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Auditing &
Assurance Services

Timothy J. Louwers, PhD, CPA,

CISA, CFF
Professor Emeritus
James Madison University

Penelope L. Bagley, PhD, CPA

Department Chair and
Kenneth E. Peacock Distinguished Professor
Appalachian State University

Allen D. Blay, PhD, CPA

Department Chair and
EY Professor of Accounting
Florida State University

Jerry R. Strawser, PhD, CPA

KPMG Chair and Professor of Accounting
Texas A&M University

Jay C. Thibodeau, PhD, CPA

Rae D. Anderson Professor of Accounting
Bentley University
 Final PDF to printer

AUDITING & ASSURANCE SERVICES

Published by McGraw Hill LLC, 1325 Avenue of the Americas, New York, NY 10019. Copyright
©2024 by McGraw Hill LLC. All rights reserved. Printed in the United States of America. No part of
this publication may be reproduced or distributed in any form or by any means, or stored in a database or
retrieval system, without the prior written consent of McGraw Hill LLC, including, but not limited to, in
any network or other electronic storage or transmission, or broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available to customers outside
the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 LWI 28 27 26 25 24 23
ISBN 978-1-266-28599-8
MHID 1-266-28599-7
Cover Image: paul kline/E+/Getty Images
All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a
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does not guarantee the accuracy of the information presented at these sites.

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lou85997_fm_ise.indd ii 10/10/22 07:11 pm

Some people come into our lives and quickly go. Some
stay awhile and leave footprints on our hearts and we
are never quite the same.
Anonymous

We dedicate this book to the following educators

whose footprints we try to follow:
Professor Homer Bates
(University of North Florida)

Professor Stanley Biggs

(University of Connecticut)

Professor Lewis C. Buller

(Indiana State University)

Professor Patrick Delaney

(Northern Illinois University)

Professor William Hillison

(Florida State University)

Professor John Ivancevich

(University of Houston)

Professor Richard Kochanek

(University of Connecticut)

Professor John L. “Jack” Kramer

(University of Florida)

Professor Jack Robertson

(University of Texas at Austin)

Professor Robert Strawser

(Texas A&M University)

Professor Sally Webber

(Northern Illinois University)

Professor “IBM Jim” Whitney

(The Citadel)
Meet the Authors
Timothy J. Louwers is Professor Emeritus at James Madison University.
Professor Louwers received his undergraduate and master’s degrees from The Citadel and
his PhD from Florida State University. Prior to beginning his academic career, he worked
in public accounting with KPMG, specializing in financial, governmental, and information
systems auditing. He is a certified public accountant (South Carolina and Virginia) and a
certified information systems auditor. He is also certified in financial forensics.
Professor Louwers’s research interests include auditors’ reporting decisions and ethical
issues in the accounting profession. He has authored or coauthored more than 60 publications
on a wide range of accounting, auditing, and technology-related topics, including articles
in the Journal of Accounting Research, Accounting Horizons, the Journal of Business Ethics,
Behavioral Research in Accounting, Decision Sciences, the Journal of Forensic Accounting,
Issues in Accounting Education, the Journal of Accountancy, the CPA Journal, and
Today’s CPA. Some of his published work has been reprinted in Russian and Chinese.
Courtesy of James Madison
University
He is a respected lecturer on auditing and technology-related issues and has received
teaching excellence awards from the University of Houston and Louisiana State University.
He has appeared on both local and national television news broadcasts, including MSNBC
and CNN news programs.

Penelope L. Bagley is the Department Chairperson and the Kenneth E.

Peacock Distinguished Professor.
Professor Bagley received her undergraduate and master’s degrees from North Carolina
State University and her PhD from the University of Georgia. Prior to obtaining her
PhD, Professor Bagley worked for a short time in the audit field. She is a certified public
accountant in North Carolina. Professor Bagley teaches both undergraduate and gradu-
ate auditing courses. She has authored and coauthored publications on accounting and
auditing topics in journals such as Auditing: A Journal of Practice & Theory, Account-
ing Horizons, and Behavioral Research in Accounting. She has also coauthored auditing
cases, published in Issues in Accounting Education. Professor Bagley is active in the
American Accounting Association and has served on various committees for the Audit-
ing Section. Professor Bagley likes to spend time with her husband Matt and children,
Courtesy of Appalachian Garrett and Julianne. She enjoys exercising in her spare time, she regularly competes in
State University running and triathlon races. Her crowning athletic achievement was qualifying for and
running the 2019 Boston Marathon.

Allen D. Blay is the Department Chair and EY Professor of Accounting at

Florida State University.
Professor Blay completed his PhD at the University of Florida in 2000. He teaches audit-
ing at all levels and teaches a seminar in auditing research in the doctoral program. His
research interests relate to auditor judgment and decision making. Professor Blay has
authored or coauthored publications on a wide range of accounting and auditing topics
in journals such as The Accounting Review, Contemporary Accounting Research, Audit-
ing: A Journal of Practice and Theory, Organizational Behavior and Human Decision
Processes, the Journal of Business Ethics, Behavioral Research in Accounting, Issues in
Accounting Education, the International Journal of Auditing, and the Journal of Account-
ing, Auditing, and Finance. He is currently an editor for Issues in Accounting Education
and serves on several editorial boards.
Courtesy of Kallen M. Lunt

iv

Courtesy of Michael Kellett
for Mays Business School
Courtesy of Bentley
University
Meet the Authors v
Professor Blay has been active in the American Accounting Association and is 2022–
23 president of the Auditing Section. He also cochaired the 2020 Auditing Section Mid-
year Meeting and served on the steering committee for the Intensive Data and Analytics
Summer Workshop each year since its inception, as well as in many other roles over the
years. He is also active in the American Institute of CPAs, serving in various volunteer
roles relating to the Uniform CPA Exam. Prior to entering academics, Professor Blay
worked in public accounting auditing financial institutions. He currently is chair of the
accounting department at Florida State University.
Jerry R. Strawser is Associate Dean for Graduate Programs at Mays
Business School at Texas A&M University and holds the KPMG Chair in Accounting.
Prior to his current appointment, Professor Strawser served as executive vice president
and chief financial officer at Texas A&M University, dean of Mays Business School at
Texas A&M University, interim executive vice president and provost at Texas A&M
University, interim dean of the C. T. Bauer College of Business at the University of
Houston, and Arthur Andersen & Co. Alumni Professor of Accounting.
Professor Strawser has coauthored three textbooks and more than 60 journal articles. In
addition to his academic experience, he had prior public accounting experience at two Big
Four accounting firms. He has also developed and delivered numerous executive devel-
opment programs to organizations such as AT&T, Centerpoint Energy, Continental Air-
lines, ConocoPhillips, Halliburton, KBR, KPMG, Minute Maid, PricewaterhouseCoopers,
McDermott International, Shell, Southwest Bank of Texas, and the Texas Society of Certi-
fied Public Accountants. Professor Strawser is a certified public accountant in the state of
Texas and earned his BBA and PhD in accounting from Texas A&M University.
Jay C. Thibodeau is the Rae D. Anderson Professor of Accounting and
Director of PhD Programs at Bentley University.
Professor Thibodeau is a former auditor and a CPA. He received his BS degree from
the University of Connecticut in 1987 and his PhD from the University of Connecticut
in 1996. He has conducted executive education programs for numerous leading firms
including Fidelity Investments, KPMG, PricewaterhouseCoopers, Stryker, and Bluecoat
Technologies.
He is a coauthor of two books, Auditing and Assurance Services and Auditing and
Accounting Cases: Investigating Issues of Fraud and Professional Ethics. In addition, he
has written over 60 articles and book chapters for academics and practitioners and has
published in journals such as Auditing: A Journal of Practice & Theory, Journal of Infor-
mation Systems, Accounting Horizons and Issues in Accounting Education.
Professor Thibodeau served as the president of the Auditing Section of the American
Accounting Association for the 2014/2015 academic year. He has also received national
recognition for his work seven times. First, for his thesis, winning the 1996 Outstand-
ing Doctoral Dissertation Award presented by the ABO section of the AAA. Four other
times, for curriculum innovation, winning the 2001 Joint AICPA/AAA Collaboration
Award, the 2003 Innovation in Assurance Education Award, the 2016 Forensic Account-
ing Teaching Innovation Award, and the 2019 Innovation in Assurance Education Award.
Once, for outstanding service, receiving a Special Service Award from the Auditing Sec-
tion for his work in helping to create the Center for Audit Quality’s Access to Auditors
program. And, finally, for research excellence, winning the 2020 Glen McLaughlin Prize
for Research in Accounting and Ethics given by the University of Oklahoma.
Look Beneath the Surface. . .

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

facts—in other words, to look beneath the surface. Whether evaluating the Enron and World-
Com scandals of the early 2000s, the financial crisis of 2007–2008, the Wirecard fraud in
2020 or present-day issues and challenges related to significant estimation uncertainty, under-
standing the auditor’s responsibility related to fraud, maintaining a clear perspective, probing
for details, and understanding the big picture are indispensable to effective auditing.
With the availability of greater levels of qualitative and quantitative information
(“Big Data”), the need for technical skills and challenges facing today’s auditor is greater
than ever. The Louwers, Bagley, Blay, Strawser, and Thibodeau team has dedicated
years of experience in the auditing field to this new edition of Auditing & Assurance
Services, supplying the necessary investigative tools for future auditors.

Cutting-Edge Coverage
The ninth edition of Auditing & Assurance Services continues its tradition as the most
up-to-date auditing text on the market. All chapters and modules have been revised to
incorporate
∙ The latest professional standards, recodifications, and proposals from the Interna-
tional Auditing and Assurance Standards Board, Auditing Standards Board, and
Public Company Accounting Oversight Board.
∙ A list of the relevant professional standards that are covered in that chapter, including
comprehensive coverage of the new PCAOB standards on auditing estimates.

Data Analytics
One trend has emerged as a potential sea change in the financial statement auditing process:
the data and analytics challenge.
We believe students should be prepared to make the best use possible of relevant data
using state-of-the-art analytical tools. In fact, the terms big data and data and analytics
are frequently being used to describe a growing movement among audit professionals.
As the AICPA moves to add data and analytics onto the Uniform CPA Examination, our
collective view is that students must be able to not only meet current requirements, but
be ahead of the game.
To prepare students, the ninth edition of Auditing & Assurance Services has been
revised deliberately to help students critically think about the use of increased data and
analytical tools in the financial statement audit. In addition to changes within the main
chapters of the book, we have added
∙ A new comprehensive example of data and analytics in auditing included in
Module G, which follows the AICPA Guide to Data Analytics and covers the entire
thought process of an auditor.
∙ Updated data to Author-Created Cases and Exercises (as part of Data Analytics
Module) that cover the majority of uses of data analytics in the financial statement
audit, along with extensive solutions to help instructors implement the materials in
their classroom.
It is our belief that students should be trained in the process of data and analytics and
learn to think critically about situations they may face in an audit. We believe that the
knowledge students attain should be software independent, particularly since software

vi
technology changes so rapidly. However, we also believe that it is important for students
to become familiar with at least one specific data and analytic software tool, and recent
AACSB standards echo this belief. Thus, an important goal of the ninth edition is to
provide a clear and implementable method to fully integrate a leading data analysis tool,
the IDEA Data Analysis software, into the auditing class. Many of our exercises,
however, can be implemented using whatever technology an instructor chooses to
use, like Excel or Alteryx.
We believe that IDEA provides an outstanding platform to illustrate the steps that
auditors need to take related to data and data analysis while completing the financial
statement audit. Leading auditing professionals have confirmed that using IDEA is
an outstanding way for entry-level auditing professionals to begin the journey into
the world of big data and data analytics. Simply stated, big data is manifested in the
financial statement auditing process through the use of tools like IDEA.
Overall, our revisions related to the big data challenge were designed to provide
instructors a set of tools and mechanisms to bring data and analytics into the classroom
in a meaningful way. Through the use of these tools, students can be sure they are
prepared to enter practice with an appreciation for and knowledge of the increasing
importance of data and analytics in the auditing profession.
Perhaps most importantly, the ninth edition of Auditing & Assurance Services
also continues to be the most up-to-date auditing text on the market. All chapters and
modules have been revised to incorporate the latest updates from the international
standards of auditing (ISAs), the Auditing Standards Board (ASB), and the Public
Company Accounting Oversight Board (PCAOB). With Auditing & Assurance
Services, ninth edition, students are prepared to take on auditing’s latest challenges.
The Louwers author team uses a conversational, yet professional tone—hailed by
reviewers as a key strength of the book.

