Chapter uo01 uo- uoAuditing uoand uoAssurance
Services
Solution Manual For Auditing & Assurance Services
uo uo uo uo uo uo u
9th Edition by Timothy Louwers, Penelope Bagley
uo uo uo uo uo uo uo
,Chapter uo01 uo- uoAuditing uoand uoAssurance
Services
CHAPTER uo01
Auditing uoand uoAssurance uoServices
LEARNING uoOBJECTIVES
Review Multiple Exercises, uoProblems,
Checkpoints
uo uoChoice uoand uoSimulations
1. uoDefine uoinformation uorisk uoand uoexplain uohow 1, uo2, uo3 29, uo31, uo38 65*
uothe uofinancial uostatement uoauditing uoprocess
uohelps uoto uoreduce uothis uorisk, uothereby
uoreducing uothe uocost uoof uocapital uofor uoa
uocompany.
2. Define uoand uocontrast uoassurance, 4, uo5, uo6, uo7, uo8 23, uo25, uo28, uo44, 60, uo65*
uoattestation, 50
and uofinancial uostatement uoauditing uoservices.
3. Describe uoand uodefine uothe uoassertions uothat 9, uo10, uo11 36, uo39, uo40, uo41, 62, uo63, uo67, uo68, uo69
uomanagement uomakes uoabout uothe uo45,
uorecognition, uomeasurement, uopresentation, 46, uo47, uo48, uo49,
uoand uodisclosure uoof uothe uofinancial uo52,
uostatements uoand uoexplain uowhy uoauditors 53, uo54, uo55, uo57,
uouse uothem uoas uoa uofocal uopoint uoof uothe uoaudit. uo58,
59
4. Define uoprofessional uoskepticism uoand uoexplain 12 24, uo37 61
uoits uokey uocharacteristics.
5. Describe uothe uoorganization uoof uopublic 13, uo14 30, uo42, uo56 72
uoaccounting uofirms uoand uoidentify uothe
uovarious uoservices uothat uothey uooffer.
6. Describe uothe uoaudits uoand uoauditors 15, uo16, uo17, uo18 26, uo27, uo32, uo34, 64, uo66
uoin uogovernmental, uointernal, uoand uo35
uooperational uoauditing.
7. List uoand uoexplain uothe uorequirements uofor 19, uo20, uo21, uo22 33, uo43, uo51 70, uo71
uobecoming uoa uocertified uopublic uoaccountant
uo(CPA) uoand uoother uocertifications uoavailable
uoto uoan uoaccounting uoprofessional.
(*) uoItem uorelates uoto uomultiple uolearning uoobjectives
,Chapter uo01 uo- uoAuditing uoand uoAssurance
Services
SOLUTIONS uoFOR uoREVIEW uoCHECKPOINTS
1.1 Business uorisk uois uothe uorisk uothat uoan uoentity uowill uofail uoto uomeet uoits uobusiness uoobjectives. uoWhen
uoassessing uobusiness uorisk, uoa uoprofessional uomust uoconsider uoall uopossible uothreats uoto uoan uoentity‗s uogoals
uoand uoobjectives. uoSome uoillustrative uoexamples uoinclude uothe uorisk uothat: uo1) uoits uoexisting uocustomers
uowill uostart uobuying uoproducts uoor uoservices uofrom uoits uoprimary uocompetitors; uo2) uoits uoproduct uolines uowill
uobecome uoobsolete; uo3) uoits uotaxes uowill uoincrease; uo4) uokey uogovernment uocontracts uowill uobe uolost; uo5)
uokey uoemployees uowill uoleave uothe uoentity; uoand uomany uoother uoexamples uoexist.
