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 vi Contents

Further reading 154

Suggested solutions to tasks 154
Self-assessment questions (solutions available to students) 156
Self-assessment questions (solutions available to tutors) 157
Topics for class discussion without solutions 158

5 Corporate governance 161

Learning objectives 161
Introduction to corporate governance 162
Part 1: The need for effective c­ orporate governance 162
Part 2: Models of corporate governance and the UK
Corporate Governance Code 167
Models of corporate governance 170
The UK Corporate Governance Code 174
Board committees 181
The UK Stewardship Code 186
Audit firm corporate governance 190
Concluding remarks on corporate governance 191
Summary 191
Key points of the chapter 191
References and further reading 192
Self-assessment questions (solutions available to students) 194
Self-assessment questions (solutions available to tutors) 194
Topics for class discussion without solutions 196

6 The risk-based approach to audit: audit judgement 197

Learning objectives 197
Why is a risk-based approach to audit an aid to the auditor? 197
Broad approach to minimize audit risk 200
A practical example 211
Case Study 6.1: Edengrove Limited 211
Other practical matters 213
Case Study 6.2: Kemback Limited, Part 1 217
Case Study 6.2: Kemback Limited, Part 2 220
Business risk approach to audit 222
Business risk and inherent risk approaches: similarities
and dissimilarities 227
The business risk approach and smaller clients
and smaller audit firms 230
Analytical review as a risk analysis tool 230
Judgement in accounting and auditing and its relationship to risk 232
Management of the audit process 234
The terms of reference provide the audit framework 236
Case Study 6.3: Hughes Electronics Limited 236
Planning the assignment 240
Case Study 6.4: County Hotel Limited, Part 1 240
Case Study 6.4: County Hotel Limited, Part 2 242
Summary 248
Key points of the chapter 248
References 249

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 Contents vii

Further reading 249

Suggested solutions to tasks 250
Self-assessment questions (solutions available to students) 253
Self-assessment questions (solutions available to tutors) 256
Topics for class discussion without solutions 256

7 The search for evidence explained 257

Learning objectives 257
The audit defined as a search for e­ vidence to enable
an opinion to be formed 257
Forming conclusions on the basis of evidence:
the exercise of judgement 261
Reliability of audit evidence (grades of audit evidence) 265
Case Study 7.1: Ridgewalk plc 269
The business risk approach to gathering audit evidence 271
The stages of the audit process and the evidential requirements
at each stage 274
Limited assurance and ­compilation engagements and agreed
upon procedures 277
Conclusion 279
Summary 279
Key points of the chapter 280
Reference 281
Further reading 281
Self-assessment questions (solutions available to students) 281
Self-assessment questions (solutions available to tutors) 283
Topics for class discussion without solutions 284

8 Systems work: basic ideas 1 285

Learning objectives 285
Introduction 285
Layers of regulation and control expanded 287
Case Study 8.1: High Quality Limited:
small independent supermarket 299
Case Study 8.2: Caiplie Financial Services: entity in the financial
services sector 301
Accounting and quality assurance/control systems 302
General controls 304
Case Study 8.3: Horton Limited: cash received system 308
Summary 323
Key points of the chapter 323
References 324
Further reading 324
Self-assessment questions (solutions available to students) 325
Self-assessment questions (solutions available to tutors) 325
Topics for class discussion without solutions 325

9 Systems work: basic ideas 2 326

Learning objectives 326
Introduction 326

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 viii Contents

Application controls 327

Data capture/input controls 327
Processing controls 334
Output controls 336
Database systems 337
E-commerce 339
Audit approaches to systems and controls 345
Summary 364
Key points of the chapter 364
Further reading 365
Self-assessment questions (solutions available to students) 365
Self-assessment questions (solutions available to tutors) 366
Topics for class discussion without solutions 367

10 Testing and evaluation of systems 368

Learning objectives 368
Introduction 368
Sales and receivables system 369
Case Study 10.1: Broomfield plc: sales and trade receivables system 369
Purchases and trade payables system 371
Case Study 10.2: Broomfield plc: part of purchases
and trade payables system 372
Payroll system 374
Case Study 10.3: Troston plc: production payroll 374
General and application controls in a sales system 376
Case Study 10.4: Burbage Limited: sales order processing
and application controls 377
Tests of controls 379
Evaluation of systems and audit conclusions 390
Summary 392
Key points of the chapter 392
Reference 393
Further reading 393
Self-assessment questions (solutions available to students) 393
Self-assessment questions (solutions available to tutors) 395
Topics for class discussion without solutions 395

11 Substantive testing, computer-assisted audit techniques

and audit programmes 396
Learning objectives 396
Introduction 396
Substantive testing of transactions, account balances
and disclosures 396
Case Study 11.1: Powerbase plc: the substantive audit
programme for purchases 398
The use of audit software 402
Directional testing 410
Substantive audit programmes for wages 412
Substantive audit programmes for cash and bank balances 414

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 Contents ix

Communication of audit matters to those charged with

governance (management letter) 415
Audit management with the computer 420
Summary 422
Key points of the chapter 423
Reference 424
Further reading 424
Self-assessment questions (solutions available to students) 424
Self-assessment questions (solutions available to tutors) 425
Topics for class discussion without solutions 426

12 Sampling and materiality 427

Learning objectives 427
Introduction 427
What is sampling? 428
Designing and selecting the sample for testing 428
Case Study 12.1: Broomfield plc: an example of judgemental
sampling 430
Sample selection methodology 432
Evaluation of test results 436
Monetary unit sampling (MUS) 438
Comparative advantages of statistical and non-statistical
sampling 439
Alternative statistical sampling methods 441
Materiality 442
Summary 454
Key points of the chapter 454
References 455
Further reading 456
Self-assessment questions (solutions available to students) 457
Self-assessment questions (solutions available to tutors) 458
Topics for class discussion without solutions 458

13 Final work: general principles and analytical review

of financial statements and management assertions
on financial statement headings 460
Learning objectives 460
Introduction 460
Prefinal work 461
Balance sheet date work 462
Bridging work between conclusion of interim work
and the balance sheet date 463
Analytical procedures 464
Case Study 13.1: Kothari Limited: analytical review 468
Case Study 13.2: Art Aid Limited: analytical review 473
Detailed final audit work: general matters 477
Summary 485
Key points of the chapter 485
Further reading 486

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 x Contents

Self-assessment questions (solutions available to students) 486

Self-assessment questions (solutions available to tutors) 487
Topics for class discussion without solutions 488

14 Final work: non-current assets, trade receivables

and financial assets 489
Learning objectives 489
Introduction 489
Tangible non-current assets and depreciation 490
Case Study 14.1: Pykestone plc: non-current assets 490
Trade receivables and sales 506
Case Study 14.2: Sterndale plc: ageing statement 509
Case Study 14.3: Sterndale plc: analytical review of sales
and trade receivables 510
Financial assets 520
Summary 520
Key points of the chapter 520
Further reading 522
Self-assessment questions (solutions available to students) 522
Self-assessment questions (solutions available to tutors) 523
Topics for class discussion without solutions 523

15 Final work: specific ­problems related to inventories, ­construction

contracts, trade payables and financial liabilities 524
Learning objectives 524
Introduction 524
Inventories 525
Analytical procedures 530
Case Study 15.1: Billbrook Limited: analysis of inventory, Part 1 530
Case Study 15.1: Billbrook Limited: analysis of inventory, Part 2 531
Case Study 15.2: Greenburn Limited: inventory taking instructions 536
Valuation of construction contracts 547
Trade payables and purchases 547
Analytical procedures 550
Financial liabilities 557
Summary 557
Key points of the chapter 557
Further reading 559
Self-assessment questions (solutions available to students) 559
Self-assessment questions (solutions available to tutors) 561
Topics for class discussion without solutions 561

16 Final review: post-balance sheet period, provisions, contingencies,

letter of representation 562
Learning objectives 562
Introduction 562
Post-balance sheet events 563
Provisions, contingent liabilities and contingent assets 568
Going concern 577
Audit work to detect post-balance sheet events and contingencies 577

