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Ferdinand A. Gul, Hong Kong Auditing: Economic Theory and Practice.

(Hong Kong: City University of Hong Kong Press, 2000, pp. xxxii, 819).

It is an interesting book that is nicely written and easily readable. It is a comprehensive audit text book, which deals with theoretical as well as practical aspects of auditing. It can be used as a text book in auditing courses at the undergraduate as well as graduate level, and is also highly recommended for practitioners because it provides useful information on theoretical foundations for audits, discusses ethics of auditing, and presents a comprehensive overview of EDP auditing. The highlights of individual chapters are presented below.

The first chapter traces the development of audit profession since the twelfth century and discusses the nature of auditing. The second chapter provides an overview of the theoretical framework of auditing based on agency theory. It is a unique chapter, which links audit theory and practice to agency theory and builds a link between auditing standards and the conceptual framework. It is an innovative approach in an auditing text book because it provides a better explanation for economic rationality of the auditing function. In this chapter, the author also discusses the association between audit quality and Big 5 audit firms and relates the two important concepts of competence and independence in auditing with an earlier conceptual framework for auditing developed by Mautz and Sharaf (pp. 29-30).

Chapter 3 discusses rights, duties, and liabilities of auditors stemming from audit contracts within the legal environment of a country. It discusses how the concepts of competence and independence are related to the auditing legal functions and obligations. The Hong Kong legal environments are discussed in an appendix to the chapter. The fourth chapter is on ethics and is unique in the way that it looks at the economics of the ethical compliance model, which has not been fully explained in any other auditing text book, and provides an introduction to an area of economics research concerning the compliance behavior, including discussion on the Moral Development theory. This chapter also explores the question of professional ethics, especially the need for professional independence. In an appendix, it examines the impact of the Management Advisory Services (MAS) on the auditors' independence, as presented by the results of several empirical studies on MAS.

Chapter 5 provides an overview of the auditing process and discusses the importance of evidential matters in this process. Specifically, it includes discussion on matters related to the evaluation of internal control structure and audit evidence-gather functions. The section on audit strategy should be of particular interest to the readers. Chapters 6 and 7 deal with risk analyses and control risk assessment, respectively. The main contribution of Chapter 6 is the idea of risk-driven audits and risk analysis (audit risk model), where the relationship between business risk and audit risk is discussed. The chapter also discusses the audit-pricing model, which explains how the audit risk model is used to have a better understanding of the pricing mechanism for audit services. The assessment of the internal control structure is covered in Chapter 7. This chapter specifically discusses how the auditor's assessment and evaluation of the internal control mechanism as well as the associated risks provide the basis for planning and design of substantive audit procedures.

The use of audit sampling and statistical tests in the audit process is presented in Chapter 8. This chapter specifically explains the basic concepts underlying the statistical audit sampling and risk assessment. The chapter shows how the statistical sampling techniques, along with other auditing procedures, provide the basis for audit evidence evaluation for formulating an overall audit conclusion.

The next three chapters, i.e. Chapters 9, 10, and 11 deal with the EDP environment and EDP control. These three chapters expose the readers, especially the students, to the use of computers in the auditing process. Chapter 9 discusses the impact of EDP on the internal control structure, whereas Chapter 10 explains the study and evaluation of the internal control structure in an EDP environment. A discussion of the audit computer controls explains how these computer controls are used in different types of computerized accounting systems, and these systems are the online, real-time systems, distributed data-processing systems, minicomputer and microcomputer systems, data management systems, EFT and EDI systems, etc. The use of Computer-Assisted Audit Techniques (CAATs) is discussed in Chapter 11, and this chapter especially explains two techniques used in practice.

The next seven chapters, i.e., Chapters 12 through 18, deal with auditing procedures for different items in the balance sheet and income statement. Discussion of auditing procedures is relevant for Hong Kong firms as well as for firms in other countries with audit environment similar to the Hong Kong audit environment, especially the firms in the Southeast Asian countries. Different phases of the audit cycle are discussed in these chapters, and the treatment of evidential matters is especially explained. These chapters also discuss how the working papers are prepared and maintained for proper risk evaluation. Discussion in these chapters especially shows the importance of materiality in conjunction with the going concern assumption for proper evaluation of audit evidence in a given risk environment.

Chapter 19 is focused on the reporting phase of the audit function. It discusses different types of opinions, which auditors might express in their audit reports. It also discusses the circumstances resulting in departure from the standard report, including discussion of the effect of an inherent uncertainty on the going concern assumption.

The concluding Chapter 20 discusses the nature and role of internal auditing and examines the standards related to the functioning of internal auditors. The chapter also discusses the nature and benefits of operational auditing. After examining the differences between the operational and financial auditing, the chapter describes a general approach to the operational audit process.

Overall, it is an interesting book that is innovative in several ways. As discussed earlier, it can be used in the audit courses in several countries, and it will also be useful to practitioners. It, however, fails to cover certain areas of auditing that have recently assumed greater importance as a result of globalization of business environment and uncertainty of earnings numbers disclosed in the financial reports. It does not deal with the international aspects of audit environment, especially auditing of multinationals. A discussion on the differences in the legal environments of different countries would explain the differences in the risk environment, especially compared to the risk environment in the U.S. legal system, where litigation is a common problem for auditors. It also does not discuss the role of audit committees in providing reliable information to the financial statements users, especially in the environment in which the management is being accused of providing distorted earnings figures to the financial statement users.

Bikki Jaggi

Rutgers University

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Author:Jaggi, Bikki
Publication:Journal of International Accounting Research
Article Type:Book Review
Date:Jan 1, 2003
Previous Article:Epstein, Barry J., and Abbas Ali Mirza, IAS 2002 Interpretation and Application of International Accounting Standards.
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