Course Book 2018-2019

COURSE BOOK
Auditing
EBC2058
Academic Year: 2018-2019

Course Period: 5
School of Business and Economics
Bachelor
ã 2018 Maastricht University School of Business and Economics
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Table of Contents
Introduction ............................................................................................. 3
Learning objectives ................................................................................... 6
Course structure ....................................................................................... 7
Literature ................................................................................................. 8
Assessment .............................................................................................. 9
Grading .................................................................................................. 10
Fraud and Plagiarism ................................................................................ 11
Complaints .............................................................................................. 11
Course schedule ...................................................................................... 13
Lectures & Tutorials.................................................................................. 14
Auditing - EBC2058 2018 - 2019 Page 2 of 40

Introduction
Course Coordinators
Ann Vanstraelen: a.vanstraelen@maastrichtuniversity.nl

Room: B2.15, Phone: 043 388 36 81
Lena Pieper: l.pieper@maastrichtuniversity.nl

Room: B2.23, Phone: 043 388 49 23
Tutor
Lena Pieper: l.pieper@maastrichtuniversity.nl
Room: B2.23, Phone: 043 388 49 23
Course Description
This course is an introduction to the area of auditing (or, in Dutch,
accountantscontrole). This area concerns the external attestation of financial
reports, which is the main activity of auditors working within accounting firms.
Auditing services are part of a wider group of services called assurance services.
The IAASB (International Auditing and Assurance Standards Board) defines an
assurance engagement as: “an engagement in which a practitioner expresses a
conclusion designed to enhance the degree of confidence of the intended users
other than the responsible party about the outcome of the evaluation or
measurement of a subject matter against criteria”. The subject matter of
assurance services can take many forms, like for example assurance on the
effectiveness of internal control, performance on human rights, or sustainability
performance. The audit of the financial statements is an example of an assurance
service focusing on the reliability of financial information, and for which IFRS
(International Financial Reporting Standards) are generally used as benchmark
criteria.
Course Objectives
The objectives of this course are twofold. First, students should obtain a solid
knowledge of the literature on auditing. To that end, both a textbook and

academic articles on the subject of the course will be covered. The literature of
this block emphasizes three aspects of auditing: (1) Conducting an audit is a
judgmental process, i.e. auditing is not “just applying the standard procedures”;
(2) Conducting an audit requires a good understanding of clients, especially their
strategy and risks; and (3) The client’s internal control has a strong influence on
the audit. As this is the introductory course to auditing, it will give a
comprehensive and streamlined coverage of the audit process.
The second objective of this course is that students should obtain skills that
are important in an auditing environment. To train students’ practical skills,
cases on various auditing aspects will be discussed. More specifically, the
purposes of these cases are: (1) to develop students’ problem-solving skills in
auditing settings; (2) to develop experience in using and interpreting data in
decision contexts in which they are commonly used; and (3) to develop students’
report-writing and oral presentation skills.
This course is part of the tracks preparing for the post-graduate program
auditing (to obtain the license of Registeraccountant), both within the economics
and international business programs. This course prepares for the assurance
services course in the master program and the advanced auditing course in the
post-graduate program. Hence, a top-down approach is applied: this auditing
course provides an overview of the auditing area, the assurance services course
focuses on the economics of assurance services and the functioning and
regulation of the audit market and the post-graduate course discusses the
various auditing processes in more detail. In addition, the post-graduate course
emphasizes the practical skills required to conduct audits.
Relationships with Other Courses

Auditing is related to many other subject areas. For example, financial
accounting refers to the external reporting of, mostly financial, information.
Auditing concerns the attestation of external reports. The financial information
system, or bookkeeping system, is the main source of the financial reporting
system. Frequently, these internal systems are computerized systems. The
quality, or more specifically the reliability, of financial reporting depends to a
large degree on the quality of the internal control system. The latter is studied in
the internal control courses. Current audit approaches emphasize the importance
of the organization discipline, and especially strategic and risk management, and
the use of data analytics for auditing. Hence, understanding auditing requires at
least a basic understanding of all these related subject areas.

Student Portal, Website and Language
All relevant information will be posted on the Student Portal.
Website containing course description:

https://www.maastrichtuniversity.nl/education/bachelor/bachelor-
economics-and-business-economics/courses-curriculum
Instruction language: English
Use of PBL
The tutorial meetings will make use of PBL. In each tutorial meeting, a discussion
leader will be appointed who is responsible for structuring the session and
making sure that all relevant topics are covered sufficiently. Notes need to be
taken individually by the students.
Prerequisites
Knowledge and understanding of internal control and accounting systems (level
comparable to: course Internal control & accounting systems). Exchange
students are advised to take at least two courses of the available Fiscal
Economics courses.

Learning objectives
BSc Learning goals How are they achieved in

this course?
Knowledge & Insight Our graduates are able Students read and
to understand and use discuss academic
academic knowledge in a articles.
self-directed manner.
Academic attitude Our graduates have Students are able to

developed an academic contribute to discussions
attitude. and give presentations
using insights from
academic literature.
Global citizenship Our graduates are aware This course addresses

of their responsibility in a the role of the auditor to
global, ethical, and social act in the public interest.
context.
Interpersonal Our graduates are able Students of diverse

competences to demonstrate excellent countries or cultures
interpersonal interact in academic
competences in an discussions during
international professional tutorial meetings, and
setting work in small groups on
case studies to deliver a
professional case-report
and presentation.

