Acct 546 – Auditing and Assurance Services

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My expectations for your performance on exams are as follows. Exams will include brief essay questions, most of which will require recall of material, and longer essay questions, most of which will require analysis of presented material using your acquired knowledge. For questions requiring recall, the expectation is that you will recall the material accurately, precisely, and completely. For questions requiring analysis, the expectation is that you will appropriately apply the (correct) knowledge to the question so as to arrive at an accurate, precise, and complete analysis. Preparing for exams is facilitated by keeping up with the work in class, and by practicing with the old exams that I will post on Blackboard. Also, prior to each exam, I will provide you with an outline of the materials we have covered. These outlines also will contain information about additional office hours that I hold prior to exams.

The first midterm, which will be held on Tuesday, September 22 (in class), will cover the material presented from August 25 through September 17. The second midterm, which will be held on Thursday, October 29 (in class), will cover the material presented from September 24 through October 27. The final exam, which is scheduled for Thursday, December 10, 11:00 – 1:00, will cover the material presented from November 3 through December 3. In other words, the final exam will not be cumulative.
My expectations for your performance on cases are that you will exert a great deal of, and thoughtful, effort, so that there is a high probability of arriving at accurate, complete, and precise responses. I also expect that your written responses to cases will appropriately document your effort and thought processes. Whether you complete your cases individually or in a group is YOUR CHOICE. Either choice is fine as long as groups contain no more than 5 members. You may work with students in the other section of 546; however, if you choose to do this, the case will be due at the beginning of the 9:30 class irrespective of how many 11:00 section members are in the group. Also, if you choose to work in a group, everyone in the group will receive the same grade on the case. Perhaps most important, if you choose to work in a group, I expect that you will resolve any group-related issues.
Finally, with regard to class participation, I expect that you will be prepared each day to provide quality contributions to class. “Quality” contributions reflect many factors. For example, thoughtful comments and questions that reflect effort are of higher quality than are continual comments and questions that do not reflect effort. I will grade participation each day on a scale of 0-6, and there will be 25 days of graded participation (all class periods except the first and the day of the speech by Tim Griffy). Thus, you do not have to have “perfect” participation every day to obtain the maximum participation points. However, you may not obtain more than 100 points for class participation.
It is to your advantage to attend class every day, be well prepared, and act professionally (including being on time). This is true for at least four reasons. First, and most significant, the material we cover in class is what is considered most important for the course and, therefore, will be the material tested on exams. Second, class starts promptly at 9:30 or 11:00, not 9:30-ish or 11:00-ish. Third, participation is part of your grade. Obviously, you cannot participate if you are not there and it may be more difficult to participate appropriately if you are late and miss the first part of what is discussed that day. Fourth, it is in your best interest to act professionally because I reserve the right to decrease your final letter grade by 1/3 for continued unprofessional conduct. Unprofessional conduct includes, but is not limited to, coming to class late; interrupting class with talking, texting, emailing (except when asked to engage in these behaviors as part of class); engaging in activities related to other classes; and so forth. If I have a concern about unprofessional conduct, I will talk with you individually first. If the conduct continues, I will lower your grade. So, for example, if your total points from exams, cases, and participation would earn you a B-, I reserve the right to lower your grade to a C+.
Policy for Making up Exams
It is to your advantage to take the exams at the time they are given. With regard to exams, the policy of the Leventhal School of Accounting is that you should not miss exams unless there is a very serious emergency AND you can properly document this emergency. Also, to the extent possible, you must inform me of the emergency prior to the exam (I understand that this is not always possible). If you miss an exam for something other than a serious emergency and/or you cannot provide documentation, you will receive a grade of -0- on the exam. If there is a serious emergency and you can provide proper documentation and, where possible, notify me of the situation prior to the exam, I will not give a makeup exam. Instead, I will determine your grade from the remaining course requirements. That is, I will “gross up” the points from the other components of your grade so that it is as if you are operating on a 1000-point scale. This policy works to your advantage (which is why I have implemented it) for two reasons. First, it is virtually impossible to create makeup exams that are of the same level of difficulty as the original exam; thus, I tend to err on the side of more difficult when creating the makeup one. Second, if you have experienced an emergency, your performance on an exam shortly thereafter likely would be compromised.
Finally, you must take the final exam at the scheduled time unless an incomplete contract has previously been approved according to the Leventhal School of Accounting standards (or, of course, unless there is an emergency, as above). Please see the LSOA standards attached to the end of the syllabus for further information.
Policy for Regrading Cases and Exams
All of your cases and exams will be returned to you, along with a solution (except that no solution will be provided for the final exam). The solution sheet will show the point breakdown used for grading the case or exam, along with the correct answers. If you believe that your case or exam has been graded in error, I am happy to regrade your paper if you do the following. For a simple mistake, such as an addition error, please just show me the error. For a more complicated issue such as a debate about an essay answer, please put your concern in writing. You must explain why you believe your answer is correct, where “correct” is defined by the solution sheet. NOTE: For either type of issue, you must contact me within 10 days of receiving the case or exam. If I do not receive a request for regarding within 10 days of your receipt of the case or exam, the grade will be considered final. Additionally, I reserve the right to regrade the entire case or exam.