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 Contents xi

Evaluation of misstatements identified during the audit 580

Management letter of representation 582
Audit documentation 587
Role of the final review 589
Summary 591
Key points of the chapter 591
Further reading 593
Self-assessment questions (solutions available to students) 594
Self-assessment questions (solutions available to tutors) 595
Topics for class discussion without solutions 596

17 Assurance engagements and internal audit 597

Learning objectives 597
Introduction 597
Assurance engagements 598
Case Study 17.1: Protecting the environment in an area
of scenic beauty 615
Case Study 17.2: Gilling Limited 618
Internal audit 622
Case Study 17.3: Greenburn Limited: fleet of vans 624
Case Study 17.4: Photocopying costs in an educational institution 626
Case Study 17.5: Barnton plc 627
How to make the internal audit ­function effective 629
Reliance on internal audit by the external auditor 632
Outsourcing of internal audit work 636
Case Study 17.6: Internal audit at Troston plc 637
Key points of the chapter 639
Further reading 640
Self-assessment questions (solutions available to students) 640
Self-assessment questions (solutions available to tutors) 642
Topics for class discussion without solutions 643

18 The auditors’ report 644

Learning objectives 644
Introduction 645
The unmodified opinion 646
Specific audit considerations in respect of quoted companies/public
interest entities 664
The modified audit opinion 672
Limitation of scope 675
Disagreement 681
Disclaimer of responsibility 685
Reporting on corporate governance issues 686
Summary 693
Key points of the chapter 694
Reference 695
Further reading 695
Self-assessment questions (solutions available to students) 695
Self-assessment questions (solutions available to tutors) 698
Topics for class discussion without solutions 698

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 xii Contents

19 Fraud and going concern 700

Learning objectives 700
Introduction to fraud 700
Responsibility for fraud detection 702
Recent debates relating to fraud 714
Case law relating to fraud 718
Auditing scandals 720
Consideration of law and regulations 722
Introduction to going concern 727
Directors’ and auditors’ responsibilities for going concern 729
Reporting on going concern 735
Summary 736
Key points of the chapter 737
References 738
Further reading 739
Self-assessment questions (solutions available to students) 739
Self-assessment questions (solutions available to tutors) 740
Topics for class discussion without solutions 740

20 The audit expectations gap and audit quality 741

Learning objectives 741
The audit expectations gap 741
The causes of the audit expectations gap, possible
developments and solutions 743
Audit quality 756
Summary 766
Key points of the chapter 766
References 767
Further reading 768
Self-assessment questions (solutions available to students) 768
Self-assessment questions (solutions available to tutors) 769
Topic for class discussion without solution 769

21 The auditor and liability under the law 770

Learning objectives 770
Introduction 770
Criminal liability 771
Civil liability 772
Case law 773
Auditing standards 788
Professional conduct 789
Potential ways of reducing auditor liability 790
Summary 797
Key points of the chapter 797
References 798
Further reading 799
Self-assessment questions (solutions available to students) 800
Self-assessment questions (solutions available to tutors) 801
Topics for class discussion without solutions 802

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 Contents xiii

22 Issues in auditing 804

Learning objectives 804
Introduction 804
The accounting/auditing profession? 805
Regulation 809
IFAC, the accountancy profession and globalization 816
Audit reporting 820
Independence 828
Choice in the UK audit market 832
Audit data analytics 837
Summary 842
Key points of the chapter 842
References 844
Further reading 847
Self-assessment questions (solutions available to students) 848
Self-assessment questions (solutions available to tutors) 848
Topics for class discussion without solutions 848

23 Examination hints and final remarks 849

Learning objectives 849
Introduction 849
General examination hints 849
Auditing as an examination subject 852
Final remarks 853

Credits 855
Index 857

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
 A C K N O WL E D G E ME NTS

The authors and publishers wish to thank The Institute of Chartered Accoun-
tants in Ireland who have kindly given permission for the use of their past
examination questions in this book. We are grateful to the Association of Char-
tered Certified Accountants (ACCA) for permission to reproduce past exami-
nation questions. The suggested solutions in the exam answer bank have been
prepared by us, unless otherwise stated.
The authors and publishers would also like to thank the following who have
kindly given permission for short verbatim extracts of material for which they
hold copyright, to be reproduced in this book:
The International Federation of Accountants (IFAC®)
The International Auditing and Assurance Standards Board (IAASB®)
Financial Reporting Council (FRC)
International Accounting Standards Board (IASB®)
The authors and publishers would also like to thank Rolls-Royce plc who
has given the publisher permission to reproduce the extracts from Rolls-Royce
plc’s 2017 Annual Report which appear in Chapter 18. However, Rolls-Royce
in no way endorses the content of this book.
In preparing this book the authors benefited from discussions on auditing with
the following individuals: Tony Berry, the late Mary Bowerman, Alex Dunlop,
Pik Liew, Sean McCartney, Michael Sherer, Joanna Stevenson, Mahbub Zaman,
Jamil Ampomah, Emad Awadallah, Ian Dewing, Magda Abou-Seada Obby
Phiri, Mostafa Hussien, Gareth Morgan and Ursula Lucas. Although we would
like to blame these individuals for any errors or inadequacies of expression
remaining in the book we will follow custom and practice and accept the blame
for any such deficiencies. We received many useful comments and feedback
from students we have taught at the Universities of Essex, Sheffield Hallam,
Stirling and Dundee. We also acknowledge the insights we have gained by
discussing the subject of auditing with Diogenis Baboukardos, Ilias Basioudis,
Vivien Beattie, Emer Curtis, Silvia Gaia, Stella Fearnley, Ian Fraser, Catherine
Gowthorpe, the late David Gwilliam, David Hatherly, Christopher Humphrey,
Marjana Johansson, Phil Johnson, Suzanne Kerr, Anastasia Kopita, Azimjon
Kuvandikov, Steve Leonard, Kamran Malikov, Bill McInnes, Pat Mould, Martin
Nolan, Ian Percy, Brenda Porter, Michael Power, Dan Shen, Liya Shen, the
late Jayne Smith, Kim Smith, Stuart Turley, Shahzad Uddin, Andrew Wood,
Zhifang Zhang and participants at the annual Audit and Assurance Conference.
Particular thanks go to Laurie Orgee for his helpful comments on some aspects
of computer systems, and to Martyn Jones of Deloitte for insights into modern
audit approaches. We also had useful discussions with Christine Helliar and
Susan Whittaker on problems faced by students of auditing and how these can
be resolved. We also owe a debt of gratitude for the forbearance of Loraine,
Simon, Josslin, Dorothea and Kevin, Primrose and Abigail. Finally, we are
grateful to the publishers for their encouragement and patience.

xiv
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
 Acknowledgements xv

The author and publishers would like to thank the following reviewers who
provided invaluable commentary for this new edition and previous editions:
Ilias Basioudis (Senior Lecturer, Aston University), Roy Chandler (Professor,
Cardiff University), John Craner (Teaching Fellow, University of Birmingham),
Ian Dennis (Senior Lecturer, Oxford Brookes University), Ian Dewing (Pro-
fessor, University of East Anglia), Julie Drake (Principal Lecturer, University
of Huddersfield), Ellie Franklin (Senior Lecturer in Finance, Middlesex Uni-
versity London), Jan (Sarah) Loughran (Associate Professor in Accounting,
Durham University), Wendy Mazzucco (Lecturer, Glasgow Caledonian Uni-
versity), Astero Michael (Lecturer, Intercollege Limassol), Ian Money (Senior
Lecturer in Accounting and Finance, The University of York) and Susan Whit-
taker (Senior Lecturer, University of West of England).

