SOLUTION MANUAL
AUDITING ASSUARANCE SERVICES
, CHAPTER 01
Auditing And Assurance Services
LEARNING OBJECTIVES
Review Multiple Exercises, Problems,
Checkpoints Choice And 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, Attestation, 4, 5, 6, 7, 8 23, 25, 28, 44, 60, 65*
And FINANCIAL STATEMENT Auditing 50
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 Recognition, 46, 47, 48, 49, 52,
Measurement, Presentation, And Disclosure 53, 54, 55, 57, 58,
Of The FINANCIAL STATEMENTs And 59
Explain Why Auditors Use Them As A Focal
Point Of The Audit.
4. Define Professional Skepticism And Explain 12 24, 37 61
ItsKey Characteristics.
5. Describe The Organization Of Public 13, 14 30, 42, 56 72
ACCOUNTINGFirms And Identify The
Various Services That They Offer.
6. Describe The Audits And Auditors In 15, 16, 17, 18 26, 27, 32, 34, 35 64, 66
Governmental, Internal, And
OperationalAuditing.
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 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 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
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 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 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
, Auditor‘S Success Depends Upon His Or Her Independent, Objective, And Competent Assessment Of
The Information (E.G., The Conformity Of The FINANCIAL STATEMENTs With The Appropriate
Reporting Framework). The Independent Auditor‘S Role Is To Lend Credibility To The Information;
Hence, The Outsider Will Likely SeekHis Or Her Independent Opinion About The FINANCIAL
STATEMENTs.
1.6 An Attestation Engagement Is ―An Engagement In Which A Practitioner Is Engaged To Issue Or Does
Issue AWritten Communication That Expresses A Conclusion About The Reliability Of A Written
Assertion That Is The Responsibility Of Another Party‖ (SSAE 10, AT 101.01). To Attest Means To
Lend Credibility Or To Vouch ForThe Truth Or Accuracy Of The STATEMENTs That One Party
Makes To Another. The Attest Function Is A Term Often Applied To The Activities Of Independent Cpas
When Acting As Auditors Of FINANCIAL STATEMENTs.
1.7 An Assurance Service Engagement Is One That Improves The Quality Of Information, Or Its Context, For
Decision Makers. Thus, An Attestation Service Engagement Is One Type Of An Assurance Service.
Another Way Of Thinking About The Issue Is To Remember That The FINANCIAL STATEMENT Audit
Engagement Is One Type OfAn Attestation Service. Please See Exhibit 1.3 In The Text Which Depicts
The Relationship Among Assurance, Attestation, And Auditing Engagements.
1.8 According To The American ACCOUNTING Association, ―Auditing Is A Systematic Process Of
Objectively Obtaining And Evaluating Evidence Regarding Assertions About Economic Actions And
Events To Ascertain The Degree Of Correspondence Between The Assertions And Established Criteria
And Communicating The Results To Interested Users.‖ In Effect, Auditors Add Reliability To The
Information That Is Provided To Interested Users. Of Course, This Definition Is Focused On An External
Reporting Context. Students May Also Discuss How Governmental And Internal Auditors Operate As
Well.
In Response To ―What Do Auditors Do?‖ Students Can Respond By Stating That Auditors (1) Obtain And
Evaluate Evidence About Assertions Made By Management About Economic Actions And Events, (2)
Ascertain The Degree Of Correspondence Between The Assertions And The Appropriate Reporting
Framework, And (3) Issue AnAudit Report (Opinion). Students Can Also Respond More Generally By
Stating That Auditors Essentially Lend Credibility To The FINANCIAL STATEMENTs Presented By
Management.
1.9 FINANCIAL ACCOUNTING Refers To The Process Of Recording, Classifying, Summarizing, And
Reporting About A Company‘S Assets, Liabilities, Capital, Revenues, And Expenses In The FINANCIAL
STATEMENTs In Accordance WithThe Applicable FINANCIAL Reporting Framework (E.G., GAAP).
In So Doing, The Management Team Is Making Several Assertions About The FINANCIAL
STATEMENTs. The FINANCIAL ACCOUNTING Process Is The Responsibility Of The Management
Team.
FINANCIAL STATEMENT Auditing Refers To The Process Whereby Professional Auditors Gather
Evidence Related To The Assertions That Management Makes In The FINANCIAL STATEMENTs,
Evaluates The Evidence And Concludes On The Fairness Of The FINANCIAL STATEMENTs In A
Report.
They Differ Because Accountants Produce The FINANCIAL STATEMENTs In Accordance With The
Applicable FINANCIAL Reporting Framework. After This Is Complete, FINANCIAL STATEMENT
Auditors Then Perform Procedures To Ascertain Whether The FINANCIAL STATEMENTs Have Been
Prepared In Accordance With The Applicable FINANCIAL Reporting Framework.
1.10 The Two Major Classifications Of ASB Assertions With Several Assertions In Each
Classification Are:Assertions About Classes Of Transactions And Events, And Related
Disclosures
Occurrence Assertion: The Objective Is To Establish With Evidence That Transactions Giving Rise To
Assets, Liabilities, Sales, And Expenses Occurred. Key Questions Include ―Did The Recorded Sales
Transactions Really Occur?‖
