Chapter ||01 ||- |Auditing |and ||Assurance ||Services
SOLUTION MANUAL FOR AUDITING AND ASSURANCE SERVICES
9TH EDITION BY TIMOTHY LOUWERS PENELOPE BAGLEY
,Chapter ||01 ||- |Auditing |and ||Assurance ||Services
CHAPTER ||01
Auditing ||and ||Assurance ||Services
LEARNING ||OBJECTIVES
Review Multiple Exercises, |Problems,
Checkpoints
|| ||Choice ||and ||Simulations
1. ||Define ||information ||risk ||and ||explain ||how ||the 1, ||2, ||3 29, ||31, ||38 65*
||financial ||statement ||auditing ||process ||helps
||to ||reduce ||this ||risk, ||thereby ||reducing ||the
||cost ||of ||capital ||for ||a ||company.
2. Define ||and ||contrast ||assurance, ||attestation, 4, ||5, ||6, ||7, ||8 23, ||25, ||28, ||44, 60, ||65*
and ||financial ||statement ||auditing ||services. 50
3. Describe ||and ||define ||the ||assertions ||that 9, ||10, ||11 36, ||39, ||40, ||41, ||45, 62, ||63, ||67, ||68, ||69
||management ||makes ||about ||the ||recognition, 46, ||47, ||48, ||49, ||52,
||measurement, ||presentation, ||and ||disclosure 53, ||54, ||55, ||57, ||58,
||of ||the ||financial ||statements ||and ||explain ||why 59
||auditors ||use ||them |as ||a ||focal ||point ||of |the
||audit.
4. Define |professional ||skepticism ||and |explain |its 12 24, ||37 61
||key ||characteristics.
5. Describe |the |organization |of |public |accounting 13, ||14 30, ||42, ||56 72
||firms ||and ||identify ||the ||various ||services ||that
||they ||offer.
6. Describe ||the ||audits ||and ||auditors ||in 15, ||16, ||17, ||18 26, ||27, ||32, ||34, ||35 64, ||66
||governmental, |internal, |and |operational
||auditing.
7. List ||and ||explain ||the ||requirements ||for 19, ||20, ||21, ||22 33, ||43, ||51 70, ||71
||becoming |a |certified ||public |accountant |(CPA)
||and ||other ||certifications ||available ||to ||an
||accounting ||professional.
(*) ||Item |relates |to ||multiple ||learning ||objectives
,Chapter ||01 ||- |Auditing |and ||Assurance ||Services
SOLUTIONS ||FOR ||REVIEW ||CHECKPOINTS
1.1 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.
1.2 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 ||reliable ||information. ||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, ||investors ||may ||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
1.3 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 ||company‘s ||management ||to ||make ||their ||business ||or ||service ||appear ||to ||be ||better ||than ||it ||actually ||may |be,
||to ||put ||their ||best ||foot ||forward. ||As ||a ||result, ||preparers ||and ||issuers ||of ||financial ||information ||(directors,
||managers, ||accountants, ||and ||other ||people ||employed ||in ||a ||business) ||might ||benefit ||by ||giving ||false,
||misleading, ||or ||overly ||optimistic ||information. ||This ||potential ||conflict ||of ||interest ||between ||information
||providers ||and ||users || which ||provides ||the ||underlying ||basis ||for ||the ||demand ||for ||reliable ||information.
1.4 The ||four ||major ||elements ||of |the ||broad ||definition ||of ||assurance ||services ||are
Independence. | | CPAs ||want ||to ||preserve ||their ||reputation ||and ||competitive ||advantage ||by |always ||preserving
||integrity ||and ||objectivity ||when ||performing ||assurance ||services.
Professional ||services. ||Virtually ||all ||work ||performed ||by ||CPAs ||is ||defined ||as ||―professional ||services‖ ||as ||long
||as ||it ||involves ||some ||element ||of ||judgment ||based ||on ||education ||and ||experience.
