alone fraud audit case on the market (available
online).

Create a State-of-the-Art Learning Environment:

Instructor Resources
The author team and McGraw-Hill are dedicated to providing instructors with the
best teaching resources available. In addition to the solutions manual, test bank, and
PowerPoint Presentations, and the Apollo Shoe Case, the following resources are also
available.

The Updated Auditor

The author team scrutinizes leading business and academic publications for relevant
issues and research that sheds light on auditing and the audit process. Recent findings
from academic research and discussions from professional literature are drawn from the
following publications:
∙ Accounting Horizons
∙ Accounting Today
∙ Auditing: A Journal of Practice & Theory
∙ Behavioral Research in Accounting
∙ Bloomberg Businessweek
∙ CFO.com
∙ CPA Journal
∙ Journal of Accountancy
∙ Journal of Accounting and Economics
∙ The Accounting Review
∙ The Wall Street Journal
These excerpts are highlighted throughout the text as Auditing Insights to allow for
easy identification and review by instructors and students.
In addition to the use of Auditing Insights, on a monthly basis, the author team pro-
vides an Updated Auditor briefing, which summarizes the content of relevant business
and academic publications on a chapter-by-chapter basis, to allow students to apply cur-
rent developments in the profession with material discussed in class. The Updated Audi-
tor briefing is available in Connect. With the Updated Auditor, instructors will always
be at the cutting edge of auditing practice!

xi
IDEA Software and Workbook
With the availability of unprecedented amounts of quantitative and qualitative infor-
mation and tools available to access and process that information, it is imperative that
students learn and utilize the latest technologies used by auditing professionals. As
previously stated, McGraw-Hill Education has forged a partnership with Caseware
Analytics for the use of the IDEA data analysis tool. Chapters 3 (audit planning), 4 (risk
assessment), 5 (internal control), 7–9 (operating cycle chapters), Module F (attributes
sampling), and Module G (variables sampling) have been revised to reference the use of
IDEA within the chapter or module.
In addition, the seventh edition includes end-of-chapter exercises utilizing author-
developed databases exclusively for use with Auditing & Assurance Services as well
as supplemental materials available in Connect to complement the IDEA workbook and
provide hands-on instructions on using the IDEA software. The authors also provide
implementation guidance to instructors and detailed solutions and explanations on this
new content. Overall, the author team has provided significant resources to prepare stu-
dents for the auditing environment in 2017 and beyond.

Roger CPA Review

McGraw-Hill Education has partnered with Roger CPA Review, a global leader in CPA
Exam preparation, to provide students a smooth transition from the accounting class-
room to successful completion of the CPA Exam. While many aspiring accountants
wait until they have completed their academic studies to begin preparing for the CPA
Exam, research shows that those who become familiar with exam content earlier in the
process have a stronger chance of successfully passing the CPA Exam. Accordingly,
students using these McGraw-Hill materials will have access to sample CPA Exam
Multiple-Choice questions and Task-based Simulations from Roger CPA Review, with
expert-written explanations and solutions. All questions are either directly from the
AICPA or are modeled on AICPA questions that appear in the exam. Task-based Simu-
lations are delivered via the Roger CPA Review platform, which mirrors the look, feel
and functionality of the actual exam. McGraw-Hill Education and Roger CPA Review
are dedicated to supporting every accounting student along their journey, ultimately
helping them achieve career success in the accounting profession. For more information
about the full Roger CPA Review program, exam requirements and exam content, visit
www.rogercpareview.com.

TestGen
TestGen is a complete, state-of-the-art test generator and editing application software
that allows instructors to quickly and easily select test items from McGraw Hill’s Test-
Gen testbank content and to organize, edit and customize the questions and answers to
rapidly generate paper tests. Questions can include stylized text, symbols, graphics, and
equations that are inserted directly into questions using built-in mathematical templates.
With both quick-and-simple test creation and flexible and robust editing tools, TestGen
is a test generator system for today’s educators.

xii
Association to Advance Collegiate Schools of
Business (AACSB) Statement
McGraw-Hill Education is a proud corporate member of AACSB International. Under-
standing the importance and value of AACSB accreditation, Auditing & Assurance
Services, 7e, recognizes the curricula guidelines detailed in the AACSB standards for
business accreditation by connecting selected questions in the text and test bank to the
eight general knowledge and skill guidelines in the AACSB standards. The statements
contained in Auditing & Assurance Services, 7e, are provided only as a guide for the
users of this textbook. The AACSB leaves content coverage and assessment within the
purview of individual schools, their mission, and their faculty. Although Auditing &
Assurance Services, 7e, and the teaching package make no claim of any specific
AACSB qualification or evaluation, we have within Auditing & Assurance Services, 7e,
labeled selected questions according to the eight general knowledge and skills areas.

MCGRAW-HILL CUSTOMER EXPERIENCE GROUP

CONTACT INFORMATION
At McGraw-Hill Education, we understand that getting the most from new technology
can be challenging. That's why our services don't stop after you purchase our products.
You can contact our Product Specialists 24 hours a day to get product training online.
Or you can search the knowledge bank of Frequently Asked Questions on our support
website. For Customer Support, call 800-331-5094 or visit www.mhhe.com/support.
One of our Technical Support Analysts will be able to assist you in a timely fashion.

