Chapter 01 - Auditing and Assurance Services
Solution Manual For Auditing & Assurance Services
9th Edition by Timothy Louwers, Penelope Bagley
,Chapter j701 j7- j7Auditing j7and j7Assurance
j7Services
CHAPTER j701
Auditing j7and j7Assurance j7Services
LEARNING j7OBJECTIVES
Review Multiple Exercises, j7Problems,
j7Checkpoints j7Choic j7and j7Simulations
e
1. j7Define j7information j7risk j7and j7explain j7how 1, j72, j73 29, j731, j738 65*
j7the j7financial j7statement j7auditing j7process
j7helps j7to j7reduce j7this j7risk, j7thereby
j7reducing j7the j7cost j7of j7capital j7for j7a
j7company.
2. Define j7and j7contrast j7assurance, 4, j75, j76, j77, j78 23, j725, j728, j744, 60, j765*
j7attestation, 50
and j7financial j7statement j7auditing j7services.
3. Describe j7and j7define j7the j7assertions j7that 9, j710, j711 36, j739, j740, j741, 62, j763, j767, j768, j769
j7management j7makes j7about j7the j745,
j7recognition, j7measurement, j7presentation, 46, j747, j748, j749,
j7and j7disclosure j7of j7the j7financial j752,
j7statements j7and j7explain j7why j7auditors j7use 53, j754, j755, j757,
j7them j7as j7a j7focal j7point j7of j7the j7audit. j758,
59
4. Define j7professional j7skepticism j7and j7explain 12 24, j737 61
j7its j7key j7characteristics.
5. Describe j7the j7organization j7of j7public 13, j714 30, j742, j756 72
j7accounting j7firms j7and j7identify j7the j7various
j7services j7that j7they j7offer.
6. Describe j7the j7audits j7and j7auditors 15, j716, j717, j718 26, j727, j732, j734, 64, j766
j7in j7governmental, j7internal, j7and j735
j7operational j7auditing.
7. List j7and j7explain j7the j7requirements j7for 19, j720, j721, j722 33, j743, j751 70, j771
j7becoming j7a j7certified j7public j7accountant
j7(CPA) j7and j7other j7certifications j7available
j7to j7an j7accounting j7professional.
(*) j7Item j7relates j7to j7multiple j7learning j7objectives
,Chapter j701 j7- j7Auditing j7and j7Assurance
j7Services
SOLUTIONS j7FOR j7REVIEW j7CHECKPOINTS
1.1 Business j7risk j7is j7the j7risk j7that j7an j7entity j7will j7fail j7to j7meet j7its j7business j7objectives. j7When
j7assessing j7business j7risk, j7a j7professional j7must j7consider j7all j7possible j7threats j7to j7an j7entity‘s j7goals
j7and j7objectives. j7Some j7illustrative j7examples j7include j7the j7risk j7that: j71) j7its j7existing j7customers
j7will j7start j7buying j7products j7or j7services j7from j7its j7primary j7competitors; j72) j7its j7product j7lines j7will
j7become j7obsolete; j73) j7its j7taxes j7 will j7increase; j74) j7key j7government j7contracts j7will j7be j7lost; j75)
j7key j7employees j7will j7leave j7the j7entity; j7and j7many j7other j7examples j7exist.
