Chapter 01 - Auditing and Assurance Services
Solution Manual For Auditing & Assurance Services
9th Edition by Timothy Louwers, Penelope Bagley
,Chapter5s015s-
5sAuditing5sand5sAssurance5sServices
CHAPTER5s01
Auditing5sand5sAssurance5sServices
LEARNING5sOBJECTIVES
Review5sChec Multiple Exercises,5sProblems,5s
kpoints 5sChoic and5sSimulations
e
1.5sDefine5sinformation5srisk5sand5sexplain5show5s 1,5s2,5s3 29,5s31,5s38 65*
the5sfinancial5sstatement5sauditing5sprocess5sh
elps5sto5sreduce5sthis5srisk,5sthereby5sreducing
5sthe5scost5sof5scapital5sfor5sa5scompany.
2. 4,5s5,5s6,5s7,5s8 23,5s25,5s28,5s44, 60,5s65*
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and5sfinancial5sstatement5sauditing5sservices.
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5smanagement5smakes5sabout5sthe5srecognition 46,5s47,5s48,5s49,5s5
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e5sof5sthe5sfinancial5sstatements5sand5sexplain5s 53,5s54,5s55,5s57,5s5
why5sauditors5suse5sthem5sas5sa5sfocal5spoint5sof 8,
5sthe5saudit. 59
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ain5sits5skey5scharacteristics.
5. 13,5s14 30,5s42,5s56 72
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ces5sthat5sthey5soffer.
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tional5sauditing.
7. 19,5s20,5s21,5s22 33,5s43,5s51 70,5s71
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becoming5sa5scertified5spublic5saccountant5s(CP
A)5sand5sother5scertifications5savailable5sto5san
5saccounting5sprofessional.
(*)5sItem5srelates5sto5smultiple5slearning5sobjectives
,Chapter5s015s-
5sAuditing5sand5sAssurance5sServices
SOLUTIONS5sFOR5sREVIEW5sCHECKPOINTS
1.1 Business5srisk5sis5sthe5srisk5sthat5san5sentity5swill5sfail5sto5smeet5sits5sbusiness5sobjectives.5sWhen5sasse
ssing5sbusiness5srisk,5sa5sprofessional5smust5sconsider5sall5spossible5sthreats5sto5san5sentity‘s5sgoals5sand5sob
jectives.5sSome5sillustrative5sexamples5sinclude5sthe5srisk5sthat:5s1)5sits5sexisting5scustomers5swill5sstart5sbu
ying5sproducts5sor5sservices5sfrom5sits5sprimary5scompetitors;5s2)5sits5sproduct5slines5swill5sbecome5sobsolet
e;5s3)5sits5staxes5swill5sincrease;5s4)5skey5sgovernment5scontracts5swill5sbe5slost;5s5)5skey5semployees5swill5sle
ave5sthe5sentity;5sand5smany5sother5sexamples5sexist.