xiii
New to the Seventh Edition of
In response to feedback and guidance from numerous auditing accounting faculty, the authors have made many
important changes to the seventh edition of Auditing & Assurance Services, including the following:
Highlights of Auditing &
Assurance Services, 7e
∙ The seventh edition of Auditing & Assurance Ser-
vices features Connect and SmartBook.
∙ All chapter and modules have been revised to incorpo-
rate professional standards adopted through May 2016.
In addition, the reorganized PCAOB framework (which
becomes effective December 31, 2016) has been utilized
throughout the text.
∙ Auditing Insight boxes have been added and updated
throughout the textbook to place issues discussed within
the text into a real-world context. These boxes incorporate
numerous examples from business and academic publica-
tions as well as actual company annual reports and audit
reports.
∙ Examples using the Caseware IDEA software have been
added in Chapters 3, 4, 5, 7, 8, 9, Module F, and Module
G. In addition, end-of-chapter exercises using author-
developed databases exclusively for use with Auditing &
Part I: The Contemporary Auditing Environment
CHAPTER 1: Auditing and Assurance Services
∙ Our discussion about the CPA exam has been revised to
fully reflect the substantial changes being made to the
exam as of April 1, 2017. Due primarily to the outsourc-
ing of routine tasks and significant advances in informa-
tion technology, the job of a newly licensed CPA has
changed. The AICPA responded with a revised exam
that has an increased emphasis on higher-order skills like
problem solving, critical thinking, and analytical ability.
The changes are fully described in the text.
∙ Increased our emphasis about the importance of audit qual-
ity in the current environment and added an Auditing Insight
that describes the audit quality indicators project recently
completed by the PCAOB in 2015.
∙ Added a new exhibit that provides an example of the
2014/2015 Sustainability Report for the Coca-Cola Com-
pany. We also added a new exhibit that features Mickey
Mantle’s baseball card from 1961.
∙ Increased our emphasis on the emergence of big data in
the auditing environment and added an Auditing Insight
that describes what students need to succeed in a world
characterized by big data.
xiv
Assurance Services as well as supplemental materials to
complement the IDEA workbook are provided.
∙ Coverage in the cycle chapters has been standardized to focus
on the risk assessment process for each relevant assertion.
In addition, the chapters provide a consistent focus on how
auditors respond to assessed risk of material misstatement,
through the incorporation of easy-to-read tables throughout
Chapters 6 through 10 to highlight the key issues and risks
faced by auditors in the examination of different accounts.
These tables take the students through the risk assessment
process for each cycle on a step-by-step basis to mirror the
methodology used in current audit practice.
∙ Five new Mini-cases have been added that feature
Bernie Madoff Investment Securities (failure of auditors
and regulators to detect fraud); Crazy Eddie’s (failure of
auditors to detect fraud); Daily Journal Corporation (audi-
tor changes and internal control reporting); Lehman Broth-
ers (estimation uncertainties in the audit and failure to
make informative disclosures); and Scott London, KPMG
Partner (failure of auditor to follow the AICPA Code of
Conduct).
CHAPTER 2: Professional Standards
∙ Summarized recent academic research related to the
impact of PCAOB inspections and results of inspec-
tions on audit quality, client attraction and reten-
tion, and audit fee growth rates (including research
specifically related to the Deloitte vignette in the intro-
duction of this chapter).
∙ Summarized recent independence issues encountered by
EY and KPMG.
∙ McDonald’s 2016 audit report, which demonstrates the
contents of an actual audit report and how this report
reflects the guidance in the reporting principle.
∙ Included an Auditing Insight regarding controversy over
PCAOB inspection of audits of Alibaba Group Holding
Limited, which have been impacted by China’s ban of
PCAOB inspections.
∙ Summarized PCAOB inspections of 2012, 2013, and 2014
audits conducted by Big Four firms and expanded analysis
to summarize the number of audits in which the client’s
report on internal control was revised as a result of the
inspection.
Auditing & Assurance Services
Part II: The Financial Statement Audit
CHAPTER 3: Engagement Planning
∙ Added a discussion to emphasize the importance of iden-
tifying all of the significant accounts and each of the rele-
vant financial statement assertions during the engagement
planning process.
∙ Included a new table to help facilitate the understanding
of significant accounts and relevant financial statement
assertions and to show how this might be documented in
the audit work papers.
∙ Added an Auditing Insight to describe the importance
of audit quality and why planning is such an important
aspect in helping to ensure that the engagement plan has
been developed to achieve quality outcomes on the audit.
∙ Added a discussion about the availability of big data on
the audit and included a demonstration problem of how to
access a client’s data using IDEA.
CHAPTER 4: Management Fraud and Audit Risk
∙ Increased focus on the importance of assessing the risk of mate-
rial misstatement for each relevant financial statement assertion
for each significant account and disclosure. This focus is entirely
consistent with the audit approaches of each of the largest audit
firms in the world. This focus will be very helpful in preparing
students to enter the auditing environment in 2017 and beyond.
∙ Added a new easy-to-read table to highlight the impor-
tance of identifying “what can go wrong” for each relevant
assertion identified in the planning process. This process is
instrumental for assessing the risk of material misstatement
for each relevant assertion.
∙ Moved our discussion of an audit client’s risk manage-
ment system to Chapter 5, where it is incorporated into
our discussion of the risk assessment component of an
effective internal control system as defined by COSO. By
moving this section, students are able to better focus on
inherent risk assessment in this chapter.
∙ Added an Auditing Insight to illustrate the potential dangers
of analyst expectations at Bankrate and an Auditing Insight
to illustrate the difficulty involved in auditing percentage of
completion estimates at Toshiba. These examples are used to
emphasize the importance of considering a client’s business
and operating environment during the risk assessment process.
∙ Incorporated newly released PCAOB Auditing Standard
2410 about Related Parties into the chapter.
CHAPTER 5: Risk Assessment: Internal Control
Evaluation
∙ Fully integrated the specifics of the COSO 2013 update to
its internal control framework. The update adds 17 explicit
principles that are associated with the five components of
internal control (i.e., control environment, risk assessment,
control activities, information and communication, and
monitoring). The chapter now includes five new exhibits to
help clarify and make these principles salient to students.
∙ Added a new easy-to-read table to reinforce the impor-
tance of identifying “what can go wrong” to help assess
the risk of material misstatement for each relevant asser-
tion that provides a foundation to help identify control
activities that might mitigate that risk. This is an impor-
tant aspect of the audit process employed by each of the
large audit firms, and the table is designed to help stu-
dents better understand that process.
∙ Added a section on internal control testing alternatives
with a focus on how auditors can use a tool such as IDEA
to test the entire population of control instances in today’s
environment. We also added two new problems where
students can complete exception tests using IDEA.
CHAPTER 6: Employee Fraud and the Audit of Cash
∙ Added two easy-to-read tables to allow for a focus on the
risk assessment process for each relevant assertion related
to cash. For each relevant assertion, students can see how
the risk of material misstatement was assessed and how
the auditors might respond to the assessed risks with tests
of control and substantive tests. The step-by-step process
mirrors the methodology used in current audit practice.
∙ Improved the flow and organization of the chapter by
integrating the section on controls designed to mitigate
the risk of employee fraud into the section on internal
control testing for the cash account. In addition, the sec-
tion on proof of cash has been moved to the extended
fraud procedures section to better align the chapter with
current audit practice.
∙ Added an Auditing Insight describing the fraud perpetrated
by a controller at a Pepsi-Cola Bottler and how he escaped
to the Appalachian trail for an extended period of time.
CHAPTER 7: Revenue and Collection Cycle
∙ Revised format tracking the audit process beginning with
identification of significant accounts and relevant assertions.
∙ Added four new tables outlining risks and tracking them
through the audit process, including tests of controls and
substantive procedures.
∙ Updated discussion of revenue recognition restatements.
∙ Increased discussion of risks related to data breaches, includ-
ing an Auditing Insight on the Target Corp. data breach.
∙ Added a discussion of the new revenue recognition standards,
including examples from financial statements of Apple Inc.
xv
∙ Updated PCAOB inspection findings through the latest
inspection reports.
∙ Includes a focus on data and analytics that inte-
grates several IDEA exercises, including new author-
created content and end-of-chapter materials.
CHAPTER 8: Acquisition and Expenditure Cycle
∙ Revised format tracking the audit process beginning with
identification of significant accounts and relevant assertions.
∙ Added five new tables outlining risks and tracking them
through the audit process, including tests of controls and
substantive procedures.
∙ Increased discussion of risks related to accounts payable.
∙ Updated PCAOB inspection findings through the latest
inspection reports.
∙ Includes a focus on data and analytics that inte-
grates several IDEA exercises, including new author-
created content and end-of-chapter materials.
CHAPTER 9: Production Cycle
∙ Revised format tracking the audit process beginning
with identification of significant accounts and relevant
assertions.
∙ Added six new tables outlining risks and tracking them
through the audit process, including tests of controls and
substantive procedures.
∙ Extensive discussion of the production process and key
reports of interest to the auditors.
∙ Updated PCAOB inspection findings through the latest
inspection reports.
∙ Includes a focus on data and analytics that integrates sev-
eral IDEA exercises, including new author-created con-
tent and end-of-chapter materials.
CHAPTER 10: Finance and Investment Cycle
∙ Revised format tracking the audit process beginning with
identification of significant accounts and relevant assertions.
∙ Added five new tables outlining risks and tracking them
through the audit process, including tests of controls and
substantive procedures.
Part III: Stand-Alone Modules
MODULE A: Other Public Accounting Services
∙ New section added on PCAOB broker–dealer standards,
including an Auditing Insight describing compliance
issues that led to the new standards.
xvi
∙ Added a new Auditing Insight regarding Verizon’s pur-
chases, including the recent proposed purchase of Yahoo!
∙ Added a new Auditing Insight describing off-
balance-sheet risk for Citigroup.
∙ Expanded discussion of auditing accounting estimates and
fair values, with discussion of extreme estimation uncertainty
and an Auditing Insight on the Lehman Brothers collapse.
∙ Added a discussion of blockchain technology and Bitcoin
transactions.
∙ Updated PCAOB inspection findings through the latest
inspection reports.
CHAPTER 11: Completing the Audit
∙ New introductory vignette discusses Valeant’s year-end
financial troubles and the effect on the auditors trying to
complete the company’s audit. Added discussion of AS
16’s increased responsibilities to communicate with those
charged with governance.
CHAPTER 12: Reports on Audited Financial
Statements
∙ New introductory vignette discusses KPMG’s report on
the audit of Rolls-Royce and the identification of critical
audit matters in this report.
∙ Discuss recently approved and proposed standards of
audit report disclosures and practices related to critical
audit matters, naming of the engagement partner, and
audits of group financial statements.
∙ Summarize recent academic research related to the dis-
closure of critical audit matters, disclosure of engagement
partner identity, receipt and issuance of going concern
reports, and inclusion of explanatory paragraphs in other-
wise unmodified audit opinions.
∙ Included examples from recent auditors’ reports of Abbott
Laboratories, Alaska Air, Best Buy Co. Inc., Caesars Enter-
tainment Corporation, The Coca-Cola Company, General
Electric, Harris Teeter Supermarkets Inc., The Kroger Co.,
Penske Automotive Group, and Softbank Corp. to illustrate
how auditors modify their reports for situations encountered
in practice.
∙ Include results of an Audit Analytics research report sum-
marizing 15 years of data regarding going-concern reports.
∙ Updated for the revised standards on accounting and review
services, including a section on preparation engagements.
∙ A new table clarifies the differences between prepara-
tion engagements and services that are not preparation
engagements.
MODULE B: Professional Ethics
∙ Opened the module with the story of disgraced former
KPMG partner Scott London who sacrificed his career to
share confidential client information with a friend.
∙ Added a discussion of Aristotelian virtue ethics to already
existing discussions of Kantian categorical imperatives
and utilitarianism.
∙ Added a discussion of the role of the PCAOB’s Division
of Enforcement and Investigations.
MODULE C: Legal Liability
∙ Updated the introductory vignette on litigation involving
BDO Seidman for its audits of E.S. Bankest to include the
ultimate resolution of this litigation.
∙ Updated the summary of major settlements involving Big
Four accounting firms to include settlements occurring
since 2008.
∙ Expanded the discussion of academic research examining
auditor litigation to include recent studies that investigated
the factors affecting the litigation risk faced by audit firms.
MODULE D: Internal Audits, Governmental Audits,
and Fraud Examinations
∙ Updated the coverage of the reliance of Congress on the
GAO.
∙ Discussed the variety of services provided by internal
auditors.
∙ Added Benford’s law to the fraud investigation discussion.
MODULE E: Overview of Sampling
∙ New introductory vignette involve the recent U.S.
Supreme Court ruling on use of sampling methods to
determine monetary damages against Tyson Foods in an
employment dispute.
∙ Revised walk-through example of the use of sampling to
address a nonauditing issue.
∙ Auditing Insight addresse how sampling risk affected pre-
dictions in the 2015 United Kingdom general elections for
David Cameron and the Conservative Party.
∙ Included a brief example of sampling in the evaluation of
internal control to illustrate the major steps and decisions
made in the sampling process.
MODULE F: Attributes Sampling
∙ Introductory section provide an overview of the audit
engagement, the use of the audit risk model, and the role
of attributes sampling in the audit engagement to place
the attributes sampling process in context.
∙ IDEA is used in the determination of sample size, selec-
tion of sample items, and evaluation of sample results to
supplement the use of AICPA sampling tables.
∙ Additional end-of-chapter items provide students with the
opportunity to use IDEA in various stages of the attributes
sampling process.
∙ Summarized a recent academic study that surveyed the
sampling practices of six international accounting firms
with respect to establishing parameters and selecting sam-
ple items.
MODULE G: Variables Sampling
∙ Introductory section provides an overview of the audit
engagement, the use of the audit risk model, and the role
of variables sampling in the audit engagement to place the
variables sampling process in context.
∙ IDEA is used in the determination of sample size, selec-
tion of sample items, and evaluation of sample results to
supplement the use of formulae in MUS.
∙ Additional end-of-chapter items to provide students with
the opportunity to use IDEA in various stages of MUS
applications.
∙ Auditing Insight summarize the results of a recent aca-
demic study that surveyed the sampling practices of six
international accounting firms.
∙ Previous content on classical variables sampling and
nonstatistical sampling has been expanded and relocated
into appendixes to provide instructors with flexibility in
addressing these topics.
MODULE H: Auditing and Information Technology
∙ Significantly revised (and simplified) the module
throughout to reinforce how the client’s use of auto-
mated transaction processing systems affects the major
stages of the audit team’s study and evaluation of inter-
nal control.
∙ Provided an example of how students encounter IT gen-
eral and app controls when using a smartphone.
∙ Added additional end-of-chapter material that requires
students to identify tests of controls that would be used to
evaluate the operating effectiveness of general and auto-
mated application controls.
xvii
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Acknowledgments
OUR SINCEREST THANKS . . .
The American Institute of Certified Public Accountants (AICPA) has generously given
permission for liberal quotations from official pronouncements and other AICPA publi-
cations, all of which lend authoritative sources to the text. In addition, several publish-
ing houses, professional associations, and accounting firms have granted permission to
quote and extract from their copyrighted material. Their cooperation is much appreci-
ated because a great amount of significant auditing thought exists in this wide variety
of sources.
A special acknowledgment is due to the Association for Certified Fraud Examiners
(ACFE). It has been a generous contributor to the fraud auditing material in this text. The
authors also acknowledge the valuable inclusion of the educational version of IDEA software
in the seventh edition, which significantly enhances the practical application of the book.
Also, the authors are particularly grateful to Meghann Cefaratti (Northern Illinois
University), Brad Roof (James Madison University), and Yigal Rechtman (Pace University)
for their many insightful comments over the past several years. The feedback they con-
tributed while teaching from our text has contributed greatly to the clarity and accuracy
of subsequent editions. A special thanks to Michael K. Shaub for his valuable critique of
Chapter 5 and to Steven Dwyer, Suzanne McLaughlin, and Frank Wimer for the example
developed to help explain the difference between general and application controls in
Module H. Thanks to Helen Roybark for her help with the preparation of the instructor
PowerPoint presentations.
We are sincerely grateful for the valuable input of all those who helped guide our
developmental decisions for the past seven editions of Auditing & Assurance Services:

Dawn P. Addington, LuAnn Bean,

Central New Mexico Community College Florida Institute of Technology
Michael D. Akers, Frank J. Beil,
Marquette University University of Minnesota
Fatima Alali, Marie Blouin,
California State University–Fullerton Penn State University–Harrisburg
Sylvia Anderson, David Blum,
University of Maryland University Moraine Park Technical College
College Russell F. Briner,
Jeffrey J. Archambault, University of Texas at San Antonio
Marshall University Alexander K. Buchholz,
Jack Armitage, Brooklyn College of the City University
University of Nebraska–Omaha of New York
MaryAnne Atkinson, Suzanne M. Busch,
Central Washington University California State University–East Bay
Dereck D. Barr, Eric Carlsen,
The University of Mississippi Kean University

xx
 Acknowledgments xxi

Meghann Cefaratti, Keith Jones,

Northern Illinois University George Mason University
John Critchett Bonita K. Peterson Kramer,
Madonna University Montana State University–Bozeman
Karl Dahlberg, Joseph M. Larkin,
Rutgers University St. Joseph’s University
John E. Delaney, Rose Layton,
Southwestern Texas University University of Southern California
Marcus Mason Doxey, Pamela Legner,
University of Kentucky College of DuPage
Raymond Elson, Philip Levine,
Valdosta State University Berkeley College
Tom English, R. D. Licastro,
Boise State University Penn State University–University Park
Patricia Feller, Maureen Mascha,
Nashville State Community College Marquette University
Marilyn Fisher, Dorothy McMullen,
Corinthian Colleges Rider University
Diana R. Franz, Heidi H. Meier,
University of Toledo Cleveland State University
John Gabelman, Bharat Merchant,
Columbus State Community College Baruch College
Clyde Galbraith, Eddie Metrejean,
West Chester University Georgia Southern University
Andy Garcia, Charles Miller,
Bowling Green State University California Polytech University
David Gelb, Perry Moore,
Seton Hall University Lipscomb University
Earl Godfrey, Fowler A. Murrell,
Gardner-Webb University Lehman College
Judith G. Grant, Ramesh Narasimhan,
Northern Virginia Community Montclair State University
College at Annandale Vincent Owhoso,
Emily Elaine Griffith, Northern Kentucky University
The University of Georgia Dwight M. Owsen
Richard Hale, Long Island University Brooklyn
Midway College Gary Peters,
James Hansen, University of Arkansas
University of Illinois at Chicago Byron Pike,
Aretha Hill, Minnesota State University–Mankato
Florida A&M University Marshall Pitman,
Steven C. Hunt, University of Texas–San Antonio
Western Illinois University Sharon Polansky,
Venkataraman Iyer, Texas A&M University–Corpus Christi
The University of
North Carolina at Greensboro
xxii Acknowledgments