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 L ist of C ase S tudies

Chapter 1
CASE STUDY 1.1 Erin and Lee, Part 1 5
CASE STUDY 1.1 Erin and Lee, Part 2 6
CASE STUDY 1.1 Erin and Lee, Part 3  8
CASE STUDY 1.1 Erin and Lee, Part 4  10
Chapter 4
CASE STUDY 4.1 Rosedale Cosmetics plc, Part 1 140
CASE STUDY 4.1 Rosedale Cosmetics plc, Part 2 141
CASE STUDY 4.1 Rosedale Cosmetics plc, Part 3 143
CASE STUDY 4.1 Rosedale Cosmetics plc, Part 4 146
CASE STUDY 4.1 Rosedale Cosmetics plc, Part 5 146
CASE STUDY 4.1 Rosedale Cosmetics plc, Part 6 150
Chapter 6
CASE STUDY 6.1 Edengrove Limited 211
CASE STUDY 6.2 Kemback Limited, Part 1 217
CASE STUDY 6.2 Kemback Limited, Part 2 220
CASE STUDY 6.3 Hughes Electronics Limited 236
CASE STUDY 6.4 County Hotel Limited, Part 1 240
CASE STUDY 6.4 County Hotel Limited, Part 2 242
CASE STUDY 6.5 Cosmetics company: Fine Faces plc 253
Chapter 7
CASE STUDY 7.1 Ridgewalk plc 269
Chapter 8
CASE STUDY 8.1 High Quality Limited: small independent
supermarket299
CASE STUDY 8.2 Caiplie Financial Services:
entity in the financial services sector 301
CASE STUDY 8.3 Horton Limited: cash received system 308
Chapter 10
CASE STUDY 10.1 Broomfield plc: sales and trade
receivables system  369
CASE STUDY 10.2 Broomfield plc: part of purchases and
trade payables system 372
CASE STUDY 10.3 Troston plc: production payroll 374
CASE STUDY 10.4 Burbage Limited: sales order processing
and application controls  377
Chapter 11
CASE STUDY 11.1 Powerbase plc: the substantive audit
programme for purchases  398

xvi
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 List of Case Studies xvii

Chapter 12
CASE STUDY 12.1 Broomfield plc: an example of
judgemental sampling 430
Chapter 13
CASE STUDY 13.1 Kothari Limited: analytical review 468
CASE STUDY 13.2 Art Aid Limited: analytical review 473
Chapter 14
CASE STUDY 14.1 Pykestone plc: non-current assets 490
CASE STUDY 14.2 Sterndale plc: ageing statement 509
CASE STUDY 14.3 Sterndale plc: analytical review of sales
and trade receivables 510
Chapter 15
CASE STUDY 15.1 Billbrook Limited: analysis of inventory, Part 1 530
CASE STUDY 15.1 Billbrook Limited: analysis of inventory, Part 2 531
CASE STUDY 15.2 Greenburn Limited: inventory taking instructions 536
Chapter 17
CASE STUDY 17.1 Protecting the environment in an area of scenic beauty 615
CASE STUDY 17.2 Gilling Limited 618
CASE STUDY 17.3 Greenburn Limited: fleet of vans 624
CASE STUDY 17.4 Photocopying costs in an educational institution 626
CASE STUDY 17.5 Barnton plc 627
CASE STUDY 17.6 Internal audit at Troston plc 637

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
 INDEX OF LEGAL CASES

ADT Ltd vs BDO Binder Hamlyn [1996] B.C.C. 808 771, 785 and 799
Andrew and others vs Kounnis Freeman [1999] 2 B.C.L.C. 641 786 and 799
Anns vs Merton London Borough Council [1978] A.C. 728 777
AWA Ltd vs Daniels t/a Deloitte Haskins & Sells [1992] 7 A.C.S.R. 759,
[1992] 9 A.C.S.R. 383 793
Bank of Credit and Commerce International (Overseas) Ltd (In Liquidation)
vs Price Waterhouse [No. 2], [1998] B.C.C. 617, [1998] E.C.C. 410  800
Barings plc (In Liquidation) and Another vs Coopers & Lybrand and
Others (No. 8) [2000] All ER [D] 616 793 and 800
Candler vs Crane Christmas & Co. [1951] C.A. [1951] 2K.B. 164 [1951]
1 All E.R. 426 [1951] 1 T.L.R. 371 773 and 797
Caparo Industries plc vs Dickman and Others [1989] Q.B. 653,
[1989] 2 W.L.R. 316, [1989] 1 All E.R. 798, [1989] 5 B.C.C. 105,
B.C.L.C. 154, [1990] 2 A.C. 605, [1990] 2 W.L.R. 358, 1
All E.R. 568, [1990] B.C.C. 164, [1990] B.C.L.C. 273. 776
Coulthard & Orrs vs Neville Russell [1998] 1 B.C.L.C. 143, [1998] B.C.C. 359 800
Donaghue vs Stevenson [1932] S.C. [H.L.] 31 773
Electra Private Equity Partners vs KPMG Peat Marwick [2001] B.C.L.C. 589 800
Galoo Ltd and Others vs Bright Grahame Murray (A Firm) [1994]
B.C.L.C. 492, [1994] 1 W.L.R. 1360, [1995] 1 All E.R. 16, [1994]
B.C.C. 319 783 and 787
Hedley Byrne & Co. vs Heller and Partners Ltd [1963] A.C. 465,
[1963] 2 All E.R. 575, [1963] 3 W.L.R. 101 773 and 797
Irish Woollen Co. Ltd vs Tyson and Others [1900] 26 Acct. L. R. 13 719 and 737
James McNaughton Paper Group Ltd. vs Hicks Anderson & Co. [1991]
2 W.L.R. 641, [1991] 2 Q.B. 113, [1991] 1 All E.R. 134, [1991]
B.C.L.C. 163, [1990] B.C.C. 891 781
Jarvis plc vs PriceWaterhouseCoopers [2000] 2 B.C.L.C. 368 149
JEB Fasteners Ltd vs Marks Bloom & Co. [1981] 3 All E.R. 289 775 and 797
Man Nutzfahrzeuge AG vs Freightliner Ltd and Ernst & Young [2007]
EWCA Civ 910 800
Morgan Crucible Co. vs Hill Samuel Bank Ltd and Others [1991]
Ch 295, [1991] 1 All E.R. 148, [1991] 2 W.L.R. 655, [1991]
B.C.L.C. 178, [1991] B.C.C. 82 782
Re Kingston Cotton Mill Co. (No. 2) [1896] 2 Ch 279 718 & 737
Re Thomas Gerrard & Son Ltd [1967] 2 All E.R. 525, [1967]
3 W.L.R. 84, [1968] Ch 455 719 & 737
Royal Bank of Scotland vs Bannerman Johnstone Maclay and
Others [2002] S.L.T. 181  685 and 786
Sasea Finance Limited [in liquidation] vs KPMG [2000] 1 B.C.L.C. 236,
[2000] 1 All E.R. 676 714
Stone & Rolls Ltd (in Liquidation) vs Moore Stephens (a Firm) [2009]
UKHL39719
Twomax Ltd and Goode vs Dickson, McFarlane and Robinson
[1983] S.L.T. 98 775, 776, 797 and 798
xviii
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 PR EFACE

Members of the following accounting bodies are permitted by company law

to act as auditors of limited companies in the British Isles, so it is appropriate
that auditing should occupy an important place in their examination schemes:
Association of Chartered Certified Accountants (ACCA)
The Institute of Chartered Accountants in England and Wales (ICAEW)
The Institute of Chartered Accountants in Ireland (ICAI)
The Institute of Chartered Accountants of Scotland (ICAS)
This book provides a sound basis for the study of auditing for the above bodies’
examinations and also for the examinations of the Institute of Internal Auditors
(IIA) and of the Chartered Institute of Public Finance and Accountancy (CIPFA).
The book will be suitable for studies of auditing at degree level and profes-
sional examinations and master’s courses.
This seventh edition of this book contains references to the International Stan-
dards on Auditing (ISAs) and the International Standard on Quality Control
issued by the International Auditing and Assurance Standards Board® (IAASB).
IAASB is one of the independent standard-setting boards of the International
Federation of Accountants® (IFAC). Generally we quote from ISAs issued by
IAASB, but occasionally we refer to ISAs (UK) published by Financial Reporting
Council (FRC) where they contain material with particular reference to the UK.
The ISAs are designed to support the auditor in obtaining reasonable assur-
ance in forming their opinions. They are structured as follows:
1. The first section contains:
• an introduction
• overall objectives of the auditor
• definitions
• requirements.
2. The second section contains:
• application and other explanatory material supporting the require-
ments (in some cases explanatory material is contained in appendices).
The paragraph numbers in the second section are prefixed by ‘A’. We quote
from the first and second sections and the appendices when we believe it is appro-
priate to support our discussion of the audit process. Regarding the ISAs (UK)
it is important to note that the paragraph numbers are identical to the ISAs pub-
lished by IAASB, but that the ISAs (UK) are supplemented by sub-paragraphs.
As far as accounting standards are concerned, International Financial
Reporting Standards® (IFRS Standards), including International Accounting
Standards (IAS Standards), affecting the work of the auditor have also been
adopted in the UK. Currently, standards issued by the Accounting Standards
Board are titled Financial Reporting Standards (FRSs). In this book we shall
quote, where necessary, from IFRS Standards and IAS Standards. Where appro-
priate we also refer to UK GAAP, in particular to FRS102, which is the principal
accounting standard. We would mention at this point that we do not consider all
xix
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 xx Preface