Course structure
Lectures
This course includes three lectures: two guest lectures and one lecture by the
course coordinator. The first guest lecture by Prof. Jean Bedard (Bentley
University) takes place on 09 May at 13.30 hrs. The second lecture by Guy
Parmentier (Certified Auditor) is on 20 May at 11.00 hrs. The lecture by the
course coordinator Prof. Ann Vanstraelen will give you an overview of the course
and takes place on 22 May at 11.00 hrs All lectures are mandatory. Only for the
lecture by the course coordinator, you have a valid reason not to attend if you
have a class of another course at the same time.
Tutorials
The bulk of the course consists of tutorial meetings, 9 in total. The tutorials take
place twice a week on Monday and Thursday. The format is PBL. A discussion
leader will be appointed for each meeting. Students are required to take notes on
an individual basis. A grade for participation will be given for each tutorial
meeting. All tutorials are in principle mandatory unless you have a valid reason
for being absent! In the latter case, you hand in your preparation for the tutorial
meeting before the start of the meeting.
Workshop
A workshop in collaboration with PwC is scheduled on 16 May from 13.00 to
17.30 hrs. The workshop kicks off in room TS53 H0.06. The workshop is
mandatory!
Case presentations
Students are required to work on 3 case-studies in small groups (3 to 4
students). Cases will be provided one week in advance. The cases will be
presented during a tutorial meeting. One group of students has to present their
memo on the case, and one group has to comment on the content of the
presentation. Finally, all students can ask questions about the case and comment
on the content and style of the presentation. The text of the case memos is
limited to at most seven pages (excluding tables and appendices).

Literature
Textbook (mandatory)
The textbook used in this course is:
Johnstone, Gramling, and Rittenberg. 2019. Auditing: A Risk-Based

Approach (11th Edition), Cengage.
This textbook covers a wide range of topics regarding auditing. Like this course,
the book covers the whole auditing process, includes the international standards
on auditing (ISAs), and it will guide you in solving the cases. Furthermore, every
chapter contains a section on “what you will learn” (i.e. the learning objectives)
and sections on “why it matters” to help students seeing beyond the factual
insights provided in the chapters.
Academic articles (mandatory)

During some tutorial meetings, a selection of academic articles will be discussed
in addition to the chapters from the textbook. The articles can be downloaded
from the e-journals available through the UM library.
- Hsieh, Y., and C. Lin (2016). Audit firms’ client acceptance decisions:
Does partner-level industry expertise matter? Auditing: A Journal of
Practice and Theory 35 (2): 9-120.
- Dennis, S.A., and K.M. Johnstone (2016). A field survey of contemporary
brainstorming practices. Accounting Horizons 30 (4): 449-472.
- Cao, M., R. Chychyla, and T. Stewart. (2015). Big data analytics in
financial statement audits. Accounting Horizons 29(2): 423-429.
Cases (mandatory)
The cases that need to be solved will be announced during the course, one week
in advance.

Assessment
The assessment of the course is based on course work and an exam. The course
work consists of class participation and working on cases in small groups (3 to 4
students).
Your presence at the lectures, tutorial meetings and workshop is
required. In case you cannot attend a lecture, meeting or workshop due to
unforeseen circumstances, you have to inform your tutor by e-mail about the
reason for your absence and you should include your preparatory work for the
assignments for that meeting (if applicable). You are not allowed to miss more
than 2 meetings (including opening lecture, guest lecture, tutorials, and
workshop); otherwise you will fail the course.
Every student is required to carefully and thoroughly read the literature and
prepare the assignment before each tutorial meeting. You will receive a grade
for class participation for each tutorial meeting.
You will receive the case material one week in advance. Do not search on the
internet for possible solutions to the case studies. This will be
considered as fraud and plagiarism (see also section Fraud and Plagiarism
below).
The written cases must be handed in:
a) per email to your tutor before 8:30am the same day the presentation is
scheduled, and
b) as hardcopy during the same group session in which the presentation is
scheduled, otherwise it will be judged 0.0 (nil).
At the end of the course there will be a written exam consisting of open
questions and possibly some multiple-choice questions. In case you need to take
a re-sit, the exam format will be an oral exam.
The exam (both first-time and re-sit) will cover the lectures and literature
(textbook and articles) discussed during the tutorial meetings. It is a closed-book
exam so you cannot bring the textbook and articles. You are, however, allowed
to bring a non-programmable calculator, and a dictionary.
Please read the rules of procedure for examinations (to be found on the Student
Portal) carefully. Take into account that it is not allowed to take any of the
examination papers or your scrap paper home.

Grading
At the end of the course there will be a written exam with open questions. The
exam will cover the textbook and the journal articles discussed during the
course.
Summary Grade:
Written case analyzes 20%
Case presentation 10%
Class participation 20%
Written exam 50%
To pass, the summary grade should be minimally a 5.5. The average grade for
the cases (analyzes, and presentation) and class participation should be
minimally a 5. The grade for the examination should also be minimally a 5. It
should be noted that the grade for the cases and class participation is valid up
until the start of next year's course. Hence, students failing to pass the course
(either the first time, or by taking repeat exams) before the start of next year's
Auditing course should do all course work again.
As noted above, you are required to attend the lectures, tutorial meetings and
workshop. If you cannot attend one of the meetings, you inform your tutor
before the start of the meeting by e-mail of the reason of absence and you
include your homework of the tasks for that meeting (if applicable). Missing more
than two meetings (including lectures, tutorials, and workshop) implies failure of
the course.

