Homework_1_Key - Chapter 1 The Demand for Audit and Other...

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Chapter 1 The Demand for Audit and Other Assurance Services ± Multiple Choice Questions From CPA Examinations 1-14 a. (3) b. (2) c. (2) d. (3) 1-15 a. (2) b. (3) c. (4) d. (3) 1-17 a. The interest rate for the loan that requires a review report is lower than the loan that did not require a review because of lower information risk. A review report provides moderate assurance to financial statement users, which lowers information risk. An audit report provides further assurance and lower information risk. As a result of reduced information risk, the interest rate is lowest for the loan with the audit report. b. Given these circumstances, Vial-tek should select the loan from City First Bank that requires an annual audit. In this situation, the additional cost of the audit is less than the reduction in interest due to lower information risk. The following is the calculation of total costs for each loan: LENDER CPA SERVICE COST OF CPA SERVICES ANNUAL INTEREST ANNUAL LOAN COST Existing loan None 0 $ 332,500 $ 332,500 First National Bank Review $ 20,000 $ 297,500 $ 317,500 City First Bank Audit $ 45,000 $ 262,500 $ 307,500
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1-17 (continued) c. Vial-tek should select the loan from First National Bank due to the higher cost of the audit and the reduced interest rate for the loan from First National Bank. The following is the calculation of total costs for each loan: LENDER CPA SERVICE COST OF CPA SERVICES ANNUAL INTEREST ANNUAL LOAN COST Existing loan None 0 $ 332,500 $ 332,500 First National Bank Review $ 20,000 $ 280,000 $ 300,000 City First Bank Audit $ 50,000 $ 262,500 $ 312,500 d. Vial-tek may desire to have an audit because of the many other positive benefits that an audit provides. The audit will provide Vial- tek’s management with assurance about annual financial information used for decision-making purposes. The audit may detect errors or fraud, and provide management with information about the effectiveness of controls. In addition, the audit may result in recommendations to management that will improve efficiency or effectiveness. e. The auditor must have a thorough understanding of the client and its environment, including the client’s e-commerce technologies, industry, regulatory and operating environment, suppliers, customers, creditors, and business strategies and processes. This thorough analysis helps the auditor identify risks associated with the client’s strategies that may affect whether the financial statements are fairly stated. This strategic knowledge of the client’s business often helps the auditor identify ways to help the client improve business operations, thereby providing added value to the audit function.
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Homework_1_Key - Chapter 1 The Demand for Audit and Other...

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