Solution Manual For Auditing & Assurance Services, 9th Edition by Timothy Louwers (All Chapters Complete)

Solution Manual For Auditing & Assurance Services, 9th Edition by Timothy Louwers, Penelope Bagley (All Chapters Complete) 1.14 There are three major areas of public accounting services • Financial Statement Audit and other types of Assurance services. • Tax services. • Consulting and Advisory services. 1.15 Operational auditing is the study of business operations for the purpose of making recommendations about the economic and efficient use of resources, effective achievement of business objectives, and compliance with company policies. The AICPA views operational auditing as a type of consulting or advisory service offered by public accounting firms. 1.16 The GAGAS issued by the GAO is very clear on this point. Specifically, the elements of expanded-scope auditing include (1) financial and compliance audits, (2) economy and efficiency audits, and (3) program results audits. 1.17 Compliance auditing involves a study of an organization‘s policies, procedures, and, ultimately, its performance in following applicable laws, rules, and regulations. An example would be a school district‘s policies and procedures related to a meal program for its students. In these types of situations, there would be a demand for a compliance audit which would be designed to ensure that the school district complies with the stated policies and procedures of the program. 1.18 Other kinds of auditors include Internal Revenue Service auditors who are required to audit the taxable income and deductions taken by taxpayers in tax returns and determine their correspondence with the standards found in the Internal Revenue Code. They also might have to audit for fraud and tax evasion. Other examples include state and federal bank examiners who are responsible for auditing banks, savings and loan associations, and other financial institutions for evidence of solvency and compliance with banking and other related laws and regulations. SOLUTIONS FOR MULTIPLE CHOICE-QUESTIONS 1.23 a. Incorrect This is an attestation to the prize promoter‘s claims. Because attestation and audit engagements are subsets of assurance engagements, this is an example of an assurance engagement. However, each response is an example of an assurance engagement; thus, the answer is (e). b. Incorrect This is an audit engagement to give an opinion on financial statements. Because attestation and audit engagements are subsets of assurance engagements, this is an example of an assurance engagement. However, each response is an example of an assurance engagement; thus, the answer is (e). c. Incorrect This is an assurance engagement on a newspaper‘s circulation data. Because attestation and audit engagements are subsets of assurance engagements, all are assurance engagements. Thus, the answer is (e). d. Incorrect This is an assurance engagement on the performance of golf balls. Because attestation and audit engagements are subsets of assurance engagements, all are assurance engagements. Thus, the answer is (e). e. Correct Because attestation and audit engagements are subsets of assurance engagements, all of the responses are examples of assurance engagements. 1.24 a. Correct The management team is generally trying to put its ―best foot forward‖ when reporting their financial statement information. The auditor must make sure that the management team does not violate the accounting rules when doing so. IN essence, this statement characterizes why professional skepticism is required to be exercised by auditors. Chapter 01 - Auditing and Assurance Services b. Incorrect ―Exclusively in the capacity of an auditor‖ is not an idea that relates to an attitude of professional skepticism. c. Incorrect Professional obligations are not related to an attitude of professional skepticism. d. Incorrect While it is true that financial statement and financial data are verifiable, this does not related to the reasons why an auditor needs to begin an audit with an attitude of professional skepticism. 1.25 a. Incorrect While work on a forecast would potentially be covered by the attestation standards, the auditors must provide assurance about some type of management assertion in an attestation engagement. b. Correct This is the basic definition of an attestation service, as articulated in the book and the professional standards. c. Incorrect Since there is no assurance about any management assertion when preparing a tax return with information that has not been reviewed or audited, this type of tax work is not considered an attestation service. d. Incorrect Since there is no assurance about any management assertion when giving expert testimony about particular facts in an income tax case, this type of work is not considered an attestation service. 1.19 The purpose of the continuing education requirement is to ensure that CPAs in practice maintain their expertise at a sufficiently high level in light of evolving business conditions and new regulations. For CPAs in public practice, 120 hours of continuing education is required every three years with no less than 20 hours in any one year. For CPAs not in public practice, the general requirement is 120 or fewer (90 in some states) every three years. 1.20 Not everything can be learned in the classroom, and some on-the-job experience is helpful before a person is able to be held out to the public as a licensed professional. Also, the experience requirement tends to ―weed out‖ those individuals who are just looking to become certified without ever being involved in actual accounting work. 1.21 State boards administer the state accountancy laws and are responsible for ensuring that candidates have passed the CPA examination and satisfied the state requirements for education and experience before being awarded a CPA certificate. At the same time, new CPAs must pay a fee to obtain a state license to practice. Thereafter, state boards of accountancy regulate the behavior of CPAs under their jurisdiction (enforcing state rules of conduct) and supervise the continuing education requirements. As a result, the state boards play an important role in the CPA certification and licensure process. 1.22 After becoming a CPA licensed in one state, a person can obtain a CPA certificate and license in another state. The process is known as reciprocity. CPAs can file the proper application with another state board of accountancy, meet the state‘s requirements, and obtain another CPA certificate. Many CPAs hold certificates and licenses in several states. From a global perspective, individuals must be licensed in each country. Similar to CPAs in the United States, chartered accountants (CAs) practice in Australia, Canada, Great Britain, and India. 1.26 a. Incorrect The objective of environmental auditing is to help achieve and maintain compliance with environmental laws and regulations and to help identify and correct unregulated environmental hazards. This answer is therefore incorrect. b. Incorrect The objective of financial auditing is to obtain assurance on the conformity of financial statements with generally accepted accounting principles. This answer is therefore incorrect. Chapter 01 - Auditing and Assurance Services c. Incorrect The objective of compliance auditing is the entity‘s compliance with laws and regulations. This answer is therefore incorrect. d. Correct Operational auditing refers to the study of business operations for the purpose of making recommendations about the economic and efficient use of resources, effective achievement of business objectives, and compliance with company policies. 