MODERN AUDITING

7th Edition
William C. Boynton
California Polytechnic State
University at San Luis Obispo

Raymond N. Johnson
Portland State University

Walter G. Kell
University of Michigan
Developed by:
Gregory K. Lowry, MBA,
CPA John Wiley & Sons, Inc.
Saint Paul’s College
 CHAPTER 2
FINANCIAL STATEMENT AUDITS AND
AUDITORS’ RESPONSIBILITIES
 Fundamentals Underlying Financial
Statement Audits
 Independent Auditor Relationships
 Auditing Standards
 Assurance Provided by an Audit
 The Auditor’s Report
 Trends Affecting Auditor Responsibilities
Relationship Between
Accounting and Auditing
Figure 2-1
 Need for Financial
Statement Audits
1. Conflict of Interest
2. Consequence
3. Complexity
4. Remoteness
Economic Benefits of an Audit

1. Access to Capital Markets

2. Lower Cost of Capital
3. Deterrent to Inefficiency and Fraud
4. Control and Operational
Improvements
 Limitations of a
Financial Statement Audit
Following are 2 important economic
limits:
1. Reasonable Cost
2. Reasonable Length of Time
Following are 2 important limitations
associated with the established
accounting framework:
1. Alternative Accounting Principles
2. Accounting Estimates
 Independent Auditor
Relationships
1. Management
2. Board of Directors and Audit
Committee
3. Internal Auditors
4. Stockholders
 Generally Accepted Auditing Standards
Figure 2-2
General Standards
1. The audit is to be performed by a person or
persons having adequate technical training and
proficiency as an auditor.
2. In all matters relating to the assignment, an
independence in mental attitude is to be
maintained by the auditor or auditors.
3. Due professional care is to be exercised in the
performance of the audit and the preparation of
the report.
 Generally Accepted Auditing Standards
Figure 2-2
Standards of Field Work
1. The work is to be adequately planned, and
assistants, if any, are to be properly supervised.
2. A sufficient understanding of the internal
control structure is to be obtained to plan the
audit and to determine the nature, timing, and
extent of tests to be performed.
3. Sufficient competent evidential matter is to be
obtained through inspection, observation,
inquiries, and confirmations to afford a
reasonable basis for an opinion regarding the
financial statements under audit.
 Generally Accepted Auditing Standards
Figure 2-2
Standards of Reporting
1. The report shall state whether the financial
statements are presented in accordance with
generally accepted accounting principles.
2. The report shall identify those circumstances in
which such principles have not been
consistently observed in the current period in
relation to the preceding period.
3. Informative disclosures in the financial
statements are to be regarded as reasonably
adequate unless otherwise stated in the report.
 Generally Accepted Auditing Standards
Figure 2-2
Standards of Reporting
4. The report shall either contain an expression of
opinion regarding the financial statements, taken
as a whole, or an assertion to the effect that an
opinion cannot be expressed. When an overall
opinion cannot be expressed, the reasons therefore
should be stated. In all cases where an auditor’s
name is associated with financial statements, the
report should contain a clear-cut indication of the
character of the auditor’s work, if any, and the
degree of responsibility the auditor is taking.
 Assurance Provided
by an Audit
1. Auditor Independence
2. Reasonable Assurance
3. Detection of Fraud
4. Responsibility to Detect Fraud
5. Responsibility to Report Fraud
6. Illegal Client Acts
7. Assurance About a Going Concern
 Auditor’s Standard Report
Basic Elements of Auditor’s Standard Report
Title
Addressee
Introductory Paragraph
Scope
Paragraph
Opinion
Paragraph
Firm’s Signature
Date
Types of Auditors’ Reports
and Circumstances
Figure 2-4
Types of Auditors’ Reports
and Circumstances
Figure 2-4
Management Responsibility Report
Figure 2-5
 Trends Affecting Auditor
Responsibilities
1. Information Technologies
2. Assurance Services
 CHAPTER 2
FINANCIAL STATEMENT AUDITS AND
AUDITORS’ RESPONSIBILITIES
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