Chapter a01 a- aAuditing aand aAssurance
aServices
Solution Manual For Auditing & Assurance Services
a a a a a a a
a 9th Edition by Timothy Louwers, Penelope Bagley
a a a a a a
,Chapter a01 a- aAuditing aand aAssurance
aServices
CHAPTER a01
Auditing aand aAssurance aServices
LEARNING aOBJECTIVES
Review Multiple Exercises, aProblems,
Checkpoints
a aChoice aand aSimulations
1. aDefine ainformation arisk aand aexplain ahow 1, a2, a3 29, a31, a38 65*
athe afinancial astatement aauditing aprocess
ahelps ato areduce athis arisk, athereby
areducing athe acost aof acapital afor aa
acompany.
2. Define aand acontrast aassurance, aattestation, 4, a5, a6, a7, a8 23, a25, a28, a44, 60, a65*
and afinancial astatement aauditing aservices. 50
3. Describe aand adefine athe aassertions athat 9, a10, a11 36, a39, a40, a41, 62, a63, a67, a68, a69
amanagement amakes aabout athe arecognition, a45,
ameasurement, apresentation, aand adisclosure 46, a47, a48, a49,
aof athe afinancial astatements aand aexplain a52,
a why aauditors ause athem aas aa afocal apoint aof 53, a54, a55, a57,
athe aaudit. a58,
59
4. Define aprofessional askepticism aand aexplain 12 24, a37 61
aits akey acharacteristics.
5. Describe athe aorganization aof apublic 13, a14 30, a42, a56 72
aaccounting afirms aand aidentify athe avarious
aservices athat athey aoffer.
6. Describe athe aaudits aand aauditors ain 15, a16, a17, a18 26, a27, a32, a34, a35 64, a66
agovernmental, ainternal, aand
aoperational aauditing.
7. List aand aexplain athe arequirements afor 19, a20, a21, a22 33, a43, a51 70, a71
abecoming aa acertified apublic aaccountant
a(CPA) aand aother acertifications aavailable ato
aan aaccounting aprofessional.
(*) aItem arelates ato amultiple alearning aobjectives
,Chapter a01 a- aAuditing aand aAssurance
aServices
SOLUTIONS aFOR aREVIEW aCHECKPOINTS
1.1 Business arisk ais athe arisk athat aan aentity awill afail ato ameet aits abusiness aobjectives. aWhen
aassessing abusiness arisk, aa aprofessional amust aconsider aall apossible athreats ato aan aentity‘s agoals aand
aobjectives. aSome aillustrative aexamples ainclude athe arisk athat: a1) aits aexisting acustomers a will astart
abuying aproducts aor aservices afrom aits aprimary acompetitors; a2) aits aproduct alines a will abecome
aobsolete; a3) aits ataxes awill aincrease; a4) akey agovernment acontracts awill abe alost; a5) akey aemployees
awill aleave athe aentity; aand amany aother aexamples aexist.
1.2 To ahelp aminimize abusiness arisk aand atake aadvantage aof aother aopportunities apresented ain atoday‘s
acompetitive abusiness aenvironment, adecision amakers asuch aas achief aexecutive aofficers a(CEOs) ademand
atimely, arelevant, aand areliable ainformation. aThere aare aat aleast afour aenvironmental aconditions athat
aincrease ademand afor areliable ainformation. aFirst, acomplexity awhich aimplies athat aevents aand
atransactions ain atoday‘s aglobal abusiness aenvironment acan abe acomplicated. aMost ainvestors ado anot
ahave athe alevel aof aexpertise aneeded ato aproperly aaccount afor acomplex atransactions. aSecond ais
aremoteness a which aimplies athat adecision amakers aare aoften aseparated afrom acurrent aand apotential
abusiness arelationships adue ato adistance aand atime. aFor aexample, ainvestors amay anot abe aable ato avisit
adistant alocations ato acheck aup aon atheir ainvestments. aThird ais atime-sensitivity awhich aimplies athat ain
atoday‘s aeconomic aenvironment, ainvestors aand aother ausers aof afinancial astatements aneed ato amake
adecisions amore arapidly athan aever abefore. aAs aa aresult, athe aability ato apromptly aobtain ahigh-quality
ainformation ais aessential. aFourth ais aa aconsequence awhich aimplies athat adecisions amay avery a well
ainvolve asignificant ainvestments. a As aa aresult, athe aconsequences acan abe asevere aif ainformation acannot
abe aobtained
1.3 Of aall athe adifferent arisks adiscussed ain athe achapter aup ato athis apoint, ainformation arisk ais athe aone athat
ais amost alikely ato acreate athe ademand afor aindependent aand aobjective aassurance aservices ais
ainformation arisk aor athe aprobability athat athe ainformation acirculated aby aan aentity awill abe afalse aor
amisleading. aBecause athe aprimary asource aof ainformation afor ainvestors aand acreditors ais athe acompany
aitself, aan aincentive aexists afor athat acompany‘s amanagement ato amake atheir abusiness aor aservice aappear
ato abe abetter athan ait aactually amay abe, ato aput atheir abest afoot aforward. aAs aa aresult, apreparers aand
aissuers aof afinancial ainformation a(directors, amanagers, aaccountants, aand aother apeople aemployed ain aa
abusiness) amight abenefit aby agiving afalse, amisleading, aor aoverly aoptimistic ainformation. aThis apotential
aconflict aof ainterest abetween ainformation aproviders aand ausers awhich aprovides athe aunderlying abasis
afor athe ademand afor areliable ainformation.