the detailed requirements of accounting standards in this book (in other words this
book is not about accounting (or indeed auditing standards)). We are concerned
primarily with principles and where these principles have been reflected in official
standards, we quote from those standards.
In Chapter 4 we introduce students to the requirements of the Companies Act
2006, which is in force in Great Britain. Students outside of Great Britain should
refer to company legislation in their own jurisdiction. We also introduce you to new
EU directives and regulations where appropriate. This seventh edition has been
restructured to some extent and contains a new chapter on corporate governance
which we have placed towards the front of the book (see Chapter 5) because of its
importance. We have also reworked the chapter on current issues (Chapter 22).
As in previous editions we have adopted the framework of the audit year
of a firm of auditors auditing the financial statements of a variety of organiza-
tions. Care has been taken to ensure that the practical work of the auditor is
presented as clearly and logically as possible so that the student will have a good
appreciation of what the audit process is about. Students are recommended to
take note of any important developments relating to international accounting
and auditing standards.
One of the strengths of this book, in our view, is the carefully paced tutorial
approach that has been adopted throughout, which means that it can be used
as a tool in the classroom as well as for private study. We have attempted to
make the book as readable and interesting as possible.
Regrettably, auditing is often seen as being deadly boring. This is not our
view, and we would go so far as to say that those who believe it to be boring will
tend to be unimaginative and bad auditors in consequence. Auditing affects most
people in society, either directly or indirectly, and its current role is changing,
and in some important areas is being extended. Our hope is that this book will
prove to be a useful vehicle for providing an understanding of what auditing is
about and that it will be a valuable contribution to the auditing debate.

T H E FRA M EW O R K O F TH E B O O K
The chapters contain detailed study material illustrated by many examples,
case studies and questions. Some of the questions – called tasks or activities –
are within the body of the text and they involve the student in a self-learning
process; they expect students to advance the argument themselves either using
principles discussed in the text or by using their common sense and imagina-
tion. In each case, you should make sure that you try to answer these questions
before proceeding to the next part of the text. In the case of tasks, the suggested
solutions are provided at the end of each chapter, whereas for the activities the
solution is provided immediately following the question.
At the end of each chapter there is a comprehensive range of self-­assessment
questions designed to help you decide if the material in the text has been
understood. Auditing in practice requires the exercise of considerable judge-
ment in the context of a particular set of circumstances, and some of the ques-
tions are mini-case studies aimed at giving you experience in analyzing and
interpreting information and forming reasoned conclusions. Suggested solu-
tions to some of these questions have been provided for students on the com-
panion ­website. Other solutions are only available to recognized tutors on the
same website, for which they need to register.

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 Preface xxi

Figure 0.1 shows how the audit process flows through the contents of the
study chapters. You will find it useful to look back at this diagram occasionally
when studying individual chapters (right-hand column) to locate the subject you
are studying within a particular stage of the auditing process (left-hand column).
Note that the chapters are not set out in strict numerical sequence. This is
because some chapters are relevant to more than one stage. Some of the chapters
do not fit into the process itself but are useful in that they throw light onto how
auditing is viewed and on possible directions that auditing will take in the future.

FIGURE 0.1 Stages in the auditing process and how they are covered in the chapters

Setting the scene Chapter 1 Why are auditors needed?

Chapter 2 An overview of the postulates and concepts of auditing
Chapter 3 The meaning and importance of auditor independence:
factors affecting independence and measures to attain it
Chapter 4 Audit regulation
Chapter 5 Corporate governance (Part 1)
Chapter 6 The risk-based approach to audit: audit judgement
Chapter 7 The search for evidence explained
Starting the audit Chapter 6 The risk-based approach to audit: audit judgement
process Chapter 12 Sampling and materiality
Systems work and Chapter 8 Systems work: basic ideas 1
transactions testing Chapter 9 Systems work: basic ideas 2
Chapter 17 Assurance engagements and internal audit
Chapter 10 Testing and evaluation of systems
Chapter 11 Substantive testing, computer-assisted audit techniques and audit programmes
Chapter 12 Sampling and materiality
Pre-final and balance Chapter 11 Substantive testing, computer-assisted audit techniques and audit programmes
sheet date work and Chapter 13 Final work: general principles, analytical review of financial statements and
final work management assertions on financial statement headings
Chapter 14 Final work: non-current assets, trade receivables and financial assets
Chapter 15 Final work: specific problems related to inventories, construction contracts,
trade payables and financial liabilities
Chapter 16 Final review: post-balance sheet period, provisions, contingencies, letter of
representation
Analytical review of Chapter 13 Final work: general principles, analytical review of financial statements and
accounts management assertions on financial statement headings
Audit reporting Chapter 18 The auditors’ report
Chapter 19 Fraud and going concern
Chapter 17 Assurance engagements and internal audit
The auditor’s liability Chapter 21 The auditor and liability under the law
under law Chapter 20 The audit expectations gap and audit quality
Critical examination Chapter 5 Corporate governance (Part 2)
of auditing and new
Chapter 22 Issues in auditing
developments

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
 xxii Preface

NO T E

Please note that official Examination Questions, together with suggested s­ olutions,
can be found on the companion website for the book.

These contain two sets of questions. The first set has been presented in
the form of two examination papers, each containing six questions. Suggested
solutions have been provided for the questions on these papers but of course
you should first attempt to answer them by yourself. The second set contains
selected questions which you can use as additional exercises to test your knowl-
edge and understanding for yourself. Your tutors may wish to set some of
these questions as a formal exercise, so check with them before attempting any.
Suggested solutions to the second set of questions are available on the website
mentioned above.

H OW T O U S E TH I S B O O K

NO T E FO R T UT O R S

The authors have prepared guidance notes for tutors to accompany this book. This
guidance is available in the lecturers’ section of the companion website of this title.

To use the book intelligently you need to plan your work and set aside regular
time each week for study. If you have no prior knowledge of auditing, you will
probably need about 150 hours of study to cover the material in this book to
examination standard – say about 4.5 hours per week of concentrated study over
a period of eight to nine months. Time for additional reading and for practice
questions is included in this total and it is absolutely essential for you to devote
time to these. Auditing as a subject requires both literacy and to some extent
numeracy – particularly the former in the examination context – and it is vital
that you gain experience in expressing yourself and writing up your solutions to
the selected questions. You should not look at the suggested solutions until you
have worked the questions yourself. Don’t forget that frequently there may be
no single ‘correct’ solution. If this is the case our suggested solution will make
it clear.
Your approach to using the book should be something like this:
• Read the learning objectives at the beginning of the chapter then briefly
skim through the chapter page by page to get a feel for the length and
complexity of the subjects it covers. It might also be useful at this stage to
have a brief look through the summary at the end of the chapter.
• Begin reading the chapter, following up where necessary the occasional
suggestions for further reading, references to source material or cross-
references to other parts of the text, and make sure you understand each
section before moving on. The marginal notes are usually brief explanatory
notes that have been devised to carry information or advice which is not
essential to your understanding of the subject or your mastery of your own
particular syllabus. Make notes in the remaining marginal space as you go
along, especially on those topics featured in the learning objectives.

