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

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CHAPTER 1

Introduction and Overview of Audit Assurance Learning Objectives 1.Differentiate among assurance, attestation, and audit services.

2.Describe the different types of assurance services.

3.Explain the demand for audit and assurance services.

4.Discuss the different roles of the financial statement preparer and the auditor.

5.Identify the roles of different regulators and organizations that affect the audit profession.

6.Explain the concepts of reasonable assurance, materiality, and the nature of an unqualified/unmodified report on the audit of financial statements.

7.Explain the concept of reasonable assurance and the nature of an unqualified report on internal controls over financial reporting.

8.Discuss the audit expectation gap.

ANSWERS TO MULTIPLE -CHOICE QUESTIONS

1.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 2.A LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Management, Section: Different Assurance Services 3.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 LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Management, Section: Different Assurance Services

• C

LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Management, Section: Demand for Audit and Assurance Services 6.B LO 4, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Management, Section: Preparers and Auditors 7.A LO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: Reporting, Section: The Role of Regulators and Regulations 8.D LO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA BC: Governance Perspective, Section: The Role of Regulators and Regulations Auditing A Practical Approach With Data Analytics 1e Raymond Johnson, Laura Davis Wiley, Robyn Moroney (Solutions Manual All Chapters, 100% Original Verified, A+ Grade) 1 / 4

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• 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 Financial 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

ANSWERS TO REVIEW QUESTIONS

1.1 An assurance service is any service provided by an independent practitioner that improves the quality of information that was prepared by someone else. An independent practitioner 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 (investors/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

1.2 The criterion used in a financial statement audit to measure and evaluate subject matter is the applicable financial reporting framework used by the client. The most common framework used in the U.S. is GAAP.LO 1, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: None, AICPA AC: Measurement Analysis and Interpretation, Section: Assurance, Attestation, and Audit Services

1.3 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 because it includes management’s judgment when applying accounting standards and estimates. 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 auditor may arrive at an inappropriate conclusion if information is tampered with or excluded. 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 population, and sampling cannot provide absolute assurance.LO 2, BT: C, Difficulty: Medium, TOT: 15 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Management, Section: Different Assurance Services

1.4 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 Assurance Services

1.5 Investors are interested in the information that financial statements can provide about their investment. This includes, but is not limited to, information regarding the profitability 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

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1.6 Both the preparer and the auditor have responsibilities regarding the company’s financial 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 financial statements are presented fairly and in accordance with the applicable financial reporting framework. The three responsibilities of auditors are to conduct the audit in accordance with the appropriate audit standards, plan and perform the audit with professional skepticism, and exercise professional judgment.LO 4, BT: C, Difficulty: Medium, TOT: 15 min., AACSB: None, AICPA AC: Reporting, Section: Preparers and Auditors

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

1.8 Some functions of the state boards of accountancy include issuing CPA licenses, adopting and enforcing professional conduct rules for CPAs, enforcing continuing professional education requirements, and administering disciplinary actions. 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

1.9 The principles of GAAS start with the purpose of an audit, which is to provide an opinion on whether a company’s financial statements are presented fairly and in accordance with GAAP. The next principle describes the premise upon which an audit is conducted. This outlines management’s responsibility to prepare the financial statements in accordance with the applicable framework, manage and maintain internal controls over financial reporting, and provide the auditor with access to all documentation relevant to conduct the audit. The next principle outlines the responsibilities of the auditor, which explicitly states auditors have to be competent, comply with auditing standards, maintain professional skepticism and exercise professional judgment during an audit. While performing an audit, an auditor must obtain reasonable assurance that the financial statements are free from material misstatement, but also recognize it is not an absolute assurance due to several limitations. The last principle states that auditors must report the results of the audit in a formalized written report.LO 5, BT: C, Difficulty: Easy, TOT: 10 min., AACSB: None, AICPA AC: Reporting, Section: The Role of Regulators and Regulations

1.10 Audit reports for private and public companies are very similar in content. Both reports contain the essential components: a title with the word “independent,” an address to the shareholders/owners and board, identification of which financial statements were audited, a description of the responsibilities of the parties involved, a description of the conduct of an audit, an opinion on the outcome, a signature with the firm’s name and a date indicating the end of fieldwork. However, there are a few differences between the two. The title for an audit report of a public company includes the term “registered” indicating the firm is registered with the PCAOB. Audit reports for public companies state the auditor is required to be independent from the company in accordance with U.S. federal securities laws and with regulations of the SEC and PCAOB. One of the biggest differences between the reports is that public companies include a paragraph referencing the audit of the firm’s internal controls over financial reporting. Public companies are required to have two audits, one for financial statements and the other for ICFR; whereas, private companies are not required to have an audit of ICFR. Also, auditors must provide a statement about auditor tenure at the bottom of the audit report public companies. Finally, the order of the paragraphs in 3 / 4

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the two reports is different. The audit report for a public company begins with the auditor’s opinion in the first paragraph. In the audit report for a private company, the opinion is given in the last paragraph.LO 6, BT: AN, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Reporting, Section: Audit Report on Financial Statements

1.11 The components of an auditor’s report on internal controls over financial reporting include the title, address, opinion, reference to the financial statement audit, basis for opinion paragraph, scope paragraph, definition and limitations paragraph, signature and date. The title must include two important terms— “independent” and “registered”—signifying the auditor’s independence and that the firm is registered with the PCAOB. The report is addressed to the board and shareholders of the company. The opinion paragraph states that an audit of the company’s internal controls was conducted using the COSO Internal Control-Integrated Framework as the criteria, and then states whether or not the company maintained effective internal control. The next paragraph references the audit of the company’s financial statements since public companies require two audits. The basis for opinion paragraph briefly describes the responsibilities of management and the auditor and mentions that auditors are required to be independent from the company. The scope paragraph briefly describes how an audit of ICFR is conducted. The definition and inherent limitations paragraph defines ICFR for users unfamiliar with the terminology and emphasizes that internal controls will not be able to prevent or detect all misstatements or errors. The report is signed by the firm and dated to represent the end of the fieldwork.LO 7, BT: C, Difficulty: Medium, TOT: 15 min., AACSB: None, AICPA AC: Reporting, Section: Audit Report on Internal Controls over Financial Reporting

1.12 The audit expectation gap occurs when the auditor’s professional responsibilities do not align with the financial statement users’ beliefs. This gap is created when the user has unrealistic expectations for

the audit. Some examples of unrealistic expectations are as follows:

• the user may believe the auditor is providing absolute assurance instead of reasonable assurance, • the user may believe the auditor is guaranteeing future viability of the company, • the user may believe a favorable audit conclusion indicates complete accuracy instead of no material misstatements, • the user may believe the auditor will find any and all fraud when that is simply impossible, and • the user may believe the auditor has tested every transaction instead of a sample.It is impossible for professional auditing standards to give users what they want because of inherent limitations with the conduct of an audit.Auditors sometimes do not meet professional standards because of time constraints in completing the audit (possibly being short staffed), not exercising enough professional skepticism, and not maintaining professional competence through continuing professional education.LO 8, BT: AN, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis and Management, Section: The Audit Expectation Gap

SOLUTIONS TO ANALYSIS PROBLEMS

AP1.1 Although internal and external audit are different professional fields, they share some similar responsibilities. Both fields follow rules and regulations made by their respective professional organizations, the Institute of Internal Auditors (IIA) and the American Institute of Certified Public Accountants (AICPA). Additionally, external auditors of public companies must adhere to regulations set forth by the PCAOB and SEC. Internal auditors are typically employees of the organization and therefore

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