Solution Manual For Auditing And Assurance Services, 17th Edition By Alvin A. Arens, Randal J. Elder, Mark S. Beasley, Chris E. Hogan

Solution Manual For Auditing And Assurance
Services, 17th Edition By Alvin A. Arens, Randal J.
Elder, Mark S.
Beasley, Chris E. Hogan

,SOLUTION MANUAL FOR
Auditing And Assurance Services, 17th Edition By 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. 8

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. 16

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




4-1

, PURPOSE To Evaluate To Determine To Determine
Whether Whether The Client Whether The
Operating Is 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)

Concept Checks (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.

4-2

,  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.

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 He Or She 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 He Or She
Is Involved In Doing Audits, Or Has 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

4-3