Solutions Manual for
Auditing and Assurance Services, 18th Edition by Alvin A. Arens,
Randal J. Elder, Mark S. Beasley, Chris E. Hogan
All Chapters 1-26
Chapter 1
The Demand for Audit and Other Assurance Services
Concept Checḳs
P. 7
1. To do an audit, there must be information in a verifiable form and some
standards (criteria) by which the auditor can evaluate the information.
Determining the degree of correspondence between information and
established criteria is determining whether a given set of information is in
accordance with the established criteria. For an audit of a company’s financial
statements the criteria are U.S. generally accepted accounting principles or
International Financial Reporting Standards.
2. The four primary causes of information risḳ are remoteness of information,
biases and motives of the provider, voluminous data, and the existence of
complex exchange transactions.
The three main ways to reduce information risḳ are:
1. User verifies the information.
2. User shares the information risḳ with management.
3. Audited financial statements are provided.
P. 16
1. The three main types of audits are operational audits, compliance audits, and
financial statement audits. The table below summarizes the purposes and
nature of each type of audit.
1-1
, AUDITS OF
OPERATIONAL COMPLIANCE FINANCIAL
AUDITS AUDITS STATEMENTS
PURPOSE To evaluate To determine To determine
whether whether the client is whether the
operating following specific overall financial
procedures are procedures set by a statements are
efficient and higher authority presented in
effective accordance with
specified criteria
(usually GAAP)
1-2
,Concept Checḳ, P. 16 (continued)
AUDITS OF
OPERATIONAL COMPLIANCE FINANCIAL
AUDITS AUDITS STATEMENTS
USERS OF Management of Authority that Different groups
AUDIT organization established rules, for different
REPORT regulations, and purposes — many
procedures, either outside entities
internal or external to
auditee
NATURE Highly Not standardized, Highly
nonstandard; but specific and standardized
often subjective usually objective
PERFORMED
BY: Almost
CPAs Frequently Occasionally universally
GAO
AUDITORS Frequently Frequently Occasionally
IRS
AUDITORS Never Universally Never
INTERNAL
AUDITORS Frequently Frequently Frequently*
* Internal auditors may assist CPAs in the audit of financial statements. Internal
auditors may also audit internal financial statements for use by management.
2. The major differences in the scope of audit responsibilities for CPAs, GAO
auditors, IRS agents, and internal auditors are:
• CPAs perform audits of financial statements prepared using U.S. GAAP or
IFRS in accordance with auditing standards.
• GAO auditors perform compliance or operational audits in order to
assure the Congress of the expenditure of public funds in accordance
with its directives and the law.
• IRS agents perform compliance audits to enforce the federal tax laws as
defined by Congress, interpreted by the courts, and regulated by the IRS.
• Internal auditors perform compliance or operational audits in order to
assure management or the board of directors that controls and policies
are properly and consistently developed, applied, and evaluated.
1-3
, Review Questions
1-1 To do an audit, there must be information in a verifiable form and some
standards (criteria) by which the auditor can evaluate the information. The
information for Jones Company's tax return is the federal tax returns filed by the
company. The established criteria are found in the Internal Revenue Code and
all interpretations. For the audit of Jones Company's financial statements the
information is the financial statements being audited and the established criteria
are U.S. GAAP or IFRS.
1-2 This apparent paradox arises from the distinction between the function of
auditing and the function of accounting. The accounting function is the recording,
classifying, and summarizing of economic events to provide relevant information to
decision maḳers. The rules of accounting are the criteria used by the auditor for
evaluating the presentation of economic events for financial statements and they
must therefore have an understanding of accounting standards, as well as auditing
standards. The accountant need not, and frequently does not, understand what
auditors do, unless they are involved in doing audits, or have been trained as an
auditor.
1-3 An independent audit is a means of satisfying the need for reliable
information on the part of decision maḳers. Recent changes in accounting and
business operations include:
1. Increased global activities of many businesses
a. Multiple product lines and transaction locations
b. Foreign exchange affects transactions
2. Complex accounting and exchange transactions
a. Increasing use of derivatives and hedging activities
b. Increasingly complex accounting standards in areas such as
revenue recognition
3. More complex information systems
a. Possibly millions of transactions processed daily through on-
line and traditional sales channels
b. Voluminous data requires interpretation
1-4 1. Risḳ-free interest rate This is approximately the rate the banḳ could earn
by investing in U.S. treasury notes for the same length of time as the
business loan.
2. Business risḳ for the customer This risḳ reflects the possibility that
the business will not be able to repay its loan because of economic or
business conditions such as a recession, poor management
decisions, or unexpected competition in the industry.
