Auditing and Assurance Services 6th Edition Solution Manual
Auditing and Assurance Services 6th Edition Solution Manual offers a comprehensive guide to solving every question in your textbook, helping you master the material.
Danny
Contributor
4.2
54
3 days ago
Preview (16 of 562)
Sign in to access the full document!
Chapter 01 - Auditing and Assurance Services
1-1
CHAPTER 01
Auditing and Assurance Services
LEARNING OBJECTIVES
Review
Checkpoints
Multiple
Choice
Exercises, Problems,
and Simulations
1. Define information risk and explain how the
financial statement auditing process helps to
reduce this risk, thereby reducing the cost of
capital for a company.
1, 2, 3 29, 31, 38 57*
2. Define and contrast financial statement
auditing, attestation, and assurance type
services.
4, 5, 6, 7, 8 23, 25, 28, 44,
50
52, 57*
3. Describe and define the assertions that
management makes about the recognition,
measurement, presentation, and disclosure of
the financial statements and explain why
auditors use them as a focal point of the audit.
9, 10, 11 36, 39, 40, 41, 45,
46, 47, 48, 49
54, 55, 59
4. Define professional skepticism and explain its
key characteristics.
12 24, 37 53
5. Describe the organization of public accounting
firms and identify the various services that
they offer.
13, 14 30, 42 56*, 62
6. Describe the audits and auditors in
governmental, internal, and operational
auditing.
15, 16, 17, 18 26, 27, 32, 34, 35 56*, 58
7. List and explain the requirements for
becoming a certified public accountant (CPA)
and other certifications available to an
accounting professional.
19, 20, 21, 22 33, 43, 51 60, 61
(*) Item relates to multiple learning objectives
1-1
CHAPTER 01
Auditing and Assurance Services
LEARNING OBJECTIVES
Review
Checkpoints
Multiple
Choice
Exercises, Problems,
and Simulations
1. Define information risk and explain how the
financial statement auditing process helps to
reduce this risk, thereby reducing the cost of
capital for a company.
1, 2, 3 29, 31, 38 57*
2. Define and contrast financial statement
auditing, attestation, and assurance type
services.
4, 5, 6, 7, 8 23, 25, 28, 44,
50
52, 57*
3. Describe and define the assertions that
management makes about the recognition,
measurement, presentation, and disclosure of
the financial statements and explain why
auditors use them as a focal point of the audit.
9, 10, 11 36, 39, 40, 41, 45,
46, 47, 48, 49
54, 55, 59
4. Define professional skepticism and explain its
key characteristics.
12 24, 37 53
5. Describe the organization of public accounting
firms and identify the various services that
they offer.
13, 14 30, 42 56*, 62
6. Describe the audits and auditors in
governmental, internal, and operational
auditing.
15, 16, 17, 18 26, 27, 32, 34, 35 56*, 58
7. List and explain the requirements for
becoming a certified public accountant (CPA)
and other certifications available to an
accounting professional.
19, 20, 21, 22 33, 43, 51 60, 61
(*) Item relates to multiple learning objectives
Chapter 01 - Auditing and Assurance Services
1-1
CHAPTER 01
Auditing and Assurance Services
LEARNING OBJECTIVES
Review
Checkpoints
Multiple
Choice
Exercises, Problems,
and Simulations
1. Define information risk and explain how the
financial statement auditing process helps to
reduce this risk, thereby reducing the cost of
capital for a company.
1, 2, 3 29, 31, 38 57*
2. Define and contrast financial statement
auditing, attestation, and assurance type
services.
4, 5, 6, 7, 8 23, 25, 28, 44,
50
52, 57*
3. Describe and define the assertions that
management makes about the recognition,
measurement, presentation, and disclosure of
the financial statements and explain why
auditors use them as a focal point of the audit.
9, 10, 11 36, 39, 40, 41, 45,
46, 47, 48, 49
54, 55, 59
4. Define professional skepticism and explain its
key characteristics.
12 24, 37 53
5. Describe the organization of public accounting
firms and identify the various services that
they offer.
13, 14 30, 42 56*, 62
6. Describe the audits and auditors in
governmental, internal, and operational
auditing.
15, 16, 17, 18 26, 27, 32, 34, 35 56*, 58
7. List and explain the requirements for
becoming a certified public accountant (CPA)
and other certifications available to an
accounting professional.
19, 20, 21, 22 33, 43, 51 60, 61
(*) Item relates to multiple learning objectives
1-1
CHAPTER 01
Auditing and Assurance Services
LEARNING OBJECTIVES
Review
Checkpoints
Multiple
Choice
Exercises, Problems,
and Simulations
1. Define information risk and explain how the
financial statement auditing process helps to
reduce this risk, thereby reducing the cost of
capital for a company.
1, 2, 3 29, 31, 38 57*
2. Define and contrast financial statement
auditing, attestation, and assurance type
services.
4, 5, 6, 7, 8 23, 25, 28, 44,
50
52, 57*
3. Describe and define the assertions that
management makes about the recognition,
measurement, presentation, and disclosure of
the financial statements and explain why
auditors use them as a focal point of the audit.
