Solution Manual for Auditing and Assurance Services 17th Edition by Alvin A. Arens | All Chapters Fully Covered.

Chapter 1

The Demand for Audit and Other Assurance Services
 Concept Checks

P. 8

1. To do an audit, there must be information in a verifiable form and some
standards (criteria) by which the auditor can evaluate the information.
Determining the degree of correspondence between information and
established criteria is determining whether a given set of information is in
accordance with the established criteria. For an audit of a company’s
financial statements the criteria are U.S. generally accepted accounting
principles or International Financial Reporting Standards.

2. The four primary causes of information risk are remoteness of information,
biases and motives of the provider, voluminous data, and the existence of
complex exchange transactions.
The three main ways to reduce information risk are:
1. User verifies the information.
2. User shares the information risk with management.
3. Audited financial statements are provided.

P. 16

1. The three main types of audits are operational audits, compliance audits, and
financial statement audits. The table below summarizes the purposes and
nature of each type of audit.


AUDITS OF
OPERATIONAL COMPLIANCE FINANCIAL
AUDITS AUDITS STATEMENTS
PURPOSE To evaluate To determine To determine
whether whether the client is whether the
operating following specific overall financial
procedures are procedures set by a statements are
efficient and higher authority presented in
effective accordance with
specified criteria
(usually GAAP)




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,Concept #xdChecks #xd(continued)

AUDITS #xdOF
OPERATIONAL COMPLIANCE #xdFINANCIAL

#xd AUDITS #xd AUDITS #xdSTATEMENT

S
USERS Management Authority #xdthat Different #xdgroups
#xdOF #xdof #xdestablished #xdrules, #xdfor #xddifferent

#xd AUDIT #xdorganization #xdregulations, #xdand #xdpurposes #xd—

#xdREPORT #xdprocedures, #xdeither #xdmany #xdoutside

#xdinternal #xdor #xdexternal #xdentities

#xdto #xdauditee



NATURE Highly Not Highly
#xdnonstandard; #xdstandardized, #xdstandardized

#xdoften #xdbut #xdspecific

#xdsubjective #xdand #xdusually

#xdobjective



PERFORMED
#xdBY: Almost
CPAs Frequently Occasionally #xduniversally



GAO
#xdAUDITOR Frequently Frequently Occasionally
S
IRS
#xdAUDITOR Never Universally Never
S
INTERNAL
#xd AUDITOR Frequently Frequently Frequently*
S
* #xdInternal #xdauditors #xdmay #xdassist #xdCPAs #xdin #xdthe #xdaudit #xdof #xdfinancial
#xdstatements. #xdInternal #xdauditors #xdmay #xdalso #xdaudit #xdinternal #xdfinancial

#xdstatements #xdfor #xduse #xdby #xdmanagement.




2. The # x d major # x d differences # x d in # x d the # x d scope # x d of # x d audit # x d responsibilities
# x d for # x d CPAs, # x d GAO #xdauditors, #xdIRS #xdagents, #xdand #xdinternal #xdauditors

#xdare:




 CPAs #xdperform #xdaudits #xdof #xdfinancial #xdstatements #xdprepared #xdusing
#xdU.S. #xdGAAP #xdor #xdIFRS #xdin # x d accordance # x d with # x d auditing

# x d standards.

 GAO #xdauditors #xdperform #xdcompliance #xdor #xdoperational #xdaudits #xdin
#xdorder #xdto #xdassure #xdthe #xdCongress #xdof #xdthe #xdexpenditure #xdof #xdpublic

#xdfunds #xdin #xdaccordance #xdwith #xdits #xddirectives #xdand #xdthe #xdlaw.

 IRS #xdagents #xdperform #xdcompliance #xdaudits #xdto #xdenforce #xdthe #xdfederal
#xdtax #xdlaws #xdas #xddefined #xdby #xdCongress, #xdinterpreted #xdby #xdthe #xdcourts,


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, #xdand #xdregulated #xdby #xdthe #xdIRS.
 Internal #xdauditors #xdperform #xdcompliance #xdor #xdoperational #xdaudits #xdin
#xdorder #xdto #xdassure #xdmanagement #xdor #xdthe #xdboard #xdof #xddirectors #xdthat

#xdcontrols #xdand #xdpolicies #xdare #xdproperly #xdand #xdconsistently #xddeveloped,

#xdapplied, #xdand # x d evaluated.