Retention of Graded Coursework
I return all cases and exams to you after they are graded. If you are not present on the day a case or exam is returned, I will continue to bring it to class for one week after the initial return attempt. After that, I will maintain items in my office for you to pick up during office hours. Any items not picked up will be shredded at the end of the 2015 spring semester.
Technology Policy
Laptop and Internet usage is not permitted during academic or professional sessions, except when required by the instructor. The same is true for the use of other personal communication devices, such as cell phones. ANY e-devices (cell phones, laptops, Ipods, tablets, etc.) must be completely turned off during class time unless the professor instructs you to the contrary. Videotaping faculty lectures is not permitted due to copyright infringement regulations. Audiotaping may be permitted if approved by me. Use of any recorded or distributed material is reserved exclusively for the USC students registered in this class.
Support Systems
Students whose primary language is not English should check with the American Language Institute, which sponsors courses and workshops specifically for international graduate students. 
The Office of Disability Services and Programs. provides certification for students with disabilities and helps arrange the relevant accommodations. 
If an officially declared emergency makes travel to campus infeasible, USC Emergency Information will provide safety and other updates, including ways in which instruction will be continued by means of blackboard, teleconferencing, and other technology.
Discrimination, sexual assault, and harassment are not tolerated by the university.  You are encouraged to report any incidents to the Office of Equity and Diversity or to the Department of Public Safety,  This is important for the safety of the whole USC community.  Another member of the university community – such as a friend, classmate, advisor, or faculty member – can help initiate the report or can initiate the report on behalf of another person.  The Center for Women and Men provides 24/7 confidential support, and the sexual assault resource center webpage describes reporting options and other resources.


Statement on Academic Integrity

USC seeks to maintain an optimal learning environment. General principles of academic honesty include the concept of respect for the intellectual property of others, the expectation that individual work will be submitted unless otherwise allowed by an instructor, and the obligations both to protect one’s own academic work from misuse by others as well as to avoid using another’s work as one’s own. All students are expected to understand and abide by these principles. SCampus, the Student Guidebook, ( or contains the University Student Conduct Code (see University Governance, Section 11.00), while the recommended sanctions are located in Appendix A.
Students will be referred to the Office of Student Judicial Affairs and Community Standards for further review, should there be any suspicion of academic dishonesty. The Review process can be found at: . Failure to adhere to the academic conduct standards set forth by these guidelines and our programs will not be tolerated by the USC Marshall community and can lead to dismissal.
Students enrolled in any class offered by the Leventhal School of Accounting are expected to uphold and adhere to the standards of academic integrity established by the Leventhal School of Accounting Student Honor Code. Students are responsible for obtaining, reading, and understanding the Honor Code System handbook. Students who are found to have violated the Code will be subject to disciplinary action as described in the handbook. For more specific information, please refer to the Student Honor Code System handbook, available from the receptionist in ACC 101.
Plagiarism – presenting someone else’s ideas as your own, either verbatim or recast in your own words – is a serious academic offense with serious consequences.  Please familiarize yourself with the discussion of plagiarism in SCampus in Section 11 Behavior Violating University Standards  Other forms of academic dishonesty are equally unacceptable.  See additional information in SCampus and university policies on scientific misconduct,

Class Notes and Recording Policy

Notes or recordings made by students based on a university class or lecture may only be made for purposes of individual or group study, or for other non-commercial purposes that reasonably arise from the student’s membership in the class or attendance at the university. This restriction also applies to any information distributed, disseminated or in any way displayed for use in relationship to the class, whether obtained in class, via email or otherwise on the Internet, or via any other medium. Actions in violation of this policy constitute a violation of the Student Conduct Code, and may subject an individual or entity to university discipline and/or legal proceedings.