1.4 The afour amajor aelements aof athe abroad adefinition aof aassurance aservices aare
Independence. a CPAs awant ato apreserve atheir areputation aand acompetitive aadvantage aby aalways
apreserving aintegrity aand aobjectivity a when aperforming aassurance aservices.
Professional aservices. aVirtually aall awork aperformed aby aCPAs ais adefined aas a―professional aservices‖ aas
along aas ait ainvolves asome aelement aof ajudgment abased aon aeducation aand aexperience.
Improving athe aquality aof ainformation aor aits acontext. aThe aemphasis ais aon a―information,‖ aCPAs‘
atraditional aarea aof aexpertise. aCPAs acan aenhance aquality aby aassuring ausers aabout athe areliability aand
arelevance aof ainformation, aand athese atwo afeatures aare aclosely arelated ato athe afamiliar acredibility-
lending aproducts aof aattestation aand aaudit aservices. a―Context‖ ais arelevance ain aa adifferent alight. aFor
aassurance aservices, aimproving athe acontext aof ainformation arefers ato aimproving aits ausefulness awhen
atargeted ato aparticular adecision amakers ain athe asurroundings aof aparticular adecision aproblems.
For adecision amakers. aAs athe a―consumers‖ aof aassurance aservices, adecision amakers aare athe abeneficiaries aof
athe aassurance aservices. aDecision amakers amay aor amay anot abe athe a―client‖ athat apays athe afee aand amay aor
amay anot abe aone aof athe aparties ato aan aassertion aor aother ainformation, abut athey apersonify athe aconsumer
afocus aof anew aand adifferent aprofessional a work.
1.5 An aassurance aservices aengagement ais aany aassignment athat aimproves athe aquality aof ainformation, aor
aits acontext, afor adecision amakers. aBecause ainformation a(e.g., afinancial astatements) aare aprepared aby
amanagers aof aan aentity awho ahave aauthority aand aresponsibility afor afinancial asuccess aor afailure, aan
aoutsider amay abe askeptical athat athe ainformation atruly ais aobjective, afree afrom abias, afully ainformative,
aand afree afrom amaterial aerror, aintentional aor ainadvertent. a The aservices aof aan aindependent aauditor
ahelps aresolve athose adoubts abecause athe
, Chapter a01 a- aAuditing aand aAssurance
aServices
auditor‘s asuccess adepends aupon ahis aor aher aindependent, aobjective, aand acompetent aassessment aof
athe ainformation a(e.g., athe aconformity aof athe afinancial astatements a with athe aappropriate areporting
aframework). aThe aindependent aauditor‘s arole ais ato alend acredibility ato athe ainformation; ahence, athe
aoutsider awill alikely aseek ahis aor aher aindependent aopinion aabout athe afinancial astatements.