1.2 To5shelp5sminimize5sbusiness5srisk5sand5stake5sadvantage5sof5sother5sopportunities5spresented5sin5stoday‘s5sco
mpetitive5sbusiness5senvironment,5sdecision5smakers5ssuch5sas5schief5sexecutive5sofficers5s(CEOs)5sdemand5s
timely,5srelevant,5sand5sreliable5sinformation.5sThere5sare5sat5sleast5sfour5senvironmental5sconditions5sthat5sin
crease5sdemand5sfor5sreliable5sinformation.5sFirst,5scomplexity5swhich5simplies5sthat5sevents5sand5stransactio
ns5sin5stoday‘s5sglobal5sbusiness5senvironment5scan5sbe5scomplicated.5sMost5sinvestors5sdo5snot5shave5sthe5sle
vel5sof5sexpertise5sneeded5sto5sproperly5saccount5sfor5scomplex5stransactions.5sSecond5sis5sremoteness5swhich
5simplies5sthat5sdecision5smakers5sare5soften5sseparated5sfrom5scurrent5sand5spotential5sbusiness5srelationships5s
due5sto5sdistance5sand5stime.5sFor5sexample,5sinvestors5smay5snot5sbe5sable5sto5svisit5sdistant5slocations5sto5sche
ck5sup5son5stheir5sinvestments.5sThird5sis5stime-
sensitivity5swhich5simplies5sthat5sin5stoday‘s5seconomic5senvironment,5sinvestors5sand5sother5susers5sof5sfinan
cial5sstatements5sneed5sto5smake5sdecisions5smore5srapidly5sthan5sever5sbefore.5sAs5sa5sresult,5sthe5sability5sto5
spromptly5sobtain5shigh-
quality5sinformation5sis5sessential.5sFourth5sis5sa5sconsequence5swhich5simplies5sthat5sdecisions5smay5svery5s
well5sinvolve5ssignificant5sinvestments.5 s As5sa5sresult,5sthe5sconsequences5scan5sbe5ssevere5sif5sinformation5s
cannot5sbe5sobtained
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hat5sis5smost5slikely5sto5screate5sthe5sdemand5sfor5sindependent5sand5sobjective5sassurance5sservices5sis5sinfor
mation5srisk5sor5sthe5sprobability5sthat5sthe5sinformation5scirculated5sby5san5sentity5swill5sbe5sfalse5sor5smislea
ding.5sBecause5sthe5sprimary5ssource5sof5sinformation5sfor5sinvestors5sand5screditors5sis5sthe5scompany5sitself
,5san5sincentive5sexists5sfor5sthat5scompany‘s5smanagement5sto5smake5stheir5sbusiness5sor5sservice5sappear5sto5s
be5sbetter5sthan5sit5sactually5smay5sbe,5sto5sput5stheir5sbest5sfoot5sforward.5sAs5sa5sresult,5spreparers5sand5sissue
rs5sof5sfinancial5sinformation5s(directors,5smanagers,5saccountants,5sand5sother5speople5semployed5sin5sa5sbusi
ness)5smight5sbenefit5sby5sgiving5sfalse,5smisleading,5sor5soverly5soptimistic5sinformation.5sThis5spotential5sc
onflict5sof5sinterest5sbetween5sinformation5sproviders5sand5susers5swhich5sprovides5sthe5sunderlying5sbasis5sf
or5sthe5sdemand5sfor5sreliable5sinformation.
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Independence.5 s CPAs5swant5sto5spreserve5stheir5sreputation5sand5scompetitive5sadvantage5sby5salways5spres
erving5sintegrity5sand5sobjectivity5swhen5sperforming5sassurance5sservices.
Professional5sservices.5sVirtually5sall5swork5sperformed5sby5sCPAs5sis5sdefined5sas5s―professional5sservices‖5s
as5slong5sas5sit5sinvolves5ssome5selement5sof5sjudgment5sbased5son5seducation5sand5sexperience.
Improving5sthe5squality5sof5sinformation5sor5sits5scontext.5sThe5semphasis5sis5son5s―information,‖5sCPAs‘5stra
ditional5sarea5sof5sexpertise.5sCPAs5scan5senhance5squality5sby5sassuring5susers5sabout5sthe5sreliability5sand5sr
elevance5sof5sinformation,5sand5sthese5stwo5sfeatures5sare5sclosely5srelated5sto5sthe5sfamiliar5scredibility-
lending5sproducts5sof5sattestation5sand5saudit5sservices.5s―Context‖5sis5srelevance5sin5sa5sdifferent5slight.5sFor5sas
surance5sservices,5simproving5sthe5scontext5sof5sinformation5srefers5sto5simproving5sits5susefulness5swhen5starg
eted5sto5sparticular5sdecision5smakers5sin5sthe5ssurroundings5sof5sparticular5sdecision5sproblems.