9, 10, 11 36, 39, 40, 41, 45,
46, 47, 48, 49
54, 55, 59
4. Define professional skepticism and explain its
key characteristics.
12 24, 37 53
5. Describe the organization of public accounting
firms and identify the various services that
they offer.
13, 14 30, 42 56*, 62
6. Describe the audits and auditors in
governmental, internal, and operational
auditing.
15, 16, 17, 18 26, 27, 32, 34, 35 56*, 58
7. List and explain the requirements for
becoming a certified public accountant (CPA)
and other certifications available to an
accounting professional.
19, 20, 21, 22 33, 43, 51 60, 61
(*) Item relates to multiple learning objectives
Chapter 01 - Auditing and Assurance Services
1-2
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, is 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
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
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
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.
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
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
1-2
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, is 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
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
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
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.
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
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
Chapter 01 - Auditing and Assurance Services
1-3
information (e.g., the conformity of the financial statements with the appropriate reporting framework).
The independent auditor’s role is to lend credibility to the information; hence, the outsider will likely seek
his or her independent opinion about the financial statements.
1.7 An assurance service engagement is one that improves the quality of information, or its context, for
decision makers. Thus, an attestation service engagement is one type of an assurance service. Another
way of thinking about the issue is to remember that the financial statement audit engagement is one type of
an attestation service. Please see exhibit 1.3 in the text which depicts the relationship among assurance,
attestation, and auditing engagements.
1.8 The four major elements of the broad definition of assurance services are
Independence. CPAs want to preserve their reputation and competitive advantage by always preserving
integrity and objectivity when performing assurance services.
Professional services. Virtually all work performed by CPAs is defined as “professional services” as long
as it involves some element of judgment based on education and experience.
Improving the quality of information or its context. The emphasis is on “information,” CPAs’ traditional
area of expertise. CPAs can enhance quality by assuring users about the reliability and relevance of
information, and these two features are closely related to the familiar credibility-lending products of
attestation and audit services. “Context” is relevance in a different light. For assurance services, improving
the context of information refers to improving its usefulness when targeted to particular decision makers in
the surroundings of particular decision problems.
For decision makers. As the “consumers” of assurance services, decision makers are the beneficiaries of the
assurance services. Decision makers may or may not be the “client” that pays the fee and may or may not
be one of the parties to an assertion or other information, but they personify the consumer focus of new and
different professional work.
1.9 Financial accounting refers to the process of recording, classifying, summarizing and reporting about a
company’s assets, liabilities, capital, revenues, and expenses in the financial statements in accordance with
the applicable financial reporting framework (e.g., GAAP). In so doing, the management team is making a
number of assertions about the financial statements. The financial accounting process is the responsibility
of the management team. Financial statement auditing refers to the process whereby professional auditors
gather evidence related to the assertions that management makes in the financial statements, evaluates the
evidence and concludes on the fairness of the financial statements in a report.
They differ because accountants produce the financial statements in accordance with the applicable
financial reporting framework. After this is complete, financial statement auditors then perform procedures
to ascertain whether the financial statements have been prepared in accordance with the applicable financial
reporting framework.
1.10 The three major classifications of ASB assertions with several assertions in each classification are:
Transaction Assertions
Occurrence assertion: The objective is to establish with evidence that transactions giving rise to assets,
liabilities, sales, and expenses actually occurred. Key questions include “Did the recorded sales
transactions really occur?”
Completeness and cutoff assertion: The objective is to establish with evidence that all transactions of the
period are in the financial statements and all transactions that properly belong in the preceding or following
accounting periods are excluded. Completeness also refers to proper inclusion in financial statements of all
assets, liabilities, revenue, expense, and related disclosures. Key questions related to completeness include
1-3
information (e.g., the conformity of the financial statements with the appropriate reporting framework).
The independent auditor’s role is to lend credibility to the information; hence, the outsider will likely seek
his or her independent opinion about the financial statements.
1.7 An assurance service engagement is one that improves the quality of information, or its context, for
decision makers. Thus, an attestation service engagement is one type of an assurance service. Another
way of thinking about the issue is to remember that the financial statement audit engagement is one type of
an attestation service. Please see exhibit 1.3 in the text which depicts the relationship among assurance,
attestation, and auditing engagements.
1.8 The four major elements of the broad definition of assurance services are
Independence. CPAs want to preserve their reputation and competitive advantage by always preserving
integrity and objectivity when performing assurance services.
Professional services. Virtually all work performed by CPAs is defined as “professional services” as long
as it involves some element of judgment based on education and experience.
Improving the quality of information or its context. The emphasis is on “information,” CPAs’ traditional
area of expertise. CPAs can enhance quality by assuring users about the reliability and relevance of
information, and these two features are closely related to the familiar credibility-lending products of
attestation and audit services. “Context” is relevance in a different light. For assurance services, improving
the context of information refers to improving its usefulness when targeted to particular decision makers in
the surroundings of particular decision problems.
For decision makers. As the “consumers” of assurance services, decision makers are the beneficiaries of the
assurance services. Decision makers may or may not be the “client” that pays the fee and may or may not
be one of the parties to an assertion or other information, but they personify the consumer focus of new and
different professional work.
