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auditing and assurance services, 15/e alvin a arens solutions manaual and test bank
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Auditing and
Assurance Services
Assurance Services
Fifteenth Edition
Alvin A. Arens
Randal J. Elder
Mark S. Beasley
Mark S. Beasley
Chris Hogan
Boston
Columbus
Indianapolis New
York San Francisco Upper Saddle River
Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto
Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
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Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
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Manufactured in the United States of America. This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458, or you may fax your request to 201-236-3290.
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|
CONTENTS
I. THE AUDITING
PROFESSION
1 The Demand for Audit and Other Assurance
Services... 1-1
2 The CPA Profession........................................ 2-1
3 Audit Reports................................................ 3-1
4 Professional Ethics......................................... 4-1
5 Legal Liability................................................ 5-1
II. THE AUDIT
PROCESS
6 Audit Responsibilities and Objectives..................... 6-1
7 Audit Evidence.............................................. 7-1
8 Audit Planning and Analytical Procedures................ 8-1
9 Materiality and Risk......................................... 9-1
10 Internal Control, Control Risk, and
Section 404 Audits... 10-1
11 Fraud Auditing............................................... 11-1
12 The Impact of Information Technology on
the Audit Process 12-1
13 Overall Audit Strategy and Audit Program................ 13-1
III. APPLICATION
OF THE AUDIT PROCESS TO THE SALES AND COLLECTION CYCLE
14 Audit of the Sales and Collection Cycle:
Tests of Controls
and
Substantive Tests of Transactions.................... 14-1
15 Auditing Sampling for Tests of Controls
and
Substantive Tests of Transactions.................... 15-1
16 Completing the Tests in the Sales and
Collection Cycle:
Accounts
Receivable....................................... 16-1
17 Audit Sampling for Tests of Details of
Balances.......... 17-1
IV. APPLICATION
OF THE AUDIT PROCESS TO OTHER CYCLES
18 Audit of the Acquisition and Payment
Cycle:
Tests
of Controls, Substantive Tests of Transactions,
and
Accounts Payable...................................... 18-1
19 Completing the Tests in the Acquisition
and Payment Cycle:
Verification
of Selected Accounts.......................... 19-1
20 Audit of the Payroll and Personnel Cycle................. 20-1
21 Audit of the Inventory and Warehousing
Cycle........... 21-1
22 Audit of the Capital Acquisition and
Repayment Cycle... 22-1
23 Audit of Cash and Financial Instruments.................. 23-1
V. COMPLETING
THE AUDIT
24 Completing the Audit........................................ 24-1
VI. OTHER
ASSURANCE AND NONASSURANCE SERVICES
25 Other Assurance Services.................................. 25-1
26 Internal and Governmental Financial
Auditing
and
Operational Auditing................................... 26-1
Chapter 1
The Demand for Audit and Other Assurance Services
< Review Questions
1-1 The relationship among audit services, attestation
services, and assurance services is reflected in Figure 1-3 on page 12 of the
text. An assurance service is an independent professional service to
improve the quality of information for decision makers. An attestation service
is a form of assurance service in which the CPA firm issues a report about the
reliability of an assertion that is the responsibility
of another party. 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.
The most
common form of audit service is an audit of historical financial statements, in which the auditor expresses a
conclusion as to whether the financial
statements are presented in accordance with an applicable financial
reporting framework such as U.S. GAAP or IFRS. An example of an attestation
service is a report on the effectiveness of an entity’s internal control over
financial reporting. 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 that contribute to this need are:
1.
Remoteness of
information
a.
Owners
(stockholders) divorced from management
b.
Directors not
involved in day-to-day operations or decisions
c.
Dispersion of the business among numerous geographic locations and complex corporate structures
2.
Biases and
motives of provider
a.
Information will
be biased in favor of the provider when his or her goals are inconsistent with
the decision maker’s goals.
3.
Voluminous data
a.
Possibly millions of transactions processed daily via sophisticated computerized systems
b.
Multiple product
lines
c.
Multiple
transaction locations
4.
Complex exchange
transactions
a.
New and changing
business relationships lead to innovative accounting and reporting problems
b.
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 U.S. treasury notes 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.