Flexible Organization “The format allows you to integrate the

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

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

vii
 achieve this goal. Although the chapters follow a logical sequence that we recommend
professors consider for their classes, the modules have been written to be used on a
stand-alone basis. In essence, the modules have been deliberately prepared for entirely
flexible implementation of these topics without excessive reliance on chapter sequencing.
We encourage you to integrate these modules into your syllabi in a manner that best
suits your approach to the auditing course.
An additional feature that provides instructor flexibility is an alternate chapter
(with a full complement of supplemental and ancillary materials) that focuses on the
PCAOB audit report for issuers. In addition, PCAOB versions of report examples
and summary exhibits and end of chapter materials have been prepared to accom-
pany the AICPA reporting chapter. This provides instructors with three options to
teach audit reporting:
1. Focus exclusively on the AICPA report (text copy)
2. Focus on the AICPA report while introducing differences between the AICPA report
and PCAOB report (text copy and summary materials available on Connect)
3. Focus exclusively on the PCAOB report (alternate chapter available on Connect)

Engage Your Students with Real Examples

An effective accounting textbook integrates real-world scenarios with theoretical discus-
sion. Auditing & Assurance Services places the student in the role of a decision maker
by illustrating the application of auditing concepts using actual situations experienced
by accounting firms and companies such as
∙ Each chapter or module opens with a “real-world” example that draws upon concepts
discussed within that chapter or module.
∙ A series of mini-cases and Updated Classroom Cases available on the Instructor
Resource Center have been developed for use by instructors to further bring text
material to life. These resources feature real situations experienced by companies,
individuals, or accounting firms and are updated by the authors to include both
timeless classics such as Arthur Andersen’s failure to detect fraud at Enron to more
recent situations such as the Wirecard fraud and PCAOB inspections of audits con-
ducted for Chinese companies listed on U.S. exchanges.

Updated Classroom Cases

The author-prepared Updated Classroom Cases provides students and instructors with a
brief overview of “real-time” auditing issues, along with references to suggested read-
ings and guidelines for incorporating the content into the classroom. Previous items
have featured the KPMG “Steal the Exam” issue related to PCAOB inspections and
the 2018 ban of PwC for audits of companies listed on the India Stock Exchange. We
have added cases that address recent issues and developments in the accounting and
auditing profession, such as the Theranos fraud, Wirecard fraud, Luckin Coffee fraud,
and PCAOB inspections of audits conducted for Chinese companies listed on U.S.
exchanges. New items are added as events develop and are available in Connect.

viii
Fraud Awareness
The fraud coverage in Auditing & Assurance Services is extensive and is complemented
by real-world examples chosen to engage students through the following tools:
∙ Auditing Insights integrated throughout the text.
∙ Mini-cases and Updated Classroom cases that may be assigned to supplement text
chapters and modules that expose students to landmark fraud cases including Enron,
Satyam Computer Services, and Luckin Coffee.
∙ Specific discussion of management fraud (Chapter 4), employee fraud (Chapter 6),
and the Certified Fraud Examiner Exam (Module D).

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

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

The Updated Auditor

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

ix
 IDEA Software and Workbook
With the availability of unprecedented amounts of quantitative and qualitative information
and tools available to access and process that information, it is imperative that students
learn and utilize the latest technologies used by auditing professionals. As previously
stated, McGraw Hill Education has forged a partnership with Caseware Analytics for
the use of the IDEA data analysis tool. Chapters 3 (audit planning), 4 (risk assessment), 5
(internal control), 7–9 (operating cycle chapters), both modules on sampling (Modules E
and F), and the new data and analytics module (Module G) have been revised to
reference the use of IDEA within the chapter or module.
In addition, the ninth edition includes end-of-chapter exercises utilizing author-developed
databases exclusively for use with Auditing & Assurance Services as well as supplemental
materials available in Connect to complement the IDEA workbook and provide hands-on
instructions on using the IDEA software. The authors also provide
∙ Implementation guidance to instructors.
∙ Robust video walk-throughs.
∙ Detailed solutions and explanations on this new content.
Overall, the author team has provided significant resources to prepare students for the
auditing environment in 2023 and beyond.

Standards Update
The professional standards facing auditors continue to evolve. The author-prepared Standards
Update provides a summary of current exposure drafts and pronouncements issued
subsequent to the publication of the text. This invaluable resource provides students
and instructors with an “evergreen” text and summarizes the most current activities
of the Auditing Standards Board and Public Company Accounting Oversight Board.
The Standards Update is updated biannually and is available in Connect.

Highlights of Auditing & Assurance Services, 9e

In response to feedback and guidance from numerous auditing accounting faculty, the
authors have made many important changes to the ninth edition of Auditing & Assurance
Services, including the following:
∙ The ninth edition of Auditing & Assurance Services features Connect and SmartBook.
∙ Module G has been updated to include full coverage of the current uses of Data and
Analytics in auditing, including extensive Data Analytics Exercises with author-
created data.
∙ Module I is new to the ninth edition. The module is focused on describing the steps and
complexities involved in the audit of internal control over financial reporting at an issuer.
∙ All chapters and modules have been revised to incorporate professional standards adopted
through January 2022.
∙ Updates have been added to the Apollo Shoes, Inc. case with Data Analytics content.
Apollo Shoes, Inc. is an audit case designed to introduce students to the entire audit
process. Auto-gradable questions, instructor implementation guide, and videos can be
found online in Connect.

x
∙ Auditing Insight boxes have been added and updated throughout the textbook to
place issues discussed within the text into a real-world context. These boxes incor-
porate numerous examples from business and academic publications as well as actual
company annual reports and audit reports.
∙ Examples using the Caseware IDEA software are included in Chapters 3, 4, 5, 7,
8, 9, Module E, Module F, and the new Module G focusing on Data and Analytics.
In addition, end-of-chapter exercises using author-developed databases exclusively
for use with Auditing & Assurance Services as well as supplemental materials to
complement the IDEA workbook are provided.
∙ Tables in the cycle chapters have been fully standardized to focus on the risk assessment
process for each relevant assertion. The chapters provide a consistent focus on how
auditors respond to assessed risk of material misstatement, through the incorporation
of easy-to-read tables throughout Chapters 6 through 10 to highlight the key issues
and risks faced by auditors in the examination of different accounts. These tables take
the students through the risk assessment process for each cycle on a step-by-step basis
to mirror the methodology used in current audit practice.

Remote Proctoring and Browser-Locking Capabilities

Remote proctoring and browser-locking capabilities, hosted by Proctorio within Connect,
provide control of the assessment environment by enabling security options and verifying
the identity of the student.
Seamlessly integrated within Connect, these services allow instructors to control
the assessment experience by verifying identification, restricting browser activity, and
monitoring student actions.
Instant and detailed reporting gives instructors an at-a-glance view of potential academic
integrity concerns, thereby avoiding personal bias and supporting evidence-based claims.

Tegrity: Lectures 24/7

Tegrity in Connect is a tool that makes class time available 24/7 by automatically
capturing every lecture. With a simple one-click start-and-stop process, you capture
all computer screens and corresponding audio in a format that is easy to search, frame
by frame. Students can replay any part of any class with easy-to-use, browser-based
viewing on a PC, Mac, iPod, or other mobile device.
Educators know that the more students can see, hear, and experience class resources,
the better they learn. In fact, studies prove it. Tegrity’s unique search feature helps students
efficiently find what they need, when they need it, across an entire semester of class
recordings. Help turn your students’ study time into learning moments immediately sup-
ported by your lecture. With Tegrity, you also increase intent listening and class participa-
tion by easing students’ concerns about note-taking. Using Tegrity in Connect will make
it more likely you will see students’ faces, not the tops of their heads.

Test Builder in Connect

Available within Connect, Test Builder is a cloud-based tool that enables instructors to
format tests that can be printed or administered within a Learning Management System

xi
 (LMS). Test Builder offers a modern, streamlined interface for easy content configuration
that matches course needs, without requiring a download.
Test Builder allows you to
∙ Access all test bank content from a particular title.
∙ Easily pinpoint the most relevant content through robust filtering options.
∙ Manipulate the order of questions or scramble questions and/or answers.
∙ Pin questions to a specific location within a test.
∙ Determine your preferred treatment of algorithmic questions.
∙ Choose the layout and spacing.
∙ Add instructions and configure default settings.
Test Builder provides a secure interface for better protection of content and allows
for just-in-time updates to flow directly into assessments.

Association to Advance Collegiate Schools of

Business (AACSB) Statement
McGraw Hill Education is a proud corporate member of AACSB International. Under-
standing the importance and value of AACSB accreditation, Auditing & Assurance Services,
9e, recognizes the curricula guidelines detailed in the AACSB standards for business
accreditation by connecting selected questions in the text and test bank to the eight gen-
eral knowledge and skill guidelines in the AACSB standards. The statements contained
in Auditing & Assurance Services, 9e, are provided only as a guide for the users of this text-
book. The AACSB leaves content coverage and assessment within the purview of individual
schools, their mission, and their faculty. Although Auditing & Assurance Services, 9e, and
the teaching package make no claim of any specific AACSB qualification or evaluation,
we have within Auditing & Assurance Services, 9e, labeled selected questions in Connect
according to the eight general knowledge and skills areas.