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
 Preface xxiii

• When you come to each task or activity you should attempt to answer
it before moving on. Check your own answers against the suggested
­solutions at the end of each chapter (in the case of tasks) and against our
comments following each activity. If your answers are incorrect, make
sure you understand where and why you went wrong before moving on
to the next subject. Sometimes tasks will require you to think of answers
which have not been specifically covered in the preceding text, but by
using a combination of common sense and imagination you should still
be able to answer them. These questions are designed to involve you
actively in the learning process, not simply to test your knowledge; they
ask you to engage in critical thought at strategic points throughout the text
and this will ultimately deepen your understanding of the subject. Don’t
be tempted to skip them. Indeed, you may lose out if you do, since later
topics often require an understanding of the areas covered by them.
At the end of each chapter you will find a series of self-assessment questions.
These have been designed to test your understanding of the main points in each
chapter so you should attempt them whenever they appear. Suggested solutions
to some of these questions have been provided on the companion website in
the student/lecturer section. Other solutions are only available to recognized
tutors on the same website. If you answer any of the questions incorrectly, make
sure you check back in the text to find out why. Often the commentary on the
answers will give you a good idea of where and why you went wrong. Make
sure you follow up these leads.
Occasionally it may be advisable for you to tackle one of the full examina-
tion questions. Remember that it is good practice to ask yourself, before you
start the question, what area of knowledge it is designed to test. Once you have
completed your answer, study the answer provided in the answers section on
the student side of the companion website, noting the main points of principle
and checking back if any of your answers are wrong.
At intervals in your study you will need to build in revision sessions. It may
be helpful to rework the self-assessment questions in earlier chapters to identify
areas needing priority revision attention.
You should aim to have completed your main studies at least one month
before the examination. The final month should be the time for revision, not for
initial learning. Work and rework the practice questions, noting the points of
principle and remembering the vital importance of speed in examination work.

CO M PAN IO N W EB S I T E
For students
• Answers to self-assessment questions (student questions)
• Additional appendix material for chapters in the book
• Related links

For tutors
• Guidance notes for tutors
• PowerPoint lecture slides
• Additional appendix material for chapters in the book

