Chapterf701f7-
f7Auditingf7andf7Assurancef7Services
Solution Manual For Auditing & Assurance Services
f7 f7 f7 f7 f7 f7 f7f7
9th Edition by Timothy Louwers, Penelope Bagley
f7 f7 f7 f7 f7 f7
,Chapterf701f7-
f7Auditingf7andf7Assurancef7Services
CHAPTERf701
Auditingf7andf7Assurancef7Services
LEARNINGf7OBJECTIVES
Reviewf7Chec Multiplef7Choi Exercises,f7Problems,f7
kpoints ce andf7Simulations
1.f7Definef7informationf7riskf7andf7explainf7howf 1,f72,f73 29,f731,f738 65*
7thef7financialf7statementf7auditingf7processf
7helpsf7tof7reducef7thisf7risk,f7therebyf7reduci
ngf7thef7costf7off7capitalf7forf7af7company.
2. 4,f75,f76,f77,f78 23,f725,f728,f744, 60,f765*
Definef7andf7contrastf7assurance,f7attestation 50
,
andf7financialf7statementf7auditingf7services.
3. 9,f710,f711 36,f739,f740,f741,f74 62,f763,f767,f768,f769
Describef7andf7definef7thef7assertionsf7that 5,
f7managementf7makesf7aboutf7thef7recognitio 46,f747,f748,f749,f75
n,f7measurement,f7presentation,f7andf7disclos 2,
uref7off7thef7financialf7statementsf7andf7expla 53,f754,f755,f757,f75
inf7whyf7auditorsf7usef7themf7asf7af7focalf7poi 8,
ntf7off7thef7audit. 59
4. 12 24,f737 61
Definef7professionalf7skepticismf7andf7expl
ainf7itsf7keyf7characteristics.
5. 13,f714 30,f742,f756 72
Describef7thef7organizationf7off7publicf7acco
untingf7firmsf7andf7identifyf7thef7variousf7serv
icesf7thatf7theyf7offer.
6. 15,f716,f717,f718 26,f727,f732,f734,f73 64,f766
Describef7thef7auditsf7andf7auditorsf 5
7inf7governmental,f7internal,f7andf7oper
ationalf7auditing.
7. 19,f720,f721,f722 33,f743,f751 70,f771
Listf7andf7explainf7thef7requirementsf7forf7
becomingf7af7certifiedf7publicf7accountantf7(C
PA)f7andf7otherf7certificationsf7availablef7tof7
anf7accountingf7professional.
(*)f7Itemf7relatesf7tof7multiplef7learningf7objectives
,Chapterf701f7-
f7Auditingf7andf7Assurancef7Services
SOLUTIONSf7FORf7REVIEWf7CHECKPOINTS
1.1 Businessf7riskf7isf7thef7riskf7thatf7anf7entityf7willf7failf7tof7meetf7itsf7businessf7objectives.f7Whenf7ass
essingf7businessf7risk,f7af7professionalf7mustf7considerf7allf7possiblef7threatsf7tof7anf7entity‗sf7goalsf7andf
7objectives.f7Somef7illustrativef7examplesf7includef7thef7riskf7that:f71)f7itsf7existingf7customersf7willf7star
tf7buyingf7productsf7orf7servicesf7fromf7itsf7primaryf7competitors;f72)f7itsf7productf7linesf7willf7becomef7
obsolete;f73)f7itsf7taxesf7willf7increase;f74)f7keyf7governmentf7contractsf7willf7bef7lost;f75)f7keyf7employee
sf7willf7leavef7thef7entity;f7andf7manyf7otherf7examplesf7exist.