1.9 Financial accounting refers to the process of recording, classifying, summarizing and reporting about a
company’s assets, liabilities, capital, revenues, and expenses in the financial statements in accordance with
the applicable financial reporting framework (e.g., GAAP). In so doing, the management team is making a
number of assertions about the financial statements. The financial accounting process is the responsibility
of the management team. Financial statement auditing refers to the process whereby professional auditors
gather evidence related to the assertions that management makes in the financial statements, evaluates the
evidence and concludes on the fairness of the financial statements in a report.
They differ because accountants produce the financial statements in accordance with the applicable
financial reporting framework. After this is complete, financial statement auditors then perform procedures
to ascertain whether the financial statements have been prepared in accordance with the applicable financial
reporting framework.
1.10 The three major classifications of ASB assertions with several assertions in each classification are:
Transaction Assertions
Occurrence assertion: The objective is to establish with evidence that transactions giving rise to assets,
liabilities, sales, and expenses actually occurred. Key questions include “Did the recorded sales
transactions really occur?”
Completeness and cutoff assertion: The objective is to establish with evidence that all transactions of the
period are in the financial statements and all transactions that properly belong in the preceding or following
accounting periods are excluded. Completeness also refers to proper inclusion in financial statements of all
assets, liabilities, revenue, expense, and related disclosures. Key questions related to completeness include
Chapter 01 - Auditing and Assurance Services
1-4
“Are the financial statements (including footnotes) complete?” and “Were all the transactions recorded in
the right period?”
Accuracy assertion: The objective is to establish with evidence that transactions have been recorded at the
correct amount. Key questions include “Were the expenses recorded at the proper dollar amount?”
Classification assertion: The objective is to establish with evidence that transactions were posted to the
correct accounts. Key questions include “Was this expense recorded in the appropriate account?”
Balance Assertions
Existence assertion: The objective is to establish with evidence that the balance represents assets,
liabilities, sales, and expenses that are real and in existence at the balance sheet date. Key questions
include “Does this number truly represent assets that existed at the balance sheet date?”
Rights and obligations assertion: The objectives related to rights and obligations are to establish with
evidence that assets are owned (or rights such as capitalized leases are shown) and liabilities are owed. Key
questions related to this assertion include “Does the company really own the assets? And “Are related legal
responsibilities identified?”
Completeness assertion: The objective is to establish with evidence that all balances of the period are in the
financial statements. Key questions related to completeness include “Are the financial statements
(including footnotes) complete?”
Valuation assertion: The objective is to establish with evidence that balances have been valued correctly.
Key questions include “Are the accounts valued correctly?” and “Are expenses allocated to the period(s)
benefited?”
Presentation and Disclosure Assertions
Occurrence assertion: The objective is to establish with evidence that transactions giving rise to assets,
liabilities, sales and expenses actually occurred. Key questions include “are we properly presenting and
disclosing transactions that occurred during this period?”
Rights and obligations assertion: The objectives related to establishing with evidence the proper
presentation of assets, liabilities, revenues and expenses to which the company has a legal right or a legal
obligation Key questions related to this assertion include: “Has the company properly presented the assets
in its possession? And, “Are related legal responsibilities identified and properly disclosed?”
Completeness assertion: The objective is to establish with evidence that all balances of the period are
presented and/or disclosed in the financial statements. Key questions related to completeness include: “Are
the financial statements (including footnotes) complete?”
Accuracy and valuation assertion: The objectives are to establish with evidence that balances presented
and disclosed in the financial statements have been recorded accurately and have been valued correctly.
Key questions include “Are the accounts valued correctly?” and “Are expenses allocated to the period(s)
benefited?”
Classification and understandability assertion: The objective is to establish with evidence that
presentation and disclosures are properly classified on the financial statements and that financial statements
including footnotes are understandable to the financial statement users. Key questions relate to “Is this
account properly presented in the correct financial statement category” And, “are the footnote disclosures
presented to promote an understanding of the nature of the account?”
1-4
“Are the financial statements (including footnotes) complete?” and “Were all the transactions recorded in
the right period?”
Accuracy assertion: The objective is to establish with evidence that transactions have been recorded at the
correct amount. Key questions include “Were the expenses recorded at the proper dollar amount?”
Classification assertion: The objective is to establish with evidence that transactions were posted to the
correct accounts. Key questions include “Was this expense recorded in the appropriate account?”
Balance Assertions
Existence assertion: The objective is to establish with evidence that the balance represents assets,
liabilities, sales, and expenses that are real and in existence at the balance sheet date. Key questions
include “Does this number truly represent assets that existed at the balance sheet date?”
Rights and obligations assertion: The objectives related to rights and obligations are to establish with
evidence that assets are owned (or rights such as capitalized leases are shown) and liabilities are owed. Key
questions related to this assertion include “Does the company really own the assets? And “Are related legal
responsibilities identified?”
Completeness assertion: The objective is to establish with evidence that all balances of the period are in the
financial statements. Key questions related to completeness include “Are the financial statements
(including footnotes) complete?”
Valuation assertion: The objective is to establish with evidence that balances have been valued correctly.
Key questions include “Are the accounts valued correctly?” and “Are expenses allocated to the period(s)
benefited?”
