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JOHNSTONE
GRAMLING
RITTENBERG
AUDITING
A Risk-based Approach
11T H E D I T I O N 11T H E D I T I O N
AUDITING A Risk-based Approach

AUDITING A Risk-based Approach
JOHNSTONE | GRAMLING | RITTENBERG JOHNSTONE | GRAMLING | RITTENBERG
To register or access your online learning solution or purchase materials 11T H

for your course, visit www.cengagebrain.com.
EDITION
SE / Johnstone/Gramling/Rittenberg / Auditing: A Risk-Based Approach, 11e ISBN-13: 9781337619455 ©2019 Designer: Stratton Design
Printer: Xxxxx Binding: Casebound Trim: 8.5” x 10.875” CMYK
19455_fm_hr_i-xxxi.indd 4 1/24/18 3:36 PM
Contents
PREFACE xiii Review Questions and Short Cases 44

ABOUT THE AUTHORS xxvii Fraud Focus: Contemporary and Historical Cases 49
How Can You Learn by Leveraging The Features Application Activities 54
of this Textbook? xxix Academic Research Cases 55
1 Quality Auditing:
Why It Matters 2 2 The Auditor’s Responsibilities
Regarding Fraud and
Mechanisms to Address Fraud:
An Overview of External Auditing 4 Regulation and Corporate
Decision Makers’ Need for Reliable Information
and the Role of a Financial Statement Audit 4 Governance 56
What Is a Financial Statement Audit? 6
Parties Involved in Preparing and Auditing Financial Fraud Defined 58
Statements 9 Misappropriation of Assets 58
Providers of External Auditing Services 9 Fraudulent Financial Reporting 58
Skills and Knowledge Needed by External Auditors 10
The Fraud Triangle 60
Achieving Audit Quality 11 Incentives or Pressures to Commit Fraud 62
Audit Firm Culture 12 Opportunities to Commit Fraud 62
Skills and Qualities of the Engagement Team 13 Rationalizing the Fraud 63
Effectiveness of the Audit Process 13
Reliability and Usefulness of Audit Reporting 13 History of Fraudulent Financial Reporting 64
Factors Outside the Control of Auditors 14 Examples of Recent Frauds and Implications for External
Auditors 64
Professional Conduct Requirements that Help Insights from COSO Studies 64
Auditors Achieve Audit Quality 15 The Enron Fraud 67
AICPA Requirements: Code of Professional Conduct 16
Fraud: Auditors’ Responsibilities and Users’
SEC and PCAOB: Other Guidance on Professional
Responsibilities 25 Expectations 72
International Professional Requirements That Help Fraud-Related Requirements in Professional Auditing
Auditors Achieve Audit Quality 27 Standards 72
Frameworks for Professional and Ethical Decision The Sarbanes-Oxley Act of 2002 as a Regulatory
Making 28 Response to Fraud 74
A Framework for Professional Decision Making 28 Corporate Governance Defined 77
A Framework for Ethical Decision Making 32 Characteristics of Effective Corporate Governance 80
Importance of Client Acceptance and Continuance Responsibilities of Audit Committees 81
Decisions to Audit Quality 35 Significant Terms 84
Risks Considered in Client Acceptance and Continuance
Prompt for Critical Thinking 85
Decisions 37
Other Considerations 39 Review Questions and Short Cases 86
Engagement Letters 39 Fraud Focus: Contemporary and Historical Cases 91
Significant Terms 41 Application Activities 95
Prompt for Critical Thinking 44 Academic Research Cases 97 v

vi Contents
3 Internal Control Over Financial

Reporting: Responsibilities of
Management and the External
Importance of Internal Control to the External
Audit 131
Application: Assessing Control Design Effectiveness,
Implementation, and Operating Effectiveness 131
Auditor 98 Significant Terms 135
Importance of Internal Control Over Financial
Review Questions and Short Cases 137
Reporting 100
Fraud Focus: Contemporary and Historical Cases 144
Internal Control Defined 101
Entity-Wide Controls and Transaction Controls 103 Application Activities 145
Control Environment 105 Academic Research Cases 147
Commitment to Integrity and Ethical Values
4
(COSO Principle 1) 106
The Board of Directors Exercises Oversight Responsibility Professional Legal
Management Establishes Structure, Authority, and Liability 148
Responsibility (COSO Principle 3) 107
The Organization Demonstrates Commitment to The Legal Environment and the Effects of Lawsuits
Competence (COSO Principle 4) 107 on Audit Firms 150
The Organization Enforces Accountability Liability Doctrines 150
Class Action Lawsuits 151
Risk Assessment 109 Contingent-Fee Compensation for Lawyers 151
Management Specifies Relevant Objectives The Audit Viewed as an Insurance Policy: The Expectations
(COSO Principle 6) 109 Gap 152
The Organization Identifies and Analyzes Risk
Applicable Laws and Causes of Legal Action 153
Types of Law and Legal Actions Relevant to Auditors 153
The Organization Assesses Fraud Risk (COSO Principle 8) 110
Parties that May Bring Suit Against Auditors 154
The Organization Identifies and Analyzes Significant Change
(COSO Principle 9) 110 Auditor Liability under Contract Law, Common Law,
Control Activities 111 and Statutory Law 156
The Organization Selects and Develops Control Activities Contract Law: Liability to Clients 156
(COSO Principle 10) 112 Common Law: Liability to Third Parties 157
Management Selects and Develops General Controls Over Statutory Law: Liability to Third Parties 158
Technology (COSO Principle 11) 115 Significant Terms 162
The Organization Deploys Control Activities Through Policies
and Procedures (COSO Principle 12) 116 Review Questions and Short Cases 163
Information and Communication 117 Fraud Focus: Contemporary and Historical Cases 167
The Organization Uses Relevant Information Application Activities 168
The Organization Communicates Internally Academic Research Case 169
5
The Organization Communicates Externally
(COSO Principle 15) 118 Professional Auditing
Monitoring 120 Standards and the Audit
The Organization Conducts Ongoing and/or Separate Opinion Formulation
Evaluations (COSO Principle 16) 120
Management Evaluates and Communicates Deficiencies
Process 170
Professional Auditing Standards 172
Management’s Responsibilities for Internal Control
Auditing Standards Issued by the AICPA, IAASB,
Over Financial Reporting 122 and PCAOB 173
Management Documentation of Internal Control 122
Comparing the Auditing Standards 174
Management Reporting on Internal Control Over Financial
Reporting 123 Principles Underlying the Auditing
Evaluating Internal Control Over Financial Reporting 125 Standards 175
Assessing Deficiencies in Internal Control Over Financial PCAOB Guidance—Five Topical Categories
Reporting 127 of Standards 175

Contents vii
AICPA Guidance: Principles Governing an Audit 176 Additional Evidence Considerations 247
IAASB Guidance: Objectives of an Audit 176 Auditing Management Estimates 247
Overview of the Audit Opinion Formulation Process 177 Auditing Related-Party Transactions 249
Using a Specialist/Expert to Assist with Obtaining
Audit Opinion Formulation Process: Accounting Audit Evidence 251
Cycles 179
Documenting Audit Evidence 253
Audit Opinion Formulation Process: Financial Documenting Risk Assessment Procedures 253
Statement Assertions 180 Documenting Tests of Controls and Substantive
Existence or Occurrence Assertion 181 Procedures 254
Completeness Assertion 181 Documenting Significant Findings and Their Resolution 255
Rights and Obligations Assertion 182 Characteristics of Quality Audit Documentation 255
Valuation or Allocation Assertion 183 Audit Programs 257
Presentation and Disclosure Assertion 184 Applying Decision-Making Frameworks 259
Audit Opinion Formulation Process: Audit Evidence Significant Terms 260
and Audit Procedures 184
Evidence Example: Substantive Audit Procedures to Obtain Prompt for Critical Thinking 262
Evidence About Management’s Valuation Assertion 185 Review Questions and Short Cases 262
Audit Opinion Formulation Process: Audit Fraud Focus: Contemporary and Historical Cases 268
Documentation 186
Application Activities 272
Five Phases of the Audit Opinion Formulation
Academic Research Cases 275
Process 187
Phase I—Making Client Acceptance and Continuance Data Analytics Using ACL 276
Decisions 187
Phase II—Performing Risk Assessment 189
Phase III—Obtaining Evidence About Internal Control 194
7
Phase IV—Obtaining Substantive Evidence About Accounts,
Disclosures, and Assertions 202 Planning the Audit: Identifying,
Phase V—Completing the Audit and Making Reporting
Decisions 205
Assessing, and Responding
Applying Decision-Making Frameworks 207
to the Risk of Material
Significant Terms 208
Misstatement 278
Prompt for Critical Thinking 209 Materiality 280
Review Questions and Short Cases 210 Materiality Levels 281
Planning Materiality 282
Application Activities 219 Identifying and Assessing the Risk of Material
Misstatement 286
Academic Research Cases 221 Client Business Risks 286
The Audit Risk Model 291
6 Audit Evidence 222

Responding to Identified Risk of Material
Misstatement 303
Determining Evidence Needed in the Audit 303
Audit Procedures to Respond to the Assessed Risk of Material
Obtaining Sufficient Appropriate Audit Misstatement 306
Evidence 224 Applying Decision-Making Frameworks 309
Sufficiency of Audit Evidence 226
Appropriateness of Audit Evidence 228 Significant Terms 310
Audit Procedures 234 Prompt for Critical Thinking 311
Types of Audit Procedures 234 Review Questions and Short Cases 314
Timing of Procedures 240
Substantive Analytical Procedures 241
Performing Analytical Procedures 243
Brief Application of Substantive Analytical Procedures 246 Academic Research Cases 337

viii Contents
8 Specialized Audit Tools:

Attributes Sampling, Monetary
Unit Sampling, and Data
Identifying Fraud Risks 411
How do Fraudsters Perpetrate their Schemes?
Identifying Fraud Risk Factors 413
411
Identifying Control Risks 418

Analytics Tools 338 Controls Related to Existence/Occurrence 419
Controls Related to Completeness 421
Using Sampling and Data Analytics Tools for Controls Related to Valuation 421
Gathering and Evaluating Audit Evidence 341 Documenting Controls 423
Objectives of Sampling and Risks Associated with Performing Planning Analytical Procedures 425
Sampling 343 Responding to Identified Risks of Material
Nonsampling and Sampling Risks 343 Misstatement 428
Nonstatistical and Statistical Sampling 346 Obtaining Evidence About Internal Control
Attributes Sampling for Tests of Controls 349 Operating Effectiveness in the Revenue Cycle 430
Steps in Attributes Sampling 349 Selecting Controls to Test and Performing Tests
of Controls 432
Basic Steps in Sampling Account Balances and Considering the Results of Tests of Controls 434
Assertions: A Nonstatisical Sampling Application 362
Basic Steps in Sampling Account Balances and Assertions 362 Obtaining Substantive Evidence About Accounts,
Nonstatistical Sampling for Substantive Tests of Account Disclosures, and Assertions in the Revenue
Balances and Assertions 365 Cycle 435
Revenue and Accounts Receivable: Performing Substantive
Statistical Sampling for Substantive Tests of Account Analytical Procedures 437
Balances and Assertions: Monetary Unit Sampling Revenue: Substantive Tests of Details 438
(MUS) 367 Accounts Receivable: Substantive Procedures 439
Summary of MUS Strengths and Weaknesses 367 Accounts Receivable: Substantive Tests
Designing and Selecting a MUS Sample 368 of Details—Confirmations 439
Evaluating a MUS Sample 372 Accounts Receivable: Substantive Procedures for the
Using Data Analytics Tools to Obtain and Evaluate Allowance Account 447
Accounts Receivable: Other Substantive Procedures 448
Evidence 377
Performing Substantive Fraud-Related Procedures 449
Defining Data Analytics and Associated Terms 377
Documenting Substantive Procedures 452
Using Data Analytics Tools in the Audit 381
Business Intelligence Platforms 383 Applying Decision-Making Frameworks 454
Applying Decision-Making Frameworks 385 Significant Terms 454
Significant Terms 386 Prompt for Critical Thinking 455
Data Analytics: Spreadsheet Modelling
and Database Querying 399 Data Analytics Using Excel: A Case in the Context of
Academic Research Cases 399 the Pharmaceutical Industry 485
Data Analytics Using ACL 487
9 Auditing the Revenue