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Another random document with
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far as the public is concerned, the thing is then finished. Fortunately,
this form of magic often works—but unfortunately, it does not work
so often as it used to.[65]
What has been said indicates that magic may be regarded as a
form of thought characteristic of, but not confined to, primitive—or
what Professor Ellsworth Faris has called preliterate—man. It
suggests, also, that primitive thought and primitive mentality are
ordinarily associated with a definite organization of life and
experience, perhaps even a definite economic organization of society.
We all are disposed to think in magical terms in those regions of our
experience that have not been rationalized, and where our control is
uncertain and incomplete. The stock exchange and the golf course,
where success is uncertain and fortuitous, all tend to breed their own
superstition.
“Magic,” as Thorndyke says, “implies a mental state, and so may
be viewed from the standpoint of the history of thought.” But magic,
if it is a form of thought, is not science; neither is it art. The arts may
be said to begin with the lower animals. But in the art with which the
beaver constructs a dam and the bird builds a nest there is neither
magic nor science.
We can best understand magic and its relation to science if we
recall that thought is itself an interrupted act, “a delayed response” to
use the language of the behaviorists. There is the impulse to act,
which is interrupted by reflection, but eventually the impulse
completes itself in action. Magic has the character of thought in so
far as it is an impulse that is interrupted and so becomes conscious.
But it is not rational thought because it does not foresee and seek to
define the relation between the end it seeks and the means necessary
to achieve that end. Between ends and means there is always a hiatus
in which there is feeling but not clear intuition of how that end is to
be achieved.
All human activities tend to assume the character of magic in so
far as they become purely traditional and conventional, defined in
some sacred formula piously transmitted. It is peculiarly
characteristic of modern life, however, that all our inherited forms of
behavior tend to become rationalized. It is characteristic of modern
life that nothing is accepted merely on authority, every tradition is
subject to criticism.
 It is only in very recent years that we have achieved scientific
agriculture and scientific cooking. On the other hand we have already
scientific advertising and scientific “cheering.” “Yelling” at ball
games, once so spontaneous, has now become an art, if not a duty.[66]
 III. MENTALITY AND CITY LIFE
The reason the modern man is a more rational animal than his
more primitive ancestor is possibly because he lives in a city, where
most of the interests and values of life have been rationalized,
reduced to measurable units, and even made objects of barter and
sale. In the city—and particularly in great cities—the external
conditions of existence are so evidently contrived to meet man’s
clearly recognized needs that the least intellectual of peoples are
inevitably led to think in deterministic and mechanistic terms.
The embodiment of rational thought is the tool, the machine, in
which all the parts are manifestly designed to achieve a perfectly
intelligible end. The primitive man lives in a vastly different world,
where all the forces about him are mysterious and uncontrollable,
and where nature seems as wild, as romantic, and as unpredictable
as his own changing moods. The primitive man has almost no
machinery, and relatively few tools.
The mentality of the modern man, on the other hand, is based
upon the machine and upon the application of science to all the
interests of life—to education, to advertising, and, presently,
perhaps, to politics. The culture of the modern man is
characteristically urban, as distinguished from the folk culture,
which rests on personal relations and direct participation in the
common life of the family, the tribe, and the village community.
In fact, if we define them strictly, as Lévy-Bruhl seems to do, we
may say that reason and reflective thinking were born in the city.
They came, if not into existence, at least into vogue, in Athens, in the
time of Socrates and the Sophists. The Sophists were, in fact, a
distinctly urban phenomenon, and we owe to Socrates—who was one
of them—the first clear recognition of conceptional, as distinguished
from perceptional, knowledge. We owe to Plato, Socrates’ disciple,
the definition of the most fundamental tool of modern scientific
thought, namely, the concept, i.e., the Platonic idea.
Magic may be regarded, therefore, as an index, in a rough way,
not merely of the mentality, but of the general cultural level of races,
peoples, and classes. It is even possible that a more thoroughgoing
analysis of the mental processes involved in magic and rational
thought will permit us to measure the mentalities of social groups
with as much precision, at least, as we now measure and grade—with
the aid of the Binet-Simon tests—the intelligence of individuals. At
least we should know in this case what we were measuring, namely,
the extent and degree to which a given group or class had acquired
the ability and the habit of thinking in rational rather than magical
terms.
With a more precise conception of the nature of magic and of the
mechanisms of pre-logical thinking, we shall, no doubt, be able not
merely to compare and perhaps measure with a certain degree of
accuracy and objectivity the mentality and cultural levels of different
cultural groups, but we shall be able also to describe the process by
which races and peoples make the transition from one cultural level
to another. This transition, which Thorndyke has described in his
history of magic, is everywhere in progress. These changes in a
contemporary and living society are open and accessible to
investigation, now that history has enabled us to see them, as they
can never see them later, when they have become history.
In a recent paper in the American Journal of Sociology,
Professor U. G. Weatherly has called attention to the advantages of
the West Indies as a sociological laboratory.
Islands are peculiarly interesting sociologically, provided, of
course, that they are inhabited. For one thing, they are physically
defined. The island community is, for this reason, invariably isolated,
geographically and socially, and because the means of
communication are known, the extent of isolation can be reduced to
relatively measurable terms.
This isolation tends to give to each separate island community
an individuality that one rarely finds elsewhere. Because islands are
geographically limited and isolated, the influence of climate and
physiographic characteristics, as well as of economic organization, in
defining cultural traits, can be estimated and assessed with greater
accuracy than elsewhere. Until one has visited some of the Lesser
Antilles, he is not likely to understand or appreciate Frederick A.
Ober’s rather drastic summary of their history—“Discovered by the
Spaniards, appropriated by the Dutch, Danish, or English, and finally
abandoned to the semi-barbarous blacks from Africa, this has been
the usual succession in the islands.”[67]
 The rather bitter note of this statement probably reflects the
tone of the white planters, whose position in the islands has
gradually declined since the emancipation of the slaves.
It directs attention, however, to what is, from the point of view
of the student of human nature and of society, the most interesting
and unique feature of the islands, namely, the racial situation. As
Professor Weatherly has said, “Perhaps nowhere else is there a better
opportunity for securing definite evidence bearing on the opposing
theories of race and contact as factors in cultural growth.” Every
island, in fact, is a separate racial melting-pot in which the mingled
cultures and races of Europe, Africa, and Asia seem to be gradually,
very gradually, simmering down to a single cultural, and eventually,
also, to a single racial, blend.
 IV. OBEAH: THE MAGIC OF THE BLACK
MAN
Outside the Spanish Islands, Negroes are the dominant race in
the West Indies. In regions where they have not been replaced by
Hindus, as they have been in Trinidad and Demerara, British
Guiana, they constitute 90 per cent of the population. They are, in
fact, the only people who regard themselves as natives. The Asiatics
and the Europeans are, for the most part, mere sojourners.
So far as the islands now have a native culture it is the culture of
the Negro folk. It is, at the same time, the most characteristic
manifestation of the mentality of the West Indian black man, so far
as he has preserved what Lévy-Bruhl describes as the mentality of
primitive man.
What is more interesting about obeah is that while as a practice
and a belief it is universal among the uneducated classes of the black
population in the islands, it is everywhere different, and everywhere
in process of change. Practices that were originally imported from
Africa tend to assimilate and fuse with related practices and traits of
the European and Hindu cultures wherever the Africans have come
into contact with them.
This is evident, in the first place, from the fact that the obeah
man is not always a Negro; he may be, and not infrequently is, a
Hindu. In the second place, the ritual of obeah may include anything
from patent medicine to Guinea pepper. Among the instruments of
obeah in the possession of the police of Trinidad recently were a
stone image, evidently of Hindu origin, and a book of magic ritual
published in Chicago, which pretended to be, and no doubt had been,
translated originally from the writings of Albertus Magnus, the great
medieval writer on magic. A book called Le Petit Albert is said to be
extremely popular among obeah men in the French Islands.
The favorite decoctions in use among witch doctors consist of
bones, ashes, “grave dirt,” human nail parings—mixed, perhaps, with
asafetida or any other substance having a pungent odor. But in
addition to these, obeah men in the West Indies use the candles, the
little shrines, or “chapels,” as they call them, and various other
portions of the ritual of the Catholic church.
In January, 1917, a woman known as Valentine Sims, a native of
St. Lucia, was convicted, in Port-of-Spain, Trinidad, of obtaining
money by the assumption of supernatural powers. The testimony in
the case showed that, among other things, she attended the Roman
Catholic church, and, on pretense of receiving holy communion, took
the altar bread distributed to the worshipers during the communion,
and used it in practicing obeah.
All this suggests that obeah, as one finds it in the West Indies, is
not so much a tradition and a cultural inheritance as it is an innate
predisposition, like a sense of humor, or “the will to believe,” as
James describes it. Behind these practices, and supporting them, are
all sorts of fears and a general sense of insecurity in regard to the
physical and spiritual environment that more cultivated persons
either do not feel, or they find escape from in quite different
practices.
This is clearly indicated in the letters found among the papers of
obeah adepts which have been confiscated from time to time by the
police. From these letters one gains an insight into the nature and
extent of the terrors, anxieties, and perils of the soul which trouble
the dreams and imaginations of the black man, whom we ordinarily
think of as roaming, cheerful, care-free, and unconcerned in a
worried and troubled world.
The black man in the West Indies is greatly troubled about a
great many things. He has more than the usual number of obscure
pains and aches, which he worries about a great deal, and for which
he, like most of us, is in search of some sovereign remedy. He is
disturbed about his relations with his employer. Not that, like the
workingman we know, he talks or thinks about his rights and the
rights of labor. He is not class-conscious. Quite the contrary, he is
constantly worried because he is not in favor with his employer. If he
is scolded or scowled at, he is troubled. His first assumption, in such
circumstances, is that some fellow-employee in some dark way is
influencing his employer against him, and he seeks the obeah charm
which will discover and circumvent his enemy and win back his
employer’s good will.
 If he gets into a quarrel with the family next door, if his
sweetheart looks coldly upon him, if his wife deserts him, he
inevitably assumes that there are personal and magical influences at
work, seeking to undermine otherwise sweet and happy relations.
Frequently he is right. At any rate the obeah man exploits these
suspicions, and that is the reason strenuous efforts are being made in
the British Islands to stamp the superstition out.
Visiting the police courts in the English islands, one is
profoundly impressed by the patient efforts of most of the judges to
discover and apply the rules of law to the petty personal and
neighborhood difficulties that the natives are so fond of airing in the
courts. One gets the impression that the most difficult thing for the
primitive mind to conceive and administer for himself is justice. On
the other hand, the Negro, at least, knows and appreciates justice
when he meets it. That is probably one reason why he likes to take
his troubles to court.
 V. FASHIONS IN OBEAH
One gets the impression that there are fashions in obeah.
Dominica, for example, is noted for its use of love-philters; in
Montserrat, obeah is mainly a protection against evil spirits and a
means of communication with the dead; in Antigua, obeah is most
generally a form of medicine. Amulets, “guards,” as they are
popularly called, intended to ward off evil spirits or protect one
against the ill-will of an evil-minded neighbor are also popular. Nevis
has a reputation for “black magic.”
The older generation of obeah men were supposed to have a
knowledge of vegetable poisons the effects of which cannot be
detected on postmortem. In Nevis the older tradition has apparently
lingered longer than elsewhere. At any rate, magical practices seem
to have assumed a more malignant form in Nevis than in some of the
other islands.
In 1916 an old woman, Rose Eudelle, deaf and bedridden, was
convicted of practicing obeah. She seems to have been one of the few
witch doctors who believed sincerely in the efficacy of their own
practices. She had a great reputation, and boasted that she had killed
one man and sent another to the asylum. Curiously enough, she
practiced obeah mainly through correspondence, and when she was
finally arrested, some fifty letters from clients in various islands, one
of them in New York City, were discovered. There was great
excitement in Nevis when she was arrested. As she had solemnly
threatened the colored police sergeant who arrested her, the whole
black population was confidently expecting that some dramatic
misfortune would overtake him. Here there seemed to be something
more nearly approaching primitive and African magic than in any of
the other thirty-eight cases of which I obtained some sort of record.
Not only is the fashion in obeah different in the different islands,
but interest in magic, which is said to be declining everywhere, is less
modified in some islands than in others. In Barbados, though the
practices still persist, prosecutions for obeah have almost entirely
ceased. In the police station at Castries, St. Lucia, on the other hand,
there are still preserved the heart and hand of a Negro boy who was
killed some years ago to furnish an obeah man with the instruments
of magic to enable him to open the vaults of the local bank and rob it
of the treasure which was supposed to be amassed there.
The fact is, then, that the mentality of the black population of
the West Indies, as that of Africa, is changing under the influence of
contact with the white man’s culture, and particularly under the
influence of the very energetic prosecutions which not only have
made the profession less profitable, but by undermining faith in his
supernatural powers, have robbed the obeah man of the terror which
he at one time inspired.
Aside from the superficial changes in the original superstition
and the gradual decline of interest and belief in magic, it seems as if
certain more fundamental changes, reflected in these practices, were
taking place. First, the obeah man tends to become, on the one hand,
a sort of unlicensed physician, as in the case of Percival Duval, an
obeah man who maintained regular office hours, wrote prescriptions,
and prescribed medicines. Actually, Duval seems to have used a little
less medicine and a little more hocus pocus than the average medical
practitioner in our own country did a few years ago. But he was
convicted, and upon appeal to the higher court his conviction was
confirmed. Another obeah man in St. John’s, Antigua, was found to
be dealing, along with the other instruments of obeah, very largely in
patent medicines and homely household remedies. Among the
instruments of obeah taken from his office when it was raided were
the following: (1) Exhibit labeled “ground bones and ashes.” The
sample consisted of a mixture of a calcium compound and probably
lime, wood-ashes, and incense. The incense content was 26.3 per
cent. (2) Exhibit labeled “ground glass and smith coal.” This sample
consisted of a coarse commercial oxygen mixture. (3) Yellow powder.
This consisted of a cheap, scented starch powder. (4) Supposed dog’s
tongue. This consisted entirely of vegetable matter composed
principally of starch cells. (5) Exhibit labeled “ashes and incense.”
The sample consisted of incense, wood-ashes, and charcoal, earth,
and small pebbles, with a small proportion of oxygen mixture. It
contained 17.3 per cent of incense in lump and powdered form. (6)
Exhibit “vial with yellow liquid.” The sample consisted of ordinary
commercial oil of anise. (7) Vial with brownish liquid. The sample
consisted of a solution of iodine in potassium iodine of
approximately 15 per cent strength.
The fact is, the obeah man in the West Indies is in a way to
become a quack doctor. This represents one direction in which
change is taking place.
On the other hand, there is a disposition of the obeah man to
become a sort of confessor and privy counselor in all the intimate
and personal affairs of the common people. The black people—and
not only black, but occasionally Portuguese, who are the traders in
the smaller islands—go to him with affairs of business and of the
heart. They write him long personal letters, and he sends them a
magical prayer or incantation to cure them of bodily ailments, to
protect them from dangers of travel, and to insure general good
fortune. In an affair of the heart, the witch doctor frequently
prescribed a magic powder, sweetly scented, to accompany and lend
a delicate and stimulating fragrance to a love letter. In principle, this
aspect of the obeah man’s practice is like Mr. Coué’s—“Every day, in
every way, I am better and better”—only that the uses of obeah are
more specific. In any case, there is here a very evident tendency of
the practice to assume a form in which the ritual of obeah is merely a
device, like the prayers of primitive folk, for magically re-enforcing
the expression of a wish. So closely are the magical practices of the
obeah man connected—in the mind of the ordinary black man—with
religion that in one case, at any rate, he pretended to cure a boy of
insanity by making believe that he was operating as the agent or
proxy of the priest.
This, then, represents a second tendency to change in the
practices of magic by the black man. If obeah in some instances
seems to be taking the form of popular medicine, in others it tends to
assume the form of a pagan religious ceremony, adapting itself to the
forms and the ritual of the local church.
 VI. THE PROBLEM STATED
In a recent volume, Studies in Human Nature, Mr. J. B. Baillie
has suggested that the disposition and the ability to think abstractly,
disinterestedly, and scientifically is not only a relatively recent
acquisition of the human race, but at the same time is a local
phenomenon.

