Chapter 01 - Auditing and Assurance Services
SOLUTION MANUAL FOR
Auditing & Assurance Services
by Timothy J. Louwers
9th Edition
,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 59
Why 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 13, 14 30, 42, 56 72
Accounting 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
, Chapter 01 - Auditing and Assurance Services
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
SOLUTION MANUAL FOR
Auditing & Assurance Services
by Timothy J. Louwers
9th Edition
,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 59
Why 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 13, 14 30, 42, 56 72
Accounting 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
, Chapter 01 - Auditing and Assurance Services
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
