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c. The four causes of information risk are essentially the same for a buyer
of an automobile and a user of financial statements:
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
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
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.
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
d. The three ways users of financial statements and buyers of
automobiles reduce information risk are also similar:
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
User shares information risk with management
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.
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
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.
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.
Susan Virms will accumulate and evaluate four types of
Count the trucks to determine their existence.
Use registrations documents held by Oatley for
comparison to the serial number on each truck to
Examine the trucks to determine each truck's physical
Examine the blue book to determine the fair market
value of each truck.
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.
The report results are to include:
which of the 35 trucks are parked in Regional's
parking lot the night of June 30.
whether all of the trucks are owned by Regional
the condition of each truck, using established
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:
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.
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
(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
Count the buses to determine their existence.
Use registrations documents held by Olson for
comparison to the serial number on each bus to
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.
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.
- Fall '13