1.6 An aattestation aengagement ais a―an aengagement ain awhich aa apractitioner ais aengaged ato aissue aor adoes
aissue aa awritten acommunication athat aexpresses aa aconclusion aabout athe areliability aof aa a written
aassertion athat ais athe aresponsibility aof aanother aparty‖ a(SSAE a10, aAT a101.01). aTo aattest ameans ato
alend acredibility aor ato avouch afor athe atruth aor aaccuracy aof athe astatements athat aone aparty amakes ato
aanother. aThe aattest afunction ais aa aterm aoften aapplied ato athe aactivities aof aindependent aCPAs awhen
aacting aas aauditors aof afinancial astatements.
1.7 An aassurance aservice aengagement ais aone athat aimproves athe aquality aof ainformation, aor aits acontext,
afor adecision amakers. a Thus, aan aattestation aservice aengagement ais aone atype aof aan aassurance aservice.
a Another away aof athinking aabout athe aissue ais ato aremember athat athe afinancial astatement aaudit
aengagement ais aone atype aof aan aattestation aservice. aPlease asee aexhibit a1.3 ain athe atext awhich adepicts
athe arelationship aamong aassurance, aattestation, aand aauditing aengagements.
1.8 According ato athe aAmerican aAccounting aAssociation, a―Auditing ais aa asystematic aprocess aof aobjectively
aobtaining aand aevaluating aevidence aregarding aassertions aabout aeconomic aactions aand aevents ato
aascertain athe adegree aof acorrespondence abetween athe aassertions aand aestablished acriteria aand
acommunicating athe aresults ato ainterested ausers.‖ aIn aeffect, aauditors aadd areliability ato athe ainformation
athat ais aprovided ato ainterested ausers. aOf acourse, athis adefinition ais afocused aon aan aexternal areporting
acontext. aStudents amay aalso adiscuss ahow agovernmental aand ainternal aauditors aoperate aas awell.
In aresponse ato a―What ado aauditors ado?‖ astudents acan arespond aby astating athat aauditors a(1) aobtain aand
aevaluate aevidence aabout aassertions amade aby amanagement aabout aeconomic aactions aand aevents, a(2)
aascertain athe adegree aof acorrespondence abetween athe aassertions aand athe aappropriate areporting
aframework, aand a(3) aissue aan aaudit areport a(opinion). aStudents acan aalso arespond amore agenerally aby
astating athat aauditors aessentially alend acredibility ato athe afinancial astatements apresented aby
amanagement.
1.9 Financial aaccounting arefers ato athe aprocess aof arecording, aclassifying, asummarizing, aand areporting
aabout aa acompany‘s aassets, aliabilities, acapital, arevenues, aand aexpenses ain athe afinancial astatements ain
aaccordance awith athe aapplicable afinancial areporting aframework a(e.g., aGAAP). aIn aso adoing, athe
amanagement ateam ais amaking aseveral aassertions aabout athe afinancial astatements. aThe afinancial
aaccounting aprocess ais athe aresponsibility aof athe amanagement ateam.
Financial astatement aauditing arefers ato athe aprocess awhereby aprofessional aauditors agather aevidence
arelated ato athe aassertions athat amanagement amakes ain athe afinancial astatements, aevaluates athe aevidence
aand aconcludes aon athe afairness aof athe afinancial astatements ain aa areport.
They adiffer abecause aaccountants aproduce athe afinancial astatements ain aaccordance awith athe aapplicable
afinancial areporting aframework. aAfter athis ais acomplete, afinancial astatement aauditors athen aperform
aprocedures ato aascertain awhether athe afinancial astatements ahave abeen aprepared ain aaccordance awith athe
aapplicable afinancial areporting aframework.
1.10 The atwo amajor aclassifications aof aASB aassertions awith aseveral aassertions ain aeach
a classification aare: aAssertions aAbout aClasses aof aTransactions aand aEvents, aand aRelated
a Disclosures
Occurrence aassertion: aThe aobjective ais ato aestablish awith aevidence athat atransactions agiving arise ato
aassets, aliabilities, asales, aand aexpenses aoccurred. a Key aquestions ainclude a―Did athe arecorded asales
atransactions areally aoccur?‖
Completeness aassertion: aThe aobjective ais ato aestablish awith aevidence athat aall atransactions aof athe
aperiod athat ashould abe aare aincluded ain athe afinancial astatements a(including afootnotes). aCompleteness
aalso arefers ato aproper ainclusion ain afinancial astatements aof aall arevenue, aexpense, aand arelated
adisclosures. aKey aquestions arelated ato
aServices
Solution Manual For Auditing & Assurance Services
a a a a a a a
a 9th Edition by Timothy Louwers, Penelope Bagley
a a a a a a
,Chapter a01 a- aAuditing aand aAssurance
aServices
CHAPTER a01
Auditing aand aAssurance aServices
LEARNING aOBJECTIVES
Review Multiple Exercises, aProblems,
Checkpoints
a aChoice aand aSimulations
1. aDefine ainformation arisk aand aexplain ahow 1, a2, a3 29, a31, a38 65*
athe afinancial astatement aauditing aprocess
ahelps ato areduce athis arisk, athereby
areducing athe acost aof acapital afor aa
acompany.