Improving ||the ||quality ||of ||information ||or ||its ||context. ||The ||emphasis ||is ||on ||―information,‖ ||CPAs‘ ||traditional
||area ||of ||expertise. ||CPAs ||can ||enhance ||quality ||by ||assuring ||users ||about ||the ||reliability ||and ||relevance ||of
||information, ||and ||these ||two ||features ||are ||closely ||related ||to ||the ||familiar ||credibility-lending ||products ||of
||attestation |and |audit |services. ||―Context‖ |is |relevance |in |a |different |light. |For |assurance |services, ||improving
||the ||context ||of ||information ||refers ||to ||improving ||its ||usefulness ||when ||targeted ||to ||particular ||decision ||makers
||in ||the ||surroundings ||of ||particular ||decision ||problems.
For |decision ||makers. |As |the |―consumers‖ |of |assurance |services, |decision ||makers |are |the |beneficiaries |of |the
||assurance |services. |Decision |makers ||may |or |may |not |be |the |―client‖ |that |pays |the |fee |and ||may |or ||may |not |be
||one ||of ||the ||parties ||to ||an ||assertion ||or ||other ||information, ||but ||they ||personify ||the ||consumer ||focus ||of ||new
||and ||different ||professional ||work.
1.5 An ||assurance ||services ||engagement ||is ||any ||assignment ||that ||improves ||the ||quality ||of ||information, ||or ||its
||context, ||for ||decision ||makers. ||Because ||information ||(e.g., ||financial ||statements) ||are ||prepared ||by ||managers
||of ||an ||entity ||who ||have ||authority |and ||responsibility ||for ||financial ||success ||or ||failure, ||an ||outsider ||may |be
||skeptical ||that ||the ||information ||truly ||is ||objective, ||free ||from ||bias, ||fully ||informative, ||and ||free ||from ||material
||error, ||intentional ||or ||inadvertent. | | The ||services ||of ||an ||independent ||auditor ||helps ||resolve ||those ||doubts
||because ||the
, Chapter ||01 ||- |Auditing |and ||Assurance ||Services
auditor‘s ||success ||depends ||upon ||his ||or ||her ||independent, ||objective, ||and ||competent ||assessment ||of ||the
||information ||(e.g., ||the ||conformity ||of ||the ||financial ||statements ||with ||the ||appropriate ||reporting ||framework).
||The ||independent ||auditor‘s ||role ||is ||to ||lend ||credibility |to ||the ||information; ||hence, ||the ||outsider ||will ||likely
||seek ||his ||or ||her ||independent ||opinion ||about ||the ||financial ||statements.
1.6 An ||attestation ||engagement ||is ||―an ||engagement ||in ||which ||a ||practitioner ||is ||engaged ||to ||issue ||or ||does
||issue ||a ||written ||communication ||that ||expresses ||a ||conclusion ||about ||the ||reliability ||of ||a ||written ||assertion
||that ||is ||the ||responsibility ||of ||another ||party‖ ||(SSAE ||10, ||AT ||101.01). ||To ||attest ||means ||to ||lend ||credibility ||or
||to ||vouch ||for ||the ||truth ||or ||accuracy ||of ||the ||statements ||that ||one ||party ||makes ||to ||another. ||The ||attest ||function
||is ||a ||term ||often ||applied ||to ||the ||activities ||of ||independent ||CPAs ||when ||acting ||as ||auditors ||of ||financial
||statements.
1.7 An ||assurance ||service ||engagement ||is ||one ||that ||improves ||the ||quality ||of ||information, ||or ||its ||context, ||for
||decision ||makers. | | Thus, ||an ||attestation ||service ||engagement ||is ||one ||type ||of ||an ||assurance ||service.
| | Another ||way ||of ||thinking ||about ||the ||issue ||is ||to ||remember ||that ||the ||financial ||statement ||audit ||engagement ||is
||one ||type ||of ||an ||attestation ||service. ||Please ||see ||exhibit ||1.3 ||in ||the ||text ||which ||depicts ||the ||relationship
||among ||assurance, ||attestation, ||and ||auditing ||engagements.
