The business environment in both Hong Kong and globally is characterised by rapid changes in terms of E-commerce, information technology and the vast expansion of commerce and technology. These changes and the volatile nature of business evidenced by the recent Asian financial crisis have created unprecedented challenges to the accounting profession. Some of these challenges include a need to improve financial reporting and audit quality, and generally contribute to better corporate governance. The spate of corporate collapses such as Enron and Worldcom in the United States in the 2000s and the role of auditors in these financial scandals also reinforced the need for corporate governance reforms including higher quality auditing. This book is, in part, a response to these challenges. It provides an up-to-date exposition of auditing, including issues related to auditor quality and IT auditing. These and other auditing issues based on Hong Kong auditing standards, law, practice and experience are extensively discussed in this book.

Integrating economic theories, concepts and practice of auditing, this book is geared towards the needs of accounting students and practitioners not only in Hong Kong, but also in countries that have similar auditing standards such as Singapore and Malaysia.

A major feature of this book is that it boldly draws on economic theories (agency theory, contracting theory, economics of ethical compliance behaviour, audit product differentiation and corporate governance, to name a few) to explain aspects of auditing. The book also provides updated materials on the professional standards in auditing (issued by the Hong Kong Institute of Certified Public Accountants, updated June 2014), the auditor’s legal duty and liability (e.g. Companies Ordinance [Chapter 622] effective in 2014), statistical audit sampling and IT auditing. In this new edition, a new section — Auditing in Focus — has been added in each chapter to discuss the new development of the profession in various dimensions, and explain in laymen terms some research findings that might be useful for practitioners.

Organisation of Contents

Chapters 1 and 2 provide an overview of the development and nature of auditing. Chapter 2 also includes a discussion of the economic theory of auditing, and integrated within this framework is a discussion of the Hong Kong Auditing Standards. Chapter 3 covers the auditor’s duty and legal liability, while Chapter 4 is concerned with the ethical dimensions of auditing.

The technical aspects of the audit process, including risk analysis, are covered in Chapters 5 to 18. Chapter 5 provides an overview of the audit process, including the phases of an audit and an examination of evidential matter and working papers. Since there is a clear emphasis on the risk analysis approach to modern auditing, this is discussed in Chapter 6. The Chapter also includes a discussion on business risk and its relationship to audit risk. It recognises the importance of materiality and the going concern assumption in evaluating audit evidence. The study and assessment of the internal control structure is covered in Chapter 7. This Chapter includes a discussion on the role of corporate governance including audit committees. Chapter 8 deals with audit sampling, including some of the basic concepts underlying statistical sampling and risk assessment. Chapter 9 concentrates on IT auditing. Chapter 10 provides a discussion of tests of controls or compliance testing and substantive testing. Chapters 11 to 16 present a detailed treatment of the audit of the major accounting sub-systems, including reference to risk analysis. Chapter 17 deals with the audit report — the culmination of the audit process. Chapter 18 concludes the book by providing a detailed treatment of internal auditing and operational auditing.