The three
main ways to reduce information risk are:
1.
User verifies
the information.
2.
User shares the
information risk with management.
3.
Audited
financial statements are provided.
The
advantages and disadvantages of each are as follows:
ADVANTAGES
|
DISADVANTAGES
|
|
USER VERIFIES
INFORMATION
|
1. User obtains
information desired.
2.
User can be more confident of the qualifications and
activities of the person getting the information.
|
1. High cost of
obtaining information.
2.
Inconvenience to the person providing the information
because large number of users would be on
premises.
|
USER SHARES
INFORMATION RISK WITH MANAGEMENT
|
1. No audit costs
incurred.
|
1. User may not
be able to collect on losses.
|
AUDITED FINANCIAL STATEMENTS ARE PROVIDED
|
1. Multiple users
obtain the information.
2. Information
risk can usually be reduced sufficiently to satisfy users at reasonable cost.
3.
Minimal inconvenience to management by having only
one auditor.
|
1. May not meet
needs of certain users.
2. Cost may be
higher than the benefits in some situations, such as for a small company.
|
1-5 To do an audit, there must be information in a verifiable form and some standards (criteria)
by which the auditor can evaluate the information. Examples of established criteria include generally accepted
accounting principles and the Internal
Revenue Code. 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. The information for Jones
Company’s tax return is the federal tax returns filed by the company. The established criteria are found in the Internal
Revenue Code and all interpretations. For
the audit of Jones Company’s financial statements, the information is the
financial statements being audited and the
established criteria are generally accepted accounting principles.
1-6 The primary
evidence the internal revenue agent will use in the audit of the Jones Company’s tax return include all
available documentation and other information available in Jones’ office
or from other sources. For example, when the internal revenue agent audits
taxable income, a major source of information will be bank statements, the cash
receipts journal, and deposit slips. The internal revenue agent is likely to emphasize unrecorded receipts and revenues.
For expenses, major sources of
evidence are likely to be cancelled checks and electronic funds transfers, vendors’ invoices, and other supporting
documentation.
1-7 This apparent
paradox arises from the distinction between the function of auditing and the
function of accounting. The accounting function is the recording, classifying
and summarizing of economic events to provide relevant information to decision makers. The rules of accounting are the
criteria used by the auditor for
evaluating the presentation of economic events for financial statements and
he or she must therefore have an understanding of accounting standards, as well
as auditing standards. The accountant need
not, and frequently does not, understand what auditors do, unless he or
she is involved in doing audits, or has been trained as an auditor.
1-8
AUDITS OF
FINANCIAL STATEMENTS |
OPERATIONAL
AUDITS |
COMPLIANCE
AUDITS |
|
PURPOSE
|
To determine whether the overall
financial statements are presented in accordance with specified criteria
(usually GAAP)
|
To evaluate whether operating
procedures are efficient and effective
|
To determine whether the client is
following specific procedures set by higher authority
|
USERS OF AUDIT
REPORT
|
Different groups for different
purposes — many outside entities
|
Management of organization
|
Authority setting down procedures,
internal or external
|
NATURE
|
Highly standardized
|
Highly nonstandard; often subjective
|
Not
standardized, but specific and usually objective
|
PERFORMED BY:
CPAs |
Almost universally
|
Frequently
|
Occasionally
|
GAO
AUDITORS |
Occasionally
|
Frequently
|
Frequently
|
IRS
AUDITORS |
Never
|
Never
|
Universally
|
INTERNAL
AUDITORS |
Frequently
|
Frequently
|
Frequently
|
1-9 Five examples of
specific operational audits that could be conducted by an internal auditor in a
manufacturing company are:
1.
Examine employee time records and personnel records to determine if sufficient information is available to maximize the
effective use of personnel.
2.
Review the
processing of sales invoices to determine if it could be done more efficiently.
3.
Review the acquisitions of goods, including costs, to determine if they are being purchased at the lowest possible cost
considering the quality needed.
1-9 (continued)
4.
Review and
evaluate the efficiency of the manufacturing process.
5.
Review the processing of cash receipts to determine if they are deposited as quickly as possible.