1.8 According ||to ||the ||American ||Accounting ||Association, ||―Auditing ||is ||a |systematic ||process ||of ||objectively
||obtaining ||and ||evaluating ||evidence ||regarding ||assertions ||about ||economic ||actions ||and ||events ||to ||ascertain
||the ||degree ||of ||correspondence ||between ||the ||assertions ||and ||established ||criteria ||and ||communicating ||the
||results ||to ||interested ||users.‖ ||In ||effect, ||auditors ||add ||reliability ||to ||the ||information ||that ||is ||provided ||to
||interested ||users. ||Of ||course, ||this ||definition ||is ||focused ||on ||an ||external ||reporting ||context. ||Students ||may
||also ||discuss ||how ||governmental ||and ||internal ||auditors ||operate ||as ||well.
In |response |to ||―What ||do ||auditors ||do?‖ ||students ||can ||respond ||by ||stating ||that ||auditors |(1) ||obtain ||and ||evaluate
||evidence ||about ||assertions ||made ||by ||management ||about ||economic ||actions ||and ||events, ||(2) ||ascertain ||the
||degree ||of |correspondence ||between ||the ||assertions ||and ||the ||appropriate ||reporting ||framework, ||and ||(3) ||issue
||an ||audit ||report ||(opinion). ||Students ||can ||also ||respond ||more ||generally ||by ||stating ||that ||auditors ||essentially
||lend ||credibility ||to ||the ||financial ||statements ||presented ||by ||management.
1.9 Financial ||accounting ||refers ||to ||the ||process ||of ||recording, ||classifying, ||summarizing, ||and ||reporting ||about ||a
||company‘s |assets, ||liabilities, ||capital, ||revenues, ||and ||expenses ||in |the ||financial ||statements ||in ||accordance
||with ||the ||applicable ||financial ||reporting ||framework ||(e.g., ||GAAP). ||In ||so ||doing, ||the ||management ||team ||is
||making ||several ||assertions ||about ||the ||financial ||statements. ||The ||financial ||accounting ||process ||is ||the
||responsibility ||of ||the ||management ||team.
Financial ||statement ||auditing ||refers ||to ||the ||process ||whereby ||professional ||auditors ||gather ||evidence ||related
||to ||the ||assertions ||that ||management ||makes ||in ||the ||financial ||statements, ||evaluates ||the ||evidence ||and
||concludes ||on ||the ||fairness ||of ||the ||financial ||statements ||in ||a ||report.
They ||differ ||because ||accountants ||produce ||the ||financial ||statements ||in ||accordance ||with ||the ||applicable
||financial ||reporting ||framework. ||After ||this ||is ||complete, ||financial ||statement ||auditors ||then ||perform
||procedures ||to ||ascertain ||whether ||the ||financial ||statements ||have ||been ||prepared ||in |accordance ||with ||the
||applicable ||financial ||reporting ||framework.
1.10 The ||two ||major ||classifications ||of ||ASB ||assertions ||with ||several ||assertions ||in |each ||classification
are: ||Assertions ||About ||Classes ||of ||Transactions ||and ||Events, ||and ||Related ||Disclosures
||
Occurrence ||assertion: ||The ||objective ||is ||to ||establish ||with ||evidence ||that ||transactions ||giving ||rise ||to
||assets, ||liabilities, ||sales, ||and ||expenses ||occurred. | | Key ||questions ||include ||―Did ||the ||recorded ||sales
||transactions ||really ||occur?‖
Completeness ||assertion: ||The ||objective ||is ||to ||establish ||with ||evidence ||that ||all ||transactions ||of ||the ||period
||that ||should ||be ||are ||included ||in ||the ||financial ||statements ||(including ||footnotes). ||Completeness ||also ||refers ||to
||proper ||inclusion ||in ||financial ||statements ||of ||all ||revenue, ||expense, ||and ||related ||disclosures. ||Key ||questions
||related ||to
SOLUTION MANUAL FOR AUDITING AND ASSURANCE SERVICES
9TH EDITION BY TIMOTHY LOUWERS PENELOPE BAGLEY
,Chapter ||01 ||- |Auditing |and ||Assurance ||Services
CHAPTER ||01
Auditing ||and ||Assurance ||Services
LEARNING ||OBJECTIVES
Review Multiple Exercises, |Problems,
Checkpoints
|| ||Choice ||and ||Simulations
1. ||Define ||information ||risk ||and ||explain ||how ||the 1, ||2, ||3 29, ||31, ||38 65*
||financial ||statement ||auditing ||process ||helps
||to ||reduce ||this ||risk, ||thereby ||reducing ||the
||cost ||of ||capital ||for ||a ||company.