Kathy Pollock, Jaysinha Shinde,

Indiana University–Purdue University Eastern Illinois University
Fort Wayne Adrianne Slaymaker,
Duane Ponko, Metropolitan State University
Indiana University of Pennsylvania Duane Smith,
Dwayne Powell, Brescia University
Arkansas State University Beverly Strachan,
Abdul Qastin, Troy University at Montgomery
North Carolina A&T State Iris Stuart,
Linda Quick, California State University
University of South Carolina Christine N. Todd,
Hema Rao, Colorado State University–Pueblo
SUNY–Oswego John Trussel,
Jason T. Rasso, Penn State University–Harrisburg
University of South Florida Jerry L. Turner,
Yigal Rechtman, University of Memphis
Pace University Frank Venezia,
Barbara Reider, State University at Albany
University of Montana Barbara Vinciguerra,
Raymond Reisig, Moravian College
Pace University Bobby Waldrup,
John Rigsby, University of North Florida
Mississippi State University Rick Warne,
Pamela Roush, University of Cincinnati
University of Central Florida J. Donald Warren Jr.,
Maria Sanchez, Rutgers University
Rider University Christian Wurst,
Kristen Kelli Saunders, Temple University
University of South Carolina Tu Xu,
Tammi Schaefer, Georgia State University
University of South Carolina Xu Zhaohui,
Bunney L. Schmidt, University of Houston–Clear Lake
Utah Valley State College Lin Zheng,
Timothy Andrew Seidel, Northeastern Illinois University
University of Arkansas Douglas Ziegenfuss,
Carol Shaver, Old Dominion University
Louisiana Tech University

In addition, we would like to recognize our outstanding staff at McGraw-Hill: Man-

aging Director, Tim Vertovec; Brand Manager, Pat Plumb; Marketing Manager, Cheryl
Osgood; Product Developers, Rebecca Mann and Randall Edwards; Senior Content
Project Managers, Dana Pauley and Angela Norris; Buyer, Laura Fuller; and Designer,
Matt Diamond. For their encouragement, assistance, and guidance in the production of
this book, we are grateful.
 Acknowledgments xxiii

Few understand the enormous commitment of time and energy that it takes to put
together a textbook. As authors, we are constantly scanning The Wall Street Journal and
other news outlets for real-world examples to illustrate theoretical discussions, reread-
ing and rewriting each other’s work to make sure that key concepts are understandable,
and double-checking our solutions to end-of-chapter problems. Among the few who do
understand the time and energy commitment are our family members (Barbara Louwers;
Kristin, Jackson, Elijah, Jonah, Ansley, and Laney Grace Blay; Karen, Matthew, Joshua,
and Adam Sinason; Susan and Meghan Strawser; and Ellen, Jenny, Eric, and Jessica
Thibodeau) who uncomplainingly endured endless refrains of, “I just need a couple more
minutes to finish this section.” Words cannot express our gratitude to each of them for
their patience and unending support.
Tim Louwers
Allen Blay
Dave Sinason
Jerry Strawser
Jay Thibodeau
Brief Contents
PART ONE
The Contemporary Auditing Environment
1. Auditing and Assurance Services
2. Professional Standards 40
PART TWO
The Financial Statement Audit
3. Engagement Planning 75
4. Management Fraud and Audit Risk
PART THREE
Stand-Alone Modules
1 Please refer to pages xviii–xxiii for guidance
on when to best integrate these modules.
A. Other Public Accounting Services 583
B. Professional Ethics 628
C. Legal Liability 676
D. Internal Audits, Governmental Audits, and
117 Fraud Examinations 720

5. Risk Assessment: Internal Control E. Overview of Sampling 762

Evaluation 173 F. Attributes Sampling 795
6. Employee Fraud and the Audit of Cash 227 G. Variables Sampling 835
7. Revenue and Collection Cycle 279 H. Auditing and Information Technology 883
8. Acquisition and Expenditure Cycle 336
9. Production Cycle 394 CASES C1
10. Finance and Investment Cycle 443 INDEX I1
11. Completing the Audit 500
12. Reports on Audited Financial Statements 540

xxiv
Contents
PART ONE
THE CONTEMPORARY AUDITING
ENVIRONMENT
Chapter 1
Auditing and Assurance Services 1
User Demand for Reliable Information 2
Information Risk in a Big Data World 3 Practices 56
Auditing, Attestation, and Assurance
Services 4
Definition of Financial Statement Auditing
Auditing in a Big Data Environment 6
Attestation Engagements 7
Assurance Services 9
Examples of Assurance Services 10
Management’s Financial Statement Assertions 12
Existence or Occurrence (Existence, Occurrence)
Rights and Obligations
(Rights and Obligations) 14
Completeness (Completeness, Cutoff) 15
Valuation and Allocation (Accuracy or
Valuation) 15
Presentation and Disclosure (Classification,
Understandability) 15
Importance of Assertions 17
Professional Skepticism 18
Public Accounting 21
Assurance Services 21
Tax Services 23
Consulting and Advisory Services 23
Other Kinds of Engagements and Information
Professionals 24
Internal Auditing 24
Governmental Auditing 25
Regulatory Auditors 26
Become a Professional and Get Certified! 26
Education 27
Examination 27
Experience 28
State Certificate and License 29
Skill Sets and Your Education 30
Summary 31
Key Terms 31
Multiple-Choice Questions for Practice and
Review 32
Exercises and Problems 37
Chapter 2
Professional Standards 40
Introduction 41
Generally Accepted Auditing Standards (GAAS) 42
Fundamental Principle: Responsibilities 45
Fundamental Principle: Performance 48
Fundamental Principle: Reporting 54
Evaluating the Quality of Public Accounting Firms’
System of Quality Control 56
PCAOB Inspection of Firms 58
5 Summary 60
Key Terms 61
Multiple-Choice Questions for Practice and
Review 63
Exercises and Problems 66
Appendix 2A
13
Referencing Professional Standards 73
PART TWO
THE FINANCIAL STATEMENT AUDIT
Chapter 3
Engagement Planning 75
Introduction 76
Pre-Engagement Activities (AU-C 300, AS 2101) 77
Client Acceptance or Continuance 77
Compliance with Independence and Ethical
Requirements 79
Engagement Letters 80
Audit Plan (AU-C 300, AS 2101) 82
Staffing the Audit Engagement 83
Considering the Work of Internal Auditors
(AU-C 610, AS 2605) 84
Using the Work of an Audit Specialist
(AU-C 620, AS 1210) 85
Use of IT Auditors 85
Time Budget 85
Materiality (AU-C 320, AS 2105) 87
Materiality Calculation 89
Audit Procedures for Obtaining Audit
Evidence (AU-C 500, AS 1105) 90
1. Inspection of Records and Documents 93
2. Inspection of Tangible Assets 96
xxv
xxvi Contents

3. Observation 96 Inquiry of Audit Committee, Management, and Others

4. Inquiry 96 within the Company 145
5. Confirmation 97 Overall Assessment and Documentation of Inherent Risk
6. Recalculation 97 Assessment (AU 500, AS 1105, AU 265,
7. Reperformance 97 AS 2201) 146
8. Analytical Procedures 98 Document Risk Assessment 147
Planning in a Computerized Environment 99 Fraud and Other Significant Risks (AU 330,
Effect of Client’s Computerized Processing AS 2301) 147
on Audit Planning 100 Communication of Fraud Risks 148
Computer-Assisted Audit Techniques (CAATs) 102 Auditors’ Responsibilities for Noncompliance with
Audit Documentation (AU-C 230, AS 1215) 104 Laws and Regulations (AU 250, AS 2405) 149
Permanent Files 104 Audit Strategy Memorandum 151
Current Files 105 Summary 152
Audit Documentation Arrangement and Indexing 106 Key Terms 152
Summary 108 Multiple-Choice Questions for Practice and
Key Terms 109 Review 154
Multiple-Choice Questions for Practice and Exercises and Problems 158
Review 110 Appendix 4A
Exercises and Problems 114 Selected Financial Ratios 169

Chapter 4 Appendix 4B
Sample Audit Memorandum 170
Management Fraud and Audit Risk 117
Introduction 118
Audit Risk (AU 320, AS 1101) 119 Chapter 5
Audit Risk 119
Risk Assessment: Internal Control
Inherent Risk 120
Control Risk 120
Evaluation 173
Detection Risk 120 Introduction 174
Audit Risk Model 120 Internal Control Defined 175
Fraud Risk (AU-C 240, AS 2401) 124 Management Versus Auditors’ Responsibility for
Fraud 126 Internal Control 176
Types of Fraud 128 Auditors’ Internal Control Responsibilities 176
128
Other Definitions Related to Fraud Components of Internal Control 179
Inherent Risk Assessment—“What Could Go Control Environment 180
Wrong?” (AU 315, AS 2110) 130 Risk Assessment 181
Understanding the Client’s Business and Control Activities 183
Its Environment 132 Information and Communication 187
Industry, Regulatory, and Other External Factors 132 Monitoring 188
The Nature of the Company 133 Limitations of Internal Control 190
Related Parties 133 Internal Control Evaluation 191
Selection and Application of Accounting Principles, Phase 1: Understand and Document the Client’s Internal
Including Related Disclosures 134 Control 192
Company Objectives, Strategies, and Related Business Phase 2: Assess the Control Risk (Preliminary) 197
Risks 135 Phase 3: Identify Controls to Test and Perform Tests of
Company Performance Measures 137 Controls 199
Gathering Information and Preliminary Analytical Responsibilities in Public Company Audits Required
Procedures 137 by PCAOB Auditing Standard No. 2201 203
General Business Sources 137 Requirements 204
Company Sources 138 Internal Control Communications 207
Information from Client Acceptance or Continuance Summary 208
Evaluation, Audit Planning, Past Audits, and Other Key Terms 209
Engagements 138 Multiple-Choice Questions for Practice and
Preliminary Analytical Procedures Review 210
(AU 520, AS 2110) 138 Exercises and Problems 214
Audit Team Brainstorming Discussions 144 Appendix 5A
 Contents xxvii

