Solution Manual Auditing and
Assurance Services Arens
Auditing
Georgia Institute of Technology - Main Campus
107 pag.
Document shared on https://www.docsity.com/en/solution-manual-auditing-and-assurance-services-arens/7518466/
, Chapter 1
The Demand for Audit and Other Assurance Services
Review Questions
1-1 The relationship among audit services, attestation services, and assurance
services is reflected in Figure 1-3 on page 13 of the text. An assurance service is
an independent professional service to improve the quality of information for
decision makers. An attestation service is a form of assurance service in which
the CPA firm issues a report about the reliability of an assertion that is the
responsibility of another party. Audit services are a form of attestation service in
which the auditor expresses a written conclusion about the degree of
correspondence between information and established criteria.
The most common form of audit service is an audit of historical financial
statements, in which the auditor expresses a conclusion as to whether the
financial statements are presented in conformity with generally accepted
accounting principles. An example of an attestation service is a report on the
effectiveness of an entity’s internal control over financial reporting. There are
many possible forms of assurance services, including services related to
business performance measurement, health care performance, and information
system reliability.
1-2 An independent audit is a means of satisfying the need for reliable
information on the part of decision makers. Factors of a complex society which
contribute to this need are:
1. Remoteness of information
a. Owners (stockholders) divorced from management
b. Directors not involved in day-to-day operations or decisions
c. Dispersion of the business among numerous geographic
locations and complex corporate structures
2. Biases and motives of provider
a. Information will be biased in favor of the provider when his or
her goals are inconsistent with the decision maker's goals.
3. Voluminous data
a. Possibly millions of transactions processed daily via
sophisticated computerized systems
b. Multiple product lines
c. Multiple transaction locations
4. Complex exchange transactions
a. New and changing business relationships lead to innovative
accounting and reporting problems
b. Potential impact of transactions not quantifiable, leading to
increased disclosures
1-1
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,1-3 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.
Auditing has no effect on either the risk-free interest rate or business risk.
However, auditing can significantly reduce information risk.
1-4 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.
The advantages and disadvantages of each are as follows:
ADVANTAGES DISADVANTAGES
USER VERIFIES 1. User obtains information 1. High cost of obtaining
INFORMATION desired. information.
2. User can be more confident 2. Inconvenience to the
of the qualifications and person providing the
activities of the person information because
getting the information. large number of users
would be on premises.
USER SHARES 1. No audit costs incurred. 1. User may not be able
INFORMATION to collect on losses.
RISK WITH
MANAGEMENT
AUDITED 1. Multiple users obtain the 1. May not meet needs
FINANCIAL information. of certain users.
STATEMENTS 2. Information risk can usually 2. Cost may be higher
ARE PROVIDED be reduced sufficiently to than the benefits in
satisfy users at reasonable some situations, such
cost. as for a small
3. Minimal inconvenience to company.
management by having
only one auditor.
1-2
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, 1-5 To do an audit, there must be information in a verifiable form and some
standards (criteria) by which the auditor can evaluate the information. Examples
of established criteria include generally accepted accounting principles and the
Internal Revenue Code. 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. 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 generally accepted accounting principles.
1-6 The primary evidence the internal revenue agent will use in the audit of
the Jones Company's tax return include all available documentation and other
information available in Jones' office or from other sources. For example, when
the internal revenue agent audits taxable income, a major source of information
will be bank statements, the cash receipts journal and deposit slips. The internal
revenue agent is likely to emphasize unrecorded receipts and revenues. For
expenses, major sources of evidence are likely to be cancelled checks, vendors'
invoices and other supporting documentation.
1-7 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
he or she must therefore have an understanding of generally accepted
accounting principles (GAAP), as well as auditing standards. The accountant
need not, and frequently does not, understand what auditors do, unless he or she
is involved in doing audits, or has been trained as an auditor.
