The practice of auditing is changing and traditional audit services are becoming a diminishing proportion of the services offered by accounting firms. Assurance services are expected to be the primary growth area for auditors in the 21st century. To reflect these changes in accounting practice, this edition focuses more on assurance services than prior editions. In addition, the new‘Professional environment vignettes’ throughout the whole text also illustrate current changes and developments in professional practice of interest to the reader. However, at this point in time the core assurance service for most accounting firms is the traditional financial statement audit, and as such, it is the assurance service that receives the most attention throughout this textbook.

The internationalisation of accounting and auditing standards is an ongoing development in global accounting practice. The importance of International Auditing (and Accounting) Standards is expected to increase over the coming years, for this reason and for non-Australian readers, this textbook includes references to International as well as Australian Auditing Standards wherever appropriate. This cross-referencing of Australian and International Auditing Standards is also of particular benefit to readers in Asia and the Pacific rim and to overseas students studying at Australian universities.

Significant changes from the previous edition

In preparing this edition, we have acknowledged a number of recent developments. Primarily they have included (1) the growing importance of assurance services to the accounting profession, (2) changes in information technology and the growth of e-commerce, (3) the internationalisation of auditing practice and standards, (4) amendments to the Corporations Law and the changes to auditing standards, and (5) the increasing number of international students undertaking Australian degrees and professional courses. The structure of the book has also been amended to improve readability and the logical flow of topics covered.

Organisation

How to use this book. This double-page graphic feature assists readers to see at a glance how they can make best use of the key features of this text.

Chapter openers. This double-page spread presents a summarised account of the main elements in each chapter, the learning outcomes, and the relevant professional statements, thus providing readers with a broad contextual base from which to approach each chapter. To maximise relevance for other than Australian readers, both the relevant Australian professional statements and any corresponding international statements are listed.

Learning objectives. The learning objectives are linked to the relevant section of the text by use of an abbreviated restatement of the objective within the margin.

Learning check. The learning checks have been summarised into two blocks within each chapter summarising the major points covered. These checks are to reinforce student learning and provide a basis for subsequent revision.

Professional environment vignettes. Within each chapter are one or two professional environment vignettes that highlight changes in the professional audit environment. These vignettes are to keep students up-to-date with recent trends, new developments, and changes in technology impacting upon auditing and assurance services.

Glossary. The key terms, bolded in the text and listed at the end of each chapter are defined in a Glossary at the end of the text. This enables readers to clarify quickly the meaning of technical or unusual terms throughout the text.

Content

In summary, the following changes have been made to the content of this edition:

• There is a greater focus on the assurance services offered by the accounting profession.
• Greater consideration of current developments in audit and assurance practice is made throughout the text through the use of professional environment vignettes.
  
• The increasing importance of international accounting and auditing standards is reflected throughout the text.
• The application of audit procedures within a computerised information system has been removed as a separate chapter and is instead included throughout the text where appropriate.
• A separate chapter has been devoted to issues associated with the growth in e-commerce.
• Ongoing changes arising from the Corporate Law Economic Reform Program have been included.
• Significant changes to the function and profession of internal auditing have been included.
• The ongoing controversial debate over audit independence has been explored in more detail.
• The end of chapter questions have been extensively revised, with numerous professional application questions and case studies drawn from the professional examination papers of Australian and international accounting bodies.

Part 1, The audit and assurance environment

Part 1 has been changed to better illustrate the impact of assurance services on the audit environment. This has been reflected in the change of title for this part from‘The audit environment’ to‘The auditing and assurance environment’. Within the various chapters the following specific changes have been made.

Chapter 1 now includes in the title‘assurance’ to reflect the broader auditing and assurance environment. A new section discusses the‘Assurance Engagement Framework’ which is now a standard issued by the International Federation of Accountants. An expanded section has been introduced to discuss why and how the auditing paradigm has been shifted and the implications of this shift on the perception of audit independence and auditor liability. The discussion of the types of audit services offered by accounting firms has been updated to reflect some of the very current types of assurance services provided.

The major change to Chapter 2 relates to the recent changes to the rules on independence. It discusses the recent debate over audit independence (which has primarily occurred in the USA) and the developments leading to the changes in the Securities and Exchange Commission’s rules on audit independence. This topic is also dealt with in Chapter 18. The discussion on corporate governance is expanded to take into account the latest Australian practices and the implications of the UK’s‘Turnbull Report’.

Chapter 3 on auditor’s legal liability remains substantially unchanged. Changes to the role of the Australian Securities and Investment Commission and updates of the Corporation Law through the Corporate Law Economic Reform Program have been reflected in the chapter. However, there have not been any major legal judgements significantly affecting the common law in relation to auditors since the previous edition.

Part 2, Audit Planning

There has been significant restructuring of Chapter 4 to improve logical flow and readability. The chapter is now more clearly focussed on why there is a demand for auditors, what their duties are, and the main parties with whom they have a relationship.

Substantial revision has been made to Chapters 5 and 6 compared to the equivalent Chapters 5, 6 and 7 in the previous edition. Chapter 5 now introduces the core concepts underlying the determination of an audit strategy and the planning of a particular engagement. These are the concepts of risk, materiality, assertions and evidence. Chapter 6 now explains the application of these concepts in planning for a particular audit engagement in addition to explaining the process of accepting an engagement and recording the evidence gathered and decisions made in performing that engagement.