2. Define ||and ||contrast ||assurance, ||attestation, 4, ||5, ||6, ||7, ||8 23, ||25, ||28, ||44, 60, ||65*
and ||financial ||statement ||auditing ||services. 50
3. Describe ||and ||define ||the ||assertions ||that 9, ||10, ||11 36, ||39, ||40, ||41, ||45, 62, ||63, ||67, ||68, ||69
||management ||makes ||about ||the ||recognition, 46, ||47, ||48, ||49, ||52,
||measurement, ||presentation, ||and ||disclosure 53, ||54, ||55, ||57, ||58,
||of ||the ||financial ||statements ||and ||explain ||why 59
||auditors ||use ||them |as ||a ||focal ||point ||of |the
||audit.
4. Define |professional ||skepticism ||and |explain |its 12 24, ||37 61
||key ||characteristics.
5. Describe |the |organization |of |public |accounting 13, ||14 30, ||42, ||56 72
||firms ||and ||identify ||the ||various ||services ||that
||they ||offer.
6. Describe ||the ||audits ||and ||auditors ||in 15, ||16, ||17, ||18 26, ||27, ||32, ||34, ||35 64, ||66
||governmental, |internal, |and |operational
||auditing.
7. List ||and ||explain ||the ||requirements ||for 19, ||20, ||21, ||22 33, ||43, ||51 70, ||71
||becoming |a |certified ||public |accountant |(CPA)
||and ||other ||certifications ||available ||to ||an
||accounting ||professional.
(*) ||Item |relates |to ||multiple ||learning ||objectives
,Chapter ||01 ||- |Auditing |and ||Assurance ||Services
SOLUTIONS ||FOR ||REVIEW ||CHECKPOINTS
1.1 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.
1.2 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 ||reliable ||information. ||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, ||investors ||may ||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
1.3 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 ||company‘s ||management ||to ||make ||their ||business ||or ||service ||appear ||to ||be ||better ||than ||it ||actually ||may |be,
||to ||put ||their ||best ||foot ||forward. ||As ||a ||result, ||preparers ||and ||issuers ||of ||financial ||information ||(directors,
||managers, ||accountants, ||and ||other ||people ||employed ||in ||a ||business) ||might ||benefit ||by ||giving ||false,
||misleading, ||or ||overly ||optimistic ||information. ||This ||potential ||conflict ||of ||interest ||between ||information
||providers ||and ||users || which ||provides ||the ||underlying ||basis ||for ||the ||demand ||for ||reliable ||information.
1.4 The ||four ||major ||elements ||of |the ||broad ||definition ||of ||assurance ||services ||are
Independence. | | CPAs ||want ||to ||preserve ||their ||reputation ||and ||competitive ||advantage ||by |always ||preserving
||integrity ||and ||objectivity ||when ||performing ||assurance ||services.
Professional ||services. ||Virtually ||all ||work ||performed ||by ||CPAs ||is ||defined ||as ||―professional ||services‖ ||as ||long
||as ||it ||involves ||some ||element ||of ||judgment ||based ||on ||education ||and ||experience.