McGraw Hill Education and UWorld are dedicated to supporting every accounting student
along their journey, ultimately helping them achieve career success in the accounting profession.
In partnership with UWorld, a global leader in education technology, we provide
students a smooth transition from the accounting classroom to successful completion
of the CPA Exam. While many aspiring accountants wait until they have completed
their academic studies to begin preparing for the CPA Exam, research shows that those
who become familiar with exam content earlier in the process have a stronger chance
of successfully passing. Accordingly, students using these McGraw Hill materials will
have access to the highest quality CPA Exam multiple-choice questions and task-based
simulations from UWorld, with expert-written explanations and solutions. All questions
are either directly from the AICPA or are modeled on AICPA questions that appear in
the exam. Task-based simulations are delivered via the UWorld platform, which mirrors
the look, feel, and functionality of the actual exam. For more information about the full
UWorld CPA Review program, exam requirements, and exam content, visit https://
accounting.uworld.com/cpa-review/partner/university/.
xii
New to the Ninth Edition of
Auditing & Assurance Services
Part I: The Contemporary
Auditing Environment
The following breakdown shows the revisions we made
on a chapter-by-chapter basis:
CHAPTER 1: Auditing and Assurance Services
∙ Revised the section on management's financial state-
ment assertions to reflect the changes to the ASB asser-
tion classifications brought on by SAS 134 (Paragraph
A133). The new guidance eliminates the category
related to presentation and footnote disclosures and
now categorizes those assertions within the events and
transactions and the account balances categories. The
guidance became effective on December 15, 2021.
∙ Added new Auditing Insights related to: (1) a new
measure of accounting reporting complexity using
XBRL; (2) the issue of whether the Evergrande
Group should have received a going-concern opin-
ion; and (3) the possibility of Big Four firms adding
legal services to their professional service offerings.
Part II: The Financial Statement Audit
CHAPTER 3: Engagement Planning
∙ Added new introductory vignette discussing recent
large auditor switches and considerations when
determining to accept a new audit client.
∙ Added a new exhibit to better highlight the various
parties’ responsibilities with regard to communicat-
ing with predecessor auditor when making client
acceptance decisions.
∙ Included review checkpoint focusing on independence.
∙ Added a new Auditing Insight discussing finding
from academic study regarding the use of audit spe-
cialists in the audit engagement.
∙ Included a brief discussion of “eating time” in the
Time Budget discussion and added a new end of
chapter exercise related to eating time.
∙ Added a new exhibit highlighting relationship of
overall materiality to performance materiality, two
new review checkpoints, and a new end of chapter
question focusing on materiality.
∙ Updated Assertions, Evidence, and Audit Proce-
dures table for new AICPA assertions, per SAS No.
134, Auditor Reporting and Amendments, including
Amendments Addressing Disclosures in the Audit of
Financial Statements, Paragraph A133.
∙ Revised the section that introduces assurance,
attestation, and audit services. In addition, added
two related Auditing Insights that describe the new
IFRS International Sustainability Standards Board
and Non-Fungible Tokens. Both of these areas rep-
resent significant assurance opportunities for CPA
firms.
CHAPTER 2: Professional Standards
∙ Added opening vignette discussing current issues
surrounding the PCAOB's inability to inspect audits
of Chinese companies listed on U.S. exchanges.
∙ Added Auditing Insights related to Mattel and
independence, updates on the United Kingdom's
Financial and Reporting Council requirements for
reducing the influence of Big Four firms, and the
Wirecard fraud and reliability of audit evidence.
∙ Updated Auditing Insights on KPMG's advance
notification of audits selected for PCAOB inspection,
academic research related to PCAOB inspections,
and the results of PCAOB inspections for the Big
Four firms.
∙ Updated Audit Insights and examples throughout the
chapter.
CHAPTER 4: The Audit Risk Model and Inherent
Risk Assessment
∙ Consolidated prior Learning Objectives 4-5 and 4-6
into one more comprehensive learning objective.
∙ Added a new introductory vignette highlighting the
impact of the COVID-19 pandemic on audit risk
assessment and auditor’s planned responses to risk.
∙ Updated discussion on how the audit risk model
is used in practice, moving away from quantita-
tive calculations of risk and instead focusing on
qualitative terms (low, moderate, high) and the
relationships of the various risks within the model
and the implications for audit planning. Updated
multiple choice questions at the end of the chap-
ter, moving away from qualitative audit risk model
calculations.
∙ Included review checkpoint focusing on the relation-
ships highlighted throughout the audit risk model.
∙ Added a new Auditing Insight focusing on how the
COVID-19 pandemic has impacted fraud detection
and growth.
xiii
∙ Updated Exhibit 4.9 (formally 4.7) to highlight
misstatements by assertion, utilizing new AICPA
assertions.
∙ Updated Audit Insights and examples throughout
the chapter.
CHAPTER 5: Risk Assessment: Internal Control
Evaluation
∙ Removed all material related to the internal control
over financial reporting required for issuers by
the Sarbanes–Oxley Act of 2002 and moved such
material to a new Module I.
∙ Focused this chapter entirely on the evaluation of
the system of internal control on the financial state-
ment audit. By splitting this chapter, we believe that
it will be a better way to present the internal control
topic to students.
∙ Moved the section that described the limitations
of an internal control system directly following its
definition, allowing for a complete understanding of
what is meant by an effective internal control system
and its limitations.
CHAPTER 6: Employee Fraud and the Audit of Cash
∙ Added multiple new and current Auditing Insights.
∙ Fully updated the audit approach to confirmations to
reflect the current electronic confirmation environment.
CHAPTER 7: Revenue and Collection Cycle
∙ Fully updated Auditing Insight boxes to include several
new examples.
∙ Converted several additional end of chapter exercises
to machine-gradable Connect versions.
∙ Provided new PCAOB Inspection Focus boxes to
emphasize risk areas in audit inspections.
CHAPTER 8: Acquisition and Expenditure Cycle
∙ Further revised all tables in the chapter to be identi-
cal in format and consistent for all cycle chapters
(6-10). This enables instructors to present a common
format that matches the current method of auditing,
from identification of significant accounts and rel-
evant assertions to substantive procedures to audit
residual risks.
∙ Added multiple new Auditing Insights covering cur-
rent news related to auditing the expenditure cycle.
∙ Added new PCAOB Inspection Insight boxes to pro-
vide students with specific examples of risk areas in
the acquisition and expenditure cycle.
xiv
CHAPTER 9: Production Cycle and the Audit of
Inventory
∙ Revised the chapter to continue to remove focus from
the production cycle and increase coverage of inven-
tory substantive procedures. The chapter addresses
risks of material misstatement in the inventory account
for companies ranging from manufacturers to retailers
such as Target.
∙ Revised all tables in the chapter to be identical in
format for all cycle chapters (6–10). This enables
instructors to present a common format that matches
the current method of auditing, from identification
of significant accounts and relevant assertions to
substantive procedures to audit residual risks.
∙ Included a discussion of auditing difficulties related
to remote auditing of inventory counts.
∙ New PCAOB Inspection Focus boxes provide a
direct link to risk areas in the audit of inventory.
CHAPTER 10: Finance and Investment Cycle
∙ Significantly expanded the discussion of auditing
accounting estimates, including fair values, to address
the newly revised PCAOB standards. In addition,
added a much more detailed discussion of the general
approach to auditing accounting estimates.
∙ Updated tables throughout the chapter to include
examples involving auditing accounting estimates in
investment accounts.
∙ Included new PCAOB Inspection Insight boxes to
demonstrate risk areas within the finance and invest-
ment cycle.
CHAPTER 11: Completing the Audit
∙ Added a new introductory vignette featuring Eastman
Kodak Company (Kodak) and the going-concern
assessment auditors must do when completing the audit.
∙ Added two new Auditing Insights related to auditing
estimates, one discussing the impact of estimates
on Amazon Inc.’s financial statements, another
discussing the difficulty of auditing estimates.
∙ Added a new Auditing Insight discussing the difficulty
of auditing estimates.
∙ Updated Audit Insights and examples throughout
the chapter.
CHAPTER 12: Reports on Audited Financial Statements
∙ Added opening vignette illustrating how COVID-19
impacted the going-concern reporting for various
companies, including Norwegian Cruise Lines and
Carnival Cruise Lines.
∙ Added or updated Auditing Insights related to scope
limitations, component auditors (with data drawn from
the PCAOB's Form AP disclosure database), additional
disclosures in auditors' reports, going-concern reports
(with data drawn from the Audit Analytics database),
and comparative reporting for General Motors in light
of their change in auditors from Deloitte to EY.
∙ Added excerpts from actual auditors' reports for
consistency (Nike), going concern (PG&E), and
supplemental information (General Electric).
Part III: Stand-Alone Modules
MODULE A: Other Public Accounting Services
∙ Moved material on reporting on financial statements
prepared using special purpose frameworks; speci-
fied elements, accounts, or items; and compliance
with contractual agreements or regulatory require-
ments to Chapter 12 to focus on engagements other
than GAAS/PCAOB audits.
∙ Incorporated guidance provided by Statement on
Standards for Attestation Engagements No. 21 that
created two types of examination engagements
(assertion-based examination engagements and
direct examination engagements).
∙ Expanded coverage of Service Organization Controls
(SOC) engagements, including providing excerpted
wording used in Type 1 and Type 2 reports.
∙ Added Auditing Insights on deficiencies identified
in PCAOB inspections for audits involving service
organizations and broker-dealer compliance, Phillip
Morris' integrated report and examples of assurance
provided by auditors on information included in that
report, trends in corporate responsibility reporting
and academic research examining accountant assur-
ance on this information, and the SEC's 2022 pro-
posal for disclosure of greenhouse-gas emissions
and energy consumption and the potential impact of
these disclosures on accountant assurance.
MODULE B: Professional Ethics
∙ Added an Auditing Insight that focuses on recent
calls by regulators to investigate possible conflicts
of interest at accounting firms, questioning whether
consulting services impact their independent finan-
cial statement audit.
∙ Updated Auditing Insights summarizing the results of
recent academic research on going concern reports.
∙ Included discussion of reporting on financial statements
prepared using special purpose frameworks; specified
elements, accounts, or items; and compliance with con-
tractual agreements or regulatory requirements.
∙ Developed alternate reporting chapter and support-
ing materials that provides instructors with flexibil-
ity in covering the AICPA auditors' report, PCAOB
auditors' report, or both reports.
∙ Added an Auditing Insight that describes the difficulty
in changing auditors. By using the example of
KPMG, which had been auditing General Electric
since 1909, the insight illuminates that it is not an
easy task. As the Insight describes, “in theory making a
switch to another auditor sounds simple, the reality
is that it is anything but.”
∙ Added an Auditing Insight that describes how two part-
ners at PwC were fined individually, for inadequate
audit work on British tech company Redcentric Plc due
to a lack of competence in conducting the audit. Also,
added an Auditing Insight which illustrates how three
Ernst & Young employees violated independence rules
when they used contingent fees for billing a client for
tax services. Taken together, the insights provide useful
examples to students of what can happen if they violate
the AICPA rules of conduct.
MODULE C: Legal Liability
∙ Added a new Auditing Insight featuring the implica-
tions of legal liability to junior auditors, highlighting
recent filings of UK audit regulator against junior
auditors.
∙ Updated Auditing Insight on Foreign Corrupt Practices
Act violations.
∙ Updated Auditing Insight on class action lawsuits.
∙ Updated Auditing Insight for recent academic research
on factors influencing auditor litigation.
MODULE D: Internal Audits, Governmental
Audits, and Fraud Examinations
∙ Reorganization of Internal Audit section, discussion of
Internal Audit Standards now precedes discussion
xv
 of Types of Internal Audit Services and Internal
Audit Reports.
∙ Updated Auditing Insights and examples throughout
the modules to reflect current events and trends.
∙ Updated discussion of Benford’s Law.
MODULES E and F: Sampling
∙ Updated Auditing Insights for deficiencies identified in
PCAOB inspections related to the application of attri-
butes (Module E) and variables (Module F) sampling.
∙ Expanded and clarified walk-through examples to
illustrate the use of IDEA in attributes and variables
sampling.
MODULE G: Data and Analytics in Auditing
∙ Added a comprehensive example to illustrate the
steps that auditors are following in completing Data
and Analytics in auditing. The example walks
through each of the the techniques that should be
conducted using the audit of accounts receivable and
revenue in a financial statement audit. Importantly,
the module follows the approach from the AICPA
Guide to Audit Data Analytics. Most notably, the
example is included within Connect to allow for
continuous updating and the most current and rele-
vant approach to be employed on a continuous basis.
∙ Updated data and analytics exercises in the new
Module G related to revenue recognition, along with
several existing author-created and IDEA workbook
exercises, enabling instructors to have many options for
integration of data analytics into their courses with new
solutions to reduce the availability of answers to students.
∙ Updated data for all data and analytic exercises
included within both this chapter and Module G that
focus on issues related to audits of the inventory
account. The revised data reduces the likelihood of
student access to solutions.
∙ Updated the section describing the common tools
used in Audit Data Analytics based on the author
team's cutting-edge understanding of practice.
∙ The updated end-of-chapter multiple choice, exer-
cises, and problems contain entirely author-created
questions and examples, as well as significant assis-
tance for instructors for implementing the exercises
in their classrooms.
xvi
MODULE H: Auditing and Information Technology
∙ Included a new introduction to the chapter that
describes a relatable example of the different ways
that information technology (IT) errors can impact
an audit client. The example describes several
colleges and universities that mistakenly sent out
incorrect scholarship award notifications to students.
∙ Added several new "PCAOB Inspection Focus"
examples which describe recent inspection find-
ings from the PCAOB on issues that are being dis-
cussed in the text. For example, one of the examples
focuses on a failure to audit information technology
general controls (ITGCs) and one of the examples
focuses on program change controls.
∙ Revised the section on important roles in an IT
computing environment at an organization to better
reflect current practice.
∙ Added an insight on the SEC's plans regarding the
disclosure of cybersecurity risks in regulatory filings.
MODULE I: The Audit of Internal Control for
Issuers
∙ New to this edition, we have added a new Module
I that describes the steps and complexities involved
in the audit of internal control over financial
reporting.
∙ The new module contains excerpts from the most
recent Stanley Black & Decker management report
on internal control over financial reporting and
excerpts from Deloitte & Touche's most recent opin-
ion on internal control over financial reporting for
Fannie Mae, which was an adverse opinion.
∙ The new module contains a comprehensive sec-
tion on the benchmarks that auditors use to evaluate
internal control effectiveness on the audit of internal
control and a robust discussion of the evaluation of
internal control design effectiveness and the operat-
ing effectiveness of internal control activities.
∙ The new module also describes the process used by
audit teams to evaluate internal control deficiencies,
illustrated with an Auditing Insight and examples
that illustrate PCAOB Inspection results.
∙ Of course, the new module includes stand-alone
multiple choice questions, along with problems and
exercises.
Acknowledgments
OUR SINCEREST THANKS. . .
The American Institute of Certified Public Accountants (AICPA) has generously given
permission for liberal quotations from official pronouncements and other AICPA publi-
cations, all of which lend authoritative sources to the text. In addition, several publishing
houses, professional associations, and accounting firms have granted permission to quote
and extract from their copyrighted material. Their cooperation is much appreciated because
a great amount of significant auditing thought exists in this wide variety of sources.
A special acknowledgment is due to the Association for Certified Fraud Examiners
(ACFE). It has been a generous contributor to the fraud auditing material in this text. The
authors also acknowledge the valuable inclusion of the educational version of IDEA soft-
ware in the eighth edition, which significantly enhances the practical application of the book.
Also, the authors are particularly grateful to Ryan T. Dunn, PhD, CPA (Auburn Uni-
versity), Meghann Cefaratti (Northern Illinois University), Brad Roof (James Madison
University), and Yigal Rechtman (Pace University) for their many insightful comments
over the past several years. The feedback they contributed while teaching from our text
has contributed greatly to the clarity and accuracy of subsequent editions. A special
thanks to Michael K. Shaub for his valuable critique of Chapter 5 and to Cristina Alberti,
Todd Burns, and Brent Stevens for their input on Module H. In addition, thanks to Ste-
ven Dwyer, Suzanne McLaughlin, and Frank Wimer for the example developed to help
explain the difference between general and application controls in Module H and to Bill
Stearns for the inspiration to include the assurance implications of NFTs in Chapter 1.
Thanks to Helen Roybark for her help with the preparation of the instructor PowerPoint
presentations and Joleen Kremin for her contribution to the Apollo Shoes, Inc. case.
We are sincerely grateful for the valuable input of all those who helped guide our
developmental decisions for the past eight editions of Auditing & Assurance Services:

Abdul Qastin Barbara Vinciguerra Carmela Gordon,

North Carolina A&T State Moravian College Trident Technical College
Adrianne Slaymaker Beverly Strachan Carol Shaver
Metropolitan State University Troy University at Louisiana Tech University
Alexander K. Buchholz Montgomery Charles J. Pendola,
Brooklyn College of the City Bharat Merchant St. Joseph’s College-New York
University of New York Baruch College Charles Miller
Amy Bourne, Bobby Waldrup California Polytech University
Oregon State University University of North Florida Christian Wurst
Andy Garcia Bonita K. Peterson Kramer Temple University
Bowling Green State University Montana State University– Christine N. Todd
Anne Albrecht, Bozeman Colorado State University–
Texas Christian University Bunney L. Schmidt Pueblo

Aretha Hill Utah Valley State College Clyde Galbraith

Florida A&M University Byron Pike West Chester University
Minnesota State University– David Blum
Barbara Reider
Mankato Moraine Park Technical College
University of Montana

xvii
xviii Acknowledgments

David Gelb Iris Stuart Linda Quick

Seton Hall University California State University University of South Carolina
Dawn P. Addington J. Donald Warren Jr., LuAnn Bean
Central New Mexico Community Rutgers University Florida Institute of Technology
College Jack Armitage Marcus Mason Doxey
Dereck D. Barr University of Nebraska–Omaha University of Kentucky
The University of Mississippi James Hansen Maria Sanchez
Diana R. Franz University of Illinois at Chicago Rider University
University of Toledo Jason T. Rasso Marie Blouin
Dorothy McMullen University of South Florida Penn State University–Harrisburg
Rider University Jaysinha Shinde Marilyn Fisher
Douglas Ziegenfuss Eastern Illinois University Corinthian Colleges
Old Dominion University Jeffrey J. Archambault Marshall K. Pitman,
Marshall University
Dr. Marina Grau, University of Texas at San
Houston Community College Jennifer McCallen, Antonio
University of Georgia Marshall Pitman
Duane Ponko
Indiana University of Pennsylvania Jerry L. Turner University of Texas–San Antonio
University of Memphis
Duane Smith MaryAnne Atkinson
Brescia University John Critchett Central Washington University
Madonna University
Dwayne Powell Maureen Mascha
Arkansas State University John E. Delaney Marquette University
Southwestern Texas University
Dwight M. Owsen Meghann Cefaratti
Long Island University Brooklyn John Gabelman Northern Illinois University
Columbus State Community College
Earl Godfrey Michael D. Akers
John Rigsby Marquette University
Gardner-Webb University
Mississippi State University
Eddie Metrejean Pamela Legner
John Trussel College of DuPage
Georgia Southern University
Penn State University–Harrisburg
Emily Elaine Griffith Pamela Roush
Joseph Aranyosi,
The University of Georgia University of Central Florida
University of Phoenix
Eric Carlsen Patricia Feller
Joseph M. Larkin
Kean University Nashville State Community
St. Joseph’s University College
Fatima Alali Judith G. Grant Perry Moore
California State University– Northern Virginia Community
Fullerton Lipscomb University
College at Annandale
Fowler A. Murrell Philip Levine
Karl Dahlberg
Lehman College Berkeley College
Rutgers University
Frank J. Beil R. D. Licastro
Kate Sorensen,
University of Minnesota Penn State University–University
University of Memphis
Park
Frank Venezia Kathy Pollock
State Ryan T. Dunn, PhD, CPA Ramesh Narasimhan
Indiana University–Purdue
Albany University Fort Wayne Montclair State University
Gary Peters Keith Jones Raymond Elson
University of Arkansas George Mason University Valdosta State University
Heidi H. Meier Kristen Kelli Saunders Raymond Reisig
Cleveland State University University of South Carolina Pace University
Hema Rao Lin Zheng Richard Hale
SUNY–Oswego Northeastern Illinois University Midway College
 Acknowledgments xix

Rick Warne, Todd Burns, and Suzanne M. Busch Tu Xu

Brent Stevens California State University– Georgia State University
University of Cincinnati East Bay Venkataraman Iyer
Rose Layton Sylvia Anderson The University of North Carolina
University of Southern California University of Maryland at Greensboro
Russell F. Briner University College Vincent Owhoso
University of Texas at San Antonio Tammi Schaefer Northern Kentucky University
Sara Adams, University of South Carolina Xu Zhaohui
Southern Oregon University Timothy Andrew Seidel University of Houston–
Sharon Polansky University of Arkansas Clear Lake
Texas A&M University–Corpus Tom English Yigal Rechtman
Christi Boise State University Pace University
Steven C. Hunt Tracy Reed
Western Illinois University Appalachian State University

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

ing Director, Tim Vertovec; Senior Portfolio Director, Becky Olson; Associate Portfolio
Manager, Stephanie DeRosa; Marketing Manager, Lauren Schur; Product Developer,
Sarah Wood; Content Project Managers, Mary Powers and Tammy Juran; Buyer, Laura
Fuller; and Designer, Matt Diamond. For their encouragement, assistance, and guidance
in the production of this book, we are grateful.
Few understand the enormous commitment of time and energy that it takes to put
together a textbook. As authors, we are constantly scanning The Wall Street Journal and
other news outlets for real-world examples to illustrate theoretical discussions, reread-
ing and rewriting each other’s work to make sure that key concepts are understandable,
and double-checking our solutions to end-of-chapter problems. Among the few who do
understand the time and energy commitment are our family members (Matt, Garrett, and
Julianne Bagley; Kristin, Jackson, Elijah, Jonah, Ansley, and Laney Grace Blay; Susan
and Meghan Strawser; and Ellen, Jenny, Eric, and Jessica Thibodeau) who uncomplain-
ingly endured endless refrains of, “I just need a couple more minutes to finish this sec-
tion.” Words cannot express our gratitude to each of them for their patience and unending
support.

A SPECIAL RECOGNITION
As we close, we owe a special debt of gratitude to two former co-authors who contributed
mightily to previous editions of this text: Robert Ramsey (who retired from the University
of Kentucky) and David Sinason (who retired from the University of Northern Illinois).
While they are no longer actively teaching and conducting research, their efforts reflected
in this textbook will continue to influence the professional development and lives of
future accountants for many years to come.
Tim Louwers
Pennie Bagley
Allen Blay
Jerry Strawser
Jay Thibodeau
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Brief Contents
PART ONE
The Contemporary Auditing Environment
1. Auditing and Assurance Services
2. Professional Standards 45
PART TWO
The Financial Statement Audit
3. Engagement Planning and Audit
Evidence 82
4. The Audit Risk Model and Inherent Risk
Assessment 122
5. Risk Assessment: Internal Control
Evaluation 174
6. Employee Fraud and the Audit of
Cash 215
7. Revenue and Collection Cycle 263
8. Acquisition and Expenditure Cycle
9. The Production Cycle and Auditing
Inventory 381
10. Finance and Investment Cycle 433
11. Completing the Audit 487
12. Reports on Audited Financial Statements 524
1
PART THREE
Stand-Alone Modules
Please refer to pages xv–xvi for guidance on
when to best integrate these modules.
A. Other Public Accounting Services 578
B. Professional Ethics 612
C. Legal Liability 662
D. Internal Audits, Governmental Audits, and
Fraud Examinations 706
E. Attributes Sampling 742
F. Variables Sampling 783
G. Data and Analytics in Auditing 834
H. Information Technology Auditing 873
321
I. The Audit of Internal Control For
Issuers 914
INDEX 947

xxii
Contents
PART ONE Chapter 2
THE CONTEMPORARY AUDITING Professional Standards
ENVIRONMENT Introduction 46
Generally Accepted Auditing Standards (GAAS) 47
Chapter 1 Organization of GAAS 48
Auditing and Assurance Services Fundamental Principle: Responsibilities 50
Competence and Capabilities 51
User Demand for Reliable Information 2
Independence and Due Care 51
Information Risk in a Big Data World 3
Professional Skepticism and Professional Judgment 53
Auditing, Attestation, and Assurance Services 5
Fundamental Principle: Performance 54
Assurance Services 5
Planning and Supervision 55
Examples of Assurance Services 6
Materiality 56
Attestation Engagements 8
Risk Assessment 57
Financial Statement Auditing 10
Audit Evidence 58
Auditing in a Big Data Environment 12
Fundamental Principle: Reporting 60
Management’s Financial Statement
Evaluating the Quality of Public Accounting
Assertions 13
Firms’ Practices 62
Existence or Occurrence (Existence, Occurrence,
System of Quality Control 63
Cutoff) 14
PCAOB Inspection of Firms 65
Completeness (Completeness, Cutoff) 15
Summary 67
Valuation and Allocation (Accuracy, Valuation,
Key Terms 68
and Allocation) 16
Multiple-Choice Questions for Practice and Review 69
Rights and Obligations (Rights and
Exercises and Problems 73
Obligations) 17
Appendix 2A
Presentation and Disclosure (Classification,
Presentation) 17 Referencing Professional Standards 80
Importance of Assertions 18
Professional Skepticism 18 PART TWO
Public Accounting 22 THE FINANCIAL STATEMENT AUDIT
Auditing and Assurance Services 23
Tax Services 24 Chapter 3
Advisory Services 25 Engagement Planning and Audit Evidence
Other Kinds of Engagements and Information Introduction 83
Professionals 26 Pre-Engagement Activities 84
Internal Auditing 26 Client Acceptance or Continuance 84
Governmental Auditing 27 Compliance with Independence and Ethical
Regulatory Auditors 28 Requirements 87
Become a Professional and Get Certified! 28 Engagement Letters 87
Education 28 Audit Plan 89
Examination 29 Staffing the Audit Engagement 90
Experience 30 Time Budget 94
State Certificate and License 30 Materiality 95
Skill Sets and Your Education 30 Materiality Calculation 96
Summary 32 Other Issues that Impact Materiality 97
Key Terms 33 How Auditors Use Materiality 98
Multiple-Choice Questions for Practice and Audit Procedures for Obtaining Audit Evidence 99
Review 34 1. Inspection of Records and Documents 102
Exercises and Problems 39 2. Inspection of Tangible Assets 104