Audit Plan 220 Significant Accounts and Relevant Assertions 285

Appendix 5B Risk of Material Misstatement 287
Revenue Recognition 287
Auditor Reports on Internal Control over Collectability of Accounts Receivable 290
Financial Reporting 220 Customer Returns and Allowances 290
Internal Control Activities and Design Evaluation 290
Chapter 6 Entity-Level Controls in the Revenue and
Collections Cycle 291
Employee Fraud and the Audit Control Considerations at the Account and
of Cash 227 Assertion Level 291
Introduction 228 Tests of Operating Effectiveness of Internal
Employee Fraud Overview 229 Control 293
Employee Fraud Red Flags 230 Summary: Control Risk Assessment 296
Characteristics of Fraudsters 230 Substantive Analytical Procedures and Tests of
The Fraud Triangle (AU-C 315, AS 2401) 232 Details 297
Incentive/Pressure 233 Analytical Procedures 300
Opportunity 233 Confirmation of Accounts and Notes Receivable 301
Attitude/Rationalization 234 Alternative Procedures 305
Fraud Prevention 235 Additional Notes about Confirmations 306
Managing People and Pressures in the Workplace 235 Dual-Purpose Nature of Accounts Receivable
Internal Control Activities and Employee Confirmations 306
Monitoring 236 Review for Collectability 306
Tone at the Top 238 Cutoff and Sales Returns 307
The Audit of Cash 239 Audit Risk Model Applied 309
Audit Evidence Used to Test Cash 239 Application in the Field 309
Significant Accounts and Relevant Assertions 243 Audit Cases: Extended Audit Procedures
Risk of Material Misstatement 244 (AS 2301) 310
Evaluating the Design and Operating Effectiveness of Summary 317
Internal Controls 244 Key Terms 317
Substantive Procedures 250 Multiple-Choice Questions for Practice and
“Extended Procedures” to Detect Fraud 257 Review 318
Summary 260 Exercises and Problems 322
Key Terms 261 Appendix 7A
Multiple-Choice Questions for Practice and Internal Control Questionnaires 332
Review 262
Exercises and Problems 265 Appendix 7B
Appendix 6A Audit Plan 334
Internal Control Questionnaires 276
Appendix 6B Chapter 8
Audit Plans 278 Acquisition and Expenditure Cycle 336
Introduction 337
Chapter 7 Acquisition and Expenditure Cycle: Typical
Activities 338
Revenue and Collection Cycle 279 Purchasing Goods and Services 338
Introduction 280 Receiving the Goods or Services 340
Revenue and Collection Cycle: Typical Recording the Asset or Expense and Related
Activities 280 Liability 341
Receiving and Processing Customer Orders, Including Significant Accounts and Relevant Assertions 341
Credit Granting 281 Accounts Payable 342
Delivering Goods and Services to Customers 282 Expenses 343
Billing Customers and Accounting for Accounts Risk of Material Misstatement 344
Receivable 282 Internal Control Activities and Design Evaluation 346
Management Reports and Data Files in the Revenue and Entity-Level Controls 346
Collection Cycle 283 Control Considerations 346
xxviii Contents

Custody 348 Chapter 10

Periodic Reconciliation 348
Testing of Operating Effectiveness of Internal Finance and Investment Cycle 443
Control 349 Introduction 444
Tests of Controls 349 Finance and Investment Cycle: Typical
Substantive Analytical Procedures and Tests of Activities 445
Details 351 Financing the Entity through Debt and
Open Purchase Orders 351 Stockholder Equity 446
Audit Risk Model Applied 359 Financial Planning (1) 447
Fraud Cases: Extended Audit Procedures (ISA/AS Raising Capital (2) 447
2301) 361 Investing Transactions: Investments and
Audit Issues in the Expense and Acquisition Intangibles (3) 449
Cycle 364 Significant Accounts and Relevant Assertions 452
Summary 365 Risk of Material Misstatement 453
Key Terms 365 Fair Market Value 454
Multiple-Choice Questions for Practice and Related-Party Transactions 455
Review 366 Lease Accounting 455
Exercises and Problems 369 Loan Covenants 456
Appendix 8A Impairments 457
Internal Control Questionnaires 377 Presentation and Disclosure 457
Internal Control Activities and Design
Appendix 8B Evaluation 458
Audit Plans 380 Control Considerations 460
Appendix 8C Tests of Operating Effectiveness of Internal Control 460
Control over Accounting Estimates 463
The Payroll Cycle 382 Authorization 464
Multiple-Choice Questions for Practice and Record Keeping 464
Review 390 Custody 465
Exercises and Problems 392 Summary: Control Risk Assessment 465
Substantive Analytical Procedures and Tests of
Chapter 9 Details 466
Auditing Fair Value Measurements (AS 2502) 472
Production Cycle 394 Derivative Instruments, Hedging Activities, and
Phar-Mor Inc. 395 Investments in Securities (AS 2503) 473
Production Cycle: Typical Activities 396 Long-Term Liabilities and Related Accounts 474
Significant Accounts and Relevant Assertions 400 Stockholders’ Equity: Substantive Procedures 476
Risk of Material Misstatement 402 Auditing Stock-Based Compensation Plans 476
Internal Control Activities and Design Fraud Cases: Extended Audit Procedures
Evaluation 404 (AS 2301) 477
Testing of Operating Effectiveness of Internal Summary 482
Control 408 Key Terms 484
Substantive Analytical Procedures and Tests of Multiple-Choice Questions for Practice and
Details 411 Review 484
Inventory Circumstances 416 Exercises and Problems 488
Audit Risk Model Applied 421 Appendix 10A
Fraud Case: Extended Audit Procedures (AS 2301) 421 Internal Control Questionnaires 496
Summary 423
Key Terms 425 Appendix 10B
Multiple-Choice Questions for Practice and Substantive Audit Plans 497
Review 426
Exercises and Problems 429 Chapter 11
Appendix 9A
Completing the Audit 500
Internal Control Questionnaires 439
Introduction 501
Appendix 9B Audit Timeline 502
Audit Plans 441 Procedures Performed During Fieldwork 504

Completing Substantive Procedures 504
Attorney Letters 505
Written Representations 509
Ability to Continue as a Going Concern 512
Adjusting Entries and Financial Statement
Disclosure 513
Audit Documentation Review 516
Subsequent Events and Subsequently
Discovered Facts 517
Subsequent Events 517
Subsequently Discovered Facts 519
Responsibilities Following the Audit
Report Release Date 521
Omitted Procedures 521
Communications with Individuals Charged with
Governance 521
Management Letter 523
Summary of Audit Communications 523
Summary 524
Key Terms 524
Multiple-Choice Questions for Practice and
Review 525
Exercises and Problems 528
Chapter 12
Reports on Audited Financial
Statements 540
Introduction 541
Overview of Auditors’ Reports 542
The Standard Report 543
Auditors’ Reports for Public Entities 544
Types of Opinions 546
Conditions That Require Modifications to
the Auditors’ Standard (Unmodified)
Report 547
Departures from GAAP 547
Scope Limitations 549
Audits of Group Financial Statements 553
Auditors’ Reports Referencing Other Matters
Encountered During the Audit 556
Consistency 556
“Going-Concern” Uncertainties 556
Other Information Accompanying Audited
Financial Statements 557
Required Supplementary Information 558
Other Modifications 559
Summary: Emphasis-of-Matter and Other-
Matter Paragraphs 559
Other Reporting Topics 560
Comparative Financial Statements 560
Summary Financial Statements 562
Supplementary Information 563
Disclaimers of Opinion 563
Summary 564
Key Terms 566
Contents xxix
Multiple-Choice Questions for Practice and Review 567
Exercises and Problems 569
PART THREE
STAND-ALONE MODULES
Module A
Other Public Accounting Services 583
Introduction 585
Attestation Engagements 585
Introduction to Attestation Engagements 585
Applying Agreed-Upon Procedures 588
Prospective Financial Information and Pro Forma
Financial Information 588
An Examination of an Entity’s Internal Control over
Financial Reporting That Is Integrated with an Audit
of Its Financial Statements (AT 501) 590
Compliance Attestation 591
Broker–Dealer Compliance 592
Management’s Discussion and Analysis 594
Service Organizations 594
Unaudited Financial Statements: Reviews,
Compilations, and Preparation Engagements 598
Review Services 598
Compilation Services 602
Preparation of Financial Statements 603
Summary of Audits, Reviews, and Compilations 604
Responsibilities Related to Reporting on Interim
Financial Information 604
Other Topics: Special and Restricted-Use
Reports 606
Specified Elements, Accounts, or Items 606
Special-Purpose Frameworks 607
Reports on Application of Requirements of an Appropriate
Financial Reporting Framework 609
Assurance Services 611
Why Develop New Assurance Services? 611
Definition: Assurance Services 612
eXtensible Business Reporting Language (XBRL) 613
Enhanced Business Reporting 613
Integrated Reporting 613
Trust Services 614
Sustainability Reporting 615
Summary 616
Key Terms 617
Multiple-Choice Questions for Practice and
Review 618
Exercises and Problems 621
Module B
Professional Ethics 628
Introduction 629
General Ethics 630
xxx Contents
An Ethical Decision Process 631
Philosophical Principles in Ethics 632
The Imperative Principle 632
The Principle of Utilitarianism (or
Consequentialism) 634
The Generalization Argument 634
Virtue Ethics 634
Ethical Codes of Conduct 635
U.S. Securities and Exchange Commission (SEC) 636
The Public Company Accounting Oversight Board
(PCAOB) 636
The International Federation of Accountants (IFAC) 636
The Professional Ethics Executive Committee (PEEC) of
the American Institute of CPAs (AICPA) 637
An Emphasis on Independence 639
American Institute of Certified Public Accountants 639
SEC and PCAOB Independence Rules 646
Other Effects of Sarbanes–Oxley on Auditor
Independence 648
Government Accountability Office (GAO) Independence
Requirements 649
AICPA Rules of Conduct: Integrity and
Objectivity, Responsibilities to Clients, and Other
Responsibilities 650
Integrity and Objectivity Rule 650
General Standards Rule 652
Compliance with Standards Rule 651
Accounting Principles Rule 652
Confidential Client Information Rule 652
Fees and Other Types of Remuneration 654
Acts Discreditable Rule 656
Advertising and Other Forms of Solicitation Rule
Form of Organization and Name Rule 658
The International Ethics Standards Board for
Accountants (IESBA) Code 659
Consequences of Violating the Code of
Professional Conduct 659
Self-Regulatory Discipline 659
Public Regulation Discipline 660
Summary 662
Key Terms 663
Multiple-Choice Questions for Practice and
Review 663
Exercises and Problems 667
Module C
Legal Liability 676
The Legal Environment 678
Liability Under Common Law 680
Liability to Clients 680
Liability to Third Parties 681
Liability for Compilation and Review Services 686
Liability Under Statutory Law 687
The Securities Act of 1933 (Securities Act) 688
Section 11: Civil Liability 688
Auditors’ Defenses under the Securities Act 689
Section 13: Statute of Limitations 690
Section 17: Antifraud 690
Section 24: Criminal Liability 690
The Securities Exchange Act of 1934
(Securities Exchange Act) 691
Section 10 and Rule 10(b)-5: Antifraud 691
Section 18: Civil Liability 693
Auditors’ Defenses under the Securities Exchange Act 693
Section 32: Criminal Liability 694
Foreign Corrupt Practices Act (FCPA) 694
Summary of Auditors’ Liability to Clients and
Third Parties 695
The Changing Landscape of Auditors’ Liability 697
Sarbanes–Oxley 697
Racketeer Influenced and Corrupt Organizations Act 698
Aiding and Abetting 699
Organization of Accounting Firms as
Limited Liability Partnerships 699
Proportionate Liability 700
Class-Action Suits 700
Auditors’ Liability Caps 702
Other Developments 702
Summary 703
Key Terms 704
Multiple-Choice Questions for Practice and
Review 705
Exercises and Problems 710
Module D
Internal Audits, Governmental Audits,
657
and Fraud Examinations 720
Introduction 721
“External,” Governmental, and Internal Audits 722
Internal Audits 723
Independence 723
Value-Added Audit 725
Scope of Service 726
Internal Audit Standards 730
Internal Audit Reports 731
Governmental Audits 732
Types of Governmental Audits 734
Audit Procedures—Economy, Efficiency, and
Program Results Audits 735
GAO Government Auditing Standards 737
Single Audit Act of 1984 and Amendments of 1996 738
GAO Audit Reports 739
Fraud Examinations 741
The Art of Fraud Examinations 743
Fraud Examiner Responsibilities 745
Building a Fraud Case 747
Protecting the Evidence 747
Obtaining Litigation Support 747
Summary 747
Key Terms 749
 Contents xxxi

