@PROFDOCDIGITALLIBRARIES
Solution Manual for Auditing & Assurance Services,
8th Edition by Timothy Louwers
PR
O
FD
CHAPTER 01
Auditing and Assurance Services
LEARNING OBJECTIVES
O
Review Multiple Exercises, Problems,
Checkpoints and Simulations
C
Choice
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 financial statement 4, 5, 6, 7, 8 23, 25, 28, 44, 60, 65*
auditing, attestation, and assurance services. 50
,@PROFDOCDIGITALLIBRARIES
3. Describe and define the assertions that 9, 10, 11 36, 39, 40, 41, 45, 62, 63, 67
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 64*
firms and identify the various services that
they offer.
PR
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 68, 69
becoming a certified public accountant (CPA)
O
and other certifications available to an
accounting professional.
FD
O
C
,@PROFDOCDIGITALLIBRARIES
(*) Item relates to multiple learning objectives
PR
O
FD
O
C
, @PROFDOCDIGITALLIBRARIES
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
PR
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
O
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
FD
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 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.
O
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
C
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.
1.5 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.
1.6 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
Solution Manual for Auditing & Assurance Services,
8th Edition by Timothy Louwers
PR
O
FD
CHAPTER 01
Auditing and Assurance Services
LEARNING OBJECTIVES
O
Review Multiple Exercises, Problems,
Checkpoints and Simulations
C
Choice
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 financial statement 4, 5, 6, 7, 8 23, 25, 28, 44, 60, 65*
auditing, attestation, and assurance services. 50
,@PROFDOCDIGITALLIBRARIES
3. Describe and define the assertions that 9, 10, 11 36, 39, 40, 41, 45, 62, 63, 67
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 64*
firms and identify the various services that
they offer.
PR
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 68, 69
becoming a certified public accountant (CPA)
O
and other certifications available to an
accounting professional.
FD
O
C
,@PROFDOCDIGITALLIBRARIES
(*) Item relates to multiple learning objectives
PR
O
FD
O
C
, @PROFDOCDIGITALLIBRARIES
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
PR
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
O
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
FD
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 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.
O
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
C
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.
1.5 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.
1.6 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
