Auditing and Financial Statements Essays

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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
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
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