Multiple-Choice Questions for Practice and Appendix F.A

Review 749 AICPA Sample Size Tables 832
Exercises and Problems 753
Appendix F.B
Module E AICPA Sample Evaluation Tables 834
Overview of Sampling 762
Module G
Introduction 762
What Is Sampling? 763 Variables Sampling 835
When Should Sampling Be Used? 764 Introduction 836
Sampling Risk versus Nonsampling Risk 764 Role of Variables Sampling in the Audit 836
Statistical Sampling versus Nonstatistical Sampling 766 Definition of Variables Sampling 836
The Basic Steps Involved with Sampling 767 Monetary Unit Sampling (MUS) 837
Planning 767 Steps 1–3: Planning 839
Performing 768 Step 4: Determine the Sample Size 839
Documenting the Sampling Procedure 771 Step 5: Select the Sample Items 842
Use of Sampling in the Audit 772 Step 6: Measure the Sample Items 844
Study and Evaluation of Internal Control 773 Step 7: Evaluate the Sample Results 845
Substantive Procedures 775 Other Variables Sampling Approaches 849
Summary: Sampling Risks for Audit Sampling 777 Variables Sampling: Documenting 850
An Overview of Audit Sampling 777 Summary 851
Planning (Steps 1–3) 777 Key Terms 852
Performing 777 Multiple-Choice Questions for Practice and
Evaluate Sample Results (Step 7) 779 Review 853
Documenting the Sampling Procedure 779 Exercises and Problems 856
Example of Audit Sampling 779 Appendix G.A
Summary 780 AICPA MUS Tables 872
Key Terms 780
Multiple-Choice Questions for Practice Appendix G.B
and Review 782 Classical Variables Sampling 874
Exercises and Problems 785
Appendix G.C
Module F Nonstatistical Sampling 881
Attributes Sampling 795
Module H
Introduction 796
Role of Attributes Sampling in the Audit 796 Auditing and Information Technology 883
Planning 797 Introduction 884
Step 1: Determine the Objective of Sampling 797 Information Technology (IT) Systems 885
Step 2: Define the Characteristic of Interest 797 Reliance on It Controls 887
Step 3: Define the Population 798 General Controls 887
Performing 799 Automated Application Controls 894
Step 4: Determine the Sample Size 800 Output Controls 896
Step 5: Select the Sample Items 805 Assessing Control Risk in an It Environment 898
Step 6: Measure the Sample Items 806 Testing Controls in an It Environment 900
Step 7: Evaluating the Sample Results 808 End-User Computing and Other Environments 901
Calculating the Upper Limit Rate of Deviation 808 End-User Computing Control Considerations 901
Making the Evaluation Decision 810 Service Organizations 903
Qualitative Evaluation of Deviations 811 Computer Abuse and Computer Fraud 904
Documenting 812 Preventive, Detective, and Damage-Limiting Controls 905
Other Attributes Sampling Methods 813 Computer Forensics 907
Summary 814 Summary 907
Key Terms 814 Key Terms 908
Multiple-Choice Questions for Practice Multiple-Choice Questions for Practice and
and Review 815 Review 908
Exercises and Problems 819 Exercises and Problems 910
xxxii Contents
Cases
Andersen: An Obstruction of Justice? C1
PTL Club—The Harbinger of Things to Come? C5
GM: Running on Empty? C11
Unhealthy Accounting at HealthSouth C14
KPMG: How Many Firms? C17
Something Went Sour at Parmalat C20
GE: How Much Are Auditors Paid? C23
Satyam Computer Services Ltd.—India’s Enron C26
Auditor Changes at Daily Journal Corporation C30
London Has Fallen C33
Lehman Brothers: Subprime Accounting? C34
Bernard L. Madoff: The Fraud of the Century C37
When the Music Stops: Crazy Eddie’s C40
Index I1
 CHAPTER 1

Auditing and
Assurance Services

Our system of capital formation relies upon the confidence of millions of

savers to invest in companies. The auditor’s opinion is critical to that trust.
James R. Doty, Chairman, Public Company Accounting Oversight Board
(PCAOB)

Professional Standards References

AU-C/ISA AS
Topic Section Section

1001, 1005,
Overall Objectives of the Independent Auditor 200 1010, 1015
Consideration of Fraud in a Financial Statement Audit 240 2401
Audit Evidence 500 1105
Attestation Standards AT 101 AT 101
Compliance Auditing Considerations in Audits of Recipients of Governmental Financial Assistance 935 6110

LEARNING OBJECTIVES to master these professional auditing standards.

You are about to embark on a journey of
understanding how auditors work to keep the
capital markets safe and secure for the investing
public. You should know that students demonstrate
success in the auditing course quite differently than
they do in other accounting courses. For example,
when taking financial accounting, students typically
demonstrate success by correctly identifying the
proper journal entry for a given set of facts and
circumstances. In auditing, success is typically
demonstrated by completing multiple-choice, short-
answer, and simulation-type questions based on the
professional standards that regulate the auditing
process. Overall, this book provides you with a
comprehensive set of materials that will allow you
Chapter 1 provides an introduction to the auditing
and assurance profession.
Your objectives are to be able to:
LO 1-1 Define information risk and explain how the
financial statement auditing process helps to
reduce this risk, thereby reducing the cost of
capital for a company.
LO 1-2 Define and contrast financial statement
auditing, attestation, and assurance services.
LO 1-3 Describe and define the assertions that
management makes about the recognition,
measurement, presentation, and disclosure
of the financial statements and explain why
auditors use them as the focal point of the
audit.

1
2 Part One The Contemporary Auditing Environment

LO 1-4 Define professional skepticism and explain LO 1-6 Describe the audits and auditors in
its key characteristics. governmental, internal, and operational
LO 1-5 Describe the organization of public auditing.
accounting firms and identify the various LO 1-7 List and explain the requirements for becom-
services that they offer. ing a certified public accountant (CPA) and
other certifications available to an account-
ing professional.

USER DEMAND FOR RELIABLE INFORMATION

LO 1-1
Define information risk and
explain how the financial
statement auditing process
helps to reduce this risk,
thereby reducing the cost of
capital for a company.
In 2002, the Sarbanes–Oxley Act was passed as a direct response to a wave of major
financial statement frauds that had just occurred at companies like Enron, WorldCom,
and Tyco. While the law was passed many years ago, the effect of this landmark legisla-
tion on financial statement auditing has been far reaching. Perhaps the most important
change ushered in by the law is that financial statement auditing of public companies is
regulated. Specifically, the Public Company Accounting Oversight Board (PCAOB) is
now responsible for setting all audit standards to be followed on audits of public com-
panies. In addition, the PCAOB is required to perform inspections of the audit work
completed and the quality control processes employed by audit firms. As a direct result,
accounting students should know that if they plan to work as financial statement audi-
tors, they will be entering a world that is focused on audit quality. Consider the following
Auditing Insight.

AUDITING INSIGHT Audit Quality

In July 2015, the PCAOB released a concept statement that detailed
28 different indicators of audit quality. The indicators were cat-
egorized within three broad categories. The first category, audit
professionals, focused on measures such as partner workload and
industry expertise of professionals. The second category, audit pro-
cess, focused on measures such as compliance with independence
requirements and PCOAB inspection results. The third category, audit
results, focused on measures such as number of client restatements
and client frauds. The list is a clear indication to students that qual-
ity matters more than anything else in their future work as auditing
professionals.
Source: PCAOB Concept Release on Audit Quality Indicators: Release
No.2015-005, July 1, 2015. Available at http://pcaobus.org/Rules/Rulemaking/
Docket%20041/Release_2015_005.pdf.

Why is audit quality so important? Well, both investors and creditors depend on
reliable financial statement information to make their investment and lending decisions
about a company. As a result, the confidence of investors and creditors is shaken each
and every time that audit quality is compromised. In fact, before we think about audit
quality any further, we must first explain the vital role that financial statement auditors
play in supplying key decision makers with useful, understandable, and timely infor-
mation. When you have a better understanding of why auditing is so critical to help
ensure the liquidity of the world’s capital markets, we will then explore in detail the
process auditors take to help ensure that audit quality is achieved. Because many of you
are likely planning to enter the public accounting profession and work as an auditor, we
hope that you will work hard to acquire this knowledge so that you may do your part in
playing a key role in maintaining the public’s confidence in both the auditing profes-
sion and the capital markets.
Another random document with
no related content on Scribd:
 CHAP. II.
It was long ere Sebastian could calm the anguish of her, who still
“Warmed his fond heart, and beat in every pulse:”