xxiii
xxiv Contents

3. Observation 104 Appendix 4B

4. Inquiry 104 Sample Audit Memorandum 171
5. Confirmation 105
6. Recalculation 106
7. Reperformance 106 Chapter 5
8. Analytical Procedures 106 Risk Assessment: Internal Control Evaluation
Audit Documentation 107
Introduction 175
Permanent Files 108
Definition of Internal Control 176
Current Files 108
Internal Control Effectiveness 176
Audit Documentation Arrangement and Indexing 109
Limitations of Internal Control 177
Summary 112
Management versus Auditors’ Responsibility for
Key Terms 113
Internal Control 178
Multiple-Choice Questions for Practice and Review 114
Management’s Internal Control Responsibilities 178
Exercises and Problems 117
Auditors’ Internal Control Responsibilities 178
Chapter 4 Components of Internal Control 180
Control Environment 180
The Audit Risk Model and Inherent Risk Risk Assessment 182
Assessment Control Activities 183
Introduction 123 Information and Communication 188
Audit Risk 123 Monitoring 189
Audit Risk 123 Internal Control Evaluation 190
Inherent Risk 125 Phase 1: Understand and Document the Client’s Internal
Control Risk 125 Control System 192
Detection Risk 125 Phase 2: Assessment of Control Risk 196
Audit Risk Model 126 Phase 3: Identify Controls to Test and Perform
Fraud Risk 128 Tests of Controls 199
Fraud 130 Internal Control Communications 204
Types of Fraud 131 Summary 205
Inherent Risk Assessment—“What Could Go Key Terms 206
Wrong?” 134 Multiple-Choice Questions for Practice and Review 207
Understanding the Client’s Business and Its Exercises and Problems 210
Environment 135 Appendix 5A
Gathering Information and Preliminary Audit Plan 214
Analytical Procedures 140
General Business Sources 140 Chapter 6
Company Sources 140
Information from Client Acceptance or Continuance Employee Fraud and the Audit of Cash
Evaluation, Audit Planning, Past Audits, and Introduction 216
Other Engagements 140 The Need for Skepticism in Audits of Cash 217
Preliminary Analytical Procedures 141 Employee Fraud Overview 217
Audit Team Brainstorming Discussions 146 Employee Fraud Red Flags 218
Inquiry of Audit Committee, Management, and Others Characteristics of Fraudsters 219
within the Company 147 The Fraud Triangle 220
Overall Assessment and Documentation of Inherent Incentive/Pressure 220
Risk Assessment 147 Opportunity 222
Required Documentation 149 Attitude/Rationalization 222
Other Considerations 149 Fraud Prevention 223
Audit Strategy Memorandum 152 Managing People and Pressures in the Workplace 223
Summary 153 Internal Control Activities and Employee Monitoring 224
Key Terms 154 Tone at the Top 226
Multiple-Choice Questions for Practice and Review 155 The Audit of Cash 227
Exercises and Problems 159 Management Reports and Data Files in an Audit of Cash 227
Appendix 4A Significant Accounts and Relevant Assertions 230
Selected Financial Ratios 170 Risk of Material Misstatement 231
 Contents xxv

Evaluating the Design and Operating Effectiveness Appendix 7A

of Internal Controls 232 Internal Control Questionnaires 317
Substantive Procedures 238
“Extended Procedures” to Detect Fraud 243 Appendix 7B
Summary 247 Audit Plan 319
Key Terms 247
Multiple-Choice Questions for Practice and Review 248
Exercises and Problems 252 Chapter 8
Appendix 6A Acquisition and Expenditure Cycle
Internal Control Questionnaires 260
Introduction 322
Appendix 6B Acquisition and Expenditure Cycle: Typical
Audit Plans 262 Activities 323
Purchasing Goods and Services 1 324
Chapter 7 Receiving the Goods or Services 2 325
Recording the Asset or Expense and Related
Revenue and Collection Cycle
Liability 3 325
Introduction 264 Significant Accounts and Relevant Assertions 326
Revenue and Collection Cycle: Typical Activities 265 Accounts Payable 326
Receiving and Processing Customer Orders, Including Expenses 327
Credit Granting 1 266 Risk of Material Misstatement 329
Delivering Goods and Services to Customers 2 266 Internal Control Activities and Design Evaluation 331
Billing Customers and Accounting for Accounts Entity-Level Controls 331
Receivable 3 267 Control Considerations 332
System Generated Reports and Data Files in the Revenue Custody 332
and Collection Cycle 267 Periodic Reconciliation 333
Significant Accounts and Relevant Assertions 270 Testing of Operating Effectiveness of Internal
Risk of Material Misstatement 271 Control 333
Revenue Recognition 272 Tests of Controls 333
Collectability of Accounts Receivable 274 Substantive Procedures 337
Customer Returns and Allowances 275 Accounts Payable and the Completeness Assertion 338
Internal Control Activities and Design Evaluation 275 Other Expenditure Cycle Accounts 340
Entity-Level Controls in the Revenue and Collections Presentation and Disclosure 345
Cycle 276 Audit Risk Model Applied 345
Control Considerations at the Account and Assertion Fraud Cases: Extended Audit Procedures 347
Level 276 Summary 350
Tests of Operating Effectiveness of Internal Control 279 Key Terms 350
Summary: Control Risk Assessment 282 Multiple-Choice Questions for Practice and
Substantive Analytical Procedures and Tests of Review 351
Details 282 Exercises and Problems 354
Analytical Procedures 283 Appendix 8A
Confirmation of Accounts and Notes Receivable 286 Internal Control Questionnaires 364
Alternative Procedures 291
Additional Notes about Confirmations 291 Appendix 8B
Dual-Purpose Nature of Accounts Receivable Audit Plans 367
Confirmations 292
Appendix 8C
Review for Collectability 292
Cutoff and Sales Returns 292 The Payroll Cycle 369
Audit Risk Model Applied 294
Application in the Field 294 Chapter 9
Audit Cases: Extended Audit Procedures 295
Summary 301
The Production Cycle and Auditing Inventory
Key Terms 302 Keeping Count 382
Multiple-Choice Questions for Practice and Review 302 Inventory Management: Typical Activities 383
Exercises and Problems 307 Significant Accounts and Relevant Assertions 386
xxvi Contents

Risk of Material Misstatement 388 Key Terms 470

Internal Control Activities and Design Evaluation 390 Multiple-Choice Questions for Practice and Review 470
Testing of Operating Effectiveness of Internal Exercises and Problems 474
Control 394 Appendix 10A
Substantive Analytical Procedures and Tests of Internal Control Questionnaires 482
Details 399
Difficult Inventory Circumstances 406 Appendix 10B
Audit Risk Model Applied 411 Substantive Audit Plans 484
Fraud Case: Extended Audit Procedures 412
Summary 413 Chapter 11
Key Terms 414
Multiple-Choice Questions for Practice and Completing the Audit
Review 414 Introduction 488
Exercises and Problems 418 Audit Timeline 488
Appendix 9A Procedures Performed During Fieldwork 490
Internal Control Questionnaires 429 Completing Substantive Procedures 490
Attorney Letters 492
Appendix 9B Written Representations 494
Audit Plans 431 Ability to Continue as a Going Concern 496
Adjusting Entries and Financial Statement Disclosure 498
Chapter 10 Audit Documentation Review 501
Finance and Investment Cycle Subsequent Events and Subsequently
Discovered Facts 502
Introduction 434 Subsequent Events 502
Finance and Investment Cycle: Typical Activities 436 Subsequently Discovered Facts 503
Financing the Entity through Debt and Stockholder Responsibilities Following the Audit Report
Equity 437 Release Date 505
Financial Planning 1 437 Omitted Procedures 505
Raising Capital 2 437 Communications with Individuals Charged with
Investing Transactions: Investments Governance 505
and Intangibles 3 439 Management Letter 507
Significant Accounts and Relevant Assertions 441 Summary of Audit Communications 507
Risk of Material Misstatement 442 Summary 508
Complex Transactions 443 Key Terms 509
Fair Market Value 444 Multiple-Choice Questions for Practice and Review 510
Related-Party Transactions 444 Exercises, Problems, and Simulations 513
Lease Accounting 445
Loan Covenants 445
Impairments 446 Chapter 12
Presentation and Disclosure 446
Reports on Audited Financial Statements
Internal Control Activities and Design Evaluation 447
Control Considerations 448 Introduction 525
Tests of Operating Effectiveness of Internal Control 449 Overview of Auditors’ Reports 526
Control over Accounting Estimates 451 The Standard Report for Nonissuers 527
Authorization 452 Types of Opinions 529
Record Keeping 452 Conditions that Require Modifications to the Auditors’
Custody 452 Standard (Unmodified) Report 530
Summary: Control Risk Assessment 453 Departures from GAAP 530
Substantive Analytical Procedures and Tests of Scope Limitations 533
Details 454 Audits of Group Financial Statements 537
Investment Securities 457 Auditors’ Reports Referencing Other Matters
Long-Term Liabilities and Related Accounts 462 Encountered during the Audit 540
Stockholders’ Equity 463 Consistency 540
Fraud Cases: Extended Audit Procedures 465 “Going-Concern” Uncertainties 541
Summary 469 Other Information Included in Annual Reports 542
 Contents xxvii

