Solution Manual
Auditing And Assurance Services,
By Timothy Louwers, Penelope Bagley,
9th Edition
,Chapter 01
Auditing And Assurance Services
Learning Objectives
Review Multipl Exercises,
Checkpoints e Problems, And
Choice Simulations
1. Define Information Risk And Explain How 1, 2, 3 29, 31, 38 65*
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 Assertions That 9, 10, 11 36, 39, 40, 41, 45, 62, 63, 67, 68, 69
Management Makes About The 46, 47, 48, 49, 52,
Recognition, Measurement, Presentation, 53, 54, 55, 57, 58,
And Disclosure Of The Financial 59
Statements And Explain Why Auditors Use
Them As A Focal Point Of The Audit.
4. Define Professional Skepticism And Explain 12 24, 37 61
Its Key Characteristics.
5. Describe The Organization Of Public 13, 14 30, 42, 56 72
Accounting Firms And Identify The Various
Services That They Offer.
6. Describe The Audits And Auditors 15, 16, 17, 18 26, 27, 32, 34, 35 64, 66
In Governmental, Internal, And
Operational Auditing.
7. List And Explain The Requirements For 19, 20, 21, 22 33, 43, 51 70, 71
Becoming A Certified Public Accountant
(Cpa) And Other Certifications Available
To An Accounting Professional.
(*) Item Relates To Multiple Learning Objectives
,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 Reliable Information. 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, Investors May
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 Put Their 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 Overly Optimistic
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
Preserving Integrity 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, Improving The Context Of Information Refers To Improving Its
Usefulness When Targeted To Particular Decision Makers In The 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 Skeptical That 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
Auditing And Assurance Services,
By Timothy Louwers, Penelope Bagley,
9th Edition
,Chapter 01
Auditing And Assurance Services
Learning Objectives
Review Multipl Exercises,
Checkpoints e Problems, And
Choice Simulations
1. Define Information Risk And Explain How 1, 2, 3 29, 31, 38 65*
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 Assertions That 9, 10, 11 36, 39, 40, 41, 45, 62, 63, 67, 68, 69
Management Makes About The 46, 47, 48, 49, 52,
Recognition, Measurement, Presentation, 53, 54, 55, 57, 58,
And Disclosure Of The Financial 59
Statements And Explain Why Auditors Use
Them As A Focal Point Of The Audit.
4. Define Professional Skepticism And Explain 12 24, 37 61
Its Key Characteristics.
5. Describe The Organization Of Public 13, 14 30, 42, 56 72
Accounting Firms And Identify The Various
Services That They Offer.
6. Describe The Audits And Auditors 15, 16, 17, 18 26, 27, 32, 34, 35 64, 66
In Governmental, Internal, And
Operational Auditing.
7. List And Explain The Requirements For 19, 20, 21, 22 33, 43, 51 70, 71
Becoming A Certified Public Accountant
(Cpa) And Other Certifications Available
To An Accounting Professional.
(*) Item Relates To Multiple Learning Objectives
,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 Reliable Information. 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, Investors May
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 Put Their 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 Overly Optimistic
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
Preserving Integrity 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, Improving The Context Of Information Refers To Improving Its
Usefulness When Targeted To Particular Decision Makers In The 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 Skeptical That 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
