Assurance Services - (Download Link at the end of this File) 1-1 Cha...

Auditing and Assurance Services An Integrated Approach, 17e Arens, Elder, Beasley, Hogan (Solutions Manual All Chapter)

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1-1 Chapter 1

The Demand for Audit and Other Assurance Services

 Concept Checks

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• To do an audit, there must be information in a verifiable form and some

standards (criteria) by which the auditor can evaluate the information.Determining the degree of correspondence between information and established criteria is determining whether a given set of information is in accordance with the established criteria. For an audit of a company’s financial statements the criteria are U.S. generally accepted accounting principles or International Financial Reporting Standards.

• The four primary causes of information risk are remoteness of information,

biases and motives of the provider, voluminous data, and the existence of complex exchange transactions.

The three main ways to reduce information risk are:

• User verifies the information.
• User shares the information risk with management.
• Audited financial statements are provided.

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• The three main types of audits are operational audits, compliance audits, and

financial statement audits. The table below summarizes the purposes and nature of each type of audit.

OPERATIONAL

AUDITS

COMPLIANCE

AUDITS

AUDITS OF

FINANCIAL

STATEMENTS

PURPOSE To evaluate whether operating procedures are efficient and effective To determine whether the client is following specific procedures set by a higher authority To determine whether the overall financial statements are presented in accordance with specified criteria (usually GAAP)

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1-2 Concept Checks (continued)

OPERATIONAL

AUDITS

COMPLIANCE

AUDITS

AUDITS OF

FINANCIAL

STATEMENTS

USERS OF

AUDIT

REPORT

Management of organization Authority that established rules, regulations, and procedures, either internal or external to auditee Different groups for different purposes — many outside entities NATURE Highly nonstandard; often subjective Not standardized, but specific and usually objective Highly standardized

PERFORMED

BY:

CPAs Frequently Occasionally Almost universally GAO AUDITORS Frequently Frequently Occasionally IRS AUDITORS Never Universally Never

INTERNAL

AUDITORS Frequently Frequently Frequently*

• Internal auditors may assist CPAs in the audit of financial statements. Internal

auditors may also audit internal financial statements for use by management.

• The major differences in the scope of audit responsibilities for CPAs, GAO

auditors, IRS agents, and internal auditors are:

• CPAs perform audits of financial statements prepared using U.S.GAAP or IFRS in accordance with auditing standards.• GAO auditors perform compliance or operational audits in order to assure the Congress of the expenditure of public funds in accordance with its directives and the law.• IRS agents perform compliance audits to enforce the federal tax laws as defined by Congress, interpreted by the courts, and regulated by the IRS.• Internal auditors perform compliance or operational audits in order to assure management or the board of directors that controls and policies are properly and consistently developed, applied, and evaluated.

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