1-10 When auditing historical financial
statements, an auditor must have a thorough understanding of the client and its environment. This
knowledge should include the client’s
regulatory and operating environment, business strategies and processes,
and measurement indicators. This strategic understanding is also useful in other assurance or consulting
engagements. For example, an auditor who is performing an assurance
service on information technology would need to understand the client’s
business strategies and processes related to information technology, including such things as purchases and
sales via the Internet. Similarly, a
practitioner performing a consulting engagement to evaluate the
efficiency and effectiveness of a client’s manufacturing process would likely
start with an analysis of various measurement indicators, including ratio
analysis and benchmarking against key competitors.
1-11 The major differences in the scope of audit
responsibilities are:
1.
CPAs perform audits in accordance with auditing standards of published financial
statements prepared in accordance with U.S. GAAP or IFRS.
2.
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.
3.
IRS agents
perform compliance audits to enforce the federal tax laws as defined by Congress, interpreted by the courts, and
regulated by the IRS.
4.
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.
1-12 The four parts of the Uniform CPA
Examination are: Auditing and Attestation, Financial Accounting and Reporting,
Regulation, and Business Environment and Concepts.
1-13 Information risk is the risk that information upon
which a business decision is made is
inaccurate. Fair value accounting is often based on estimates and requires judgment. Fair value can be estimated
using multiple methods with some estimates
being more subjective than others. Fair value estimates are made at a point in time, but can also change
rapidly, depending on market conditions. All of these factors increase
information risk.
<
Multiple Choice Questions From CPA Examinations
1-14 a. (3) b. (2) c. (2) d. (1)
1-15 a. (2) b. (3) c. (4) d. (2)
< Discussion
Questions And Problems
1-16 a. The relationship among
audit services, attestation services, and assurance services is reflected in
Figure 1-3 on page 12 of the text. Audit services
are a form of attestation service, and attestation services are a form of assurance service. In a
diagram, audit services are located within the attestation service
area, and attestation services are
located within the assurance service area.
b.
1. (2) An
attestation service other than an audit service
2.
(1) An audit of historical financial statements
3. (2) An
attestation service other than an audit service
4.
(2) An attestation service other than an audit
service; or
(3) An assurance service that is not an
attestation service (WebTrust developed from the AICPA Special Committee on Assurance Services, but the service meets the
criteria for an attestation service.)
5. (2) An
attestation service other than an audit service
6. (2) An
attestation service other than an audit service
7. (2) An
attestation service other than an audit service
8. (2) An
attestation service that is not an audit service
(Review services are a form of attestation, but are performed according to Statements on Standards for
Accounting and Review Services.)
9. (2) An
assurance service that is not an attestation service
10.
(2) An attestation service other than an audit
service
11.
(3) An assurance service that is not an
attestation service
1-17 a. The interest rate for the loan that
requires a review report is lower than the
loan that did not require a review because of lower information risk. A review report provides moderate
assurance to financial statement
users, which lowers information risk. An audit report provides further
assurance and lower information risk. As a result of reduced information risk,
the interest rate is lowest for the loan with the audit report.
b.
Given these
circumstances, Busch should select the loan from First City Bank that requires an annual audit. In this situation, the
additional cost of the audit is less than the reduction in interest due to lower information risk. The following is the
calculation of total costs for each loan:
test bank for Auditing and Assurance Services, 15e (Arens)
Chapter 6
Audit Responsibilities and Objectives
Learning
Objective 6-1
1)
The objective of an audit of the financial statements is an expression of an
opinion on:
A)
the fairness of the financial statements in all material respects.
B)
the accuracy of the financial statements.
C)
the accuracy of the annual report.
D)
the accuracy of the balance sheet and income statement.
Answer: A
Terms: Objective of ordinary audit of financial
statements
Diff: Easy
Objective: LO 6-1
AACSB: Reflective thinking skills
2)
If the auditor believes that the financial statements are not fairly stated or
is unable to reach a conclusion because of insufficient evidence, the auditor:
A)
should withdraw from the engagement.
B)
should request an increase in audit fees so that more resources can be used to
conduct the audit.
C)
has the responsibility of notifying financial statement users through the
auditor's report.
D)
should notify regulators of the circumstances.
