Chapter 01 - Auditing and Assurance Services
Solution Manual For Auditing & Assurance
Services 9th Edition By Timothy Louwers,
P e n e l o p e Bagley Latest Update
,Chapter 01 - Auditing and Assurance Services
CHAPTER 01
AUDITING AND ASSURANCE SERVICES
LEARNING OBJECTIVES
REVIEW MULTI EXERCISES,
CHECKPOINTS PLE PROBLEMS, AND
CHOIC SIMULATIONS
E
1. DEFINE INFORMATION RISK AND 1, 2, 3 29, 31, 38 65*
EXPLAIN HOW THE FINANCIAL
STATEMENT AUDITING PROCESS
HELPS TO REDUCE THIS RISK,
THEREBY REDUCING THE COST
OF CAPITAL FOR A
COMPANY.
2. DEFINE AND CONTRAST ASSURANCE, 4, 5, 6, 7, 8 23, 25, 28, 44, 60, 65*
ATTESTATION, 50
AND FINANCIAL STATEMENT AUDITING
SERVICES.
3. DESCRIBE AND DEFINE THE 9, 10, 11 36, 39, 40, 41, 45, 62, 63, 67, 68, 69
ASSERTIONS THAT MANAGEMENT 46, 47, 48, 49, 52,
MAKES ABOUT THE RECOGNITION, 53, 54, 55, 57, 58,
MEASUREMENT, PRESENTATION, 59
AND DISCLOSURE OF THE FINANCIAL
STATEMENTS AND EXPLAIN WHY
AUDITORS USE THEM AS A FOCAL
POINT
OF THE AUDIT.
4. DEFINE PROFESSIONAL SKEPTICISM 12 24, 37 61
AND EXPLAIN ITSKEY
CHARACTERISTICS.
5. DESCRIBE THE ORGANIZATION OF 13, 14 30, 42, 56 72
PUBLIC ACCOUNTINGFIRMS AND
IDENTIFY THE VARIOUS SERVICES
THAT THEY OFFER.
6. DESCRIBE THE AUDITS AND 15, 16, 17, 18 26, 27, 32, 34, 35 64, 66
AUDITORS IN
GOVERNMENTAL, INTERNAL,
AND OPERATIONALAUDITING.
7. LIST AND EXPLAIN THE 19, 20, 21, 22 33, 43, 51 70, 71
REQUIREMENTS FOR 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 RELIABLEINFORMATION. 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, INVESTORSMAY 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 PUTTHEIR 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 OVERLYOPTIMISTIC 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 PRESERVINGINTEGRITY 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, IMPROVINGTHE
CONTEXT OF INFORMATION REFERS TO IMPROVING ITS USEFULNESS WHEN TARGETED
, Chapter 01 - Auditing and Assurance Services
TO PARTICULAR DECISION MAKERS INTHE 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 OUTSIDER MAY BE SKEPTICALTHAT 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 9th Edition By Timothy Louwers,
P e n e l o p e Bagley Latest Update
,Chapter 01 - Auditing and Assurance Services
CHAPTER 01
AUDITING AND ASSURANCE SERVICES
LEARNING OBJECTIVES
REVIEW MULTI EXERCISES,
CHECKPOINTS PLE PROBLEMS, AND
CHOIC SIMULATIONS
E
1. DEFINE INFORMATION RISK AND 1, 2, 3 29, 31, 38 65*
EXPLAIN HOW THE FINANCIAL
STATEMENT AUDITING PROCESS
HELPS TO REDUCE THIS RISK,
THEREBY REDUCING THE COST
OF CAPITAL FOR A
COMPANY.
2. DEFINE AND CONTRAST ASSURANCE, 4, 5, 6, 7, 8 23, 25, 28, 44, 60, 65*
ATTESTATION, 50
AND FINANCIAL STATEMENT AUDITING
SERVICES.
3. DESCRIBE AND DEFINE THE 9, 10, 11 36, 39, 40, 41, 45, 62, 63, 67, 68, 69
ASSERTIONS THAT MANAGEMENT 46, 47, 48, 49, 52,
MAKES ABOUT THE RECOGNITION, 53, 54, 55, 57, 58,
MEASUREMENT, PRESENTATION, 59
AND DISCLOSURE OF THE FINANCIAL
STATEMENTS AND EXPLAIN WHY
AUDITORS USE THEM AS A FOCAL
POINT
OF THE AUDIT.
4. DEFINE PROFESSIONAL SKEPTICISM 12 24, 37 61
AND EXPLAIN ITSKEY
CHARACTERISTICS.
5. DESCRIBE THE ORGANIZATION OF 13, 14 30, 42, 56 72
PUBLIC ACCOUNTINGFIRMS AND
IDENTIFY THE VARIOUS SERVICES
THAT THEY OFFER.
6. DESCRIBE THE AUDITS AND 15, 16, 17, 18 26, 27, 32, 34, 35 64, 66
AUDITORS IN
GOVERNMENTAL, INTERNAL,
AND OPERATIONALAUDITING.
7. LIST AND EXPLAIN THE 19, 20, 21, 22 33, 43, 51 70, 71
REQUIREMENTS FOR 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 RELIABLEINFORMATION. 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, INVESTORSMAY 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 PUTTHEIR 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 OVERLYOPTIMISTIC 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 PRESERVINGINTEGRITY 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, IMPROVINGTHE
CONTEXT OF INFORMATION REFERS TO IMPROVING ITS USEFULNESS WHEN TARGETED
, Chapter 01 - Auditing and Assurance Services
TO PARTICULAR DECISION MAKERS INTHE 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 OUTSIDER MAY BE SKEPTICALTHAT 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