No recording and copyright noticeNo student may record any lecture, class discussion or meeting with me without my prior express written permission.  The word “record” or the act of recording includes, but is not limited to, any and all means by which sound or visual images can be stored, duplicated or retransmitted whether by an electro-mechanical, analog, digital, wire, electronic or other device or any other means of signal encoding. I reserve all rights, including copyright, to my lectures, course syllabi and related materials, including summaries, PowerPoints, prior exams, answer keys, and all supplementary course materials available to the students enrolled in my class whether posted on Blackboard or otherwise.  They may not be reproduced, distributed, copied, or disseminated in any media or in any form, including but not limited to all course note-sharing websites.  Exceptions are made for students who have made prior arrangements with DSP and me.  

USC Emergencies: 213-740-4321

USC Public Safety—Non-Emergencies: 213-740-6000

USC Emergency Information Line 740-9233

USC Information Line 740-2311

KUSC Radio 91.5

Course Calendar (REVISED AS OF 9/16/15)
Key Dates

Thurs., 9/24 – Midterm 1 (in class)

Friday, 10/9 – Talk by Carson Block, Muddy Waters (2:30 PM)

Monday, 10/12 – Case 1 due (by 5:00)

Thurs., 10/29 – Case 2 due (before class)

Thurs., 10/29 – Talk by Clark Hudgins, (in class)

Tues., 11/3 – Midterm 2 (in class)

Thurs., 11/19 – Case 3 due (before class)

Friday, 11/20 – Talk by Tim Griffy, EY (10:00 AM)

Tues., 12/1 – Case 4 due (before class)

Thurs., 12/10 – Final Exam (location TBD)
Key to reading assignment abbreviations:
JGR = Johnstone, Gramling, and Rittenberg, Auditing: A Risk-Based Approach … (10th ed.)

BBGP = Beasley, Buckless, Gramling, and Prawitt, Auditing Cases… (6th ed.)





Reading Assignments to do Before Class

Other Assignments Due





Introduction to assurance services




The landscape of financial statement auditing

JGR, Ch. 1 – 1-14, 21-23
Bonner, 2014

Rapoport, 2015




Economic and societal (investor protection) roles of auditing

JGR, Ch. 2 – 56-65
Ernst & Young, 2012

Zeff, 2003 (just skim!)




The audit verification (and communication) processes and their oversight

JGR, Ch. 1 – 14-17, 21-23; Ch. 4 – 132-142;

Ch. 5 – 180-185

AU 110, 150, 161
CAQ, 2012

Cullinan, et al., 2013

For your later info.:

AS 7

QC 20, 30, 40

Lindberg and Seifert, 2011

Spend a few minutes perusing the PCAOB website – (this is also where you will find the AU readings to the left)
JGR, Prob. 5-51 – answer and be prepared to discuss





Reading Assignments to do Before Class

Other Assignments Due




Independence in the auditor-client relationship

JGR, Ch. 1 – 17-20;

Ch. 4 – 152-163

AU 220

ET 101.01

Arel, et al., 2005

Greenstone, 2013

Hermanson, 2009

Herrick and Barrionuevo,


Kowsman, et al., 2014

PCAOB, 2011

Answer and be prepared to discuss homework problem (which will be handed out in previous class)




Professional judgment and skepticism in audit work

JGR, Ch. 4 – 142-147
AS 13.7

AU 210, 230.07-.09,






Framework for audit engagement; client acceptance; overview of audit risk, materiality, and misstatements

JGR, Ch. 1 – 23-28;

Ch. 5 – 185-187, 192-193; Ch. 7 – 286-288

AS 8.2-.4; 11.1-11.6;


AU 315.01 – 315.10

QC 20.14- 20.16

Eilifsen and Messier,

2015 – excerpts (part 1)

Levitt, 1998

Answer and be prepared to discuss Laventhol & Horwath case (which will be handed out in previous class)