Cycle 400
Data Analytics Using Tableau
488
10
Significant Accounts, Disclosures, and Relevant
Assertions 402 Auditing Cash, Marketable
Processing Revenue Transactions 404
An Overview of the Audit Opinion Formulation Process in the
Securities, and Complex
Revenue Cycle 406 Financial Instruments 490
Identifying Inherent Risks 407
Inherent Risks: Revenue 407 Significant Accounts, Disclosures, and Relevant
Inherent Risks: Accounts Receivable 410 Assertions 493

Contents ix
Common Cash Accounts: Checking, Cash Management, Fraud Focus: Contemporary and Historical Cases 556
and Petty Cash Accounts 493
Relevant Financial Statement Assertions 494
An Overview of the Audit Opinion Formulation Process Data Analytics: Spreadsheet Modelling
for Cash Accounts 497 and Database Querying 567
Identifying Inherent Risks 498
Identifying Fraud Risks 499
11
Identifying Control Risks 501
Typical Controls Over Cash 502
Auditing Inventory, Goods
Implications of Ineffective Controls 505 and Services, and Accounts
Controls for Petty Cash 507 Payable: The Acquisition
Controls for Cash Management Techniques 507
Documenting Controls 507
and Payment Cycle 568
Performing Planning Analytical Procedures 510
Responding to Identified Risks of Material Assertions 571
Misstatement 512 Processing Transactions in the Acquisition and Payment
Obtaining Evidence about Internal Control Operating Cycle 572
Assertions Relevant to Inventory 573
Effectiveness for Cash 514
Assertions Relevant to Accounts Payable 574
Selecting Controls to Test and Performing Tests
of Controls 514 An Overview of the Audit Opinion Formulation Process in the
Acquisition and Payment Cycle 575
Considering the Results of Tests of Controls 515
Obtaining Substantive Evidence about Cash Identifying Inherent Risks 575
Accounts, Disclosures, and Assertions 516 Identifying Fraud Risks 577
Cash Accounts: Performing Substantive Analytical Identifying Control Risks 578
Procedures 518
Overview of Internal Controls in the Acquisition
Cash Accounts: Performing Substantive Tests of Details 518 and Payment Cycle 579
Performing Substantive Fraud-Related Procedures for Cash Documenting Controls 586
Accounts 524
Documenting Substantive Procedures 525 Performing Planning Analytical Procedures 588
Auditing Marketable Securities 526 Responding to Identified Risks of Material
Significant Accounts, Disclosures, and Relevant Misstatement 592
Assertions 526
Obtaining Evidence About Internal Control
An Overview of the Audit Opinion Formulation Process
for Marketable Securities 528
Operating Effectiveness in the Acquisition
Identifying Inherent, Fraud, and Control Risks Relevant and Payment Cycle 594
to Marketable Securities 528 Selecting Controls to Test and Performing Tests
Performing Planning Analytical Procedures for Marketable of Controls 594
Securities 531 Considering the Results of Tests of Controls 595
Responding to Identified Risks of Material Obtaining Substantive Evidence About Accounts,
Misstatement 531 Disclosures, and Assertions in the Acquisition
Obtaining Evidence about Internal Control Operating
and Payment Cycle 598
Effectiveness for Marketable Securities 532
Substantive Tests of Inventory and Cost of Goods Sold 598
Obtaining Substantive Evidence about Marketable
Substantive Tests of Accounts Payable and Related Expense
Securities 532
Accounts 611
Auditing Complex Financial Instruments 536 Documenting Substantive Procedures 616
Overview of Complex Financial Instruments 536
Audit Considerations for Complex Financial
Instruments 536 Significant Terms 619
Applying Decision-Making Frameworks 540 Prompt for Critical Thinking 620
Significant Terms 541 Review Questions and Short Cases 621
Prompts for Critical Thinking 542 Fraud Focus: Contemporary and Historical Cases 630
Review Questions and Short Cases 545 Application Activities 634

x Contents
Data Analytics Using Excel: A Case in the Context Applying Decision-Making Frameworks 681
of the Pharmaceutical Industry 637 Significant Terms 682
Academic Research Cases 640 Prompt for Critical Thinking 683
ACL 640 Review Questions and Short Cases 684
12
Auditing Long-Lived
Assets and Merger and
Acquisition Activity 642

13 Auditing Debt, Equity,
and Long-Term Liabilities
Requiring Management
Assertions 645
Activities in the Long-Lived Asset Acquisition and Payment
Estimates 700
Cycle 645
Relevant Financial Statement Assertions 646 Significant Accounts, Disclosures, and Relevant
An Overview of the Audit Opinion Formulation Process in the Assertions 702
Revenue Cycle 646 Debt 702
Identifying Inherent Risks 647 Equity 703
An Overview of the Audit Opinion Formulation Process
Identifying Fraud Risks 649 for Debt and Equity 705
Identifying Control Risks 650 Identifying Inherent Risks 705
Internal Controls for Long-lived Assets 652 Inherent Risks—Debt 705
Documenting Controls 653 Inherent Risks—Equity 705
Performing Planning Analytical Procedures 654 Identifying Fraud Risks 707
Responding to Identified Risks of Material Identifying Control Risks 709
Misstatement 656 Controls—Debt 709
Controls—Equity 709
Obtaining Evidence About Internal Control
Documenting Controls 710
Operating Effectiveness for Long-Lived Asset
Accounts and Related Expenses 660 Performing Planning Analytical Procedures 710
Selecting Controls to Test and Performing Tests of Responding to Identified Risks of Material
Controls 660
Misstatement 711
Considering the Results of Tests of Controls 661
Obtaining Evidence about Internal Control Operating
Obtaining Substantive Evidence About Accounts,
Effectiveness for Debt and Equity 712
Disclosures, and Assertions for Long-Lived Asset Selecting Controls to Test and Performing Tests
Accounts and Related Expenses 663 of Controls 712
Performing Substantive Analytical Procedures 664
Substantive Tests of Details for Tangible Assets 666 Obtaining Substantive Evidence About
Substantive Tests of Details for Natural Resources and the Accounts, Disclosures, and Assertions for
Related Expense Accounts 668 Debt and Equity 713
Substantive Tests of Details for Intangible Assets and the Substantive Analytical Procedures—Debt 713
Related Expense Accounts 669 Substantive Tests of Details—Debt 715
Substantive Procedures Related to Asset Impairment 669 Substantive Tests of Details—Equity 716
Substantive Procedures Related to Leases 672 Performing Substantive Fraud-Related Procedures
Performing Substantive Fraud-Related Procedures 673 for Debt and Equity 717
Documenting Substantive Procedures 674 Documenting Substantive Procedures 718
Auditing Merger and Acquisition Activities 674 Long-Term Liabilities Requiring Management
Valuing the Assets and Liabilities of an Acquisition 675 Estimates 719
Audit Considerations for Valuing Identifiable Assets Warranty Reserves 719
and Liabilities 676 Pension Obligations and Other Postemployment Benefits 721
Audit Considerations for Restructuring Charges Related
to an Acquisition 678
Audit Considerations for Valuing Goodwill 679 Significant Terms 724

Contents xi
Prompt for Critical Thinking 724 Unqualified Audit Reports: U.S. Public Companies 799
Unmodified Audit Reports: U.S. Nonpublic Companies 801
Unmodified Audit Reports: Non-U.S. Companies 802
Unqualified/Unmodified Audit Opinions with Report
Application Activities 730 Modifications 804
Data Analytics Using Excel: A Case in the Emphasis-of-Matter 804
Context of the Pharmaceutical Industry 731 Information about Certain Audit Participants 805
Reference to Other Auditors 806
Academic Research Case 733 Inconsistent Application of GAAP 808
Justified Departure from GAAP 809
14
Substantial Doubt about the Client Being a Going
Completing a Quality Concern 810
Client Correction of a Material Misstatement in Previously
Audit 734 Issued Financial Statements 814
Qualified Opinions, Adverse Opinions, and Disclaimers
Obtain Remaining Audit Evidence 737
of Opinion 816
Detected Misstatements 737
Qualified Opinions 816
Loss Contingencies 742
Adverse Opinions 820
Adequacy of Disclosures 747
Disclaimers of Opinion 821
Noncompliance with Laws and Regulations 752
Review Analytical Procedures 755 Critical Audit Matters and Key Audit Matters 824
The Going-Concern Assumption 757 Key Audit Matters (KAMs) 824
Subsequent Events 763 Critical Audit Matters (CAMs) 826
KAMs or CAMs? 829
Management Representation Letter versus
a Management Letter 767 Audit Reports on Internal Control Over Financial
Management Representation Letter 767 Reporting for U.S. Public Companies 830
Management Letter 769 Omitted Audit Procedures 834
Engagement Quality Review 771 Applying Decision-Making Frameworks 836
Audit Committee Communications 773 Significant Terms 837
Significant Terms 777 Prompt for Critical Thinking 838
Prompt for Critical Thinking 778 Review Questions and Short Cases 840
Review Questions and Short Cases 780 Fraud Focus: Contemporary and Historical Cases 847
Fraud Focus: Contemporary and Historical Cases 785 Application Activities 850
Application Activities 789 Academic Research Cases 851
Using ACL to Perform Benford Analysis 792
ACL APPENDIX 853
15
REFERENCES 869
Audit Reports for Financial
CASE INDEX 871
Statement Audits 794
INDEX 873
Audit Reporting Principles 796 “WHY IT MATTERS” FEATURE CONTENT 886
Unqualified/Unmodified Audit Reports on Financial AUDITING STANDARDS 889
Statements 798 ADDITIONAL RESOURCES 895

Preface
The auditing environment continues to change in significant ways. University

graduates entering the auditing profession today should be prepared for a high
standard of responsibility, should be ready to serve the public interest, and
should recognize the emerging issues and continuing points of focus facing
auditors. Examples of today’s emerging issues and continuing points of focus
facing the profession include:
• New accounting guidance from the Financial Accounting Standards
Board on leases and revenue recognition.
• Increased need for critical thinking and professional skepticism.
• Increased and growing use of data analytics tools.
• Continued and increasing importance of ethical and professional deci-
sion making.
• Continued efforts toward international convergence of auditing stan-
dards of the American Institute of Certified Public Accountants (AICPA)
and the International Auditing and Assurance Standards Board (IAASB).
• Reorganization of the Public Company Accounting Oversight Board
(PCAOB) auditing standards to provide auditors and others with a logi-
cal framework and easy access to the standards governing the conduct
of audits of public companies.
• The IAASB’s issuance of new and revised auditor reporting standards,
which require auditors to provide more transparent and informative
reports on the companies they audit, including the disclosure of key
audit matters.
• The PCAOB’s adoption of a new auditing standard on the auditor’s
report, including the disclosure of critical audit matters.
The eleventh edition of Financial Statement Auditing: A Risk-Based
Approach represents the most up-to-date professional auditing guidance avail-
able and reflects the many emerging issues and continuing points of focus in
the profession. This text provides students with the tools they need to under-
stand the full range of issues associated with conducting a quality financial
statement audit in an evolving national and global context.
Revision Themes and New Enhancements in the Eleventh Edition