1.2 To j7help j7minimize j7business j7risk j7and j7take j7advantage j7of j7other j7opportunities j7presented j7in j7today‘s
j7competitive j7business j7environment, j7decision j7makers j7such j7as j7chief j7executive j7officers j7(CEOs)
j7demand j7timely, j7relevant, j7and j7reliable j7information. j7There j7are j7at j7least j7four j7environmental
j7conditions j7that j7increase j7demand j7for j7reliable j7information. j7First, j7complexity j7which j7implies j7that
j7events j7and j7transactions j7in j7today‘s j7global j7business j7environment j7can j7be j7complicated. j7Most
j7investors j7do j7not j7have j7the j7level j7of j7expertise j7needed j7to j7properly j7account j7for j7complex
j7transactions. j7Second j7is j7remoteness j7which j7implies j7that j7decision j7makers j7are j7often j7separated
j7from j7current j7and j7potential j7business j7relationships j7due j7to j7distance j7and j7time. j7For j7example,
j7investors j7may j7not j7be j7able j7to j7visit j7distant j7locations j7to j7check j7up j7on j7their j7investments. j7Third
j7is j7time-sensitivity j7which j7implies j7that j7in j7today‘s j7economic j7environment, j7investors j7and j7other
j7users j7of j7financial j7statements j7need j7to j7make j7decisions j7more j7rapidly j7than j7ever j7before. j7As j7a
j7result, j7the j7ability j7to j7promptly j7obtain j7high-quality j7information j7is j7essential. j7Fourth j7is j7a
j7consequence j7which j7implies j7that j7decisions j7may j7very j7well j7involve j7significant j7investments. j 7 As
j7a j7result, j7the j7consequences j7can j7be j7severe j7if j7information j7cannot j7be j7obtained
1.3 Of j7all j7the j7different j7risks j7discussed j7in j7the j7chapter j7up j7to j7this j7point, j7information j7risk j7is j7the
j7one j7that j7is j7most j7likely j7to j7create j7the j7demand j7for j7independent j7and j7objective j7assurance j7services
j7is j7information j7risk j7or j7the j7probability j7that j7the j7information j7circulated j7by j7an j7entity j7will j7be
j7false j7or j7misleading. j7Because j7the j7primary j7source j7of j7information j7for j7investors j7and j7creditors j7is
j7the j7company j7itself, j7an j7incentive j7exists j7for j7that j7company‘s j7management j7to j7make j7their j7business
j7or j7service j7appear j7to j7be j7better j7than j7it j7actually j7may j7be, j7to j7put j7their j7best j7foot j7forward. j7As j7a
j7result, j7preparers j7and j7issuers j7of j7financial j7information j7(directors, j7managers, j7accountants, j7and
j7other j7people j7employed j7in j7a j7business) j7might j7benefit j7by j7giving j7false, j7misleading, j7or j7overly
j7optimistic j7information. j7This j7potential j7conflict j7of j7interest j7between j7information j7providers j7and
j7users j7which j7provides j7the j7underlying j7basis j7for j7the j7demand j7for j7reliable j7information.
1.4 The j7four j7major j7elements j7of j7the j7broad j7definition j7of j7assurance j7services j7are
Independence. j 7 CPAs j7want j7to j7preserve j7their j7reputation j7and j7competitive j7advantage j7by j7always
j7preserving j7integrity j7and j7objectivity j7when j7performing j7assurance j7services.
Professional j7services. j7Virtually j7all j7work j7performed j7by j7CPAs j7is j7defined j7as j7―professional
j7services‖ j7as j7long j7as j7it j7involves j7some j7element j7of j7judgment j7based j7on j7education j7and
j7experience.
Improving j7the j7quality j7of j7information j7or j7its j7context. j7The j7emphasis j7is j7on j7―information,‖ j7CPAs‘
j7traditional j7area j7of j7expertise. j7CPAs j7can j7enhance j7quality j7by j7assuring j7users j7about j7the j7reliability
j7and j7relevance j7of j7information, j7and j7these j7two j7features j7are j7closely j7related j7to j7the j7familiar
j7credibility-lending j7products j7of j7attestation j7and j7audit j7services. j7―Context‖ j7is j7relevance j7in j7a j7different
j7light. j7For j7assurance j7services, j7improving j7the j7context j7of j7information j7refers j7to j7improving j7its
j7usefulness j7when j7targeted j7to j7particular j7decision j7makers j7in j7the j7surroundings j7of j7particular
j7decision j7problems.
For j7decision j7makers. j7As j7the j7―consumers‖ j7of j7assurance j7services, j7decision j7makers j7are j7the
j7beneficiaries j7of j7the j7assurance j7services. j7Decision j7makers j7may j7or j7may j7not j7be j7the j7―client‖ j7that j7pays
j7the j7fee j7and j7may j7or j7may j7not j7be j7one j7of j7the j7parties j7to j7an j7assertion j7or j7other j7information, j7but
j7they j7personify j7the j7consumer j7focus j7of j7new j7and j7different j7professional j7work.
1.5 An j7assurance j7services j7engagement j7is j7any j7assignment j7that j7improves j7the j7quality j7of j7information,
j7or j7its j7context, j7for j7decision j7makers. j7Because j7information j7(e.g., j7financial j7statements) j7are
j7prepared j7by j7managers j7of j7an j7entity j7who j7have j7authority j7and j7responsibility j7for j7financial j7success
j7or j7failure, j7an j7outsider j7may j7be j7skeptical j7that j7the j7information j7truly j7is j7objective, j7free j7from j7bias,
, Chapter j701 j7- j7Auditing j7and j7Assurance
j7Services
j7fully j7informative, j7and j7free j7from j7material j7error, j7intentional j7or j7inadvertent. j7 The j7services j7of j7an
j7independent j7auditor j7helps j7resolve j7those j7doubts j7because j7the
Solution Manual For Auditing & Assurance Services
9th Edition by Timothy Louwers, Penelope Bagley
,Chapter j701 j7- j7Auditing j7and j7Assurance
j7Services
CHAPTER j701
Auditing j7and j7Assurance j7Services
LEARNING j7OBJECTIVES
Review Multiple Exercises, j7Problems,
j7Checkpoints j7Choic j7and j7Simulations
e
1. j7Define j7information j7risk j7and j7explain j7how 1, j72, j73 29, j731, j738 65*
j7the j7financial j7statement j7auditing j7process
j7helps j7to j7reduce j7this j7risk, j7thereby
j7reducing j7the j7cost j7of j7capital j7for j7a
j7company.