Answer: C
Terms: Auditor believes that financial statements
are nor fairly presented
Diff: Easy
Objective: LO 6-1
AACSB: Reflective thinking skills
3)
Auditors accumulate evidence to:
A)
defend themselves in the event of a lawsuit.
B)
determine if the financial statements are correct.
C)
satisfy the requirements of the Securities Acts of 1933 and 1934.
D)
reach a conclusion about the fairness of the financial statements.
Answer: D
Terms: Auditors accumulate evidence
Diff: Easy
Objective: LO 6-1
AACSB: Reflective thinking skills
Learning
Objective 6-2
1)
The responsibility for adopting sound accounting policies and maintaining
adequate internal control rests with the:
A)
board of directors.
B)
company management.
C)
financial statement auditor.
D)
company's internal audit department.
Answer: B
Terms: Responsibility for adopting sound accounting
policies and maintaining adequate internal controls
Diff: Easy
Objective: LO 6-2
AACSB: Reflective thinking skills
2)
If management insists on financial statement disclosures that the auditor finds
unacceptable, the auditor can withdraw from the engagement or:
A)
Issue an
adverse audit report
|
Issue a
qualified audit report
|
Yes
|
Yes
|
B)
Issue an
adverse audit report
|
Issue a
qualified audit report
|
No
|
No
|
C)
Issue an
adverse audit report
|
Issue a
qualified audit report
|
Yes
|
No
|
D)
Issue an
adverse audit report
|
Issue a
qualified audit report
|
No
|
Yes
|
Answer: A
Terms: Auditor insists on financial statement
disclosures that management finds unacceptable
Diff: Easy
Objective: LO 6-2
AACSB: Reflective thinking skills
3)
In certifying their annual financial statements, the CEO and CFO of a public
company certify that the financial statements comply with the requirements of:
A)
GAAP.
B)
the Sarbanes-Oxley Act.
C)
the Securities Exchange Act of 1934.
D)
GAAS.
Answer: C
Terms: Certifying annual financial statements by CEO
and CFO
Diff: Easy
Objective: LO 6-2
AACSB: Reflective thinking skills
Topic: Public
4)
Which of the following statements is true of a public company's financial
statements?
A)
Sarbanes-Oxley requires the CEO only to certify the financial statements.
B)
Sarbanes-Oxley requires the CFO only to certify the financial statements.
C)
Sarbanes-Oxley requires the CEO and CFO to certify the financial statements.
D)
Sarbanes-Oxley requires neither the CEO nor the CFO to certify the financial
statements.
Answer: C
Terms: Public company's financial statements
Diff: Easy
Objective: LO 6-2
AACSB: Reflective thinking skills
Topic: SOX
5)
The responsibility for the preparation of the financial statements and the
accompanying footnotes belongs to:
A)
the auditor.
B)
management.
C)
both management and the auditor equally.
D)
management for the statements and the auditor for the notes.
Answer: B
Terms: Responsibility for preparation of the
financial statements and the accompanying footnotes
Diff: Moderate
Objective: LO 6-2
AACSB: Reflective thinking skills
6)
Because they operate the business on a daily basis, a company's management
knows more about the company's transactions and related assets, liabilities,
and equity than the auditors.
A)
True
B)
False
Answer: A
Terms: Responsibility for fair presentation of
financial statements
Diff: Easy
Objective: LO 6-2
AACSB: Reflective thinking skills
7)
The annual reports of many public companies include a statement about
management's responsibilities and relationship with the CPA firm.
A)
True
B)
False
Answer: A
Terms: Management's responsibility and relationship
with CPA firm
Diff: Easy
Objective: LO 6-2
AACSB: Reflective thinking skills
8)
The auditors determine which disclosures must be presented in the financial
statements.
A)
True
B)
False
Answer: B
Terms: Responsibility for fair presentation of
financial statements
Diff: Easy
Objective: LO 6-2
AACSB: Reflective thinking skills
Learning
Objective 6-3
1)
The auditor's best defense when material misstatements are not uncovered is to
have conducted the audit:
A)
in accordance with generally accepted auditing standards.
B)
as effectively as reasonably possible.
C)
in a timely manner.
D)
only after an adequate investigation of the management team.
