Chapter 01 - Auditing and Assurance
dk dk dk dk dk
Services
Solution Manual For Auditing & Assurance Services
dk dk dk dk dk dk dk
dk 9th Edition by Timothy Louwers, Penelope Bagley
dk dk dk dk dk dk
,Chapter 01 - Auditing and Assurance
dk dk dk dk dk
Services
CHAPTER 01 dk
Auditing and Assurance Servicesdk dk dk
LEARNING OBJECTIVESdk
Review Multiple Exercises, Problems, dk
dk Checkpoints Choice
dk and Simulations
dk dk
1. Define information risk and explain how
dk dk dk dk dk dk 1, 2, 3
dk dk 29, 31, 38
dk dk 65*
the financial statement auditing process
dk dk dk dk dk
helps to reduce this risk, thereby
dk dk dk dk dk dk
reducing the cost of capital for a
dk dk dk dk dk dk dk
company.
dk
2. Define and contrast assurance, attestation,
dk dk dk dk 4, 5, 6, 7, 8
dk dk dk dk 23, 25, 28, 44,
dk dk dk 60, 65*dk
and financial statement auditing services.
dk dk dk dk 50
3. Describe and define the assertions that
dk dk dk dk dk 9, 10, 11
dk dk 36, 39, 40, 41,
dk dk dk 62, 63, 67, 68, 69
dk dk dk dk
management makes about the recognition,
dk dk dk dk dk 45,
dk
measurement, presentation, and disclosure
dk dk dk dk 46, 47, 48, 49,
dk dk dk
of the financial statements and explain
dk dk dk dk dk dk 52,
dk
why auditors use them as a focal point of
dk dk dk dk dk dk dk dk dk 53, 54, 55, 57,
dk dk dk
the audit.
dk dk 58,
dk
59
4. Define professional skepticism and explain
dk dk dk dk 12 24, 37dk 61
its key characteristics.
dk dk dk
5. Describe the organization of public
dk dk dk dk 13, 14 dk 30, 42, 56
dk dk 72
accounting firms and identify the various
dk dk dk dk dk dk
services that they offer.
dk dk dk dk
6. Describe the audits and auditors in
dk dk dk dk dk 15, 16, 17, 18
dk dk dk 26, 27, 32, 34, 35
dk dk dk dk 64, 66 dk
governmental, internal, and
dk dk dk
operational auditing.
dk dk
7. List and explain the requirements for
dk dk dk dk dk 19, 20, 21, 22
dk dk dk 33, 43, 51
dk dk 70, 71 dk
becoming a certified public accountant
dk dk dk dk dk
(CPA) and other certifications available
dk dk dk dk dk
to an accounting professional.
dk dk dk dk
(*) Item relates to multiple learning objectives
dk dk dk dk dk dk
,Chapter 01 - Auditing and Assurance
dk dk dk dk dk
Services
SOLUTIONS FOR REVIEW CHECKPOINTS dk dk dk
1.1 Business risk is the risk that an entity will fail to meet its business objectives. When
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
assessing business risk, a professional must consider all possible threats to an entity‗s goals
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
and objectives. Some illustrative examples include the risk that: 1) its existing customers will
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
start buying products or services from its primary competitors; 2) its product lines will become
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
obsolete; 3) its taxes will increase; 4) key government contracts will be lost; 5) key employees
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
will leave the entity; and many other examples exist.
