Auditing And Assurance Services - WuperBooks

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To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.comSolutions ManualAuditing andAssurance ServicesFourteenth EditionAlvin A. ArensRandal J. ElderMark S. BeasleyPrentice HallBoston Columbus Indianapolis New York San Francisco Upper Saddle RiverAmsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal TorontoDelhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.comThis work is protected by United States copyright laws and is providedsolely for the use of instructors in teaching their courses and assessingstudent learning. Dissemination or sale of any part of this work (includingon the World Wide Web) will destroy the integrity of the work and is notpermitted. The work and materials from it should never be made availableto students except by instructors using the accompanying text in theirclasses. All recipients of this work are expected to abide by theserestrictions and to honor the intended pedagogical purposes and the needsof other instructors who rely on these materials.VP, Editorial Director: Sally YaganExecutive Editor: Stephanie WallEditorial Project Manager: Christina RumbaughProduction Project Manager: Carol O’RourkeSenior Operations Specialist: Diane PeiranoPrinter/Binder: Offset Paperback ManufacturersCopyright 2012, 2010, 2008, 2006, 2005 Pearson Education, Inc., publishing asPrentice Hall, One Lake Street, Upper Saddle River, New Jersey 07458. All rightsreserved. Manufactured in the United States of America. This publication is protected byCopyright, and permission should be obtained from the publisher prior to any prohibitedreproduction, storage in a retrieval system, or transmission in any form or by any means,electronic, mechanical, photocopying, recording, or likewise. To obtain permission(s) touse material from this work, please submit a written request to Pearson Education, Inc.,Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458.Many of the designations by manufacturers and seller to distinguish their products areclaimed as trademarks. Where those designations appear in this book, and the publisherwas aware of a trademark claim, the designations have been printed in initial caps or allcaps.10 987654321ISBN-13: 978-0-13-257607-9ISBN-10:0-13-257607-4

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.comCONTENTSI.THE AUDITING PROFESSION12345The Demand for Audit and Other Assurance Services .The CPA Profession.Audit Reports.Professional Ethics .Legal Liability.1-12-13-14-15-1II. THE AUDIT PROCESS678910111213Audit Responsibilities and Objectives.Audit Evidence .Audit Planning and Analytical Procedures.Materiality and Risk .Section 404 Audits of Internal Control and Control Risk.Fraud Auditing .The Impact of Information Technology on the Audit Process .Overall Audit Plan and Audit Program .6-17-18-19-110-111-112-113-1III. APPLICATION OF THE AUDIT PROCESS TO THE SALES ANDCOLLECTION CYCLE14151617Audit of the Sales and Collection Cycle: Tests of Controlsand Substantive Tests of Transactions .Auditing Sampling for Tests of Controlsand Substantive Tests of Transactions .Completing the Tests in the Sales and Collection Cycle:Accounts Receivable .Audit Sampling for Tests of Details of Balances .14-115-116-117-1IV. APPLICATION OF THE AUDIT PROCESS TO OTHER CYCLES181920212223Audit of the Acquisition and Payment Cycle:Tests of Controls, Substantive Tests of Transactions,and Accounts Payable .Completing the Tests in the Acquisition and Payment Cycle:Verification of Selected Accounts.Audit of the Payroll and Personnel Cycle.Audit of the Inventory and Warehousing Cycle .Audit of the Capital Acquisition and Repayment Cycle .Audit of Cash Balances .18-119-120-121-122-123-1V. COMPLETING THE AUDIT24Completing the Audit .24-1VI. OTHER ASSURANCE AND NONASSURANCE SERVICES2526Other Assurance Services.Internal and Governmental Financial Auditingand Operational Auditing .25-126-1

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To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.comChapter 1The Demand for Audit and Other Assurance Services Review Questions1-1The relationship among audit services, attestation services, and assuranceservices is reflected in Figure 1-3 on page 12 of the text. An assurance service isan independent professional service to improve the quality of information fordecision makers. An attestation service is a form of assurance service in whichthe CPA firm issues a report about the reliability of an assertion that is theresponsibility of another party. Audit services are a form of attestation service inwhich the auditor expresses a written conclusion about the degree ofcorrespondence between information and established criteria.The most common form of audit service is an audit of historical financialstatements, in which the auditor expresses a conclusion as to whether thefinancial statements are presented in accordance with an applicable financialreporting framework such as U.S. GAAP or IFRS. An example of an attestationservice is a report on the effectiveness of an entity’s internal control over financialreporting. There are many possible forms of assurance services, including servicesrelated to business performance measurement, health care performance, andinformation system reliability.1-2An independent audit is a means of satisfying the need for reliableinformation on the part of decision makers. Factors of a complex society whichcontribute to this need are:1.2.3.4.Remoteness of informationa.Owners (stockholders) divorced from managementb.Directors not involved in day-to-day operations or decisionsc.Dispersion of the business among numerous geographiclocations and complex corporate structuresBiases and motives of providera.Information will be biased in favor of the provider when his orher goals are inconsistent with the decision maker's goals.Voluminous dataa.Possibly millions of transactions processed daily viasophisticated computerized systemsb.Multiple product linesc.Multiple transaction locationsComplex exchange transactionsa.New and changing business relationships lead to innovativeaccounting and reporting problemsb.Potential impact of transactions not quantifiable, leading toincreased disclosures1-1