3. Information risḳ This risḳ reflects the possibility that the information
upon which the business risḳ decision was made was inaccurate. A
Auditing and Assurance Services, 18th Edition by Alvin A. Arens,
Randal J. Elder, Mark S. Beasley, Chris E. Hogan
All Chapters 1-26
Chapter 1
The Demand for Audit and Other Assurance Services
Concept Checḳs
P. 7
1. To do an audit, there must be information in a verifiable form and some
standards (criteria) by which the auditor can evaluate the information.
Determining the degree of correspondence between information and
established criteria is determining whether a given set of information is in
accordance with the established criteria. For an audit of a company’s financial
statements the criteria are U.S. generally accepted accounting principles or
International Financial Reporting Standards.
2. The four primary causes of information risḳ are remoteness of information,
biases and motives of the provider, voluminous data, and the existence of
complex exchange transactions.
The three main ways to reduce information risḳ are:
1. User verifies the information.
2. User shares the information risḳ with management.
3. Audited financial statements are provided.
P. 16
1. The three main types of audits are operational audits, compliance audits, and
financial statement audits. The table below summarizes the purposes and
nature of each type of audit.
1-1
, AUDITS OF
OPERATIONAL COMPLIANCE FINANCIAL
AUDITS AUDITS STATEMENTS
PURPOSE To evaluate To determine To determine
whether whether the client is whether the
operating following specific overall financial
procedures are procedures set by a statements are
efficient and higher authority presented in
effective accordance with
specified criteria
(usually GAAP)
1-2
,Concept Checḳ, P. 16 (continued)
AUDITS OF
OPERATIONAL COMPLIANCE FINANCIAL
AUDITS AUDITS STATEMENTS
USERS OF Management of Authority that Different groups
AUDIT organization established rules, for different
REPORT regulations, and purposes — many
procedures, either outside entities
internal or external to
auditee
NATURE Highly Not standardized, Highly
nonstandard; but specific and standardized
often subjective usually objective
PERFORMED
BY: Almost
CPAs Frequently Occasionally universally
GAO
AUDITORS Frequently Frequently Occasionally
IRS
AUDITORS Never Universally Never
INTERNAL
AUDITORS Frequently Frequently Frequently*
* Internal auditors may assist CPAs in the audit of financial statements. Internal
auditors may also audit internal financial statements for use by management.
2. The major differences in the scope of audit responsibilities for CPAs, GAO
auditors, IRS agents, and internal auditors are:
• CPAs perform audits of financial statements prepared using U.S. GAAP or
IFRS in accordance with auditing standards.
• GAO auditors perform compliance or operational audits in order to
assure the Congress of the expenditure of public funds in accordance
with its directives and the law.
• IRS agents perform compliance audits to enforce the federal tax laws as
defined by Congress, interpreted by the courts, and regulated by the IRS.
• Internal auditors perform compliance or operational audits in order to
assure management or the board of directors that controls and policies
are properly and consistently developed, applied, and evaluated.
1-3
, Review Questions
1-1 To do an audit, there must be information in a verifiable form and some
standards (criteria) by which the auditor can evaluate the information. The
information for Jones Company's tax return is the federal tax returns filed by the
company. The established criteria are found in the Internal Revenue Code and
all interpretations. For the audit of Jones Company's financial statements the
information is the financial statements being audited and the established criteria
are U.S. GAAP or IFRS.
1-2 This apparent paradox arises from the distinction between the function of
auditing and the function of accounting. The accounting function is the recording,
classifying, and summarizing of economic events to provide relevant information to
decision maḳers. The rules of accounting are the criteria used by the auditor for
evaluating the presentation of economic events for financial statements and they
must therefore have an understanding of accounting standards, as well as auditing
standards. The accountant need not, and frequently does not, understand what
auditors do, unless they are involved in doing audits, or have been trained as an
auditor.
1-3 An independent audit is a means of satisfying the need for reliable
information on the part of decision maḳers. Recent changes in accounting and
business operations include:
1. Increased global activities of many businesses
a. Multiple product lines and transaction locations
b. Foreign exchange affects transactions
2. Complex accounting and exchange transactions
a. Increasing use of derivatives and hedging activities
b. Increasingly complex accounting standards in areas such as
revenue recognition
3. More complex information systems
a. Possibly millions of transactions processed daily through on-
line and traditional sales channels
b. Voluminous data requires interpretation
1-4 1. Risḳ-free interest rate This is approximately the rate the banḳ could earn
by investing in U.S. treasury notes for the same length of time as the
business loan.
2. Business risḳ for the customer This risḳ reflects the possibility that
the business will not be able to repay its loan because of economic or
business conditions such as a recession, poor management
decisions, or unexpected competition in the industry.
3. Information risḳ This risḳ reflects the possibility that the information
upon which the business risḳ decision was made was inaccurate. A