1.27 a. Incorrect This is not the primary objective of an operational audit. However, while completing an operational audit, a professionally skeptical auditor should still be concerned about compliance with financial accounting standards. b. Correct This statement exactly characterizes the goal of an operational audit. In addition, the statement is part of the basic definition of operational auditing. c. Incorrect An operational audit does not focus on the financial statements of an entity. d. Incorrect While analytical tools and skills may be used during an operational audit, they are also a very important aspect of financial auditing. 1.28 a. Correct According to the AICPA definition found in AU 200 (paragraph 11) and in your book, ―the purpose of an audit is to enhance the degree of confidence that intended users can place in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. As a result, this is the correct response. b. Incorrect The AICPA definition is not limited to the FASB for the appropriate reporting framework that is used as the benchmark when completing an audit. The definition is general enough to include other financial reporting frameworks as well, such as IFRS. c. Incorrect The AICPA definition does not focus on the SEC as an appropriate reporting framework to be used as a benchmark when completing an audit. The definition is focused on the ―applicable‖ financial reporting framework, such as GAAP or IFRS. The reference to the SEC is wrong. d. Incorrect This phrase is not referenced in the AICPA definition found in the auditing standards. This phrase is found in the AAA definition of the audit found in this book. 1.29 a. Incorrect While complexity is an important condition that increases the demand for reliable information, the potential conflict of interest between management and the bank is far and away the biggest factor driving the demand for audited financial statements. b. Incorrect While remoteness is an important condition that increases the demand for reliable information, the potential conflict of interest between management and the bank is far and away the biggest factor driving the demand for audited financial statements. c. Incorrect While the consequences of making a bad decision are an important condition that increases the demand for reliable information, the potential conflict of interest between management and the bank is far and away the biggest factor driving the demand for audited financial statements. d. Correct The potential conflict of interest between management and the bank is far and away the biggest factor driving the demand for audited financial statements. Consider for example a company that was desperate for cash in order to survive. Would it be possible that the management team would present unreliable financial statements to the bank in order to get a desperation loan? Because of this possibility, a financial statement audit is needed to add credibility to the financial statements. 1.30 a. Incorrect According to Section 201 of the Sarbanes-Oxley Act, bookkeeping services are prohibited. b. Incorrect According to Section 201 of the Sarbanes-Oxley Act, internal audit services are prohibited. c. Incorrect According to Section 201 of the Sarbanes-Oxley Act, valuation services are prohibited. Chapter 01 - Auditing and Assurance Services d. Correct Sarbanes-Oxley prohibits the provision of all of the services listed in answers a, b, and c; therefore, d (all of the above) is the best response. 1.31 a. Incorrect Financial statement auditors do not reduce business risk. b. Correct After completing a financial statement audit, information risk has been reduced for investors. c. Incorrect Complexity creates demand for accounting services but is not an objective of the financial statement audit. d. Incorrect Auditors do not directly control the timeliness of financial statements. Management must first provide the information to be audited. 1.32 a. Incorrect A financial statement opinion is the objective of a financial statement audit, not a compliance audit. b. Incorrect A basis for a report on internal control is the objective of an internal control audit under Section 404 of the Sarbanes-Oxley Act, not a compliance audit. c. Incorrect A study of effective and efficient resources is the objective of an operational audit, not a compliance audit. d. Correct A compliance audit refers to procedures that are designed to ascertain that the company‘s personnel are following laws, rules, regulations, and policies. 1.33 a. Incorrect While successful completion of the Uniform CPA is necessary to be licensed as a CPA, a candidate also requires the proper experience and proper education. Thus, letter (d.) is correct. b. Incorrect While proper experience is necessary to be licensed as a CPA, a candidate also requires the successful completion of the Uniform CPA and proper education. Thus, letter (d.) is correct. c. Incorrect While proper education is necessary to be licensed as a CPA, a candidate also requires the successful completion of the Uniform CPA and proper experience. Thus, letter (d.) is correct. d. Correct A candidate requires the successful completion of the Uniform CPA, proper experience and proper education to be licensed as a CPA. 1.34 a. Incorrect The GIAA is not responsible for monitoring the use of public funds by public officials. This is the responsibility of the GAO. b. Incorrect The CIA is not responsible for monitoring the use of public funds by public officials. This is the responsibility of the GAO. c. Incorrect The SEC is not responsible for monitoring the use of public funds by public officials. This is the responsibility of the GAO. d. Correct The mission of the U.S. Government Accountability Office is to ensure that public officials are using public funds efficiently, effectively, and economically. 1.35 a. Incorrect A financial audit is typically not included as part of a performance audit. b. (&d) Correct The two categories of performance audits are economy and efficiency audits and program audits. c. Incorrect A compliance audit is typically not included as part of a performance audit. d. (&b) Correct The two categories of performance audits are economy and efficiency audits and program audits. 1.36 a. Incorrect A review of credit ratings of customers would not provide evidence about the completeness of accounts receivable. Because GAAP requires the accounts receivable balance to be valued at the amount expected to be collected from customers, the review of credit ratings relates to valuation. b. Incorrect A review of credit ratings of customers would not provide evidence about the existence of accounts receivable. Because GAAP requires the accounts receivable balance to be valued at the amount expected to be collected from customers, the review of credit ratings relates to valuation. c. Correct A review of credit ratings of customers‘ gives indirect evidence of the Chapter 01 - Auditing and Assurance Services collectability of accounts receivable. Because GAAP requires the accounts receivable balance to be valued at the amount expected to be collected from customers, the review of credit ratings relates to valuation.