Improving ||the ||quality ||of ||information ||or ||its ||context. ||The ||emphasis ||is ||on ||―information,‖ ||CPAs‘ ||traditional
||area ||of ||expertise. ||CPAs ||can ||enhance ||quality ||by ||assuring ||users ||about ||the ||reliability ||and ||relevance ||of
||information, ||and ||these ||two ||features ||are ||closely ||related ||to ||the ||familiar ||credibility-lending ||products ||of
||attestation |and |audit |services. ||―Context‖ |is |relevance |in |a |different |light. |For |assurance |services, ||improving
||the ||context ||of ||information ||refers ||to ||improving ||its ||usefulness ||when ||targeted ||to ||particular ||decision ||makers
||in ||the ||surroundings ||of ||particular ||decision ||problems.
For |decision ||makers. |As |the |―consumers‖ |of |assurance |services, |decision ||makers |are |the |beneficiaries |of |the
||assurance |services. |Decision |makers ||may |or |may |not |be |the |―client‖ |that |pays |the |fee |and ||may |or ||may |not |be
||one ||of ||the ||parties ||to ||an ||assertion ||or ||other ||information, ||but ||they ||personify ||the ||consumer ||focus ||of ||new
||and ||different ||professional ||work.
1.5 An ||assurance ||services ||engagement ||is ||any ||assignment ||that ||improves ||the ||quality ||of ||information, ||or ||its
||context, ||for ||decision ||makers. ||Because ||information ||(e.g., ||financial ||statements) ||are ||prepared ||by ||managers
||of ||an ||entity ||who ||have ||authority |and ||responsibility ||for ||financial ||success ||or ||failure, ||an ||outsider ||may |be
||skeptical ||that ||the ||information ||truly ||is ||objective, ||free ||from ||bias, ||fully ||informative, ||and ||free ||from ||material
||error, ||intentional ||or ||inadvertent. | | The ||services ||of ||an ||independent ||auditor ||helps ||resolve ||those ||doubts
||because ||the
, Chapter ||01 ||- |Auditing |and ||Assurance ||Services
auditor‘s ||success ||depends ||upon ||his ||or ||her ||independent, ||objective, ||and ||competent ||assessment ||of ||the
||information ||(e.g., ||the ||conformity ||of ||the ||financial ||statements ||with ||the ||appropriate ||reporting ||framework).
||The ||independent ||auditor‘s ||role ||is ||to ||lend ||credibility |to ||the ||information; ||hence, ||the ||outsider ||will ||likely
||seek ||his ||or ||her ||independent ||opinion ||about ||the ||financial ||statements.
1.6 An ||attestation ||engagement ||is ||―an ||engagement ||in ||which ||a ||practitioner ||is ||engaged ||to ||issue ||or ||does
||issue ||a ||written ||communication ||that ||expresses ||a ||conclusion ||about ||the ||reliability ||of ||a ||written ||assertion
||that ||is ||the ||responsibility ||of ||another ||party‖ ||(SSAE ||10, ||AT ||101.01). ||To ||attest ||means ||to ||lend ||credibility ||or
||to ||vouch ||for ||the ||truth ||or ||accuracy ||of ||the ||statements ||that ||one ||party ||makes ||to ||another. ||The ||attest ||function
||is ||a ||term ||often ||applied ||to ||the ||activities ||of ||independent ||CPAs ||when ||acting ||as ||auditors ||of ||financial
||statements.
1.7 An ||assurance ||service ||engagement ||is ||one ||that ||improves ||the ||quality ||of ||information, ||or ||its ||context, ||for
||decision ||makers. | | Thus, ||an ||attestation ||service ||engagement ||is ||one ||type ||of ||an ||assurance ||service.
| | Another ||way ||of ||thinking ||about ||the ||issue ||is ||to ||remember ||that ||the ||financial ||statement ||audit ||engagement ||is
||one ||type ||of ||an ||attestation ||service. ||Please ||see ||exhibit ||1.3 ||in ||the ||text ||which ||depicts ||the ||relationship
||among ||assurance, ||attestation, ||and ||auditing ||engagements.
