Chapter160116-
16Auditing16and16Assurance16Services
Solution Manual For Auditing & Assurance Services
9th Edition by Timothy Louwers, Penelope Bagley
,Chapter160116-
16Auditing16and16Assurance16Services
CHAPTER1601
Auditing16and16Assurance16Services
LEARNING16OBJECTIVES
Review16Che Multiple Exercises,16Problems,1
ckpoints 16Choic 6and16Simulations
e
1.16Define16information16risk16and16explain16h 1,162,163 29,1631,1638 65*
ow16the16financial16statement16auditing16pr
ocess16helps16to16reduce16this16risk,16there
by16reducing16the16cost16of16capital16for16
a16company.
2. 4,165,166,167,168 23,1625,1628,1644, 60,1665*
Define16and16contrast16assurance,16attestati 50
on,
and16financial16statement16auditing16services.
3. 9,1610,1611 36,1639,1640,1641,1 62,1663,1667,1668,166
Describe16and16define16the16assertions16t 645, 9
hat16management16makes16about16the16reco 46,1647,1648,1649,1
gnition,16measurement,16presentation,16and1 652,
6disclosure16of16the16financial16statements16 53,1654,1655,1657,1
and16explain16why16auditors16use16them16as 658,
16a16focal16point16of16the16audit. 59
4. 12 24,1637 61
Define16professional16skepticism16and16ex
plain16its16key16characteristics.
5. 13,1614 30,1642,1656 72
Describe16the16organization16of16public16a
ccounting16firms16and16identify16the16variou
s16services16that16they16offer.
6. 15,1616,1617,161 26,1627,1632,1634,1 64,1666
Describe16the16audits16and16audito 8 635
rs16in16governmental,16internal,16and16
operational16auditing.
7. 19,1620,1621,162 33,1643,1651 70,1671
List16and16explain16the16requirements16f 2
or16becoming16a16certified16public16accounta
nt16(CPA)16and16other16certifications16avail
able16to16an16accounting16professional.
(*)16Item16relates16to16multiple16learning16objectives
,Chapter160116-
16Auditing16and16Assurance16Services
SOLUTIONS16FOR16REVIEW16CHECKPOINTS
1.1 Business16risk16is16the16risk16that16an16entity16will16fail16to16meet16its16business16objectives.16
When16assessing16business16risk,16a16professional16must16consider16all16possible16threats16to16an16en
tity‘s16goals16and16objectives.16Some16illustrative16examples16include16the16risk16that:161)16its16existi
ng16customers16will16start16buying16products16or16services16from16its16primary16competitors;162)16its
16product16lines16will16become16obsolete;163)16its16taxes16will16increase;164)16key16government16cont
racts16will16be16lost;165)16key16employees16will16leave16the16entity;16and16many16other16examples16ex
ist.
1.2 To16help16minimize16business16risk16and16take16advantage16of16other16opportunities16presented16in16to
day‘s16competitive16business16environment,16decision16makers16such16as16chief16executive16officers16(
CEOs)16demand16timely,16relevant,16and16reliable16information.16There16are16at16least16four16environm
ental16conditions16that16increase16demand16for16reliable16information.16First,16complexity16which16impl
ies16that16events16and16transactions16in16today‘s16global16business16environment16can16be16complicated
.16Most16investors16do16not16have16the16level16of16expertise16needed16to16properly16account16for16com
plex16transactions.16Second16is16remoteness16which16implies16that16decision16makers16are16often16sepa
rated16from16current16and16potential16business16relationships16due16to16distance16and16time.16For16examp
le,16investors16may16not16be16able16to16visit16distant16locations16to16check16up16on16their16investments.
16Third16is16time-
sensitivity16which16implies16that16in16today‘s16economic16environment,16investors16and16other16users16
of16financial16statements16need16to16make16decisions16more16rapidly16than16ever16before.16As16a16resu
lt,16the16ability16to16promptly16obtain16high-
quality16information16is16essential.16Fourth16is16a16consequence16which16implies16that16decisions16may
16very16well16involve16significant16investments.1 6 As16a16result,16the16consequences16can16be16severe1
6if16information16cannot16be16obtained
1.3 Of16all16the16different16risks16discussed16in16the16chapter16up16to16this16point,16information16risk16is16
the16one16that16is16most16likely16to16create16the16demand16for16independent16and16objective16assuranc
e16services16is16information16risk16or16the16probability16that16the16information16circulated16by16an16ent
ity16will16be16false16or16misleading.16Because16the16primary16source16of16information16for16investors1
6and16creditors16is16the16company16itself,16an16incentive16exists16for16that16company‘s16management16
to16make16their16business16or16service16appear16to16be16better16than16it16actually16may16be,16to16put16th
eir16best16foot16forward.16As16a16result,16preparers16and16issuers16of16financial16information16(director
s,16managers,16accountants,16and16other16people16employed16in16a16business)16might16benefit16by16givi
ng16false,16misleading,16or16overly16optimistic16information.16This16potential16conflict16of16interest16b
etween16information16providers16and16users16which16provides16the16underlying16basis16for16the16dema
nd16for16reliable16information.