dk dk dk dk dk dk dk dk dk
1.2 To help minimize business risk and take advantage of other opportunities presented in today‗s
dk dk dk dk dk dk dk dk dk dk dk dk dk
competitive business environment, decision makers such as chief executive officers (CEOs)
dk dk dk dk dk dk dk dk dk dk dk
demand timely, relevant, and reliable information. There are at least four environmental conditions
dk dk dk dk dk dk dk dk dk dk dk dk dk
that increase demand for reliable information. First, complexity which implies that events and
dk dk dk dk dk dk dk dk dk dk dk dk dk
transactions in today‗s global business environment can be complicated. Most investors do not
dk dk dk dk dk dk dk dk dk dk dk dk dk
have the level of expertise needed to properly account for complex transactions. Second is
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
remoteness which implies that decision makers are often separated from current and potential
dk dk dk dk dk dk dk dk dk dk dk dk dk
business relationships due to distance and time. For example, investors may not be able to visit
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
distant locations to check up on their investments. Third is time-sensitivity which implies that in
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
today‗s economic environment, investors and other users of financial statements need to make
dk dk dk dk dk dk dk dk dk dk dk dk dk
decisions more rapidly than ever before. As a result, the ability to promptly obtain high-quality
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
information is essential. Fourth is a consequence which implies that decisions may very well
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
involve significant investments. As a result, the consequences can be severe if information
dk dk dk d k dk dk dk dk dk dk dk dk dk
cannot be obtained
dk dk dk
1.3 Of all the different risks discussed in the chapter up to this point, information risk is the one
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
that is most likely to create the demand for independent and objective assurance services is
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
information risk or the probability that the information circulated by an entity will be false or
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
misleading. Because the primary source of information for investors and creditors is the company
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
itself, an incentive exists for that company‗s management to make their business or service appear
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
to be better than it actually may be, to put their best foot forward. As a result, preparers and
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
issuers of financial information (directors, managers, accountants, and other people employed in a
dk dk dk dk dk dk dk dk dk dk dk dk dk
business) might benefit by giving false, misleading, or overly optimistic information. This
dk dk dk dk dk dk dk dk dk dk dk dk
potential conflict of interest between information providers and users which provides the
dk dk dk dk dk dk dk dk dk dk dk dk
underlying basis for the demand for reliable information.
dk dk dk dk dk dk dk dk
1.4 The four major elements of the broad definition of assurance services are
dk dk dk dk dk dk dk dk dk dk dk
Independence. CPAs want to preserve their reputation and competitive advantage by always
d k dk dk dk dk dk dk dk dk dk dk
preserving integrity and objectivity when performing assurance services.
dk dk dk dk dk dk dk dk
Professional services. Virtually all work performed by CPAs is defined as ―professional services‖
dk dk dk dk dk dk dk dk dk dk dk dk
as long as it involves some element of judgment based on education and experience.
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
Improving the quality of information or its context. The emphasis is on ―information,‖ CPAs‗
dk dk dk dk dk dk dk dk dk dk dk dk dk
traditional area of expertise. CPAs can enhance quality by assuring users about the reliability and
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
relevance of information, and these two features are closely related to the familiar credibility-
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
lending products of attestation and audit services. ―Context‖ is relevance in a different light. For
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
assurance services, improving the context of information refers to improving its usefulness when
dk dk dk dk dk dk dk dk dk dk dk dk dk
targeted to particular decision makers in the surroundings of particular decision problems.
dk dk dk dk dk dk dk dk dk dk dk dk
For decision makers. As the ―consumers‖ of assurance services, decision makers are the beneficiaries
dk dk dk dk dk dk dk dk dk dk dk dk dk
of the assurance services. Decision makers may or may not be the ―client‖ that pays the fee and may
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
or may not be one of the parties to an assertion or other information, but they personify the
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
consumer focus of new and different professional work.
dk dk dk dk dk dk dk dk
1.5 An assurance services engagement is any assignment that improves the quality of information, or
dk dk dk dk dk dk dk dk dk dk dk dk dk
its context, for decision makers. Because information (e.g., financial statements) are prepared by
dk dk dk dk dk dk dk dk dk dk dk dk dk
managers of an entity who have authority and responsibility for financial success or failure, an
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
outsider may be skeptical that the information truly is objective, free from bias, fully informative,
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
and free from material error, intentional or inadvertent. The services of an independent auditor
dk dk dk dk dk dk dk dk d k dk dk dk dk dk
helps resolve those doubts because the
dk dk dk dk dk dk
, Chapter 01 - Auditing and Assurance
dk dk dk dk dk
Services
auditor‗s success depends upon his or her independent, objective, and competent assessment of
dk dk dk dk dk dk dk dk dk dk dk dk
the information (e.g., the conformity of the financial statements with the appropriate reporting
dk dk dk dk dk dk dk dk dk dk dk dk dk
framework). The independent auditor‗s role is to lend credibility to the information; hence, the
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
outsider will likely seek his or her independent opinion about the financial statements.
dk dk dk dk dk dk dk dk dk dk dk dk dk
1.6 An attestation engagement is ―an engagement in which a practitioner is engaged to issue or
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
does issue a written communication that expresses a conclusion about the reliability of a
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
written assertion that is the responsibility of another party‖ (SSAE 10, AT 101.01). To attest
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
means to lend credibility or to vouch for the truth or accuracy of the statements that one party
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
makes to another. The attest function is a term often applied to the activities of independent
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
CPAs when acting as auditors of financial statements.
