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THE AUDIT
COMMITTEE
HANDBOOK
Fourth Edition

LOUIS BRAIOTTA, JR., C.P.A.
School of Management
State University of New York at Binghamton




New York • Chichester • Brisbane • Toronto • Singapore
The Audit
Committee
Handbook
Fourth Edition
THE AUDIT
COMMITTEE
HANDBOOK
Fourth Edition

LOUIS BRAIOTTA, JR., C.P.A.
School of Management
State University of New York at Binghamton




New York • Chichester • Brisbane • Toronto • Singapore
This book is printed on acid-free paper.

Copyright © 2004 by John Wiley & Sons. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada

No part of this publication may be reproduced, stored in a retrieval system, or transmitted
in any form or by any means, electronic, mechanical, photocopying, recording, scanning,
or otherwise, except as permitted under Section 107 or 108 of the 1976 United States
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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used
their best efforts in preparing this book, they make no representations or warranties with
respect to the accuracy or completeness of the contents of this book and specifically
disclaim any implied warranties of merchantability or fitness for a particular purpose.
No warranty may be created or extended by sales representatives or written sales
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situation. You should consult with a professional where appropriate. Neither the
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For general information on our other products and services, or technical support, please
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ISBN: 0-471-48884-4

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1
To the Adopters of the third edition
and dedicated to my mother,
Frances Braiotta.
From the Forewords of the First Two Editions . . .


Excerpt from the foreword to the second edition:

Members of audit committees will find this second edition an invaluable resource
in meeting their oversight responsibilities and give them an increasing awareness
of their current duties as well as an insight into future developments.

”Richard S. Hickok, CPA
Chairman, Hickok Associates, Inc.,
and Chairman Emeritus of KMG/Main Hurdman
(now KPMG Peat Marwick)


Excerpt from the foreword of the first edition:

Audit committee members will find this book a useful reference in performing
their oversight responsibilities. It should also help them develop a constructive re-
lationship between their function and the activities of the full corporate board,
management, and internal and external auditors.

”John C. Biegler, CPA
Chairman Emeritus, Price Waterhouse International
(now PricewaterhouseCoopers)
About the Website

As a purchaser of Audit Committee Handbook, Fourth Edition, you have access to
the companion website. The website contains a Glossary and other Appendices
that provide valuable perspective and key legislation to interested readers. To ac-
cess the website, go to www.wiley.com/go/auditcommittee.


Website Contents
C Glossary
D Historical Perspective on Audit Committees
E Foreign Corrupt Practices Act Amendments
F Federal Deposit Insurance Corporation Improvement Act
G Excerpt from The Code of Best Practice
H Model Business Corporation Act”Chapter 8: Directors and Officers
I Committee of Sponsoring Organizations of the Treadway Commission, Internal
Control-Integrated Framework”Volume 1, Executive Summary
J Example of a Code of Business Conduct”Some Broad Guidelines




ix
Contents

Preface, xv

Acknowledgments, xix


PART ONE
GETTING ACQUAINTED WITH YOUR RESPONSIBILITIES 1

1 Corporate Accountability: The New Environment, 1
The Nature and Importance of Corporate Accountability, 3
Recent Developments in Corporate Accountability, 10
Corporate Accountability and the Audit Committee, 29
Sources and Suggested Readings, 39


2 Audit Committees: Basic Roles and Responsibilities, 42
Organization of the Audit Committee, 42
The Audit Committee Functions, 58
The External and Internal Auditing Process, 80
Sources and Suggested Readings, 94


3 The External Users of Accounting Information, 97
Introduction, 97
The Investors, 99
Credit Grantors, 112
Regulatory Agencies, 120
Other Outside Constituencies, 128
Important Developments in Business Reporting
and Assurance Services, 131
Sources and Suggested Readings, 139




xi
xii Contents


4 The Legal Position of the Audit Committee. 143
General Legal Responsibilities, 144
Legal Cases Involving the Audit Committee, 152
Guidelines for Minimizing Legal Liability, 172
Sources and Suggested Readings, 176

5 Rules of the Road”Auditing and Related Accounting Standards, 178
An Overview of Generally Accepted Auditing Standards, 178
An Analysis of the Auditing Standards, 180
Integration of Auditing and Related Accounting Standards, 181
Attestation Engagements, 189
International Auditing Standards, 189
Sources and Suggested Readings, 196


PART TWO
THE PLANNING FUNCTION OF THE AUDIT COMMITTEE 197

6 An Overview of Audit Planning, 199
Meaning of Audit Planning, 199
Analysis of Audit Planning and the Committee, 200
Benefits of Audit Planning, 209
Components of the Corporate Audit Plan, 210
Sources and Suggested Readings, 217

7 Audit Committees™s Role in Planning the Audit, 219
The Committee™s Planning Function, 219
Developing an Integrated Planning Approach, 220
Recommending the Appointment of the Independent Auditors, 228
Sources and Suggested Readings, 232


PART THREE
THE MONITORING AND REVIEWING FUNCTIONS
OF THE AUDIT COMMITTEE 233


8 Monitoring the System of Internal Control, 235
Meaning of Internal Control, 235
Responsibility for the System of Internal Control, 238
The Role of the Audit Committee, 242
Sources and Suggested Readings, 247
Contents xiii


9 Monitoring the Internal Audit Function, 249
Purpose and Need for Monitoring the Internal Audit Function, 249
Reviewing the Organization of the Corporate Audit Staff, 252
Appraising the Quality of the Auditing Staff, 276
Sources and Suggested Readings, 290

10 Reviewing Accounting Policy Disclosures, 291
Audit Committee™s Review Objective, 291
Accounting Policy Disclosures, 296
Guidelines for Reviewing Accounting Policy Disclosures, 312
Sources and Suggested Readings, 319

11 A Perspective on Fraud and the Auditor, 320
Meaning of Fraud in a Financial Statement Audit, 320
The External Auditor™s Responsibility, 329
Investigating Known Fraud, 337
The Audit Committee™s Oversight Approach to Fraud Risk Assessment, 339
Sources and Suggested Readings, 346

12 Reviewing Certain General Business Practices, 349
Questionable Foreign Payments, 349
Corporate Perquisites, 358
Corporate Contributions, 362
Sources and Suggested Readings, 367


PART FOUR
THE REPORTING FUNCTION AND THE AUDIT COMMITTEE 371

13 Independent Auditors™ Reports, 373
The Auditors™ Reports on Audited Financial Statements, 373
Other Auditing Opinions, 377
Other Reports of the Auditors, 381
Sources and Suggested Readings, 387

14 The Audit Committee™s Report and Concluding Observations, 389
Purpose of the Audit Committee™s Report, 389
Guidelines for Preparing the Report, 391
Concluding Observations, 397
Sources and Suggested Readings, 403
xiv Contents


APPENDIXES
A Accounting, Auditing, and Attestation Standards Topical Index of
References to Accounting Principles Board, Financial Accounting

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