Chapter 1 - Chapter 01 - An Introduction to Assurance and...

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing 1-1 CHAPTER 1 AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING Answers to Multiple-Choice Questions 1-13 B 1-19 A 1-14 B 1-20 D 1-15 C 1-21 D 1-16 C 1-22 D 1-17 C 1-23 B 1-18 C Solutions to Problems 1-24 The memo should cite the following facts: There is a historical relationship between accounting and auditing. When parties to the agency relationship (contract) do not possess the same amount of information (information asymmetry) there is a natural conflict of interest between the parties. For example, when an owner and manager are negotiating an employment contract, the owner may assume that the manager likely will use organizational funds for personal uses. Auditing plays an important role in such relationships. The owner and manager will consummate an employment contract only if the manager agrees to be monitored. Auditing can be used to monitor the contract agreed to by the two parties. (P.S. As an attorney, Lee should be well versed on contract law.) Auditing is also used to monitor other types of contracts for which no laws or regulations require an audit, for example, contracts between management and debt holders. There is historical evidence of forms of auditing in the early Greek states and in the United Kingdom during the industrial revolution. More relevant evidence is the fact that 82 percent of the NYSE companies were audited prior to the securities acts. Additional evidence for the demand for auditing is also provided by the fact that many private companies and municipalities not subject to the securities acts contract for audits. 1-25 There are two major factors that may make an audit necessary for Greenbloom Garden Centers. First, the company may require long-term financing for its expansion into other cities in Florida. Entities such as banks or insurance companies are likely to be the sources of the company's debt financing. These entities normally require audited financial statements before lending significant funds and generally require audited financial statements during the time period the debt is outstanding. There is information asymmetry between the lender of funds and the owner of the business, and this asymmetry results in
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This note was uploaded on 10/16/2011 for the course AIM 6334 taught by Professor Chrits during the Spring '11 term at University of Texas at Austin.

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Chapter 1 - Chapter 01 - An Introduction to Assurance and...

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