dk dk dk dk dk dk dk dk
1.7 An assurance service engagement is one that improves the quality of information, or its context,
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
for decision makers. Thus, an attestation service engagement is one type of an assurance
dk dk dk d k dk dk dk dk dk dk dk dk dk dk
service. Another way of thinking about the issue is to remember that the financial statement audit
dk d k dk dk dk dk dk dk dk dk dk dk dk dk dk dk
engagement is one type of an attestation service. Please see exhibit 1.3 in the text which depicts
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
the relationship among assurance, attestation, and auditing engagements.
dk dk dk dk dk dk dk dk
1.8 According to the American Accounting Association, ―Auditing is a systematic process of
dk dk dk dk dk dk dk dk dk dk dk
objectively obtaining and evaluating evidence regarding assertions about economic actions and
dk dk dk dk dk dk dk dk dk dk dk
events to ascertain the degree of correspondence between the assertions and established criteria
dk dk dk dk dk dk dk dk dk dk dk dk dk
and communicating the results to interested users.‖ In effect, auditors add reliability to the
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
information that is provided to interested users. Of course, this definition is focused on an
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
external reporting context. Students may also discuss how governmental and internal auditors
dk dk dk dk dk dk dk dk dk dk dk dk
operate as well.
dk dk dk
In response to ―What do auditors do?‖ students can respond by stating that auditors (1) obtain and
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
evaluate evidence about assertions made by management about economic actions and events, (2)
dk dk dk dk dk dk dk dk dk dk dk dk dk
ascertain the degree of correspondence between the assertions and the appropriate reporting
dk dk dk dk dk dk dk dk dk dk dk dk
framework, and (3) issue an audit report (opinion). Students can also respond more generally by
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
stating that auditors essentially lend credibility to the financial statements presented by
dk dk dk dk dk dk dk dk dk dk dk dk
management.
dk
1.9 Financial accounting refers to the process of recording, classifying, summarizing, and reporting
dk dk dk dk dk dk dk dk dk dk dk
about a company‗s assets, liabilities, capital, revenues, and expenses in the financial statements in
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
accordance with the applicable financial reporting framework (e.g., GAAP). In so doing, the
dk dk dk dk dk dk dk dk dk dk dk dk dk
management team is making several assertions about the financial statements. The financial
dk dk dk dk dk dk dk dk dk dk dk dk
accounting process is the responsibility of the management team.
dk dk dk dk dk dk dk dk dk
Financial statement auditing refers to the process whereby professional auditors gather evidence
dk dk dk dk dk dk dk dk dk dk dk
related to the assertions that management makes in the financial statements, evaluates the evidence
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
and concludes on the fairness of the financial statements in a report.
dk dk dk dk dk dk dk dk dk dk dk dk
They differ because accountants produce the financial statements in accordance with the applicable
dk dk dk dk dk dk dk dk dk dk dk dk
financial reporting framework. After this is complete, financial statement auditors then perform
dk dk dk dk dk dk dk dk dk dk dk dk
procedures to ascertain whether the financial statements have been prepared in accordance with the
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
applicable financial reporting framework.
dk dk dk dk
1.10 The two major classifications of ASB assertions with several assertions in each
dk dk dk dk dk dk dk dk dk dk dk
dk classification are: Assertions About Classes of Transactions and Events, and Related
dk dk dk dk dk dk dk dk dk dk
dk Disclosures
Occurrence assertion: The objective is to establish with evidence that transactions giving rise to
dk dk dk dk dk dk dk dk dk dk dk dk dk
assets, liabilities, sales, and expenses occurred. Key questions include ―Did the recorded sales
dk dk dk dk dk dk d k dk dk dk dk dk dk
transactions really occur?‖
dk dk dk
Completeness assertion: The objective is to establish with evidence that all transactions of the
dk dk dk dk dk dk dk dk dk dk dk dk dk
period that should be are included in the financial statements (including footnotes). Completeness
dk dk dk dk dk dk dk dk dk dk dk dk dk
also refers to proper inclusion in financial statements of all revenue, expense, and related
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
dk dk dk dk dk
Services
Solution Manual For Auditing & Assurance Services
dk dk dk dk dk dk dk
dk 9th Edition by Timothy Louwers, Penelope Bagley
dk dk dk dk dk dk
,Chapter 01 - Auditing and Assurance
dk dk dk dk dk
Services
CHAPTER 01 dk
Auditing and Assurance Servicesdk dk dk
LEARNING OBJECTIVESdk
Review Multiple Exercises, Problems, dk
dk Checkpoints Choice
dk and Simulations
dk dk
1. Define information risk and explain how
dk dk dk dk dk dk 1, 2, 3
dk dk 29, 31, 38
dk dk 65*
the financial statement auditing process
dk dk dk dk dk
helps to reduce this risk, thereby
dk dk dk dk dk dk
reducing the cost of capital for a
dk dk dk dk dk dk dk
company.