Coverage of Emerging Data Analytics Tools. Data analytics tools include qual-
itative and quantitative techniques and processes that auditors use to enhance
their productivity and effectiveness in terms of extracting, categorizing, iden-
tifying, and analyzing patterns in their client’s data. Emerging data analytics
tools facilitate testing 100% of a population, enabling the auditor to focus on
potentially erroneous transactions or risky areas of the audit. These emerging
tools also include sophisticated data visualization tools, for example, Tableau.
Data analytics tools also include familiar platforms such as Excel, ACL, and
IDEA; the landscape is changing dramatically and quickly in this space, so
instructors and students must be adaptive to fast-paced change. We introduce
xiii

xiv Preface
key terms and explain data analytics tools in an expanded Chapter 8, with
an entirely new section, “Using Data Analytics Tools to Obtain and Evaluate
Evidence.” We also include end-of-chapter problems to reinforce opportuni-
ties to employ data analytics tools within Chapter 8 and the following cycle
chapters (e.g., data analytics in the revenue cycle in Chapter 9).
Auditing Standards Exhibit–PCAOB, AICPA, and IAASB–appears inside the
front cover of this textbook. This exhibit allows for easy access to relevant
standards, and provides a platform for relative comparisons across each of the
standards-setting bodies. End-of-chapter problems require students to review
and apply the material in the Auditing Standards Exhibit. These problems
provide students with practice completing task-based simulations similar to
what they will see on the CPA exam; we highlight these problems with an
identifying icon.
Three New Learning Engagement Features. Students today demand more than
case facts and standard lectures. They require opportunities to engage with the
instructor and classmates on important topics facing the profession.
• “Why It Matters” feature. This feature helps students see beyond the
factual insights provided in the chapters. Elements include for example,
extensions based on in-the-news examples that illustrate fundamen-
tal features and applications of text facts, professional standards in
foreign jurisdictions, and interesting points that may be tangential to
the text facts, but that should facilitate students’ deep engagement
with the chapter. Certain of these features are noted as relating to an
International Focus.
• “Prompt for Critical Thinking—It’s Your Turn!” feature. This feature
encourages students to engage in critical thinking as they acquire knowl-
edge relevant to each chapter. This feature is intentionally creative in
form and substance, and varies widely in structure based upon the learn-
ing objective to which it is related. As an example of one such prompt,
students are asked to consider auditors’ responsibilities with respect to
internal controls around the Foreign Corrupt Practices Act.
• “What Do You Think?—For Classroom Discussion” feature. This fea-
ture provides an avenue by which instructors can facilitate preparation
for class, cognitive engagement, and critical thinking through discus-
sions with other students. Like the Prompt for Critical Thinking fea-
ture, What Do You Think? is creative in form and substance and varies
in unexpected ways to spark students’ interest in engagement with the
chapter topic. This feature is an ideal way for instructors to facilitate an
interesting class discussion using a flipped-classroom approach (either
involving the entire class or within small teams).
Below we provide examples of each of these three new learning engagement
features that appear in Chapter 14 (“Completing a Quality Audit”) with
respect to the learning objective “Obtaining Remaining Audit Evidence on
Noncompliance with Laws and Regulations.”
• The Why It Matters feature articulates the motivation for and provisions
of the Foreign Corrupt Practices Act (FCPA).
• The Prompt for Critical Thinking feature extends this discussion by
prompting students to think about corruption, how to measure it, and
its variation across different jurisdictions.
• The What Do You Think? feature encourages students to consider the
applicability of the FCPA in today’s business and auditing environment.

Preface xv
Compliance with the Foreign Corrupt Practices

Act (FCPA) of 1977
Why It Matters
This feature highlights an important law that many companies have purpose of obtaining or retaining business. This provision is
failed to comply with. commonly called the anti-bribery provision of the FCPA.
• Companies that have securities listed on U.S. markets must
The FCPA was written to respond to SEC investigations in the 1970s make and keep financial records that accurately and fairly
revealing that over 400 companies had made questionable or ille- reflect the transactions of the company and must design
gal payments of over $300 million to foreign officials, politicians, and maintain an adequate system of internal accounting
and political parties. The payments involved bribery of foreign offi- controls.
cials to facilitate business operations in their respective foreign • Certain payments to foreign officials are acceptable. These
countries. The main provisions of the FCPA include: include grease payments, which are payments made to an
official to expedite the performance of the duties that the
• No U.S. person or company that has securities listed on U.S. official would already be bound to perform.
markets may make a payment to a foreign official for the
Prompt for Critical Thinking
Before reading this text, had you heard of the Transparency Inter- from most corrupt to least corrupt just from what you know, and
national corruption perception index? Think critically about what (2) guess what their ranking is on a scale from 02100 on the cor-
you know about the political and economic structure of the fol- ruption perception index from 0 (highly corrupt) to 100 (very
lowing countries. In the spaces below, (1) rank the six countries clean):
Country (in alphabetical Rank (1 5 most to 6 5 least corrupt among this list) Estimated corruption perception
order) index (0 2 100)
Belgium
Brazil
New Zealand
Somalia
South Korea
United States of America
After ranking the countries, visit Transparency International and compare your answers and estimates against theirs:
https://www.transparency.org/news/feature/corruption_perceptions_index_2016#table
What are your reactions to what you have learned? What rankings surprised you? How accurate were your rankings?

xvi Preface
What Do You Think? For Classroom Discussion
The FCPA of 1977 was enacted a LONG time ago! list are well-known? Focus on one of the enforcement actions
1. Do you think it is still relevant today? Why or why not? (perhaps at the discretion of your instructor) and explain how the
2. Review the following SEC website: company violated the FCPA.
https://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml What are

your impressions? What surprises you? What companies on this
Updates to “Focus on Fraud” Feature. The authors continue their use of this
learning engagement feature, which provides compelling examples of recent
frauds, and the role of the auditor in preventing, detecting, or (sometimes) not
detecting those frauds. Below we provide an example of this learning feature
that appears in Chapter 14 (“Completing a Quality Audit”) with respect to the
learning objective “Obtaining Remaining Audit Evidence on Noncompliance
with Laws and Regulations.”
Focus on Fraud Triton Energy and Noncompliance with Laws

and Regulations
This feature describes a historically important case involving noncom- • The recording of false journal entries by Triton Indonesia’s
pliance with the Foreign Corrupt Practices Act (FCPA) of 1977. Commercial Manager and Controller were made to cover
up the improper payments.
Triton Energy engages in the exploration and production of crude
oil and natural gas in many areas around the world. Triton has tra- These improper payments and false journal entries were
ditionally operated in relatively high-risk, politically unstable areas facilitated because Triton’s CEO, Bill Lee, was an aggressive top
where larger and better-known producers do not operate. Top manager who provided weak tone at the top in terms of his failure
Triton Indonesia officials (President, CFO, Commercial Manager, to encourage compliance with applicable laws and regulations,
and Controller) were investigated by the SEC for violations of the failure to discourage improper payments, and failure to imple-
Foreign Corrupt Practices Act. These violations included: ment internal controls to deter improper payments. Triton was
ultimately fined $300,000 related to the scandal.
• Improper payments were made to a middleman who used
For further details, see the SEC’s Securities Exchange Act of 1934
the funds to reduce Triton Indonesia’s tax liability.
Release No. 38343 and Accounting and Auditing Enforcement Release
• Improper payments were made to a middleman who used No. 889, February 27, 1997.
the funds to ensure a favorable governmental audit.
• Improper payments were made to a middleman who used
the funds to obtain corporate tax refunds from government
officials.
• To help students prepare for the CPA exam, MindTap for Auditing
includes two pre- and post-tests using author-selected multiple-choice
questions from Becker Professional Education, all tailored to this edi-
tion’s critical learning objectives.
• “Check Your Basic Knowledge” feature. To enhance and expand on the

Becker CPA Exam Questions feature, each chapter includes additional
true-false and multiple-choice questions within the chapter text itself.

Preface xvii
Following the discussion of each learning objective within the chapters,

we challenge students to answer four questions (two true-false and two
multiple-choice) to alert students to their effective learning, or alterna-
tively, to their lack of understanding (which should encourage students
to more carefully acquire the concepts relating to each particular learn-
ing objective). Taken collectively, the Becker CPA Exam Questions and
Check Your Basic Knowledge questions ensure that students have the
opportunity to challenge themselves during reading the chapter, thereby
tracking their learning, and after reading the chapter.
• Updated and Expanded Chapter Examples and End-of-Chapter prob-
lems, including “Review Questions and Short Cases,” “Application
Activities,” along with more extensive longer cases: “Fraud Focus:
Contemporary and Historical Cases.” To help instructors identify these
problems, the text includes the following icons that highlight overall
themes: Ethics, Fraud, Professional Skepticism, International Issues,
and Auditing Standards Application Activities. We also rely exten-
sively on using facts from SEC Accounting, Auditing, and Enforcement
Releases (AAERs) and PCAOB Enforcement Actions in the cases to illus-
trate the regulatory implications of auditors’ judgments and decisions.
For most chapters, we have updated the Academic Research Cases,
providing instructors with an opportunity to introduce students to the
relevance of academic research to the auditing profession.
Examples of Selected Cases by Chapter include:
Longtop Financial Technologies (Ch. 1), Bentley’s Brisbane Partnership (Ch. 1),
Wells Fargo (Ch. 2), Weatherford International (Ch. 2), Lime Energy (Ch. 2),
U.S. Department of Defense (Ch. 3), Diamond Foods (Ch. 3), Chesapeake
Petroleum and Supply (Ch. 3), Florida Department of Financial Services (Ch. 4),
Toshiba (Ch. 4), Boeing (Ch. 5), ContinuityXSolutions, Inc. (Ch. 7), Ag Feed
Industries (Ch. 9), China Media Express Holdings (Ch. 9), Monsanto Corpora-
tion (Ch. 9), Agricultural Bank of China (Ch. 10), MagnaChip (Ch. 11), Miller
Energy Resources (Ch. 12), Soyo Group (Ch. 13), Logitech (Ch. 13), 2GO
(Ch. 14), Chelsea Logistics Holding Corp. (Ch. 14), Suiss Finance (Ch. 14),
ImmunoGen, Inc. (Ch. 15), Rolls Royce (Ch. 15), and Westmoreland Coal
Company (Ch. 15).
Expanded View of “Users.” In prior versions, our user-emphasis was on
shareholders, bondholders, regulators, and standards-setters as primary
actors. While of course critical, we now incorporate discussion of the role
that analysts play (e.g., in incentivizing managers, and therefore affecting the
judgments and decisions of users), along with stock market reactions to both
financial accounting and auditing information disclosures. As an illustration of
one such view, we include the following discussion in Chapter 9 (the revenue
cycle), embedded in a Why It Matters feature.

xviii Preface
Why It Matters The Incentive for Managers to Commit Fraud in the Revenue Cycle:
The Role of Stock Analysts and Consensus Earnings Calculations
This feature provides insight into the role that stock analyst following To understand this concept better, see the analysts’ forecast report
and consensus analyst earnings per share calculations play in affect- for Ford Motor Company as of June 2017, which we reproduce
ing managements’ incentives to commit fraud. below.
Stock analysts follow companies and issue earnings per share and
revenue forecasts they anticipate for the companies they follow.
This report shows that 16 analysts together, that is, by consensus make predictions about both quarterly and annual earnings per
predict Q1 2017 earnings per share of $0.35 per share, and that the share. Managers do not want to “disappoint” the market by having
actual results were better than that at $0.39 per share. It also shows their earnings results come in “under forecast,” which creates the
that the annual earnings per share for 2016 was $1.76; analysts incentive for earnings manipulation.

