,ACCESS Test Bank for Auditing & Assurance Services 9th Edition Louwers
Chapter640164-64Auditing64and64Assurance64Services
CHAPTER6401
Auditing64and64Assurance64Services
LEARNING64OBJECTIVES
Review64Che Multiple Exercises,64Problem
ckpoints 64Choic s,64and64Simulati
e ons
1.6 4 Define64information64risk64and64explain64
how64the64financial64statement64auditing64
1,642,643 29,6431,6438 65*
process64helps64to64reduce64this64risk,64the
reby64reducing64the64cost64of64capital64for6
4a64company.
2.
4,645,646,647,648 23,6425,6428,6444,6 60,6465*
Define64and64contrast64assurance,64attestat
450
ion,64and64financial64statement64auditing64se
rvices.
3.
36,6439,6440,6441,6
Describe64and64define64the64assertions64t
445,
hat64management64makes64about64the64reco 9,6410,6411 62,6463,6467,6468,6469
46,6447,6448,6449,6
gnition,64measurement,64presentation,64and64
452,
disclosure64of64the64financial64statements64a
53,6454,6455,6457,6
nd64explain64why64auditors64use64them64as64
458,
a64focal64point64of64the64audit.
59
4.
Define64professional64skepticism64and64e 12 24,6437 61
xplain64its64key64characteristics.
5.
Describe64the64organization64of64public64a 13,6414 30,6442,6456 72
ccounting64firms64and64identify64the64variou
s64services64that64they64offer.
6.
Describe64the64audits64and64audito 15,6416,6417,6418 26,6427,6432,6434,6 64,6466
rs64in64governmental,64internal,64and64 435
operational64auditing.
7.
List64and64explain64the64requirements64f
19,6420,6421,6422 33,6443,6451 70,6471
or64becoming64a64certified64public64accounta
nt64(CPA)64and64other64certifications64availa
ble64to64an64accounting64professional.
1-1
Copyright64©202464McGraw-
Hill64Education.64All64rights64reserved.64No64reproduction64or64distribution64without64the64prior64writte
n64consent64of64McGraw-Hill64Education.
mynursytest.store
,(*)64Item64relates64to64multiple64learning64objectives
1-2
Copyright64©202464McGraw-
Hill64Education.64All64rights64reserved.64No64reproduction64or64distribution64without64the64prior64writte
n64consent64of64McGraw-Hill64Education.
mynursytest.store
, ACCESS64Test64Bank64for64Auditing64&64Assurance64Services649th64Edition64Louwer
s
Chapter640164-64Auditing64and64Assurance64Services
SOLUTIONS64FOR64REVIEW64CHECKPOINTS
1.1 Business64risk64is64the64risk64that64an64entity64will64fail64to64meet64its64business64objectives.64When64as
sessing64business64risk,64a64professional64must64consider64all64possible64threats64to64an64entity’s64goals
64and64objectives.64Some64illustrative64examples64include64the64risk64that:641)64its64existing64customers
64will64start64buying64products64or64services64from64its64primary64competitors;642)64its64product64lines64
will64become64obsolete;643)64its64taxes64will64increase;644)64key64government64contracts64will64be64lost;
645)64key64employees64will64leave64the64entity;64and64many64other64examples64exist.
1.2 To64help64minimize64business64risk64and64take64advantage64of64other64opportunities64presented64in64to
day’s64competitive64business64environment,64decision64makers64such64as64chief64executive64officers64(
CEOs)64demand64timely,64relevant,64and64reliable64information.64There64are64at64least64four64environm
ental64conditions64that64increase64demand64for64reliable64information.64First,64complexity64which64impl
ies64that64events64and64transactions64in64today’s64global64business64environment64can64be64complicated
.64Most64investors64do64not64have64the64level64of64expertise64needed64to64properly64account64for64com
plex64transactions.64Second64is64remoteness64which64implies64that64decision64makers64are64often64separ
ated64from64current64and64potential64business64relationships64due64to64distance64and64time.64For64examp
le,64investors64may64not64be64able64to64visit64distant64locations64to64check64up64on64their64investments.
