Chapter 01 - Auditing and Assurance
c1 c1 c1 c1 c1
Services
Solution Manual For Auditing & Assurance Services
c1 c1 c1 c1 c1 c1 c1
c1 9th Edition by Timothy Louwers, Penelope Bagley
c1 c1 c1 c1 c1 c1
,Chapter 01 - Auditing and Assurance
c1 c1 c1 c1 c1
Services
CHAPTER 01 c1
Auditing and Assurance Services c1 c1 c1
LEARNING OBJECTIVES c1
Review Multiple Exercises, Problems, c1
c1 Checkpoints Choice
c1 and Simulations
c1 c1
1. Define information risk and explain how
c1 c1 c1 c1 c1 c1 1, 2, 3
c1 c1 29, 31, 38
c1 c1 65*
the financial statement auditing process
c1 c1 c1 c1 c1
helps to reduce this risk, thereby
c1 c1 c1 c1 c1 c1
reducing the cost of capital for a
c1 c1 c1 c1 c1 c1 c1
company.
c1
2. Define and contrast assurance, attestation,
c1 c1 c1 c1 4, 5, 6, 7, 8
c1 c1 c1 c1 23, 25, 28, 44,
c1 c1 c1 60, 65*c1
and financial statement auditing services.
c1 c1 c1 c1 50
3. Describe and define the assertions that
c1 c1 c1 c1 c1 9, 10, 11
c1 c1 36, 39, 40, 41,
c1 c1 c1 62, 63, 67, 68, 69
c1 c1 c1 c1
management makes about the recognition,
c1 c1 c1 c1 c1 45,
c1
measurement, presentation, and disclosure
c1 c1 c1 c1 46, 47, 48, 49,
c1 c1 c1
of the financial statements and explain
c1 c1 c1 c1 c1 c1 52,
c1
why auditors use them as a focal point of
c1 c1 c1 c1 c1 c1 c1 c1 c1 53, 54, 55, 57,
c1 c1 c1
the audit.
c1 c1 58,
c1
59
4. Define professional skepticism and explain
c1 c1 c1 c1 12 24, 37c1 61
its key characteristics.
c1 c1 c1
5. Describe the organization of public
c1 c1 c1 c1 13, 14 c1 30, 42, 56
c1 c1 72
accounting firms and identify the various
c1 c1 c1 c1 c1 c1
services that they offer.
c1 c1 c1 c1
6. Describe the audits and auditors in
c1 c1 c1 c1 c1 15, 16, 17, 18
c1 c1 c1 26, 27, 32, 34, 35
c1 c1 c1 c1 64, 66 c1
governmental, internal, and
c1 c1 c1
operational auditing.
c1 c1
7. List and explain the requirements for
c1 c1 c1 c1 c1 19, 20, 21, 22
c1 c1 c1 33, 43, 51
c1 c1 70, 71 c1
becoming a certified public accountant
c1 c1 c1 c1 c1
(CPA) and other certifications available to
c1 c1 c1 c1 c1 c1
an accounting professional.
c1 c1 c1
(*) Item relates to multiple learning objectives
c1 c1 c1 c1 c1 c1
,Chapter 01 - Auditing and Assurance
c1 c1 c1 c1 c1
Services
SOLUTIONS FOR REVIEW CHECKPOINTS c1 c1 c1
1.1 Business risk is the risk that an entity will fail to meet its business objectives. When
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
assessing business risk, a professional must consider all possible threats to an entity‗s goals and
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
objectives. Some illustrative examples include the risk that: 1) its existing customers will start
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
buying products or services from its primary competitors; 2) its product lines will become
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
obsolete; 3) its taxes will increase; 4) key government contracts will be lost; 5) key employees
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
will leave the entity; and many other examples exist.
