Solution Manual
Louwers, Auditing And Assurance Services
9th Edition,
,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 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 53, 54, 55, 57, 58,
Of The Financial Statements And Explain 59
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 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
,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
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