To download more slides, ebook, solutions and test bank, visit e interest rate This is approximately the rate the bank couldearn by investing in U.S. treasury notes for the same length of timeas the business loan.Business risk for the customer This risk reflects the possibility thatthe business will not be able to repay its loan because of economicor business conditions such as a recession, poor managementdecisions, or unexpected competition in the industry.Information risk This risk reflects the possibility that the informationupon which the business risk decision was made was inaccurate. Alikely cause of the information risk is the possibility of inaccuratefinancial statements.Auditing has no effect on either the risk-free interest rate or business risk.However, auditing can significantly reduce information risk.1-4The four primary causes of information risk are remoteness of information,biases and motives of the provider, voluminous data, and the existence of complexexchange transactions.The three main ways to reduce information risk are:1.2.3.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:ADVANTAGESDISADVANTAGESUSER VERIFIESINFORMATION1. User obtains informationdesired.2. User can be more confidentof the qualifications andactivities of the persongetting the information.1. High cost of obtaininginformation.2. Inconvenience to theperson providing theinformation becauselarge number of userswould be on premises.USER SHARESINFORMATIONRISK WITHMANAGEMENT1. No audit costs incurred.1. User may not be ableto collect on losses.AUDITEDFINANCIALSTATEMENTSARE PROVIDED1. Multiple users obtain theinformation.2. Information risk can usuallybe reduced sufficiently tosatisfy users at reasonablecost.3. Minimal inconvenience tomanagement by havingonly one auditor.1. May not meet needsof certain users.2. Cost may be higherthan the benefits insome situations, suchas for a smallcompany.1-2

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com1-5To do an audit, there must be information in a verifiable form and somestandards (criteria) by which the auditor can evaluate the information. Examplesof established criteria include generally accepted accounting principles and theInternal Revenue Code. Determining the degree of correspondence betweeninformation and established criteria is determining whether a given set ofinformation is in accordance with the established criteria. The information forJones Company's tax return is the federal tax returns filed by the company. Theestablished criteria are found in the Internal Revenue Code and allinterpretations. For the audit of Jones Company's financial statements theinformation is the financial statements being audited and the established criteriaare generally accepted accounting principles.1-6The primary evidence the internal revenue agent will use in the audit ofthe Jones Company's tax return include all available documentation and otherinformation available in Jones’ office or from other sources. For example, whenthe internal revenue agent audits taxable income, a major source of informationwill be bank statements, the cash receipts journal and deposit slips. The internalrevenue agent is likely to emphasize unrecorded receipts and revenues. Forexpenses, major sources of evidence are likely to be cancelled checks andelectronic funds transfers, vendors' invoices, and other supportingdocumentation.1-7This apparent paradox arises from the distinction between the function ofauditing and the function of accounting. The accounting function is the recording,classifying and summarizing of economic events to provide relevant informationto decision makers. The rules of accounting are the criteria used by the auditorfor evaluating the presentation of economic events for financial statements andhe or she must therefore have an understanding of accounting standards, as wellas auditing standards. The accountant need not, and frequently does not,understand what auditors do, unless he or she is involved in doing audits, or hasbeen trained as an auditor.1-3

To download more slides, ebook, solutions and test bank, visit ITSCOMPLIANCEAUDITSAUDITS OFFINANCIALSTATEMENTSPURPOSETo evaluatewhetheroperatingprocedures areefficient andeffectiveTo determinewhether the client isfollowing specificprocedures set byhigher authorityTo determinewhether theoverall financialstatements arepresented inaccordance withspecified criteria(usually GAAP)USERS OFAUDITREPORTManagement oforganizationAuthority settingdown procedures,internal or externalDifferent groupsfor differentpurposes — manyoutside entitiesNATUREHighlynonstandard;often subjectiveNot standardized,but specific andusually tly1-9Five examples of specific operational audits that could be conducted by aninternal auditor in a manufacturing company are:1.2.3.Examine employee time records and personnel records to determineif sufficient information is available to maximize the effective use ofpersonnel.Review the processing of sales invoices to determine if it could bedone more efficiently.Review the acquisitions of goods, including costs, to determine ifthey are being purchased at the lowest possible cost consideringthe quality needed.1-4