Fraud and Plagiarism
In order to protect the reputation of the degrees that you – as students –

receive, instances of cheating or plagiarism are treated extremely seriously.
Fraud, including plagiarism, is understood as a student’s act or failure to act that

makes it partially or fully impossible to correctly assess his/her knowledge,
insight and skills.
Plagiarism is understood as the presentation of one’s own or other people’s ideas
or words without adequate reference to the source.
Any assignment is an individual piece of work, which means that plagiarism is
strictly forbidden. Equally, the use of mobile phones, communication devices or
any other information carrier (whether the phone or other device is turned on or
off, used or not used, etc. is irrelevant) during an examination is also forbidden.
If the Board of Examiners concludes that anything has occurred in an
examination that makes it partially or fully impossible to correctly assess his/her
knowledge, insight and skills, they may impose a sanction in accordance with
SBE’s policy on fraud, including plagiarism.
More information can be found on the Student Portal.
Complaints
If you do not agree with the examination or the results therefore, there are
several procedures in place you can make use of. Please refer to the Student
Portal for more information.
Comment
Within five days after the examination date you can submit comments on the
content and design of the examination (questions) to the course coordinator.

Inspection
Within ten working days of the publication of your examination results, you will
be able to have a look at your assessed work.
In case of a multiple choice examination you can request a copy of your answer
sheet via Surfyourself (SYS).
The date and time of the inspection will be published on the Student Portal and
preferably already stated on the front page of the examination sheet.
Complaint
Students can lodge a complaint during the inspection by using the complaint
form.
Appeal
For information regarding an appeal procedure, please read the information on
the Student Portal carefully.

Course schedule
MEETING 1 (15/4): Introduction to auditing and why quality auditing

matters
MEETING 2 (18/4): The building blocks of auditing: “The audit opinion

formulation process”
MEETING 3 (25/4): Client acceptance and continuance decisions + CASE 1
MEETING 4 (29/4): The auditor’s responsibilities regarding fraud
MEETING 5 (2/5): Planning the audit + CASE 2
MEETING 6 (6/5): Audit evidence + In-Class Use of Mindbridge
MEETING 7 (9/5): Guest lecture: Auditor Judgment. Prof. Jean Bedard

(Bentley University, USA) 13.30 - 15.30
MEETING 8 (13/5): Audit sampling and data analytics tools
MEETING 9 (16/5): Workshop: 13.00 - 16.30, PwC
MEETING 10 (20/5): Guest Lecture: Guy Parmentier
MEETING 11 (22/5): Lecture Ann Vanstraelen
MEETING 12 (23/5): Auditing the revenue cycle + CASE 3
MEETING 13 (27/5): Completing a quality audit and audit reporting

Lectures & Tutorials
MEETING 1: INTRODUCTION TO AUDITING AND WHY QUALITY AUDITING

MATTERS
Literature:
Chapter 1, p. 2-19, 24-35
https://www.ifac.org/system/files/uploads/IAASB/Framework-for-Audit-Quality-
Outline.pdf
Reliable financial information is key for decision makers such as investors and
lenders. The role of external auditors is to enhance the reliability of the
information by performing a quality financial statement audit. Since financial
statement users expect a quality audit, the requirements for external auditors
are demanding. Furthermore, effective audit processes by themselves are not
sufficient to achieve audit quality since it is the combination of different factors
that determines audit quality. In addition, there are a number of professional
conduct requirements and fundamental ethics principles of which regulators
expect that these will help auditors to make professional quality decisions,
including ethical decisions, throughout the audit. One of the key concerns is that
auditors lack independence in fact or in appearance. Hence, many of the
regulations are intended to safeguard auditor independence. However,
ultimately, professional audit judgment plays a key role in achieving audit quality
and requires that the auditor exercises professional skepticism.
Task 1a:
Define the learning objectives from the summary above.
Task 1b (Textbook, p.53):

On December 20, 2011, the Public Company Accounting Oversight Board
(PCAOB) revoked the ability of Bentleys Brisbane Partnership (an external audit
firm) to perform public company audits, and the Board imposed a monetary
penalty of $ 10,000 on Robert Forbes, the audit partner in charge of the audit of
Alloy Steel International. These penalties were imposed because the PCAOB
concluded that Bentleys and Forbes failed to exercise due professional care (a
standard of care expected to be demonstrated by a competent auditing
professional), failed to obtain sufficient evidence necessary to issue an audit
opinion on the financial statements of Alloy Steel’s 2006 fiscal year-end financial
statements. The PCAOB also concluded that Bentleys violated PCAOB quality-
control standards because the firm did not develop policies to ensure that the
work performed by its personnel met PCAOB auditing standards, and the Board
said that the firm did not undertake audits that the firm could reasonably expect
to be completed with professional competence.
Alloy Steel International is an American company headquartered in Malaga,