1.4 The16four16major16elements16of16the16broad16definition16of16assurance16services16are
Independence.1 6 CPAs16want16to16preserve16their16reputation16and16competitive16advantage16by16alwa
ys16preserving16integrity16and16objectivity16when16performing16assurance16services.
Professional16services.16Virtually16all16work16performed16by16CPAs16is16defined16as16―professional16s
ervices‖16as16long16as16it16involves16some16element16of16judgment16based16on16education16and16exper
ience.
Improving16the16quality16of16information16or16its16context.16The16emphasis16is16on16―information,‖16C
PAs‘16traditional16area16of16expertise.16CPAs16can16enhance16quality16by16assuring16users16about16the1
6reliability16and16relevance16of16information,16and16these16two16features16are16closely16related16to16the
16familiar16credibility-
lending16products16of16attestation16and16audit16services.16―Context‖16is16relevance16in16a16different16ligh
t.16For16assurance16services,16improving16the16context16of16information16refers16to16improving16its16usef
ulness16when16targeted16to16particular16decision16makers16in16the16surroundings16of16particular16decisio
n16problems.
For16decision16makers.16As16the16―consumers‖16of16assurance16services,16decision16makers16are16the16be
neficiaries16of16the16assurance16services.16Decision16makers16may16or16may16not16be16the16―client‖16that1
6pays16the16fee16and16may16or16may16not16be16one16of16the16parties16to16an16assertion16or16other16infor
mation,16but16they16personify16the16consumer16focus16of16new16and16different16professional16work.
, Chapter160116-
16Auditing16and16Assurance16Services
1.5 An16assurance16services16engagement16is16any16assignment16that16improves16the16quality16of16informa
tion,16or16its16context,16for16decision16makers.16Because16information16(e.g.,16financial16statements)16a
re16prepared16by16managers16of16an16entity16who16have16authority16and16responsibility16for16financial16
success16or16failure,16an16outsider16may16be16skeptical16that16the16information16truly16is16objective,16fr
ee16from16bias,16fully16informative,16and16free16from16material16error,16intentional16or16inadvertent.1 6
The16services16of16an16independent16auditor16helps16resolve16those16doubts16because16the
16Auditing16and16Assurance16Services
Solution Manual For Auditing & Assurance Services
9th Edition by Timothy Louwers, Penelope Bagley
,Chapter160116-
16Auditing16and16Assurance16Services
CHAPTER1601
Auditing16and16Assurance16Services
LEARNING16OBJECTIVES
Review16Che Multiple Exercises,16Problems,1
ckpoints 16Choic 6and16Simulations
e
1.16Define16information16risk16and16explain16h 1,162,163 29,1631,1638 65*
ow16the16financial16statement16auditing16pr
ocess16helps16to16reduce16this16risk,16there
by16reducing16the16cost16of16capital16for16
a16company.
2. 4,165,166,167,168 23,1625,1628,1644, 60,1665*
Define16and16contrast16assurance,16attestati 50
on,
and16financial16statement16auditing16services.
3. 9,1610,1611 36,1639,1640,1641,1 62,1663,1667,1668,166
Describe16and16define16the16assertions16t 645, 9
hat16management16makes16about16the16reco 46,1647,1648,1649,1
gnition,16measurement,16presentation,16and1 652,
6disclosure16of16the16financial16statements16 53,1654,1655,1657,1
and16explain16why16auditors16use16them16as 658,
16a16focal16point16of16the16audit. 59
4. 12 24,1637 61
Define16professional16skepticism16and16ex
plain16its16key16characteristics.
5. 13,1614 30,1642,1656 72
Describe16the16organization16of16public16a
ccounting16firms16and16identify16the16variou
s16services16that16they16offer.
6. 15,1616,1617,161 26,1627,1632,1634,1 64,1666
Describe16the16audits16and16audito 8 635
rs16in16governmental,16internal,16and16
operational16auditing.
7. 19,1620,1621,162 33,1643,1651 70,1671
List16and16explain16the16requirements16f 2
or16becoming16a16certified16public16accounta
nt16(CPA)16and16other16certifications16avail
able16to16an16accounting16professional.
(*)16Item16relates16to16multiple16learning16objectives
,Chapter160116-
16Auditing16and16Assurance16Services
SOLUTIONS16FOR16REVIEW16CHECKPOINTS
1.1 Business16risk16is16the16risk16that16an16entity16will16fail16to16meet16its16business16objectives.16
When16assessing16business16risk,16a16professional16must16consider16all16possible16threats16to16an16en
tity‘s16goals16and16objectives.16Some16illustrative16examples16include16the16risk16that:161)16its16existi
ng16customers16will16start16buying16products16or16services16from16its16primary16competitors;162)16its
16product16lines16will16become16obsolete;163)16its16taxes16will16increase;164)16key16government16cont
racts16will16be16lost;165)16key16employees16will16leave16the16entity;16and16many16other16examples16ex
ist.