2. Define aand acontrast aassurance, aattestation, 4, a5, a6, a7, a8 23, a25, a28, a44, 60, a65*
and afinancial astatement aauditing aservices. 50
3. Describe aand adefine athe aassertions athat 9, a10, a11 36, a39, a40, a41, 62, a63, a67, a68, a69
amanagement amakes aabout athe arecognition, a45,
ameasurement, apresentation, aand adisclosure 46, a47, a48, a49,
aof athe afinancial astatements aand aexplain a52,
a why aauditors ause athem aas aa afocal apoint aof 53, a54, a55, a57,
athe aaudit. a58,
59
4. Define aprofessional askepticism aand aexplain 12 24, a37 61
aits akey acharacteristics.
5. Describe athe aorganization aof apublic 13, a14 30, a42, a56 72
aaccounting afirms aand aidentify athe avarious
aservices athat athey aoffer.
6. Describe athe aaudits aand aauditors ain 15, a16, a17, a18 26, a27, a32, a34, a35 64, a66
agovernmental, ainternal, aand
aoperational aauditing.
7. List aand aexplain athe arequirements afor 19, a20, a21, a22 33, a43, a51 70, a71
abecoming aa acertified apublic aaccountant
a(CPA) aand aother acertifications aavailable ato
aan aaccounting aprofessional.
(*) aItem arelates ato amultiple alearning aobjectives
,Chapter a01 a- aAuditing aand aAssurance
aServices
SOLUTIONS aFOR aREVIEW aCHECKPOINTS
1.1 Business arisk ais athe arisk athat aan aentity awill afail ato ameet aits abusiness aobjectives. aWhen
aassessing abusiness arisk, aa aprofessional amust aconsider aall apossible athreats ato aan aentity‘s agoals aand
aobjectives. aSome aillustrative aexamples ainclude athe arisk athat: a1) aits aexisting acustomers a will astart
abuying aproducts aor aservices afrom aits aprimary acompetitors; a2) aits aproduct alines a will abecome
aobsolete; a3) aits ataxes awill aincrease; a4) akey agovernment acontracts awill abe alost; a5) akey aemployees
awill aleave athe aentity; aand amany aother aexamples aexist.
1.2 To ahelp aminimize abusiness arisk aand atake aadvantage aof aother aopportunities apresented ain atoday‘s
acompetitive abusiness aenvironment, adecision amakers asuch aas achief aexecutive aofficers a(CEOs) ademand
atimely, arelevant, aand areliable ainformation. aThere aare aat aleast afour aenvironmental aconditions athat
aincrease ademand afor areliable ainformation. aFirst, acomplexity awhich aimplies athat aevents aand
atransactions ain atoday‘s aglobal abusiness aenvironment acan abe acomplicated. aMost ainvestors ado anot
ahave athe alevel aof aexpertise aneeded ato aproperly aaccount afor acomplex atransactions. aSecond ais
aremoteness a which aimplies athat adecision amakers aare aoften aseparated afrom acurrent aand apotential
abusiness arelationships adue ato adistance aand atime. aFor aexample, ainvestors amay anot abe aable ato avisit
adistant alocations ato acheck aup aon atheir ainvestments. aThird ais atime-sensitivity awhich aimplies athat ain
atoday‘s aeconomic aenvironment, ainvestors aand aother ausers aof afinancial astatements aneed ato amake
adecisions amore arapidly athan aever abefore. aAs aa aresult, athe aability ato apromptly aobtain ahigh-quality
ainformation ais aessential. aFourth ais aa aconsequence awhich aimplies athat adecisions amay avery a well
ainvolve asignificant ainvestments. a As aa aresult, athe aconsequences acan abe asevere aif ainformation acannot
abe aobtained
1.3 Of aall athe adifferent arisks adiscussed ain athe achapter aup ato athis apoint, ainformation arisk ais athe aone athat
ais amost alikely ato acreate athe ademand afor aindependent aand aobjective aassurance aservices ais
ainformation arisk aor athe aprobability athat athe ainformation acirculated aby aan aentity awill abe afalse aor
amisleading. aBecause athe aprimary asource aof ainformation afor ainvestors aand acreditors ais athe acompany
aitself, aan aincentive aexists afor athat acompany‘s amanagement ato amake atheir abusiness aor aservice aappear
ato abe abetter athan ait aactually amay abe, ato aput atheir abest afoot aforward. aAs aa aresult, apreparers aand
aissuers aof afinancial ainformation a(directors, amanagers, aaccountants, aand aother apeople aemployed ain aa
abusiness) amight abenefit aby agiving afalse, amisleading, aor aoverly aoptimistic ainformation. aThis apotential
aconflict aof ainterest abetween ainformation aproviders aand ausers awhich aprovides athe aunderlying abasis
afor athe ademand afor areliable ainformation.