Australia. Alloy’s stock was traded on the Over-the-Counter Bulletin Board, and
as such was subject to the Securities and Exchange Commission’s (SEC) rules
and requirements. On the audit of Alloy, Bentleys and Forbes made a number of
critical mistakes. Bentleys and Forbes used an unregistered audit firm in
Australia to actually perform the audit work, rather than performing the audit
work themselves. Bentleys’ and Forbes’ involvement on the engagement was
limited to reviewing the unregistered audit firm’s workpapers. The unregistered
audit firm’s personnel had no training or experience in conducting audits that
complied with PCAOB standards. Despite these factors, Bentleys and Forbes
issued and signed an unqualified audit report on Alloy’s 2006 financial
statements. For further details, see PCAOB disciplinary proceedings in Release
No. 105-2011-007.
Robert Forbes was the audit partner in charge of the Alloy Steel engagement,
and he made several critical mistakes that adversely affected audit quality.
a. What is the objective of external auditing, and how did Forbes’ and
Bentley’s actions fail to achieve that objective?
b. Why did Alloy Steel require an independent audit on its financial
statements?
c. Which parties are likely users of Alloy Steel’s financial statements? How
might they have been adversely affected by Forbes’ actions?
d. In most situations, we would worry about fraud in terms of the client,
not the audit firm. In this case, Robert Forbes essentially committed
fraud in that he signed the audit report knowing that he did not do the
work required of him. What skills and knowledge were required to do a
quality audit of Alloy Steel’s financials statements? How did the
individuals who actually performed the audit work on the Alloy Steel
engagement fail in this regard?

e. Explain how the facts in this case relate to each of the drivers of audit
quality identified in Exhibit 1.5. If a particular driver is not applicable to
this case, state why.
f. Should Bentleys and Forbes have agreed to conduct this audit in the
first place?

MEETING 2: THE BUILDING BLOCKS OF AUDITING: “THE AUDIT OPINION
FORMULATION PROCESS”
Literature:
Chapter 1, p.6-7.
Chapter 5
In the textbook, the structured process used by auditors to accomplish their

objectives is called the audit opinion formulation process which contains several
phases. To help auditors making quality judgments and decisions throughout this
process, guidance is provided by professional standards to properly plan,
perform, document, and supervise audits. The audit is designed around
management’s financial statement assertions. In assessing management’s
assertions, the auditor obtains and evaluates evidence through performing audit
procedures contained in the audit program. The risk of misstatements plays a
key role in audit planning.
Task 2a:
Task 2b:
Management assertions reflect the start of the audit process and provide the
basis for the auditor’s examination. For each of the following situations, state the
management assertion that is most likely violated.
a. The purchase of an office building for corporate headquarters is placed in

the land account.
b. A clerk drops a box of mail full of incoming sales transactions and does not
find all of them.
c. Management fails to make an allowance for doubtful accounts in its
period-ending adjusting entries.
d. A company includes some art on loan from a museum in its furniture and
fixtures account.

Task 2c (Textbook, p. 220):
Two “Why it Matters” features in the chapter highlight audit deficiencies related
to tests of controls and substantive procedures that were noted in PCAOB
inspection reports. See “The Need for Performing Tests of Controls and
Considering the Results’ (page 199) and ‘Not Performing Sufficient Appropriate
Substantive Audit Procedures Leads to Low Audit Quality’ (page 203). Obtain a
recent PCAOB inspection report of one of the Big 4 firms. Select several audit
deficiencies identified in the report and determine which phase of the audit
opinion formulation process the deficiency relates to. Discuss how the
fundamental principle of professional skepticism might have been helpful in
avoiding such deficiencies.

MEETING 3: CLIENT ACCEPTANCE AND CONTINUANCE DECISIONS
Literature:
Chapter 1, p. 35-40.
Hsieh, Y., and C. Lin (2016). Audit firms’ client acceptance decisions: Does
partner-level industry expertise matter? Auditing: A Journal of Practice and
Theory 35 (2): 9-120.
CASE 1
Client acceptance and continuance decisions are the first major phase in
conducting a quality audit, and are part of the audit firm portfolio management.
Hence, high quality audit firms will not accept to perform the financial statement
audit of any organization that approaches them, and will carefully consider
different types of risk when they make client acceptance and continuance
decisions. Once the audit firm has decided to accept a client, an engagement
letter is prepared.
Task 3a:
Task 3b (Textbook p. 55):
Locate and read the article listed below.
Hsieh, Y., and Lin, C. (2016). Audit firms’ client acceptance decisions: Does
partner-level industry expertise matter? Auditing: a journal of Practice and
Theory 35 (2): 9-120.
a. What is the purpose of the study?
b. Describe the design/method/approach used to conduct the study.
c. What are the primary findings of the study?

MEETING 4: THE AUDITOR’S RESPONSIBILITIES REGARDING FRAUD
Literature:
Chapter 2 p. 57 - 76, 81 - 84
Dennis, S.A., and K.M. Johnstone (2016). A field survey of contemporary
Humans may have different reasons to engage in fraud but typically there are
three factors present, which is called “the fraud triangle”. Auditors have clear
responsibilities regarding certain types of misstatements resulting from fraud
during the financial statement audit. However, is it really the task of the auditor
to prevent and detect fraud? What about other parties involved in the financial
reporting process such as management, internal auditors, the audit committee
and regulators? In the history of fraud cases, Enron was a famous example
where many aspects of corporate governance failed and it triggered an equally
famous and unprecedented regulatory response in the form of the Sarbanes-
Oxley Act in the US followed by similar regulations internationally.
Task 4a:
Each of the following scenarios is based on facts in an actual fraud. Categorize

each scenario as primarily indicating: (1) an incentive to commit fraud, (2) an
opportunity to commit fraud, or (3) a rationalization to commit fraud. State your
reasoning for each categorization.
a. There was intense pressure to keep the corporation’s stock from declining
further. This pressure came from investors, analysts, and the CEO, whose
financial well being was significantly dependent on the corporation’s stock
price.
b. Top management of the company closely guards internal financial

information, to the extent that even some employees on a need-to-know
basis are denied full access.