Supplementary Information 543 Key Terms 600

Other Modifications 543 Multiple-Choice Questions for Practice and Review 601
Summary: Emphasis-of-Matter and Other-Matter Exercises and Problems 605
Paragraphs 544
Comparative Financial Statements 545 MODULE B
Same Auditors, Same Opinions for Comparative Years 545
Same Auditors, Different Opinions for Comparative
Professional Ethics
Years 545 Introduction 613
Same Auditors with Modification of Previously Issued An Ethical Decision Process 614
Opinion 545 Making Ethical Decisions 615
Different Auditors in Comparative Years 546 Philosophical Principles in Ethics 616
Other Reporting Topics 548 The Imperative Principle 617
Special Purpose Frameworks 548 The Principle of Utilitarianism 618
Summary Financial Statements 550 The Generalization Argument 618
Specified Elements, Accounts, or Items 550 Virtue Ethics 619
Compliance with Contractual Agreements or Ethical Codes of Conduct 619
Regulatory Requirements 551 U.S. Securities and Exchange Commission (SEC) 620
Disclaimers of Opinion 551 The Public Company Accounting Oversight Board
Summary 552 (PCAOB) 621
Key Terms 554 The International Federation of Accountants (IFAC) 621
Multiple-Choice Questions for Practice and Review 555 The Professional Ethics Executive Committee (PEEC) of
Exercises and Problems 559 the American Institute of CPAs (AICPA) 621
Appendix 12A An Emphasis on Independence 623
Auditors’ Reports for Issuers American Institute of Certified Public Accountants 624
(Public Entities) 573 SEC and PCAOB Independence Rules 631
Other Effects of Sarbanes–Oxley on Auditor
Independence 632
Government Accountability Office (GAO) Independence
PART THREE Requirements 633
STAND-ALONE MODULES AICPA Rules of Conduct: Integrity and
Objectivity, Responsibilities to Clients, and Other
MODULE A Responsibilities 634
Integrity and Objectivity Rule 634
Other Public Accounting Services
General Standards Rule 636
Introduction 579 Compliance with Standards Rule 637
Introduction to Attestation Engagements 580 Accounting Principles Rule 637
Attestation Engagements 581 Acts Discreditable Rule 637
Service Organization Control (SOC) Engagements 582 Fees and Other Types of Remuneration 638
Agreed-Upon Procedures Engagements 584 Advertising and Other Forms of Solicitation Rule 640
Prospective Financial Information 585 Confidential Client Information Rule 641
Compliance Attestation 587 Form of Organization and Name Rule 643
Broker–Dealer Compliance 588 Consequences of Violating the Code of
Other Attestation Engagements and Summary 589 Professional Conduct 644
Accounting and Review Services for Historical Self-Regulatory Discipline 644
Financial Information 590 Public Regulation Discipline 645
Review Engagements 590 Summary 647
Compilation Engagements 593 Key Terms 648
Preparation Engagements 594 Multiple-Choice Questions for Practice and Review 649
Summary of Engagements on Historical Financial Exercises and Problems 654
Information 595
Assurance Services Engagements 595 MODULE C
Scope of Assurance Services 595
Trust Services 597
Legal Liability
The Future of Assurance Services 599 Introduction 663
Summary 600 The Legal Environment 664
xxviii Contents
Liability Under Common Law 666
Liability to Clients 666
Liability to Third Parties 667
Liability for Compilation and Review Services 672
Liability Under Statutory Law 673
The Securities Act of 1933 (Securities Act) 674
Section 11: Civil Liability 674
Auditors’ Defenses under the Securities Act 676
Section 13: Statute of Limitations 676
Section 17: Antifraud 676
Section 24: Criminal Liability 677
The Securities Exchange Act of 1934 (Securities
Exchange Act) 677
Section 10 and Rule 10(b)-5: Antifraud 678
Section 18: Civil Liability 679
Auditors’ Defenses under the Securities Exchange Act 680
Section 32: Criminal Liability 680
Foreign Corrupt Practices Act (FCPA) 681
Summary of Auditors’ Liability to Clients
and Third Parties 682
The Changing Landscape of Auditors’ Liability
Sarbanes–Oxley 684
Racketeer Influenced and Corrupt Organizations Act 685
Aiding and Abetting 686
Organization of Accounting Firms as Limited Liability
Partnerships 686
Proportionate Liability 686
Class-Action Suits 687
Auditors’ Liability Caps 688
Other Developments 688
Summary 689
Key Terms 690
Multiple-Choice Questions for Practice and Review 691
Exercises and Problems 696
MODULE D
Internal Audits, Governmental Audits,
and Fraud Examinations
Introduction 707
Internal Audits, Governmental Audits, and Fraud
Examinations 707
Internal Audits 708
Internal Auditing Defined 708
Internal Audit Standards 710
Types of Internal Audit Services 711
Internal Audit Reports 714
Governmental Audits 715
Governmental Auditing Defined 715
Types of Governmental Audits 716
GAO Government Auditing Standards 719
GAO Audit Reports 720
Single Audit Act of 1984 and Amendments of 1996 720
Fraud Examinations 721
The Art of Fraud Examinations 723
Fraud Examiner Responsibilities 724
Building a Fraud Case 726
Protecting the Evidence 726
Obtaining Litigation Support 726
Summary 727
Key Terms 728
Multiple-Choice Questions for Practice and Review 729
Exercises and Problems 732
MODULE E
Attributes Sampling
Introduction 743
Planning (Steps 1-3) 744
Step 1: Determine the Objective of Sampling 744
Step 2: Define the Characteristic of Interest 744
Step 3: Define the Population 745
Performing (Steps 4-6) 746
Step 4: Determine the Sample Size 746
Step 5: Select the Sample Items 752
683 Step 6: Measure the Sample Items 753
Evaluating Sample Results (Step 7) 754
Calculating the Upper Limit Rate of Deviation 754
Making the Evaluation Decision 755
Using IDEA to Evaluate Sample Results 756
Qualitative Evaluation of Deviations 757
Documenting 758
Other Attributes Sampling Methods 759
Summary 761
Key Terms 761
Multiple-Choice Questions for Practice
and Review 762
Exercises and Problems 766
Appendix EA
AICPA Sample Size Tables 779
Appendix EB
AICPA Sample Evaluation Tables 781
MODULE F
Variables Sampling
Introduction 784
Definition of Variables Sampling 784
PPS Sampling: Planning 786
Steps 1–3: Planning 786
PPS Sampling: Performing 788
Step 4: Determine the Sample Size 788
Step 5: Select the Sample Items 791
Step 6: Measure the Sample Items 794
Summary: Performing PPS 794
PPS Sampling: Evaluating 795
Step 7: Evaluating Sample Results 795
Other Variables Sampling Approaches 800
Documentation in Variables Sampling 801
 Contents xxix