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,  #xd #xd Review #xdQuestions

1-1 To #xddo #xdan #xdaudit, #xdthere #xdmust #xdbe #xdinformation #xdin #xda #xdverifiable #xdform
#xdand #xdsome #xdstandards #xd(criteria) #xdby #xdwhich #xdthe #xdauditor #xdcan #xdevaluate #xdthe

#xdinformation. #xdThe #xdinformation #xdfor #xdJones #xdCompany's #xdtax #xdreturn #xdis #xdthe

#xdfederal #xdtax #xdreturns #xdfiled #xdby #xdthe #xdcompany. # x d The # x d established # x d criteria

# x d are # x d found # x d in # x d the # x d Internal # x d Revenue # x d Code #xdand # x d all

# x d interpretations. # x d For # x d the # x d audit # x d of # x d Jones # x d Company's

# x d financial #xdstatements #xdthe #xdinformation #xdis #xdthe #xdfinancial #xdstatements #xdbeing

#xdaudited #xdand #xdthe #xdestablished #xdcriteria #xdare #xdU.S. #xdGAAP #xdor #xdIFRS.




1-2 This #xdapparent #xdparadox #xdarises #xdfrom #xdthe #xddistinction #xdbetween #xdthe
#xdfunction #xdof #xdauditing #xdand #xdthe #xdfunction #xdof #xdaccounting. #xdThe #xdaccounting

#xdfunction #xdis #xdthe #xdrecording, #xdclassifying, #xdand #xdsummarizing #xdof #xdeconomic

#xdevents #xdto #xdprovide #xdrelevant #xdinformation #xdto #xddecision #xdmakers. #xdThe #xdrules

#xdof #xdaccounting #xdare #xdthe #xdcriteria #xdused #xdby #xdthe #xdauditor #xdfor #xdevaluating #xdthe

#xdpresentation #xdof #xdeconomic #xdevents #xdfor #xdfinancial #xdstatements #xdand #xdhe #xdor

#xdshe #xdmust #xdtherefore #xdhave #xdan #xdunderstanding #xdof #xdaccounting #xdstandards,

#xdas #xdwell #xdas #xdauditing #xdstandards. #xdThe #xdaccountant #xdneed #xdnot, #xdand

#xdfrequently #xddoes #xdnot, #xdunderstand #xdwhat #xdauditors #xddo, #xdunless #xdhe #xdor #xdshe

#xdis #xdinvolved #xdin #xddoing #xdaudits, #xdor #xdhas #xdbeen #xdtrained #xdas #xdan #xdauditor.




1-3 An #xdindependent #xdaudit #xdis #xda #xdmeans #xdof #xdsatisfying #xdthe #xdneed #xdfor
#xdreliable #xdinformation #xdon #xdthe #xdpart #xdof #xddecision #xdmakers. #xdRecent #xdchanges

#xdin #xdaccounting #xdand #xdbusiness #xdoperations #xdinclude:




1. Increased #xdglobal #xdactivities #xdof #xdmany #xdbusinesses
a. Multiple #xdproduct #xdlines #xdand #xdtransaction #xdlocations
b. Foreign #xdexchange #xdaffects #xdtransactions
2. Complex #xdaccounting #xdand #xdexchange #xdtransactions
a. Increasing #xduse #xdof #xdderivatives #xdand #xdhedging #xdactivities
b. Increasingly #xdcomplex #xdaccounting #xdstandards #xdin #xdareas
#xdsuch #xdas #xdrevenue #xdrecognition

3. More #xdcomplex #xdinformation #xdsystems
a. Possibly #xdmillions #xdof #xdtransactions #xdprocessed #xddaily
#xdthrough #xdon- #xdline #xdand #xdtraditional #xdsales #xdchannels

b. Voluminous #xddata #xdrequires #xdinterpretation

1-4 1. # x d Risk-free #xdinterest #xdrate # x d This #xdis #xdapproximately #xdthe #xdrate
# x d

#xdthe #xdbank #xdcould #xdearn #xdby #xdinvesting #xdin #xdU.S. #xdtreasury #xdnotes

#xdfor #xdthe #xdsame #xdlength #xdof #xdtime #xdas #xdthe #xdbusiness #xdloan.

2. Business #xdrisk #xdfor #xdthe #xdcustomer # x d This #xdrisk #xdreflects #xdthe
#xdpossibility #xdthat #xdthe #xdbusiness #xdwill #xdnot #xdbe #xdable #xdto #xdrepay

#xdits #xdloan #xdbecause #xdof #xdeconomic #xdor #xdbusiness #xdconditions

#xdsuch #xdas #xda #xdrecession, #xdpoor #xdmanagement #xddecisions, #xdor

#xdunexpected #xdcompetition #xdin #xdthe #xdindustry.

3. Information #xdrisk # x d This #xdrisk #xdreflects #xdthe #xdpossibility #xdthat #xdthe
#xdinformation #xdupon #xdwhich #xdthe #xdbusiness #xdrisk #xddecision #xdwas

#xdmade #xdwas #xdinaccurate. #xdA #xdlikely #xdcause #xdof #xdthe #xdinformation


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