1.2 To uohelp uominimize uobusiness uorisk uoand uotake uoadvantage uoof uoother uoopportunities uopresented uoin uotoday‗s
uocompetitive uobusiness uoenvironment, uodecision uomakers uosuch uoas uochief uoexecutive uoofficers uo(CEOs)
uodemand uotimely, uorelevant, uoand uoreliable uoinformation. uoThere uoare uoat uoleast uofour uoenvironmental
uoconditions uothat uoincrease uodemand uofor uoreliable uoinformation. uoFirst, uocomplexity uowhich uoimplies uothat
uoevents uoand uotransactions uoin uotoday‗s uoglobal uobusiness uoenvironment uocan uobe uocomplicated. uoMost
uoinvestors uodo uonot uohave uothe uolevel uoof uoexpertise uoneeded uoto uoproperly uoaccount uofor uocomplex
uotransactions. uoSecond uois uoremoteness uowhich uoimplies uothat uodecision uomakers uoare uooften uoseparated
uofrom uocurrent uoand uopotential uobusiness uorelationships uodue uoto uodistance uoand uotime. uoFor uoexample,
uoinvestors uomay uonot uobe uoable uoto uovisit uodistant uolocations uoto uocheck uoup uoon uotheir uoinvestments. uoThird
uois uotime-sensitivity uowhich uoimplies uothat uoin uotoday‗s uoeconomic uoenvironment, uoinvestors uoand uoother
uousers uoof uofinancial uostatements uoneed uoto uomake uodecisions uomore uorapidly uothan uoever uobefore. uoAs uoa
uoresult, uothe uoability uoto uopromptly uoobtain uohigh-quality uoinformation uois uoessential. uoFourth uois uoa
uoconsequence uowhich uoimplies uothat uodecisions uomay uovery uowell uoinvolve uosignificant uoinvestments. u o As
uoa uoresult, uothe uoconsequences uocan uobe uosevere uoif uoinformation uocannot uobe uoobtained
1.3 Of uoall uothe uodifferent uorisks uodiscussed uoin uothe uochapter uoup uoto uothis uopoint, uoinformation uorisk uois uothe
uoone uothat uois uomost uolikely uoto uocreate uothe uodemand uofor uoindependent uoand uoobjective uoassurance
uoservices uois uoinformation uorisk uoor uothe uoprobability uothat uothe uoinformation uocirculated uoby uoan uoentity
uowill uobe uofalse uoor uomisleading. uoBecause uothe uoprimary uosource uoof uoinformation uofor uoinvestors uoand
uocreditors uois uothe uocompany uoitself, uoan uoincentive uoexists uofor uothat uocompany‗s uomanagement uoto uomake
uotheir uobusiness uoor uoservice uoappear uoto uobe uobetter uothan uoit uoactually uomay uobe, uoto uoput uotheir uobest uofoot
uoforward. uoAs uoa uoresult, uopreparers uoand uoissuers uoof uofinancial uoinformation uo(directors, uomanagers,
uoaccountants, uoand uoother uopeople uoemployed uoin uoa uobusiness) uomight uobenefit uoby uogiving uofalse,
uomisleading, uoor uooverly uooptimistic uoinformation. uoThis uopotential uoconflict uoof uointerest uobetween
uoinformation uoproviders uoand uousers uowhich uoprovides uothe uounderlying uobasis uofor uothe uodemand uofor
uoreliable uoinformation.
1.4 The uofour uomajor uoelements uoof uothe uobroad uodefinition uoof uoassurance uoservices uoare
Independence. u o CPAs uowant uoto uopreserve uotheir uoreputation uoand uocompetitive uoadvantage uoby uoalways
uopreserving uointegrity uoand uoobjectivity uowhen uoperforming uoassurance uoservices.
Professional uoservices. uoVirtually uoall uowork uoperformed uoby uoCPAs uois uodefined uoas uo―professional
uoservices‖ uoas uolong uoas uoit uoinvolves uosome uoelement uoof uojudgment uobased uoon uoeducation uoand
uoexperience.
