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Unformatted text preview: 1 CHAPTER 1 AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING Answers to Review Questions 1-1 The study of auditing is more conceptual in nature compared to other accounting courses. Rather than focusing on learning the rules, techniques, and computations required to prepare financial statements, auditing emphasizes learning a framework of analytical and logical skills to evaluate the relevance and reliability of the systems and processes responsible for financial information, as well as the information itself. To be successful, students must learn the framework and then learn to use logic and common sense in applying auditing concepts to various circumstances and situations. Understanding auditing can improve the decision making ability of consultants, business managers, and accountants by providing a framework for evaluating the usefulness and reliability of information. 1-2 There is a demand for auditing in a free-market economy because the agency relationship between an absentee owner and a manager produces a natural conflict of interest due to the information asymmetry that exists between the owner and manager. As a result, the agent agrees to be monitored as part of his/her employment contract. Auditing appears to be a cost-effective form of monitoring. The empirical evidence suggests auditing was demanded prior to government regulation such as statutory audit requirements. Additionally, many private companies and other entities not subject to government auditing regulations also demand auditing. 1-3 The agency relationship between an owner and manager produces a natural conflict of interest because of differences in the two parties goals and because of information asymmetry that exists between them. That is, the manager generally has more information about the true financial position and results of operations of the entity than the absentee owner does. If both parties seek to maximize their own self-interest, it is likely that the manager will not act in the best interest of the owner and may manipulate the information provided to the owner accordingly. 1-4 Independence is an important standard for auditors. If an auditor is not independent of the client, users may lose confidence in the auditors ability to report truthfully on the financial statements, and the auditors work loses its value. From an agency perspective, if the principal (owner) knows that the auditor is not independent, the owner will not trust the auditors work. Thus, the agent will not hire the auditor because the auditors report will not be effective in reducing information risk from the perspective of the owner. 1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users....
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This note was uploaded on 11/13/2011 for the course ACCT 470 taught by Professor Fdsafd during the Summer '09 term at Franklin.
- Summer '09
- The Land