Presentation and Disclosure Assertions
Occurrence assertion: The objective is to establish with evidence that transactions giving rise to assets,
liabilities, sales and expenses actually occurred. Key questions include “are we properly presenting and
disclosing transactions that occurred during this period?”
Rights and obligations assertion: The objectives related to establishing with evidence the proper
presentation of assets, liabilities, revenues and expenses to which the company has a legal right or a legal
obligation Key questions related to this assertion include: “Has the company properly presented the assets
in its possession? And, “Are related legal responsibilities identified and properly disclosed?”
Completeness assertion: The objective is to establish with evidence that all balances of the period are
presented and/or disclosed in the financial statements. Key questions related to completeness include: “Are
the financial statements (including footnotes) complete?”
Accuracy and valuation assertion: The objectives are to establish with evidence that balances presented
and disclosed in the financial statements have been recorded accurately and have been valued correctly.
Key questions include “Are the accounts valued correctly?” and “Are expenses allocated to the period(s)
benefited?”
Classification and understandability assertion: The objective is to establish with evidence that
presentation and disclosures are properly classified on the financial statements and that financial statements
including footnotes are understandable to the financial statement users. Key questions relate to “Is this
account properly presented in the correct financial statement category” And, “are the footnote disclosures
presented to promote an understanding of the nature of the account?”
Chapter 01 - Auditing and Assurance Services
1-5
1.11 The ASB set of management financial statement assertions are important to auditors because they are used
when assessing risks by determining the different types of misstatements that could occur for each
assertion. Next, auditors use the assertions to develop audit procedures that are appropriate to mitigate the
risk of material misstatement for each assertion. In essence, the key questions that must be answered about
each of the relevant assertions become the focal points for audit procedures. Audit procedures are the
means to answer the key questions posed by management’s financial statement assertions. In fact, the
procedures are completed to provide the evidence necessary to persuade the auditor that there is no material
misstatement related to each of the relevant assertions identified for an engagement.
The ASB assertions differ from the PCAOB assertions in that they provide greater detail and clarity for
auditors to conceptualize the type of misstatements that may exist in the financial statements. Thus, the
PCAOB assertions are more general than the ASB assertions. Importantly, the PCAOB recognizes that
their assertions are more general and do allow auditors to use the more granular and specific ASB
assertions when completing the audit. As a result, largely all of the firms auditing public companies with
international operations feature the ASB assertions to guide their auditing processes. Importantly, a student
of auditing will note that the ASB assertions are in direct alignment with the PCAOB assertions. This is
illustrated in the text in Exhibit 1.4
1.12 Holding a belief that a potential conflict of interest always exists between the auditor and the management
team causes auditors to always be skeptical when completing the audit. Indeed, even though the vast
majority of audits do not contain fraud, auditors have no choice but to consider the possibility of fraud on
every audit. Stated simply, errors and financial reporting frauds have happened in the past, and users of
financial statements and audit reports expect auditors to detect material misstatements if they exist.
Indeed, auditing firms have long recognized the importance of exercising professional skepticism when
making professional judgments. As a student of auditing, you can definitely expect to encounter difficult
economic transactions as an auditor. When a difficult transaction is encountered, auditors must take the
time to fully understand the economic substance of that transaction and then critically evaluate, with
skepticism, the evidence provided by the client to justify its accounting treatment. There are no shortcuts
allowed. Rather, auditors must always hold a belief that a potential conflict of interest exist between the
auditor and management and they must be unbiased and objective when making their professional
judgments.
1.13 Generally speaking, assurance services involve the lending of credibility to information, whether financial
or nonfinancial. CPAs have assured vote counts (Academy Awards), dollar amounts of prizes that
sweepstakes have claimed to award, accuracy of advertisements, investment performance statistics, and
characteristics claimed for computer software programs. Some specific examples of assurance service
engagements performed on nonfinancial information include
• eXtensible Business Reporting Language (XBRL) reporting.
• Enterprise risk management assessment.
• Information risk assessment and assurance.
• Third-party reimbursement maximization.
• Rental property operations review.
• Customer satisfaction surveys.
• Evaluation of investment management policies.
• Fraud and illegal acts prevention and deterrence.
• Internal audit outsourcing.
1-5
1.11 The ASB set of management financial statement assertions are important to auditors because they are used
when assessing risks by determining the different types of misstatements that could occur for each
assertion. Next, auditors use the assertions to develop audit procedures that are appropriate to mitigate the
risk of material misstatement for each assertion. In essence, the key questions that must be answered about
each of the relevant assertions become the focal points for audit procedures. Audit procedures are the
means to answer the key questions posed by management’s financial statement assertions. In fact, the
procedures are completed to provide the evidence necessary to persuade the auditor that there is no material
misstatement related to each of the relevant assertions identified for an engagement.