Improving uothe uoquality uoof uoinformation uoor uoits uocontext. uoThe uoemphasis uois uoon uo―information,‖ uoCPAs‗
uotraditional uoarea uoof uoexpertise. uoCPAs uocan uoenhance uoquality uoby uoassuring uousers uoabout uothe uoreliability
uoand uorelevance uoof uoinformation, uoand uothese uotwo uofeatures uoare uoclosely uorelated uoto uothe uofamiliar
uocredibility-lending uoproducts uoof uoattestation uoand uoaudit uoservices. uo―Context‖ uois uorelevance uoin uoa uodifferent
uolight. uoFor uoassurance uoservices, uoimproving uothe uocontext uoof uoinformation uorefers uoto uoimproving uoits
uousefulness uowhen uotargeted uoto uoparticular uodecision uomakers uoin uothe uosurroundings uoof uoparticular
uodecision uoproblems.
For uodecision uomakers. uoAs uothe uo―consumers‖ uoof uoassurance uoservices, uodecision uomakers uoare uothe
uobeneficiaries uoof uothe uoassurance uoservices. uoDecision uomakers uomay uoor uomay uonot uobe uothe uo―client‖ uothat
uopays uothe uofee uoand uomay uoor uomay uonot uobe uoone uoof uothe uoparties uoto uoan uoassertion uoor uoother uoinformation,
uobut uothey uopersonify uothe uoconsumer uofocus uoof uonew uoand uodifferent uoprofessional uowork.
1.5 An uoassurance uoservices uoengagement uois uoany uoassignment uothat uoimproves uothe uoquality uoof uoinformation,
uoor uoits uocontext, uofor uodecision uomakers. uoBecause uoinformation uo(e.g., uofinancial uostatements) uoare
uoprepared uoby uomanagers uoof uoan uoentity uowho uohave uoauthority uoand uoresponsibility uofor uofinancial uosuccess
, Chapter uo01 uo- uoAuditing uoand uoAssurance
Services
uoor uofailure, uoan uooutsider uomay uobe uoskeptical uothat uothe uoinformation uotruly uois uoobjective, uofree uofrom uobias,
uofully uoinformative, uoand uofree uofrom uomaterial uoerror, uointentional uoor uoinadvertent. u o The uoservices uoof uoan
uoindependent uoauditor uohelps uoresolve uothose uodoubts uobecause uothe
Services
Solution Manual For Auditing & Assurance Services
uo uo uo uo uo uo u
9th Edition by Timothy Louwers, Penelope Bagley
uo uo uo uo uo uo uo
,Chapter uo01 uo- uoAuditing uoand uoAssurance
Services
CHAPTER uo01
Auditing uoand uoAssurance uoServices
LEARNING uoOBJECTIVES
Review Multiple Exercises, uoProblems,
Checkpoints
uo uoChoice uoand uoSimulations
1. uoDefine uoinformation uorisk uoand uoexplain uohow 1, uo2, uo3 29, uo31, uo38 65*
uothe uofinancial uostatement uoauditing uoprocess
uohelps uoto uoreduce uothis uorisk, uothereby
uoreducing uothe uocost uoof uocapital uofor uoa
uocompany.
2. Define uoand uocontrast uoassurance, 4, uo5, uo6, uo7, uo8 23, uo25, uo28, uo44, 60, uo65*
uoattestation, 50
and uofinancial uostatement uoauditing uoservices.
3. Describe uoand uodefine uothe uoassertions uothat 9, uo10, uo11 36, uo39, uo40, uo41, 62, uo63, uo67, uo68, uo69
uomanagement uomakes uoabout uothe uo45,
uorecognition, uomeasurement, uopresentation, 46, uo47, uo48, uo49,
uoand uodisclosure uoof uothe uofinancial uo52,
uostatements uoand uoexplain uowhy uoauditors 53, uo54, uo55, uo57,
uouse uothem uoas uoa uofocal uopoint uoof uothe uoaudit. uo58,
59
4. Define uoprofessional uoskepticism uoand uoexplain 12 24, uo37 61
uoits uokey uocharacteristics.
5. Describe uothe uoorganization uoof uopublic 13, uo14 30, uo42, uo56 72
uoaccounting uofirms uoand uoidentify uothe
uovarious uoservices uothat uothey uooffer.