c1 c1 c1 c1 c1 c1 c1 c1 c1
1.2 To help minimize business risk and take advantage of other opportunities presented in today‗s
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
competitive business environment, decision makers such as chief executive officers (CEOs)
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
demand timely, relevant, and reliable information. There are at least four environmental conditions
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
that increase demand for reliable information. First, complexity which implies that events and
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
transactions in today‗s global business environment can be complicated. Most investors do not
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
have the level of expertise needed to properly account for complex transactions. Second is
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
remoteness which implies that decision makers are often separated from current and potential
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
business relationships due to distance and time. For example, investors may not be able to visit
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
distant locations to check up on their investments. Third is time-sensitivity which implies that in
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
today‗s economic environment, investors and other users of financial statements need to make
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
decisions more rapidly than ever before. As a result, the ability to promptly obtain high-quality
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
information is essential. Fourth is a consequence which implies that decisions may very well
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
involve significant investments. As a result, the consequences can be severe if information
c1 c1 c1 c 1 c1 c1 c1 c1 c1 c1 c1 c1 c1
cannot be obtained
c1 c1 c1
1.3 Of all the different risks discussed in the chapter up to this point, information risk is the one that
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
is most likely to create the demand for independent and objective assurance services is
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
information risk or the probability that the information circulated by an entity will be false or
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
misleading. Because the primary source of information for investors and creditors is the company
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
itself, an incentive exists for that company‗s management to make their business or service appear
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
to be better than it actually may be, to put their best foot forward. As a result, preparers and
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
issuers of financial information (directors, managers, accountants, and other people employed in a
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
business) might benefit by giving false, misleading, or overly optimistic information. This potential
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
conflict of interest between information providers and users which provides the underlying basis
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
for the demand for reliable information.
c1 c1 c1 c1 c1 c1
1.4 The four major elements of the broad definition of assurance services are
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
Independence. CPAs want to preserve their reputation and competitive advantage by always
c 1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
preserving integrity and objectivity when performing assurance services.
c1 c1 c1 c1 c1 c1 c1 c1
Professional services. Virtually all work performed by CPAs is defined as ―professional services‖ as
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
long as it involves some element of judgment based on education and experience.
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
Improving the quality of information or its context. The emphasis is on ―information,‖ CPAs‗
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
traditional area of expertise. CPAs can enhance quality by assuring users about the reliability and
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
relevance of information, and these two features are closely related to the familiar credibility-
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
lending products of attestation and audit services. ―Context‖ is relevance in a different light. For
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
assurance services, improving the context of information refers to improving its usefulness when
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
targeted to particular decision makers in the surroundings of particular decision problems.
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
For decision makers. As the ―consumers‖ of assurance services, decision makers are the beneficiaries
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
of the assurance services. Decision makers may or may not be the ―client‖ that pays the fee and may
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
or may not be one of the parties to an assertion or other information, but they personify the
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
consumer focus of new and different professional work.
c1 c1 c1 c1 c1 c1 c1 c1
1.5 An assurance services engagement is any assignment that improves the quality of information, or
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
its context, for decision makers. Because information (e.g., financial statements) are prepared by
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
managers of an entity who have authority and responsibility for financial success or failure, an
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
outsider may be skeptical that the information truly is objective, free from bias, fully informative,
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
and free from material error, intentional or inadvertent. The services of an independent auditor
c1 c1 c1 c1 c1 c1 c1 c1 c 1 c1 c1 c1 c1 c1
helps resolve those doubts because the
c1 c1 c1 c1 c1 c1
, Chapter 01 - Auditing and Assurance
c1 c1 c1 c1 c1
Services
auditor‗s success depends upon his or her independent, objective, and competent assessment of
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
the information (e.g., the conformity of the financial statements with the appropriate reporting
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
framework). The independent auditor‗s role is to lend credibility to the information; hence, the
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
outsider will likely seek his or her independent opinion about the financial statements.
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
1.6 An attestation engagement is ―an engagement in which a practitioner is engaged to issue or does
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
issue a written communication that expresses a conclusion about the reliability of a written
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
assertion that is the responsibility of another party‖ (SSAE 10, AT 101.01). To attest means to
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
lend credibility or to vouch for the truth or accuracy of the statements that one party makes to
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
another. The attest function is a term often applied to the activities of independent CPAs when
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
acting as auditors of financial statements.
c1 c1 c1 c1 c1 c1
1.7 An assurance service engagement is one that improves the quality of information, or its context,
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
for decision makers. Thus, an attestation service engagement is one type of an assurance
c1 c1 c1 c 1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
service. Another way of thinking about the issue is to remember that the financial statement audit
c1 c 1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
engagement is one type of an attestation service. Please see exhibit 1.3 in the text which depicts
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
the relationship among assurance, attestation, and auditing engagements.
c1 c1 c1 c1 c1 c1 c1 c1
1.8 According to the American Accounting Association, ―Auditing is a systematic process of objectively
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
obtaining and evaluating evidence regarding assertions about economic actions and events to
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
ascertain the degree of correspondence between the assertions and established criteria and
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
communicating the results to interested users.‖ In effect, auditors add reliability to the information
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
that is provided to interested users. Of course, this definition is focused on an external reporting
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
context. Students may also discuss how governmental and internal auditors operate as well.