Audit risk model; material misstatements in financial statement assertions

JGR, Ch. 5 – 188-190; Ch. 7 – 288-292, 308-313
AS 8.5-.11; 9; 11.7-.12;

14, Appendix A (comes

after par. 37); 15.11
Eilifsen and Messier,

2015 – excerpts (part 2)

Answer and be prepared to discuss 2 problems on assertions (which will be handed out in previous class)




OFFICE HOURS 9:00 – 2:00





Reading Assignments to do Before Class

Other Assignments Due





OFFICE HOURS – 8:15 – 9:15



Tues., 9/29

General process of risk assessment; assessing inherent risk of errors

JGR, Ch. 5 – 193-194; Ch. 6 – 257-258; Ch. 7 – 282-300
BBGP, Asher Farms (51, 53-54)
AS 8.5-.8; 12.1-.17, .41- .71, Appendix A

Read the Asher Farms case to be ready to do in class (BRING YOUR CASE BOOK TO CLASS)


Thurs., 10/1

Assessing inherent risk of earnings management and fraud; fraud brainstorming

JGR, Ch. 2 – 42-55;

Ch. 9 – 396-403

AS 12.49-.71

AU 316.1-.13, Appendix (skim)

Duncan, 2001

Elkind, 2013

KPMG, Pleasant Pasta case, 2014

Read the Pleasant Pasta case to be ready to do in class (not in casebook; will be handed out in previous class)


Tues., 10/6

Using analytical procedures to assess risks

JGR, Ch. 7 – 304-309
BBGP, Laramie Wire Manufacturing (233-235)
AS 12.46-.48
Boyle, et al., 2015

Hitzig, 2004

Read and do question 1 of the Laramie Wire case* to be ready to discuss (BRING YOUR CASE BOOK TO CLASS)
Also answer and be prepared to discuss the problems in the extra packet (which will be handed out in previous class)
*for question 1, calculate common ratios (e.g., Inventory Turnover) for this year and last year and also calculate changes in account balances from last year to this year (these are standard for IR assessment)





Reading Assignments to do Before Class

Other Assignments Due


Thurs., 10/8

Introduction to controls and integrated audits; assessing quality of entity-wide controls

JGR, Ch. 7 – 302-304
BBGP, Sarbox Scooter (181-182, 189-190)
AS 12.18 -.27, .35-.40

AU 322 (SKIM)

COSO, 2013
For your later info.: Ligthle, Baker, and Castellano, 2015

Read the Sarbox Scooter case to be ready to do in class (BRING YOUR CASE BOOK TO CLASS)


10/9, 2:30 PM

Speaker – Carson Block, Muddy Waters

Mon., 10/12

Case 1 – write up and email to me no later than 5:00 PM




Assertion-level controls; general process of control risk assessment

JGR, Ch. 3 – 94-95, 101-102
Buckless, Picture Factory exercise

AS 12.28-.34, .37-.40

Skim the Picture Factory materials and be prepared to do in class (not in casebook; will be handed out in previous class)


Thurs., 10/15

More on assertion-level controls

JGR, Ch. 3 – 95-98;

Ch. 9 – 392-395, 403-406

Seipp and Lindberg, 2012

JGR, Problems 3-58,

9-44 (items 1-8 only),

9-56 (just the misst. and assertions part, not the substantive tests part) – answer and be prepared to discuss
Also, evaluate the tips in the Seipp article and be prepared to discuss any judgment problems you could see being created by the procedures they recommend





Reading Assignments to do Before Class

Other Assignments Due


Tues., 10/20

Tests of controls, including sampling

JGR, Ch. 6 – 237-241, 252; Ch. 8 – 343-355;

Ch. 9 – 412-414

AS 13.16-.35

AS 15.13-.28

AU 350.01-.14, .31-.43
Hall, et al., 2013

JGR, Problem 9-54 (part b. only) – answer and be prepared to discuss


Thurs., 10/22

Sampling, continued; Internal control reports

JGR, Ch. 3 – 102-111;

Ch. 8 – 355-359;

Ch. 15 – 746-749
BBGP, Sarbox Scooters (Appendix B only, i.e., 191-194)
AS 5.62-.69, .85-.92, Appendix A