The ASB assertions differ from the PCAOB assertions in that they provide greater detail and clarity for
auditors to conceptualize the type of misstatements that may exist in the financial statements. Thus, the
PCAOB assertions are more general than the ASB assertions. Importantly, the PCAOB recognizes that
their assertions are more general and do allow auditors to use the more granular and specific ASB
assertions when completing the audit. As a result, largely all of the firms auditing public companies with
international operations feature the ASB assertions to guide their auditing processes. Importantly, a student
of auditing will note that the ASB assertions are in direct alignment with the PCAOB assertions. This is
illustrated in the text in Exhibit 1.4
1.12 Holding a belief that a potential conflict of interest always exists between the auditor and the management
team causes auditors to always be skeptical when completing the audit. Indeed, even though the vast
majority of audits do not contain fraud, auditors have no choice but to consider the possibility of fraud on
every audit. Stated simply, errors and financial reporting frauds have happened in the past, and users of
financial statements and audit reports expect auditors to detect material misstatements if they exist.
Indeed, auditing firms have long recognized the importance of exercising professional skepticism when
making professional judgments. As a student of auditing, you can definitely expect to encounter difficult
economic transactions as an auditor. When a difficult transaction is encountered, auditors must take the
time to fully understand the economic substance of that transaction and then critically evaluate, with
skepticism, the evidence provided by the client to justify its accounting treatment. There are no shortcuts
allowed. Rather, auditors must always hold a belief that a potential conflict of interest exist between the
auditor and management and they must be unbiased and objective when making their professional
judgments.
1.13 Generally speaking, assurance services involve the lending of credibility to information, whether financial
or nonfinancial. CPAs have assured vote counts (Academy Awards), dollar amounts of prizes that
sweepstakes have claimed to award, accuracy of advertisements, investment performance statistics, and
characteristics claimed for computer software programs. Some specific examples of assurance service
engagements performed on nonfinancial information include
• eXtensible Business Reporting Language (XBRL) reporting.
• Enterprise risk management assessment.
• Information risk assessment and assurance.
• Third-party reimbursement maximization.
• Rental property operations review.
• Customer satisfaction surveys.
• Evaluation of investment management policies.
• Fraud and illegal acts prevention and deterrence.
• Internal audit outsourcing.
Loading page 6...
Chapter 01 - Auditing and Assurance Services
1-6
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 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 insure 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.
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
1-6
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 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 insure 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.
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
Loading page 7...
Chapter 01 - Auditing and Assurance Services
1-7
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.
1-7
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.
Loading page 8...
Chapter 01 - Auditing and Assurance Services
1-8
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
1-8
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
Loading page 9...
Chapter 01 - Auditing and Assurance Services
1-9
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
1-9
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
Loading page 10...
Chapter 01 - Auditing and Assurance Services
1-10
receivable balance to be valued at the amount expected to be collected from
customers, the review of credit ratings relates to valuation.
d. Incorrect A review of credit ratings of customers would not provide evidence about the
rights 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.
e. Incorrect A review of credit ratings of customers would not provide evidence about the
occurrence 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.
1.37 a. Incorrect Rhonda’s representations are not sufficient evidence to support assertions made
in the financial statements.
b. Incorrect Despite Rhonda’s representations, Jones must gather additional evidence to
corroborate Rhonda’s assertions.
c. Incorrect Rhonda’s representations are a form of evidence (albeit weak) that should
neither be disregarded nor blindly regarded without professional skepticism.
d. Correct Rhonda’s assertions are nice. However, to be considered as sufficient to
conclude that all expenses have been recorded, they will need corroboration with
documentary evidence. Thus, this is the correct response.
1-10
receivable balance to be valued at the amount expected to be collected from
customers, the review of credit ratings relates to valuation.
d. Incorrect A review of credit ratings of customers would not provide evidence about the
rights 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.
e. Incorrect A review of credit ratings of customers would not provide evidence about the
occurrence 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.
1.37 a. Incorrect Rhonda’s representations are not sufficient evidence to support assertions made
in the financial statements.
b. Incorrect Despite Rhonda’s representations, Jones must gather additional evidence to
corroborate Rhonda’s assertions.
c. Incorrect Rhonda’s representations are a form of evidence (albeit weak) that should
neither be disregarded nor blindly regarded without professional skepticism.
d. Correct Rhonda’s assertions are nice. However, to be considered as sufficient to
conclude that all expenses have been recorded, they will need corroboration with
documentary evidence. Thus, this is the correct response.
Loading page 11...
Chapter 01 - Auditing and Assurance Services
1-11
company. Thus, there is a risk that the company is recording assets that they do
not own on their balance sheet.
b. Incorrect This is not an existence test. This is clearly a test related to rights and
obligations as the question that must be answered with evidence is to establish
that amounts reported as assets of the company represent true assets that it really
does own and that the amounts reported as liabilities truly represent its
obligations. Goods on consignment, by definition, are not owned by the
company. Thus, there is a risk that the company is recording assets that they do
not own on their balance sheet.
c. Incorrect This is not a test of valuation. This is clearly a test related to rights and
obligations as the question that must be answered with evidence is to establish
that amounts reported as assets of the company represent true assets that it really
does own and that the amounts reported as liabilities truly represent its
obligations. Goods on consignment, by definition, are not owned by the
company. Thus, there is a risk that the company is recording assets that they do
not own on their balance sheet.
d. Correct This is clearly a test related to rights and obligations as the question that must be
answered with evidence is to establish that amounts reported as assets of the
company represent true assets that it really does own and that the amounts
reported as liabilities truly represent its obligations. Goods on consignment, by
definition, are not owned by the company. Thus, there is a risk that the
company is recording assets that they do not own on their balance sheet.
e. Incorrect This is not an occurrence test. This is clearly a test related to rights and
obligations as the question that must be answered with evidence is to establish
that amounts reported as assets of the company represent true assets that it really
does own and that the amounts reported as liabilities truly represent its
obligations. Goods on consignment, by definition, are not owned by the
company. Thus, there is a risk that the company is recording assets that they do
not own on their balance sheet.
