auditing manual solution - 1Chapter 1 The Demand for Audit...

1 Chapter 1
The Demand for Audit and Other Assurance Services
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Review Questions
1-1 The relationship among audit services, attestation services, and assurance
services is reflected in Figure 1-3 on page 13 of the text. An assurance service is
an independent professional service to improve the quality of information for
decision makers. An attestation service is a form of assurance service in which
the CPA firm issues a report about the reliability of an assertion that is the
responsibility of another party. Audit services are a form of attestation service in
which the auditor expresses a written conclusion about the degree of
correspondence between information and established criteria.
The most common form of audit service is an audit of historical financial
statements, in which the auditor expresses a conclusion as to whether the
financial statements are presented in conformity with generally accepted
accounting principles. An example of an attestation service is a report on the
effectiveness of an entity’s internal control over financial reporting. There are
many possible forms of assurance services, including services related to
business performance measurement, health care performance, and information
system reliability.
1-2 An independent audit is a means of satisfying the need for reliable
information on the part of decision makers. Factors of a complex society which
contribute to this need are:
1. Remoteness of information
a. Owners (stockholders) divorced from management
b. Directors not involved in day-to-day operations or decisions
c. Dispersion of the business among numerous geographic
locations and complex corporate structures
2. Biases and motives of provider
a. Information will be biased in favor of the provider when his or
her goals are inconsistent with the decision maker's goals.
3. Voluminous data
a. Possibly millions of transactions processed daily via
sophisticated computerized systems
b. Multiple product lines
c. Multiple transaction locations
4. Complex exchange transactions
a. New and changing business relationships lead to innovative
accounting and reporting problems
b. Potential impact of transactions not quantifiable, leading to
increased disclosures
6-1

1-3 1. Risk-free interest rate This is approximately the rate the bank could
earn by investing in U.S. treasury notes for the same length of time
as the business loan.
2. Business risk for the customer This risk reflects the possibility that the
business will not be able to repay its loan because of economic or
business conditions such as a recession, poor management
decisions, or unexpected competition in the industry.
3. Information risk This risk reflects the possibility that the information
upon which the business risk decision was made was inaccurate. A
likely cause of the information risk is the possibility of inaccurate
financial statements.