For5sdecision5smakers.5sAs5sthe5s―consumers‖5sof5sassurance5sservices,5sdecision5smakers5sare5sthe5sbeneficiarie
s5sof5sthe5sassurance5sservices.5sDecision5smakers5smay5sor5smay5snot5sbe5sthe5s―client‖5sthat5spays5sthe5sfee5sand5s
may5sor5smay5snot5sbe5sone5sof5sthe5sparties5sto5san5sassertion5sor5sother5sinformation,5sbut5sthey5spersonify5sth
e5sconsumer5sfocus5sof5snew5sand5sdifferent5sprofessional5swork.
1.5 An5sassurance5sservices5sengagement5sis5sany5sassignment5sthat5simproves5sthe5squality5sof5sinformation,5sor
5sits5scontext,5sfor5sdecision5smakers.5sBecause5sinformation5s(e.g.,5sfinancial5sstatements)5sare5sprepared5sby5
smanagers5sof5san5sentity5swho5shave5sauthority5sand5sresponsibility5sfor5sfinancial5ssuccess5sor5sfailure,5san5sou
tsider5smay5sbe5sskeptical5sthat5sthe5sinformation5struly5sis5sobjective,5sfree5sfrom5sbias,5sfully5sinformative,5sa
nd5sfree5sfrom5smaterial5serror,5sintentional5sor5sinadvertent.5 s The5sservices5sof5san5sindependent5sauditor5sh
, Chapter5s015s-
5sAuditing5sand5sAssurance5sServices
elps5sresolve5sthose5sdoubts5sbecause5sthe
Solution Manual For Auditing & Assurance Services
9th Edition by Timothy Louwers, Penelope Bagley
,Chapter5s015s-
5sAuditing5sand5sAssurance5sServices
CHAPTER5s01
Auditing5sand5sAssurance5sServices
LEARNING5sOBJECTIVES
Review5sChec Multiple Exercises,5sProblems,5s
kpoints 5sChoic and5sSimulations
e
1.5sDefine5sinformation5srisk5sand5sexplain5show5s 1,5s2,5s3 29,5s31,5s38 65*
the5sfinancial5sstatement5sauditing5sprocess5sh
elps5sto5sreduce5sthis5srisk,5sthereby5sreducing
5sthe5scost5sof5scapital5sfor5sa5scompany.
2. 4,5s5,5s6,5s7,5s8 23,5s25,5s28,5s44, 60,5s65*
Define5sand5scontrast5sassurance,5sattestation 50
,
and5sfinancial5sstatement5sauditing5sservices.
3. 9,5s10,5s11 36,5s39,5s40,5s41,5s4 62,5s63,5s67,5s68,5s69
Describe5sand5sdefine5sthe5sassertions5sthat 5,
5smanagement5smakes5sabout5sthe5srecognition 46,5s47,5s48,5s49,5s5
,5smeasurement,5spresentation,5sand5sdisclosur 2,
e5sof5sthe5sfinancial5sstatements5sand5sexplain5s 53,5s54,5s55,5s57,5s5
why5sauditors5suse5sthem5sas5sa5sfocal5spoint5sof 8,
5sthe5saudit. 59
4. 12 24,5s37 61
Define5sprofessional5sskepticism5sand5sexpl
ain5sits5skey5scharacteristics.
5. 13,5s14 30,5s42,5s56 72
Describe5sthe5sorganization5sof5spublic5sacco
unting5sfirms5sand5sidentify5sthe5svarious5sservi
ces5sthat5sthey5soffer.
6. 15,5s16,5s17,5s18 26,5s27,5s32,5s34,5s3 64,5s66
Describe5sthe5saudits5sand5sauditors5 5
sin5sgovernmental,5sinternal,5sand5sopera
tional5sauditing.
7. 19,5s20,5s21,5s22 33,5s43,5s51 70,5s71
List5sand5sexplain5sthe5srequirements5sfor5s
becoming5sa5scertified5spublic5saccountant5s(CP
A)5sand5sother5scertifications5savailable5sto5san
5saccounting5sprofessional.