To the pang of parting, quickly succeeded the tortures of suspense; her

child was at the mercy of an ocean whose horrors she had herself
experienced too awfully not to apprehend similar disaster for others.
Aziek soon ceased to complain, but Sebastian’s watchful eyes marked
the sudden alteration in hers at every blast of wind. Those wintry storms
which formerly served to heighten the sublimity of their scenery, were now
heard with horror: the pale cheek, the lifted eye, the scarce-breathed, half-
checked apostrophe, all testified the suffering of an anxious mother.
Sebastian perceived the inutility of remonstrance and exhortation; these
might teach her to conceal her grief, but they could not bring her to conquer
it: he abandoned them therefore, contenting himself with winning her to
other interests, and planning new calls upon her benevolence.
He talked perpetually of Blanche, he talked without gloom; he reverted
to her sweet manners and virtues, he repeated the anecdotes of her
childhood, (anecdotes, which a mother never ceases to hear with interest) he
drew various imaginary pictures of her future destiny, and he took care to
make those pictures pleasing. By degrees Kara Aziek learnt to associate the
prospect of happiness with this temporary privation; she learnt to believe
the sanguine fortunes he foretold, and her mind, permitted to dwell on one
dear object, readily took the only way he chose should lead to it. If tears
sometimes trickled down her cheek at the name of her far-distant treasure,
they were tender tears, full of gratitude and hope.
The tedious months at length wore away, and letters arrived from Sicily.
What were the emotions of the parents when they saw the writing of
their daughter, and were thus assured of her safety! for some time they
could not read her letter; but they opened not any other, their child’s
sentiments and situation absorbed all their interest. Having recovered
himself, Sebastian read the letter aloud, though his voice and his hand yet
betrayed signs of remaining agitation.
The letter contained an account of Blanche’s voyage, a warm
acknowledgement of Gaspar’s cares, description of her reception by the
Duchess of Medina Sidonia, and a confession of her pleasurable emotions
on witnessing the customs and refinements of Europe.
To these details was added the most affecting expressions of love for her
parents, and of sorrow at their wide separation: it was evident that the
simple enjoyments of her native village yet held their place in her
uncorrupted heart; the amusements of Sicily could not displace them, for
these amusements only gratified her senses.
Charmed with the Duke and Duchess of Medina Sidonia, she described
their kindness in glowing language: her delineation of their sentiments
relieved Kara Aziek from many fears; with such noble persons she could
trust her daughter’s heart.
The packets from De Castro and Gaspar were chiefly on business:
Sebastian perused them attentively. They informed him that Queen
Elizabeth’s favorable disposition yet remained unimpaired, but that being
desirous of acting on certainties, and avoiding indiscreet reliance on her
good faith, De Castro thought it expedient to return to London with his
credentials from Sebastian, for the settlement of a final treaty between
them; of which Princess Blanche should be the pledge on the side of
Portugal, and an immediate loan of money, (for the furtherance of their
schemes,) the guarantee on the part of England.
This arranged, he would instantly send for Blanche, who might be safely
committed to Gaspar, and would be permitted to retain this watchful friend
about her person, at the court of London.
Through the exertions of Lord Essex, some German Princes had
promised to join the triple league against their common enemy, and Henry
of France, (perhaps secretly favoring those principles he had weakly yielded
up to gain a throne,) actually advanced an unconditional sum of money for
the aid of Sebastian’s agents in their various missions.
A formidable expedition under the gallant Essex, was fitting out in the
ports of England; the capture or destruction of Cadiz was its object. But the
most extraordinary part of this communication, was contained in the
following sentences.
 “Amongst the volunteers in our expedition, there are two, at whose
names your majesty will start. Antonio of Crato, and his son Don
Christopher. For some time the prior had been upheld by the English, but on
discovering the instability and levity of his character, they abandoned his
interests: I found him living a neglected and private individual in London.
“He was unconscious that my exertions here were caused by any
stronger motive than the abhorrence of the Spanish yoke, (for our secret
goes not beyond a small circle) and he deemed it right to visit me—my
reception was so cold, that he quickly left me, and we have never met since.
“He is embarked in the enterprize, foolishly believing that it is meant for
his exaltation: Lord Essex is aware of the use which may be made of this
folly, (as it indeed serves to mask the real candidate for Portugal) and
suffers him therefore to boast as he will.
“Don Christopher is of a different stamp: there is an honourable
melancholy about him, that touched me at first sight; it is easy to perceive
that he blushes at the remembrance of his mother, and that the story of your
majesty’s wrongs has reached his ears. He accompanies the Earl of Essex as
his lieutenant: for he is a true patriot, and seems earnest to make some
atonement for the sins of his parents. Let me, sire, bespeak your favor for
him, when you meet him in Portugal.”
At this mention of his perfidious cousin, Sebastian felt an emotion long
unknown: his blood ran cold, and hastily putting down the letter, he took up
that of Gaspar.
Kara Aziek had no attention to bestow on the abject Prior of Crato: she
was absorbed in grateful contemplation of the happy prospect before her.
Don Emanuel had enumerated so many Spanish and Portuguese nobles,
eager to assist in the re-establishment of Sebastian or his offspring, that it
would have been criminal to refuse placing some confidence in their efforts.
England, France, and Holland, were on their side, and nothing remained to
be concluded, except the signing of a treaty, and the delivery of their mutual
pledges.
With these prospects she was not merely consoled, she was inspirited:
for the first time since the departure of Blanche her lovely eyes shone with
happiness, and she smiled without effort. Her hopes were gay, her joy
unclouded; for of the political world and its tumults, she had experienced
too little to form a distant idea of its rapid mutations.
 Sebastian on the contrary, though he abounded in hope also, formed an
instantaneous picture of all the struggles and vicissitudes likely to follow
the public proclamation of his claims. The lives, the fortunes, of every one
embarked in his cause were now at stake: if Spain should feel in herself the
strength adequate to resistance, she would certainly refuse to yield back the
crown of Portugal, at the mere summons of England. War then, must decide
it at last; that war which he had hitherto so carefully shunned!
To the painfulness of this reflection he opposed the chief argument of De
Castro, which consisted in the horrible oppression of Philip: his extortions
and cruelty, daily ruined or maddened some noble Portuguese; he carried
their youth to fight against the Netherlands, and since not even personal
safety was purchased by submission to his yoke, was it not better to shed
their blood in brave resistance?
Aided by other powers, they would contend on equal terms, in point of
physical strength: and the force of a powerful sentiment would surely give
them superiority in all that related to opinion.
Revived by this reasoning, Sebastian banished the gloom of useless
regret, yet he could not cease to occupy himself with conjecture and
anticipation:—his mind was active and anxious, but that activity and that
anxiety were full of cheerfulness.
From this day the discourses of Sebastian and Kara Aziek lost their
pensive strain: they conversed more frequently together, and the theme they
dwelt on was their return to Europe. Time seemed long to them, because
they were eager, but it had ceased to be sad.
In these new emotions their former duties were not forgotten: as they
anticipated a removal from Cachoeira, its peaceful inhabitants, formed by
their care, and dependent on their goodness, became more interesting to
them; the Guaymures had claims on their hearts, which neither Sebastian
nor Kara Aziek were of a nature to disregard. They now redoubled their
solicitude for their welfare; and Sebastian already decided on leaving part
of his property in the hands of two respectable Portuguese, who had settled
near his abode: to these men he might safely trust it, as a deposit for the
promotion of public works, or as a fund in case of any unexpected calamity
by fire.
Months had gone by, and the second appearance of ships from that
quarter of the globe where all their interests was centered, was looked for
eagerly by Sebastian and Kara Aziek: the ships arrived.
Assured of his daughter’s health by seeing her hand writing, and now
deeply solicitous to learn the event of the pending negociation, Sebastian
transferred her letter to his wife, and opened the packet from Don Emanuel.
It was written immediately after his second return from England: it was
full of joyous expectation, Elizabeth had acceded to all the requests of the
King of Portugal; she was ready to exchange a large subsidy for the person
of the Princess Blanche; her expedition against Spain had sailed, and the
moment she should obtain some advantage there, and have the presumptive
heiress of Portugal in her possession, she meant to send and demand of
Philip the restitution of her father’s kingdom.
De Castro was come back to Sicily for the purpose of securing his
brother-in-law’s support to the measures of England: by the council of his
nobles, Philip might be influenced to resign a crown which he could not
keep without their assistance.
Affairs then were at their crisis; or rather that crisis was past, and at this
moment, Blanche was either residing in the palace of her ancestors, and
accepted as the representative of her father, or dwelling in England, while
foreign armies were disputing for her father’s rights.
The agitation excited by this idea, was yet fresh in the hearts of Kara
Aziek and her Sebastian, when a vessel with dispatches to the governor,
brought intelligence that Cadiz was taken by the English, that it was
suspected they meant to send out a fleet against Spanish America, and that
consequently the governor was called on to prepare for obstinate defence.
These news reached Cachoeira by the messenger who brought a letter
that had come in the same ship.
The letter was from Gaspar, and but a month later in date than that of De
Castro: it was short and afflicting: Don Emanuel was dead. A long and
violent fever with which he had been seized soon after his return to
Messina, had delayed the departure of Blanche, and had at last terminated
the life of her most valuable friend.
De Castro had died in the full belief that Providence favoured the cause
of justice and his King; he had died at the brightest moment of their
enterprize; he was therefore to be envied perhaps, if Providence should will
a different fate, and ordain disappointment to the allies.
 But what a shock was this event! what a loss! the grief of Sebastian was
as profound as remembrance of De Castro’s past services, and dependence
on his exertions might be expected to render it: he lamented not only the
best of men, but the most zealous of friends. The sinew of his strength was
gone; nay rather, was not De Castro the soul of every project?
A solemn check was here given to those anticipations which had so
lately spread joy through Cachoeira: one blow, taught him who had been
stricken by repeated misfortune, to expect another, and while he mourned
the companion he loved, he trembled to imagine that new calamities might
be in store for himself and others.
Kara Aziek entered into all his feelings; her daughter, deprived of this
faithful protector, whom power and influence rendered more valuable than
the humbler though equally devoted Gaspar, pressed on her heart, and
called aloud for succour.
Upon the affection of the Duke and Duchess of Medina, she slightly
calculated, (for we do not receive strong impressions by mere description,
we must witness attachment, to rely on its existence) Kara Aziek only saw
her inexperienced daughter, alone, desolate, and sad, going amongst
strangers, to whose honour she must trust for generous treatment.
Distracted, bewildered, unconscious of what to wish or to propose, she
fell into a passion of grief which Sebastian understood but too well. He was
standing buried in thought: at the sound of her sobs he started, and
approaching her to support her, said in a composed tone: “We have indeed
lost our best friend, my Aziek! he cannot be replaced. Ought I not to
consider his death as the vice of Heaven calling me to abandon this solitude
and appear on the scene myself? Even in his most sanguine moments De
Castro regarded England with suspicion, and knew her to be guided by self-
interest: that base principle may as easily lead to her betraying my affairs,
as to her advancing them. What then would be the fate of our Blanche?
rouse yourself my beloved! we must stand the shock of peril together—my
resolution is taken—I quit Brazil.”
At these words Kara Aziek flung herself on his bosom with a cry of joy;
she had lost sight of every object except her daughter, and contemplating
her desolate state, possible danger to her husband was forgotten. “O my
Sebastian!” she exclaimed, “let us indeed brave the world united; give me
back my child, and then whatever be the destiny awarded us, we shall meet
it with courage. Here, our peaceful days are over—long, long have they
been over, without Blanche we live on, bereft of our soul.—Shall we ever
see her again? O thought too blissful!”
She ceased, overcome with an emotion which Sebastian endeavoured to
moderate, by assuring her that when once they had regained their daughter,
no political motive should induce him to resign her a second time.
The letter from Caspar was again read; and a long postscript which
Sebastian had overlooked in his first consternation, now served to guide
him in his plan for the future.
This postscript informed him that Juan (the cousin of Don Emanuel) had
set off for England with the intelligence of their loss; and that the detention
of Blanche had been agreed upon amongst them, until Queen Elizabeth
should fulfil her promise by sending part of the stipulated subsidy. This
caution, together with the length of time which must pass ere Don Juan
could return, (in consequence of the secret and circuitous route by which all
voyages to an enemy’s country were necessarily taken) animated Sebastian
to hope that his daughter had not yet left Sicily, and that he might find her
still at Messina.
It was his intention rather to become his own pledge of faith, than to risk
the security of his child. Known in Sicily as the orphan ward of Don
Emanuel, she had hitherto lived unsuspected, under the protection of his