Answer: A
Terms: Auditors' best defense when material
misstatements are not uncovered
Diff: Easy
Objective: LO 6-3
AACSB: Reflective thinking skills
2)
An audit must be performed with an attitude of professional skepticism.
Professional skepticism consists of two primary components: a questioning mind
and:
A)
the assumption that upper-level management is dishonest.
B)
a critical assessment of the audit evidence.
C)
the assumption that all employees are motivated by greed.
D)
verification of all critical information by independent third parties.
Answer: B
Terms: Attitude of professional skepticism
Diff: Easy
Objective: LO 6-3
AACSB: Reflective thinking skills
3)
Which of the following is not one of the reasons that auditors provide
only reasonable assurance on the financial statements?
A)
The auditor commonly examines a sample, rather than the entire population of
transactions.
B)
Accounting presentations contain complex estimates which involve uncertainty.
C)
Fraudulently prepared financial statements are often difficult to detect.
D)
Auditors believe that reasonable assurance is sufficient in the vast majority
of cases.
Answer: D
Terms: Reasons auditors provide only reasonable
assurance on financial statements
Diff: Easy
Objective: LO 6-3
AACSB: Reflective thinking skills
4)
Which of the following statements is the most correct regarding errors and
fraud?
A)
An error is unintentional, whereas fraud is intentional.
B)
Frauds occur more often than errors in financial statements.
C)
Errors are always fraud and frauds are always errors.
D)
Auditors have more responsibility for finding fraud than errors.
Answer: A
Terms: Errors and fraud
Diff: Easy
Objective: LO 6-3
AACSB: Reflective thinking skills
5)
When an auditor believes that an illegal act may have occurred, the auditor
should first:
A)
obtain an understanding of the nature and circumstances of the act.
B)
consult with legal counsel or others knowledgeable about the illegal act.
C)
discuss the matter with the audit committee.
D)
withdraw from the engagement.
Answer: A
Terms: Auditor believes and illegal act may have
occurred
Diff: Easy
Objective: LO 6-3
AACSB: Reflective thinking skills
6)
The auditor has no responsibility to plan and perform the audit to obtain
reasonable assurance that misstatements, whether caused by errors or fraud,
that are not ________ are detected.
A)
important to the financial statements
B)
statistically significant to the financial statements
C)
material to the financial statements
D)
identified by the client
Answer: C
Terms: Auditor has no responsibility to plan and
perform audit to obtain reasonable assurance
Diff: Easy
Objective: LO 6-3
AACSB:
Reflective thinking skills
7)
Fraudulent financial reporting is most likely to be committed by whom?
A)
Line employees of the company
B)
Outside members of the company's board of directors
C)
Company management
D)
The company's auditors
Answer: C
Terms: Fraudulent financial reporting
Diff: Easy
Objective: LO 6-3
AACSB: Reflective thinking skills
8)
Which of the following would most likely be deemed a direct-effect illegal act?
A)
Violation of federal employment laws
B)
Violation of federal environmental regulations
C)
Violation of federal income tax laws
D)
Violation of civil rights laws
Answer: C
Terms: Direct-effect illegal act
Diff: Easy
Objective: LO 6-3
AACSB: Reflective thinking skills
9)
The concept of reasonable assurance indicates that the auditor is:
A)
not a guarantor of the correctness of the financial statements.
B)
not responsible for the fairness of the financial statements.
C)
responsible only for issuing an opinion on the financial statements.
D)
responsible for finding all misstatements.
Answer: A
Terms: Concept of reasonable assurance
Diff: Easy
Objective: LO 6-3
AACSB: Reflective thinking skills
10)
Which of the following is the auditor least likely to do when aware of an
illegal act?
A)
Discuss the matter with the client's legal counsel.
B)
Obtain evidence about the potential effect of the illegal act on the financial
statements.
C)
Contact the local law enforcement officials regarding potential criminal
wrongdoing.
D)
Consider the impact of the illegal act on the relationship with the company's
management.
Answer: C
Terms: Illegal acts
Diff: Easy
Objective: LO 6-3
AACSB: Reflective thinking skills
auditing and assurance services, 15/e alvin a arens solutions manaual and test bank
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