This geographical limitation of science is indeed a remarkable fact, the

importance of which our familiarity with the scientific mood and our insularity of
mind constantly tend to obscure.... We should not forget that millions of human
beings have no interest in the scientific mood at all, and seem by constitution to
have no capacity for it.... Some individuals among these nonscientific peoples may,
and do, assimilate the science of the West. But experience seems to show that such
acquisition is at best a mere accomplishment, and leaves the racial structure and
composition of their minds unaffected.... The nonscientific peoples take up science
as they put on Western clothes. One may change one’s clothes, but there is no
changing the skin. The fact is that the scientific mood arises from a peculiar
attitude of the mind to the world found amongst certain peoples of the globe; and
without this attitude science will always appear a curiosity or an irrelevance.[68]

The author assumes that the disposition to think rationally and

to cultivate abstract and scientific thought is a racial attribute.
Perhaps a more accurate statement of the matter would take account
of the fact that even within the comparatively limited area where
science is in vogue, there are large numbers of people who still—even
while using the language of science—think in the more elementary
forms of folk-thought. This seems to be true wherever large masses
of the population are still illiterate, or where, for any reason, even
when able to read, they habitually think in terms of the spoken
language, rather than in the language of the printed page. Literacy
itself is very largely a product of modern city life. Books and reading
which used to be, and to a certain extent are yet, a luxury in the
country, become a necessity in the city.
The Negroes migrating in such large numbers from the West
Indies to the United States are bringing with them habits of thought
which have largely disappeared among the Negro population native
to this country. The obeah men of the West Indies have many clients
in the United States, and a recent issue of the New York Age
announced that the Negro quarter around 135th Street, New York,
was overrun with fortune tellers and witch doctors, many or most of
them from the West Indies.
Within a few years, however, most of these superstitions will
have disappeared, or at any rate will have assumed those more
conventional forms with which we are familiar and have learned to
tolerate. This is certainly true of the city population.
Great changes are taking place, with the introduction of modern
methods of education, in our own insular possessions. Mr. Axel
Holst, of the National Bank of the Danish West Indies, who has been
a close and assiduous student of Negro folklore in the Virgin Islands,
says that the effect of the American system of education will within a
few years totally change the mental habits of the natives of St.
Thomas. Since the younger generation have begun to read books,
they are not so interested as they were in the Nansi stories, which
correspond to the Bre’r Rabbit stories of the States. Since the
introduction of American rule, newspapers have come into vogue,
and the young men have taken to political discussion.
The changes in the “mentality” of the Negro population are, Mr.
Holst says, going on visibly, and at a surprising rate. These changes,
if they are actually taking place, should be made the subject of
further investigation. Such study should enable us to determine,
among other things, more precisely than we have been able to
determine hitherto, the rôle which cultural contacts, social heritages,
and racial temperament play in the whole cultural process.
It is evident that we are not to assume, as otherwise we might,
that there is no area of the experience in which primitive or
preliterate people think realistically and rationally. On the other
hand, in contrasting primitive mentality with that of civilized man,
we need not assume—except for the sake of the contrast—that the
thinking of civilized man is always and everywhere either rational or
scientific. As a matter of fact, there are still wide areas of our
experience that have not as yet been fully rationalized, notably the
fields of medicine and religion. In medicine, at least—if we are to
believe a recent medical critic of what, in imitation of Lévy-Bruhl, we
might call “medical mentality”—the majority of practitioners still
think of diseases as morbid entities instead of convenient labels for
groups of symptoms.
The following paragraph from a recent writer states the matter
from the point of view of a critic of “medical mentality.”

It is not to be thought that any educated medical man indeed believes “a

disease” to be a material thing, although the phraseology in current use lends
colour to such supposition. Nevertheless, in hospital jargon, “diseases” are “morbid
entities,” and medical students fondly believe that these “entities” somehow exist
in rebus Naturae and were discovered by their teachers, much as was America by
Columbus.... In fact, for these gentlemen “diseases” are Platonic realities;
universals ante rem. This unavowed belief, which might be condoned were it
frankly admitted, is an inheritance from Galen, and carries with it the corollary
that our notions concerning this, that, or the other “diseases” are either absolutely
right or absolutely wrong, and are not merely matters of mental convenience.

But if the practitioners think of diseases in pre-logical terms

what can we expect of the layman, whose medical education has been
largely confined to the reading of patent medical advertisements?
What has been said suggests a problem which may be perhaps stated
in this way: How far is the existence of magic and magical mode of
thought a measure of the mentality of a racial or cultural group in
which it is found to persist? How far is what Ballie calls “the
scientific mood” an effect of the urban environment?

Robert E. Park
 CHAPTER VIII
CAN NEIGHBORHOOD WORK HAVE A
SCIENTIFIC BASIS?

