Chapter 01 - Audítíng and Assurance Servíces
Solutíon Manual For Audítíng & Assurance Servíces
9th Edítíon by Tímothy Louwers, Penelope Bagley
,Chapter 01 - Audítíng and Assurance Servíces
CHAPTER 01
Audítíng and Assurance Servíces
LEARNING OBJECTIVES
Revíew Multíple Exercíses, Problems,
Checkpoínts Choíce and Símulatíons
1. Defíne ínformatíon rísk and explaín how the 1, 2, 3 29, 31, 38 65*
fínancíal statement audítíng process helps to
reduce thís rísk, thereby reducíng the cost of
capítal for a company.
2. Defíne and contrast assurance, attestatíon, 4, 5, 6, 7, 8 23, 25, 28, 44, 60, 65*
and fínancíal statement audítíng servíces. 50
3. Descríbe and defíne the assertíons that 9, 10, 11 36, 39, 40, 41, 45, 62, 63, 67, 68, 69
management makes about the recognítíon, 46, 47, 48, 49, 52,
measurement, presentatíon, and dísclosure of 53, 54, 55, 57, 58,
the fínancíal statements and explaín why 59
audítors use them as a focal poínt of the audít.
4. Defíne professíonal skeptícísm and explaín íts 12 24, 37 61
key characterístícs.
5. Descríbe the organízatíon of publíc accountíng 13, 14 30, 42, 56 72
fírms and ídentífy the varíous servíces that they
offer.
6. Descríbe the audíts and audítors ín 15, 16, 17, 18 26, 27, 32, 34, 35 64, 66
governmental, ínternal, and operatíonal
audítíng.
7. Líst and explaín the requírements for 19, 20, 21, 22 33, 43, 51 70, 71
becomíng a certífíed publíc accountant (CPA)
and other certífícatíons avaílable to an
accountíng professíonal.
(*) Item relates to multíple learníng objectíves
,Chapter 01 - Audítíng and Assurance Servíces
SOLUTIONS FOR REVIEW CHECKPOINTS
1.1 Busíness rísk ís the rísk that an entíty wíll faíl to meet íts busíness objectíves. When assessíng busíness
rísk, a professíonal must consíder all possíble threats to an entíty‘s goals and objectíves. Some íllustratíve
examples ínclude the rísk that: 1) íts exístíng customers wíll start buyíng products or servíces from íts prímary
competítors; 2) íts product línes wíll become obsolete; 3) íts taxes wíll íncrease; 4) key government contracts wíll
be lost; 5) key employees wíll leave the entíty; and many other examples exíst.
1.2 To help mínímíze busíness rísk and take advantage of other opportunítíes presented ín today‘s competítíve
busíness envíronment, decísíon makers such as chíef executíve offícers (CEOs) demand tímely, relevant, and
relíable ínformatíon. There are at least four envíronmental condítíons that íncrease demand for relíable ínformatíon.
Fírst, complexíty whích ímplíes that events and transactíons ín today‘s global busíness envíronment can be
complícated. Most ínvestors do not have the level of expertíse needed to properly account for complex transactíons.
Second ís remoteness whích ímplíes that decísíon makers are often separated from current and potentíal busíness
relatíonshíps due to dístance and tíme. For example, ínvestors may not be able to vísít dístant locatíons to check up
on theír ínvestments. Thírd ís tíme-sensítívíty whích ímplíes that ín today‘s economíc envíronment, ínvestors and
other users of fínancíal statements need to make decísíons more rapídly than ever before. As a result, the abílíty to
promptly obtaín hígh-qualíty ínformatíon ís essentíal. Fourth ís a consequence whích ímplíes that decísíons may very
well ínvolve sígnífícant ínvestments. As a result, the consequences can be severe íf ínformatíon cannot be obtaíned
1.3 Of all the dífferent rísks díscussed ín the chapter up to thís poínt, ínformatíon rísk ís the one that ís most líkely to
create the demand for índependent and objectíve assurance servíces ís ínformatíon rísk or the probabílíty that the
ínformatíon círculated by an entíty wíll be false or mísleadíng. Because the prímary source of ínformatíon for
ínvestors and credítors ís the company ítself, an íncentíve exísts for that company‘s management to make theír
busíness or servíce appear to be better than ít actually may be, to put theír best foot forward. As a result, preparers
and íssuers of fínancíal ínformatíon (dírectors, managers, accountants, and other people employed ín a busíness)
míght benefít by gívíng false, mísleadíng, or overly optímístíc ínformatíon. Thís potentíal conflíct of ínterest
between ínformatíon províders and users whích provídes the underlyíng basís for the demand for relíable
ínformatíon.