1.8 According ||to ||the ||American ||Accounting ||Association, ||―Auditing ||is ||a |systematic ||process ||of ||objectively
||obtaining ||and ||evaluating ||evidence ||regarding ||assertions ||about ||economic ||actions ||and ||events ||to ||ascertain
||the ||degree ||of ||correspondence ||between ||the ||assertions ||and ||established ||criteria ||and ||communicating ||the
||results ||to ||interested ||users.‖ ||In ||effect, ||auditors ||add ||reliability ||to ||the ||information ||that ||is ||provided ||to
||interested ||users. ||Of ||course, ||this ||definition ||is ||focused ||on ||an ||external ||reporting ||context. ||Students ||may
||also ||discuss ||how ||governmental ||and ||internal ||auditors ||operate ||as ||well.
In |response |to ||―What ||do ||auditors ||do?‖ ||students ||can ||respond ||by ||stating ||that ||auditors |(1) ||obtain ||and ||evaluate
||evidence ||about ||assertions ||made ||by ||management ||about ||economic ||actions ||and ||events, ||(2) ||ascertain ||the
||degree ||of |correspondence ||between ||the ||assertions ||and ||the ||appropriate ||reporting ||framework, ||and ||(3) ||issue
||an ||audit ||report ||(opinion). ||Students ||can ||also ||respond ||more ||generally ||by ||stating ||that ||auditors ||essentially
||lend ||credibility ||to ||the ||financial ||statements ||presented ||by ||management.
1.9 Financial ||accounting ||refers ||to ||the ||process ||of ||recording, ||classifying, ||summarizing, ||and ||reporting ||about ||a
||company‘s |assets, ||liabilities, ||capital, ||revenues, ||and ||expenses ||in |the ||financial ||statements ||in ||accordance
||with ||the ||applicable ||financial ||reporting ||framework ||(e.g., ||GAAP). ||In ||so ||doing, ||the ||management ||team ||is
||making ||several ||assertions ||about ||the ||financial ||statements. ||The ||financial ||accounting ||process ||is ||the
||responsibility ||of ||the ||management ||team.
Financial ||statement ||auditing ||refers ||to ||the ||process ||whereby ||professional ||auditors ||gather ||evidence ||related
||to ||the ||assertions ||that ||management ||makes ||in ||the ||financial ||statements, ||evaluates ||the ||evidence ||and
||concludes ||on ||the ||fairness ||of ||the ||financial ||statements ||in ||a ||report.
They ||differ ||because ||accountants ||produce ||the ||financial ||statements ||in ||accordance ||with ||the ||applicable
||financial ||reporting ||framework. ||After ||this ||is ||complete, ||financial ||statement ||auditors ||then ||perform
||procedures ||to ||ascertain ||whether ||the ||financial ||statements ||have ||been ||prepared ||in |accordance ||with ||the
||applicable ||financial ||reporting ||framework.
1.10 The ||two ||major ||classifications ||of ||ASB ||assertions ||with ||several ||assertions ||in |each ||classification
are: ||Assertions ||About ||Classes ||of ||Transactions ||and ||Events, ||and ||Related ||Disclosures
||
Occurrence ||assertion: ||The ||objective ||is ||to ||establish ||with ||evidence ||that ||transactions ||giving ||rise ||to
||assets, ||liabilities, ||sales, ||and ||expenses ||occurred. | | Key ||questions ||include ||―Did ||the ||recorded ||sales
||transactions ||really ||occur?‖
Completeness ||assertion: ||The ||objective ||is ||to ||establish ||with ||evidence ||that ||all ||transactions ||of ||the ||period
||that ||should ||be ||are ||included ||in ||the ||financial ||statements ||(including ||footnotes). ||Completeness ||also ||refers ||to
||proper ||inclusion ||in ||financial ||statements ||of ||all ||revenue, ||expense, ||and ||related ||disclosures. ||Key ||questions
||related ||to