Preface xix
This report shows that 15 analysts together, that is, by consen- resist because they do not want to report a negative earnings
sus predict Q1 2017 revenues at $34.59 billion, while the actual surprise.
revenue that Ford reported exceeded that estimate, coming in at
$36.48 billion. Managers do not want to “disappoint” the market
by having their revenue results come in “under forecast,” which What is a negative earnings surprise or a negative revenue
creates the incentive for fraudulently overstated revenue amounts. surprise?
It is a negative departure from the consensus analyst earnings
forecast or the revenue forecast, for example, lower actual earn-
What does the term “analyst consensus forecast” mean?
ings per share amount compared to the consensus or lower rev-
It means the average earnings per share or revenue based on all enue compared to the consensus expectation.
the analysts that are following the company. If a company is at or
For further details, see
near its consensus forecast and the auditor proposes a material,
income decreasing audit adjustment, client management may https://markets.ft.com/data/equities/tearsheet/forecasts?s=F:NYQ
Hallmark Pedagogical Features

Articulating an audit opinion formulation process to help organize students’
acquisition of the technical material in each chapter. A chapter-opening figure
helps students identify the major phases in the audit process and see how the
steps within that process relate to specific chapters. The textbook describes
how auditors go through a structured judgment process to issue an audit
opinion. We refer to this process as the Audit Opinion Formulation Process,
and it serves as the foundation for this textbook.
The process consists of five phases. Phase I concerns client acceptance and
continuance. Once a client is accepted (or the audit firm decides to continue
to provide services to a client), the auditor needs to perform risk assessment
procedures to thoroughly understand the client’s business (or update prior
knowledge in the case of a continuing client), its industry, its competition,
and its management and governance processes (including internal controls) to
determine the likelihood that financial accounts might be materially misstated
(Phase II). In some audits, the auditor also obtains evidence about internal con-
trol operating effectiveness through testing those controls (Phase III). Much of
what most people think of as auditing, obtaining substantive evidence about
accounts, disclosures, and assertions, occurs in Phase IV. The information gath-
ered in Phases I through III greatly influences the amount of testing auditors
perform in Phase IV. Finally, in Phase V, the auditor completes the audit and
makes a decision about what type of audit report to issue.
Also fundamental to students’ understanding is the framework’s inclusion
of the auditing profession, audit quality, quality judgments, ethical decisions,
and professional liability. Further fundamentals highlighted in the Audit Opin-
ion Formulation Process include discussion of a framework for obtaining audit
evidence, as depicted below.
Recognizing that professional judgment, sufficient appropriate evidence,
and quality decisions are critical to conducting a quality financial state-
ment audit. In addition to the focus on professional judgment throughout the
text, numerous exercises emphasize this key auditing skill, including examples
and end-of-chapter materials based on the business press, PCAOB enforce-
ment actions, SEC filings, and company proxy statements. Further, the end-
of-chapter materials help ensure that students understand the link between
mandatory financial reporting and auditing, risk assessment, transaction
cycles, and analytical procedures.

xx Preface
IV. Obtaining
III. Obtaining
Substantive V. Completing
I. Making Client Evidence About
II. Performing Risk Evidence About the Audit and
Acceptance and Internal Control
Assessment Accounts, Making Reporting
Continuance Operating
Chapters 2, 3, 7, Disclosures, and Decisions
Decisions Effectiveness
and 9–13 Assertions Chapters 14
Chapter 1 Chapters 8–13
Chapters 8–13 and 15
Auditing Profession, Audit Quality and

the Need for Quality Judgments Professional Liability
and Ethical Decisions
Chapter 4
Chapters 1
The Audit Opinion Formulation Process and a Framework for Obtaining Audit Evidence
Chapters 5 and 6
Emphasizing that professional skepticism, which can be challenging

to maintain, is at the heart of auditor judgments. This emphasis provides
students with the tools to learn how to apply the concept of professional
skepticism. We include conceptual discussion of this topic in Chapter 1, with
substantial reinforcement through the remaining chapters in the text, as well
as in end-of-chapter materials (highlighted with an identifying icon for ease
of identification). This emphasis helps students see the practical application of
professional skepticism, as well as provides practical insights as to downside
risks when auditors fail to maintain appropriate levels of skepticism.
Using data analytics tools and analytical procedures to improve the effec-
tiveness and efficiency of the audit. The text contains a new focus on data
analytics around “big data” that will become an evolving hallmark pedagogical
feature over subsequent editions. The text covers planning, substantive, and
review-related analytical procedures, and provides ways in which auditors can
use data analytics tools to perform these procedures. Chapter 6 and Chapter 7
outline the theory of analytical procedures, and discuss appropriate processes
and best practices. Various end-of-chapter problems provide examples of using
analytical procedures. Chapters 9, 11, and 13 contain an extensive practice
case (set in the pharmaceutical industry, complete with data based on three real
companies) that would be ideal for a semester team project to enforce concepts
around analytical procedures.
Employing specific learning objectives, which we introduce at the outset
of each chapter in a “What You Will Learn” feature and summarize at the end
of each Chapter with a “Let’s Review” feature. We reinforce these objectives
throughout the chapter materials, along with linking the objectives to specific
end-of-chapter materials, including links to academic research cases to enhance
students’ appreciation for the theoretical underpinnings of the learning objec-
tives. These learning objectives help to shape students’ cognitive architecture
as they integrate their preliminary understanding of chapter topics with the
theory, examples, and accompanying discussion that follow.
Providing and applying professional decision-making and ethical
decision-making frameworks. Decision-making frameworks, introduced in
Chapter 1, require students to think about real-life professional and ethical
decisions associated in each chapter. End-of-chapter materials continue the use
of these professional and ethical decision-making frameworks to help students

Preface xxi
address contemporary issues. Further, we identify these problems as part of the

last learning objective in each chapter.
Acquiring hands-on experience through a practice-oriented audit case.
On the CengageNOW website, you will find a tool that allows students to
engage in a practice-oriented audit case. Brony’s Bikes is an auditing case that
encompasses a complete auditing scenario spanning from Performing Risk
Assessment (Phase II of the Audit Opinion Formulation Process) to making
reporting decisions (Phase V of the Audit Opinion Formulation Process). The
case includes 13 modules that address specific activities included in the Audit
Opinion Formulation Process. The authors have structured these 13 mod-
ules so that each can be undertaken independently of the other modules. For
example, Module I, Assessment of Inherent Risk, takes the students through
the audit planning process based on AU-C 200 Overall Objectives of the Inde-
pendent Auditor and the Conduct of an Audit in Accordance with Generally
Accepted Auditing Standards, AU-C 300 Planning an Audit, and AU 315-C
Understanding the Entity and Its Environment and Assessing the Risks of
Material Misstatement. Module I can be assigned on a stand-alone basis or
along with any or all of the other modules at the instructor’s discretion.
Students gain experience with auditing documentation including many
working papers. Analytical procedures are performed in Excel worksheets
requiring conclusions and recommendations.
Other Resources
MindTap: Empower Your Students
MindTap is a platform that propels students from memorization to mastery.
It gives you complete control of your course, so you can provide engaging con-
tent, challenge every learner, and build student confidence. Customize interac-
tive syllabi to emphasize priority topics, then add your own material or notes
to the eBook as desired. This outcomes-driven application gives you the tools
needed to empower students and boost both understanding and performance.
Access Everything You Need in One Place
Cut down on prep with the preloaded and organized MindTap course materi-
als. Teach more efficiently with interactive multimedia, assignments, quizzes,
and more. Give your students the power to read, listen, and study on their
phones, so they can learn on their terms.
Empower Students to Reach their Potential
Twelve distinct metrics give you actionable insights into student engagement.
Identify topics troubling your entire class and instantly communicate with
those struggling. Students can track their scores to stay motivated toward their
goals. Together, you can be unstoppable.
Control Your Course—and Your Content
Get the flexibility to reorder textbook chapters, add your own notes, and
embed a variety of content including Open Educational Resources (OER).
Personalize course content to your students’ needs. Students can even read
your notes, add their own notes, and highlight key text to aid their learning.
Get a Dedicated Team, Whenever You Need Them
MindTap isn’t just a tool; it’s backed by a personalized team eager to support
you. We can help set up your course and tailor it to your specific objectives,
so you’ll be ready to make an impact from day one. Know we’ll be standing
by to help you and your students until the final day of the term.

xxii Preface
Becker CPA Exam Questions

To help students prepare for taking the CPA exam, for each chapter, s tudents
have access to four or five representative multiple-choice questions from the
Becker test bank, tailored to each chapter’s most critical learning objectives.
ACL analytics and audit software with updated cases.

This edition integrates ACL software into end-of-chapter materials. An ACL
Appendix and tutorial is located at the end of the text. The ACL Appendix con-
tains an overview of the basic functions of ACL followed by a brief, illustrated
tutorial to help students learn how to use the basic features of the ACL Analyt-
ics. Access to the software can be provided by Instructors who are enrolled in
the ACL Academic Network program.
ACL cases include the following:
1. Pell Grants, a fraud investigation case related to this student grant
program. (Chapter 6)
2. Husky Accounts Receivable, which includes exercises in which students
identify unpaid invoices and sales made over credit limits, perform
cutoff analyses, conduct aging analyses, and identify procedures to be
performed based upon their results. (Chapter 9)
3. FloorMart Sales and Inventory, which requires students to identify store
locations in which data appear to indicate potential inaccuracies, and to
identify procedures to gather additional evidence. (Chapter 9)
4. Husky Inventory, which includes exercises in which students identify
potentially obsolete inventory, calculate inventory turnover, consider
possible write-downs, and prepare a report based on their results.
(Chapter 11)
5. Benford’s Law Case, a fraud case dealing with employee expense
reimbursements and the application of Benford’s Law of numbers.
(Chapter 14)
Organization of the Eleventh Edition

The demand for quality auditing: Chapter 1.
Chapter 1 provides the foundation for students to understand the economic

context in which financial statement auditing exists. The chapter defines
the objective of financial statement auditing and describes its role in meet-
ing society’s demands for reliable financial and internal control informa-
tion. Chapter 1 introduces the Financial Reporting Council’s Audit Quality
Framework, and identifies professional conduct requirements that help
auditors achieve high quality. This chapter also provides frameworks for
professional and ethical decision making. Chapter 1 also describes the pro-
cess by which audit firms make client acceptance and continuance decisions,
and recognizes that this process is important to achieving audit quality.
Risk assessment with a focus on fraud and internal controls over
financial reporting: Chapters 2 and 3.
Chapter 2 defines fraud, describes the fraud triangle, and provides examples
of recent financial reporting frauds. The chapter discusses users’ expectations
of auditors’ fraud-related responsibilities, explains how various require-
ments of the Sarbanes-Oxley Act of 2002 help prevent fraud, and discusses
the importance of corporate governance in relation to quality auditing.
Chapter 3 articulates the importance of internal control over financial
reporting, defines internal control, identifies and describes the components

Preface xxiii
and principles of internal control, and describes management’s responsibil-

ity related to internal control. Chapter 3 also explains how to distinguish
between material weaknesses, significant deficiencies, and control deficien-
cies in internal control over financial reporting.
Important elements of the professional environment and the audit
opinion formulation process: Chapters 4, 5, and 6.
Chapter 4 discusses the liability environment in which auditors operate,

explores the effects of lawsuits on audit firms, identifies laws from which
auditor liability is derived, and describes possible remedies, sanctions, and
auditor defenses.
Chapter 5 identifies and compares auditing standards that provide audit
guidance on the audit opinion formulation process, and discusses the foun-
dational principles underlying these standards. The chapter lists the phases
and related activities in the audit opinion formulation process, explains the
concept of accounting cycles, describes the assertions that are inherent to
financial statements, defines audit evidence and the purpose and types of
audit procedures used to obtain audit evidence, and discusses the impor-
tance of audit documentation.
Chapter 6 discusses the importance of evidence sufficiency and appro-
priateness, illustrates professional judgments about the type and timing
of audit procedures, discusses the use and application of substantive
analytical procedures, identifies issues relating to audit evidence needed
for accounts involving management estimates, and discusses evidence
issues involving specialists and related party transactions. Chapter 6 also
describes the characteristics of quality audit documentation and explains
the nature, design, and purposes of audit programs.
Planning the audit and employing appropriate audit tools: Chap-
ters 7 and 8.
Chapter 7 defines the concept of material misstatement and discusses the

importance of materiality judgments in the audit context. The chapter also
identifies the risks of material misstatement and describes how they relate
to audit risk and detection risk. Chapter 7 illustrates how auditors respond
to assessed risks of material misstatement.
In planning how to respond to assessed risk of material misstatements,
auditors need to determine which of the available specialized tools they
will use. Chapter 8 describes how auditors can use sampling techniques
and data analytics tools to gather and evaluate sufficient appropriate
audit evidence. The chapter explains the objectives of sampling for testing
controls and account balances, compares and contrasts nonstatistical and
statistical sampling, describes attributes sampling, describes the sampling
process used to gather evidence about misstatements in account balances
and assertions, describes monetary unit sampling, and explains how to use
data analytics tools to obtain and evaluate audit evidence.
Performing Audits Using the Transaction Cycle Approach: Chapters 9,
10, 11, 12, and 13.
These five chapters focus on the application of concepts developed earlier

for assessing risk, identifying and testing controls designed to address those
risks, and using substantive approaches to testing account balances. Each
chapter:
• identifies significant accounts, disclosures, and relevant assertions
• explains the process of identifying and assessing inherent risks, fraud
risks, and control risks