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
In response to ―What do auditors do?‖ students can respond by stating that auditors (1) obtain and
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
evaluate evidence about assertions made by management about economic actions and events, (2)
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
ascertain the degree of correspondence between the assertions and the appropriate reporting
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
framework, and (3) issue an audit report (opinion). Students can also respond more generally by
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
stating that auditors essentially lend credibility to the financial statements presented by
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
management.
c1
1.9 Financial accounting refers to the process of recording, classifying, summarizing, and reporting
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
about a company‗s assets, liabilities, capital, revenues, and expenses in the financial statements in
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
accordance with the applicable financial reporting framework (e.g., GAAP). In so doing, the
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
management team is making several assertions about the financial statements. The financial
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
accounting process is the responsibility of the management team.
c1 c1 c1 c1 c1 c1 c1 c1 c1
Financial statement auditing refers to the process whereby professional auditors gather evidence
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
related to the assertions that management makes in the financial statements, evaluates the evidence
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
and concludes on the fairness of the financial statements in a report.
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
They differ because accountants produce the financial statements in accordance with the applicable
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
financial reporting framework. After this is complete, financial statement auditors then perform
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
procedures to ascertain whether the financial statements have been prepared in accordance with the
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
applicable financial reporting framework.
c1 c1 c1 c1
1.10 The two major classifications of ASB assertions with several assertions in each
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
c1 classification are: Assertions About Classes of Transactions and Events, and Related
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
c1 Disclosures
Occurrence assertion: The objective is to establish with evidence that transactions giving rise to
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
assets, liabilities, sales, and expenses occurred. Key questions include ―Did the recorded sales
c1 c1 c1 c1 c1 c1 c 1 c1 c1 c1 c1 c1 c1
transactions really occur?‖
c1 c1 c1
Completeness assertion: The objective is to establish with evidence that all transactions of the
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
period that should be are included in the financial statements (including footnotes). Completeness
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
also refers to proper inclusion in financial statements of all revenue, expense, and related
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
disclosures. Key questions related to
c1 c1 c1 c1 c1
c1 c1 c1 c1 c1
Services
Solution Manual For Auditing & Assurance Services
c1 c1 c1 c1 c1 c1 c1
c1 9th Edition by Timothy Louwers, Penelope Bagley
c1 c1 c1 c1 c1 c1
,Chapter 01 - Auditing and Assurance
c1 c1 c1 c1 c1
Services
CHAPTER 01 c1
Auditing and Assurance Services c1 c1 c1
LEARNING OBJECTIVES c1
Review Multiple Exercises, Problems, c1
c1 Checkpoints Choice
c1 and Simulations
c1 c1
1. Define information risk and explain how
c1 c1 c1 c1 c1 c1 1, 2, 3
c1 c1 29, 31, 38
c1 c1 65*
the financial statement auditing process
c1 c1 c1 c1 c1
helps to reduce this risk, thereby
c1 c1 c1 c1 c1 c1
reducing the cost of capital for a
c1 c1 c1 c1 c1 c1 c1
company.
c1
2. Define and contrast assurance, attestation,
c1 c1 c1 c1 4, 5, 6, 7, 8
c1 c1 c1 c1 23, 25, 28, 44,
c1 c1 c1 60, 65*c1
and financial statement auditing services.
c1 c1 c1 c1 50
3. Describe and define the assertions that
c1 c1 c1 c1 c1 9, 10, 11
c1 c1 36, 39, 40, 41,
c1 c1 c1 62, 63, 67, 68, 69
c1 c1 c1 c1
management makes about the recognition,
c1 c1 c1 c1 c1 45,
c1
measurement, presentation, and disclosure
c1 c1 c1 c1 46, 47, 48, 49,
c1 c1 c1
of the financial statements and explain
c1 c1 c1 c1 c1 c1 52,
c1
why auditors use them as a focal point of
c1 c1 c1 c1 c1 c1 c1 c1 c1 53, 54, 55, 57,
c1 c1 c1
the audit.
c1 c1 58,
c1
59
4. Define professional skepticism and explain
c1 c1 c1 c1 12 24, 37c1 61
its key characteristics.
c1 c1 c1
5. Describe the organization of public
c1 c1 c1 c1 13, 14 c1 30, 42, 56
c1 c1 72
accounting firms and identify the various
c1 c1 c1 c1 c1 c1
services that they offer.