c. In an effort to reduce certain accrued expenses to meet budget targets,
the CFO directs the general accounting department to relocate a division’s
expenses by a significant amount. The general accounting department
refuses to acquiesce to the request, but the journal entry is made through
the corporate office. An accountant in the general accounting department
is uncomfortable with the journal entries required to reallocate divisional
expenses. He brings his concerns to the CFO, who assures him that
everything will be fine and that the entries are necessary. The accountant
considers resigning, but he does not have another job lined up and is
worried about supporting his family. Therefore, he never voices his
concerns to either the internal or external auditors.
Task 4c (Textbook, p.96):
Obtain a copy of the PCAOB’s report titled ‘Observations on Auditors’

Implementation of PCAOB Standards Relating to Auditors’ Responsibilities with
respect to Fraud’. You can use any search engine or go to
https://pcaobus.org/Inspections/Documents/2007_01-22_Release_2007-001.pdf
The PCAOB’s report summarizes findings from inspections of audit engagements

as they relate to the performance of fraud detection audit procedures. The
PCAOB report comments on auditor deficiencies in each of the following six
areas:
a. Auditor’s overall approach to the detection of fraud
b. Brainstorming sessions
c. Auditors’ responses to fraud risk factors
d. Financial Statement misstatements
e. Risk of management override of controls
f. Other areas to improve fraud detection
Summarize the PCAOB’s concerns with respect to problems its inspection teams
have noted in auditors’ performance in each of the areas listed.
Task 4d (Textbook, p.97):

Locate and read the article read listed below.

Dennis, S.A., and K.M. Johnstone. (2016). A field survey of contemporary

MEETING 5: PLANNING THE AUDIT
Literature:
Chapter 7
CASE 2
During the planning of the audit, the auditor identifies and assesses the risks of a
material misstatement, and then determines the audit procedures to
appropriately respond to the identified risks relevant to the audit. Risk-based
auditing requires a good understanding of the audit risk, inherent risk, control
risk, and detection risk, which are included in the audit risk model.
Task 5a:

If a company’s control risk is initially assessed as low, the auditor needs to
gather evidence on the operating effectiveness of the controls. For each of the
following control activities complete the following two tasks:
a. Describe the test of control that the auditor would use to determine the
operating effectiveness of the control.
b. Briefly describe how substantive tests of account balances should be

modified if the auditor finds that the control is not working as planned. In
doing so, indicate: (a) what misstatement could occur because of the
control deficiency, and (b) how the auditor’s substantive tests should be
expanded to test for the potential misstatement.
Control activities:
1. Credit approval by the credit department is required before sales-persons

accept any order of more than $ 15,000 and for all customers who have a
past-due balance higher than $ 22,000.

2. All merchandise receipts are recorded on prenumbered receiving slips. The
controller’s department periodically accounts for the numerical sequence of
the receiving slips.
3. Payments for goods received are made only by the accounts payable
department on receipt of a vendor invoice, which is then matched for
prices and quantities with approved purchase orders and receiving slips.
Panzero Bread is a major retailer of specialty sandwich items and baked goods.
The following information represents the company’s financial position as of
December 31, 2018, and December 31, 2017.
December 31, 2018 December 31, 2017

(unaudited)
(audited)
Total assets $ 698,752,000 $ 542,609,000
Accounts receivable $ 25,152,000 $ 19,041,000
Total sales $ 1,066,691,000 $ 828,971,000
Cost of goods sold $ 842,255,000 $ 628,534,000
Net income $ 57,456,000 $ 58,849,000
Earnings per share $ 1.81 $ 1.88
The auditors have detected misstatement in the accounts receivable in the past.
The auditor knows that management is under considerable pressure to meet
analyst expectations for earnings per share. Reducing earnings per share by
even $ 0.01 would cause the trend in earnings to become even more negative
than the unaudited financial numbers already reveal, and it would cause the
company to miss analysts forecasts for earnings per share by just a small
amount.

a. Use the three common benchmarks for making materiality judgments (net
income, total assets, and net sales) to establish planning materiality for the
financial statement overall.
b. What difficulties does the auditor face when the alternative bench-marks yield
differing conclusions about planning materiality? What qualitative factors
should the auditor consider in making the materiality judgment for this
company?
c. Select the benchmark from those calculated in part (a) to use for planning
materiality and provide your reasons.
Task 5d (Textbook, p.318):
The following information show the past two annual periods of results for a
fictional company, Jones Manufacturing, and a comparison with industry data for
the same period.
Prior Prior % Current Current % Industry

period of sales period % of change average
(000 (000 sales as a %
omitted) omitted) of sales
Sales $ 10,000 100 $ 11,000 100 10 100
Inventory $ 2,000 20 $ 3,250 29.5 57.5 22.5
Cost of goods $ 6,000 60 $ 6,050 55 0.83 59.5

sold
Accounts payable $ 1,200 12 $ 1,980 18 65 14.5
Sales $ 500 5 $ 550 5 10 NA

commissions
Inventory 6.3 -- 4.2 -- (33) 5.85

turnover
Average number 39 -- 48 -- 23 36
of days to collect

Employee 5% -- 8% -- 60 4
turnover
Return on 14% -- 14.3% -- 13.8

investment
Debt/Equity 35% -- 60% -- 71 30
a. Assume that the auditor expects that the client’s performance in the current
year will be similar to its performance in the prior year. From the preceding
data, identify potential risk areas and explain why they represent potential
risk. Briefly indicate how the risk analysis should affect the planning of the
audit engagement.
b. Identify any of the above data that should cause the auditor to increase the
level of professional skepticism used on the audit.