64Third64is64time-sensitivity64which
implies64that64in64today’s64economic64environment,64investors64and64other64users64of64financial64statem
ents64need64to64make64decisions64more64rapidly64than64ever64before.64As64a64result,64the64ability64to64
promptly64obtain64high-
quality64information64is64essential.64Fourth64is64a64consequence64which64implies64that64decisions64may
64very64well64involve64significant64investments.64As64a64result,64the64consequences64can64be64severe64i
f64information64cannot64be64obtained
1.3 Of64all64the64different64risks64discussed64in64the64chapter64up64to64this64point,64information64risk64is
64the64one64that64is64most64likely64to64create64the64demand64for64independent64and64objective64assu
rance64services64is64information64risk64or64the64probability64that64the64information64circulated64by64
an64entity64will64be64false64or64misleading.64Because64the64primary64source64of64information64for64
investors64and64creditors64is64the64company64itself,64an64incentive64exists64for64that
company’s64management64to64make64their64business64or64service64appear64to64be64better64than64it64actu
ally64may64be,64to64put64their64best64foot64forward.64As64a64result,64preparers64and64issuers64of64financ
ial64information64(directors,64managers,64accountants,64and64other64people64employed64in64a64business)
64might64benefit64by64giving64false,64misleading,64or64overly64optimistic64information.64This64potential
64conflict64of64interest64between64information64providers64and64users64which64provides64the64underlyin
g64basis64for64the64demand64for64reliable64information.
1.4 The64four64major64elements64of64the64broad64definition64of64assurance64services64are
Independence.64CPAs64want64to64preserve64their64reputation64and64competitive64advantage64by64always6
4preserving64integrity64and64objectivity64when64performing64assurance64services.
Professional64services.64Virtually64all64work64performed64by64CPAs64is64defined64as64“professional64se
rvices”64as64long64as64it64involves64some64element64of64judgment64based64on64education64and64experi
ence.
Improving64the64quality64of64information64or64its64context.64The64emphasis64is64on64“information,”64CP
As’64traditional64area64of64expertise.64CPAs64can64enhance64quality64by64assuring64users64about64the64
reliability64and64relevance64of64information,64and64these64two64features64are64closely64related64to64the6
4familiar64credibility-lending64products64of
attestation64and64audit64services.64“Context”64is64relevance64in64a64different64light.64For64assurance64se
rvices,64improving64the64context64of64information64refers64to64improving64its64usefulness64when64target
ed64to64particular64decision64makers64in64the64surroundings64of64particular64decision64problems.
1-3
Copyright64©202464McGraw-
Hill64Education.64All64rights64reserved.64No64reproduction64or64distribution64without64the64prior64writte
n64consent64of64McGraw-Hill64Education.
mynursytest.store
Chapter640164-64Auditing64and64Assurance64Services
CHAPTER6401
Auditing64and64Assurance64Services
LEARNING64OBJECTIVES
Review64Che Multiple Exercises,64Problem
ckpoints 64Choic s,64and64Simulati
e ons
1.6 4 Define64information64risk64and64explain64
how64the64financial64statement64auditing64
1,642,643 29,6431,6438 65*
process64helps64to64reduce64this64risk,64the
reby64reducing64the64cost64of64capital64for6
4a64company.
2.
4,645,646,647,648 23,6425,6428,6444,6 60,6465*
Define64and64contrast64assurance,64attestat
450
ion,64and64financial64statement64auditing64se
rvices.
3.
36,6439,6440,6441,6
Describe64and64define64the64assertions64t
445,
hat64management64makes64about64the64reco 9,6410,6411 62,6463,6467,6468,6469
46,6447,6448,6449,6
gnition,64measurement,64presentation,64and64
452,
disclosure64of64the64financial64statements64a
53,6454,6455,6457,6
nd64explain64why64auditors64use64them64as64
458,
a64focal64point64of64the64audit.
59
4.
Define64professional64skepticism64and64e 12 24,6437 61
xplain64its64key64characteristics.
5.
Describe64the64organization64of64public64a 13,6414 30,6442,6456 72
ccounting64firms64and64identify64the64variou
s64services64that64they64offer.
6.
Describe64the64audits64and64audito 15,6416,6417,6418 26,6427,6432,6434,6 64,6466
rs64in64governmental,64internal,64and64 435
operational64auditing.
7.
List64and64explain64the64requirements64f
19,6420,6421,6422 33,6443,6451 70,6471
or64becoming64a64certified64public64accounta
nt64(CPA)64and64other64certifications64availa
ble64to64an64accounting64professional.