1.2 Tof7helpf7minimizef7businessf7riskf7andf7takef7advantagef7off7otherf7opportunitiesf7presentedf7inf7today‗sf7
competitivef7businessf7environment,f7decisionf7makersf7suchf7asf7chieff7executivef7officersf7(CEOs)f7dema
ndf7timely,f7relevant,f7andf7reliablef7information.f7Theref7aref7atf7leastf7fourf7environmentalf7conditionsf7th
atf7increasef7demandf7forf7reliablef7information.f7First,f7complexityf7whichf7impliesf7thatf7eventsf7andf7tran
sactionsf7inf7today‗sf7globalf7businessf7environmentf7canf7bef7complicated.f7Mostf7investorsf7dof7notf7have
f7thef7levelf7off7expertisef7neededf7tof7properlyf7accountf7forf7complexf7transactions.f7Secondf7isf7remotene
ssf7whichf7impliesf7thatf7decisionf7makersf7aref7oftenf7separatedf7fromf7currentf7andf7potentialf7businessf7rel
ationshipsf7duef7tof7distancef7andf7time.f7Forf7example,f7investorsf7mayf7notf7bef7ablef7tof7visitf7distantf7loc
ationsf7tof7checkf7upf7onf7theirf7investments.f7Thirdf7isf7time-
sensitivityf7whichf7impliesf7thatf7inf7today‗sf7economicf7environment,f7investorsf7andf7otherf7usersf7off7fin
ancialf7statementsf7needf7tof7makef7decisionsf7moref7rapidlyf7thanf7everf7before.f7Asf7af7result,f7thef7ability
f7tof7promptlyf7obtainf7high-
qualityf7informationf7isf7essential.f7Fourthf7isf7af7consequencef7whichf7impliesf7thatf7decisionsf7mayf7veryf
7wellf7involvef7significantf7investments.f 7 Asf7af7result,f7thef7consequencesf7canf7bef7severef7iff7informatio
nf7cannotf7bef7obtained
1.3 Off7allf7thef7differentf7risksf7discussedf7inf7thef7chapterf7upf7tof7thisf7point,f7informationf7riskf7isf7thef7onef
7thatf7isf7mostf7likelyf7tof7createf7thef7demandf7forf7independentf7andf7objectivef7assurancef7servicesf7isf7in
formationf7riskf7orf7thef7probabilityf7thatf7thef7informationf7circulatedf7byf7anf7entityf7willf7bef7falsef7orf7m
isleading.f7Becausef7thef7primaryf7sourcef7off7informationf7forf7investorsf7andf7creditorsf7isf7thef7company
f7itself,f7anf7incentivef7existsf7forf7thatf7company‗sf7managementf7tof7makef7theirf7businessf7orf7servicef7ap
pearf7tof7bef7betterf7thanf7itf7actuallyf7mayf7be,f7tof7putf7theirf7bestf7footf7forward.f7Asf7af7result,f7preparersf
7andf7issuersf7off7financialf7informationf7(directors, f7managers,f7accountants,f7andf7other f7peoplef7employe
df7inf7af7business)f7mightf7benefitf7byf7givingf7false,f7misleading,f7orf7overlyf7optimisticf7information.f7Thi
sf7potentialf7conflictf7off7interestf7betweenf7informationf7providersf7andf7usersf7whichf7providesf7thef7unde
rlyingf7basisf7forf7thef7demandf7forf7reliablef7information.
1.4 Thef7fourf7majorf7elementsf7off7thef7broadf7definitionf7off7assurancef7servicesf7are
Independence.f 7 CPAsf7wantf7tof7preservef7theirf7reputationf7andf7competitivef7advantagef7byf7alwaysf7pr
eservingf7integrityf7andf7objectivityf7whenf7performingf7assurancef7services.
Professionalf7services.f7Virtuallyf7allf7workf7performedf7byf7CPAsf7isf7definedf7asf7―professionalf7services
‖f7asf7longf7asf7itf7involvesf7somef7elementf7off7judgmentf7basedf7onf7educationf7andf7experience.