1.41 a. Incorrect This is not a test of completeness. This is a test of existence which is completed
by auditors to answer the question as to whether the transactions recorded as an
asset really represent assets that exist and did add value to the company’s
equipment as compared to routine repair and maintenance expenses under
GAAP. Management’s existence assertion states that the reported assets
actually exist. If an addition to the equipment account cannot be located or
identified as adding value to the equipment balance, it is possible that the
amount should have been classified as repair and maintenance expenses under
GAAP.
b. Correct This is a test of existence. This test is completed by auditors to answer the
question as to whether the transactions recorded as an asset really represent
assets that exist and did add value to the company’s equipment as compared to
routine repair and maintenance expenses under GAAP. Management’s
existence assertion states that the reported assets actually exist. If an addition to
the equipment account cannot be located or identified as adding value to the
equipment balance, it is possible that the amount should have been classified as
repair and maintenance expenses under GAAP.
c. Incorrect This is not a test of valuation. This is a test of existence which is completed by
auditors to answer the question as to whether the transactions recorded as an
asset really represent assets that exist and did add value to the company’s
equipment as compared to routine repair and maintenance expenses under
GAAP. Management’s existence assertion states that the reported assets
actually exist. If an addition to the equipment account cannot be located or
identified as adding value to the equipment balance, it is possible that the
amount should have been classified as repair and maintenance expenses under
GAAP.
1-11
company. Thus, there is a risk that the company is recording assets that they do
not own on their balance sheet.
b. Incorrect This is not an existence test. This is clearly a test related to rights and
obligations as the question that must be answered with evidence is to establish
that amounts reported as assets of the company represent true assets that it really
does own and that the amounts reported as liabilities truly represent its
obligations. Goods on consignment, by definition, are not owned by the
company. Thus, there is a risk that the company is recording assets that they do
not own on their balance sheet.
c. Incorrect This is not a test of valuation. This is clearly a test related to rights and
obligations as the question that must be answered with evidence is to establish
that amounts reported as assets of the company represent true assets that it really
does own and that the amounts reported as liabilities truly represent its
obligations. Goods on consignment, by definition, are not owned by the
company. Thus, there is a risk that the company is recording assets that they do
not own on their balance sheet.
d. Correct This is clearly a test related to rights and obligations as the question that must be
answered with evidence is to establish that amounts reported as assets of the
company represent true assets that it really does own and that the amounts
reported as liabilities truly represent its obligations. Goods on consignment, by
definition, are not owned by the company. Thus, there is a risk that the
company is recording assets that they do not own on their balance sheet.
e. Incorrect This is not an occurrence test. This is clearly a test related to rights and
obligations as the question that must be answered with evidence is to establish
that amounts reported as assets of the company represent true assets that it really
does own and that the amounts reported as liabilities truly represent its
obligations. Goods on consignment, by definition, are not owned by the
company. Thus, there is a risk that the company is recording assets that they do
not own on their balance sheet.
1.41 a. Incorrect This is not a test of completeness. This is a test of existence which is completed
by auditors to answer the question as to whether the transactions recorded as an
asset really represent assets that exist and did add value to the company’s
equipment as compared to routine repair and maintenance expenses under
GAAP. Management’s existence assertion states that the reported assets
actually exist. If an addition to the equipment account cannot be located or
identified as adding value to the equipment balance, it is possible that the
amount should have been classified as repair and maintenance expenses under
GAAP.
b. Correct This is a test of existence. This test is completed by auditors to answer the
question as to whether the transactions recorded as an asset really represent
assets that exist and did add value to the company’s equipment as compared to
routine repair and maintenance expenses under GAAP. Management’s
existence assertion states that the reported assets actually exist. If an addition to
the equipment account cannot be located or identified as adding value to the
equipment balance, it is possible that the amount should have been classified as
repair and maintenance expenses under GAAP.
c. Incorrect This is not a test of valuation. This is a test of existence which is completed by
auditors to answer the question as to whether the transactions recorded as an
asset really represent assets that exist and did add value to the company’s
equipment as compared to routine repair and maintenance expenses under
GAAP. Management’s existence assertion states that the reported assets
actually exist. If an addition to the equipment account cannot be located or
identified as adding value to the equipment balance, it is possible that the
amount should have been classified as repair and maintenance expenses under
GAAP.
Loading page 12...