sister: it was true, most people concluded her to be the illegitimate offspring
of her reputed guardian, but that conclusion excited no further inquiries, and
threatened her with no danger: it was therefore the safest asylum in which
affection could place her.
Having formed his resolution, Sebastian lost no time in beginning to act:
he settled his arrangements at Cachoeira; he left the largest portion of his
remaining property in the hands he had proposed, and preparing his mind
for toils and troubles to which it was now disused, he bade an eternal
farewel to Brazil.
It was a day of dismal sadness at Cachoeira, when its founder departed:
the importunate lamentations of his Indians followed him even to St.
Salvador; many of them petitioned to go with him, some refused to quit his
side till they saw him embarked, others flung themselves into the sea and
swam after the ship.
 Sebastian had thanks and benedictions for them all: Kara Aziek repaid
them with her tears, and affectionate though mournful smiles. She knew
they were never to meet again, and her heart ached to think how delusive
were the hopes of their return, which each ardent native continued to
express, and demanded to have confirmed.
At length the sounds of sorrow no longer reached them from the
receding shore, it became more distant every moment, it lessened to a
speck, it sunk beneath the horizon! They looked back, and that vast
continent was blotted out from their sight: nothing remained but their
solitary vessel in the midst of that solemn and toiling ocean, beyond which
they were going to court difficulty and danger.
Their situation was like that of a soul returning a second time into mortal
life, after having long reposed on the calm of another world. Kara Aziek
doubted whether she should have strength to encounter the cares
inseparable from such a change; and Sebastian searched his spirit to
discover some of that fire and decisiveness which once predominated in his
character, though it had lain dormant at Cachoeira.
Bereft of Don Emanuel De Castro, he felt dependent chiefly on himself:
(for Don Juan he remembered merely as a very young lord whose character
was not yet developed when they sailed for Africa,) he shuddered to think
what might ensue should the Duke of Medina fail him at this awful
moment: should he have betrayed the secret of Blanche’s birth, her parents
might be hastening only to hear that their innocent child was immured in a
Castillian prison; but should he prove faithful, his counsel might in some
measure atone for the loss of De Castro.
Sebastian revolved these thoughts with deep attention; for the period was
critical, and he was about to play a solemn game that staked his liberty and
his life, the safety of his wife and daughter, and the existence of Portugal.
 CHAP. III.
Filled with such agitating interests, neither Kara Aziek nor Sebastian
marked the dangers of their voyage: they heard the raging storms without
apprehension; mightier storms were threatening from afar, of still-deadlier
import, and though they cherished a rational hope of finding the scene less
fearful than they dreaded, they felt a presentiment of impending evils.
In something more than three months they reached St. Lucar, whence
they immediately took a passage up the Straits, to Messina.
They had re-embarked, and the vessel was under weigh, when a stranger
put off in a boat from the shore, and gained the ship. He had come post
from Madrid on some business near St. Lucar, and was now anxious to
reach the Venetian gulph where he calculated on obtaining a birth in some
vessel proceeding to Venice: his looks were those of a man who has just
quitted a scene of confusion: he had indeed left the capital of Castille an
hour after its gloomy tyrant had breathed his last.
Philip the second was dead: and as if the whole fabric of her enormous
power was shaken by this event, the strangers in Madrid all hurried to
convey the news, each to his own country, anxious to proclaim that this was
the moment for crushing the despotism of Spain.
Sebastian was sitting alone with Kara Aziek in the cabin they had
exclusively engaged for themselves, when the captain suddenly entered, and
unconscious of the peculiar interest his passengers had in such a
communication, imparted the death of Philip merely as a piece of news. He
then bolted out again, leaving Sebastian transfixed with surprise.
This event was indeed important to him: it was that which would give
his confederates every advantage, by affording them the opportunity of
falling upon Spain at a moment when her unsettled government could but
feebly resist, or would find it policy to comply with their demands: such an
event looked like an omen of success.
Amazement had struck both Sebastian and Kara Aziek speechless: they
did not hear the concluding sentence of the captain, who had requested
leave to send his new passenger into their cabin, as he was of rank, and no
other part of the ship was fit for his reception; they were startled therefore
to see a stranger of good mien and richly habited, enter their apartment.
The bright flush of their countenances subsided directly, and they turned
towards the windows; for Sebastian was anxious to avoid the chance of
recognition.
The stranger hesitated; at length closing the door, he advanced and
apologized for his intrusion, pleading the necessity occasioned by a violent
fall of rain, which drove him from the deck, and obliged him thus to throw
himself upon the politeness of others.
The gentleman spoke in Italian, which was evidently his native tongue.
His address was too courteous for Kara Aziek to persist in an appearance
of incivility; she turned round, and pronounced with hesitation, the
permission he sought.
Sebastian remained as if in thought, with his face to the windows; the
stranger sat down: he continued to converse with his fair companion, who
listened attentively, since he talked of the event which occupied her
thoughts. He spoke eloquently of the atrocious crimes that had disgraced
the life of Philip, and hazarded several acute conjectures upon the changes
which his death would produce in the cabinets of Europe. In particular, he
described one of the tyrant’s most insolent acts to the republic of Venice,
and anathematized his iniquitous treatment of Portugal.
At this part of his harangue, Sebastian unconsciously turned round, and
fixed an earnest look on the speaker; the latter started, stretched eagerly
forward, betrayed signs of doubt and surprize, and for a moment was silent;
but he resumed his discourse, on seeing that Sebastian precipitately moved
away.
While the Italian continued to speak, he watched every movement of
Sebastian: his countenance rapidly expressed the succession of thoughts
which this observation excited; suddenly rising he came directly in front of
the person he scrutinized. At this action an indignant flush crimsoned
Sebastian’s features; his look became severe; and the proud majesty with
which he stepped back from the advance of his observer, made the latter
pause.
“I mean not to offend, Sir!” said the stranger, respectfully inclining his
head, “Gracious Virgin! can it be possible; I know not what to—I dream
surely!—so many years!—if I am right in my suspicion, my knee should
follow the homage of my mind.”
Sebastian saw that he was discovered, but resolving to retain
concealment as long as possible, he gravely replied, “your manners surprise
me, sir! I am unconscious of ever having seen you before.”
The stranger still kept his eyes rivetted to the face of Sebastian, but their
expression was rather inviting than hostile. “My memory assures me, sir,”
he returned, “that I have seen you before: it was in the palace of Santos de
Veiel, on the coast of Algarve, where I went on a secret mission from the
Venetian Republic, to the young king of Portugal. Many years have gone by
since that period, but I still retain the impression made on me by Don
Sebastian’s most princely lineaments and gracious presence.—His
moderation, justice, and magnanimity in the conduct of state business, I had
then an opportunity of observing; his ardent piety was no less my
admiration:—and since the fatal year in which he was said to have perished,
I have always been one of those who most eagerly listened to the various
stories of his re-appearance.—I wish you to know me completely, sir: I am
Signor Giuseppe Morosini: the name of the noblest house in Venice, is, I
trust, a herald of honour:—at this day, my brother holds the first dignity of
the republic.”
“Your mien announced your nobility, sir!” replied Sebastian,
endeavouring to preserve the repelling coldness with which he awed the
vivacity of the Italian: Signor Morosini looked disappointed and
embarrassed; this remark did not answer his question, and he feared to
repeat it.
“My enthusiasm transports me too far;” he said, after a short silence, “if
you are not the personage I imagine; my discourse must sound like the
ravings of a madman, pardon me sir, I have no curiosity; respect and
disinterested zeal, alone dwell in my heart.—I see that I am not understood
—or not recollected—or not credited:—I am at a loss what to do.”—
The Venetian stopt, and sitting down, Sebastian perceived that he
contrived to let his mantle fall off, and discover below the collar of his ruff,
a device of diamonds which fastened it to his vest: this very bauble he
remembered having given to the Venetian envoy, at the period mentioned
by this stranger. He now examined him attentively; and as Signor
Morosini’s countenance had lost its vivacity, and taken an air of
mortification, that expression came nearer to the serious air of a man of
business: he began to recollect his features and his figure; though the
former were extremely darkened, and the latter greatly enlarged since they
had met at De Veiel. But still he shrunk from precipitate disclosure, and
remained silent.
Kara Aziek, in whom the stranger’s first address had awakened a
thousand fears, now recovered from that impression, and exchanged an
approving glance with Sebastian: she ventured not to speak, and for some
time, silence succeeded to the warmth of energetic discourse.
The reflections of Sebastian were fluctuating and troubled: his nature led
him to implicit confidence in the protestations of a man of whom he
remembered nothing that was not honourable; but experience had taught
him to doubt and to investigate, ere he trusted past recal.
Yet in what way should he act? if Signor Giuseppe were permitted to
depart under the impression which it was evident he retained, pique at being
distrusted, might render him forward to describe the person he had seen,
and the surprise that encounter had caused him. Such conduct must prove
destructive of that secrecy, which, for awhile, should belong to Sebastian’s
intercourse with Spanish subjects: he would be traced to Messina, to the
abode of the Duke de Medina Sidonia’s wife, and the sacrifice of their
whole family might follow the annihilation of his own.
Was it not better therefore, to take a bold step, and rely at once on the
honour and truth of this Venetian? his near relationship to the Doge, and the
aversion he expressed to the memory of Philip, might be fairly considered
as grounds for confidence; and if his favorable remembrance of the
Portuguese monarch, inspired him to attempt acquiring for the confederate
powers, the assistance of Venice, his friendship must be considered as an
important advantage.
These thoughts were agitating her husband, while Kara Aziek tried to
support languid conversation with Signor Morosini: the latter preserved a
timid and mortified air, yet now and then he stole an earnest glance towards
both his mysterious companions.
Sebastian suddenly approached, and lowering his voice, said, “I would
learn from you, noble Venetian, the name of him for whom you take me?”
Signor Giuseppe raised his head, and said frankly, “For Don Sebastian
himself.”
 Sebastian gave no other answer than a gracious smile: the Venetian
seized the confession made by this well-remembered smile, and bent his
knee to the ground; the King gave him his hand, raised him up, and seated
himself by his side.
Signor Morosini, with the vivacity of his country, then began to pour
forth expressions of sincere joy, of wonder, of curiosity: he was eager to
learn where the King of Portugal could have been concealed so long; and
ere Sebastian found voice to reply, had imagined a thousand fantastic and
improbable adventures, which he uttered with more than his usual rapidity.
Sebastian briefly replied, then added, “You find Signor, that I know what
is due to the bare word of an honorable man: you have merely assured me
that you wish to serve me, and relying on that assurance, I no longer
hesitate to employ your friendship in negotiation with the Republic. For my
long irresolution at our first meeting, your own sense of discretion will
plead: in circumstances like mine, caution is a virtue.”
Signor Morosini replied with an excess of urbanity: his looks witnessed
his words; and the readiness with which he promised to use the utmost
diligence and prudence, in his negotiation with the Doge and the Senate,
forced Sebastian to confess, that his warmest friends were ever those on
whom he had no right to calculate.
Kara Aziek had retired to another part of the cabin, and taking up some
needlework, ventured not to share in a discourse, where every word was of
consequence to Sebastian, who alone could know how much to withhold or
to confide.
She observed that he never mentioned Blanche, that he prayed leave to
postpone telling the whole of his adventures, and that although he spoke of
England, France, and Holland, as favourably disposed towards him, he did
so in general terms; declining further explanation, until Venice had
determined on what course she would pursue.
Signor Giuseppe understood only, that the King of Portugal was going to
seek some old friend in Sicily; and solemnly swearing not to confide that
secret, even to his brother, he promised to be speedy in dispatching news of
success or failure, to Messina.
Thus situated, the vessel brought them to the mouth of the Venetian
gulph.
 So many ships were proceeding to Venice, that Signor Morosini found
no difficulty in procuring the passage he sought: he renewed his promises
of secresy and devotedness, and getting into a felucca, was soon removed
from the vessel of Sebastian.
Filled with unexpected satisfaction by this Providential rencontre, and
led to hope complete success, since Philip was snatched from the world,
Sebastian discouraged not the expression of Kara Aziek’s joyful feelings.
He believed that the terror of Philip’s name no longer operating to
intimidate other sovereigns, past injuries would make them rise to limit the
power of his successor, such an event must prove a signal for Portugal to
start forward in her own cause: and if at the same time her long-lost
monarch should appear at the head of a confederate army, would not his
miraculous appearance stimulate them to victory.
It was now that the sun once more shone out over the darkened fate of
Sebastian: how various, how trying had been his lot! but he was becoming
accustomed to change; and that equanimity of soul which so peculiarly
distinguishes those who have passed through many vicissitudes, was
already visible, equally under sunshine or under storms.
