Solutions Manual All Chapter

Auditing Assurance and Risk, 4e Robert Knechel, Steven Salterio

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End of Chapter Material Problems

• The United States has a federal income tax system that relies significantly on the honesty

of its taxpayers in that the IRS can’t audit everyone who files a tax return. In fact, the IRS has conducted as few as 1.3 million audits in a given year. On the other hand, many studies show that the average citizen substantially complies with the tax code.

• How does the IRS attain such a high rate of compliance from the US taxpayer

while auditing so few returns?

• What strategies do you think the IRS employs to maximize the return to its

auditing effort?

• Which of the following claims is amenable to attestation? Discuss the problems with

attesting to each assertion (e.g., measurement issues).

• “PFD’s net income for the second quarter of 2005 rose 10 percent compared to

the same quarter last year.”

• “HOC’s market share as of the end of 2005 stands at 17 percent.”
• “RGS’s new product will be significantly cheaper than its competitors’ products.”
• “WRK’s products are the best in the business.”
• “We, The Union of Non-Capitalistic People, are substantially in compliance with

the terms of the anti-ballistic missile treaty.”

• “My personal travel expenses for the Phoenix trip were $64.88.”
• “The Bendit Corporation meets or exceeds all standards contained in the Equal

Opportunity Employment Act.”

• “Chris’ National Bank has sufficient capital to withstand a downturn in the

economy of its lending area.”

• Advances in information technology have made the timely receipt of information more

and more valuable. Today, real-time information can be extracted externally from company databases through secured web sites. Analysts representing institutional investors are able to receive this type of information in real time. Similarly, press releases and quarterly information can be posted to web sites for instant access by the public.

• Analyze the effect this technology may have on the value of stock market

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• Explain the problems less sophisticated investors face when they trade in a stock

market where such technology is widely used.

• Explain why stock market regulators might restrict restricted access to real-time

company information under some circumstances.

• For each of the following industries and situations, discuss and give examples of the

ways information technology has improved the reliability and efficiency of decision making and made the timely receipt of information more valuable.

• Entertainment delivery (e.g., a cable company’s channel expansion plans)
• Agriculture (e.g., a farmer’s decisions on where to sell her crops)
• Politics (e.g., a candidate’s campaign strategy)
• General retailing (e.g., Wal-Mart)
• Utilities (e.g., water and electric)

• Consider a local pizzeria and IBM. It should be obvious that their information needs will

differ. However, their information needs will also be alike in some areas.

• Discuss the similarities and the differences. Specifically, how are the

environments in which they operate and the publics they serve different, and how are they similar?

• Discuss the manner in which each collects and processes that information.

• Consider the situation where you are interested in buying a car. Contrast the difference

between buying a new car from a licensed Hyundai dealer and buying a used car from an individual from an on-line intermediary.

• Describe how information asymmetry presents similar challenges under both

scenarios.

• Describe how you are able to reduce the risks associated with information

asymmetry under each condition.

• How could an independent, third-party reduce the risk associated with

information asymmetry?

• Auditors face some unique circumstances in auditing financial statements. Two that

suggest themselves immediately are:

• The parties paying their bill are the ones whose financial statements are being

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• Of the two types of errors auditors can make (accepting misstated financial

statements or rejecting fairly stated financial statements), accepting misstatements are of much more concern.How do these circumstances affect the audit process and how they might differ under different regulatory jurisdictions? Specifically, how do they affect the process of identifying and obtaining relevant audit information, evaluating alternatives, and selecting the best action from among those available to an auditor?

• The directors of High-Class Brands Limited are choosing an audit firm. They decide to

appoint a major firm, at an expected fee of $200,000, instead of an alternative audit firm costing $100,000. Suggest reasons for against making such a decision.

• Describe how information asymmetry creates the demand for an external assurance

service when fulfilling contractual obligations between an auto manufacturer (e.g., DaimlerChrysler) and one of its unions (e.g., the United Auto Workers). As an example, consider a critical issue facing automotive manufacturers and unions today, the outsourcing of part of the assembly process to key suppliers. Global competition has placed a significant amount of pressure on companies to reduce production and assembly costs. To reduce costs, manufacturers are outsourcing more of a vehicle’s production to suppliers, many of which are located in emerging economies. As a result, companies are reducing domestic labor forces, most of which are unionized. Most negotiated contracts with the unions allow for outsourcing decisions to occur; however, the contracts stipulate specific conditions that must exist before these decisions are allowable.

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