Improvingf7thef7qualityf7off7informationf7orf7itsf7context.f7Thef7emphasisf7isf7onf7―information,‖f7CPAs‗f7tr
aditionalf7areaf7off7expertise.f7CPAsf7canf7enhancef7qualityf7byf7assuringf7usersf7aboutf7thef7reliabilityf7an
df7relevancef7off7information,f7andf7thesef7twof7featuresf7aref7closelyf7relatedf7tof7thef7familiarf7credibility-
lendingf7productsf7off7attestationf7andf7auditf7services.f7―Context‖f7isf7relevancef7inf7af7differentf7light.f7Forf7
assurancef7services,f7improvingf7thef7contextf7off7informationf7refersf7tof7improvingf7itsf7usefulnessf7whenf7t
argetedf7tof7particularf7decisionf7makersf7inf7thef7surroundingsf7off7particularf7decisionf7problems.
Forf7decisionf7makers.f7Asf7thef7―consumers‖f7off7assurancef7services,f7decisionf7makersf7aref7thef7beneficiar
iesf7off7thef7assurancef7services.f7Decisionf7makersf7mayf7orf7mayf7notf7bef7thef7―client‖f7thatf7paysf7thef7feef7
andf7mayf7orf7mayf7notf7bef7onef7off7thef7partiesf7tof7anf7assertionf7orf7otherf7information,f7butf7theyf7person
ifyf7thef7consumerf7focusf7off7newf7andf7differentf7professionalf7work.
1.5 Anf7assurancef7servicesf7engagementf7isf7anyf7assignmentf7thatf7improvesf7thef7qualityf7off7information,f7o
rf7itsf7context,f7forf7decisionf7makers.f7Becausef7informationf7(e.g.,f7financialf7statements)f7aref7preparedf7
byf7managersf7off7anf7entityf7whof7havef7authorityf7andf7responsibilityf7forf7financialf7successf7orf7failure,f7a
nf7outsiderf7mayf7bef7skepticalf7thatf7thef7informationf7trulyf7isf7objective,f7freef7fromf7bias,f7fullyf7informa
tive,f7andf7freef7fromf7materialf7error,f7intentionalf7orf7inadvertent.f 7 Thef7servicesf7off7anf7independentf7a
, Chapterf701f7-
f7Auditingf7andf7Assurancef7Services
uditorf7helpsf7resolvef7thosef7doubtsf7becausef7the
f7Auditingf7andf7Assurancef7Services
Solution Manual For Auditing & Assurance Services
f7 f7 f7 f7 f7 f7 f7f7
9th Edition by Timothy Louwers, Penelope Bagley
f7 f7 f7 f7 f7 f7
,Chapterf701f7-
f7Auditingf7andf7Assurancef7Services
CHAPTERf701
Auditingf7andf7Assurancef7Services
LEARNINGf7OBJECTIVES
Reviewf7Chec Multiplef7Choi Exercises,f7Problems,f7
kpoints ce andf7Simulations
1.f7Definef7informationf7riskf7andf7explainf7howf 1,f72,f73 29,f731,f738 65*
7thef7financialf7statementf7auditingf7processf
7helpsf7tof7reducef7thisf7risk,f7therebyf7reduci
ngf7thef7costf7off7capitalf7forf7af7company.
2. 4,f75,f76,f77,f78 23,f725,f728,f744, 60,f765*
Definef7andf7contrastf7assurance,f7attestation 50
,
andf7financialf7statementf7auditingf7services.
3. 9,f710,f711 36,f739,f740,f741,f74 62,f763,f767,f768,f769
Describef7andf7definef7thef7assertionsf7that 5,
f7managementf7makesf7aboutf7thef7recognitio 46,f747,f748,f749,f75
n,f7measurement,f7presentation,f7andf7disclos 2,
uref7off7thef7financialf7statementsf7andf7expla 53,f754,f755,f757,f75
inf7whyf7auditorsf7usef7themf7asf7af7focalf7poi 8,
ntf7off7thef7audit. 59
4. 12 24,f737 61
Definef7professionalf7skepticismf7andf7expl
ainf7itsf7keyf7characteristics.
5. 13,f714 30,f742,f756 72
Describef7thef7organizationf7off7publicf7acco
untingf7firmsf7andf7identifyf7thef7variousf7serv
icesf7thatf7theyf7offer.