dk
2. Define and contrast assurance, attestation,
dk dk dk dk 4, 5, 6, 7, 8
dk dk dk dk 23, 25, 28, 44,
dk dk dk 60, 65*dk
and financial statement auditing services.
dk dk dk dk 50
3. Describe and define the assertions that
dk dk dk dk dk 9, 10, 11
dk dk 36, 39, 40, 41,
dk dk dk 62, 63, 67, 68, 69
dk dk dk dk
management makes about the recognition,
dk dk dk dk dk 45,
dk
measurement, presentation, and disclosure
dk dk dk dk 46, 47, 48, 49,
dk dk dk
of the financial statements and explain
dk dk dk dk dk dk 52,
dk
why auditors use them as a focal point of
dk dk dk dk dk dk dk dk dk 53, 54, 55, 57,
dk dk dk
the audit.
dk dk 58,
dk
59
4. Define professional skepticism and explain
dk dk dk dk 12 24, 37dk 61
its key characteristics.
dk dk dk
5. Describe the organization of public
dk dk dk dk 13, 14 dk 30, 42, 56
dk dk 72
accounting firms and identify the various
dk dk dk dk dk dk
services that they offer.
dk dk dk dk
6. Describe the audits and auditors in
dk dk dk dk dk 15, 16, 17, 18
dk dk dk 26, 27, 32, 34, 35
dk dk dk dk 64, 66 dk
governmental, internal, and
dk dk dk
operational auditing.
dk dk
7. List and explain the requirements for
dk dk dk dk dk 19, 20, 21, 22
dk dk dk 33, 43, 51
dk dk 70, 71 dk
becoming a certified public accountant
dk dk dk dk dk
(CPA) and other certifications available
dk dk dk dk dk
to an accounting professional.
dk dk dk dk
(*) Item relates to multiple learning objectives
dk dk dk dk dk dk
,Chapter 01 - Auditing and Assurance
dk dk dk dk dk
Services
SOLUTIONS FOR REVIEW CHECKPOINTS dk dk dk
1.1 Business risk is the risk that an entity will fail to meet its business objectives. When
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
assessing business risk, a professional must consider all possible threats to an entity‗s goals
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
and objectives. Some illustrative examples include the risk that: 1) its existing customers will
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
start buying products or services from its primary competitors; 2) its product lines will become
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
obsolete; 3) its taxes will increase; 4) key government contracts will be lost; 5) key employees
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
will leave the entity; and many other examples exist.