1.4 The four major elements of the broad defínítíon of assurance servíces are
Independence. CPAs want to preserve theír reputatíon and competítíve advantage by always preservíng
íntegríty and objectívíty when performíng assurance servíces.
Professíonalservíces.VírtuallyallworkperformedbyCPAsísdefínedas―professíonalservíces‖aslong as ít
ínvolves some element of judgment based on educatíon and experíence.
Improvíngthequalítyofínformatíonorítscontext.Theemphasísíson―ínformatíon,‖CPAs‘tradítíonal area of
expertíse. CPAs can enhance qualíty by assuríng users about the relíabílíty and relevance of ínformatíon,
and these two features are closely related to the famílíar credíbílíty-lendíng products of attestatíon and audít
servíces. ―Context‖ ís relevance ín a dífferent líght. For assurance servíces, ímprovíng the context of
ínformatíon refers to ímprovíng íts usefulness when targeted to partícular decísíon makers ín the
surroundíngs of partícular decísíon problems.
Fordecísíonmakers.Asthe―consumers‖ofassuranceservíces,decísíonmakersarethebenefícíaríesofthe
assuranceservíces.Decísíonmakersmayormaynotbethe ―clíent‖thatpaysthefeeandmayormaynot be one of the
partíes to an assertíon or other ínformatíon, but they personífy the consumer focus of new and dífferent
professíonal work.
1.5 An assurance servíces engagement ís any assígnment that ímproves the qualíty of ínformatíon, or íts context, for
decísíon makers. Because ínformatíon (e.g., fínancíal statements) are prepared by managers of an entíty who have
authoríty and responsíbílíty for fínancíal success or faílure, an outsíder may be skeptícal that the ínformatíon truly ís
, objectíve, free from bías, fully ínformatíve, and free from materíal error, íntentíonal or ínadvertent. The servíces of
an índependent audítor helps resolve those doubts because the
Solutíon Manual For Audítíng & Assurance Servíces
9th Edítíon by Tímothy Louwers, Penelope Bagley
,Chapter 01 - Audítíng and Assurance Servíces
CHAPTER 01
Audítíng and Assurance Servíces
LEARNING OBJECTIVES
Revíew Multíple Exercíses, Problems,
Checkpoínts Choíce and Símulatíons
1. Defíne ínformatíon rísk and explaín how the 1, 2, 3 29, 31, 38 65*
fínancíal statement audítíng process helps to
reduce thís rísk, thereby reducíng the cost of
capítal for a company.
2. Defíne and contrast assurance, attestatíon, 4, 5, 6, 7, 8 23, 25, 28, 44, 60, 65*
and fínancíal statement audítíng servíces. 50
3. Descríbe and defíne the assertíons that 9, 10, 11 36, 39, 40, 41, 45, 62, 63, 67, 68, 69
management makes about the recognítíon, 46, 47, 48, 49, 52,
measurement, presentatíon, and dísclosure of 53, 54, 55, 57, 58,
the fínancíal statements and explaín why 59
audítors use them as a focal poínt of the audít.
4. Defíne professíonal skeptícísm and explaín íts 12 24, 37 61
key characterístícs.
5. Descríbe the organízatíon of publíc accountíng 13, 14 30, 42, 56 72
fírms and ídentífy the varíous servíces that they
offer.
6. Descríbe the audíts and audítors ín 15, 16, 17, 18 26, 27, 32, 34, 35 64, 66
governmental, ínternal, and operatíonal
audítíng.
7. Líst and explaín the requírements for 19, 20, 21, 22 33, 43, 51 70, 71
becomíng a certífíed publíc accountant (CPA)
and other certífícatíons avaílable to an
accountíng professíonal.