6. 15,f716,f717,f718 26,f727,f732,f734,f73 64,f766
Describef7thef7auditsf7andf7auditorsf 5
7inf7governmental,f7internal,f7andf7oper
ationalf7auditing.
7. 19,f720,f721,f722 33,f743,f751 70,f771
Listf7andf7explainf7thef7requirementsf7forf7
becomingf7af7certifiedf7publicf7accountantf7(C
PA)f7andf7otherf7certificationsf7availablef7tof7
anf7accountingf7professional.
(*)f7Itemf7relatesf7tof7multiplef7learningf7objectives
,Chapterf701f7-
f7Auditingf7andf7Assurancef7Services
SOLUTIONSf7FORf7REVIEWf7CHECKPOINTS
1.1 Businessf7riskf7isf7thef7riskf7thatf7anf7entityf7willf7failf7tof7meetf7itsf7businessf7objectives.f7Whenf7ass
essingf7businessf7risk,f7af7professionalf7mustf7considerf7allf7possiblef7threatsf7tof7anf7entity‗sf7goalsf7andf
7objectives.f7Somef7illustrativef7examplesf7includef7thef7riskf7that:f71)f7itsf7existingf7customersf7willf7star
tf7buyingf7productsf7orf7servicesf7fromf7itsf7primaryf7competitors;f72)f7itsf7productf7linesf7willf7becomef7
obsolete;f73)f7itsf7taxesf7willf7increase;f74)f7keyf7governmentf7contractsf7willf7bef7lost;f75)f7keyf7employee
sf7willf7leavef7thef7entity;f7andf7manyf7otherf7examplesf7exist.
1.2 Tof7helpf7minimizef7businessf7riskf7andf7takef7advantagef7off7otherf7opportunitiesf7presentedf7inf7today‗sf7
competitivef7businessf7environment,f7decisionf7makersf7suchf7asf7chieff7executivef7officersf7(CEOs)f7dema
ndf7timely,f7relevant,f7andf7reliablef7information.f7Theref7aref7atf7leastf7fourf7environmentalf7conditionsf7th
atf7increasef7demandf7forf7reliablef7information.f7First,f7complexityf7whichf7impliesf7thatf7eventsf7andf7tran
sactionsf7inf7today‗sf7globalf7businessf7environmentf7canf7bef7complicated.f7Mostf7investorsf7dof7notf7have
f7thef7levelf7off7expertisef7neededf7tof7properlyf7accountf7forf7complexf7transactions.f7Secondf7isf7remotene
ssf7whichf7impliesf7thatf7decisionf7makersf7aref7oftenf7separatedf7fromf7currentf7andf7potentialf7businessf7rel
ationshipsf7duef7tof7distancef7andf7time.f7Forf7example,f7investorsf7mayf7notf7bef7ablef7tof7visitf7distantf7loc
ationsf7tof7checkf7upf7onf7theirf7investments.f7Thirdf7isf7time-
sensitivityf7whichf7impliesf7thatf7inf7today‗sf7economicf7environment,f7investorsf7andf7otherf7usersf7off7fin
ancialf7statementsf7needf7tof7makef7decisionsf7moref7rapidlyf7thanf7everf7before.f7Asf7af7result,f7thef7ability
f7tof7promptlyf7obtainf7high-
qualityf7informationf7isf7essential.f7Fourthf7isf7af7consequencef7whichf7impliesf7thatf7decisionsf7mayf7veryf
7wellf7involvef7significantf7investments.f 7 Asf7af7result,f7thef7consequencesf7canf7bef7severef7iff7informatio
nf7cannotf7bef7obtained
1.3 Off7allf7thef7differentf7risksf7discussedf7inf7thef7chapterf7upf7tof7thisf7point,f7informationf7riskf7isf7thef7onef
7thatf7isf7mostf7likelyf7tof7createf7thef7demandf7forf7independentf7andf7objectivef7assurancef7servicesf7isf7in
formationf7riskf7orf7thef7probabilityf7thatf7thef7informationf7circulatedf7byf7anf7entityf7willf7bef7falsef7orf7m
isleading.f7Becausef7thef7primaryf7sourcef7off7informationf7forf7investorsf7andf7creditorsf7isf7thef7company
f7itself,f7anf7incentivef7existsf7forf7thatf7company‗sf7managementf7tof7makef7theirf7businessf7orf7servicef7ap
pearf7tof7bef7betterf7thanf7itf7actuallyf7mayf7be,f7tof7putf7theirf7bestf7footf7forward.f7Asf7af7result,f7preparersf
7andf7issuersf7off7financialf7informationf7(directors, f7managers,f7accountants,f7andf7other f7peoplef7employe
df7inf7af7business)f7mightf7benefitf7byf7givingf7false,f7misleading,f7orf7overlyf7optimisticf7information.f7Thi
sf7potentialf7conflictf7off7interestf7betweenf7informationf7providersf7andf7usersf7whichf7providesf7thef7unde
rlyingf7basisf7forf7thef7demandf7forf7reliablef7information.
