Homework Wk 1

Homework Wk 1 - Chapter 1. 1.17. a. The interest rate for...

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Chapter 1. 1.17. a. The interest rate for the loan that requires an audit report is lower that the interest rate for the other two loans because the bank’s risk is reduces by the minimal information risk since a borrower’s financial statements are audited. Consequently, the interest rate for the loan that requires a review report is lower than for the loan that did not require a review because the bank bears a lower information risk. b. the annual cost under existing loan is $332,500, under 8.5% rate is $317,500, and under 7.5% rate is 307,500. Thus, Vial-tek should accept the offer from City First Bank. c. in this case, the lower cost would be $300,000 (from First National Bank) d. if the client would prefer an option with the audit, it could benefit the business from the point of view that the financial statements information will represent the correct, free of bias and reliable data for decision making purposes; and the quality of information being reported will be improved. e. Auditors should improve their achievement of client business knowledge to provide a more effective audit founded on more comprehensive and relevant audit evidence. 1.18. a. Assurance services can be completed by CPAs or by a variety of other professionals, including Consumers Union. The services provided by Consumers Union are similar to assurance services provided by CPA firms because the assurance provider is independent and the information provided in reports is unbiased. This organization provides the information to help consumers make correct decisions about the products they want to buy. Consumers Union tests a variety of products and reports their evaluations of the quality in Consumer Reports. b. Information risk reflects the possibility that the information upon which the business risk decision was made was inaccurate. A cause of the information risk that presented in this chapter is the possibility of inaccurate financial statements. Similarly, the automobile buyers may face the information risk mainly because sellers may know their vehicles problems, while potential buyers may not. c. the causes of information risk are: - Remoteness of information. It is almost impossible to receive the firsthand information in today’s economy. When information provided by others, it can be intentionally or unintentionally misstated. In the same way it works with the buyers of automobiles because the buyer cannot receive the information directly from manufacturers. The automobile dealers may present the information the way the need it to be (especially on the used auto market). -Biases and motives of the provider. The information provided by someone whose goals are inconsistent with those of the decision maker may be biased in favor of the provider. Similarly, the auto dealer may hide the unfavorable info about the car in order to sell it or they may have the biased info in the paperwork. - Voluminous data. The information can be buried in a large amount of other information. In this
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Homework Wk 1 - Chapter 1. 1.17. a. The interest rate for...

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