Chapter 01 - Auditing and Assurance Services
Solution Manual For Auditing & Assurance Services
9th Edition by Timothy Louwers, Penelope Bagley
,Chapter 01 - Auditing and Assurance Services
CHAPTER 01
Auditing and Assurance Services
LEARNING OBJECTIVES
Review Multiple Exercises, Problems,
Checkpoints Choice and Simulations
1. Define information risk and explain how the 1, 2, 3 29, 31, 38 65*
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 services. 50
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 of 53, 54, 55, 57, 58,
the financial statements and explain why 59
auditors use them as a focal point of the audit.
4. Define professional skepticism and explain its 12 24, 37 61
key characteristics.
5. Describe the organization of public accounting 13, 14 30, 42, 56 72
firms 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 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
,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 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
, Chapter 01 - Auditing and Assurance Services
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 seek
his 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 a
written 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 for
the 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 of
an 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 an
audit 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 with
the 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?‖
Completeness assertion: The objective is to establish with evidence that all transactions of the period that
should be are included in the financial statements (including footnotes). Completeness also refers to proper
inclusion in financial statements of all revenue, expense, and related disclosures. Key questions related to