The application of audit procedures within a computerised information system is now explained within the relevant chapters dealing with audit procedures. Thus Chapter 7, Internal Control and Control Risk Assessment, now explains the effect of computerisation on the internal control structure, considers the implications of computerisation in evaluating the design effectiveness of internal controls and explains the use of computer assisted audit techniques in testing the operating effectiveness of internal controls.

Part 3, Audit testing methodologies

Chapter 8 now includes further clarification of the difference between statistical and non-statistical sampling techniques. There is also greater emphasis on non-statistical sampling techniques to reflect their common usage in audit practice. The discussion of factors considered in selecting the size of the sample has been expanded to include some of the guidelines outlined in the Auditing Standard. There is also greater consideration of specific types of attribute and variables sampling plans.

The structure of Chapter 9 remains predominantly the same. To help explain the audit risk model, the chapter now includes a diagrammatic representation and discussion of the‘rain cloud’ analogy. As the audit procedures within a computerised information system are now referred to throughout the text, the impact of computer assisted audit techniques as substantive procedures has been included in this chapter. The section on‘special audit requirements’ has been expanded to include a consideration of related parties, confirmation of receivables, and the existence and valuation of inventory.

Part 4, Auditing transactions and balances

Chapters 10 to 13 have been updated to reflect the application of audit procedures within a computerised information system, which were considered in a separate chapter in the previous edition.

Chapter 10 considers the design of both manual and computerised information for recording sales and receivables transactions and balances. It explains the application of computer assisted audit techniques in evaluating control risk over sales and receivables assertions. It further explains the use of computer assisted audit techniques in the design of substantive audit procedures applicable to sales and receivables. A similar approach is followed in the remaining chapters on the audit of specific transaction classes and account balances, Chapters 11, 12 and 13, applying the techniques described in Chapter 10. However, the more specialised areas of e-commerce and on-line auditing are considered in Chapter 16.

In addition to the above changes, the material in this part has been updated to reflect changes in auditing and accounting standards and the text has been carefully revised to improve its readability. Otherwise, the content and organisation of these chapters remains close to that in the previous edition.

Part 5, Completing the audit, reporting and other services

Chapter 14 has been significantly restructured to improve the logical sequencing of topics covered and more closely align the material to the sequence of steps in practice. As part of this change, the discussion of‘post-audit responsibilities’ in the previous edition has now been incorporated in the section‘Undertaking a subsequent-events review’. The increased importance of the audit committee in the corporate governance structure of an entity has been emphasised with a section covering the auditor’s reporting responsibilities to the audit committee.

Chapter 15 has been amended to reflect the increased importance of both International Auditing (and Accounting) Standards in reporting on financial statements. A couple of new diagrams have been added to assist readers in the decision processes of (1) choosing between the various qualified audit opinions when an unqualified opinion is not appropriate, and (2) deciding on the most appropriate reporting options when there are questions about the going concern basis for preparing the accounts.

Chapter 16 is a new chapter on e-commerce. Audit issues associated with e-commerce were introduced in Chapter 20 of the previous edition. However the growth in e-commerce over the past few years has resulted in its increased importance for auditors. This chapter considers a number of issues associated with e-commerce, including (1) development of the information economy and a framework for e-commerce, (2) strategic and functional implications for assurance service providers, (3) risks and safeguards in e-commerce, and (4) considerations in auditing the transaction cycles.

The major change to Chapter 17 relates to the substantial changes to internal auditing as a function and a profession undertaken by the Institute of Internal Auditors. These changes have significantly impacted upon the definition, scope and objectives of internal auditing as well as its ethics framework. The parts relating to operational and public sector audits are still relevant and have not been substantially changed.

Part 6, Future Directions

This part, consisting of a single chapter, was introduced in the previous edition. In this edition‘assurance’ has been included in the title as it is one of the most important issue affecting the auditing profession at the moment. As would be expected for a chapter of this nature it has been significantly revised for the current edition. E-commerce has been moved to a separate chapter (Chapter 16) and has been replaced with a section discussing Mobile Internet. A section on current issues in the profession has been added to the chapter. This section addresses the topical debate over auditor independence and considers issues associated with changes in the structures of accounting firms. Value Reporting has been added as a major stream of business reporting development, shaping the growth of environmental auditing.

End-of-chapter questions

The end-of-chapter questions have been significantly revised, and over half the questions are new. A new feature is the inclusion of discussion questions that are designed to raise broader issues to enhance understanding of the material covered. In the professional application questions and case studies, extensive use has been made of questions drawn from the Institute of Chartered Accountants’ Professional Year Program. Questions have also been drawn from examinations of the Association of Chartered Certified Accountants and the American Institute of Certified Public Accountants. The material includes review questions, discussion questions, professional application questions and case studies. Both the professional application questions and the case studies have been graded in terms of difficulty. The material provides ample opportunities for self-study and for use in assignments, seminars and the classroom. The discussion questions, in particular, provide opportunities for group work within seminars and the classroom.