Chapter 01 - Auditing and Assurance
fx fx fx fx fx
Services
fx
Solution Manual For Auditing & Assurance Services
9th Edition by Timothy Louwers, Penelope Bagley
,Chapter 01 f x f x - f x Auditing and f x
Assurance
f x
CHAPTER 01 f x
Auditing and f x f x Assurance f x Services
LEARNING OBJECTIVES f x
Review Multiple Exercises, Problems, fx
Checkpoints
fx Choicfx and
fx
e Simulations
f x
1. f x Define information risk and explain
f x f x f x f x 1, f x 2, f x 3 29, f x 31, f x 38 65*
how the financial statement auditing
f x fx fx fx fx
process helps
fx to reduce fx f x f x f x f x f x
this
f x risk, thereby
f x f x f x f x
reducing the cost of capital for f x f x f x f x f x
a company.
f x fx
2. Define f x and f x contrastassurance, f x 4, f x 5, f x 6, 23, 25, f x f x 28, 60, f x 65*
attestation, f x 7, f x 8 44,
f x
and f x financial f x statement auditing f x 50
services. f x
3. Describe and define the assertions
f x f x f x f x 9, f x 10, f x 11 36, 39, f x f x 40, 62, 63, 67, f x f x
that management
f x fxmakes about f x f x 41,
f x 68, 69
f x f x
f the recognition, measurement,
x fx f x 45,
presentation, and
f x disclosure of fx f x f x 46, 47, f x f x 48,
f the x financial statements and
f x fx f x 49,
f x
explain why auditors use them as
f x f x f x f x fx f x 52,
a focal point of the audit.
f x f x f x f x f x f x 53, 54, f x f x 55,
57,
f x
58,
59
4. Define professional skepticism and
fx fx f x 12 24, f x 37 61
explain its key characteristics.
fx fx f x f x
5. Describe the organization of public
f x f x f x f x 13, f x 14 30, f x 42, f x 56 72
accounting firms and identify the
fx f x f x f x f x
various services that they offer.
f x fx f x f x f x
6. Describe the audits and f x f x f x 15, 16, f x f x 17, 26, 27, f x f x 32, 64, f x 66
auditors in governmental,
f x fx f x 18
f x 34,
f x
internal, and operational
f x f x fx 35
auditing.
f x
7. List and explain the requirements
f x f x f x f x 19, 20, f x f x 21, 33, f x 43, f x 51 70, f x 71
for becoming a certified public
f x fx f x f x f x 22
f x
accountant (CPA) and other
f x fx f x f x
certifications available to an
f x f x fx f x
accounting professional.
f x f x
(*) f x Item relates f x f x to f x multiple f x learning f x objectives
,Chapter 01
f x f x - f x Auditing and f x
Assurance
f x
SOLUTIONS f x FOR f x REVIEW f x CHECKPOINTS
1.1 Business f x risk is the risk that an entity will fail to meet its
f x f x f x f x f x f x f x f x f x f x f x
f x business f x objectives. When assessing business risk, a professional must f x fx f x f x f x f x f x
consider
f x all possible threats to an entity‘s goals and
f x objectives. Some f x f x f x f x f x f x fx f x f x
illustrative
f x examples include the risk that: 1) its existing f customersx f x f x f x f x f x f x f x f x
will start buying
fx products
f x or services from its primary competitors;
f x 2) f x f x f x f x f x f x f x f x
its
f x product lines will become
f x obsolete; 3) its taxes will increase; 4) f x f x fx f x f x f x f x f x f x f x
key
f x government contracts fwill be lost; 5)
x f x f x f x f x f x
key employees will leave the entity; and
f x many other examples exist. f x f x f x f x f x f x f x f x f x
1.2 To help
f x minimize business risk and take advantage
f x of other opportunities f x f x f x f x f x f x f x f x
f x presented in today‘s competitive business environment,
f x decision makers f x such fx f x f x f x f x f x
f x as chief f executive
x officers (CEOs) demand timely,
f relevant,
x and reliable f x f x fx f x f x f x f x
f x information. There are at least four environmental conditions thatf x increase f x f x f x f x f x fx f x f x
f x demand for reliable information. First,
f complexity
x which implies that
f x f x f x f x f x f x f x
fx events and transactions f in x today‘s global business environment
f x can be f x f x f x f x f x f x f x
f x complicated. Most investors do not have the level of expertise
f x needed fx f x f x f x f x f x f x f x f x
f x to properly f account
x for complex transactions. Second is remotenessf x f x f x fx f x f x f x
f x which implies that decisionf makers
x are often separated from current and f x f x f x f x f x f x fx f x f x
f x potential business relationships due to distance and f x time. For example, f x f x f x f x f x f x f x f x
fx investors may not be able tof x visit distant locations to check up
f x f x f x f x f x f x f x f x f x f x
f x on their investments.
