SOLUTIONS MANUAL FOR AUDITING AND ASSURANCE SERVICES, 18TH EDITION BY ARENS (CH 1 – 26)

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SOLUTIONS MANUAL FOR AUDITING AND ASSURANCE
SERVICES, 18TH EDITION BY ARENS (CH 1 – 26)

, Chapter 1
The Demand for Audit and Other Assurance Services
 Concept Checks

P. 7

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 Check, P. 16 (continued)

AUDITS OF
OPERATIONAL COMPLIANCE FINANCIAL
AUDITS AUDITS STATEMENTS
USERS OF Management of Authority that Different groups
AUDIT organization established rules, for different
REPORT regulations, and purposes — many
procedures, either outside entities
internal or external to
auditee
NATURE Highly Not standardized, Highly
nonstandard; but specific and standardized
often subjective usually objective
PERFORMED
BY: Almost
CPAs Frequently Occasionally universally
GAO
AUDITORS Frequently Frequently Occasionally
IRS
AUDITORS Never Universally Never
INTERNAL
AUDITORS Frequently Frequently Frequently*
* Internal auditors may assist CPAs in the audit of financial statements. Internal
auditors may also audit internal financial statements for use by management.

2. The major differences in the scope of audit responsibilities for CPAs, GAO
auditors, IRS agents, and internal auditors are:

 CPAs perform audits of financial statements prepared using U.S.
GAAP or IFRS in accordance with auditing standards.
 GAO auditors perform compliance or operational audits in order to
assure the Congress of the expenditure of public funds in accordance
with its directives and the law.
 IRS agents perform compliance audits to enforce the federal tax laws
as defined by Congress, interpreted by the courts, and regulated by the
IRS.
 Internal auditors perform compliance or operational audits in order to
assure management or the board of directors that controls and policies
are properly and consistently developed, applied, and evaluated.




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