1. Differentiate among assurance, attestation, and auditing services.

Solutions Manual for Auditing A Practi- cal Approach With Data Analytics, 2e Raymond Johnson, Laura Davis Wiley, Robyn Moroney

CHAPTER 1

Introduction and Overview of Audit and Assurance Learning Objectives

• Differentiate among assurance, attestation, and auditing services.
• Describe the different types of assurance services.
• Explain the demand for audit and assurance services.
• Discuss the different roles of the financial statement preparer and the auditor.
• Identify the roles of different regulators and organizations that affect the audit profes-

sion.

• Explain the concepts of reasonable assurance, materiality, and the nature of an un-

qualified/unmodified report on the audit of financial statements.

• Explain the concept of reasonable assurance and the nature of an unqualified report

on internal controls over financial reporting.

• Discuss the audit expectation gap.

ANSWERS TO MULTIPLE-CHOICE QUESTIONS

• C

LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Management,

Section: Assurance, Attestation, and Audit Services

• A

LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Management,

Section: Different Assurance Services

• B

LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Management,

Section: Different Assurance Services

4. C 1 / 4

LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Manage-

ment, Section: Different Assurance Services

• C

LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Manage-

ment, Section: Demand for Audit and Assurance Services

• B

LO 4, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Management,

Section: Preparers and Auditors

• A

LO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: Reporting, Section: The Role of Regulators and Regulations

• D

LO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA BC: Governance Perspective, Section: The Role of Regulators and Regulations

• D

LO 6, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Management,

Section: Audit Report on Financial Statements

• C

LO 6, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: Reporting, Section: Audit Report on the Finan- cial Statements

• B

LO 7, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: Reporting, Section: Audit Report on Internal Controls over Financial Reporting

• B

LO 8, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: None, AICPA PC: Professional Behavior, Section: The Audit Expectation Gap

• / 4

ANSWERS TO REVIEW QUESTIONS

R1.1 An assurance service is any service provided by an independent practitioner that im- proves the quality of information, or its context, for decision makers. An independent prac- titioner can verify that the information meets relevant criteria, which provides assurance to users who intend to use the information for decision making. An assurance engagement has three parties: the assurance provider (auditor/practitioner), the party responsible for providing the information (client), and the intended users of the information (inves- tors/lenders/others who rely on the information).LO 1, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Management,

Section: Assurance, Attestation, and Audit Services

R1.2 The criterion used in a financial statement audit to measure and evaluate subject mat- ter is the applicable financial reporting framework used by the client. The most common framework used in the U.S. is Generally Accepted Accounting Principles (GAAP).LO 1, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: None, AICPA AC: Measurement Analysis and Interpretation, Sec-

tion: Assurance, Attestation, and Audit Services

R1.3 Financial statements are not guaranteed to be free from error or fraud due to several limitations. These limitations include the nature of financial reporting, the nature of audit procedures and the need for the audit to be conducted within a reasonable period of time and within a reasonable budget. The nature of financial reporting causes limitations be- cause it includes management’s judgment when applying accounting standards and esti- mates. The nature of the audit procedures is a limitation because the auditors have to rely on management to provide all the necessary documentation needed for the audit. The au- ditor may arrive at an inappropriate conclusion if information is tampered with or ex- cluded. The last limitation refers to the limited resources of time and money for an audit engagement. It would be impractical for auditors to examine every transaction. Therefore, auditors rely on sampling measures to provide an accurate representation of the popula- tion, and sampling cannot provide absolute assurance.LO 2, BT: C, Difficulty: Medium, TOT: 15 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Manage-

ment, Section: Different Assurance Services

R1.4 Management and those charged with governance can request an operational audit to help improve the efficiency and effectiveness of a company’s operations. An organization’s internal audit department typically conducts operational audits.LO 2, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: None, AICPA BC: Governance Perspective, Section: Different As- surance Services

• / 4

R1.5 Investors are interested in the information that financial statements can provide about their investment. This includes, but is not limited to, information regarding the profit- ability of the company, return on investment, going concern/continuity of operations, and dividend distributions. An independent audit helps to ensure that the information in the financial statements is credible and of high quality.LO 3, BT: C, Difficulty: Easy, TOT: 10 min., AACSB: None, AICPA BC: Governance Perspective, Section: Demand for Audit and Assurance Services

R1.6 Both the preparer and the auditor have responsibilities regarding the company’s fi- nancial statements. Management (the preparer) is in charge of preparing the financial statements. This includes ensuring the information is presented fairly and in compliance with GAAP, or other applicable financial reporting framework. Management is responsible for designing, implementing, and maintaining internal control over financial reporting, as well as providing auditors with all the necessary documentation and personnel needed to complete the audit. Auditors are responsible for providing an opinion on whether the fi- nancial statements are presented fairly and in accordance with the applicable financial re- porting framework. The three responsibilities of auditors are to conduct the audit in ac- cordance with the appropriate audit standards, plan and perform the audit with profes- sional skepticism, and exercise professional judgment.LO 4, BT: C, Difficulty: Medium, TOT: 15 min., AACSB: None, AICPA AC: Reporting, Section: Preparers and Audi- tors

R1.7 The SOX Act of 2002, which emphasized a need for better governance over financial reporting, created the Public Company Accounting Oversight Board (PCAOB). The PCAOB is a non-profit corporation established to oversee the audits of public companies. The U.S.Securities and Exchange Commission (SEC) is a federal government agency whose role is to enforce and interpret securities laws. The SEC approves each new auditing standard estab- lished by the PCAOB before it can be implemented. The SEC and PCAOB work closely to- gether to ensure standards are in place for both public companies and auditors to safe- guard investors.LO 5, BT: C, Difficulty: Medium, TOT: 10 min., AACSB: None, AICPA AC: Reporting, Section: The Role of Regulators and Regulations

R1.8 Some functions of the state boards of accountancy include issuing Certified Public Ac- countant (CPA) licenses, adopting and enforcing professional conduct rules for CPAs, en- forcing continuing professional education requirements, and administering disciplinary ac- tions. The National Association of State Boards of Accountancy (NASBA) is a professional organization that works to unite the interests of the 55 jurisdictions of state boards with regulative and legislative bodies.LO 5, BT: AP, Difficulty: Easy, TOT: 10 min., AACSB: Analytic, AICPA PC: Professional Behavior, Section: The Role of Regulators and Regulations

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