f x Third is time-sensitivity whichf implies
x that in f x fx f x f x f x f x f x
f x today‘s economic environment, investors
f x and other users of financial f x f x f x f x fx f x f x
f x statements need to make decisions more rapidly
f xthan ever before. f x f x f x f x f x f x f x f x
f x As a result, f the ability
x to promptly
fx obtain high-quality information f is
x f x f x f x f x f x f x f x
f x essential. Fourth is a consequence which implies that decisions may very
f x f x f x fx f x f x f x f x f x f x
f x well involve significant investments.
f x f x As f x
fx a fresult,
x the consequences can be severe
f ifx information cannot be f x f x f x f x f x f x f x f x
f x obtained
1.3 Of all the different
f x risks discussed
f x in the chapter up to this point,
f x information f x f x f x f x f x f x f x f x f x f x f x risk
f xis the f x
one that is most
f x likely to create the demand
f x for independent and f x f x f x f x f x f x f x f x f x
objective assurance
f x services is information risk f x or the probability that f x fx f x f x f x f x f x f x
the
f x information circulated
f xby an entity will be f x f x f x f x f x f x
false or misleading. f x Because the primary f xsource of information for f x f x f x f x f x f x f x
investors
f x and creditors is the company itself, f an incentive exists
x for f x f x fx f x f x f x f x f x f x
that company‘s management to
f x f x make their business or service appear to f x f x f x f x f x fx f x f x f x
be better
f x than it actually
f x may be, to put their f x best foot forward. f x f x f x f x f x f x f x f x f x f x
f As x a result, preparers
f andx issuers of
fx financial information (directors, f x f x f x f x f x f x f x
f managers,
x accountants, and other people employed in
f a business)
x might f x fx f x f x f x f x f x f x
f benefit
x by giving false, misleading, f or x overly optimistic information. f x This f x f x f x f x fx f x f x
f potential
x conflict of interest between information
f x providers and users f x f x f x f x f x f x fx
f which x provides the underlying fbasis for
x the demand for reliable f x f x f x f x f x f x f x f x
f information.
x
1.4 The f x four f x major f x elements f x of the f x f x broad f x definition f x of f x assurance f x services f x are
Independence. CPAs want to preserve f x f x f x f x their reputation and competitive
f x f x f x f x advantage
by always preserving
f x integrity
fx and fx f x f x f x objectivity when performing f x f x f x assurance
f services.
x
Professional services. Virtually all work performed by CPAs is defined as
f x f x f x f x f x f x f x f x f x f x
―professional services‖ as long as
f x it involves some element of fx f x f x f x f x f x f x f x f x
fjudgmentx based on education and experience. f x f x f x f x fx
Improving the quality of information or its context. The emphasis
f x is on f x f x f x f x f x f x f x f x f x f x
―information,‖
f x CPAs‘ traditional area of expertise. CPAs can enhance f x fx f x f x f x f x f x f x
fquality x by assuring users about the f xreliability and relevance of f x f x f x f x f x fx f x f x
finformation,
x and these two features are closely related to the f x f x f x f x f x f x f x f x f x
ffamiliar credibility-lending
x products of attestation and audit services. ―Context‖
fx f x f x f x f x f x f x f x f x is
, Chapter 01 - Auditing and
f x f x f x f x
Assurance
f x
relevance in a different light. For assurance services, improving
f x f x fx f x fx f x f x f x f x f x the context of
f x f x
information
f x refers to improving its usefulness
f x when targeted f x f x f x fx f x f x f x to particular
f x
f decision
x makers in the surroundings
f x of particular f x f x f x f x f x
decision problems. f x
For decision makers.
f x f x f xAs the ―consumers‖ of assurance services, decision makers are
f x f x f x f x f x f x f x f x
the beneficiaries of
f x fx f x fx the assurance services. Decision makers may or may not be
f x fx f x f x f x f x f x f x f x
the ―client‖ that
f x f x f x f x pays the fee and may or may not be
fx f x one of
f x the f x f x f x f x f x f x f x f x
fparties
x to an f x f x f x assertion or other information,
f x but they personify
f the
x f x f x fx f x f x
fconsumer
x focus f x f x of new andf different
x professional fwork.