Kara Aziek was less philosophic, and more animated; she thought their
allotted time of suffering had reached its termination, and fondly
anticipating a re-union with her daughter, trusted that after this moment,
their destiny must remain bright and secure.
The wind favored her eagerness: their vessel proceeded rapidly, and
gained the port of Messina.
The house of Marco Cattizone (a name assumed by Gaspar, who
believed it prudent to lull curiosity, by passing for an Italian) was easily
discovered: as Sebastian and Kara Aziek approached it, their hearts
throbbed with apprehension, lest they should not find him: if he were gone
to England with Blanche, another tedious voyage must be taken.
They had wrapped themselves in large mantles to conceal their figures,
without appearing to have studied concealment, and having landed towards
night, they reached the house unnoticed. Sebastian knew that Gaspar had
married the favorite woman of the Duchess Medina, (by whom this little
estate was given as her dowry) he was therefore prepared to act cautiously,
when appearing thus unexpectedly before a friend, whose surprise might
betray him into indiscretion.
 Having learned that Marco Cattizone was at home and alone in his
garden, he went with Kara Aziek into a retired room, and desired him to be
sent for. In a few moments Gaspar entered: Sebastian and Kara Aziek stood
with their faces averted till the servant had closed the door, they then turned
round, and Gaspar uttered a cry of joy: the next instant his countenance
changed, and he exclaimed, “In the name of God, dearest master, why are
you here? this precipitate step”—His looks expressed the apprehension he
felt.
Regardless of themselves, the impatient parents only pronounced the
name of Blanche. “She is here, blessed be Heaven!” returned Gaspar, “still
the care and delight of our good Duchess.”
“Does she remember us,” exclaimed Kara Aziek, “does she love us as
she used to do?”
Gaspar’s animated reply drew a flood of joyful tears down the cheeks of
the tender mother: lost in delightful anticipations, she listened not to the
alternate interrogatories and explanations of Sebastian and his friend; when
they spoke of the subject nearest her heart, she was all ear again.
They spoke of Blanche’s prolonged stay at Messina.—Caspar confessed,
that after the death of Don Emanuel de Castro, some wavering conduct on
the part of Queen Elizabeth, had rendered him fearful of committing so
precious a pledge to her good faith. Elizabeth had taken advantage of their
loss, to dictate new terms of alliance, and in her conversation with Father
Texere, had stipulated for two of the most important islands belonging to
Portugal, in the Atlantic and Indian ocean, to be given her as a
compensation for her services, in case Don Sebastian should be restored:
the repayment of the subsidy, of course, was not abandoned in her altered
articles.
Her avidity, and the ungenerous advantage thus taken of desperate
circumstances, had alarmed Gaspar, and disgusted the other adherents of
Sebastian: they deemed it right to detain Princess Blanche till the English
Queen should come back to her former terms; since once delivered into her
possession, the safety of Blanche might be turned by her into an instrument
of fresh extortion.
The ultimatum of the confederate nobles had lately been sent to London,
and at this period, Don Juan De Castro, (who was the bearer of it) was daily
expected to arrive with the decision of Elizabeth.
 Intelligence like this must have struck a death-blow to the hopes of
Sebastian, had he not possessed a ground of encouragement in the prospect
of Venetian aid, and some consolation from the death of him who had
trampled on his country: his countenance was undismayed. “Let us not
despond, my friend! I have other resources yet.—Providence has not
abandoned your King:—our prime enemy is gone to answer for all his
crimes against God and man,—Philip of Spain is dead.”
Gaspar looked as if doubtful whether he were dreaming or awake, he
turned a vacant gaze from Sebastian to Kara Aziek: the former repeated his
assertion, briefly adding the source whence his information was derived.
That explanation led to a narrative of the adventure with Signor Morosini;
at which Gaspar passed from the extreme of despondency, to the extreme of
joy.
All his trouble vanished: he rightly believed that the accession of fresh
allies would force Elizabeth into moderation and fidelity; and that Philip III.
unwilling to strain the nerves of an infant government, and eager to regain
those friends which his gloomy predecessor had spurned from him, might
yield with a good grace to the mediation of so many princes, and restore the
crown of Portugal.
Relieved from the torture of contemplating future disasters, he now
considered the arrival of his sovereign, as an alarum to raise the spirits and
confirm the loyalty of his adherents; and no longer apprehensive for his
personal security, he delivered himself up to the gratifications of friendship.
Only the remembrance of De Castro, the generous De Castro, saddened
this meeting: his activity and virtues were sincerely eulogised: his last hours
were described by Gaspar; and many were the tears which then embalmed
his memory.
The distance of villa Rosolia, obliged Kara Aziek to resign the
expectation of embracing her daughter before the next day. Gaspar dwelt at
Messina for the convenience of receiving and forwarding dispatches beyond
sea; and Kara Aziek divined, that as his wife still retained her situation
about the person of the Duchess, he had formed the connection chiefly that
he might visit the villa unnoticed by the other domestics; thus preserving
his intercourse with the Duke, and his interest in Blanche undiscovered.
Villa Rosolia was two leagues off, but Gaspar deemed it expedient to
dispatch a messenger with a letter to Blanche under cover to his wife,
informing her of the arrival of her parents, and preparing her to receive
them on the ensuing day.
The return of this messenger brought a letter from Blanche written in the
overflowings of filial joy: she named an early hour for receiving her parents
on the morrow, when she hoped they were to meet never to part again.
Parental emotions banished sleep from the pillow of Kara Aziek and
Sebastian: their night was spent in conversation about her, upon whom hung
all their domestic happiness. Would they find her still the same artless and
admirable creature they had parted with in Brazil! would the same beautiful
countenance present itself unchanged to their partial sight?
A multitude of natural doubts and fears moderated their joy, but
increased their impatience, and they rose soon, to commence their short
journey to Rosolia.
Gaspar had the self-denial to remain behind, lest his appearance in
familiar society with the visitors of the Duchess Medina, should excite
curiosity in her household.
The hired carriage which conveyed them from Messina, was not long of
bringing them to the gate of the villa. At beholding that house which
contained her child, Kara Aziek’s emotion was heightened to painfulness:
she turned pale, grew faint, and alighting from the carriage, tottered into a
hall, almost unconscious of existence.
Having paused a little to recover herself, a servant led them into an
unoccupied apartment, where they were immediately joined by their
daughter.—She came alone.
At her entrance, both parents stretched out their arms towards her,
without having power to advance; they scarcely saw the beautiful young
creature who sprung to their embrace with the bloom of a Hebé, and a
sensibility which covered her glowing cheeks with tears: they knew it was
their child; for her voice vibrated in well-remembered sweetness on their
ear. They blessed, they embraced, they wept over her; they murmured out
their gratitude to Heaven; and lost to every thing else, thought only that
they were indeed met to part no more.
When this mutual transport had a little subsided, they were able to look
attentively on Blanche: it was not her extreme beauty (though she was
lovelier than any “mortal mixture of earth’s mould”) that elevated and
delighted their hearts; it was the expression which made that beauty
beautiful to them. Her eyes still beamed the tenderness and sweetness of her
mother, her brow yet announced the energy and heroism of her father: her
manner was still simple and modest; her words the language of unperverted
truth.
The mutual details of this happy family may be easily imagined: they
consisted on the part of the parents in the repetition of what they had
already repeated to Gaspar; and on the side of Blanche, in accounts of her
habits of life, and such interesting anecdotes of her protectress as were
connected with them.
She informed her father that the Duke had been sent for express the
evening before, on the death of Philip II. and ere Sebastian reached
Messina, had gone for Spain with his only son Don Hyppolito, in order to
appear at the first council of their new sovereign. This circumstance, though
it robbed Sebastian of that Nobleman’s advice, was yet to be considered as
replete with advantages, since in quality of counsellor to the new monarch,
he might add his influence to the Portuguese party, when England and the
other allies should openly proclaim in his favor.
Eager to introduce her protectress, Blanche now hastened away for that
purpose; she returned, preceded by the Duchess.
Her resemblance to Don Emanuel deeply affected Sebastian, he kissed
her hand in silence, and as he lifted up his head again, the Duchess saw that
tears were on his cheek; interpreting their cause, she too, turned aside to
hide rising emotion.
It is only a half-sorrow which seeks to display itself: true grief, like true
virtue, courts the shade.
Not a heart there, but was full of De Castro’s memory, yet not a lip
trusted itself to breathe his name.
The conversation flowed less on the past, than the future. Sebastian
found that the Duchess possessed an acute and penetrating mind: she had
entered into all the views of her brother and husband; and though the latter
had never consented to act in rebellion against his own lawful sovereign, he
was forward to avow his abhorrence of usurpation, and to prove it, by
entering his protest against a detention of the Portuguese crown, should
Philip refuse to resign it on the appearance of Sebastian.
She stated these principles with perfect candour, professing no more in
her husband’s name, than she knew him earnest to perform. She offered
Sebastian the protection of her house, and the use of the revenues attached
to it; for the family of Medina Sidonia was the richest in Spain, and this
Sicilian estate made but a small part of their wealth.
Impressed by her generous conduct, both Sebastian and Kara Aziek
renewed those protestations of eternal gratitude which they had first uttered,
while acknowledging all they owed to her for her maternal care of their
daughter, but they neither required nor accepted any additional favors
beyond that of shelter for awhile.
Happy were the days that now flowed away at the villa Rosolia; in the
enjoyment of life’s most hallowed affections, the parents and the child
refused to allow any moment of their time to distracting cares; they were all
absorbed in each other.
Gaspar might be said to hover over their domestic circle; for his spirit
was always with them, though their inequality of rank rendered the
discretion of distant respect an act of necessity. At some periods however,
this restraint was amply compensated. Innocent stratagems were devised by
which he had opportunities of conversing whole hours with his noble
friends; and though his wife was not entrusted with the secret of Blanche’s
connexion with these extraordinary strangers, she knew them to be his
former master and mistress, and wondered not at their graciousness to her
husband.
Letters from Spain and Venice changed the calm aspect of villa Rosolia.
—Medina Sidonia wrote, that he found the new King well-inclined to
lighten the burthens which his predecessor had imposed on the Portuguese,
nay, that he was aware of the danger of driving them to despair, and the
policy of conciliation; and that he had listened with attention to Medina’s
suggestion of placing at the head of their government their first noble, the
Duke of Braganza. This suggestion had been hazarded to try Philip’s pulse,
and from the moderation with which he received it, Medina sanguinely
concluded, that he would not attempt retaining the crown when the
legitimate owner was proved to be living.
Signor Morosini’s packet contained more substantial good fortune: it
accompanied an invitation from the Doge, for Don Sebastian to repair
immediately to Venice, where he promised (on certain conditions,
advantageous for the republic, and not inimical to the interests of Portugal)
to protect him against Spain, to procure the assistance of other Italian states,
and if supported by England and France, to take up arms in his cause.
Among the motives for gratitude to Don Sebastian which the Venetian
republic felt and acknowledged, was a very considerable loan of money
which she had borrowed at a time of imminent want, and which she had not
since been able to return. Sebastian had cancelled the debt; and he now
received this forwardness to assert his rights, as an honourable proof that
political virtue had not abandoned the world.
A list of illustrious names was subscribed to this letter: he well
remembered many of their signatures, that had been inscribed on official
papers at the period alluded to, and no longer doubting either the sincerity
or the success of Signor Morosini, he once more gave the reins to his
sanguine nature, and believed himself justified in trusting to the honor of
the Venetians.
This seemed the crisis of his fate, the hour that was to determine whether
Portugal should be emancipated, or doomed to eternal slavery. The bold act
of suddenly claiming his rights from the bosom of an independent state,
would fix the wavering inclinations of France and England; Holland had
never retracted her good faith; and thus supported, Sebastian believed
himself called on to resolve decisively.
It was important for him to secure the friendly offices of some powerful
personage in his own dominions, and to whom could he look with such
certainty, as to his kinsman the duke of Braganza?
This nobleman was that Theodosius, Duke of Barcelos, who at eleven
years old had borne a royal standard over the field of Alcazar: he was now
the only representative of their ancient house. To him, (as one dear to his
recollection, and well acquainted with his hand-writing) Sebastian intended
to address a confidential letter, informing him of his existence, and of his
determination to repair immediately to Venice, whence he should send a
summons to Philip for the restoration of his dominions.
Gaspar eagerly offered to become the bearer of this important dispatch,
fearful that any messenger less aware of its momentous nature, might fail of
delivering it, or loiter on his way. Gaspar’s long absence from Portugal
persuaded him that his person would be worn out of the memory of all but
his most familiar associates, and to none of them, except his sisters, was his
return from Barbary known. Besides the motive of duty, he pleaded his