Auditing, Assurance - Best, Shailer, Fiedler, Elder, Beasley (Solutio...

Auditing, Assurance Services & Ethics in Australia. 10e Arens, Best, Shailer, Fiedler, Elder, Beasley (Solutions Manual All Chapter)

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Copyright © 2017 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781488609138, Arens, Auditing and Assurance Services in Australia 10e 1 Chapter 1

Demand for Audit and Assurance Services

Review Questions

1-1 The relationships among audit services, attestation services and assurance services are reflected in Figure 1.1 of the text. 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. An attestation service is a form of assurance service in which the public accounting firm issues a written conclusion about an assertion made by a third party. An assurance service is an independent professional service to improve the quality of information for decision makers.The most common form of audit service is an audit of historical financial statements in which the auditor expresses an opinion as to whether the financial statements are presented in conformity with accounting standards and other mandatory disclosure requirements. An example of an attestation service is attesting to the information in an entity’s projected financial statements, which are often used to obtain financing. 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:

• Remoteness of information
• Owners (shareholders) divorced from management
• Directors not involved in day-to-day operations or decisions 2 / 4

Copyright © 2017 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781488609138, Arens, Auditing and Assurance Services in Australia 10e 2

• Dispersion of the business among numerous geographic locations

and complex corporate structures

• Biases and motives of provider
• Information will be biased in favour of the provider when his or her

goals are inconsistent with the decision maker’s goals

• Voluminous data
• Possibly millions of transactions processed daily via sophisticated

computerised systems

• Multiple product lines
• Multiple transaction locations
• Complex exchange transactions
• New and changing business relationships lead to innovative

accounting and reporting problems

• Potential impact of transactions not quantifiable, leading to

increased disclosures

1-3

1. Risk-free interest rate: This is approximately the rate the bank could

earn by investing in government bonds 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.

Auditing has no effect on either the risk-free interest rate or business risk.However, auditing can significantly reduce information risk.

1-4 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 (refer page 11 of the textbook).

The three main ways to reduce information risk are:

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Copyright © 2017 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781488609138, Arens, Auditing and Assurance Services in Australia 10e 3

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

The advantages and disadvantages of each are as follows:

ADVANTAGES DISADVANTAGES

USER VERIFIES

INFORMATION

• User obtains information

desired.

• User can be more confident of

the qualifications and activities of the person getting the information.

• High cost of obtaining

information.

• Inconvenience to the person

providing the information because a large number of users would be on premises.

USER SHARES

INFORMATION

RISK WITH

MANAGEMENT

• No audit costs incurred. 1. User may not be able to

collect on losses. For example, if loss is incurred due to the company becoming insolvent, the user may find it difficult to get his or her loss repaid.

AUDITED

FINANCIAL

STATEMENTS

ARE PROVIDED

• Multiple users obtain the

information.

• Information risk can usually

be reduced sufficiently to satisfy users at reasonable cost.

• Minimal inconvenience to

management by having only one auditor.

• May not meet needs of

certain users.

• Cost may be higher than the

benefits in some situations, such as for a small company.

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