(*)5sItem5srelates5sto5smultiple5slearning5sobjectives
,Chapter5s015s-
5sAuditing5sand5sAssurance5sServices
SOLUTIONS5sFOR5sREVIEW5sCHECKPOINTS
1.1 Business5srisk5sis5sthe5srisk5sthat5san5sentity5swill5sfail5sto5smeet5sits5sbusiness5sobjectives.5sWhen5sasse
ssing5sbusiness5srisk,5sa5sprofessional5smust5sconsider5sall5spossible5sthreats5sto5san5sentity‘s5sgoals5sand5sob
jectives.5sSome5sillustrative5sexamples5sinclude5sthe5srisk5sthat:5s1)5sits5sexisting5scustomers5swill5sstart5sbu
ying5sproducts5sor5sservices5sfrom5sits5sprimary5scompetitors;5s2)5sits5sproduct5slines5swill5sbecome5sobsolet
e;5s3)5sits5staxes5swill5sincrease;5s4)5skey5sgovernment5scontracts5swill5sbe5slost;5s5)5skey5semployees5swill5sle
ave5sthe5sentity;5sand5smany5sother5sexamples5sexist.
1.2 To5shelp5sminimize5sbusiness5srisk5sand5stake5sadvantage5sof5sother5sopportunities5spresented5sin5stoday‘s5sco
mpetitive5sbusiness5senvironment,5sdecision5smakers5ssuch5sas5schief5sexecutive5sofficers5s(CEOs)5sdemand5s
timely,5srelevant,5sand5sreliable5sinformation.5sThere5sare5sat5sleast5sfour5senvironmental5sconditions5sthat5sin
crease5sdemand5sfor5sreliable5sinformation.5sFirst,5scomplexity5swhich5simplies5sthat5sevents5sand5stransactio
ns5sin5stoday‘s5sglobal5sbusiness5senvironment5scan5sbe5scomplicated.5sMost5sinvestors5sdo5snot5shave5sthe5sle
vel5sof5sexpertise5sneeded5sto5sproperly5saccount5sfor5scomplex5stransactions.5sSecond5sis5sremoteness5swhich
5simplies5sthat5sdecision5smakers5sare5soften5sseparated5sfrom5scurrent5sand5spotential5sbusiness5srelationships5s
due5sto5sdistance5sand5stime.5sFor5sexample,5sinvestors5smay5snot5sbe5sable5sto5svisit5sdistant5slocations5sto5sche
ck5sup5son5stheir5sinvestments.5sThird5sis5stime-
sensitivity5swhich5simplies5sthat5sin5stoday‘s5seconomic5senvironment,5sinvestors5sand5sother5susers5sof5sfinan
cial5sstatements5sneed5sto5smake5sdecisions5smore5srapidly5sthan5sever5sbefore.5sAs5sa5sresult,5sthe5sability5sto5
spromptly5sobtain5shigh-
quality5sinformation5sis5sessential.5sFourth5sis5sa5sconsequence5swhich5simplies5sthat5sdecisions5smay5svery5s
well5sinvolve5ssignificant5sinvestments.5 s As5sa5sresult,5sthe5sconsequences5scan5sbe5ssevere5sif5sinformation5s
cannot5sbe5sobtained
1.3 Of5sall5sthe5sdifferent5srisks5sdiscussed5sin5sthe5schapter5sup5sto5sthis5spoint,5sinformation5srisk5sis5sthe5sone5st
hat5sis5smost5slikely5sto5screate5sthe5sdemand5sfor5sindependent5sand5sobjective5sassurance5sservices5sis5sinfor
mation5srisk5sor5sthe5sprobability5sthat5sthe5sinformation5scirculated5sby5san5sentity5swill5sbe5sfalse5sor5smislea
ding.5sBecause5sthe5sprimary5ssource5sof5sinformation5sfor5sinvestors5sand5screditors5sis5sthe5scompany5sitself
,5san5sincentive5sexists5sfor5sthat5scompany‘s5smanagement5sto5smake5stheir5sbusiness5sor5sservice5sappear5sto5s
be5sbetter5sthan5sit5sactually5smay5sbe,5sto5sput5stheir5sbest5sfoot5sforward.5sAs5sa5sresult,5spreparers5sand5sissue
rs5sof5sfinancial5sinformation5s(directors,5smanagers,5saccountants,5sand5sother5speople5semployed5sin5sa5sbusi
ness)5smight5sbenefit5sby5sgiving5sfalse,5smisleading,5sor5soverly5soptimistic5sinformation.5sThis5spotential5sc
onflict5sof5sinterest5sbetween5sinformation5sproviders5sand5susers5swhich5sprovides5sthe5sunderlying5sbasis5sf
or5sthe5sdemand5sfor5sreliable5sinformation.
