Auditing: An International Approach Seventh Canadian Edition Solution Manual

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Smieliauskas & Bewley,Auditing: An International Approach,7thEditionPage 1-1Solutions ManualCHAPTER 1Introduction to AuditingSOLUTIONS FOR REVIEW CHECKPOINTSESSENTIALS1-1.In this example of a three-party accountability structure, the owneristhe 'third party', the hired manager is the'first party' and the auditor is the 'second party'. The owner is looking out for his/her own longer-term economicinterests, but has to rely on the actions and information provided by the hired manager, who may have shorterterm concerns (like his/her own compensation and job prospects) and thus act self-interestedly.The owner is accountable for financing the business and treating the manager fairly, particularly in terms ofcompensating his/her efforts and successes appropriately. The manager is accountable for giving reliable and fairreports of the business profit performance to the owner. Give the potential conflicts between the interests of thefirst and third parties, there is information risk-the risk that the financial statement information will not be a fulland fair representation of the transactions and events that really occurred, and will not be reliable for economicdecisions that the owner may base upon it. The auditor is accountable forobjectivelyverifying the fairness andreliability of the information and providing an independent opinion on how well the information reflects theunderlying realities of the entity's operations. The auditor's opinion can benefit both the first and third parties-the owner directly by lowering information risk, and the manager indirectly because if the owner has more basis totrust the manager not to act against the owner's interests the owner will be more willing to share the profits withthe manager (this is referred to as lowering "agency costs," which are charged by the owner/principal and incurredby the manager/agent if the owner does not trust the manager). For the auditor's opinion to have value in givingthe owner some comfort (i.e., "assurance") that the manager's information can be relied on, the auditor must haveno personal interest in either side and be able remain objective.1-2.The concept of reasonable assurance describes a mental attitude that the auditor gains from the conclusionsdrawn from audit examination findings. Based on the examination, if the auditor comes to believe the financialstatements are reliable and fair to the interests of third party users, this belief forms the basis of the opinion theauditor will communicate to financial statement users in the Auditor's Report. An 'audit opinion' provides ahighlevel of assuranceto the user that the auditor believes that the information risk is low, and has evidence tosupport that belief.TEXT1-3Auditors add credibility to financial information provided by the accountable party such as management (i.e.auditors makethe financial or other information more likely to be trueorrepresentationally faithful). Othercommon ways of characterizing this property of audited numbers is that the numbers are more accurate, havehigher assurance, or are more reliable. These relate to different dimension of truthfulness, as we discuss later inthe text.1-4By obtaining more accurateorreliableinformation about the company, Aunt Zhang can obtain a moreaccuratevaluation of the company. This moreaccuratevaluation gives Aunt Zhang more confidence that she will get hermoney’s worth in the investment. The preceding assumes Aunt Zhang is risk averse—a common assumption abouteconomic behavior.1-5Auditing is the verification of numbers provided by others. To attest means to lend credibility or to vouch for thetruth or accuracy of the statements that one party makes to another. The attest function is a term often applied to

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