MEETING 6: AUDIT EVIDENCE
Literature
Chapter 6
In-class use of Mindbridge: Data Analytics
An auditor uses audit procedures to obtain evidence in order to reduce the risk
that a material misstatement exists in one or more assertions made by the
client’s management. Auditing standards require the auditor to gather sufficient
and appropriate evidence to provide a reasonable basis for an opinion regarding
the financial statements. For example, testing for the assertion existence
requires a different approach than testing for the assertion completeness. Other
examples are that analytical procedures cannot always be used as a substantive
audit procedure, and that testing accounts based on management estimates
requires a specific auditor understanding.
Task 6a:
Task 6b (Textbook p.263):
Following is a list of audit procedures performed. For each procedure, state the
type of audit procedure and identify the primary assertion(s) being tested.
a. Calculate the ratio of cost of goods sold to sales as a test of overall
reasonableness of the balance for cost of goods sold.
b. Trace a sales transaction from the origination of an incoming sales order to

the shipment if merchandise to an invoice and to the proper recording in the
sales journal.
c. Test the accuracy of the sales invoice by multiplying the number of items
shipped by the authorized price list to determine extended cost. Foot the total
and reconcile it with the total invoiced.
d. Perform inspection and independently count a sample of the client’s

marketable securities held in a safe deposit box.

e. Tour the plant to determine that a major equipment acquisition was received
and is in working condition.
Task 6c (Textbook p.264):
Assume that an automotive company discloses the following risk factors, listed as
(1) through (3), that might affect the financial statements.
1. Continued decline in market share, and a market shift (or an increase in or
acceleration of market shift) away from sales of trucks or sport utility
vehicles, or from sales of other more profitable vehicles in the U.S.
2. Substantial pension and post-retirement health care and life insurance

liabilities impairing our liquidity or financial condition.
3. The discovery of defects in vehicles resulting in delays in new model launches,

recall campaigns, or increased warranty costs.
For each risk factor, identify a related account balance that the risk might affect.
For each account balance identified, indicate how the risk will affect the audit
evidence you will gather. Identify the specific assertion of primary concern to the
auditor.
Task 6d - MindBridge:
MindBridge is an online auditing platform powered by Artificial Intelligence (AI).

It uses AI to analyze, explore and visualize financial data to help uncover errors.
In order to get a brief understanding of the MindBridge platform, please watch

the following video: https://youtu.be/kuD8WJ2EuqQ
Prior to the tutorial, please set-up your account. Your tutor will send out invites
via e-mail. Please follow the activation link provided in the email. In class, your
tutor will then give you a short tutorial on how to use MindBridge.

MEETING 7: GUEST LECTURE
Guest lecture: Auditor Judgment. 09 May. 13.30-15.30, r TS53 C-1.09
Prof. Jean Bedard (Bentley University, USA).

https://www.bentley.edu/newsroom/latest-headlines/american-accounting-
association-names-bentley-university-accounting

MEETING 8: AUDIT SAMPLING AND DATA ANALYTICS TOOLS
Literature:
Chapter 8
Cao, M., R. Chychyla, and T. Stewart. (2015). Big data analytics in financial
statement audits. Accounting Horizons 29(2): 423-429.
Please note that there are some typos in the calculations presented in
the chapter:
- p. 366 in the calculation for the projected misstatement in the lower

stratum it should be: $900/$310,000 x 2,500,000 = $ 7,258
- p. 375 in the footnote of Exhibit 8.11 it should say that the confidence
factors come from the 10% column
- p. 375 Exhibit 8.12 shows you how to calculate the incremental
allowance for the sampling risk. In the text relating to this calculation
(paragraph above Exhibit 8.11), they use the confidence factors related
to a 15% risk of incorrect acceptance, while the calculation uses 10%.
The correct sentence should be: To calculate the incremental changes,
subtract the value related to overstatement 0 (in our example, 2.31)
from the value related to overstatement 1 (in our example, 3.89), and
so on, ….
- p. 375 Exhibit 8.12 last line should be: 679 - 440 = 239
In assessing the validity of management assertions, auditors make use of

specialized tools including sampling techniques (statistical or nonstatistical) and
more recently data analytics tools to analyze client data, and obtain and evaluate
audit evidence. When using sampling, the auditor needs to answer a couple of
questions and there is always a sampling risk. While there can be factual
misstatements, auditors typically also work with projected misstatements,
tolerable misstatements and expected misstatements.