xxiv Preface
• describes planning analytical procedures that the auditor can use to

identify potential material misstatement
• articulates appropriate responses to identified risks of material mis-
statement, including appropriate tests of controls and considering
results of tests of controls
• and identifies how to apply substantive audit procedures.
Completing a quality audit and issuing the audit report: Chapters 14

and 15.
Chapter 14 discusses the procedures that auditors conduct while com-

pleting the audit. These procedures include reviewing activities relating
to detected misstatements, loss contingencies, disclosure adequacy, non-
compliance with laws or regulations, review analytical procedures, going-
concern matters, and subsequent events. The chapter also distinguishes
between a management representation letter and a management letter,
identifies procedures that are part of an engagement quality review, and
identifies issues the auditor should communicate to the audit committee
and management.
Once these activities are completed, the auditor makes a reporting
decision, which is described in Chapter 15. This chapter identifies the
principles underlying audit reporting on financial statements, describes the
information that is included in an unqualified/unmodified audit report, and
describes financial statement audits resulting in an unqualified/unmodified
audit opinion with report modifications. The chapter describes financial
statement audits resulting in a qualified opinion, an adverse opinion, or
a disclaimer of opinion. Chapter 15 describes the emerging critical audit
matters (PCAOB) and key audit matters (IAASB) disclosures that audi-
tors will, or already are, including in the auditor’s report. The chapter
also describes the information that is included in a standard unqualified
audit report on internal control over financial reporting and identifies
the appropriate audit report modifications for situations requiring other
than an unqualified report on internal control over financial reporting.
Chapter 15 concludes with a discussion of how auditors should respond
to situations in which omitted procedures come to light after the audit
report has been issued.
Supplements
Companion Site: Instructors and students can find most of the textbook’s
support materials online at login.cengage.com., including the solutions
manual, PowerPoint slides, ACL data spreadsheet files, and other resources.
Solutions Manual: The solutions manual contains the solutions to all
end-of-chapter assignments. It is available on the instructor’s page at www
.cengagebrain.com.
PowerPoint Slides: Instructors can bring their lectures to life with engaging
PowerPoint slides that are interesting, visually stimulating, and paced for
student comprehension. These slides are ideal as lecture tools and provide
a clear guide for student study and note-taking. We have purposely pro-
vided more slides rather than less! We encourage instructors to tailor down
the slides to meet their own, individual instructional preferences.
Test Bank: Cengage Learning Testing Powered by Cognero is a flexible,
online system that allows you to:

Preface xxv
• author, edit, and manage test bank content from multiple Cengage
Learning solutions,
• create multiple test versions in an instant,
• deliver tests from your LMS, your classroom, or wherever you want.
The test bank is also available in Microsoft Word.
The eleventh edition integrates the use of ACL software into both home-
work and cases. An appendix and tutorial located at the end of the text-
book provide guidance for students unfamiliar with the software. Access
to the software can be provided by instructors who are enrolled in the ACL
Academic Network program.
Access to the software for qualified instructors and their students can
be arranged with ACL through the Academic Network program: http://
info.acl.com/Academic-Network-for-Professors.html and http://info.acl.
com/Academic-Network-Program_Professor-Sign-up.html. The signup
process may take a few weeks to process so first-time instructors should
sign-up for the program in advance of their teaching semester.
Once instructors join the Academic Network, they will have access to:
• ACL GRC - a cloud-based platform for audit management (includ-
ing electronic workpapers)
• ACL Analytics
• ACL Launchpad - the single access point for ACL GRC, ACL
Analytics, as well as support, ScriptHub, and ACL Academy
• Analytical Procedures: A Case in the Context of the Pharmaceutical
Industry (Chapters 9, 11, and 13): The case contains online Excel
files that students download and analyze. The case enables students
to practice developing and conducting planning and substantive
analytical procedures. We developed the case using the published
financial statements of three prominent companies in this indus-
try, with adaptations to make the case suitable for classroom use.
Students will access an Excel file on the companion site at login.
cengage.com. The Excel file contains financial data and informa-
tion from footnote disclosures. We view these exercises as one type
of data analytic technique – one that individual instructors may
be more comfortable using than emerging data analytics such as
Tableau or other similar platforms.
Acknowledgments
We are grateful to members of the staff at Cengage for their help in developing
the eleventh edition: Matt Filimonov, Senior Product Manager; Emily Lehmann,
Associate Content Developer; Sangeetha Vijay, Content Project Manager at
SPi Global; and Emily McLellan, Marketing Manager.
Karla M. Johnstone
Audrey A. Gramling
Larry E. Rittenberg

About the Authors
Karla M. Johnstone
Karla M. Johnstone, Ph.D., CPA, is the Ernst & Young (EY) Professor of
Accounting and Information Systems at the University of Wisconsin–Madison,
School of Business. She teaches auditing, and her research investigates a broad
range of auditing topics, including: curriculum enhancements in auditing,
along with auditor decision making; client acceptance and continuance deci-
sions; how fraud risk and fraud brainstorming affect audit planning and audit
fees; client–auditor negotiation; competitive bidding; audit budget-setting
processes; and governance responses to various negative corporate events
such as fraud or internal control material weakness disclosures. Professor
Johnstone serves on the editorial boards of numerous academic journals and
is active in the Auditing Section of the American Accounting Association
(AAA). She recently completed a term as the President of the Auditing Section.
Before beginning her coursework for her Ph.D., Karla worked as a corporate
accountant and as a staff auditor and was a doctoral fellow in residence at
Coopers & Lybrand. Importantly, Karla’s research and interactions with prac-
tice—both in the U.S., and abroad (e.g., the Foundation for Audit Research in
the Netherlands)—demonstrate a significant commitment to the theory and
practice of auditing, along with associated regulatory and standards-setting
activities.
Audrey A. Gramling
Audrey A. Gramling, Ph.D., CPA, CIA is the Accounting Department
Chair and Professor at Colorado State University. Previously, she held the
Treece Endowed Chair and was Accounting Department Professor and
Chair at B ellarmine University. She has been on the accounting faculty at
Kennesaw State University, Georgia State University, Wake Forest University,
and U niversity of Illinois at Urbana-Champaign. Audrey’s research inves-
tigates both internal and external auditing issues, with a focus on decision
behavior of auditors, external auditor independence, internal control report-
ing, and other factors affecting the market for audit and assurance services.
Prior to earning her Ph.D. at the University of Arizona, Audrey worked as an
external auditor at a predecessor firm of Deloitte and as an internal auditor at
Georgia Institute of Technology. She has also served a one-year appointment
as an Academic Accounting Fellow in the Office of the Chief Accountant at
the U.S. Securities and Exchange Commission. She is a past-President of the
Auditing Section of the American Accounting Association and has served in
an advisory role to the Committee of Sponsoring Organizations (COSO).
In February 2018 she began serving as a member of the AICPA’s Auditing
Standards Board. For over three decades, in recognition of the valuable role
of auditing as a key component of corporate governance, Audrey has been
committed to both the practice and theory of quality auditing.
xxvii

xxviii About the Authors
Larry E. Rittenberg
Larry E. Rittenberg, Ph.D., CPA, CIA, is Professor Emeritus, Department
of Accounting and Information Systems, at the University of Wisconsin–
Madison, where he taught courses in auditing, risk management, and cor-
porate governance. He is also Chair Emeritus of the COSO of the Treadway
Commission, where he provided oversight of the development of the COSO
Enterprise Risk Management Framework, the COSO Guidance for Smaller
Businesses, and was instrumental in developing the Framework for COSO
2013. He has served as Vice-Chair of Professional Practices for the Institute
of Internal Auditors (IIA) and President of the IIA Research Foundation, and
has been a member of the Auditing Standards Committee of the AAA Audit-
ing Section, the NACD Blue Ribbon Commission on Audit Committees, the
IIA’s Professional Practices Committee, and Vice-President and Treasurer of
the AAA. He recently retired as audit committee chair and board member of
Woodward Governor, a publicly traded company, and has consulted on audit
committee, risk, and control issues with Petro China – the largest public
company in China. Professor Rittenberg served as a staff auditor for Ernst &
Young and has co-authored five books and monographs and numerous
research articles.
Recommendations from Instructors Who Have

Used Our Textbook Previously
Professor Tim Bell, University of North Florida. I have used [this] text for
seven years now and it has been an outstanding resource for teaching my
students the fundamentals of contemporary auditing. Text discussions and
end-of-chapter applications help me to develop students’ critical analysis and
judgment skills, sensitivity and responses to ethical dilemmas, and under-
standing and appreciation of the essential role of professional skepticism in
auditing…. My impression based on use of successive editions of the text is
that the authors have worked very hard to ensure it is up-to-date as auditing
standards and related guidance evolve and audit-relevant events occur in the
rapidly-changing business environment. Without reservation, I highly recom-
mend this text.
Professor Veena L. Brown, University of Wisconsin-Milwaukee. This text-
book is ideal for my students as it presents a good mix of theory and practice
using the integrated audit approach. The authors do a great job portraying
the auditing concepts in a deceptively simple manner. The Exhibits and the
Professional Judgment in Context presented in each chapter helps students
better grasp the sometimes-elusive auditing concepts. I have successfully used
this textbook for the past six years and look forward to exploring the next
edition with my students.
Professor Barry J. Bryan, Southern Methodist University. I selected this text-
book because I believe that it presents a realistic approach to the integrated
audit. Having worked with several of the Big Four firms, it is evident to me
that the authors have been diligent in writing a book that mirrors the risk-
based approach to the audit. In addition, my students have enjoyed outstand-
ing success on the AUD Exam having used this text as their primary study
resource.
Professor Sean Dennis, University of Kentucky. I use this book because it has
it all… detailed (yet intuitive!) explanations, challenging review questions for
students, and detailed cases that are both timely and relevant. The authors have
organized the material in a way that helps students build an understanding of
risk and the audit process from the ground up. The questions and cases at the
end of the chapters also help create engaging discussions among students that

About the Authors xxix
lead to productive critical thinking. In fact, my favorite thing about this book
is that the authors continually update the cases at the end of the chapters. This
has really helped my students relate to the course material – and I use these
cases in class as much as I can!
Professor Denise Hanes Downey, Villanova University. The beauty of this
textbook is that it facilitates an appreciation for the many nuances and
complexities of auditing without overwhelming students. The authors appro-
priately balance necessary details with illustrations and recent examples to
guide students’ understanding. As a result, students come into class ready to
engage in higher level discussions – having mastered the fundamentals on
their own. From a course design perspective, I appreciate how the chapters
stand-alone allowing professors to select chapters they find to be of par-
ticular importance without requiring additional chapters be added to the
syllabus for clarity.
Professor Kim Westermann, California Polytechnic State University. As a for-
mer auditor and current audit professor, I find the book very easy to follow
and well written. The content is organized in a similar fashion to the audit pro-
cess itself, which I think is essential for students’ understanding. The authors
also include topics that I have not found in any other auditing textbook (e.g.,
an entire chapter on corporate governance, sections on upcoming changes or
changes soon to be integrated into the profession). This textbook simply feels
more up to date about current events in auditing.
How Can You Learn by

