Auditing A Risk.pdf

Auditing A Risk
Based-Approach to
Conducting a
Quality Audit
Johnstone 10th
Edition Solutions
Manual




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1-1

,Solutions for Chapter 1

True/False Questions

1-1 T
1-2 T
1-3 F
1-4 F
1-5 F
1-6 F
1-7 T
1-8 T
1-9 T
1-10 F
1-11 T
1-12 T

Multiple Choice Questions

1-13 B
1-14 B
1-15 E
1-16 E
1-17 D
1-18 D
1-19 C
1-20 A
1-21 A
1-22 B
1-23 E
1-24 C

Review and Short Case Questions

1-25

The objective of external auditing is to provide opinions on the reliability of the financial
statements and, as part of an integrated audit, provide opinions on internal control effectiveness.
The value of the external auditing profession is affirmed when the public has confidence in its
objectivity and the accuracy of its opinions. The capital markets depend on accurate, reliable,
and objective (neutral) data that portray the economic nature of an entity’s business and in turn
provide a base to judge current progress toward long-term objectives. If the market does not
receive reliable data, investors lose confidence in the system, make poor decisions, and may lose
a great deal of money; ultimately, the system may fail. By providing an independent audit
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1-2

, opinion, the capital markets can be assured that the financial data that they are basing their
decisions upon are accurate.

1-26

The special function performed by the external auditing profession is the attestation to the
fairness of the financial statements of clients. The special function helps ensure the reliability
and integrity of the financial reporting system. The auditing profession exists to serve the users
of an organization's financial statements. These include lenders, investors, management,
government, and (indirectly) all individuals who are ultimately affected by the integrity of the
financial reporting process. Auditors need to remember that they are serving the public interest
and not the interests of client management.

1-27

Audit services are needed because there is a:

 Potential bias in providing information.
 Remoteness between a user and the organization or trading partner.
 Complexity in the transaction, information, or processing systems such that it is difficult to
determine their proper presentation without a review by an independent expert.
 Need to limit negative consequences that arise from relying on inaccurate information.

1-28

The audit enhances the quality of financial statements because the user has the assurance that an
independent, qualified professional has examined the financial statements and has rendered an
opinion on their fairness. The independence and expertise of the auditor serve as a quality control
function to overcome the potential bias of management in presenting the financial statements in a
manner that most flatters an assessment of their performance. The audit is designed to add
credibility to the financial statements.

An audit does not necessarily guarantee a fair presentation of a company's financial statements,
although it does dramatically increase the likelihood that there are no material misstatements in
the company's financial statements. The audit provides reasonable, not absolute, assurance about
the accuracy of the financial statements. The caveats about fairness exist for two reasons:

 Fairness is judged within a framework of GAAP. Some question whether GAAP results
in the fairest possible presentations when there are significant changes in market values of
investments or assets. For example, the SEC has encouraged financial institutions to move
from using historical cost required by GAAP to market values for all investments in
securities because it believes that market value presents a better picture of economic reality
than does historical cost.



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