dk dk dk dk dk dk dk dk dk
1.2 To help minimize business risk and take advantage of other opportunities presented in today‗s
dk dk dk dk dk dk dk dk dk dk dk dk dk
competitive business environment, decision makers such as chief executive officers (CEOs)
dk dk dk dk dk dk dk dk dk dk dk
demand timely, relevant, and reliable information. There are at least four environmental conditions
dk dk dk dk dk dk dk dk dk dk dk dk dk
that increase demand for reliable information. First, complexity which implies that events and
dk dk dk dk dk dk dk dk dk dk dk dk dk
transactions in today‗s global business environment can be complicated. Most investors do not
dk dk dk dk dk dk dk dk dk dk dk dk dk
have the level of expertise needed to properly account for complex transactions. Second is
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
remoteness which implies that decision makers are often separated from current and potential
dk dk dk dk dk dk dk dk dk dk dk dk dk
business relationships due to distance and time. For example, investors may not be able to visit
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
distant locations to check up on their investments. Third is time-sensitivity which implies that in
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
today‗s economic environment, investors and other users of financial statements need to make
dk dk dk dk dk dk dk dk dk dk dk dk dk
decisions more rapidly than ever before. As a result, the ability to promptly obtain high-quality
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
information is essential. Fourth is a consequence which implies that decisions may very well
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
involve significant investments. As a result, the consequences can be severe if information
dk dk dk d k dk dk dk dk dk dk dk dk dk
cannot be obtained
dk dk dk
1.3 Of all the different risks discussed in the chapter up to this point, information risk is the one
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
that is most likely to create the demand for independent and objective assurance services is
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
information risk or the probability that the information circulated by an entity will be false or
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
misleading. Because the primary source of information for investors and creditors is the company
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
itself, an incentive exists for that company‗s management to make their business or service appear
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
to be better than it actually may be, to put their best foot forward. As a result, preparers and
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
issuers of financial information (directors, managers, accountants, and other people employed in a
dk dk dk dk dk dk dk dk dk dk dk dk dk
business) might benefit by giving false, misleading, or overly optimistic information. This
dk dk dk dk dk dk dk dk dk dk dk dk
potential conflict of interest between information providers and users which provides the
dk dk dk dk dk dk dk dk dk dk dk dk
underlying basis for the demand for reliable information.
dk dk dk dk dk dk dk dk
1.4 The four major elements of the broad definition of assurance services are
dk dk dk dk dk dk dk dk dk dk dk
Independence. CPAs want to preserve their reputation and competitive advantage by always
d k dk dk dk dk dk dk dk dk dk dk
preserving integrity and objectivity when performing assurance services.
dk dk dk dk dk dk dk dk
Professional services. Virtually all work performed by CPAs is defined as ―professional services‖
dk dk dk dk dk dk dk dk dk dk dk dk
as long as it involves some element of judgment based on education and experience.
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
Improving the quality of information or its context. The emphasis is on ―information,‖ CPAs‗
dk dk dk dk dk dk dk dk dk dk dk dk dk
traditional area of expertise. CPAs can enhance quality by assuring users about the reliability and
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
relevance of information, and these two features are closely related to the familiar credibility-
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
lending products of attestation and audit services. ―Context‖ is relevance in a different light. For
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
assurance services, improving the context of information refers to improving its usefulness when
dk dk dk dk dk dk dk dk dk dk dk dk dk
targeted to particular decision makers in the surroundings of particular decision problems.
dk dk dk dk dk dk dk dk dk dk dk dk
For decision makers. As the ―consumers‖ of assurance services, decision makers are the beneficiaries
dk dk dk dk dk dk dk dk dk dk dk dk dk
of the assurance services. Decision makers may or may not be the ―client‖ that pays the fee and may
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
or may not be one of the parties to an assertion or other information, but they personify the
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
consumer focus of new and different professional work.
dk dk dk dk dk dk dk dk
1.5 An assurance services engagement is any assignment that improves the quality of information, or
dk dk dk dk dk dk dk dk dk dk dk dk dk
its context, for decision makers. Because information (e.g., financial statements) are prepared by
dk dk dk dk dk dk dk dk dk dk dk dk dk
managers of an entity who have authority and responsibility for financial success or failure, an
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
outsider may be skeptical that the information truly is objective, free from bias, fully informative,
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
and free from material error, intentional or inadvertent. The services of an independent auditor
dk dk dk dk dk dk dk dk d k dk dk dk dk dk
helps resolve those doubts because the
dk dk dk dk dk dk
, Chapter 01 - Auditing and Assurance
dk dk dk dk dk
Services
auditor‗s success depends upon his or her independent, objective, and competent assessment of
dk dk dk dk dk dk dk dk dk dk dk dk
the information (e.g., the conformity of the financial statements with the appropriate reporting
dk dk dk dk dk dk dk dk dk dk dk dk dk
framework). The independent auditor‗s role is to lend credibility to the information; hence, the
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
outsider will likely seek his or her independent opinion about the financial statements.
dk dk dk dk dk dk dk dk dk dk dk dk dk
1.6 An attestation engagement is ―an engagement in which a practitioner is engaged to issue or
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
does issue a written communication that expresses a conclusion about the reliability of a
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
written assertion that is the responsibility of another party‖ (SSAE 10, AT 101.01). To attest
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
means to lend credibility or to vouch for the truth or accuracy of the statements that one party
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
makes to another. The attest function is a term often applied to the activities of independent
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
CPAs when acting as auditors of financial statements.