1.4 The5sfour5smajor5selements5sof5sthe5sbroad5sdefinition5sof5sassurance5sservices5sare
Independence.5 s CPAs5swant5sto5spreserve5stheir5sreputation5sand5scompetitive5sadvantage5sby5salways5spres
erving5sintegrity5sand5sobjectivity5swhen5sperforming5sassurance5sservices.
Professional5sservices.5sVirtually5sall5swork5sperformed5sby5sCPAs5sis5sdefined5sas5s―professional5sservices‖5s
as5slong5sas5sit5sinvolves5ssome5selement5sof5sjudgment5sbased5son5seducation5sand5sexperience.
Improving5sthe5squality5sof5sinformation5sor5sits5scontext.5sThe5semphasis5sis5son5s―information,‖5sCPAs‘5stra
ditional5sarea5sof5sexpertise.5sCPAs5scan5senhance5squality5sby5sassuring5susers5sabout5sthe5sreliability5sand5sr
elevance5sof5sinformation,5sand5sthese5stwo5sfeatures5sare5sclosely5srelated5sto5sthe5sfamiliar5scredibility-
lending5sproducts5sof5sattestation5sand5saudit5sservices.5s―Context‖5sis5srelevance5sin5sa5sdifferent5slight.5sFor5sas
surance5sservices,5simproving5sthe5scontext5sof5sinformation5srefers5sto5simproving5sits5susefulness5swhen5starg
eted5sto5sparticular5sdecision5smakers5sin5sthe5ssurroundings5sof5sparticular5sdecision5sproblems.
For5sdecision5smakers.5sAs5sthe5s―consumers‖5sof5sassurance5sservices,5sdecision5smakers5sare5sthe5sbeneficiarie
s5sof5sthe5sassurance5sservices.5sDecision5smakers5smay5sor5smay5snot5sbe5sthe5s―client‖5sthat5spays5sthe5sfee5sand5s
may5sor5smay5snot5sbe5sone5sof5sthe5sparties5sto5san5sassertion5sor5sother5sinformation,5sbut5sthey5spersonify5sth
e5sconsumer5sfocus5sof5snew5sand5sdifferent5sprofessional5swork.
1.5 An5sassurance5sservices5sengagement5sis5sany5sassignment5sthat5simproves5sthe5squality5sof5sinformation,5sor
5sits5scontext,5sfor5sdecision5smakers.5sBecause5sinformation5s(e.g.,5sfinancial5sstatements)5sare5sprepared5sby5
smanagers5sof5san5sentity5swho5shave5sauthority5sand5sresponsibility5sfor5sfinancial5ssuccess5sor5sfailure,5san5sou
tsider5smay5sbe5sskeptical5sthat5sthe5sinformation5struly5sis5sobjective,5sfree5sfrom5sbias,5sfully5sinformative,5sa
nd5sfree5sfrom5smaterial5serror,5sintentional5sor5sinadvertent.5 s The5sservices5sof5san5sindependent5sauditor5sh
, Chapter5s015s-
5sAuditing5sand5sAssurance5sServices
elps5sresolve5sthose5sdoubts5sbecause5sthe
