TEST BANK For Auditing and Assurance Services, 9th Edition By Timothy Louwers, Penelope Bagley, Verified Chapter's 1 - 12, Complete Newest Version

,ACCESSTestBankforAuditing&AssuranceServices9thEditionLouwers
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Chapter01-AuditingandAssuranceServices
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CHAPTER01

AuditingandAssuranceServices n n




LEARNINGOBJECTIVES


Review Multiple Exercises,Problems,
Checkpoints
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1. n Define information risk and explain how the
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financial statement auditing process helps to
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1,2,3
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reduce this risk, thereby reducing the cost of
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capital for a company.
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2. Defineand contrastassurance,attestation,and e

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financial statement auditing services.
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3. Describe and define the assertions that n n n n n

36,39,40,41,45,
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management makes about the recognition,
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46,47,48,49,52,
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measurement, presentation, and disclosureof
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53,54,55,57,58,
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the financial statements and explain why
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59
auditors usethemasa focalpointoftheaudit.
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4. Defineprofessionalskepticism andexplainits e




keycharacteristics.
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12 24,37
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5. Describetheorganization ofpublic accounting e e




firmsand identifythevariousservicesthatthey
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offer.
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6. Describe the audits and auditors in n n n n n




governmental,internal,andoperational
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auditing.
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7. Listandexplaintherequirements forbecoming
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acertifiedpublicaccountant (CPA) and other
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19,20,21,22
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certifications available to an accounting
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professional.
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(*)Itemrelatestomultiplelearningobjectives
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,ACCESSTestBankforAuditing&AssuranceServices9thEditionLouwers
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Chapter01-AuditingandAssuranceServices
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SOLUTIONSFOR REVIEWCHECKPOINTS e n




1.1 Business risk is the risk thatan entity will failto meetits businessobjectives. When assessing businessrisk, a
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professional must consider allpossible threats to an entity’sgoals and objectives. Someillustrative examples
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includetherisk that: 1) its existing customers will startbuying products or servicesfrom itsprimary competitors;2)
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itsproductlines willbecomeobsolete;3)itstaxeswillincrease;4)keygovernment contractswill be lost; 5)key
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employees will leave the entity; and many other examples exist.
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1.2 To help minimize business risk and takeadvantageofother opportunities presented in today’s competitive
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nbusiness environment, decision makers such as chief executive officers(CEOs) demand timely, relevant, and
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nreliable information. There areat least four environmentalconditions that increasedemand for reliable
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ninformation. First, complexitywhich implies that events and transactions in today’s global business n n n n n n n n n n n n




nenvironmentcan becomplicated. Mostinvestorsdo nothavethelevel ofexpertise needed toproperly account forn n n n n n n n n n n n n n n n n




complex transactions. Second isremotenesswhich impliesthat decision makersareoftenseparatedfrom
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ncurrentand potentialbusinessrelationships dueto distance andtime. Forexample, investors may not be able to
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nvisit distant locations to check up on their investments. Third is time-sensitivity which
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implies thatin today’seconomic environment, investorsand otherusers of financialstatementsneed to make
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ndecisionsmorerapidlythaneverbefore.Asaresult,theabilitytopromptlyobtainhigh-qualityinformationis
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nessential. Fourth is aconsequence which implies that decisions may very well involvesignificant investments. As a
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nresult, the consequences can besevere if information cannot beobtained
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1.3 Ofallthedifferentrisksdiscussed in thechapterup to thispoint,informationrisk is the one that is most likely to n n n n n n e n n n n n n




createthedemandforindependent andobjective assuranceservices isinformation risk orthe probability that the
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information circulated by anentity will be false or misleading. Because theprimary source of information for
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investors and creditors is the company itself, an incentive exists for that
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company’smanagement to maketheirbusinessorservice appear to bebetter than it actuallymaybe, to put their best n n n n n e n n n n n




footforward. As aresult, preparers and issuers of financial information (directors, managers, accountants, and other
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people employed in a business) mightbenefit by giving false, misleading, or overly optimistic information. This
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potential conflict of interest between information providers andusers which provides the underlying basis for the
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demand for reliable information.
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1.4 Thefourmajorelementsofthebroaddefinitionofassuranceservices are
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Independence.CPAswanttopreserve their reputation andcompetitive advantagebyalwayspreserving integrity n n n n e n n n n




nand objectivity when performing assurance services.
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Professionalservices.VirtuallyallworkperformedbyCPAsisdefined as “professionalservices”aslong asit n n n n n n n e n n n n




involves some element of judgment based on education and experience.
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Improvingthequalityofinformationoritscontext.Theemphasisison “information,”CPAs’ traditional area of n n n n n n n n n n




nexpertise. CPAscan enhancequality byassuringusersaboutthereliability andrelevanceofinformation,and these
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two features are closely related to the familiar credibility-lending products of
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attestation and audit services. “Context” is relevance in a different light. For assurance services, improving the
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ncontext of information refers to improving its usefulness when targeted to particular decision makers in the
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nsurroundings of particular decision problems. n n n n




