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Solutions Manual for Auditing A Practical Approach, 4th Canadian Edition, 4e Moroney, Campbell, Hamilton, Warren (All Chapters Download link at the end of this file) 1 / 3
Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
Chapter 1 Introduction and Overview of Audit and Assurance
SOLUTIONS TO REVIEW QUESTIONS
REVIEW QUESTION 1.1
In the financial reporting context, “assurance” relates to the audit or review of an entity’s financial statements.
An audit provides reasonable assurance about the fair presentation of the financial statements, while a review provides limited assurance. The audit contains a positive expression of opinion (e.g., ”in our opinion the accompanying financial statements present fairly, in all material respects….”, while the review contains a negative expression of their conclusion (e.g., “nothing has come to our attention that causes us to believe that the financial statements do not present fairly….”.The practitioner is an auditor working in public practice providing assurance on financial statements of publicly listed companies, or other entities. Intended users are the people for whom the provider prepares their report (e.g., the shareholders). The responsible or accountable party is the person or organization (e.g., a company) responsible for the preparation of the subject matter (e.g., the financial statements).
An “assurer” must have the knowledge and expertise to assess the fairness of the information being presented by the preparers. Auditors of financial statements need to be trained accountants with detailed knowledge about the complex technical accounting and disclosure issues required to assess the choices made by the financial statement preparers.When undertaking an audit, the auditor should use professional scepticism, professional judgement, and due care.
Auditors should be independent of the client. Independent auditors have no incentives to aid the entity in presenting their results in the best possible light. They are concerned with ensuring that the information contained in the financial statements is reliable and free from any significant (material) misstatements (error or fraud). A user needs to believe that the auditor is acting independently. This means that not only should auditors be independent (i.e., not have any undue personal or financial incentive to protect the client), auditors should avoid doing anything that would cause a reasonable person to doubt their independence.
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Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
REVIEW QUESTION 1.2
The users of the financial statements issued by a large listed public company include share- holders, customers, suppliers, employees, lenders, competitors, and government agencies.
They need information that will help them evaluate the following:
• Future financial performance of the company (including profitability, liquidity, and solvency • Whether the company has overseas operations and the nature of their activities in those countries (e.g., to evaluate exposure to foreign exchange risk and the risk to the company due to a change in local economic conditions) • Possible lack of compliance with various laws and regulations, whether the company (and its industry) need government support.• Investors are concerned with the value of their investment, employees with their job security, customers with whether the company is likely to remain in business long enough to honour warranties, suppliers with whether they will be paid, lenders with the risk to their loans, competitors with the health of their rivals, and government agencies will be interested in taxes, tariffs, industry support, and economic growth.
Users of a sporting team’s financial statements are likely to be interested in the following: • Condition and performance of the team (its solvency) • Whether it is investing in physical facilities, player payments, etc.• Whether the sporting team supports local businesses and community groups.
Although sports teams are often companies limited by guarantee and have members, the members are usually unable to trade their interest in the team. Therefore, users of a sporting team’s financial statements are not concerned about profitability for its own sake, but whether it helps the team pay its players and expand its facilities. Creditors and lenders will be interested in the likelihood that they will be repaid. Government will be interested with sporting and community concerns, and whether any applicable taxes are being paid.
REVIEW QUESTION 1.3
Audits are intended to provide the users of the audit report with a positive expression of opinion regarding the financial statements. An audit is performed using a risk-based approach in order to perform procedures to obtain sufficient and appropriate audit evidence to reduce the audit risk to an acceptably low level. However, an auditor cannot review 100% of the transactions of an organization, and for that reason, while they can provide an opinion, they cannot provide absolute assurance. Other limitations include the use of professional judgement, human error, or even fraudulent activities from responsible parties or in some cases perhaps even the auditor.
REVIEW QUESTION 1.4
A performance audit (value for money audit, operational audit, or efficiency audit) is an assessment of the economy, efficiency, and effectiveness of an organization’s operations.It can be conducted internally (by internal audit) or externally (by an audit firm) and across the entire organization or for part of an organization.
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