Leveraging the Features
of this Textbook?
Follow these ten steps:
1. Before you even begin, go online to MindTap via login.cengage.com and complete
the first Becker CPA Exam Pre-test, which the authors have personally tailored to
the chapters and learning objectives in this textbook. There is a 25-question Pre-test
relating to Chapters 1–8, and another 25-question Pre-test relating to Chapters 9–15.
In addition, these same tests are available online as Becker CPA Exam Post-tests,
so that you can track your knowledge progress both within this course, as well as
relating to the upcoming CPA exam.
2. For each chapter, start by viewing the Audit Opinion Formulation Process d iagram at
the outset of the chapter. Relevant chapter topics are highlighted for your reference
so that you can track your progress through learning about all of the phases of
conducting a quality audit.
3. Take a few minutes to read the What’s Covered feature in the chapter, which briefly
describes the main themes of the chapter. Then, review the Learning Objectives. Just
as you begin to read the chapter, quickly read the What You Will Learn questions.
Engaging in these simple and quick actions will help you know what to expect out of
each chapter, which research shows will help you organize your knowledge and recall
it later (during exams!).
4. To help set the practical application for each chapter, read the Why It Matters feature
at the outset of each chapter. This feature will help you see beyond the factual insights
provided in the chapters. Elements include for example, extensions based on in-the-news
examples that illustrate fundamental features and applications of text facts, professional
standards in foreign jurisdictions, and interesting points that may be tangential to the
text facts, but that should facilitate your deep engagement with the chapter. In addition,
we highlight some of these features as relating to an International Focus.
(Continues)

xxx About the Authors
Continued
5. The 15 chapters are split into a variety of clearly articulated learning objectives, each
containing its own important insights. Within these objectives, you will encounter the
following helpful learning take-aways that we intend to engage your critical thinking
about the conceptual contents of each chapter:
“Prompt for Critical Thinking—It’s Your Turn!” feature. This feature encourages
you to engage in critical thinking as you acquire knowledge relevant to each
chapter. This feature is intentionally creative in form and substance, and varies
widely in structure based upon the learning objective to which it is related. We also
provide potential answers to these prompts at the end of the chapter so that you
can compare your thoughts about these prompts to those that the authors provide.
“What Do You Think?—For Classroom Discussion” feature. This feature provides
an avenue by which you can expect that the will use to facilitate preparation for
class, encourage cognitive engagement, and facilitate critical thinking through
discussions with other students. You have the opportunity to learn by preparing
for these discussions, and engaging with the instructor and your classmates.
Your employers and their clients will take as a given that you are proficient in your
technical knowledge; what will set you apart from other young professionals is to
express clearly articulated perspectives on the matters at hand; use these features as
practice in rising to this challenge!
6. At the conclusion of each learning objective, complete the Check Your Basic
Knowledge feature, which contains two true-false questions and two multiple-choice
questions. Your instructor will provide you with answers to these questions, so you
can compare your existing knowledge with the correct facts as you expand your
understanding of textbook materials.
7. Fraud prevention and detection is one of the most important roles that auditors
play in providing assurance with respect to financial reporting. Carefully read and be
prepared to discuss in class the examples of auditors’ roles in this regard in the Focus
on Fraud feature.
8. Attend to the Exhibits and Figures! These lists and diagrams will be very helpful to
you as you organize your knowledge in preparation for both the exams in this class,
as well as the CPA exam.
9. Examine the Let’s Review feature at the end of each chapter to ensure that you have a
solid understanding of the basic concepts of the chapter. Review the Significant Terms
list and use it as a way to review your understanding of the material that you have
read about within the chapter. As you do this review, develop a set of questions for
any topics whereby you lack understanding. Impress your instructor by drafting some
formative questions whereby you can challenge the in-class lecture on these topics.
10. Complete the End-of-Chapter Review Questions, Cases, and Application Activities
that your instructor requires, and view them not as a burden, but rather as an
opportunity for you to thoughtfully engage these topics. Doing so will enable you to
properly categorize these ideas for later retrieval and use, both in the CPA exam and
in your professional job.