6. Describe uothe uoaudits uoand uoauditors 15, uo16, uo17, uo18 26, uo27, uo32, uo34, 64, uo66
uoin uogovernmental, uointernal, uoand uo35
uooperational uoauditing.
7. List uoand uoexplain uothe uorequirements uofor 19, uo20, uo21, uo22 33, uo43, uo51 70, uo71
uobecoming uoa uocertified uopublic uoaccountant
uo(CPA) uoand uoother uocertifications uoavailable
uoto uoan uoaccounting uoprofessional.
(*) uoItem uorelates uoto uomultiple uolearning uoobjectives
,Chapter uo01 uo- uoAuditing uoand uoAssurance
Services
SOLUTIONS uoFOR uoREVIEW uoCHECKPOINTS
1.1 Business uorisk uois uothe uorisk uothat uoan uoentity uowill uofail uoto uomeet uoits uobusiness uoobjectives. uoWhen
uoassessing uobusiness uorisk, uoa uoprofessional uomust uoconsider uoall uopossible uothreats uoto uoan uoentity‗s uogoals
uoand uoobjectives. uoSome uoillustrative uoexamples uoinclude uothe uorisk uothat: uo1) uoits uoexisting uocustomers
uowill uostart uobuying uoproducts uoor uoservices uofrom uoits uoprimary uocompetitors; uo2) uoits uoproduct uolines uowill
uobecome uoobsolete; uo3) uoits uotaxes uowill uoincrease; uo4) uokey uogovernment uocontracts uowill uobe uolost; uo5)
uokey uoemployees uowill uoleave uothe uoentity; uoand uomany uoother uoexamples uoexist.
1.2 To uohelp uominimize uobusiness uorisk uoand uotake uoadvantage uoof uoother uoopportunities uopresented uoin uotoday‗s
uocompetitive uobusiness uoenvironment, uodecision uomakers uosuch uoas uochief uoexecutive uoofficers uo(CEOs)
uodemand uotimely, uorelevant, uoand uoreliable uoinformation. uoThere uoare uoat uoleast uofour uoenvironmental
uoconditions uothat uoincrease uodemand uofor uoreliable uoinformation. uoFirst, uocomplexity uowhich uoimplies uothat
uoevents uoand uotransactions uoin uotoday‗s uoglobal uobusiness uoenvironment uocan uobe uocomplicated. uoMost
uoinvestors uodo uonot uohave uothe uolevel uoof uoexpertise uoneeded uoto uoproperly uoaccount uofor uocomplex
uotransactions. uoSecond uois uoremoteness uowhich uoimplies uothat uodecision uomakers uoare uooften uoseparated
uofrom uocurrent uoand uopotential uobusiness uorelationships uodue uoto uodistance uoand uotime. uoFor uoexample,
uoinvestors uomay uonot uobe uoable uoto uovisit uodistant uolocations uoto uocheck uoup uoon uotheir uoinvestments. uoThird
uois uotime-sensitivity uowhich uoimplies uothat uoin uotoday‗s uoeconomic uoenvironment, uoinvestors uoand uoother
uousers uoof uofinancial uostatements uoneed uoto uomake uodecisions uomore uorapidly uothan uoever uobefore. uoAs uoa
uoresult, uothe uoability uoto uopromptly uoobtain uohigh-quality uoinformation uois uoessential. uoFourth uois uoa
uoconsequence uowhich uoimplies uothat uodecisions uomay uovery uowell uoinvolve uosignificant uoinvestments. u o As
uoa uoresult, uothe uoconsequences uocan uobe uosevere uoif uoinformation uocannot uobe uoobtained
1.3 Of uoall uothe uodifferent uorisks uodiscussed uoin uothe uochapter uoup uoto uothis uopoint, uoinformation uorisk uois uothe
uoone uothat uois uomost uolikely uoto uocreate uothe uodemand uofor uoindependent uoand uoobjective uoassurance
uoservices uois uoinformation uorisk uoor uothe uoprobability uothat uothe uoinformation uocirculated uoby uoan uoentity
uowill uobe uofalse uoor uomisleading. uoBecause uothe uoprimary uosource uoof uoinformation uofor uoinvestors uoand
uocreditors uois uothe uocompany uoitself, uoan uoincentive uoexists uofor uothat uocompany‗s uomanagement uoto uomake
uotheir uobusiness uoor uoservice uoappear uoto uobe uobetter uothan uoit uoactually uomay uobe, uoto uoput uotheir uobest uofoot
uoforward. uoAs uoa uoresult, uopreparers uoand uoissuers uoof uofinancial uoinformation uo(directors, uomanagers,
uoaccountants, uoand uoother uopeople uoemployed uoin uoa uobusiness) uomight uobenefit uoby uogiving uofalse,
uomisleading, uoor uooverly uooptimistic uoinformation. uoThis uopotential uoconflict uoof uointerest uobetween
uoinformation uoproviders uoand uousers uowhich uoprovides uothe uounderlying uobasis uofor uothe uodemand uofor
uoreliable uoinformation.
