Solution Manual for Auditing and Assurance Services, Global Edition, 18th Edition | Alvin A. Arens, Randal J. Elder & Mark S. Beasley

Solution Manual For
Auditing and Assurance Services, Global Edition, 18th edition Alvin A. Arens,
Randal J. Elder, Mark S. Beasley, Chris E. Hogan
Chapter 1-26

Chapter 1

The Demand for Audit and Other Assurance Services
 Concept Checks

P. 37

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. 46

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




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,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. 46 (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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,  Review Questions

1-1 To do an audit, there must be information in a verifiable form and some
standards (criteria) by which the auditor can evaluate the information. The
information for Jones Company's tax return is the federal tax returns filed by the
company. The established criteria are found in the Internal Revenue Code
and all interpretations. For the audit of Jones Company's financial
statements the information is the financial statements being audited and the
established criteria are U.S. GAAP or IFRS.

1-2 This apparent paradox arises from the distinction between the function of
auditing and the function of accounting. The accounting function is the recording,
classifying, and summarizing of economic events to provide relevant information
to decision makers. The rules of accounting are the criteria used by the auditor
for evaluating the presentation of economic events for financial statements and
they must therefore have an understanding of accounting standards, as well as
auditing standards. The accountant need not, and frequently does not,
understand what auditors do, unless they are involved in doing audits, or have
been trained as an auditor.

1-3 An independent audit is a means of satisfying the need for reliable
information on the part of decision makers. Recent changes in accounting and
business operations include:

1. Increased global activities of many businesses
a. Multiple product lines and transaction locations
b. Foreign exchange affects transactions
2. Complex accounting and exchange transactions
a. Increasing use of derivatives and hedging activities
b. Increasingly complex accounting standards in areas such as
revenue recognition
3. More complex information systems
a. Possibly millions of transactions processed daily through on-
line and traditional sales channels
b. Voluminous data requires interpretation

1-4 1. Risk-free interest rate This is approximately the rate the bank could
earn by investing in U.S. treasury notes for the same length of time
as the business loan.
2. Business risk for the customer This risk reflects the possibility that
the business will not be able to repay its loan because of economic
or business conditions such as a recession, poor management
decisions, or unexpected competition in the industry.
3. Information risk This risk reflects the possibility that the information
upon which the business risk decision was made was inaccurate. A
likely cause of the information risk is the possibility of inaccurate
financial statements.

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