Another random document with
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If a civil officer should, under the pending amendment, attempt to
quell a riot by calling on the bystanders, if they have arms, he is
punishable for that. If a marshal, the marshal of the district in which
the election occurs, the marshal nominated to the Senate and
confirmed by the Senate—I do not mean a deputy marshal—should
see an affray or a riot at the polls on election day and call upon the
bystanders to quell it, if this bill becomes a law, and one of those
bystanders has a revolver in his pocket, or another one takes a stick
or a cudgel in his hand, the marshal may be fined $5,000 and
punished by five years’ imprisonment.
Such are the devices to belittle national authority and national law,
to turn the idea of the sovereignty of the nation into a laughing-stock
and a by-word.
Under what pretexts is this uprooting and overturning to be? Any
officer who transgresses the law, be he civil or military, may be
punished in the courts of the State or in the courts of the nation
under existing law. Is the election act unconstitutional? The courts
for ten years have been open to that question. The law has been
pounded with all the hammers of the lawyers, but it has stood the
test; no court has pronounced it unconstitutional, although many
men have been prosecuted and convicted under it. Judge Woodruff
and Judge Blatchford have vindicated its constitutionality. But, as I
said before, the constitutional argument has been abandoned. The
supreme political court, practically now above Congresses or even
constitutions, the democratic caucus, has decided that the law is
constitutional. The record of the judgment is in the legislative bill.
We are told it costs money to enforce the law. Yes, it costs money
to enforce all laws; it costs money to prosecute smugglers,
counterfeiters, murderers, mail robbers and others. We have been
informed that it has cost $200,000 to execute the election act. It cost
more than $5,000,000,000 in money alone, to preserve our
institutions and our laws, in one war, and the nation which bled and
the nation which paid is not likely to give up its institutions and the
birthright of its citizens for $200,000. [Applause in the galleries.]
The presiding officer, (Mr. Cockrell, in the chair.) The Senator
will suspend a moment. The chair will announce to the galleries that
there shall be no more applause; if so, the galleries will be cleared
immediately.
Mr. Conkling. Mr. President, that interruption reminds me, the
present occupant of the chair having been deeply interested in the
bill, that the appropriations made and squandered for local and
unlawful improvements in the last river and harbor bill alone, would
pay for executing the election law as long as grass grows or water
runs. The interest on the money wrongfully squandered in that one
bill, would execute it twice over perpetually. The cost of this needless
extra session, brought about as a partisan contrivance, would execute
the election law for a great while. A better way to save the cost, than
to repeal the law, is to obey it. Let White Leagues and rifle clubs
disband; let your night-riders dismount; let your tissue ballot-box
stuffers desist; let repeaters, false-counters, and ruffians no longer be
employed to carry elections, and then the cost of executing the law
will disappear from the public ledger.
Again we are told that forty-five million people are in danger from
an army nominally of twenty-five thousand men scattered over a
continent, most of them beyond the frontiers of civilized abode.
Military power has become an affrighting specter. Soldiers at the
polls are displeasing to a political party. What party? That party
whose Administration ordered soldiers, who obeyed, to shoot down
and kill unoffending citizens here in the streets of Washington on
election day; that party which has arrested and dispersed
Legislatures at the point of the bayonet; that party which has
employed troops to carry elections to decide that a State should be
slave and should not be free; that party which has corraled courts of
justice with national bayonets, and hunted panting fugitive slaves, in
peaceful communities, with artillery and dragoons; that party which
would have to-day no majority in either House of Congress except for
elections dominated and decided by violence and fraud; that party
under whose sway, in several States, not only the right to vote, but
the right to be, is now trampled under foot.
Such is the source of an insulting summons to the Executive to
become particeps criminis in prostrating wholesome laws, and this
is the condition on which the money of the people, paid by the
people, shall be permitted to be used for the purposes for which the
people paid it.
Has the present national Administration been officiously robust in
checking the encroachments and turbulence of democrats, either by
the use of troops or otherwise? I ask this question because the next
election is to occur during the term of the present Administration.
What is the need of revolutionary measures now? What is all this
uproar and commotion, this daring venture of partisan experiment,
for? Why not make your issue against these laws, and carry your
issue to the people? If you can elect a President and a Congress of
your thinking, you will have it all your own way.
Why now should there be an attempt to block the wheels of
government on the eve of an election at which this whole question is
triable before the principals and masters of us all? The answer is
inevitable. But one truthful explanation can be made of this daring
enterprise. It is a political, a partisan manœuvre. It is a strike for
party advantage. With a fair election and an honest count, the
democratic party cannot carry the country. These laws, if executed,
insure some approach to a fair election. Therefore they stand in the
way, and therefore they are to be broken down.
I reflect upon no man’s motives, but I believe that the sentiment
which finds expression in the transaction now proceeding in the two
houses of Congress, has its origin in the idea I have stated. I believe
that the managers and charioteers of the democratic party think that
with a fair election and a fair count they cannot carry the State of
New York. They know that with free course, such as existed in 1868,
to the ballot-box and count, no matter what majority may be given in
that State where the green grass grows, the great cities will
overbalance and swamp it. They know that with the ability to give
eighty, ninety, one hundred thousand majority in the county of New
York and the county of Kings, half of it fraudulently added, it is idle
for the three million people living above the Highlands of the
Hudson to vote.
This is a struggle for power. It is a fight for empire. It is a
contrivance to clutch the National Government. That we believe; that
I believe.
The nation has tasted, and drunk to the dregs, the sway of the
democratic party, organized and dominated by the same influences
which dominate it again and still. You want to restore that dominion.
We mean to resist you at every step and by every lawful means that
opportunity places in our hands. We believe that it is good for the
country, good for every man North and South who loves the country
now, that the Government should remain in the hands of those who
were never against it. We believe that it is not wise or safe to give
over our nationality to the dominion of the forces which formerly
and now again rule the democratic party. We do not mean to connive
at further conquests, and we tell you that if you gain further political
power, you must gain it by fair means, and not by foul. We believe
that these laws are wholesome. We believe that they are necessary
barriers against wrongs, necessary defenses for rights; and so
believing, we will keep and defend them even to the uttermost of
lawful honest effort.
The other day, it was Tuesday I think, it pleased the honorable
Senator from Illinois [Mr. Davis] to deliver to the Senate an address,
I had rather said an opinion, able and carefully prepared. That
honorable Senator knows well the regard not only, but the sincere
respect in which I hold him, and he will not misunderstand the
freedom with which I shall refer to some of his utterances.
Whatever else his sayings fail to prove, they did I think, prove their
author, after Mrs. Winslow, the most copious and inexhaustible
fountain of soothing syrup. The honorable Senator seemed like one
slumbering in a storm and dreaming of a calm. He said there was no
uproar anywhere—one would infer you could hear a pin drop—from
centre to circumference. Rights, he said, are secure. I have his
language here. If I do not seem to give the substance aright I will stop
and read it. Rights secure North and South; peace and tranquillity
everywhere. The law obeyed and no need of special provisions or
anxiety. It was in this strain that the Senator discoursed.
Are rights secure, when fresh-done barbarities show that local
government in one portion of our land is no better than despotism
tempered by assassination? Rights secure, when such things can be,
as stand proved and recorded by committees of the Senate! Rights
secure, when the old and the young fly in terror from their homes,
and from the graves of their murdered dead! Rights secure, when
thousands brave cold, hunger, death, seeking among strangers in a
far country a humanity which will remember that—
“Before man made them citizens,
Great nature made them men!”
Read the memorial signed by Judge Dillon, by the democratic
mayor of Saint Louis, by Mr. Henderson, once a member of the
Senate, and by other men known to the nation, detailing what has
been done in recent weeks on the Southern Mississippi. Read the
affidavits accompanying this memorial. Has any one a copy of the
memorial here? I have seen the memorial. I have seen the signatures.
I hope the honorable Senator from Illinois will read it, and read the
affidavits which accompany it. When he does, he will read one of the
most sickening recitals of modern times. He will look upon one of the
bloodiest and blackest pictures in the book of recent years. Yet the
Senator says, all is quiet. “There is not such faith, no not in Israel.”
Verily “order reigns in Warsaw.”
Solitudinem faciunt, pacem appellant.
Mr. President, the republican party every where wants peace and
prosperity—peace and prosperity in the South, as much and as
sincerely as elsewhere. Disguising the truth, will not bring peace and
prosperity. Soft phrases will not bring peace. “Fair words butter no
parsnips.” We hear a great deal of loose, flabby talk about “fanning
dying embers,” “rekindling smoldering fires,” and so on. Whenever
the plain truth is spoken, these unctious monitions, with a Peter
Parley benevolence, fall copiously upon us. This lullaby and hush has
been in my belief a mistake from the beginning. It has misled the
South and misled the North. In Andrew Johnson’s time a convention
was worked up at Philadelphia, and men were brought from the
North and South, for ecstasy and gush. A man from Massachusetts
and a man from South Carolina locked arms and walked into the
convention arm in arm, and sensation and credulity palpitated, and
clapped their hands, and thought an universal solvent had been
found. Serenades were held at which “Dixie” was played. Later on,
anniversaries of battles fought in the war of Independence, were
made occasions by men from the North and men from the South for
emotional, dramatic, hugging ceremonies. General Sherman, I
remember, attended one of them, and I remember also, that with the
bluntness of a soldier, and the wisdom and hard sense of a
statesman, he plainly cautioned all concerned not to be carried away,
and not to be fooled. But many have been fooled, and being fooled,
have helped to swell the democratic majorities which now display
themselves before the public eye.
Of all such effusive demonstrations I have this to say: honest,
serious convictions are not ecstatic or emotional. Grave affairs and
lasting purposes do not express or vent themselves in honeyed
phrase or sickly sentimentality, rhapsody, or profuse professions.
This is as true of political as of religious duties. The Divine Master
tells us, “Not every one that saith unto me, Lord, Lord, shall enter
into the kingdom of heaven; but he that doeth the will of my Father
which is in heaven.”
Facts are stubborn things, but the better way to deal with them is
to look them squarely in the face.
The republican party and the Northern people preach no crusade
against the South. I will say nothing of the past beyond a single fact.
When the war was over, no man who fought against his flag was
punished even by imprisonment. No estate was confiscated. Every
man was left free to enjoy life, liberty, and the pursuit of happiness.
After the Southern States were restored to their relations in the
Union, no man was ever disfranchised by national authority—not
one. If this statement is denied, I invite any Senator to correct me. I
repeat it. After the Southern State governments were rebuilded, and
the States were restored to their relations in the Union, by national
authority, not one man for one moment was ever denied the right to
vote, or hindered in the right. From the time that Mississippi was
restored, there never has been an hour when Jefferson Davis might
not vote as freely as the honorable Senator in his State of Illinois. The
North, burdened with taxes, draped in mourning, dotted over with
new-made graves tenanted by her bravest and her best, sought to
inflict no penalty upon those who had stricken her with the greatest,
and, as she believed, the guiltiest rebellion that ever crimsoned the
annals of the human race.
As an example of generosity and magnanimity, the conduct of the
nation in victory was the grandest the world has ever seen. The same
spirit prevails now. Yet our ears are larumed with the charge that the
republicans of the North seek to revive and intensify the wounds and
pangs and passions of the war, and that the southern democrats seek
to bury them in oblivion of kind forgetfulness.
We can test the truth of these assertions right before our eyes. Let
us test them. Twenty-seven States adhered to the Union in the dark
hour. Those States send to Congress two hundred and sixty-nine
Senators and Representatives. Of these two hundred and sixty-nine
Senators and Representatives, fifty-four, and only fifty-four, were
soldiers in the armies of the Union. The eleven States which were
disloyal send ninety-three Senators and Representatives to Congress.
Of these, eighty-five were soldiers in the armies of the rebellion, and
at least three more held high civil station in the rebellion, making in
all eighty-eight out of ninety-three.
Let me state the same fact, dividing the Houses. There are but four
Senators here who fought in the Union Army. They all sit here now;
and there are but four. Twenty Senators sit here who fought in the
army of the rebellion, and three more Senators sit here who held
high civil command in the confederacy.
In the House, there are fifty Union soldiers from twenty-seven
States, and sixty-five confederate soldiers from eleven States.
Who, I ask you, Senators, tried by this record, is keeping up party
divisions on the issues and hatreds of the war?
The South is solid. Throughout all its borders it has no seat here
save two in which a republican sits. The Senator from Mississippi
[Mr. Bruce] and the Senator from Louisiana [Mr. Kellogg] are still
spared; and whisper says that an enterprise is afoot to deprive one of
these Senators of his seat. The South is emphatically solid. Can you
wonder that the North soon becomes solid too? Do you not see that
the doings witnessed now in Congress fill the North with alarm, and
distrust of the patriotism and good faith of men from the South?
Forty-two democrats have seats on this floor; forty-three if you add
the honorable Senator from Illinois, [Mr. Davis.] He does not belong
to the democratic party, although I must say, after reading his speech
the other day, that a democrat who asks anything more of him is an
insatiate monster. [Laughter.] If we count the Senator from Illinois,
there are forty-three democrats in this Chamber. Twenty-three is a
clear majority of all, and twenty-three happens to be exactly the
number of Senators from the South who were leaders in the late
rebellion.
Do you anticipate my object in stating these numbers? For fear you
do not, let me explain. Forty-two Senators rule the Senate; twenty-
three Senators rule the caucus. A majority rules the Senate; a caucus
rules the majority; and the twenty-three southern Senators rule the
caucus. The same thing, in the same way, governed by the same
elements, is true in the House.
This present assault upon the purity and fairness of elections,
upon the Constitution, upon the executive department, and upon the
rights of the people; not the rights of a king, not on such rights as we
heard the distinguished presiding officer, who I am glad now to
discover in his seat, dilate upon of a morning some weeks ago; not
the divine right of kings, but the inborn rights of the people—the
present assault upon them, could never have been inaugurated
without the action of the twenty-three southern Senators here, and
the southern Representatives there, [pointing to the House.]
The people of the North know this and see it. They see the lead and
control of the democratic party again where it was before the war, in
the hands of the South. “By their fruits ye shall know them.” The
honorable Senator from Alabama [Mr. Morgan], educated no doubt
by experience in political appearances, and spectacular effects, said
the other day that he preferred the democrats from the North should
go first in this debate. I admired his sagacity. It was the skill of an
experienced tactician to deploy the northern levies as the sappers
and miners; it was very becoming certainly. It was not from cruelty,
or to make them food for powder, that he set them in the forefront of
the battle; he thought it would appear better for the northern
auxiliaries to go first and tunnel the citadel. Good, excellent, as far as
it went; but it did not go very far in misleading anybody; putting the
tail foremost and the head in the sand, only displayed the species and
habits of the bird. [Laughter.]
We heard the other day that “the logic of events” had filled the
southern seats here with men banded together by a common history
and a common purpose. The Senator who made that sage
observation perhaps builded better than he knew. The same logic of
events, let me tell democratic Senators, and the communities behind
them, is destined to bring from the North more united delegations.
I read in a newspaper that it was proposed the other day in
another place, to restore to the Army of the United States men who,
educated at the nation’s cost and presented with the nation’s sword,
drew the sword against the nation’s life. In the pending bill is a
provision for the retirement of officers now in the Army, with
advanced rank and exaggerated pay. This may be harmless, it may be
kind. One swallow proves not spring, but along with other things,
suspicion will see in it an attempt to coax officers now in the Army to
dismount, to empty their saddles, in order that others may get on.
So hue and cry is raised because courts, on motion, for cause
shown in open court, have a right to purge juries in certain cases. No
man in all the South, under thirty-five years of age, can be affected by
this provision, because every such man was too young when the
armies of the rebellion were recruited to be subject to the provision
complained of. As to the rest, the discretion is a wholesome one. But,
even if it were not, let me say in all kindness to southern Senators, it
was not wise to make it a part of this proceeding, and raise this
uproar in regard to it.
Even the purpose, in part already executed, to remove the old and
faithful officers of the Senate, even Union soldiers, that their places
may be snatched by others—to overturn an order of the Senate which
has existed for a quarter of a century, in order to grasp all the petty
places here, seems to me unwise. It is not wise, if you want to disarm
suspicion that you mean aggrandizing, gormandizing, unreasonable
things.
Viewing all these doings in the light of party advantage—advantage
to the party to which I belong, I could not deplore them; far from it;
but wishing the repose of the country, and the real, lasting, ultimate
welfare of the South, and wishing it from the bottom of my heart, I
believe they are flagrantly unwise, hurtfully injudicious.
What the South needs is to heal, build, mend, plant, sow. In short,
to go to work. Invite labor; cherish it; do not drive it out. Quit
proscription, both for opinion’s sake, and for color’s sake. Reform it
altogether. I know there are difficulties in the way. I know there is
natural repugnance in the way; but drop passion, drop sentiment
which signifies naught, and let the material prosperity and
civilization of your land advance. Do not give so much energy, so
much restless, sleepless activity, to an attempt so soon to get
possession once more, and dominate and rule the country. There is
room enough at the national board, and it is not needed, it is not
decorous, plainly speaking, that the South should be the MacGregor
at the table, and that the head of the table should be wherever he sits.
For a good many reasons, it is not worth while to insist upon it.
Mr. President, one of Rome’s famous legends stands in these
words: “Let what each man thinks of the Republic be written on his
brow.” I have spoken in the spirit of this injunction. Meaning offence
to no man, and holding ill-will to no man, because he comes from the
South, or because he differs with me in political opinion, I have
spoken frankly, but with malice toward none.
This session, and the bill pending, are acts in a partisan and
political enterprise. This debate, begun after a caucus had defined
and clenched the position of every man in the majority, has not been
waged to convince anybody here. It has resounded to fire the
democratic heart, to sound a blast to the cohorts of party, to beat the
long-roll, and set the squadrons in the field. That is its object, as
plainly to be seen as the ultimate object of the attempted overthrow
of laws.
Political speeches having been thus ordained, I have discussed
political themes, and with ill-will to no portion of the country but
good will toward every portion of it, I have with candor spoken
somewhat of my thoughts of the duties and dangers of the hour.
[Applause on the floor and in the galleries.]
Lincoln’s Speech at Gettysburg.
“Four-score and seven years ago, our fathers brought forth on this
continent, a new Nation, conceived in liberty, and dedicated to the
proposition that all men are created equal.
“Now, we are engaged in a great civil war testing whether that
Nation, or any Nation, so conceived and so dedicated, can long
endure. We are met on a great battle-field of that war. We have come
to dedicate a portion of that field, as a final resting-place for those,
who here gave their lives that that Nation might live. It is altogether
fitting and proper that we should do this.
“But, in a large sense, we cannot dedicate—we cannot consecrate—
we cannot hallow this ground. The brave men, living and dead, who
struggled here, have consecrated it far above our poor power to add
or detract. The world will little note, nor long remember what we SAY
here, but it can never forget what they DID here. It is for us the living,
rather, to be dedicated here to the unfinished work which they who
fought here have thus far so nobly advanced. It is rather for us to be
here dedicated to the great task remaining before us, that from these
honored dead, we take increased devotion to that cause for which
they gave the last full measure of devotion, that we here highly
resolve that these dead shall not have died in vain; that this Nation,
under God, shall have a new birth of freedom; and that Government
of the people, by the people, and for the people shall not perish from
this earth.”
Speech of Hon. John M. Broomall, of
Pennsylvania,
On the Civil Rights Bill. House of Representatives, March 8, 1866.