x f x f x f x
1.5 An f xassurance services engagement is any f x assignment that improves f x the f x f x f x f x f x f x
f x quality of information, or
f x its context,
f x for decision makers. Because fx f x f x f x f x f x f x
f x information (e.g., financial statements)
f xare prepared by fmanagers
x of an f x f x fx f x f x f x f x
f x entity who have authority and responsibility for
f x f x financial
f x success or failure, f x f x f x f x f x fx f x
f x an outsider may be skeptical that
f x thef x information truly is objective,
f x f x f x f x f x f x f x f x
f x free from bias,
f x f x
fx fx fx fx fx
Services
fx
Solution Manual For Auditing & Assurance Services
9th Edition by Timothy Louwers, Penelope Bagley
,Chapter 01 f x f x - f x Auditing and f x
Assurance
f x
CHAPTER 01 f x
Auditing and f x f x Assurance f x Services
LEARNING OBJECTIVES f x
Review Multiple Exercises, Problems, fx
Checkpoints
fx Choicfx and
fx
e Simulations
f x
1. f x Define information risk and explain
f x f x f x f x 1, f x 2, f x 3 29, f x 31, f x 38 65*
how the financial statement auditing
f x fx fx fx fx
process helps
fx to reduce fx f x f x f x f x f x
this
f x risk, thereby
f x f x f x f x
reducing the cost of capital for f x f x f x f x f x
a company.
f x fx
2. Define f x and f x contrastassurance, f x 4, f x 5, f x 6, 23, 25, f x f x 28, 60, f x 65*
attestation, f x 7, f x 8 44,
f x
and f x financial f x statement auditing f x 50
services. f x
3. Describe and define the assertions
f x f x f x f x 9, f x 10, f x 11 36, 39, f x f x 40, 62, 63, 67, f x f x
that management
f x fxmakes about f x f x 41,
f x 68, 69
f x f x
f the recognition, measurement,
x fx f x 45,
presentation, and
f x disclosure of fx f x f x 46, 47, f x f x 48,
f the x financial statements and
f x fx f x 49,
f x
explain why auditors use them as
f x f x f x f x fx f x 52,
a focal point of the audit.
f x f x f x f x f x f x 53, 54, f x f x 55,
57,
f x
58,
59
4. Define professional skepticism and
fx fx f x 12 24, f x 37 61
explain its key characteristics.
fx fx f x f x
5. Describe the organization of public
f x f x f x f x 13, f x 14 30, f x 42, f x 56 72
accounting firms and identify the
fx f x f x f x f x
various services that they offer.
f x fx f x f x f x
6. Describe the audits and f x f x f x 15, 16, f x f x 17, 26, 27, f x f x 32, 64, f x 66
auditors in governmental,
f x fx f x 18
f x 34,
f x
internal, and operational
f x f x fx 35
auditing.
f x
7. List and explain the requirements
f x f x f x f x 19, 20, f x f x 21, 33, f x 43, f x 51 70, f x 71
for becoming a certified public
f x fx f x f x f x 22
f x
accountant (CPA) and other
f x fx f x f x
certifications available to an
f x f x fx f x
accounting professional.
f x f x
(*) f x Item relates f x f x to f x multiple f x learning f x objectives
,Chapter 01
f x f x - f x Auditing and f x
Assurance
f x
SOLUTIONS f x FOR f x REVIEW f x CHECKPOINTS
1.1 Business f x risk is the risk that an entity will fail to meet its
f x f x f x f x f x f x f x f x f x f x f x
f x business f x objectives. When assessing business risk, a professional must f x fx f x f x f x f x f x
consider
f x all possible threats to an entity‘s goals and
f x objectives. Some f x f x f x f x f x f x fx f x f x
illustrative
f x examples include the risk that: 1) its existing f customersx f x f x f x f x f x f x f x f x
will start buying
fx products
f x or services from its primary competitors;
f x 2) f x f x f x f x f x f x f x f x
its
f x product lines will become
f x obsolete; 3) its taxes will increase; 4) f x f x fx f x f x f x f x f x f x f x
key
f x government contracts fwill be lost; 5)
x f x f x f x f x f x
key employees will leave the entity; and
f x many other examples exist. f x f x f x f x f x f x f x f x f x
1.2 To help
f x minimize business risk and take advantage
f x of other opportunities f x f x f x f x f x f x f x f x
f x presented in today‘s competitive business environment,
f x decision makers f x such fx f x f x f x f x f x
f x as chief f executive
x officers (CEOs) demand timely,
f relevant,
x and reliable f x f x fx f x f x f x f x
f x information. There are at least four environmental conditions thatf x increase f x f x f x f x f x fx f x f x
f x demand for reliable information. First,
f complexity
x which implies that
f x f x f x f x f x f x f x
fx events and transactions f in x today‘s global business environment
f x can be f x f x f x f x f x f x f x
f x complicated. Most investors do not have the level of expertise
f x needed fx f x f x f x f x f x f x f x f x
f x to properly f account
x for complex transactions. Second is remotenessf x f x f x fx f x f x f x
f x which implies that decisionf makers
x are often separated from current and f x f x f x f x f x f x fx f x f x
f x potential business relationships due to distance and f x time. For example, f x f x f x f x f x f x f x f x
fx investors may not be able tof x visit distant locations to check up
f x f x f x f x f x f x f x f x f x f x
f x on their investments.
