Solution Manual For Auditing & Assurance
Services 9th Edition by Timothy Louwers,
Penelope Bagley
,CHAPTER 01
Auditing and Assurance Services
LEARNING OBJECTIVES
Review Checkpoints
MultipleChoice
Exercises, Problems,and Simulations
1. Define information risk and explain how the financial statement auditing process helps to reduce this risk, thereby reducing the cost
ofcapital for a company.
1, 2, 3
29, 31, 38
65*
2. Define and contrast assurance, attestation,
and financial statement auditing services.
4, 5, 6, 7, 8
23, 25, 28, 44,
50
60, 65*
, 3. Describe and define the assertions that management makes about the recognition, measurement, presentation, and disclosure of the
financial statements and explain why auditors use them as a focal point of the audit.
9, 10, 11
36, 39, 40, 41, 45,
46, 47, 48, 49, 52,
53, 54, 55, 57, 58,
59
62, 63, 67, 68, 69
4. Define professional skepticism and explain itskey characteristics.
12
24, 37
61
5. Describe the organization of public accountingfirms and identify the various services that they offer.
13, 14
30, 42, 56
72
6. Describe the audits and auditors in governmental, internal, and operationalauditing.
15, 16, 17, 18
, 26, 27, 32, 34, 35
64, 66
7. List and explain the requirements for becoming a certified public accountant (CPA)and other certifications available to an
accounting professional.
19, 20, 21, 22
33, 43, 51
70, 71
(*) Item relates to multiple learning objectives
SOLUTIONS FOR REVIEW CHECKPOINTS
• Business risk is the risk that an entity will fail to meet its business
objectives. When assessing business risk, a professional must consider all possible threats to an entity‘s
goals and objectives. Some illustrative examples include the risk that: 1) its existing customers will start
buying products or services from its primary competitors; 2) its product lines will become obsolete; 3) its
taxes will increase; 4) key government contracts will be lost; 5) key employees will leave the entity; and
many other examples exist.
• To help minimize business risk and take advantage of other opportunities presented in
today‘s competitive business environment, decision makers such as chief executive officers (CEOs)
demand timely, relevant, and reliable information. There are at least four environmental conditions that
increase demand for reliableinformation. First, complexity which implies that events and transactions in
today‘s global business environment can be complicated. Most investors do not have the level of expertise
needed to properly account for complex transactions. Second is remoteness which implies that decision
makers are often separated from current and potential business relationships due to distance and time. For
example, investorsmay not be able to visit distant locations to check up on their investments. Third is time-
sensitivity which implies that in today‘s economic environment, investors and other users of financial
statements need to make decisions more rapidly than ever before. As a result, the ability to promptly obtain
high-quality information is essential. Fourth is a consequence which implies that decisions may very well
involve significant investments. As a result, the consequences can be severe if information cannot be
obtained
• Of all the different risks discussed in the chapter up to this point, information risk is the
one that is most likely to create the demand for independent and objective assurance services is information
risk or the probability that the information circulated by an entity will be false or misleading. Because the
primary source of information for investors and creditors is the company itself, an incentive exists for that
Services 9th Edition by Timothy Louwers,
Penelope Bagley
,CHAPTER 01
Auditing and Assurance Services
LEARNING OBJECTIVES
Review Checkpoints
MultipleChoice
Exercises, Problems,and Simulations
1. Define information risk and explain how the financial statement auditing process helps to reduce this risk, thereby reducing the cost
ofcapital for a company.
1, 2, 3
29, 31, 38
65*
2. Define and contrast assurance, attestation,
and financial statement auditing services.
4, 5, 6, 7, 8
23, 25, 28, 44,
50
60, 65*
, 3. Describe and define the assertions that management makes about the recognition, measurement, presentation, and disclosure of the
financial statements and explain why auditors use them as a focal point of the audit.
9, 10, 11
36, 39, 40, 41, 45,
46, 47, 48, 49, 52,
53, 54, 55, 57, 58,
59
62, 63, 67, 68, 69
4. Define professional skepticism and explain itskey characteristics.
12
24, 37
61
5. Describe the organization of public accountingfirms and identify the various services that they offer.
13, 14
30, 42, 56
72
6. Describe the audits and auditors in governmental, internal, and operationalauditing.
15, 16, 17, 18
, 26, 27, 32, 34, 35
64, 66
7. List and explain the requirements for becoming a certified public accountant (CPA)and other certifications available to an
accounting professional.
19, 20, 21, 22
33, 43, 51
70, 71
(*) Item relates to multiple learning objectives
SOLUTIONS FOR REVIEW CHECKPOINTS
• Business risk is the risk that an entity will fail to meet its business
objectives. When assessing business risk, a professional must consider all possible threats to an entity‘s
goals and objectives. Some illustrative examples include the risk that: 1) its existing customers will start
buying products or services from its primary competitors; 2) its product lines will become obsolete; 3) its
taxes will increase; 4) key government contracts will be lost; 5) key employees will leave the entity; and
many other examples exist.
• To help minimize business risk and take advantage of other opportunities presented in
today‘s competitive business environment, decision makers such as chief executive officers (CEOs)
demand timely, relevant, and reliable information. There are at least four environmental conditions that
increase demand for reliableinformation. First, complexity which implies that events and transactions in
today‘s global business environment can be complicated. Most investors do not have the level of expertise
needed to properly account for complex transactions. Second is remoteness which implies that decision
makers are often separated from current and potential business relationships due to distance and time. For
example, investorsmay not be able to visit distant locations to check up on their investments. Third is time-
sensitivity which implies that in today‘s economic environment, investors and other users of financial
statements need to make decisions more rapidly than ever before. As a result, the ability to promptly obtain
high-quality information is essential. Fourth is a consequence which implies that decisions may very well
involve significant investments. As a result, the consequences can be severe if information cannot be
obtained
• Of all the different risks discussed in the chapter up to this point, information risk is the
one that is most likely to create the demand for independent and objective assurance services is information
risk or the probability that the information circulated by an entity will be false or misleading. Because the
primary source of information for investors and creditors is the company itself, an incentive exists for that