1-1
Copyright64©202464McGraw-
Hill64Education.64All64rights64reserved.64No64reproduction64or64distribution64without64the64prior64writte
n64consent64of64McGraw-Hill64Education.
mynursytest.store
,(*)64Item64relates64to64multiple64learning64objectives
1-2
Copyright64©202464McGraw-
Hill64Education.64All64rights64reserved.64No64reproduction64or64distribution64without64the64prior64writte
n64consent64of64McGraw-Hill64Education.
mynursytest.store
, ACCESS64Test64Bank64for64Auditing64&64Assurance64Services649th64Edition64Louwer
s
Chapter640164-64Auditing64and64Assurance64Services
SOLUTIONS64FOR64REVIEW64CHECKPOINTS
1.1 Business64risk64is64the64risk64that64an64entity64will64fail64to64meet64its64business64objectives.64When64as
sessing64business64risk,64a64professional64must64consider64all64possible64threats64to64an64entity’s64goals
64and64objectives.64Some64illustrative64examples64include64the64risk64that:641)64its64existing64customers
64will64start64buying64products64or64services64from64its64primary64competitors;642)64its64product64lines64
will64become64obsolete;643)64its64taxes64will64increase;644)64key64government64contracts64will64be64lost;
645)64key64employees64will64leave64the64entity;64and64many64other64examples64exist.
1.2 To64help64minimize64business64risk64and64take64advantage64of64other64opportunities64presented64in64to
day’s64competitive64business64environment,64decision64makers64such64as64chief64executive64officers64(
CEOs)64demand64timely,64relevant,64and64reliable64information.64There64are64at64least64four64environm
ental64conditions64that64increase64demand64for64reliable64information.64First,64complexity64which64impl
ies64that64events64and64transactions64in64today’s64global64business64environment64can64be64complicated
.64Most64investors64do64not64have64the64level64of64expertise64needed64to64properly64account64for64com
plex64transactions.64Second64is64remoteness64which64implies64that64decision64makers64are64often64separ
ated64from64current64and64potential64business64relationships64due64to64distance64and64time.64For64examp
le,64investors64may64not64be64able64to64visit64distant64locations64to64check64up64on64their64investments.
64Third64is64time-sensitivity64which
implies64that64in64today’s64economic64environment,64investors64and64other64users64of64financial64statem
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promptly64obtain64high-
quality64information64is64essential.64Fourth64is64a64consequence64which64implies64that64decisions64may
64very64well64involve64significant64investments.64As64a64result,64the64consequences64can64be64severe64i
f64information64cannot64be64obtained
1.3 Of64all64the64different64risks64discussed64in64the64chapter64up64to64this64point,64information64risk64is
64the64one64that64is64most64likely64to64create64the64demand64for64independent64and64objective64assu
rance64services64is64information64risk64or64the64probability64that64the64information64circulated64by64
an64entity64will64be64false64or64misleading.64Because64the64primary64source64of64information64for64
investors64and64creditors64is64the64company64itself,64an64incentive64exists64for64that
company’s64management64to64make64their64business64or64service64appear64to64be64better64than64it64actu
ally64may64be,64to64put64their64best64foot64forward.64As64a64result,64preparers64and64issuers64of64financ
ial64information64(directors,64managers,64accountants,64and64other64people64employed64in64a64business)
64might64benefit64by64giving64false,64misleading,64or64overly64optimistic64information.64This64potential
64conflict64of64interest64between64information64providers64and64users64which64provides64the64underlyin
g64basis64for64the64demand64for64reliable64information.
1.4 The64four64major64elements64of64the64broad64definition64of64assurance64services64are
Independence.64CPAs64want64to64preserve64their64reputation64and64competitive64advantage64by64always6
4preserving64integrity64and64objectivity64when64performing64assurance64services.
Professional64services.64Virtually64all64work64performed64by64CPAs64is64defined64as64“professional64se
rvices”64as64long64as64it64involves64some64element64of64judgment64based64on64education64and64experi
ence.
Improving64the64quality64of64information64or64its64context.64The64emphasis64is64on64“information,”64CP
As’64traditional64area64of64expertise.64CPAs64can64enhance64quality64by64assuring64users64about64the64
reliability64and64relevance64of64information,64and64these64two64features64are64closely64related64to64the6
4familiar64credibility-lending64products64of
attestation64and64audit64services.64“Context”64is64relevance64in64a64different64light.64For64assurance64se
rvices,64improving64the64context64of64information64refers64to64improving64its64usefulness64when64target
ed64to64particular64decision64makers64in64the64surroundings64of64particular64decision64problems.
1-3
Copyright64©202464McGraw-
Hill64Education.64All64rights64reserved.64No64reproduction64or64distribution64without64the64prior64writte
n64consent64of64McGraw-Hill64Education.
mynursytest.store