2. Define j7and j7contrast j7assurance, 4, j75, j76, j77, j78 23, j725, j728, j744, 60, j765*
j7attestation, 50
and j7financial j7statement j7auditing j7services.
3. Describe j7and j7define j7the j7assertions j7that 9, j710, j711 36, j739, j740, j741, 62, j763, j767, j768, j769
j7management j7makes j7about j7the j745,
j7recognition, j7measurement, j7presentation, 46, j747, j748, j749,
j7and j7disclosure j7of j7the j7financial j752,
j7statements j7and j7explain j7why j7auditors j7use 53, j754, j755, j757,
j7them j7as j7a j7focal j7point j7of j7the j7audit. j758,
59
4. Define j7professional j7skepticism j7and j7explain 12 24, j737 61
j7its j7key j7characteristics.
5. Describe j7the j7organization j7of j7public 13, j714 30, j742, j756 72
j7accounting j7firms j7and j7identify j7the j7various
j7services j7that j7they j7offer.
6. Describe j7the j7audits j7and j7auditors 15, j716, j717, j718 26, j727, j732, j734, 64, j766
j7in j7governmental, j7internal, j7and j735
j7operational j7auditing.
7. List j7and j7explain j7the j7requirements j7for 19, j720, j721, j722 33, j743, j751 70, j771
j7becoming j7a j7certified j7public j7accountant
j7(CPA) j7and j7other j7certifications j7available
j7to j7an j7accounting j7professional.
(*) j7Item j7relates j7to j7multiple j7learning j7objectives
,Chapter j701 j7- j7Auditing j7and j7Assurance
j7Services
SOLUTIONS j7FOR j7REVIEW j7CHECKPOINTS
1.1 Business j7risk j7is j7the j7risk j7that j7an j7entity j7will j7fail j7to j7meet j7its j7business j7objectives. j7When
j7assessing j7business j7risk, j7a j7professional j7must j7consider j7all j7possible j7threats j7to j7an j7entity‘s j7goals
j7and j7objectives. j7Some j7illustrative j7examples j7include j7the j7risk j7that: j71) j7its j7existing j7customers
j7will j7start j7buying j7products j7or j7services j7from j7its j7primary j7competitors; j72) j7its j7product j7lines j7will
j7become j7obsolete; j73) j7its j7taxes j7 will j7increase; j74) j7key j7government j7contracts j7will j7be j7lost; j75)
j7key j7employees j7will j7leave j7the j7entity; j7and j7many j7other j7examples j7exist.
