The buyer of an automobile is likely to be concerned

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Unformatted text preview: information. c. The four causes of information risk are essentially the same for a buyer of an automobile and a user of financial statements: (1) Remoteness of information It is difficult for a user to obtain much information about either an automobile manufacturer or the automobile itself without incurring considerable cost. The automobile buyer does have the advantage of possibly knowing other users who are satisfied or dissatisfied with a similar automobile. (2) Biases and motives of provider There is a conflict between the automobile buyer and the manufacturer. The buyer wants to buy a high quality product at minimum cost whereas the seller wants to maximize the selling price and quantity sold. (3) Voluminous data There is a large amount of available information about automobiles that users might like to have in order to evaluate an automobile. Either that information is not available or too costly to obtain. (4) Complex exchange transactions The acquisition of an automobile is expensive and certainly a complex decision because of all the components that go into making a good automobile and choosing between a large number of alternatives. d. The three ways users of financial statements and buyers of automobiles reduce information risk are also similar: (1) User verifies information him or herself That can be obtained by driving different automobiles, examining the specifications of the automobiles, talking to other users and doing research in various magazines. (2) User shares information risk with management The manufacturer of a product has a responsibility to meet its warranties and to provide a reasonable product. The buyer of an automobile can return the automobile for correction of defects. In some cases a refund may be obtained. (3) Examine the information prepared by Consumer Reports This is similar to an audit in the sense that independent information is provided by an independent party. The 6- 9 information provided by Consumer Reports is comparable to that provided by a CPA firm that audited financial statements. 6-10 1-19 a. The following parts of the definition of auditing are related to the narrative: (1) Virms is being asked to issue a report about qualitative and quantitative information for trucks. The trucks are therefore the information with which the auditor is concerned. (2) There are four established criteria which must be evaluated and reported by Virms: existence of the trucks on the night of June 30, 2009, ownership of each truck by Regional Delivery Service, physical condition of each truck and fair market value of each truck. (3) Susan Virms will accumulate and evaluate four types of evidence: (a) Count the trucks to determine their existence. (b) Use registrations documents held by Oatley for comparison to the serial number on each truck to determine ownership. (c) Examine the trucks to determine each truck's physical condition. (d) Examine the blue book to determine the fair market value of each truck. (4) Susan Virms, CPA, appears qualified, as a competent, independent person. She is a CPA, and she spends most of her time auditing used automobile and truck dealerships and has extensive specialized knowledge about used trucks that is consistent with the nature of the engagement. (5) The report results are to include: (a) which of the 35 trucks are parked in Regional's parking lot the night of June 30. (b) whether all of the trucks are owned by Regional Delivery Service. (c) the condition of each truck, using established guidelines. (d) fair market value of each truck using the current blue book for trucks. b. The only parts of the audit that will be difficult for Virms are: (1) Evaluating the condition, using the guidelines of poor, good, and excellent. It is highly subjective to do so. If she uses a different criterion than the "blue book," the fair market value will not be meaningful. Her experience will be essential in using this guideline. (2) Determining the fair market value, unless it is clearly defined in the blue book for each condition. 6-11 1-20 a. narrative: The following parts of the definition of auditing are related to the (1) Haraldsson is being asked to issue a report about qualitative and quantitative information for the buses. The buses and their value are therefore the information with which she is concerned. (2) There are four established criteria which must be evaluated and reported by Haraldsson: existence of the buses on the night of August 31, 2008, ownership of each bus by Danville Bus Services, physical condition of each bus and fair market value of each bus. (3) Annaliese Haraldsson will accumulate and evaluate four types of evidence: (e) Count the buses to determine their existence. (f) Use registrations documents held by Olson for comparison to the serial number on each bus to determine ownership. (g) Examine the buses to determine each bus's physical condition. She can examine the bus’s condition herself or hire an expert to do so. (h) Examine the blue book to det...
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This note was uploaded on 02/04/2014 for the course ACCOUNTING 211 taught by Professor Alikapur during the Fall '13 term at American University of Sharjah.

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