1.2 To16help16minimize16business16risk16and16take16advantage16of16other16opportunities16presented16in16to
day‘s16competitive16business16environment,16decision16makers16such16as16chief16executive16officers16(
CEOs)16demand16timely,16relevant,16and16reliable16information.16There16are16at16least16four16environm
ental16conditions16that16increase16demand16for16reliable16information.16First,16complexity16which16impl
ies16that16events16and16transactions16in16today‘s16global16business16environment16can16be16complicated
.16Most16investors16do16not16have16the16level16of16expertise16needed16to16properly16account16for16com
plex16transactions.16Second16is16remoteness16which16implies16that16decision16makers16are16often16sepa
rated16from16current16and16potential16business16relationships16due16to16distance16and16time.16For16examp
le,16investors16may16not16be16able16to16visit16distant16locations16to16check16up16on16their16investments.
16Third16is16time-
sensitivity16which16implies16that16in16today‘s16economic16environment,16investors16and16other16users16
of16financial16statements16need16to16make16decisions16more16rapidly16than16ever16before.16As16a16resu
lt,16the16ability16to16promptly16obtain16high-
quality16information16is16essential.16Fourth16is16a16consequence16which16implies16that16decisions16may
16very16well16involve16significant16investments.1 6 As16a16result,16the16consequences16can16be16severe1
6if16information16cannot16be16obtained
1.3 Of16all16the16different16risks16discussed16in16the16chapter16up16to16this16point,16information16risk16is16
the16one16that16is16most16likely16to16create16the16demand16for16independent16and16objective16assuranc
e16services16is16information16risk16or16the16probability16that16the16information16circulated16by16an16ent
ity16will16be16false16or16misleading.16Because16the16primary16source16of16information16for16investors1
6and16creditors16is16the16company16itself,16an16incentive16exists16for16that16company‘s16management16
to16make16their16business16or16service16appear16to16be16better16than16it16actually16may16be,16to16put16th
eir16best16foot16forward.16As16a16result,16preparers16and16issuers16of16financial16information16(director
s,16managers,16accountants,16and16other16people16employed16in16a16business)16might16benefit16by16givi
ng16false,16misleading,16or16overly16optimistic16information.16This16potential16conflict16of16interest16b
etween16information16providers16and16users16which16provides16the16underlying16basis16for16the16dema
nd16for16reliable16information.
1.4 The16four16major16elements16of16the16broad16definition16of16assurance16services16are
Independence.1 6 CPAs16want16to16preserve16their16reputation16and16competitive16advantage16by16alwa
ys16preserving16integrity16and16objectivity16when16performing16assurance16services.
Professional16services.16Virtually16all16work16performed16by16CPAs16is16defined16as16―professional16s
ervices‖16as16long16as16it16involves16some16element16of16judgment16based16on16education16and16exper
ience.
Improving16the16quality16of16information16or16its16context.16The16emphasis16is16on16―information,‖16C
PAs‘16traditional16area16of16expertise.16CPAs16can16enhance16quality16by16assuring16users16about16the1
6reliability16and16relevance16of16information,16and16these16two16features16are16closely16related16to16the
16familiar16credibility-
lending16products16of16attestation16and16audit16services.16―Context‖16is16relevance16in16a16different16ligh
t.16For16assurance16services,16improving16the16context16of16information16refers16to16improving16its16usef
ulness16when16targeted16to16particular16decision16makers16in16the16surroundings16of16particular16decisio
n16problems.
For16decision16makers.16As16the16―consumers‖16of16assurance16services,16decision16makers16are16the16be
neficiaries16of16the16assurance16services.16Decision16makers16may16or16may16not16be16the16―client‖16that1
6pays16the16fee16and16may16or16may16not16be16one16of16the16parties16to16an16assertion16or16other16infor
mation,16but16they16personify16the16consumer16focus16of16new16and16different16professional16work.
, Chapter160116-
16Auditing16and16Assurance16Services
1.5 An16assurance16services16engagement16is16any16assignment16that16improves16the16quality16of16informa
tion,16or16its16context,16for16decision16makers.16Because16information16(e.g.,16financial16statements)16a
re16prepared16by16managers16of16an16entity16who16have16authority16and16responsibility16for16financial16
success16or16failure,16an16outsider16may16be16skeptical16that16the16information16truly16is16objective,16fr
ee16from16bias,16fully16informative,16and16free16from16material16error,16intentional16or16inadvertent.1 6
The16services16of16an16independent16auditor16helps16resolve16those16doubts16because16the