1.2 To j7help j7minimize j7business j7risk j7and j7take j7advantage j7of j7other j7opportunities j7presented j7in j7today‘s
j7competitive j7business j7environment, j7decision j7makers j7such j7as j7chief j7executive j7officers j7(CEOs)
j7demand j7timely, j7relevant, j7and j7reliable j7information. j7There j7are j7at j7least j7four j7environmental
j7conditions j7that j7increase j7demand j7for j7reliable j7information. j7First, j7complexity j7which j7implies j7that
j7events j7and j7transactions j7in j7today‘s j7global j7business j7environment j7can j7be j7complicated. j7Most
j7investors j7do j7not j7have j7the j7level j7of j7expertise j7needed j7to j7properly j7account j7for j7complex
j7transactions. j7Second j7is j7remoteness j7which j7implies j7that j7decision j7makers j7are j7often j7separated
j7from j7current j7and j7potential j7business j7relationships j7due j7to j7distance j7and j7time. j7For j7example,
j7investors j7may j7not j7be j7able j7to j7visit j7distant j7locations j7to j7check j7up j7on j7their j7investments. j7Third
j7is j7time-sensitivity j7which j7implies j7that j7in j7today‘s j7economic j7environment, j7investors j7and j7other
j7users j7of j7financial j7statements j7need j7to j7make j7decisions j7more j7rapidly j7than j7ever j7before. j7As j7a
j7result, j7the j7ability j7to j7promptly j7obtain j7high-quality j7information j7is j7essential. j7Fourth j7is j7a
j7consequence j7which j7implies j7that j7decisions j7may j7very j7well j7involve j7significant j7investments. j 7 As
j7a j7result, j7the j7consequences j7can j7be j7severe j7if j7information j7cannot j7be j7obtained
1.3 Of j7all j7the j7different j7risks j7discussed j7in j7the j7chapter j7up j7to j7this j7point, j7information j7risk j7is j7the
j7one j7that j7is j7most j7likely j7to j7create j7the j7demand j7for j7independent j7and j7objective j7assurance j7services
j7is j7information j7risk j7or j7the j7probability j7that j7the j7information j7circulated j7by j7an j7entity j7will j7be
j7false j7or j7misleading. j7Because j7the j7primary j7source j7of j7information j7for j7investors j7and j7creditors j7is
j7the j7company j7itself, j7an j7incentive j7exists j7for j7that j7company‘s j7management j7to j7make j7their j7business
j7or j7service j7appear j7to j7be j7better j7than j7it j7actually j7may j7be, j7to j7put j7their j7best j7foot j7forward. j7As j7a
j7result, j7preparers j7and j7issuers j7of j7financial j7information j7(directors, j7managers, j7accountants, j7and
j7other j7people j7employed j7in j7a j7business) j7might j7benefit j7by j7giving j7false, j7misleading, j7or j7overly
j7optimistic j7information. j7This j7potential j7conflict j7of j7interest j7between j7information j7providers j7and
j7users j7which j7provides j7the j7underlying j7basis j7for j7the j7demand j7for j7reliable j7information.
1.4 The j7four j7major j7elements j7of j7the j7broad j7definition j7of j7assurance j7services j7are
Independence. j 7 CPAs j7want j7to j7preserve j7their j7reputation j7and j7competitive j7advantage j7by j7always
j7preserving j7integrity j7and j7objectivity j7when j7performing j7assurance j7services.
Professional j7services. j7Virtually j7all j7work j7performed j7by j7CPAs j7is j7defined j7as j7―professional
j7services‖ j7as j7long j7as j7it j7involves j7some j7element j7of j7judgment j7based j7on j7education j7and
j7experience.
Improving j7the j7quality j7of j7information j7or j7its j7context. j7The j7emphasis j7is j7on j7―information,‖ j7CPAs‘
j7traditional j7area j7of j7expertise. j7CPAs j7can j7enhance j7quality j7by j7assuring j7users j7about j7the j7reliability
j7and j7relevance j7of j7information, j7and j7these j7two j7features j7are j7closely j7related j7to j7the j7familiar
j7credibility-lending j7products j7of j7attestation j7and j7audit j7services. j7―Context‖ j7is j7relevance j7in j7a j7different
j7light. j7For j7assurance j7services, j7improving j7the j7context j7of j7information j7refers j7to j7improving j7its
j7usefulness j7when j7targeted j7to j7particular j7decision j7makers j7in j7the j7surroundings j7of j7particular
j7decision j7problems.
For j7decision j7makers. j7As j7the j7―consumers‖ j7of j7assurance j7services, j7decision j7makers j7are j7the
j7beneficiaries j7of j7the j7assurance j7services. j7Decision j7makers j7may j7or j7may j7not j7be j7the j7―client‖ j7that j7pays
j7the j7fee j7and j7may j7or j7may j7not j7be j7one j7of j7the j7parties j7to j7an j7assertion j7or j7other j7information, j7but
j7they j7personify j7the j7consumer j7focus j7of j7new j7and j7different j7professional j7work.
1.5 An j7assurance j7services j7engagement j7is j7any j7assignment j7that j7improves j7the j7quality j7of j7information,
j7or j7its j7context, j7for j7decision j7makers. j7Because j7information j7(e.g., j7financial j7statements) j7are
j7prepared j7by j7managers j7of j7an j7entity j7who j7have j7authority j7and j7responsibility j7for j7financial j7success
j7or j7failure, j7an j7outsider j7may j7be j7skeptical j7that j7the j7information j7truly j7is j7objective, j7free j7from j7bias,
, Chapter j701 j7- j7Auditing j7and j7Assurance
j7Services
j7fully j7informative, j7and j7free j7from j7material j7error, j7intentional j7or j7inadvertent. j7 The j7services j7of j7an
j7independent j7auditor j7helps j7resolve j7those j7doubts j7because j7the