Chapter 01 - Auditing and Assurance Services
1-12
d. Incorrect This is not a test of rights and obligations. This is a test of existence which is
completed by auditors to answer the question as to whether the transactions
recorded as an asset really represent assets that exist and did add value to the
company’s equipment as compared to routine repair and maintenance expenses
under GAAP. Management’s existence assertion states that the reported assets
actually exist. If an addition to the equipment account cannot be located or
identified as adding value to the equipment balance, it is possible that the
amount should have been classified as repair and maintenance expenses under
GAAP.
e. Incorrect This is not a test of occurrence. This is a test of existence which is completed by
auditors to answer the question as to whether the transactions recorded as an
asset really represent assets that exist and did add value to the company’s
equipment as compared to routine repair and maintenance expenses under
GAAP. Management’s existence assertion states that the reported assets
actually exist. If an addition to the equipment account cannot be located or
identified as adding value to the equipment balance, it is possible that the
amount should have been classified as repair and maintenance expenses under
GAAP.
1.42 a. Incorrect Under Sarbanes-Oxley, public accounting firms are prevented from acting in a
managerial decision-making role for an audit client.
b. Incorrect Under Sarbanes-Oxley, public accounting firms are prevented from auditing the
firm’s own work on an audit client.
1-12
d. Incorrect This is not a test of rights and obligations. This is a test of existence which is
completed by auditors to answer the question as to whether the transactions
recorded as an asset really represent assets that exist and did add value to the
company’s equipment as compared to routine repair and maintenance expenses
under GAAP. Management’s existence assertion states that the reported assets
actually exist. If an addition to the equipment account cannot be located or
identified as adding value to the equipment balance, it is possible that the
amount should have been classified as repair and maintenance expenses under
GAAP.
e. Incorrect This is not a test of occurrence. This is a test of existence which is completed by
auditors to answer the question as to whether the transactions recorded as an
asset really represent assets that exist and did add value to the company’s
equipment as compared to routine repair and maintenance expenses under
GAAP. Management’s existence assertion states that the reported assets
actually exist. If an addition to the equipment account cannot be located or
identified as adding value to the equipment balance, it is possible that the
amount should have been classified as repair and maintenance expenses under
GAAP.
1.42 a. Incorrect Under Sarbanes-Oxley, public accounting firms are prevented from acting in a
managerial decision-making role for an audit client.
b. Incorrect Under Sarbanes-Oxley, public accounting firms are prevented from auditing the
firm’s own work on an audit client.
Loading page 13...
Chapter 01 - Auditing and Assurance Services
1-13
1.45 a. Correct Management is more likely to overstate assets and understate liabilities. As a
result, when auditing an asset balance, the most relevant assertions are likely to
be either existence or valuation. In this situation, because of the nature of cash
and the fact that is no foreign currency translation calculation, the existence
assertion is clearly the most important assertion.
b. Incorrect Although rights and obligations is an important assertion, it is not the most
relevant assertion for the cash balance. Since management is more likely to
overstate assets, when auditing an asset balance, the most relevant assertions are
likely to be either existence or valuation. In this situation, because of the nature
of cash and the fact that is no foreign currency translation calculation, the
existence assertion is clearly the most important assertion.
c. Incorrect Although valuation is an important assertion, it is not the most relevant assertion
for the cash balance. In this situation, because of the nature of cash and the fact
that is no foreign currency translation calculation, the existence assertion is
clearly the most important assertion. If however, there was a foreign currency
translation adjustment, valuation of cash would also be relevant.
d. Incorrect Although occurrence is an important assertion, it is not the most relevant
assertion for any balance sheet account. Rather, the occurrence assertion is more
closely related to income statement accounts because the question that needs to
be answered with evidence is whether the transaction really did occur in
accordance with GAAP. In this situation, because of the nature of cash and the
fact that is no foreign currency translation calculation, the existence assertion is
clearly the most important assertion.
1.46 a. Incorrect This evidence would provide evidence about management’s assertion about
rights and obligations and perhaps existence. However, this evidence would not
help to value the investment in accordance with GAAP.
b. Incorrect While this evidence would potentially be helpful to value an investment in
another company, it is not the best answer. If a quote was available from an
independent source, this would be a better form of evidence for valuation.
c. Incorrect This evidence would provide evidence about management’s assertion about
existence and perhaps rights and obligations. However, this evidence would not
help to value the investment in accordance with GAAP.
d. Correct Always remember that management is more likely to overstate assets. As a
result, when auditing an asset balance like investments, a relevant assertion is
likely to be valuation. In this situation, to answer the question of what the
investment should be valued at in the balance sheet, an auditor would first seek
to obtain a market quotation from an independent source like the Wall Street
Journal.
1.47 a. Incorrect This test is not related to presentation and disclosure. A cutoff test is clearly a
test of the completeness assertion as the test is designed to insure that all
1-13
1.45 a. Correct Management is more likely to overstate assets and understate liabilities. As a
result, when auditing an asset balance, the most relevant assertions are likely to
be either existence or valuation. In this situation, because of the nature of cash
and the fact that is no foreign currency translation calculation, the existence
assertion is clearly the most important assertion.
b. Incorrect Although rights and obligations is an important assertion, it is not the most
relevant assertion for the cash balance. Since management is more likely to
overstate assets, when auditing an asset balance, the most relevant assertions are
likely to be either existence or valuation. In this situation, because of the nature
of cash and the fact that is no foreign currency translation calculation, the
existence assertion is clearly the most important assertion.
c. Incorrect Although valuation is an important assertion, it is not the most relevant assertion
for the cash balance. In this situation, because of the nature of cash and the fact
that is no foreign currency translation calculation, the existence assertion is
clearly the most important assertion. If however, there was a foreign currency
translation adjustment, valuation of cash would also be relevant.
d. Incorrect Although occurrence is an important assertion, it is not the most relevant
assertion for any balance sheet account. Rather, the occurrence assertion is more
closely related to income statement accounts because the question that needs to
be answered with evidence is whether the transaction really did occur in
accordance with GAAP. In this situation, because of the nature of cash and the
fact that is no foreign currency translation calculation, the existence assertion is
clearly the most important assertion.