f x Third is time-sensitivity whichf implies
x that in f x fx f x f x f x f x f x
f x today‘s economic environment, investors
f x and other users of financial f x f x f x f x fx f x f x
f x statements need to make decisions more rapidly
f xthan ever before. f x f x f x f x f x f x f x f x
f x As a result, f the ability
x to promptly
fx obtain high-quality information f is
x f x f x f x f x f x f x f x
f x essential. Fourth is a consequence which implies that decisions may very
f x f x f x fx f x f x f x f x f x f x
f x well involve significant investments.
f x f x As f x
fx a fresult,
x the consequences can be severe
f ifx information cannot be f x f x f x f x f x f x f x f x
f x obtained
1.3 Of all the different
f x risks discussed
f x in the chapter up to this point,
f x information f x f x f x f x f x f x f x f x f x f x f x risk
f xis the f x
one that is most
f x likely to create the demand
f x for independent and f x f x f x f x f x f x f x f x f x
objective assurance
f x services is information risk f x or the probability that f x fx f x f x f x f x f x f x
the
f x information circulated
f xby an entity will be f x f x f x f x f x f x
false or misleading. f x Because the primary f xsource of information for f x f x f x f x f x f x f x
investors
f x and creditors is the company itself, f an incentive exists
x for f x f x fx f x f x f x f x f x f x
that company‘s management to
f x f x make their business or service appear to f x f x f x f x f x fx f x f x f x
be better
f x than it actually
f x may be, to put their f x best foot forward. f x f x f x f x f x f x f x f x f x f x
f As x a result, preparers
f andx issuers of
fx financial information (directors, f x f x f x f x f x f x f x
f managers,
x accountants, and other people employed in
f a business)
x might f x fx f x f x f x f x f x f x
f benefit
x by giving false, misleading, f or x overly optimistic information. f x This f x f x f x f x fx f x f x
f potential
x conflict of interest between information
f x providers and users f x f x f x f x f x f x fx
f which x provides the underlying fbasis for
x the demand for reliable f x f x f x f x f x f x f x f x
f information.
x
1.4 The f x four f x major f x elements f x of the f x f x broad f x definition f x of f x assurance f x services f x are
Independence. CPAs want to preserve f x f x f x f x their reputation and competitive
f x f x f x f x advantage
by always preserving
f x integrity
fx and fx f x f x f x objectivity when performing f x f x f x assurance
f services.
x
Professional services. Virtually all work performed by CPAs is defined as
f x f x f x f x f x f x f x f x f x f x
―professional services‖ as long as
f x it involves some element of fx f x f x f x f x f x f x f x f x
fjudgmentx based on education and experience. f x f x f x f x fx
Improving the quality of information or its context. The emphasis
f x is on f x f x f x f x f x f x f x f x f x f x
―information,‖
f x CPAs‘ traditional area of expertise. CPAs can enhance f x fx f x f x f x f x f x f x
fquality x by assuring users about the f xreliability and relevance of f x f x f x f x f x fx f x f x
finformation,
x and these two features are closely related to the f x f x f x f x f x f x f x f x f x
ffamiliar credibility-lending
x products of attestation and audit services. ―Context‖
fx f x f x f x f x f x f x f x f x is
, Chapter 01 - Auditing and
f x f x f x f x
Assurance
f x
relevance in a different light. For assurance services, improving
f x f x fx f x fx f x f x f x f x f x the context of
f x f x
information
f x refers to improving its usefulness
f x when targeted f x f x f x fx f x f x f x to particular
f x
f decision
x makers in the surroundings
f x of particular f x f x f x f x f x
decision problems. f x
For decision makers.
f x f x f xAs the ―consumers‖ of assurance services, decision makers are
f x f x f x f x f x f x f x f x
the beneficiaries of
f x fx f x fx the assurance services. Decision makers may or may not be
f x fx f x f x f x f x f x f x f x
the ―client‖ that
f x f x f x f x pays the fee and may or may not be
fx f x one of
f x the f x f x f x f x f x f x f x f x
fparties
x to an f x f x f x assertion or other information,
f x but they personify
f the
x f x f x fx f x f x
fconsumer
x focus f x f x of new andf different
x professional fwork.
x f x f x f x
1.5 An f xassurance services engagement is any f x assignment that improves f x the f x f x f x f x f x f x
f x quality of information, or
f x its context,
f x for decision makers. Because fx f x f x f x f x f x f x
f x information (e.g., financial statements)
f xare prepared by fmanagers
x of an f x f x fx f x f x f x f x
f x entity who have authority and responsibility for
f x f x financial
f x success or failure, f x f x f x f x f x fx f x
f x an outsider may be skeptical that
f x thef x information truly is objective,
f x f x f x f x f x f x f x f x
f x free from bias,
f x f x