Summary 802 Computer Operations Controls 882

Key Terms 803 Program Development Controls 883
Multiple-Choice Questions for Practice and Review 804 Summary 884
Exercises and Problems 807 Automated Application Controls 887
Appendix FA Input Controls 887
AICPA PPS Tables 818 Processing Controls 888
Output Controls 889
Appendix FB Summary 889
Classical Variables Sampling 820 Assessing Control Risk in An It Environment 891
Testing Controls in An It Environment 893
Appendix FC End-User Computing and Other Environments 896
Nonstatistical Sampling 831 End-User Computing Control Considerations 897
Computer Abuse and Computer Fraud 899
MODULE G Preventive, Detective, and Damage-Limiting
Controls 900
Data and Analytics in Auditing Computer Forensics 902
Introduction 835 Summary 902
The Art of Discovery 835 Key Terms 903
Audit of the Future 837 Multiple-Choice Questions for Practice and
Data and Analytics 837 Review 904
Common Uses of Audit Data Analytics 839 Exercises and Problems 906
Risk Assessment Procedures 839
Tests of Controls 841 MODULE I
Substantive Analytical Procedures 843 The Audit of Internal Control For Issuers
Tests of Details 844
Conducting Audit Data Analytics 847 Introduction 915
Plan the ADA 847 Laws, Regulations & Standards 916
Access and Prepare the Data 848 Effectiveness of Internal Control 916
Consider the Relevance and Reliability of the Data 849 Management’s Responsibility 917
Perform the ADA 851 Auditors’ Responsibilities 918
Evaluate the Results and Draw Conclusions 852 The Audit of Internal Control Over Financial
Documentation Requirements 853 Reporting 920
Common Tools Used in ADA 854 Components of Internal Control over Financial
Professional Skepticism in ADA 855 Reporting 921
The Next Generation of Auditing 855 Performing the Audit 923
External Big Data 856 Audit Planning 923
Artificial Intelligence 856 Testing Design and Operating Effectiveness 924
Distributed Ledger Technology 857 Evaluating Identified Deficiencies 926
Summary 858 Severity of Deficiency 927
Key Terms 858 Compensating Controls 927
Multiple-Choice Questions for Practice and Communicating the Results of the Audit 929
Review 859 Communicating Significant Deficiencies and
Exercises and Problems 862 Material Weakness 929
Audit Reporting 930
MODULE H Auditors’ Separate Report on Internal Control
Over Financial Reporting 931
Information Technology Auditing Modifications to the Standard Report 931
Introduction 874 Summary 934
Automated Transaction Processing 875 Key Terms 935
Reliance on IT Controls 877 Multiple-Choice Questions for Practice and
Scoping the IT Audit Procedures 877 Review 935
Types of IT Control Activities 879 Exercises, Problems, and Simulations 941
General IT Controls 880
Access to Programs and Data Controls 880
Program Change Controls 881 Index 947
Another random document with
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would never find a key to these bewildering enigmas that made up
the life of the great world out of doors, which now for some
inscrutable purpose he was called upon to enter, perseverance,
study and devout patience furnished him at last with some kind of
reward.
Not less than two years of concentrated effort was necessary ere the
boy began to make real progress in the least subtle of the
astonishing complexities of that potent civilization of the West as
evolved in the latter days of the nineteenth century of the Christian
era. But as one slight piece of knowledge after another rewarded his
intense application, he seemed to derive some ground of certainty
from his successes, so that by the time he was nearly eighteen years
of age he had pieced together these hard-won fragments of
experience in such numbers that they wove themselves into a kind of
fabric of lucid ideas. Endowed with this basis upon which to stand,
he felt the hour to be at hand when the courage and the capacity
would be his to make some sort of an entrance into the life of men
and things, in the actual and visible out-of-doors world.
One evening he said to his father with an almost proud air: “To-
morrow, my father, I intend to put to the test all this knowledge that
has come to me during my many days of study—that is, of course,
my father, if you think I speak the language well enough.”
“Yes, beloved one,” said his father, with a mournfulness which was in
strange contrast with the exaltation of his own mood. “I think by now
you speak the language well enough to do so.”
“And I am growing very learned in the newspaper, am I not, my
father?” he said almost joyfully, for although in his heart he still
loathed the newspaper, the sense of achievement in being able to
read and to understand the less inscrutable of its mysteries was very
high.
“Yes, beloved one,” said his father, “I consider your progress is
wonderful.”
“I observe, my father,” said the boy proudly, “that according to the
newspaper we purchased this morning—no, no, that is not the true
way of speaking—no, I meant merely to say that according to this
morning’s paper, ‘a bright boy is wanted at No. 12, Webster’s
Buildings in the City.’ It is my purpose, my father, to present myself at
No. 12, Webster’s Buildings in the City to-morrow morning at the
hour of nine.”
“This is indeed Achilles,” said his father. He peered wistfully at the
wan cheeks now brilliant with the excitement of resolve.
“If you will embrace me, my father,” said the boy, “I will go now to my
chamber all alone by myself. I am grown so powerful with the
knowledge I have gained that I feel as if I may do almost anything.”
The white-haired man took the frail form into his embrace.
“I beseech you,” he said, as he held him in his arms, “not to demand
too much of the strength that Nature has lent you. I would urge you
not to go out among the life of the great city if you have a single
misgiving.”
“I have not a single misgiving, my father,” said the boy. “I am able to
read and to write and to speak the English tongue. I know how to ask
the con—the conductor to stop the horses of the omnibus. I can do
sums—compound fractions. I am acquainted with most of the streets
in the great city. Have I not walked therein alone several times?”
“Well, well, Achilles,” said his father softly, “if you have really made
up your mind!”
“You do speak the language beautifully, my father,” said the boy. “If
you have really made up your mind! Why, those are the very words I
heard a woman street-person use in Piccadilly yesterday.”
The boy took a lighted candle and went up the stairs. This was the
first occasion on which he had ventured to do this unattended since
the night he had passed in the cell at the police station. But now a
new-born sense of power was upon him, the fruit of knowledge. Of
late he had made an amazing advance in his studies. He was
already beginning to move about the great world out of doors in
freedom and security. He had even begun to carry his capacity in his
bearing. Only that afternoon a small girl of ten with a basket on her
arm had asked him to tell her the time, and also the nearest way to
High Holborn. And the proud consciousness was his that he had
performed both these offices with perfect satisfaction to them both.
He lay in his pillows that night with almost the sensations of a
conqueror. Who among all the cruel and remorseless throng in the
streets of the great city, who were yet so strong and capable and so
wonderfully certain of themselves, could have done more? A year
ago such an achievement as this would have been beyond his
wildest ambitions. A month ago he could not have done it. A week
ago it would have been barely possible. As he lay in this flush of
valour it occurred to him suddenly that the light was burning at its
fullest. There and then he determined, for the first time in his life, to
get out of bed and turn it out.
He jumped from the sheets with a bound, fearing to delay. With a
touch of the finger the room was plunged in complete darkness. Like
one possessed he darted back across the floor and found his way
back into his bed. He buried his head deep down under the clothes.
He lay there shuddering among nameless horrors, and shuddering
fell asleep.
That night his father never sought his couch at all. He sat below in
the little room until the daylight came, pondering the contents of the
ancient tome. In the morning at seven o’clock when the boy came
down-stairs again he found his father still in meditation.
“I have had such dreams, my father,” said the boy, and his face was
still flushed with the excitement of the previous night. “Some of them
were so hideous that they made me cry out, yet all the time I knew
myself to be one of the great ones of the earth.”
 XI
At eight o’clock, after having made a delicate meal, the boy set out
on his pilgrimage into the streets of the great city. It was a delicious
morning of early spring. The sun stole through its white curtains,
playing elvishly on the traffic. The sounds and cries which ascended
from the purlieus of this vast open theatre seemed to be mellowed,
and to merge themselves in the primal harmony of the unplumbed
spaces overhead. Never before had the boy felt such an exhilaration
as on this glorious day. He crossed from one pavement to another
with wonderful valiancy, sometimes evading the heads of the horses
with a feeling that was almost akin to unconcern. He took his way
from street to street with the conviction ever re-affirming itself within
him that he would find his way to No. 12, Webster’s Buildings in the
City.
In the height of this new power, which for the first time in his life had
rendered him fit to move in the great world out of doors, he gave
expression to his sense of joy by breaking out suddenly into the
reverberating, wavelike music of the Iliads. His lips moved to the
measure of those mighty cadences; they rolled out of his mouth, and
their song was louder than the thunder of the traffic. As he pressed
ever onwards through the endless, elbowing throng, he knew himself
as one with the son of Peleus.
Without once faltering, or one mistake in his course he found himself
before the façade of Webster’s Buildings in the City as the clocks
were striking nine. A moment’s reflection showed him which was No.
12. It comprised a suite of offices on the ground floor.
Quite a number of boys of various ages and sizes were waiting on
the pavement outside the door. They had formed themselves into a
queue. First the boy stood looking at the mystic No. 12 which was
painted on the fanlight over the door, and then at the row of youthful
faces, which was already regarding him critically. After a moment of
hesitation he walked past them and plunged into the interior of the
building. As he did so, loud and angry protests arose of, “’Ere, you
come back, Barnum and Bailey!” “Take yer turn, yer young swine!”
“Give ’im one for himself!”
The boy not understanding to whom this enigmatic truculence was
addressed, walked through the dark passage into the first room that
he saw, the door of which was partly open. A morose-looking man
who was biting a pen was standing just inside it.
The boy took off his hat and bowed low.
“M-may it p-please you, sir,” he said, repeating slowly but in
strangely timid accents, a speech which he had already carefully
rehearsed a thousand times, “I d-desire to offer m-myself in the
capacity of a bright boy.”
The morose-looking man took the pen out of his mouth with great
deliberation, and also with an astonishment which he did not seek to
dissemble.
“Do you, indeed?” he said. “We do want a bright boy, but we don’t
want ’em too bright. You go back and wait your turn, you cheeky
young imp.”
The boy stood a moment in perplexity, unable to grasp what was
implied by this answer, and what, in the circumstances, was the
fitting course to pursue. In the next, however, he had received
enlightenment. The problem was solved for him by the man with the
pen. “D—— your young impudence!” he said, taking him by the
shoulders. In the next instant the boy had been run through the
passage and flung out on to the pavement with the aid of a heavy
kick.
His re-appearance and mode of egress were not lost on the select
company of bright boys who formed the queue. They seemed to
accord them a very decided approval. As the boy stood in
bewilderment, with his former morbid dread of physical violence
returning upon him, loud howls of derision arose from the queue.
At first it did not occur to the boy that they were directed at himself.
But, as he continued to stand before the door in irresolution and
surprise, the displeasure with which he was viewed personally was
brought somewhat forcibly to his notice. A boy sauntered out from
the middle of the queue and collected a handful of mud from the
gutter. He then crept up stealthily behind him, and flung it down the
back of his neck.
In spite of this not particularly delicate hint, however, and in spite of
the cries of derision all about him which seemed every moment to
increase, the boy continued to stand before the door. At last a
powerful boy, who was the first in the queue, turned to a companion
and said: “Keep my place, Nosey.” He then stepped out, and seizing
the boy ferociously by the ear, half led and half dragged him to the
tail of the queue. After having cuffed him severely, he said, “You get
out of your place again, and I’ll break your neck.”
Humiliation, terror and bodily pain were now added to the boy’s
bewilderment, but even these potent forces, mighty in combination
as they were, could not overcome the new-born strength of purpose
that had so recently sprung up in his heart. Doggedly, yet sickly
enough, he continued to stand behind the other boys, striving by
every means in his power to divine precisely what was taking place
around him; and to learn what line of conduct would consort with an
immunity from personal violence, and yet further the end to which he
had pledged himself.
He stood on the pavement nearly an hour while other boys formed
up behind him. Happily none considered it to be worthy of their
dignity to visit him with further notice now that his place had been
unmistakably indicated to him and his presumption had been fittingly
rebuked. Nevertheless he hardly dared to breathe or to look to the
right or to the left lest he should again incur their notice. At last,
however, an incident happened which afforded him intense relief.
In the process of time boy after boy in front of him had passed
through the sacred door, and then after a brief interval within had
returned and had gone away disconsolate, incurring as he did so,
from those who still waited, sundry observations whose import the
boy found it impossible to fathom. But at last one of these came out
wearing an air of somewhat emphatic disgust, and said in a derisive
tone to those who yet remained in the queue: “You can all go ’ome.
Cocoa’s got it. Five bob a week, and a two bob rise every year.”
Upon this announcement, the boy was privileged to observe a
strange thing. All the other boys, not only those in front of him, but
those behind him also, melted away in silence as if by the agency of
magic. At first, so great was his relief at finding himself delivered in
this miraculous fashion of their presence that he could hardly realize
his good fortune.
For the next half-hour he stood where he was, meditating on what
course he must pursue. As he did so, there mounted still higher in
his mind the paramount necessity of speaking his carefully-
rehearsed words to those who were in need of a bright boy. For in
the magic dispersal of those ruthless and terrible youthful street-
persons he recognized clearly the hand of Providence. Whatever
befell he must force himself to obey the high resolve he had formed
the previous night which had now gained the sanction of heaven. If it
cost him his life he must present himself again before the man in the
office who had already used him so dreadfully.
With a compressed mouth and a stern face, from which he hoped all
traces of the mud had been removed by the assiduous use of his
handkerchief, although he could still feel it trickling down his back in
a most disconcerting manner, he ventured forth again into the dark
entrance of No. 12, Webster’s Buildings. The door at the end of the
passage was now closed. He tapped timidly upon the glass. There
came no answer. After waiting a full minute, in which he listened with
nervous intensity for permission to enter, he tapped again a little
louder. There was still no answer. Mustering up all his courage he
tapped a third time as loudly as he dared. Even if he broke the glass
he must obtain an answer!
“Come in,” said a voice from behind the door.
The boy opened the door and entered hat in hand. In the crowded
room was a number of men and boys seated on tall stools. The boy
clenched his hands and closed his eyes.
“M-may it p-please you, gentlemen,” he said shrilly at the top of his
voice, “I desire to offer m-myself in the c-capacity of a bright boy.”
In profound astonishment all the men and boys ceased their labours
for a moment. One of them, the morose-looking man, with whom
previously he had had dealings, gave a short laugh.
“Oh, it’s you again, is it?” he said. “Kindly wait a moment until I get to
you.”
As he spoke, he picked up a heavy and long ruler and descended
from his stool. The boy waited in obedience to his request. The man
took him by the ear and led him out into the passage, and proceeded
to beat him with the ruler brutally about the head and shoulders.
“Do you think we will be plagued out of our lives by the likes of you?”
he said, as he flung the limp and breathless form into the street for
the second time. “You come here again, and I’ll have you locked up.”
Bruised, breathless and bleeding, the boy dragged himself away
from the vicinity of No. 12, Webster’s Buildings in the City. Yet it was
only in the flesh he was conquered; his spirit was still fortified with
resolve. What were his haps in comparison with those of Hector at
the Defence of Troy? Therefore after leaning against the wall of an
insurance office for a little time in order to recover some of the
physical power which had been so rudely knocked out of him, he
determined to renew his attempts to gain pieces of silver. It might be
that others besides the occupants of No. 12, Webster’s Buildings in
the City were in need of a bright boy. Indeed, it was most likely; at
least there appeared to be a large number of bright boys who were
desirous of gaining pieces of silver.
Accordingly he resolved to use his powers of observation, and to
select for himself a shop or an office which he deemed likely to stand
in need of the services of a bright boy. Yet his first choice was not
fortunate. After mustering every consideration in its favour, he
entered a small and unassuming shop in Gracechurch Street.
As he entered with a curious sensation in his heart, he was met by a
young woman with a supercilious lift to her chin and an abundance
of dark hair, who looked him up and down as though he had no right
to be there.
“What do you want?” she said in a sharp tone, and hurting him with
her suspicious eyes.
“M-may it p-please you, m-madam,” he stammered, “I d-desire to
offer myself in the capacity of a bright boy.”
“Oh, d-do y-you?” said the young woman. “Go home and wash your
neck and then go and drown yourself.”
The boy slunk out into the street as though she had hit him a blow in
the face.
All through the afternoon he wandered up and down the crowded
pavements of the great city. In the course of his weary pilgrimage he
entered many shops and offices sickly yet doggedly; sickly yet
doggedly he made the offer of his services. Some of the answers he
met with were not intelligible; some of them were. Yet in spite of
every rebuff, of every conspiracy on the part of fortune, of the
increasing sense of bodily suffering, of the aches that stole over his
limbs, of the faintness that crept over him owing to these long hours
of unaccustomed physical and mental exertion and absence of food,
he forced himself to go on. What were such sufferings, such
journeyings, such adventures, such vicissitude in comparison with
the ten long years in which his beloved Odysseus was banished
from the shores of Ithaca! What clay was this that already it should
begin to quail? How those great ones of old would have mocked him
had he dared to confess to them that he felt distressed!
Yet he did feel distressed. It was almost useless to deny it. As for the
tenth time that afternoon, he was told “To take himself off, and to
look lively about it,” a formula which repetition had enabled him to
recognize, and experience had indicated the only course to pursue,
despair and humiliation, accompanied by terror, that most active of
all his enemies, crept upon him, and as the clocks of the great city
were striking five, tears sprang to his eyes. Almost in the same
moment he had dashed them away, had proudly overcome them.
What if the great Agamemnon could have seen him! How would he
be able to meet those mighty ones, how would he be able to grasp
their hands, to look into their faces, if this was the measure of his
courage?
By this time he had come into Cannon Street, hard by to Saint
Paul’s. On the left side of the street, along which he passed, were
great blocks of gloomy warehouses. Flights of stone steps ran up to
their entrances; and as he limped by one of these, involuntarily he
sank down in sheer weariness upon a bottom step. He felt bitterly
hungry, yet he had no means of satisfying his pangs, for there was
not a penny in his pocket; and the only food he had had that day had
been a little milk and bread at eight o’clock that morning. Yet he still
fought with all the resolution of which he was capable against the
physical weakness which now held him so inexorably in its clutch.
Again he began to recite the Iliads under his breath, not now
because the joy of battle was in his veins, but because he sought to
derive sustenance from those high-hearted ones who looked on
valour as their right.
As he sat on the bottom step of the warehouse, with his throbbing
head pressed against the cold stone, he beheld a heavy railway car
drawn by a mighty horse come up with a shattering rattle to the door
of the great building. The man who was driving it cast the reins on
the horse’s neck, and standing upon the dray shouted up into the
second storey. Thereupon a door was opened in the wall of the
warehouse, and a large box attached to the hook of a crane was
swung outwards and downwards towards the dray. As the drayman
proceeded to assist it on to the dray and to disengage it from the
hook, the mighty horse grew impatient and began to prance.
“Whoa there, you ——!” called out the drayman to the horse.
Standing on the kerb at the opposite side of the street watching
these proceedings was a small and pale urchin, whose clothes were
in rags and whose toes were bursting through his shoes. Suddenly
with amazing daring and rapidity he darted between a hansom, two
omnibuses and a covered van, and peremptorily seized the head of
the great horse.
“Nah then,” he said to the horse sharply, “worrer yer at? Kim up.”
He gave the great horse a blow on the neck and backed it a yard or
two.
“Good kid,” said the drayman, unhooking another box from the
crane, “hold him there a bit.”
The boy seated on the bottom step of the warehouse assimilated
every detail of these proceedings. He pondered them deeply. And as
he did so, quite suddenly a flash of meaning made his pulses quiver.
Instantly he withdrew his throbbing head from the cold stone, and
rose heavily. He approached the ragged urchin who was still holding
the head of the great horse.
“I—I b-beg y-your p-pardon,” he said, addressing the urchin with
immense politeness, “but I—I a-assume you will r-receive a p-piece
of silver for this brave action?”
“Come again,” said the urchin, who was not accustomed to this
mode of address.
The boy contrived to grasp that his meaning was not understood.
“The s-street-p-per—t-the m-man on the—on the c-car will give you
a p-piece of s-silver because you make the great horse stand still,”
he stammered, in order to make it clearer.
“Piece o’ silver!” said the urchin derisively. “More likely to gimme a
thick ear. Lucky if I git the price of a fag.”
The boy retired to the bottom step of the warehouse with this
mysterious piece of information. With infinite pains he had mastered,
as far as he was aware, all the coins in the currency; he had come to
believe that he knew the appearance and purchasing power of them
all, from the farthing to the sovereign, from the halfpenny stamp to
the five-pound note. But he had never encountered “a thick ear,” or
“the price of a fag,” in all his researches.
Timidly, reluctantly he went back to the urchin.
“I—I beg y-your p-pardon,” he said as courteously as before, “but w-
would you m-mind informing me what is the monetary value of the
price of a fag?”
“A nickel, o’ course,” said the urchin in a tone that seemed to
indicate that further intercourse was not desired. He was disposed to
resent the intrusion of a busybody into his personal and private
affairs.
“A n-nickel,” said the boy blankly. “W-would you mind in-informing
me wh-what is a nickel?”
“A brown, o’ course,” said the urchin, eyeing him sternly.
“Oh yes,” said the boy, “one of those brown coins which are called p-
pennies. I am much in-indebted to you for this in-information.”
With a grave smile of thanks the boy lifted his cap and returned
again to the steps of the warehouse. After a moment, however, in
which he stood in irresolution he limped away along the street. His
progress was carefully noted by the urchin, who watched the frail
figure solemnly as it proceeded along the crowded pavements of
Cannon Street.
“Gawdstrewth!” he exclaimed, spitting with vehemence, and dealing
the great horse a further admonitory blow on the neck.
The boy, however, as he limped with his hunger and weariness
through the crowd of street-persons who were about him everywhere
and who dealt him continual buffets, was under the dominion of an
idea. He had gained yet another fragment of practical knowledge by
the medium of first-hand experience. He must turn it to account at
the first opportunity. He was hungry. That inexorable power in whose
hands he was had inflicted that salutary condition upon him in order
to make trial of his quality. And what an incomparable sense of
power it would confer upon him to feed that hunger for the first time
in his life by his own personal skill in the practical sciences!
A hundred yards along the street was another huge block of gloomy
warehouses almost identical with the others. It also was furnished
with a flight of stone steps and a crane dangling above a door in the
second storey. Their similarity, even to the smallest details, enabled
the boy to see in the appearance of this second warehouse this
same indubitable hand. He sat down as before on the bottom step,
and in simple faith proceeded to await the arrival of a second dray
drawn by a great horse.
As thus he sat with an exalted patience for that which he knew must
come to pass, yet with his limbs trembling so that he could not hold
his knees from knocking together, the clock of the cathedral across
the street boomed the hour of six. Its august echoes reverberated in
his spirit; they filled it with awe; the sense of a remote yet noble
kinship overwhelmed him as he sat. He looked across the street with
dim eyes; the colossal spire was uplifted sheer, it was lost in the
lowering darkness of the sky. The sombre and vast walls of the
church seemed to proclaim themselves to his imagination like the
voices of heroes upon which it fed. Their ghostliness, for already
they were enveloped in the shadows of evening, set his lips again in
motion. Involuntarily they began to move to the familiar lines of the
Purgatorio:

Era gia l’ ora che volge il disio

ai naviganti, e intenerisce il cuore
lo di ch’ han detto ai dolci amici addio;

e che lo nuovo peregrin d’amore

punge, se ode squilla di lontano,
che paia il giorno pianger che si more;

quand’ io incominciai a render vano

l’ udire ed a mirare una dell’ alme
surta, che l’ ascoltar chiedea con mano.

The huge clock of the cathedral boomed again and yet again. His
lips still moved softly to the music they emitted. No dray and no great
horse had arrived. But his resolve was undaunted; his faith remained
inviolate. His frame was growing numb and chill. The stone had
grown very cold. The stealthy hues of the night were wrapping
themselves about everything. The lamps were now lit in Saint Paul’s
Churchyard. A serried bank of dark clouds was looming up out of the
west. At his heart was a curious sinking; he seemed to feel a little
faint.
It still wanted a few minutes to seven by the stolid face that peered at
him from across the street, when his devout patience and his simple
faith met with their reward. Just as he had foreseen, a heavy dray
drawn by a great horse came rattling round the corner of the
cathedral. As it neared the warehouse on the steps of which he sat,
it began to slow up. Yes, never a doubt about it, it was coming to
stand under the creaking piece of iron above his head, the crane
dangling from the second storey.
This dray stopped precisely as the other one had done at the other
warehouse. In a precisely similar fashion the drayman cast the reins
loose on the great horse’s neck. Again the drayman stood up and
called unintelligible words into the second storey. The door opened
as before; the crane began to squeak and grunt; the box hung
suspended in mid-air. Swinging and rotating it descended to the
drayman’s arms. And then just as before the mighty animal began to
prance.
With his heart beating as though it would break him in pieces the boy
rose from the bottom step of the warehouse. He pressed his hands
to his sides. “Courage, Achilles!” he muttered under his breath,
“Courage, Achilles!”
The great horse still pranced. The man on the dray shouted a
horrible oath. With flaming eyes and cheeks of death the boy
dragged his faint limbs to the kerb. As he came near the great
animal, and he beheld its scarlet nostrils and huge and wicked eyes,
he knew it for a monster of fable that could turn him to stone with its
glance. A chill stole through his veins. He extended his hands
towards the great horse. His eyes were filled with a dreadful rushing
darkness. He felt himself swaying with a kind of sick impotence; it
was as though the hand of fate had maimed him.
“Lay ’old of his head, can’t yer?” the brutal voice of the man on the
dray percolated to his ears. “What are yer lookin’ at ’im for?”
The great horse lifted its hoofs; the boy reeled back with the face of
a corpse.
“Mind he don’t eat yer,” said a quiet voice at his side.
A second small and ragged urchin, far less in stature than himself
and half his years, calmly took hold of the great horse by the near
rein, shook it, struck the animal on the neck very boldly, and
proceeded to back it just as the other urchin had done.
“Nah then, worrer yer mean by it?” he said, scolding it in a shrill
voice like a woman would an infant.
The impassive face upon the cathedral boomed the hour.
In a strange anguish of the spirit, which he had never felt before, the
boy staggered away from the warehouse into the ever-gathering
shadows of the great city. He did not know where he was. He did not
know what he did. He was in the enfolding grasp of an unknown
power; he was in the bosom of the gods.
Without apprehension, and without reason, he was borne through
the maze of cabs, vans and omnibuses to the other side of the
street. He clutched feebly at the chill iron railings that formed a girdle
round the cathedral. A bell seemed to be tolling. It filled his heart with
voices. An occult force, which had never grasped him till this hour,
began to draw this broken wayfarer seeking for sanctuary towards
the unknown.
He issued back to a frail sense of entity to find himself on the steps
of the cathedral. He saw lights; he smelt warmth; he heard remote
and strange music; he heard the hushed clamour of many voices. He
was in a vast place echoing yet domeless. He was on his knees
pressing his temples against the cold marble flags.
The deep voice of the organ filled the warmed air with a thousand
vibrations. Afar off were bright-burning candles and solemn songs.
He pressed his temples closer to the chill flags. He panted like a
hunted deer.
Hours later, when he staggered out of the enervating warmth of the
cathedral, the night was pitch dark. The chill airs of the evening
made his jaws clap together. He did not know where he was. Moving
with little tottering steps, his flesh as water, his eyes blind with night,
he followed the line of railings that engirdled the cathedral. He
clutched at them; he hugged them blindly to his bosom; he was like a
mariner in uncharted seas who has lost his compass. He followed
the course of the railings, dragging one foot after another almost as
one who is bereft of the power of volition. It took him nearly an hour
to complete the circuit of the railings, and then he found himself back
again at the point whence he had started, the steps of the cathedral.
Still clinging to the railings he started to go round them again. Within
him the instinct was paramount that if he did not keep his faint limbs
in motion he was lost. He would perish in the streets of the great city.
Passing each iron rail in its turn through his numb hands he went on
and on, and in the process of time returned again whence he started
to the steps of the cathedral.
For the third time he set out to traverse the line of the railings. He
was very cold. Yet the flesh must continue to obey, or that nameless
destination which he had ceased to remember would never be won.
As before, railing by railing, he made the circuit, and for the third time
returned whence he started. Without an instant’s tarrying he set out
again. The impassive face upon the cathedral boomed the hour of
midnight. The dark heavens looked like Erebus. A sharp cold spray
of rain was dashed suddenly upon his cheeks.
This blessed succour seemed to give him a flicker of power.
“Courage, Achilles!” he muttered faintly. He could not feel his feet as
they crept over the wet pavements; they seemed to be poised in the
jaws of an abyss. His form seemed to be disembodied in the air of
the night. But the flesh was still making its answer; the unending
procession of the railings still continued to slide through his hands.
Yet his fingers could feel nothing. How soft and vague everything
was growing! A delicious softness had begun to creep out of the
sharp airs of the night.
As his eyes were closing he grew conscious that a pair of arms were
enfolding him.
“My father,” he muttered, “my father.”
He pressed his closed eyes against a garment which was wet yet
protective. He was lying against his father’s bosom. His father had
followed in his steps as he set out in the morning, and had never
been more than fifty yards from him during the whole of the day.
 XII
The next day the boy returned to the study of the practical sciences
under his father’s guidance. The brief hour of self-reliance, of actual
motive power, seemed to pass almost as suddenly as it had come.
Yet although he had been ground down into the dust again, the sap
and fibre had appeared to increase in his frame. He went alone no
more into the streets of the great city in search of pieces of silver, but
the need of obtaining them by his own address was never absent
from his thoughts.
One sultry evening of midsummer, when he returned to the little
room after a dusty and stifling pilgrimage about the streets in his
father’s company in the pursuit of knowledge, he said with an air of
mournful conviction, “Each day makes it more clear to me, my father,
that if once our store of silver pieces should fail us, we shall lose this
little room of ours. Every time I walk abroad in the great city I see
numbers and numbers of these poor street-persons whose sad faces
tell me that they have lost their little rooms.”
His father, although he would have sought to deny this assertion,
was yet not able to do so.
Indoors and out of doors the boy pursued his studies with a most
vigilant constancy. He read the newspaper daily, and committed
portions of it to memory. And he accompanied his father all about the
streets of the great city. He accompanied him into the most
inaccessible places, using his ears and eyes faithfully. And at last, it
occurred to him that if there was no place for him in the universal
scheme in his capacity as a “bright boy,” a special dispensation
might permit him to enter some other sphere of usefulness. For
example, in one of the advertisement columns of the newspaper he
had observed that in addition to cooks, clerks, office boys,
coachmen, commercial travellers, hairdressers’ assistants, and
laundryman’s apprentices, who were required by various people,
there was also a handy youth wanted by Messrs. Crumpett and
Hawker, Publishers, 24 Trafalgar Square. Apply by Letter.
“Would you say, my father,” he inquired anxiously, “that I have
credentials to fulfil the capacity of a handy youth? I am eighteen
years and twelve days old; I can wash and scour the utensils in
which we cook our food; I can make the fire and polish the
hearthstone, and also the fire-grate; I can cleanse the bricks of the
floor. And, my father, I can remove the dust from the chimney-piece;
and I constantly dust and arrange the books in the shop. Would you
say it would be presumptuous to offer myself in the capacity of a
handy youth?”
“I think, beloved one, you are quite competent to take this course,”
said his father sadly, “if you can find the courage.”
“I think I can find the courage, my father, if you will help me a little,”
said the boy, with his bright eyes gleaming out of his gaunt cheeks.
They knelt together in the little room.
That evening the boy took pen, ink, note-paper and envelope, and
with infinite pains composed his first letter. In a very dainty and
delicately-written hand it ran as follows—
“To Messrs. Crumpett and Hawker, Publishers,
24 Trafalgar Square.
“Gentlemen,
“It is my aspiration to serve you in the capacity of a handy
youth. Should you deem me worthy of your trust, it shall
be my constant aim to render myself worthy of it.
“I have the honour to be, Gentlemen, your obedient and
respectful servant,
“William Jordan (the younger).”
He showed this composition to his father, who approved it in silence.
Then he stole out all alone into the darkness with an almost
breathless secrecy and confided it to a letter-box in the street.
Such an adventure as this had the power to tantalize and excite him.
When he sought the ancient authors as a refuge from the insurgency
of his thoughts, his mind could no longer feel the spell of their magic
pages.
“I pray that the postman will carry the letter to its true destination, my
father,” he said anxiously.
“It is on the knees of the gods, Achilles,” said the white-haired man.