Chapter 1
The Demand for Audit and Other Assurance Services
Review Questions
1-1nowitzki The relationship among audit rvices, attestation rvices, and assurance rvices is reflected in Figure 1-3 on page 12 of the text. An assurance rvice is an independent professional rvice to improve the quality of information for decision makers. An attestation rvice is a form of assurance rvice in which the CPA firm issues a report about the reliability of an asrtion that is the responsibility of another party. Audit rvices are a form of attestation rvice in which the auditor express a written conclusion about the degree of correspondence between information and established criteria.
The most common form of audit rvice is an audit of historical financial statements, in which the auditor express a conclusion as to whether the financial statements are prented in accordance with an applicable financial reporting framework such as U.S. GA
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AP or IFRS. An example of an attestation rvice is a report on the effectiveness of an entity’s internal control over financial reporting. There are many possible forms of assurance rvices, including rvices related to business performance measurement, health care performance, and information system reliability.
1-2 An independent audit is a means of satisfying the need for reliable 词性information on the part of decision makers. Factors of a complex society which contribute to this need are:
1.Remoteness of information
a.Owners (stockholders) divorced from management
b.Directors not involved in day-to-day operations or decisions
c.Dispersion of the business among numerous geographic locations and complex corporate structures
2.Bias and motives of provider
a.Information will be biad in favor of the provider when his or her goals are inconsistent with the decision maker's goals.
3.Voluminous data
a.Possibly millions of transactions procesd daily via sophisticated computerized systems
b.Multiple product lines
c.Multiple transaction locations
4.Complex exchange transactions
a.New and changing business relationships lead to innovative accounting and reporting problems
b.Potential impact of transactions not quantifiable, leading to incread disclosures
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1-3 1. Risk-free interest rate This is approximately the rate the bank could earn by investing in U.S. treasury notes for the same length of time as the business loan.
2.Business risk for the customer This risk reflects the possibility that the business will not be able to repay its loan becau of economic or business conditions such as a recession, poor management decisions, or unexpected competition in the industry.
3.Information risk This risk reflects the possibility that the information upon which the business risk decision was made was inaccurate. A likely cau of the information risk is the possibility of inaccurate financial statements.
Auditing has no effect on either the risk-free interest rate or business risk. However, auditing can significantly reduce information risk.
1-4 The four primary caus of information risk are remoteness of information, bias and motives of the provider, voluminous data, and the existence of complex exchange transactions.
The three main ways to reduce information risk are:
1.Ur verifies the information.
2.Ur shares the information risk with management.hma
3.Audited financial statements are provided.
The advantages and disadvantages of each are as follows:
英语音标教学视频 | ADVANTAGES | DISADVANTAGES |
USER VERIFIES INFORMATION | 1.flag怎么读Ur obtains information desired. 2.Ur can be more confident of the qualifications and activities of the person getting the information. | 1.High cost of obtaining information. 2.Inconvenience to the person providing the information becau large number of urs would be on premis. |
USER SHARES INFORMATION RISK WITH MANAGEMENT | 1.cumulativeNo audit costs incurred. | 散文赏析1.Ur may not be able to collect on loss. |
AUDITED FINANCIAL STATEMENTS ARE PROVIDED | 1.Multiple urs obtain the information.bingbar 2.Information risk can usually be reduced sufficiently to satisfy urs at reasonable cost. 3.Minimal inconvenience to management by having only one auditor. | 1.May not meet needs of certain urs. 2.Cost may be higher than the benefits in some situations, such as for a small company. |
| | |
1-5 To do an audit, there must be information in a verifiable form and some standards (criteria) by which the auditor can evaluate the information. Examples of established criteria include generally accepted accounting principles and the Internal Revenue Code. Determining the degree of correspondence between information and established criteria is determining whether a given t of information is in accordance with the established criteria. 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 generally accepted accounting principles.