dk dk dk dk dk dk dk dk
1.7 An assurance service engagement is one that improves the quality of information, or its context,
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
for decision makers. Thus, an attestation service engagement is one type of an assurance
dk dk dk d k dk dk dk dk dk dk dk dk dk dk
service. Another way of thinking about the issue is to remember that the financial statement audit
dk d k dk dk dk dk dk dk dk dk dk dk dk dk dk dk
engagement is one type of an attestation service. Please see exhibit 1.3 in the text which depicts
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
the relationship among assurance, attestation, and auditing engagements.
dk dk dk dk dk dk dk dk
1.8 According to the American Accounting Association, ―Auditing is a systematic process of
dk dk dk dk dk dk dk dk dk dk dk
objectively obtaining and evaluating evidence regarding assertions about economic actions and
dk dk dk dk dk dk dk dk dk dk dk
events to ascertain the degree of correspondence between the assertions and established criteria
dk dk dk dk dk dk dk dk dk dk dk dk dk
and communicating the results to interested users.‖ In effect, auditors add reliability to the
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
information that is provided to interested users. Of course, this definition is focused on an
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
external reporting context. Students may also discuss how governmental and internal auditors
dk dk dk dk dk dk dk dk dk dk dk dk
operate as well.
dk dk dk
In response to ―What do auditors do?‖ students can respond by stating that auditors (1) obtain and
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
evaluate evidence about assertions made by management about economic actions and events, (2)
dk dk dk dk dk dk dk dk dk dk dk dk dk
ascertain the degree of correspondence between the assertions and the appropriate reporting
dk dk dk dk dk dk dk dk dk dk dk dk
framework, and (3) issue an audit report (opinion). Students can also respond more generally by
dk dk dk dk dk dk dk dk dk dk dk dk dk dk dk
stating that auditors essentially lend credibility to the financial statements presented by
dk dk dk dk dk dk dk dk dk dk dk dk
management.
dk
1.9 Financial accounting refers to the process of recording, classifying, summarizing, and reporting
dk dk dk dk dk dk dk dk dk dk dk
about a company‗s assets, liabilities, capital, revenues, and expenses in the financial statements in
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
accordance with the applicable financial reporting framework (e.g., GAAP). In so doing, the
dk dk dk dk dk dk dk dk dk dk dk dk dk
management team is making several assertions about the financial statements. The financial
dk dk dk dk dk dk dk dk dk dk dk dk
accounting process is the responsibility of the management team.
dk dk dk dk dk dk dk dk dk
Financial statement auditing refers to the process whereby professional auditors gather evidence
dk dk dk dk dk dk dk dk dk dk dk
related to the assertions that management makes in the financial statements, evaluates the evidence
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
and concludes on the fairness of the financial statements in a report.
dk dk dk dk dk dk dk dk dk dk dk dk
They differ because accountants produce the financial statements in accordance with the applicable
dk dk dk dk dk dk dk dk dk dk dk dk
financial reporting framework. After this is complete, financial statement auditors then perform
dk dk dk dk dk dk dk dk dk dk dk dk
procedures to ascertain whether the financial statements have been prepared in accordance with the
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
applicable financial reporting framework.
dk dk dk dk
1.10 The two major classifications of ASB assertions with several assertions in each
dk dk dk dk dk dk dk dk dk dk dk
dk classification are: Assertions About Classes of Transactions and Events, and Related
dk dk dk dk dk dk dk dk dk dk
dk Disclosures
Occurrence assertion: The objective is to establish with evidence that transactions giving rise to
dk dk dk dk dk dk dk dk dk dk dk dk dk
assets, liabilities, sales, and expenses occurred. Key questions include ―Did the recorded sales
dk dk dk dk dk dk d k dk dk dk dk dk dk
transactions really occur?‖
dk dk dk
Completeness assertion: The objective is to establish with evidence that all transactions of the
dk dk dk dk dk dk dk dk dk dk dk dk dk
period that should be are included in the financial statements (including footnotes). Completeness
dk dk dk dk dk dk dk dk dk dk dk dk dk
also refers to proper inclusion in financial statements of all revenue, expense, and related
dk dk dk dk dk dk dk dk dk dk dk dk dk dk