For decision makers. Asthe“consumers” ofassuranceservices, decision makers are the beneficiaries of the
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assuranceservices.Decisionmakersmayormaynotbethe“client”thatpaysthefeeandmayormaynotbeone of the
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parties toan assertion orother information, but they personify the consumer focus of new and different professional
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work.
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1.5 An assurance services engagement isany assignment that improves thequality ofinformation, oritscontext, for
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decision makers. Because information (e.g., financial statements) areprepared by managers of anentity
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whohaveauthorityandresponsibilityforfinancialsuccessorfailure, an outsidermaybeskeptical that the
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information truly is objective, free from bias,fullyinformative, and free from materialerror,
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, ACCESSTestBankforAuditing&AssuranceServices9thEditionLouwers
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Chapter01-AuditingandAssuranceServices
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intentional or inadvertent. The services of an independent auditor helps resolve those doubts because the
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nauditor’s success depends upon his or her independent, objective, andcompetent assessment of the
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information (e.g., the conformity of the financial statements with the appropriate reporting framework). The
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nindependent auditor’s role is to lend credibility to the information; hence, the outsider will likely seek his or her
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nindependent opinion about the financial statements. n n n n n




1.6 An attestation engagement is “an engagementin which apractitioner is engaged to issueordoesissue a written
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communication that expresses a conclusion about thereliability of awritten assertion that isthe
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responsibilityofanother party”(SSAE10,AT101.01).Toattestmeanstolendcredibilityortovouchforthe truth
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oraccuracy ofthestatementsthatonepartymakestoanother. Theattestfunction isatermoften applied to the
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activities of independent CPAs when acting as auditors of financial statements.
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1.7 Anassuranceserviceengagementisonethatimprovesthequalityofinformation,oritscontext,fordecision
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makers.Thus,an attestation serviceengagementis onetypeofanassuranceservice.Anotherway ofthinking
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about the issue is to remember that the financial statement audit engagement is onetype of an attestation service.
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Please see exhibit 1.3 in the textwhich depicts therelationship among assurance, attestation, and auditing
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engagements.
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1.8 According to the American Accounting Association, “Auditing isa systematic process of objectively obtaining and
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evaluating evidence regarding assertions about economic actions and events to ascertain the degree of
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correspondence between the assertions and established criteria and communicating the results to interested
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users.” Ineffect, auditorsaddreliability to the information thatisprovided to interestedusers. Of course, this
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definition is focused on an external reporting context. Students may also discuss howgovernmental and internal
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auditors operate as well.
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In response to “What do auditorsdo?” studentscan respond bystating thatauditors(1) obtainand evaluate
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nevidenceaboutassertionsmadebymanagementabouteconomicactionsandevents,(2)ascertainthedegreeof
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ncorrespondence betweentheassertionsandtheappropriatereportingframework, and (3) issuean audit report n n e n n n




n(opinion). Students can alsorespond more generally by statingthat auditors essentially lend credibility to the
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nfinancial statements presented by management.
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1.9 Financial accountingrefers to the processofrecording, classifying, summarizing, and reporting abouta
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company’sassets,liabilities,capital,revenues,and expensesin thefinancialstatementsinaccordancewith the
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applicablefinancialreportingframework(e.g.,GAAP).Insodoing,themanagementteamismakingseveral
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assertions aboutthefinancial statements. Thefinancial accounting process is the responsibility of the
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managementteam.
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Financial statement auditing refers to theprocess whereby professional auditors gather evidence related to the
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assertionsthatmanagementmakes in the financial statements, evaluates theevidenceand concludes on the
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fairness of the financial statements in a report.
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Theydifferbecauseaccountantsproducethefinancialstatementsin accordancewiththeapplicablefinancial
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reportingframework.Afterthisiscomplete,financialstatementauditorsthen performprocedurestoascertain
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whetherthefinancialstatementshavebeenprepared inaccordance withtheapplicablefinancial reporting
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framework.
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1.10 The twomajorclassificationsof ASBassertionswith several assertions in eachclassification are:
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n Assertions About Classes of Transactions and Events, and Related Disclosures
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Occurrence assertion: Theobjectiveisto establish withevidence thattransactionsgiving riseto assets, liabilities,
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sales, and expenses occurred. Keyquestionsinclude“Did therecordedsalestransactionsreally occur?”
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