c1 c1 c1 c1
6. Describe the audits and auditors in
c1 c1 c1 c1 c1 15, 16, 17, 18
c1 c1 c1 26, 27, 32, 34, 35
c1 c1 c1 c1 64, 66 c1
governmental, internal, and
c1 c1 c1
operational auditing.
c1 c1
7. List and explain the requirements for
c1 c1 c1 c1 c1 19, 20, 21, 22
c1 c1 c1 33, 43, 51
c1 c1 70, 71 c1
becoming a certified public accountant
c1 c1 c1 c1 c1
(CPA) and other certifications available to
c1 c1 c1 c1 c1 c1
an accounting professional.
c1 c1 c1
(*) Item relates to multiple learning objectives
c1 c1 c1 c1 c1 c1
,Chapter 01 - Auditing and Assurance
c1 c1 c1 c1 c1
Services
SOLUTIONS FOR REVIEW CHECKPOINTS c1 c1 c1
1.1 Business risk is the risk that an entity will fail to meet its business objectives. When
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
assessing business risk, a professional must consider all possible threats to an entity‗s goals and
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
objectives. Some illustrative examples include the risk that: 1) its existing customers will start
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
buying products or services from its primary competitors; 2) its product lines will become
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
obsolete; 3) its taxes will increase; 4) key government contracts will be lost; 5) key employees
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
will leave the entity; and many other examples exist.
c1 c1 c1 c1 c1 c1 c1 c1 c1
1.2 To help minimize business risk and take advantage of other opportunities presented in today‗s
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
competitive business environment, decision makers such as chief executive officers (CEOs)
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
demand timely, relevant, and reliable information. There are at least four environmental conditions
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
that increase demand for reliable information. First, complexity which implies that events and
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
transactions in today‗s global business environment can be complicated. Most investors do not
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
have the level of expertise needed to properly account for complex transactions. Second is
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
remoteness which implies that decision makers are often separated from current and potential
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
business relationships due to distance and time. For example, investors may not be able to visit
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
distant locations to check up on their investments. Third is time-sensitivity which implies that in
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
today‗s economic environment, investors and other users of financial statements need to make
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
decisions more rapidly than ever before. As a result, the ability to promptly obtain high-quality
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
information is essential. Fourth is a consequence which implies that decisions may very well
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
involve significant investments. As a result, the consequences can be severe if information
c1 c1 c1 c 1 c1 c1 c1 c1 c1 c1 c1 c1 c1
cannot be obtained
c1 c1 c1
1.3 Of all the different risks discussed in the chapter up to this point, information risk is the one that
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
is most likely to create the demand for independent and objective assurance services is
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
information risk or the probability that the information circulated by an entity will be false or
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
misleading. Because the primary source of information for investors and creditors is the company
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
itself, an incentive exists for that company‗s management to make their business or service appear
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
to be better than it actually may be, to put their best foot forward. As a result, preparers and
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
issuers of financial information (directors, managers, accountants, and other people employed in a
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
business) might benefit by giving false, misleading, or overly optimistic information. This potential
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
conflict of interest between information providers and users which provides the underlying basis
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
for the demand for reliable information.
c1 c1 c1 c1 c1 c1
1.4 The four major elements of the broad definition of assurance services are
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
Independence. CPAs want to preserve their reputation and competitive advantage by always
c 1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
preserving integrity and objectivity when performing assurance services.
c1 c1 c1 c1 c1 c1 c1 c1
Professional services. Virtually all work performed by CPAs is defined as ―professional services‖ as
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
long as it involves some element of judgment based on education and experience.
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
Improving the quality of information or its context. The emphasis is on ―information,‖ CPAs‗
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
traditional area of expertise. CPAs can enhance quality by assuring users about the reliability and
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
relevance of information, and these two features are closely related to the familiar credibility-
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
lending products of attestation and audit services. ―Context‖ is relevance in a different light. For
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
assurance services, improving the context of information refers to improving its usefulness when
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
targeted to particular decision makers in the surroundings of particular decision problems.