1.4 The afour amajor aelements aof athe abroad adefinition aof aassurance aservices aare
Independence. a CPAs awant ato apreserve atheir areputation aand acompetitive aadvantage aby aalways
apreserving aintegrity aand aobjectivity a when aperforming aassurance aservices.
Professional aservices. aVirtually aall awork aperformed aby aCPAs ais adefined aas a―professional aservices‖ aas
along aas ait ainvolves asome aelement aof ajudgment abased aon aeducation aand aexperience.
Improving athe aquality aof ainformation aor aits acontext. aThe aemphasis ais aon a―information,‖ aCPAs‘
atraditional aarea aof aexpertise. aCPAs acan aenhance aquality aby aassuring ausers aabout athe areliability aand
arelevance aof ainformation, aand athese atwo afeatures aare aclosely arelated ato athe afamiliar acredibility-
lending aproducts aof aattestation aand aaudit aservices. a―Context‖ ais arelevance ain aa adifferent alight. aFor
aassurance aservices, aimproving athe acontext aof ainformation arefers ato aimproving aits ausefulness awhen
atargeted ato aparticular adecision amakers ain athe asurroundings aof aparticular adecision aproblems.
For adecision amakers. aAs athe a―consumers‖ aof aassurance aservices, adecision amakers aare athe abeneficiaries aof
athe aassurance aservices. aDecision amakers amay aor amay anot abe athe a―client‖ athat apays athe afee aand amay aor
amay anot abe aone aof athe aparties ato aan aassertion aor aother ainformation, abut athey apersonify athe aconsumer
afocus aof anew aand adifferent aprofessional a work.
1.5 An aassurance aservices aengagement ais aany aassignment athat aimproves athe aquality aof ainformation, aor
aits acontext, afor adecision amakers. aBecause ainformation a(e.g., afinancial astatements) aare aprepared aby
amanagers aof aan aentity awho ahave aauthority aand aresponsibility afor afinancial asuccess aor afailure, aan
aoutsider amay abe askeptical athat athe ainformation atruly ais aobjective, afree afrom abias, afully ainformative,
aand afree afrom amaterial aerror, aintentional aor ainadvertent. a The aservices aof aan aindependent aauditor
ahelps aresolve athose adoubts abecause athe
, Chapter a01 a- aAuditing aand aAssurance
aServices
auditor‘s asuccess adepends aupon ahis aor aher aindependent, aobjective, aand acompetent aassessment aof
athe ainformation a(e.g., athe aconformity aof athe afinancial astatements a with athe aappropriate areporting
aframework). aThe aindependent aauditor‘s arole ais ato alend acredibility ato athe ainformation; ahence, athe
aoutsider awill alikely aseek ahis aor aher aindependent aopinion aabout athe afinancial astatements.