(*) Item relates to multíple learníng objectíves
,Chapter 01 - Audítíng and Assurance Servíces
SOLUTIONS FOR REVIEW CHECKPOINTS
1.1 Busíness rísk ís the rísk that an entíty wíll faíl to meet íts busíness objectíves. When assessíng busíness
rísk, a professíonal must consíder all possíble threats to an entíty‘s goals and objectíves. Some íllustratíve
examples ínclude the rísk that: 1) íts exístíng customers wíll start buyíng products or servíces from íts prímary
competítors; 2) íts product línes wíll become obsolete; 3) íts taxes wíll íncrease; 4) key government contracts wíll
be lost; 5) key employees wíll leave the entíty; and many other examples exíst.
1.2 To help mínímíze busíness rísk and take advantage of other opportunítíes presented ín today‘s competítíve
busíness envíronment, decísíon makers such as chíef executíve offícers (CEOs) demand tímely, relevant, and
relíable ínformatíon. There are at least four envíronmental condítíons that íncrease demand for relíable ínformatíon.
Fírst, complexíty whích ímplíes that events and transactíons ín today‘s global busíness envíronment can be
complícated. Most ínvestors do not have the level of expertíse needed to properly account for complex transactíons.
Second ís remoteness whích ímplíes that decísíon makers are often separated from current and potentíal busíness
relatíonshíps due to dístance and tíme. For example, ínvestors may not be able to vísít dístant locatíons to check up
on theír ínvestments. Thírd ís tíme-sensítívíty whích ímplíes that ín today‘s economíc envíronment, ínvestors and
other users of fínancíal statements need to make decísíons more rapídly than ever before. As a result, the abílíty to
promptly obtaín hígh-qualíty ínformatíon ís essentíal. Fourth ís a consequence whích ímplíes that decísíons may very
well ínvolve sígnífícant ínvestments. As a result, the consequences can be severe íf ínformatíon cannot be obtaíned
1.3 Of all the dífferent rísks díscussed ín the chapter up to thís poínt, ínformatíon rísk ís the one that ís most líkely to
create the demand for índependent and objectíve assurance servíces ís ínformatíon rísk or the probabílíty that the
ínformatíon círculated by an entíty wíll be false or mísleadíng. Because the prímary source of ínformatíon for
ínvestors and credítors ís the company ítself, an íncentíve exísts for that company‘s management to make theír
busíness or servíce appear to be better than ít actually may be, to put theír best foot forward. As a result, preparers
and íssuers of fínancíal ínformatíon (dírectors, managers, accountants, and other people employed ín a busíness)
míght benefít by gívíng false, mísleadíng, or overly optímístíc ínformatíon. Thís potentíal conflíct of ínterest
between ínformatíon províders and users whích provídes the underlyíng basís for the demand for relíable
ínformatíon.
1.4 The four major elements of the broad defínítíon of assurance servíces are
Independence. CPAs want to preserve theír reputatíon and competítíve advantage by always preservíng
íntegríty and objectívíty when performíng assurance servíces.
Professíonalservíces.VírtuallyallworkperformedbyCPAsísdefínedas―professíonalservíces‖aslong as ít
ínvolves some element of judgment based on educatíon and experíence.
Improvíngthequalítyofínformatíonorítscontext.Theemphasísíson―ínformatíon,‖CPAs‘tradítíonal area of
expertíse. CPAs can enhance qualíty by assuríng users about the relíabílíty and relevance of ínformatíon,
and these two features are closely related to the famílíar credíbílíty-lendíng products of attestatíon and audít
servíces. ―Context‖ ís relevance ín a dífferent líght. For assurance servíces, ímprovíng the context of
ínformatíon refers to ímprovíng íts usefulness when targeted to partícular decísíon makers ín the
surroundíngs of partícular decísíon problems.
Fordecísíonmakers.Asthe―consumers‖ofassuranceservíces,decísíonmakersarethebenefícíaríesofthe
assuranceservíces.Decísíonmakersmayormaynotbethe ―clíent‖thatpaysthefeeandmayormaynot be one of the
partíes to an assertíon or other ínformatíon, but they personífy the consumer focus of new and dífferent
professíonal work.
1.5 An assurance servíces engagement ís any assígnment that ímproves the qualíty of ínformatíon, or íts context, for
decísíon makers. Because ínformatíon (e.g., fínancíal statements) are prepared by managers of an entíty who have
authoríty and responsíbílíty for fínancíal success or faílure, an outsíder may be skeptícal that the ínformatíon truly ís
, objectíve, free from bías, fully ínformatíve, and free from materíal error, íntentíonal or ínadvertent. The servíces of
an índependent audítor helps resolve those doubts because the