1.46 a. Incorrect This evidence would provide evidence about management’s assertion about
rights and obligations and perhaps existence. However, this evidence would not
help to value the investment in accordance with GAAP.
b. Incorrect While this evidence would potentially be helpful to value an investment in
another company, it is not the best answer. If a quote was available from an
independent source, this would be a better form of evidence for valuation.
c. Incorrect This evidence would provide evidence about management’s assertion about
existence and perhaps rights and obligations. However, this evidence would not
help to value the investment in accordance with GAAP.
d. Correct Always remember that management is more likely to overstate assets. As a
result, when auditing an asset balance like investments, a relevant assertion is
likely to be valuation. In this situation, to answer the question of what the
investment should be valued at in the balance sheet, an auditor would first seek
to obtain a market quotation from an independent source like the Wall Street
Journal.
1.47 a. Incorrect This test is not related to presentation and disclosure. A cutoff test is clearly a
test of the completeness assertion as the test is designed to insure that all
Loading page 14...
Chapter 01 - Auditing and Assurance Services
1-14
1.48 a. Incorrect This test is designed to test the completeness assertion for the inventory account.
It does not provide any evidence related to the rights and obligations assertion.
b. Correct This is clearly a test related to rights and obligations as the question that must be
answered with evidence is to establish that the inventory reported as assets really
is owned by the company. Goods on consignment, by definition, are not owned
by the company. Thus, there is a risk that the company is recording assets that
they do not own on their balance sheet.
c. Incorrect This test is designed to test the completeness assertion for sales revenue. It does
not provide evidence related to the rights and obligations assertion for inventory.
d. Incorrect This test is designed to test the presentation and disclosure assertion for
inventory purchase commitments. It does not provide evidence related to the
rights and obligations assertion for inventory.
1.49 a. Incorrect Management is far more likely to understate liabilities than to overstate them.
As a result, when auditing the accrued liabilities account, existence or
occurrence is not as likely to be violated. Rather, the most relevant assertion is
likely to be completeness.
1-14
1.48 a. Incorrect This test is designed to test the completeness assertion for the inventory account.
It does not provide any evidence related to the rights and obligations assertion.
b. Correct This is clearly a test related to rights and obligations as the question that must be
answered with evidence is to establish that the inventory reported as assets really
is owned by the company. Goods on consignment, by definition, are not owned
by the company. Thus, there is a risk that the company is recording assets that
they do not own on their balance sheet.
c. Incorrect This test is designed to test the completeness assertion for sales revenue. It does
not provide evidence related to the rights and obligations assertion for inventory.
d. Incorrect This test is designed to test the presentation and disclosure assertion for
inventory purchase commitments. It does not provide evidence related to the
rights and obligations assertion for inventory.
1.49 a. Incorrect Management is far more likely to understate liabilities than to overstate them.
As a result, when auditing the accrued liabilities account, existence or
occurrence is not as likely to be violated. Rather, the most relevant assertion is
likely to be completeness.
Loading page 15...
Chapter 01 - Auditing and Assurance Services
1-15
SOLUTIONS FOR EXERCISES AND PROBLEMS
1.52 Audit, Attestation, and Assurance Services
Students may encounter some difficulty with this matching question because the Special Committee on
Assurance Services (SCAS) listed many things that heretofore have been considered “attestation services”
(long before assurance services were invented). As a result, we believe that this question is a good vehicle
for discussing the considerable overlap that exists between attestation and assurance services.
• Real estate demand studies: Assurance service
• Ballot for awards show: Assurance service
• Utility rates applications: Assurance service
• Newspaper circulation audits: Assurance service
• Third-party reimbursement maximization: Assurance service
• Annual financial report to stockholders: Audit service
1-15
SOLUTIONS FOR EXERCISES AND PROBLEMS
1.52 Audit, Attestation, and Assurance Services
Students may encounter some difficulty with this matching question because the Special Committee on
Assurance Services (SCAS) listed many things that heretofore have been considered “attestation services”
(long before assurance services were invented). As a result, we believe that this question is a good vehicle
for discussing the considerable overlap that exists between attestation and assurance services.
• Real estate demand studies: Assurance service
• Ballot for awards show: Assurance service
• Utility rates applications: Assurance service
• Newspaper circulation audits: Assurance service
• Third-party reimbursement maximization: Assurance service
• Annual financial report to stockholders: Audit service
Loading page 16...
15 more pages available. Scroll down to load them.
Preview Mode
Sign in to access the full document!
100%
Study Now!
XY-Copilot AI
Unlimited Access
Secure Payment
Instant Access
24/7 Support
Document Chat
Document Details
Subject
Auditing