Task 8a:
Task 8b:
Indicate which of the following situations involve audit sampling (statistical or
non-statistical) and why.
a. An auditor is examining loan receivables at a local bank. The population of
loans contains two strata. One stratum is composed of 25 loans that are each
greater than €1 million. The second stratum contains 450 loans that are less
than €1 million. The auditor has decided to test all loans greater than €1
million and 15 loans less than €1 million.
b. Assume the same factors as in (a) except that the auditor decides to apply
analytical procedures to the second stratum of loans.
c. An auditor has haphazardly selected 30 sales invoices to be examined for
proper pricing of the goods purchased by the customer.
d. The prepaid insurance account is made up of four policies that total €45,000.
The auditor has decided that this account is immaterial and decides that no
policies will be examined.
Task 8c (Textbook, p.391):

By using the tables in Exhibit 8.5 and the following combinations of inputs,
calculate the sample size and the number of expected errors in attributes
sampling:
Risk of Tolerable Rate of Expected Sample Size (with

Overreliance Deviaton Population expected Errors in
Deviation Rate Parentheses)
5% 2% 1%
10% 6% 6%

Task 8d:
Assume that you are auditing the inventory of Husky Manufacturing Company for
the year ended December 31, 2018, and you are using MUS. The book value is $
5,416,665.66. The risk of incorrect acceptance is 10% (90% confidence level).
The tolerable misstatement is $ 210,000, and expected misstatement is $
60,000, so the ratio of expected misstatement to tolerable misstatement is 29%.
The ratio of tolerable misstatement to the population book value is 3.9%.
a. Calculate the sample size and the sampling interval.
b. Calculate the total estimated misstatement assuming the following

misstatements were found in the sample.
Book Value Audit Value
$ 27,963.45 $ 23,963.45
$ 18,795.22 $ 17,345.22
$ 223,786.54 $ 217,786.54
c. What conclusion do you reach based upon your calculation?
Task 8e: Mindbridge

Solve the mini-case provided under “Course Material” on the Student Portal.
Task 8f:
Locate and read the article listed below.
Cao, M., R. Chychyla, and T. Stewart. (2015). Big data analytics in

financial statement audits. Accounting Horizons 29(2): 423-429.

MEETING 9: WORKSHOP
The workshop is organized in collaboration with PwC Netherlands & Luxembourg.
16 May, 13.00 to 17.30 hrs, kick-off room TS53, H0.06.

MEETING 10: GUEST LECTURE
Guest lecture: Fraud, risk assessment and audit risk. 20 May. 11.00 hrs. Room:
TS53 C-1.05
Guy Parmentier (Certified Belgian Auditor)

http://www.parmrev.be/

MEETING 11: LECTURE
Overview lecture, 22 May. 11.00 hrs. Room: TS53 C-1.05.

Prof. Ann Vanstraelen
https://www.maastrichtuniversity.nl/a.vanstraelen
https://www.maastrichtuniversity.nl/a.vanstraelen/research

MEETING 12: AUDITING THE REVENUE CYCLE
Literature:
Chapter 9
CASE 3
The revenue cycle is typically considered as high risk because the accounts
related to this cycle are highly susceptible to misstatements, either intentional or
unintentional. One of the primary audit deficiencies identified by public oversight
bodies relate to revenue recognition.
Task 12a:
The following are routine procedures for the audit of revenue processes. For each
procedure, state whether it is a test of controls or a substantive procedure, state
which management assertion the procedure is designed to fulfill and state the
type of evidence used in the procedure.
a. Review minutes from meetings of the board of directors for evidence that
accounts receivable have been factored.
b. Gather a sample of sales invoices and ensure that a copy of the sales order
and the shipping document has been attached.
c. Obtain an accounts receivable aging schedule and assess the likelihood of
collection.
Task 12b:
Your client is Grange’s Appliance Company, an appliance wholesaler. Select the
most appropriate audit procedure for the following assertions (see next page) on
the revenue process.

Assertion Audit Procedure
a. Ensure that the entity has legal

title to accounts receivable
(rights and obligations).
b. Determine that recorded

accounts receivable include all
amounts owed to the client
(completeness).
c. Verify that all accounts

receivable are recorded in the
correct period (cut-off).
d. Ensure that the allowance for

uncollectable accounts is
properly stated (valuation and
allocation).
e. Confirm that recorded accounts

receivable are valid (existence).

During a discussion, one auditor noted that her approach to testing sales
transactions was to select a random sample of recorded sales and trace back
through the system to supporting documents, noting that all items billed were
shipped and were invoiced at correct prices. She stated that she then had high
confidence about the correctness of the sales account, and, therefore, having
performed a dual-purpose test, the remaining work on sales (assuming the
procedures also evidenced the working of control procedures) could be limited. A
second auditor disagreed. Her approach was to select evidence of shipments,
such as prenumbered shipping documents, and then trace forward through the
system to the actual invoice, noting the existence of control procedures and the
correctness of the invoice processing. If no exceptions were noted, however, she
agreed with the first auditor that the remaining audit work on the sales account
could be limited.
a. Which auditor is right; or are both right? Explain.

b. What assertion is the second auditor testing?
c. What is a dual-purpose test? Explain whether the tests performed by both

of the auditors are dual-purpose tests.