Neighborhood work at present and as now practiced cannot, for

two reasons, be said to be based upon science. First, the social
sciences—and I refer to sociology in particular—have at present little
to offer as a scientific basis for social work; secondly, what
knowledge the social sciences have accumulated has been used little,
or not at all, by neighborhood workers.
The trend of neighborhood work to a scientific basis.—But if
neighborhood work has not had a scientific basis, it has had, from its
inception, as one of its conscious or unconscious motives, the search
after knowledge as the basis of human relations. Settlement work,
especially, represents not only the most devoted and the most
idealistic, but also the most intelligent, phase of social work of the
past generation. The settlement in its origin was an extension of the
university. It carried over into a new environment the love of truth
and, it may be added, the spirit of science. The residents of the
settlement were brought at once into touch with social reality; that is,
with the concrete facts of human life.
This early venture into intimate contact with social reality may
accordingly be called the first stage in the trend of neighborhood
work toward a scientific basis. But settlement workers soon found
that sympathetic understanding and intimate contacts failed to solve
many of the actual problems of neighborhood work. The
recalcitrancy of the boys’ gang, the opposition and manipulations of
the ward boss, the competition of commercialized recreation, the
unsolvable cultural conflict between immigrant parents and
Americanized children are only a few of the many perplexing
conditions of neighborhood life in immigrant areas which resisted
the spirit of good will of settlement workers. They therefore began to
study their communities in the attempt to state the factors at work by
an analysis of the elements in the situation. Hull House Maps and
Papers, The City Wilderness, and Americans in Process are
illustrations of the careful study and keen observation of these very
early efforts to determine and to take account of the many and
different conditions affecting neighborhood work. This interest in
the discovery of factors in the social situation may therefore be called
the second stage in the trend of neighborhood work toward a
scientific basis.
Science, however, is concerned not with factors, but with forces.
The distinction is not always clearly drawn between a factor and a
force. “Factors are the elements that co-operate to make a given
situation. Forces are type-factors operative in typical situations.”[69]
A factor is thought of as a concrete cause for an individual event; a
force is conceived to be an abstract cause for events in general so far
as they are similar. A particular gang of boys, the Torpedo gang, of
which Tony is the leader—and which is made up of eight street Arabs
—is a factor in the situation which a certain settlement in an Italian
colony in Chicago faces. But as soon as the attention shifts from this
one gang and this particular settlement to settlements in general and
to gangs in general the transition is made from a factor to a force. A
gang is a factor to a given settlement; the gang is a force from the
standpoint of all settlements.
The study of social forces in the community.—If neighborhood
work can have a scientific basis, it is because there are social forces in
community life—forces like geographical conditions, human wishes,
community consciousness—that can be studied, described, analyzed,
and ultimately measured. In a series of research projects now in
progress in the Department of Sociology in the University of Chicago,
studies are being made of the social forces of community life. While
the city of Chicago is used as the laboratory for this investigation, it is
assumed that the processes of urban life in one community are in
certain ways typical of city life throughout the United States.
The term “community” is widely used by sociologists,
neighborhood workers, and others, but often with widely divergent
meanings. In research in any field it is necessary to define our
concepts and to make relevant distinctions. In the literature of the
subject there is a growing disposition to emphasize as one of the
fundamental aspects of the community its geographical setting.
Whatever else the community may be, it signifies individuals,
families, groups, or institutions located upon an area and some or all
of the relationships which grow out of this common location.
“‘Community’ is the term which is applied to societies and social
groups where they are considered from the point of view of the
geographical distribution of the individuals and institutions of which
they are composed.”[70]
Upon reflection it is evident that markedly different social
relationships may have their roots in the conditions of a common
territorial location. Indeed, it is just these outstanding differences in
communal activities, viewed in relation to their geographic
background, which have caused much of the confusion in the use of
the term “community.” For community life, as conditioned by the
distribution of individuals and institutions over an area, has at least
three quite different aspects.
First of all, there is the community viewed almost exclusively in
terms of location and movement. How far has the area itself, by its
very topography and by all its other external and physical
characteristics, as railroads, parks, types of housing, conditioned
community formation and exerted a determining influence upon the
distribution of its inhabitants and upon their movements and life? To
what extent has it had a selective effect in sifting and sorting families
over the area by occupation, nationality, and economic or social
class? To what extent is the work of neighborhood or community
institutions promoted or impeded by favorable or unfavorable
location? How far do geographical distances within or without the
community symbolize social distances? This apparently “natural”
organization of the human community, so similar in the formation of
plant and animal communities, may be called the “ecological
community.”
No comprehensive study of the human community from this
standpoint has yet been made. A prospectus for such a study is
outlined in an earlier chapter by Professor R. D. McKenzie, in this
volume, under the title, “The Ecological Approach to the Study of the
Human Community.”[71] Yet there are several systematic treatises
and a rapidly growing literature of scientific research in the two
analogous fields of plant ecology and animal ecology. The processes
of competition, invasion, succession, and segregation described in
elaborate detail for plant and animal communities seem to be
strikingly similar to the operation of these same processes in the
human community. The assertion might even be defended that the
student of community life or the community organization worker
might secure at present a more adequate understanding of the basic
factors in the natural organization of the community from
Warming’s Oecology of Plants or from Adams’s Guide to the Study
of Animal Ecology than from any other source.
In the second place, the community may be conceived in terms
of the effects of communal life in a given area upon the formation or
the maintenance of a local culture. Local culture includes those
sentiments, forms of conduct, attachments, and ceremonies which
are characteristic of a locality, which have either originated in the
area or have become identified with it. This aspect of local life may be
called “the cultural community.” This relationship of cultural
patterns to territorial areas has not yet been adequately studied
unless in the phenomena of language. What, for example, are studies
in dialect but one illustration of how local areas with their entailed
isolation differentially affect customs of speech? Concrete materials
for a wider study of culture in relation to location are increasing,
notably upon preliterate peoples and upon retarded groups
geographically isolated, as the southern mountaineers or the remote
inhabitants of Pitcairn Island.
The immigrant colony in an American city possesses a culture
unmistakably not indigenous but transplanted from the Old World.
The telling fact, however, is not that the immigrant colony maintains
its old-world cultural organization, but that in its new environment it
mediates a cultural adjustment to its new situation. How basically
culture is dependent upon place is suggested by the following
expressions, “New England conscience,” “southern hospitality,”
“Scottish thrift,” “Kansas is not a geographical location so much as a
state of mind.” Neighborhood institutions like the church, the school,
and the settlement are essentially cultural institutions, and
recognition of this fact has far-reaching implications for the policies
and programs of these local centers.
 There remains a third standpoint from which the relation of a
local area to group life may be stated. In what ways and to what
extent does the fact of common residence in a locality compel or
invite its inhabitants to act together? Is there, or may there be
developed upon a geographical basis, a community consciousness?
Does contiguity by residence insure or predispose to co-operation in
at least those conditions of life inherent in geographic location, as
transportation, water supply, playgrounds, etc.? Finally, what degree
of social and political action can be secured on the basis of local
areas? This is the community of the community organization worker
and of the politician, and may be described as “the political
community.” It is upon this concept of the community as a local area
that American political organization has been founded.
These three definitions of the community are not perhaps
altogether mutually exclusive. They do, however, represent three
distinctly different aspects of community life that will have to be
recognized in any basic study of the community and of community
organization. A given local area, like Hyde Park in Chicago, may at
the same time constitute an ecological, cultural, and political
community, while another area like the lower North Side in the same
city, which forms a distinct ecological unit, falls apart into several
cultural communities and cannot, at any rate from the standpoint of
a common and effective public opinion, be said to constitute a going
political community. The Black Belt in Chicago comprises one
cultural community but overflows several ecological areas and has no
means of common political action except through ward lines
arbitrarily drawn.
It follows that the boundaries of local areas determined
ecologically, culturally, and politically seldom, if ever, exactly
coincide. In fact, for American cities it is generally true that political
boundaries are drawn most arbitrarily, without regard either to
ecological or cultural lines, as is notoriously the case in the familiar
instance of the gerrymander. Therefore it is fair to raise the question:
How far are the deficiencies in political action through our
governmental bodies and welfare action through our social agencies
the result of the failure to base administrative districts upon
ecological or cultural communities?[72]
 This analysis of the community into its threefold aspects
suggests that the study of social forces in a local area should assume
that the neighborhood or the community is the resultant of three
main types of determining influences: first, ecological forces; second,
cultural forces; and third, political forces.
Ecological forces.—The ecological forces are those which have to
do with the process of competition and the consequent distribution
and segregation by residence and occupation. Through competition
and the factors which affect it, as trade centers, etc., every
neighborhood in the city becomes a component and integral part of
the larger community, with a destiny bound up by its relation to it. In
the study of the growth of the city it is found that the life of any
neighborhood is determined, in the long run, not altogether by the
forces within itself, but even more by the total course of city life. To
think of the neighborhood or the community in isolation from the
city is to disregard the biggest fact about the neighborhood.
Studies of urban growth reveal that the city grows outward from
its central business district (1) in a series of expanding zones.[73]
There is a “zone of transition” (2) encircling the downtown area. This
is the area of deterioration, the so-called “slum”, created in large part
by the invasion of business and light manufacture. A third area (3) is
inhabited by workers in industry who have escaped from the area of
deterioration (2) and who desire to live within easy access of their
work. Beyond this zone is the “residential area” (4) of high-class
apartment buildings or of exclusive “restricted” districts of single
family dwellings. Still farther, out beyond the city limits, is the
“commuters’ zone” (5) of suburban areas or satellite cities within a
sixty-minute ride of the central business district.
Within these zones of urban growth are to be found local
districts or communities, and these in turn subdivide into smaller
areas called neighborhoods. In the long run, geographical factors and
the process of competition fix the boundaries and the centers of
these areas. It is important that neighborhood work be in accordance
with, rather than in opposition to, these silent but continuous
influences. A map of local communities was prepared to show the
way in which rivers, railroads, large industrial establishments, parks,
and boulevards divide the city into its constituent local communities
—residential and industrial.