Read the Sarbox Scooter pages and be ready to use Appendix B in class (BRING YOUR CASE BOOK TO CLASS)


Tues., 10/27

Basic principles of evidence and documentation

JGR, Ch. 6 – 230-244
AS 15

JGR, Problems 6-48 (items a.-h. only) and 9-56 (for the misstatement/

assertions affected parts, refer to your notes from class 15) – answer and be prepared to discuss


Thurs., 10/29

Basic principles of evidence and documentation, continued; Talk by Clark Hudgins, Senior Vice-President,

JGR, Ch. 6 – 250-255, 257-261
AS 3.1-.13

AU 330 (in preparation for talk), 336

KPMG, 2014

Case 2 – write up and email to me before class starts


Tues., 11/3




Thurs., 11/5

Introduction to substantive tests; Planning and performing substantive analytical procedures

JGR, Ch. 6 – 244-250; Ch. 8 – 308-312
AS 8.9-.11

AS 13.8-.10, .36-.38

AU 329, 350.48





Reading Assignments to do Before Class

Other Assignments Due


Tues., 11/10

Performing substantive analytical procedures; planning and performing tests of details

JGR, Ch. 9 – 421-428; Ch. 10 – 488-496;

Ch. 11 – 552-556

BBGP, Bud’s Big Blue Mfg. (273-274);

Wally’s Billboard & Sign Supply (249-250, 252)

AS 13.39-.46

AU 330, 331

McConnell, et al., 2014
KPMG, Majestic Hotels case, 2012

Read the Majestic Hotels case’s 2 exs. of analytical procedures; be ready to discuss how well the auditors did on these (not in casebook; will be handed out in previous class).
Read the Bud’s pages and Wally’s pages and be ready to use in class (BRING YOUR CASE BOOK TO CLASS)


Thurs., 11/12

Performing tests of details, including sampling

JGR, Ch. 8 – 346, 359-372
Kinney, Jeff’s Designs case, 1996
AS 13.36-.47

AU 350.15-.30

Skim the Jeff’s Designs case to be ready to go over in class (not in casebook; will be handed out in previous class)


Tues., 11/17

Auditing estimates

JGR, Ch. 6 – 253-255; Ch. 9 – 428-429
BBGP, RedPack Beer (301-308)
Ernst & Young, Wildcat Sporting Goods case, 2012
AU 342

Read RedPack Beer and and be ready to do in class (BRING YOUR CASE BOOK TO CLASS)
Read Wildcat case and be ready to go over in class (not in casebook; will be handed out in previous class)


Thurs., 11/19

End-of-year testing; Substantive testing related to fraud

JGR, Ch. 9 – 430-431; Ch. 10 – 496; Ch. 11 - 562
AS 12.49-.58, .65-.69

AS 13.12-.15

Carmichael, 2010

Clikeman, 2013

Morhweis, 2003
For your later reading:

AS 18

AU 317





Reading Assignments to do Before Class

Other Assignments Due



11/20, 12 – 1:30 PM


Talk by Tim Griffy, EY, on resisting client pressures

Case 3 due: Write up and email to me by 5:00 PM


Tues., 11/26

Aggregating results and materiality

JGR, Ch. 14 – 664-668; Ch. 16 – 775-778

Ch. 18 – 958-967

AS 14.10-.26
Kinney, Precision Vision case, 1996

JRG, Problem 16-37 – answer and be prepared to discuss
Read Precision Vision case and be prepared to do in class (not in casebook; will be handed out in previous class)


Thurs., 11/28



Tues., 12/1

Finishing the audit; going-concern judgments; etc.

JGR, Ch. 14—668--670, 677-689
AS 6.1-.11

AU 341
For your later info.:

AS 7, 17

AU 333, 337, 560, 561


Thurs., 12/3

Auditor reports

JGR, Ch. 15
KPMG, 2014
For your later info.:

AS 6

AU 508, 543

JGR, Problem 15-60 – answer and be prepared to discuss

Thurs., 12/10, 11- 1


(location TBD)