MEETING 13: COMPLETING A QUALITY AUDIT AND AUDIT REPORTING
Literature:
Chapter 14
Chapter 15
Prior to completing the audit, auditors perform a wide range of additional tasks
before the auditor decides which type of audit opinion will be issued.
Task 13a:
Task 13b:
Frieda Van Roy, an independent auditor, is auditing the financial statements of
George Henry Lee Corporation for the year ended 31 December 2017. Frieda
plans to sign the auditor’s report on about 10 March 2018 but is concerned about
events and transactions occurring after 31 December 2017 that may affect the
2017 financial statements.
(a) What general types of subsequent events require Frieda’s consideration
and evaluation?
(b) What audit procedures should Frieda consider performing to gather
evidence concerning subsequent events?
Task 13c:
1. While management assertions reflect the start of the audit process, audit
reports reflect the end. Indeed, auditors’ responsibilities are to examine
management assertions and to communicate the results of their examinations.
Indicate for each of the examples below what type of audit opinion is most
appropriate.
a. Although the audit of Den Bossen N.V. went without incident and you are
prepared to issue an unqualified opinion, you discover after the engagement
that one of the partners in your firm (who did not have any direct ties to the
engagement) holds a material investment in their common stock.

b. This is the first year you have audited Reukloos B.V.'s financial statements.
The previous auditors have gone out of business and their level of
cooperation with your auditors is negligible. A few of your conclusions rest
on the old auditors' work.
c. Due to a conflict of interest discovered between another audit firm and
Planet Utilities B.V., your firm was brought in to audit their financial
statements well after the end of their fiscal year. The old firm is cooperating
fully with your auditors and you are prepared to issue an unqualified opinion
except that you could not physically count their ending inventory. You have,
however, satisfied yourself through other audit procedures that the
inventory balance is fairly presented.
2. To make the audit report more informative to investors and other

stakeholders, the international auditing standards have recently been revised
(and are effective as of 2016) to allow the auditor to include more information on
so-called “Key Audit Matters” in the audit report. Search for the latest audit
report on the financial statements of a Dutch listed company and discuss 3 key
audit matters included in the audit report.

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COURSE BOOK

Academic Year: 2018-2019

School of Business and Economics

ã 2018 Maastricht University School of Business and Economics

Auditing - EBC2058 2018 - 2019 Page 2 of 40

Ann Vanstraelen: a.vanstraelen@maastrichtuniversity.nl

Lena Pieper: l.pieper@maastrichtuniversity.nl

Auditing - EBC2058 2018 - 2019 Page 3 of 40

Relationships with Other Courses

Auditing - EBC2058 2018 - 2019 Page 4 of 40

Website containing course description:

Instruction language: English

Auditing - EBC2058 2018 - 2019 Page 5 of 40

BSc Learning goals How are they achieved in

Academic attitude Our graduates have Students are able to

Global citizenship Our graduates are aware This course addresses

Interpersonal Our graduates are able Students of diverse

Auditing - EBC2058 2018 - 2019 Page 6 of 40

Auditing - EBC2058 2018 - 2019 Page 7 of 40

Johnstone, Gramling, and Rittenberg. 2019. Auditing: A Risk-Based

Academic articles (mandatory)

Auditing - EBC2058 2018 - 2019 Page 8 of 40

Auditing - EBC2058 2018 - 2019 Page 9 of 40

Auditing - EBC2058 2018 - 2019 Page 10 of 40

In order to protect the reputation of the degrees that you – as students –

Fraud, including plagiarism, is understood as a student’s act or failure to act that

More information can be found on the Student Portal.

Auditing - EBC2058 2018 - 2019 Page 11 of 40

Auditing - EBC2058 2018 - 2019 Page 12 of 40

MEETING 1 (15/4): Introduction to auditing and why quality auditing

MEETING 2 (18/4): The building blocks of auditing: “The audit opinion

MEETING 3 (25/4): Client acceptance and continuance decisions + CASE 1

MEETING 4 (29/4): The auditor’s responsibilities regarding fraud

MEETING 5 (2/5): Planning the audit + CASE 2

MEETING 6 (6/5): Audit evidence + In-Class Use of Mindbridge

MEETING 7 (9/5): Guest lecture: Auditor Judgment. Prof. Jean Bedard

MEETING 8 (13/5): Audit sampling and data analytics tools

MEETING 9 (16/5): Workshop: 13.00 - 16.30, PwC

MEETING 10 (20/5): Guest Lecture: Guy Parmentier

MEETING 11 (22/5): Lecture Ann Vanstraelen

MEETING 12 (23/5): Auditing the revenue cycle + CASE 3

MEETING 13 (27/5): Completing a quality audit and audit reporting

Auditing - EBC2058 2018 - 2019 Page 13 of 40

MEETING 1: INTRODUCTION TO AUDITING AND WHY QUALITY AUDITING

Task 1b (Textbook, p.53):

Alloy Steel International is an American company headquartered in Malaga,

Auditing - EBC2058 2018 - 2019 Page 15 of 40

Auditing - EBC2058 2018 - 2019 Page 16 of 40

In the textbook, the structured process used by auditors to accomplish their

a. The purchase of an office building for corporate headquarters is placed in

Auditing - EBC2058 2018 - 2019 Page 17 of 40

Auditing - EBC2058 2018 - 2019 Page 18 of 40

Task 3b (Textbook p. 55):

Locate and read the article listed below.

b. Describe the design/method/approach used to conduct the study.

c. What are the primary findings of the study?

Auditing - EBC2058 2018 - 2019 Page 19 of 40

Task 4b (Textbook, p.87):

Each of the following scenarios is based on facts in an actual fraud. Categorize

b. Top management of the company closely guards internal financial