1.4 Thef7fourf7majorf7elementsf7off7thef7broadf7definitionf7off7assurancef7servicesf7are
Independence.f 7 CPAsf7wantf7tof7preservef7theirf7reputationf7andf7competitivef7advantagef7byf7alwaysf7pr
eservingf7integrityf7andf7objectivityf7whenf7performingf7assurancef7services.
Professionalf7services.f7Virtuallyf7allf7workf7performedf7byf7CPAsf7isf7definedf7asf7―professionalf7services
‖f7asf7longf7asf7itf7involvesf7somef7elementf7off7judgmentf7basedf7onf7educationf7andf7experience.
Improvingf7thef7qualityf7off7informationf7orf7itsf7context.f7Thef7emphasisf7isf7onf7―information,‖f7CPAs‗f7tr
aditionalf7areaf7off7expertise.f7CPAsf7canf7enhancef7qualityf7byf7assuringf7usersf7aboutf7thef7reliabilityf7an
df7relevancef7off7information,f7andf7thesef7twof7featuresf7aref7closelyf7relatedf7tof7thef7familiarf7credibility-
lendingf7productsf7off7attestationf7andf7auditf7services.f7―Context‖f7isf7relevancef7inf7af7differentf7light.f7Forf7
assurancef7services,f7improvingf7thef7contextf7off7informationf7refersf7tof7improvingf7itsf7usefulnessf7whenf7t
argetedf7tof7particularf7decisionf7makersf7inf7thef7surroundingsf7off7particularf7decisionf7problems.
Forf7decisionf7makers.f7Asf7thef7―consumers‖f7off7assurancef7services,f7decisionf7makersf7aref7thef7beneficiar
iesf7off7thef7assurancef7services.f7Decisionf7makersf7mayf7orf7mayf7notf7bef7thef7―client‖f7thatf7paysf7thef7feef7
andf7mayf7orf7mayf7notf7bef7onef7off7thef7partiesf7tof7anf7assertionf7orf7otherf7information,f7butf7theyf7person
ifyf7thef7consumerf7focusf7off7newf7andf7differentf7professionalf7work.
1.5 Anf7assurancef7servicesf7engagementf7isf7anyf7assignmentf7thatf7improvesf7thef7qualityf7off7information,f7o
rf7itsf7context,f7forf7decisionf7makers.f7Becausef7informationf7(e.g.,f7financialf7statements)f7aref7preparedf7
byf7managersf7off7anf7entityf7whof7havef7authorityf7andf7responsibilityf7forf7financialf7successf7orf7failure,f7a
nf7outsiderf7mayf7bef7skepticalf7thatf7thef7informationf7trulyf7isf7objective,f7freef7fromf7bias,f7fullyf7informa
tive,f7andf7freef7fromf7materialf7error,f7intentionalf7orf7inadvertent.f 7 Thef7servicesf7off7anf7independentf7a
, Chapterf701f7-
f7Auditingf7andf7Assurancef7Services
uditorf7helpsf7resolvef7thosef7doubtsf7becausef7the