Reference List
Class 2
Bonner, S.E., “Notes on Anecdotal and Empirical Evidence,” 2014.
Rapoport, M., “PWC Settles with MF Global Investors,” Wall Street Journal (April 18-19, 2015), p. B2.
Class 3
Ernst & Young, The Sarbanes Oxley Act at 10: Enhancing the Reliability of Financial Reporting and Audit Quality (2012),$FILE/JJ0003.pdf
Zeff, S.A., “How the U.S. Accounting Profession Got Where It Is Today: Part II,” Accounting Horizons (December 2003), 267-286.
Class 4
Center for Audit Quality, “Guide to PCAOB Inspections,” 2012.
Cullinan, C.P., C.E. Earley, and P.B. Roush, “Multiple Auditing Standards and Standard Setting: Implications for Practice and Education,” Current Issues in Auditing (2013), C1-C10.
Lindberg, D.L., and D. L. Seifert, “A Comparison of U.S. Auditing Standards with International Standards on Auditing,” The CPA Journal (April 2011), 17-21.
Class 5
Arel, B., R.G. Brody, and K. Pany, “Audit Firm Rotation and Audit Quality,” The CPA Journal (January 2005), 36-39.
Greenstone, M., “See Red Flags, Hear Red Flags,” The New York Times (December 6, 2013), ??
Hermanson, D.R., “How Consulting Services Could Kill Private-Sector Auditing,” The CPA Journal (January 2009), 6-9.
Herrick, T. and A. Barrionuevo, “Were Auditor and Client Too Close-Knit?” The Wall Street Journal (January 21, 2002), C1.
Kowsman, P., D. Enrich, and M. Patrick, “KPMG Faces Criticism for Espirito Santo Audit Work,” The Wall Street Journal (August 28, 2014), ??
PCAOB, “Auditor Independence and Audit Firm Rotation,” PCAOB Concept Release, 2011.
Class 7
Eilifsen, A., and W.F. Messier, Jr., “Materiality Guidance of the Major Public Accounting Firms,” Auditing: A Journal of Practice & Theory (May 2015), 3-26, selected excerpts.
Levitt, A., Jr., “The Numbers Game,” The CPA Journal (December 1998), 14-18.
Class 8
Eilifsen, A., and W.F. Messier, Jr., “Materiality Guidance of the Major Public Accounting Firms,” Auditing: A Journal of Practice & Theory (May 2015), 3-26, selected excerpts.
Class 11
Duncan, J.R., “Twenty Pressures to Manage Earnings,” The CPA Journal (July 2001), 32-37.
Elkind, P. “The Confessions of Andy Fastow,” Fortune (July 1, 2013).
Class 12
Boyle, D.M., J.F. Boyle, and B.W. Carpenter, “Insights into the SEC’s Accounting Quality Model,” The CPA Journal (May 2015), 16-21.
Hitzig, N.B., “The Hidden Risk in Analytical Procedures: What WorldCom Revealed,” The CPA Journal (February 2004), 32-35.
Class 13
COSO (Committee of Sponsoring Organizations of the Treadway Commission), Internal Control-Integrated Framework, Executive Summary, May 2013.
Lightle, S.S., B. Baker, and J.F. Castellano, “Assessment of Tone at the Top: The Psychology of Control Risk Assessment,” The CPA Journal (June 2015), 50-55.
Class 15
Seipp, E., and D. L. Lindberg, “A Guide to Effective Audit Interviews,” The CPA Journal (April 2012), 26-31.
Class 16
Hall, T.W., A.W. Higson, B.J. Pierce, K.H. Price, and C.J. Skousen, “Haphazard Sampling: Selection Biases and the Estimation Consequences of These Biases,” Current Issues in Auditing (No. 2, 2013), P16-P22.
Class 19
KPMG, “Audit Documentation,” 2014.
Class 22
McConnell, D.K., Jr., C.H. Schweiger, and S.C. McConnell, “The External Confirmation Process,” The CPA Journal (January 2014), 40-43.

Class 25
Carmichael, D.R., “Double-Entry, Nonstandard Entries, and Fraud,” The CPA Journal (October 2010), 62-65.
Clikeman, P.M., Introduction and Chapter 1, Called to Account: Financial Frauds that Shaped the Accounting Profession. New York, NY: Routledge, 2013.
Mohrweis, L.C., “Lessons from the Baptist Foundation Fraud,” The CPA Journal (July 2003), 50-51.
Class 30
KPMG (UK), Audit Committees’ and Auditors’ Reports: A Survey of December Year-Ends under the New Reporting, May 2014.

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