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Chapter 12
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
LEARNING OBJECTIVES
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
LEARNING OBJECTIVES CONT'D
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
LEARNING OBJECTIVES CONT'D
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.424
Pre-final work
Discussions are held with management near the
year-end to ensure that preparation of financial
statements runs smoothly and timetables are met.
Auditors maintain regular contact with management
to detect problems early on in the process.
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – pp.424–425
Potentially problematic areas include:
(a) known problems;
(b) stocktaking instructions;
(c) timetable for preparation of year-end financial
statements;
(d) circularizations;
(e) requirements of accounting and reporting
standards;
(f) new legislation;
(g) requirements of auditing standards.
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – pp.425–426
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.426
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – pp.427–428
Analytical procedures.
ASB has adopted a balance sheet approach when
defining assets and liabilities and less attention is
paid to matching and accruals and to the profit
and loss account. It may mean that it becomes
more difficult to interpret profit and loss account
and income/expense headings.
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.429
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.429 CONT'D
Specifically, auditors determine whether:
(a) financial statements have been prepared using
consistent and appropriate accounting principles;
(b) information published with the financial statements
is compatible with them;
(c) presentation and disclosure are as required by law
and by regulatory bodies and achieve truth and
fairness;
(d) conclusions drawn from tests and overall review of
the financial statements enable an opinion to be
formed.
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.430
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
ACTIVITY 12.1
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.432
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
ACTIVITY 12.2
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.434
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – pp.434–435
(c) Z-scores.
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
ACTIVITY 12.3
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
ACTIVITY 12.3 CONT'D
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.440
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – pp.441–442
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.448
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.448 CONT'D
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
ACTIVITY 12.4
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.449
Apart from a satisfactory control environment,
specific controls are necessary to minimise control
risk over:
• acquisitions, revaluation, impairment;
• safeguarding;
• disposals;
• maintenance, insurance;
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.450
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.451
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
ACTIVITY 12.5
3,150,000
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
ACTIVITY 12.5 CONT'D
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
ACTIVITY 12.5 CONT'D
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
ACTIVITY 12.6
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – pp.454–455
• profits/losses on disposal;
• revaluations;
• significant repairs;
• maintenance charges.
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.455
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
ACTIVITY 12.7
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – pp.457–458
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – pp.457–458 CONT'D
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.458
For disposals of fixed assets, determine the
reasons if significant and whether an impairment
review of the remaining assets is necessary.
Substantive procedures include:
(1) check number sequence of disposal approvals
and to the fixed assets register;
(2) select random sample of approvals and check
authorization signature and trace to sales
despatch notes.
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.462
• residual values;
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – pp.462–463
Trade debtors
Trade debtors are normally classified as current
assets. It is important to determine the point at
which the property in goods is transferred or service
performed. Sales of goods and services cause
trade debtors to come into existence or increase
cash balances, so audit work on sales cannot be
divorced from work on the assets accounts.
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.464
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with The
The withProcess:
Audit
Audit The AuditPrinciples,
Process: Process 4Practice
Principles, th Edition
Practice and
and Cases
Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – pp.464–465
Important elements when safeguarding trade
debtors are as follows:
(a) the rapid billing of customers;
(b) regular preparation of statements and reminder
letters;
(c) offer of cash discounts;
(d) approval of entries reducing the stated amount
of debtors’ balances,
(e) ageing statement;
(f) credit limits.
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
ACTIVITY 12.8
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – pp.471–472
Substantive approaches cover:
(a) creation of trade debtors’ balances;
(b) proving trade debtors are genuine, accurate
and complete;
(c) proving reasonable relationships between trade
debtors/sales and other figures in the financial
statements;
(d) checking cut-off;
(e) proving clearing entries are genuine, accurate
and complete, especially write-offs of balances;
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
ACTIVITY 12.9
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
ACTIVITY 12.9 CONT'D
(b) an accounts department member (not cashier)
periodically checks the cash received book with
the cash book and bank paying-in book and,
monthly, the cashier reconciles cash book and
bank statement balances, and the reconciliation
is checked and initialled by the chief accountant.
You have been asked to find evidence to prove that
cash receipts have been properly entered in the
cash records and the debtors ledger accounts.
Suggest appropriate substantive procedures.
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – pp.474–475
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.474
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
ACTIVITY 12.10
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
KEY POINTS – p.475
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
ACTIVITY 12.11
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
CHAPTER SUMMARY
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
CHAPTER SUMMARY CONT'D
• The need to analyse in detail as well as in
global terms;
• The fact that auditors are insiders in terms of
the information they have the right to obtain and
that more detailed information is thus available
to them than would be to investment analysts;
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
CHAPTER SUMMARY CONT'D
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
FURTHER READING
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning
FURTHER READING CONT'D
Use
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Audit The AuditPrinciples,
Process 4Practice
th Edition
and Cases
By Iain Gray
Third Edition & Gray
by Iain Stuart&Manson ISBN 9781844806782
Stuart Manson ISBN 1-86152-946-5
© 2005
2008 Thomson
Cengage Learning