1.6 An aattestation aengagement ais a―an aengagement ain awhich aa apractitioner ais aengaged ato aissue aor adoes
aissue aa awritten acommunication athat aexpresses aa aconclusion aabout athe areliability aof aa a written
aassertion athat ais athe aresponsibility aof aanother aparty‖ a(SSAE a10, aAT a101.01). aTo aattest ameans ato
alend acredibility aor ato avouch afor athe atruth aor aaccuracy aof athe astatements athat aone aparty amakes ato
aanother. aThe aattest afunction ais aa aterm aoften aapplied ato athe aactivities aof aindependent aCPAs awhen
aacting aas aauditors aof afinancial astatements.
1.7 An aassurance aservice aengagement ais aone athat aimproves athe aquality aof ainformation, aor aits acontext,
afor adecision amakers. a Thus, aan aattestation aservice aengagement ais aone atype aof aan aassurance aservice.
a Another away aof athinking aabout athe aissue ais ato aremember athat athe afinancial astatement aaudit
aengagement ais aone atype aof aan aattestation aservice. aPlease asee aexhibit a1.3 ain athe atext awhich adepicts
athe arelationship aamong aassurance, aattestation, aand aauditing aengagements.
1.8 According ato athe aAmerican aAccounting aAssociation, a―Auditing ais aa asystematic aprocess aof aobjectively
aobtaining aand aevaluating aevidence aregarding aassertions aabout aeconomic aactions aand aevents ato
aascertain athe adegree aof acorrespondence abetween athe aassertions aand aestablished acriteria aand
acommunicating athe aresults ato ainterested ausers.‖ aIn aeffect, aauditors aadd areliability ato athe ainformation
athat ais aprovided ato ainterested ausers. aOf acourse, athis adefinition ais afocused aon aan aexternal areporting
acontext. aStudents amay aalso adiscuss ahow agovernmental aand ainternal aauditors aoperate aas awell.
In aresponse ato a―What ado aauditors ado?‖ astudents acan arespond aby astating athat aauditors a(1) aobtain aand
aevaluate aevidence aabout aassertions amade aby amanagement aabout aeconomic aactions aand aevents, a(2)
aascertain athe adegree aof acorrespondence abetween athe aassertions aand athe aappropriate areporting
aframework, aand a(3) aissue aan aaudit areport a(opinion). aStudents acan aalso arespond amore agenerally aby
astating athat aauditors aessentially alend acredibility ato athe afinancial astatements apresented aby
amanagement.
1.9 Financial aaccounting arefers ato athe aprocess aof arecording, aclassifying, asummarizing, aand areporting
aabout aa acompany‘s aassets, aliabilities, acapital, arevenues, aand aexpenses ain athe afinancial astatements ain
aaccordance awith athe aapplicable afinancial areporting aframework a(e.g., aGAAP). aIn aso adoing, athe
amanagement ateam ais amaking aseveral aassertions aabout athe afinancial astatements. aThe afinancial
aaccounting aprocess ais athe aresponsibility aof athe amanagement ateam.
Financial astatement aauditing arefers ato athe aprocess awhereby aprofessional aauditors agather aevidence
arelated ato athe aassertions athat amanagement amakes ain athe afinancial astatements, aevaluates athe aevidence
aand aconcludes aon athe afairness aof athe afinancial astatements ain aa areport.
They adiffer abecause aaccountants aproduce athe afinancial astatements ain aaccordance awith athe aapplicable
afinancial areporting aframework. aAfter athis ais acomplete, afinancial astatement aauditors athen aperform
aprocedures ato aascertain awhether athe afinancial astatements ahave abeen aprepared ain aaccordance awith athe
aapplicable afinancial areporting aframework.
1.10 The atwo amajor aclassifications aof aASB aassertions awith aseveral aassertions ain aeach
a classification aare: aAssertions aAbout aClasses aof aTransactions aand aEvents, aand aRelated
a Disclosures
Occurrence aassertion: aThe aobjective ais ato aestablish awith aevidence athat atransactions agiving arise ato
aassets, aliabilities, asales, aand aexpenses aoccurred. a Key aquestions ainclude a―Did athe arecorded asales
atransactions areally aoccur?‖
Completeness aassertion: aThe aobjective ais ato aestablish awith aevidence athat aall atransactions aof athe
aperiod athat ashould abe aare aincluded ain athe afinancial astatements a(including afootnotes). aCompleteness
aalso arefers ato aproper ainclusion ain afinancial astatements aof aall arevenue, aexpense, aand arelated
adisclosures. aKey aquestions arelated ato