Mr. Speaker, it is alleged that this species of legislation will widen
the breach existing between the two sections of the country, will
offend our southern brethren. Do not gentlemen know that those
who are most earnestly asking this legislation are our southern
brethren themselves.
They are imploring us to protect them against the conquered
enemies of the country, who notwithstanding their surrender, have
managed, through their skill or our weakness, to seize nearly all the
conquered territory.
This is not the first instance in the world’s history in which all that
had been gained by hard fighting was lost by bad diplomacy.
But they, whose feelings are entitled to so much consideration in
the estimation of those who urge this argument, are not our southern
brethren, but the southern brethren of our political opponents; the
conquered rebels, pardoned and unpardoned; traitors priding
themselves upon their treason.
These people are fastidious. The ordinary terms of the English
language must be perverted to suit their tastes. Though they
surrendered in open and public war, they are not to be treated as
prisoners. Though beaten in the last ditch of the last fortification,
they are not to be called a conquered people. The decision of the
forum of their own choosing is to be explained away into
meaningless formality for their benefit. Though guilty of treason,
murder, arson, and all the crimes in the calendar, they are “our
southern brethren.” The entire decalogue must be suspended lest it
should offend these polished candidates for the contempt and
execration of posterity.
Out of deference to the feelings of these sensitive gentlemen, an
executive construction must be given to the word “loyalty,” so that it
shall embrace men who only are not hanged because they have been
pardoned, and who only did not destroy the Government because
they could not. Out of deference to the feelings of these sensitive
gentlemen, too, a distinguished public functionary, once the
champion of the rights of man, a leader in the cause of human
progress, a statesman whose keen foreknowledge could point out the
“irrepressible conflict between slavery and freedom,” cannot now see
that treason and loyalty are uncompromising antagonisms.
It is charged against us that the wheels of Government are stopped
by our refusal to admit the representatives of these southern
communities. When we complain that Europe is underselling us in
our markets, and demand protection for the American laborer, we
are told to “admit the southern Senators and Representatives.” When
we complain that excessive importations are impoverishing the
country, and rapidly bringing on financial ruin, we are told to “admit
the southern Senators and Representatives.” When we complain that
an inflated currency is making the rich richer, and the poor poorer,
keeping the prices of even the necessaries of life beyond the reach of
widows and orphans who are living upon fixed incomes, the
stereotyped answer comes, “Admit the southern Senators and
Representatives.” When we demand a tax upon cotton to defray the
enormous outlay made in dethroning that usurping “king of the
world,” still the answer comes, and the executive parrots everywhere
repeat it, “Admit the southern Senators and Representatives.”
The mind of the man who can see in that prescription a remedy for
all political and social diseases must be curiously constituted. Would
these Senators and Representatives vote a tax upon cotton? Would
they protect American industry by increasing duties? Would they
prevent excessive importations? To believe this requires as
unquestioning a faith as to believe in the sudden conversion of whole
communities from treason to loyalty.
We are blocking the wheels of Government! Why, the Government
has managed to get along for four years, not only without the aid of
the Southern Senators and Representatives, but against their efforts
to destroy it; and in the mean time has crushed a rebellion that
would have destroyed any other Government under heaven. Surely
the nation can do without the services of these men, at least during
the time required to examine their claims and to protect by
appropriate legislation our Southern brethren. None but a Democrat
would think of consulting the wolf about what safeguard should be
thrown around the flock.
Those who advocate the admission of the Senators and
Representatives from the States lately reclaimed from the rebellion,
as a means of protecting the loyal men in those States and as a
substitute for the system of legislation of which this bill is part, well
know that the majority in both Houses of Congress ardently desire
the full recognition of those States, and only ask that the rights and
interests of the truly loyal men in those States shall be first
satisfactorily secured.
Much useless controversy has been had about the legal status of
those States. There is no difference between the two parties of the
country on that point. The actual point of difference is this: the
Democrats affiliate with their old political friends in the South, the
late rebels, the friends and followers of Breckinridge, Lee, and Davis.
The Union majority, on the other hand, naturally affiliate with the
loyal men in the South, the men who have always supported the
Government against Breckinridge, Lee, and Davis. Each party wants
the South reconstructed in the hands of its own “southern brethren.”
In short, the northern party corresponding with the loyal men of
the South ask that the legitimate results of Grant’s victory shall be
carried out, while the northern party corresponding with the rebels
of the South ask that things should be considered as if Lee had been
the conqueror, or at least as if there had been a drawn battle, without
victory on either side.
This brings the rights of those in whose behalf the opponents of
the bill under consideration are acting directly in question, and in
order to limit down the field of controversy as far as possible, let us
inquire how far all parties agree upon the legal status of the
communities lately in rebellion. Now, the meanest of all
controversies is that which comes from dialectics. Where the
disputants attach different meanings to the same word their time is
worse than thrown away. I have always looked upon the question
whether the States are in or out of the Union as only worthy of the
schoolmen of the middle ages, who could write volumes upon a mere
verbal quibble. The disputants would agree if they were compelled to
use the word “State” in the same sense. I will endeavor to avoid this
trifling.
All parties agree that at the close of the rebellion the people of
North Carolina, for example, had been “deprived of all civil
government.” The President, in his proclamation of May 29, 1865,
tells the people of North Carolina this in so many words, and he tells
the people of the other rebel States the same thing in his several
proclamations to them. This includes the Conservatives and
Democrats, who, however they may disagree, at last agree in this,
that the President shall do their thinking.
The Republicans subscribe to this doctrine, though they differ in
their modes of expressing it. Some say that those States have ceased
to possess any of the rights and powers of government as States of
the Union. Others say, with the late lamented President, that “those
States are out of practical relations with the Government.”
Others hold that the State organizations are out of the Union. And
still others that the rebels are conquered, and therefore that their
organizations are at the will of the conqueror.
The President has hit upon a mode of expression which embraces
concisely all these ideas. He says that the people of those States were,
by the progress of the rebellion and by its termination, “deprived of
all civil government.”
One step further. All parties agree that the people of these States,
being thus disorganized for all State purposes, are still at the election
of the government, citizens of the United States, and as such, as far
as they have not been disqualified by treason, ought to be allowed to
form their own State governments, subject to the requirements of the
Constitution of the United States.
Still one step further. All parties agree that this cannot be done by
mere unauthorized congregations of the people, but that the time,
place and manner must be prescribed by some department of the
Government, according to the argument of Mr. Webster and the
spirit of the decision of the Supreme Court in Luther vs. Borden, 7
Howard, page 1.
Yet another step in the series of propositions. All parties agree that
as Congress was not in session at the close of the rebellion, the
President, as Commander-in-Chief, was bound to take possession of
the conquered country and establish such government as was
necessary.
Thus far all is harmonious; but now the divergence begins. At the
commencement of the present session of Congress three-fourths of
both Houses held that when the people of the States are “deprived of
all civil government,” and when, therefore, it becomes necessary to
prescribe the time, place, and manner in and by which they shall
organize themselves again into States while the President may take
temporary measures, yet only the law-making power of the
Government is competent to the full accomplishment of the task. In
other words, that only Congress can enable citizens of the United
States to create States. I have said that at the commencement of the
session three-fourths of both houses held this opinion. The
proportion is smaller now, and by a judicious use of executive
patronage it may become still smaller; but the truth of the
proposition will not be affected if every Representative and Senator
should be manipulated into denying it.
On the other hand, the remaining fourth, composed of the supple
Democracy and its accessions, maintain that this State-creating
power is vested in the President alone, and that he has already
exercised it.
The holy horror with which our opponents affect to contemplate
the doctrine of destruction of States is that much political hypocrisy.
Every man who asks the recognition of the existing local
governments in the South thereby commits himself to that doctrine.
The only possible claim that can be set up in favor of the existing
governments is based upon the theory that the old ones have been
destroyed. The present organizations sprang up at the bidding of the
President after the conquest among a people who, he said, had been
“deprived of all civil government.”
If the President’s “experiment” had resulted in organizing the
southern communities in loyal hands, the majority in Congress
would have found no difficulty in indorsing it and giving it the
necessary efficiency by legislative enactment.
In this case, too, the President never would have denied the power
of Congress in the premises. He never would have set up the theory
that the citizens of the United States, through their representatives,
are not to be consulted when those who have once broken faith with
them ask to have the compact renewed.
Our opponents have no love for the President. They called him a
usurper and a tyrant in Tennessee. They ridiculed him as a negro
“Moses.” They tried to kill him, and failing that, they accused him of
being privy to the murder of his predecessor. But when his
“experiment” at reconstruction was found to result in favor of their
friends, the rebels, then they hung themselves about his neck like so
many mill-stones, and tried to damn him to eternal infamy by
indorsing his policy. Will they succeed? Will he shake them off, or go
down with them?
But let us suffer these discordant elements to settle their own
terms of combinations as best they may. The final result cannot be
doubtful.
If ten righteous men were needed to save Sodom, even Andrew
Johnson will find it impossible to save the Democratic party.
Our path of duty is plain before us. Let us pass this bill and such
others as may be necessary to secure protection to the loyal men of
the South. If our political opponents thwart our purposes in this, let
us go to the country upon that issue.
I am by no means an advocate of extensive punishment, either in
the way of hanging or confiscation, though some of both might be
salutary. I do not ask that full retribution be enforced against those
who have so grievously sinned. I am willing to make forgiveness the
rule and punishment the exception; yet I have my ultimatum. I
might excuse the pardon of the traitors Lee and Davis, even after the
hanging of Wirz, who but obeyed their orders, orders which he would
have been shot for disobeying. I might excuse the sparing of the
master after killing the dog whose bite but carried with it the venom
engendered in the master’s soul. I might look calmly upon a
constituency ground down by taxation, and tell the complainants
that they have neither remedy nor hope of vengeance upon the
authors of their wrongs. I might agree to turn unpityingly from the
mother whose son fell in the Wilderness, and the widow whose
husband was starved at Andersonville, and tell them that in the
nature of things retributive justice is denied them, and that the
murderers of their kindred may yet sit in the councils of their
country; yet even I have my ultimatum. I might consent that the
glorious deeds of the last five years should be blotted from the
country’s history; that the trophies won on a hundred battle-fields,
the sublime visible evidence of the heroic devotion of America’s
citizen soldiery, should be burned on the altar of reconciliation. I
might consent that the cemetery at Gettysburg should be razed to the
ground; that its soil should be submitted to the plow, and that the
lamentation of the bereaved should give place to the lowing of cattle.
But there is a point beyond which I shall neither be forced nor
persuaded. I will never consent that the government shall desert its
allies in the South and surrender their rights and interests to the
enemy, and in this I will make no distinction of caste or color either
among friends or foes.
The people of the South were not all traitors. Among them were
knees that never bowed to the Baal of secession, lips that never
kissed his image. Among the fastness of the mountains, in the rural
districts, far from the contagion of political centres, the fires of
patriotism still burned, sometimes in the higher walks of life, oftener
in obscure hamlets, and still oftener under skins as black as the
hearts of those who claimed to own them.
These people devoted all they had to their country. The homes of
some have been confiscated, and they are now fugitives from the
scenes that gladdened their childhood. Some were cast into
dungeons for refusing to fire upon their country’s flag, and still
others bear the marks of stripes inflicted for giving bread and water
to the weary soldier of the Republic, and aiding the fugitive to escape
the penalty of the disloyalty to treason. If the God of nations listened
to the prayers that ascended from so many altars during those
eventful years, it was to the prayers of these people.
Sir, we talked of patriotism in our happy northern homes, and
claimed credit for the part we acted; but if the history of these people
shall ever be written, it will make us blush that we ever professed to
love our country.
The government now stands guard over the lives and fortunes of
these people. They are imploring us not to yield them up without
condition to those into whose hands recent events have committed
the destinies of the unfortunate South. A nation which could thus
withdraw its protection from such allies, at such a time, without their
full and free consent, could neither hope for the approval of mankind
nor the blessing of heaven.
Speech, of Hon. Charles A. Eldridge, of
Wisconsin.
Against the Civil Rights Bill, in the House of Representatives, March

2, 1866.
Mr. Speaker: I thought yesterday that I would discuss this measure
at some length; but I find myself this morning very unwell; and I
shall therefore make only a few remarks, suggesting some objections
to the bill.
I look upon the bill before us, Mr. Speaker, as one of the series of
measures rising out of a feeling of distrust and hatred on the part of
certain individuals, not only in this House, but throughout the
country, toward these persons who formerly held slaves. I had hoped
that long before this time the people of this country would have come
to the conclusion that the subject of slavery and the questions
connected with it had already sufficiently agitated this country. I had
hoped that now, when the war is over, when peace has been restored,
when in every State of the Union the institution of slavery has been
freely given up, its abolition acquiesced in, and the Constitution of
the United States amended in accordance with that idea, this subject
would cease to haunt us as it is made to do in the various measures
which are constantly being here introduced.
This bill is, it appears to me, one of the most insidious and
dangerous of the various measures which have been directed against
the interest of the people of this country. It is another of the
measures designed to take away the essential rights of the State. I
know that when I speak of States and State rights, I enter upon
unpopular subjects. But, sir, whatever other gentlemen may think, I
hold that the rights of the States are the rights of the Union, that the
rights of the States and the liberty of the States are essential to the
liberty of the individual citizen. * * *

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PREFACE xiii Review Questions and Short Cases 44

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3 Internal Control Over Financial

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6 Audit Evidence 222

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8 Specialized Audit Tools:

Identifying Control Risks 418

9 Auditing the Revenue

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Significant Accounts, Disclosures, and Relevant

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The auditing environment continues to change in significant ways. University

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Compliance with the Foreign Corrupt Practices

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Hallmark Pedagogical Features

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Auditing Profession, Audit Quality and

Emphasizing that professional skepticism, which can be challenging

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address contemporary issues. Further, we identify these problems as part of the

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