1-3
Document shared on https://www.docsity.com/en/solution-manual-auditing-and-assurance-services-arens/7518466/
Assurance Services Arens
Auditing
Georgia Institute of Technology - Main Campus
107 pag.
Document shared on https://www.docsity.com/en/solution-manual-auditing-and-assurance-services-arens/7518466/
, Chapter 1
The Demand for Audit and Other Assurance Services
Review Questions
1-1 The relationship among audit services, attestation services, and assurance
services is reflected in Figure 1-3 on page 13 of the text. An assurance service is
an independent professional service to improve the quality of information for
decision makers. An attestation service is a form of assurance service in which
the CPA firm issues a report about the reliability of an assertion that is the
responsibility of another party. Audit services are a form of attestation service in
which the auditor expresses a written conclusion about the degree of
correspondence between information and established criteria.
The most common form of audit service is an audit of historical financial
statements, in which the auditor expresses a conclusion as to whether the
financial statements are presented in conformity with generally accepted
accounting principles. An example of an attestation service is a report on the
effectiveness of an entity’s internal control over financial reporting. There are
many possible forms of assurance services, including services related to
business performance measurement, health care performance, and information
system reliability.
1-2 An independent audit is a means of satisfying the need for reliable
information on the part of decision makers. Factors of a complex society which
contribute to this need are:
1. Remoteness of information
a. Owners (stockholders) divorced from management
b. Directors not involved in day-to-day operations or decisions
c. Dispersion of the business among numerous geographic
locations and complex corporate structures
2. Biases and motives of provider
a. Information will be biased in favor of the provider when his or
her goals are inconsistent with the decision maker's goals.
3. Voluminous data
a. Possibly millions of transactions processed daily via
sophisticated computerized systems
b. Multiple product lines
c. Multiple transaction locations
4. Complex exchange transactions
a. New and changing business relationships lead to innovative
accounting and reporting problems
b. Potential impact of transactions not quantifiable, leading to
increased disclosures
1-1
Document shared on https://www.docsity.com/en/solution-manual-auditing-and-assurance-services-arens/7518466/
,1-3 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.
Auditing has no effect on either the risk-free interest rate or business risk.
However, auditing can significantly reduce information risk.
1-4 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.
The advantages and disadvantages of each are as follows:
ADVANTAGES DISADVANTAGES
USER VERIFIES 1. User obtains information 1. High cost of obtaining
INFORMATION desired. information.
2. User can be more confident 2. Inconvenience to the
of the qualifications and person providing the
activities of the person information because
getting the information. large number of users
would be on premises.
USER SHARES 1. No audit costs incurred. 1. User may not be able
INFORMATION to collect on losses.
RISK WITH
MANAGEMENT
AUDITED 1. Multiple users obtain the 1. May not meet needs
FINANCIAL information. of certain users.
STATEMENTS 2. Information risk can usually 2. Cost may be higher
ARE PROVIDED be reduced sufficiently to than the benefits in
satisfy users at reasonable some situations, such
cost. as for a small
3. Minimal inconvenience to company.
management by having
only one auditor.
1-2
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, 1-5 To do an audit, there must be information in a verifiable form and some
standards (criteria) by which the auditor can evaluate the information. Examples
of established criteria include generally accepted accounting principles and the
Internal Revenue Code. 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. 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 generally accepted accounting principles.
1-6 The primary evidence the internal revenue agent will use in the audit of
the Jones Company's tax return include all available documentation and other
information available in Jones' office or from other sources. For example, when
the internal revenue agent audits taxable income, a major source of information
will be bank statements, the cash receipts journal and deposit slips. The internal
revenue agent is likely to emphasize unrecorded receipts and revenues. For
expenses, major sources of evidence are likely to be cancelled checks, vendors'
invoices and other supporting documentation.
1-7 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
he or she must therefore have an understanding of generally accepted
accounting principles (GAAP), as well as auditing standards. The accountant
need not, and frequently does not, understand what auditors do, unless he or she
is involved in doing audits, or has been trained as an auditor.
1-3
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