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
For decision makers. As the ―consumers‖ of assurance services, decision makers are the beneficiaries
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
of the assurance services. Decision makers may or may not be the ―client‖ that pays the fee and may
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
or may not be one of the parties to an assertion or other information, but they personify the
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
consumer focus of new and different professional work.
c1 c1 c1 c1 c1 c1 c1 c1
1.5 An assurance services engagement is any assignment that improves the quality of information, or
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
its context, for decision makers. Because information (e.g., financial statements) are prepared by
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
managers of an entity who have authority and responsibility for financial success or failure, an
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
outsider may be skeptical that the information truly is objective, free from bias, fully informative,
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
and free from material error, intentional or inadvertent. The services of an independent auditor
c1 c1 c1 c1 c1 c1 c1 c1 c 1 c1 c1 c1 c1 c1
helps resolve those doubts because the
c1 c1 c1 c1 c1 c1
, Chapter 01 - Auditing and Assurance
c1 c1 c1 c1 c1
Services
auditor‗s success depends upon his or her independent, objective, and competent assessment of
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
the information (e.g., the conformity of the financial statements with the appropriate reporting
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
framework). The independent auditor‗s role is to lend credibility to the information; hence, the
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
outsider will likely seek his or her independent opinion about the financial statements.
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
1.6 An attestation engagement is ―an engagement in which a practitioner is engaged to issue or does
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
issue a written communication that expresses a conclusion about the reliability of a written
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
assertion that is the responsibility of another party‖ (SSAE 10, AT 101.01). To attest means to
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
lend credibility or to vouch for the truth or accuracy of the statements that one party makes to
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
another. The attest function is a term often applied to the activities of independent CPAs when
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
acting as auditors of financial statements.
c1 c1 c1 c1 c1 c1
1.7 An assurance service engagement is one that improves the quality of information, or its context,
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
for decision makers. Thus, an attestation service engagement is one type of an assurance
c1 c1 c1 c 1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
service. Another way of thinking about the issue is to remember that the financial statement audit
c1 c 1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
engagement is one type of an attestation service. Please see exhibit 1.3 in the text which depicts
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
the relationship among assurance, attestation, and auditing engagements.
c1 c1 c1 c1 c1 c1 c1 c1
1.8 According to the American Accounting Association, ―Auditing is a systematic process of objectively
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
obtaining and evaluating evidence regarding assertions about economic actions and events to
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
ascertain the degree of correspondence between the assertions and established criteria and
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
communicating the results to interested users.‖ In effect, auditors add reliability to the information
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
that is provided to interested users. Of course, this definition is focused on an external reporting
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
context. Students may also discuss how governmental and internal auditors operate as well.
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
In response to ―What do auditors do?‖ students can respond by stating that auditors (1) obtain and
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
evaluate evidence about assertions made by management about economic actions and events, (2)
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
ascertain the degree of correspondence between the assertions and the appropriate reporting
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
framework, and (3) issue an audit report (opinion). Students can also respond more generally by
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
stating that auditors essentially lend credibility to the financial statements presented by
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
management.
c1
1.9 Financial accounting refers to the process of recording, classifying, summarizing, and reporting
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
about a company‗s assets, liabilities, capital, revenues, and expenses in the financial statements in
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
accordance with the applicable financial reporting framework (e.g., GAAP). In so doing, the
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
management team is making several assertions about the financial statements. The financial
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
accounting process is the responsibility of the management team.
c1 c1 c1 c1 c1 c1 c1 c1 c1
Financial statement auditing refers to the process whereby professional auditors gather evidence
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
related to the assertions that management makes in the financial statements, evaluates the evidence
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
and concludes on the fairness of the financial statements in a report.
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
They differ because accountants produce the financial statements in accordance with the applicable
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
financial reporting framework. After this is complete, financial statement auditors then perform
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
procedures to ascertain whether the financial statements have been prepared in accordance with the
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
applicable financial reporting framework.
c1 c1 c1 c1
1.10 The two major classifications of ASB assertions with several assertions in each
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
c1 classification are: Assertions About Classes of Transactions and Events, and Related
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
c1 Disclosures
Occurrence assertion: The objective is to establish with evidence that transactions giving rise to
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
assets, liabilities, sales, and expenses occurred. Key questions include ―Did the recorded sales
c1 c1 c1 c1 c1 c1 c 1 c1 c1 c1 c1 c1 c1
transactions really occur?‖
c1 c1 c1
Completeness assertion: The objective is to establish with evidence that all transactions of the
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
period that should be are included in the financial statements (including footnotes). Completeness
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
also refers to proper inclusion in financial statements of all revenue, expense, and related
c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1 c1
disclosures. Key questions related to
c1 c1 c1 c1 c1