1.4 The uofour uomajor uoelements uoof uothe uobroad uodefinition uoof uoassurance uoservices uoare
Independence. u o CPAs uowant uoto uopreserve uotheir uoreputation uoand uocompetitive uoadvantage uoby uoalways
uopreserving uointegrity uoand uoobjectivity uowhen uoperforming uoassurance uoservices.
Professional uoservices. uoVirtually uoall uowork uoperformed uoby uoCPAs uois uodefined uoas uo―professional
uoservices‖ uoas uolong uoas uoit uoinvolves uosome uoelement uoof uojudgment uobased uoon uoeducation uoand
uoexperience.
Improving uothe uoquality uoof uoinformation uoor uoits uocontext. uoThe uoemphasis uois uoon uo―information,‖ uoCPAs‗
uotraditional uoarea uoof uoexpertise. uoCPAs uocan uoenhance uoquality uoby uoassuring uousers uoabout uothe uoreliability
uoand uorelevance uoof uoinformation, uoand uothese uotwo uofeatures uoare uoclosely uorelated uoto uothe uofamiliar
uocredibility-lending uoproducts uoof uoattestation uoand uoaudit uoservices. uo―Context‖ uois uorelevance uoin uoa uodifferent
uolight. uoFor uoassurance uoservices, uoimproving uothe uocontext uoof uoinformation uorefers uoto uoimproving uoits
uousefulness uowhen uotargeted uoto uoparticular uodecision uomakers uoin uothe uosurroundings uoof uoparticular
uodecision uoproblems.
For uodecision uomakers. uoAs uothe uo―consumers‖ uoof uoassurance uoservices, uodecision uomakers uoare uothe
uobeneficiaries uoof uothe uoassurance uoservices. uoDecision uomakers uomay uoor uomay uonot uobe uothe uo―client‖ uothat
uopays uothe uofee uoand uomay uoor uomay uonot uobe uoone uoof uothe uoparties uoto uoan uoassertion uoor uoother uoinformation,
uobut uothey uopersonify uothe uoconsumer uofocus uoof uonew uoand uodifferent uoprofessional uowork.
1.5 An uoassurance uoservices uoengagement uois uoany uoassignment uothat uoimproves uothe uoquality uoof uoinformation,
uoor uoits uocontext, uofor uodecision uomakers. uoBecause uoinformation uo(e.g., uofinancial uostatements) uoare
uoprepared uoby uomanagers uoof uoan uoentity uowho uohave uoauthority uoand uoresponsibility uofor uofinancial uosuccess
, Chapter uo01 uo- uoAuditing uoand uoAssurance
Services
uoor uofailure, uoan uooutsider uomay uobe uoskeptical uothat uothe uoinformation uotruly uois uoobjective, uofree uofrom uobias,
uofully uoinformative, uoand uofree uofrom uomaterial uoerror, uointentional uoor uoinadvertent. u o The uoservices uoof uoan
uoindependent uoauditor uohelps uoresolve uothose uodoubts uobecause uothe
