Cpas who perform audits or provide other assurance

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Unformatted text preview: urance services about information generated with these technologies need a basic knowledge and understanding of information technology and e-commerce in order to identify and respond to risks in the financial and other information generated by these technologies. 6- 6 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) Discussion Questions And Problems 1-16 a. The relationship among audit services, attestation services and assurance services is reflected in Figure 1-3 on page 13 of the text. Audit services are a form of attestation service, and attestation services are a form of assurance service. In a diagram, audit services are located within the attestation service area, and attestation services are located within the assurance service area. b. 1. (1) 2. 3. 4. 5. 6. 7. 8. 9. 1-17 a. Audit of historical financial statements (2) An attestation service other than an audit service; or (3) An assurance service that is not an attestation service (WebTrust developed from the AICPA Special Committee on Assurance Services, but the service meets the criteria for an attestation service.) (2) An attestation service other than an audit service (2) An attestation service other than an audit service (2) An attestation service other than an audit service (2) An attestation service that is not an audit service (Review services are a form of attestation, but are performed according to Statements on Standards for Accounting and Review Services.) (2) An attestation service other than an audit service (2) An attestation service other than an audit service (3) An assurance service that is not an attestation service 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: 6-7 1-17 (continued) LENDER Existing loan First National Bank City First Bank CPA SERVICE COST OF CPA SERVICES ANNUAL INTEREST ANNUAL LOAN COST None 0 $ 332,500 $ 332,500 Review $ 20,000 $ 297,500 $ 317,500 Audit $ 45,000 $ 262,500 $ 307,500 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 Existing loan First National Bank City First Bank CPA SERVICE COST OF CPA SERVICES ANNUAL INTEREST ANNUAL LOAN COST None 0 $ 332,500 $ 332,500 Review $ 20,000 $ 280,000 $ 300,000 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 Vialtek’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. 1-18 a. The services provided by Consumers Union are very similar to assurance services provided by CPA firms. The services provided by Consumers Union and assurance services provided by CPA firms are designed to improve the quality of information for decision makers. CPAs are valued for their independence, and the reports provided by Consumers Union are valued because Consumers Union is independent of the products tested. 6- 8 1-18 (continued) b. The concepts of information risk for the buyer of an automobile and for the user of financial statements are essentially the same. They are both concerned with the problem of unreliable information being provided. In the case of the auditor, the user is concerned about unreliable information being provided in the financial statements. The buyer of an automobile is likely to be concerned about the manufacturer or dealer providing unreliable...
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