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com1-9 (continued)4.5.Review and evaluate the efficiency of the manufacturing process.Review the processing of cash receipts to determine if they aredeposited as quickly as possible.1-10 When auditing historical financial statements, an auditor must have athorough understanding of the client and its environment. This knowledge shouldinclude the client’s regulatory and operating environment, business strategiesand processes, and measurement indicators. This strategic understanding is alsouseful in other assurance or consulting engagements. For example, an auditorwho is performing an assurance service on information technology would need tounderstand the client’s business strategies and processes related to informationtechnology, including such things as purchases and sales via the Internet.Similarly, a practitioner performing a consulting engagement to evaluate theefficiency and effectiveness of a client’s manufacturing process would likely startwith an analysis of various measurement indicators, including ratio analysis andbenchmarking against key competitors.1-11The major differences in the scope of audit responsibilities are:1.2.3.4.CPAs perform audits in accordance with auditing standards ofpublished financial statements prepared in accordance with U.S.GAAP or IFRS.GAO auditors perform compliance or operational audits in order toassure the Congress of the expenditure of public funds in accordancewith its directives and the law.IRS agents perform compliance audits to enforce the federal taxlaws as defined by Congress, interpreted by the courts, and regulatedby the IRS.Internal auditors perform compliance or operational audits in orderto assure management or the board of directors that controls andpolicies are properly and consistently developed, applied andevaluated.1-12 The four parts of the Uniform CPA Examination are: Auditing and Attestation,Financial Accounting and Reporting, Regulation, and Business Environment andConcepts.1-13 It is important for CPAs to be knowledgeable about information technology,including e-commerce, because many of their clients rely extensively on thesetechnologies. Examples of commonly used e-commerce technologies includepurchases and sales of goods through the Internet, automatic inventoryreordering via direct connection to inventory suppliers, and online banking. CPAswho perform audits or provide other assurance services about informationgenerated with these technologies need a basic knowledge and understanding ofinformation technology and e-commerce in order to identify and respond to risksin the financial and other information generated by these technologies.1-5

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Multiple Choice Questions From CPA c.(4)d.(3) Discussion Questions And Problems1-161-17a.The relationship among audit services, attestation services andassurance services is reflected in Figure 1-3 on page 12 of the text.Audit services are a form of attestation service, and attestationservices are a form of assurance service. In a diagram, auditservices are located within the attestation service area, andattestation services are located within the assurance service 0.(2)(2)(3)An attestation service other than an audit serviceAn audit of historical financial statementsAn attestation service other than an audit serviceAn attestation service other than an audit service; orAn assurance service that is not an attestation service(WebTrust developed from the AICPA Special Committeeon Assurance Services, but the service meets thecriteria for an attestation service.)An attestation service other than an audit serviceAn attestation service other than an audit serviceAn attestation service that is not an audit service(Review services are a form of attestation, but areperformed according to Statements on Standards forAccounting and Review Services.)An attestation service other than an audit serviceAn attestation service other than an audit serviceAn assurance service that is not an attestation servicea.The interest rate for the loan that requires a review report is lowerthan the loan that did not require a review because of lowerinformation risk. A review report provides moderate assurance tofinancial statement users, which lowers information risk. An auditreport provides further assurance and lower information risk. As aresult of reduced information risk, the interest rate is lowest for theloan with the audit report.b.Given these circumstances, Busch should select the loan from FirstCity Bank that requires an annual audit. In this situation, theadditional cost of the audit is less than the reduction in interest dueto lower information risk. The following is the calculation of totalcosts for each loan:1-6

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com1-17 (continued)LENDERExisting loanUnited National BankFirst City Bankc.ANNUALINTERESTANNUALLOAN COSTNone0 247,500 247,500Review 20,000 202,500 222,500Audit 45,000 157,500 202,500Busch should select the loan from United National Bank due to thehigher cost of the audit and the reduced interest rate for the loanfrom United National Bank. The following is the calculation of totalcosts for each loan:LENDERExisting loanUnited National BankFirst City Bank1-18CPACOST OF CPASERVICESERVICESCPACOST OF CPASERVICESERVICESANNUALINTERESTANNUALLOAN COSTNone0 247,500 247,500Review 20,000 180,000 200,000Audit 55,000 157,500 212,500d.Busch may desire to have an audit because of the many otherbenefits that an audit provides. The audit will provide Busch’smanagement with assurance about annual financial information usedfor decision-making purposes. The audit may detect errors or fraud, andprovide management with information about the effectiveness ofcontrols. In addition, the audit may result in recommendations tomanagement that will improve efficiency or effectiveness.e.The auditor must have a thorough understanding of the client and itsenvironment, including the client’s e-commerce technologies, industry,regulatory and operating environment, suppliers, customers, creditors,and business strategies and processes. This thorough analysis helpsthe auditor identify risks associated with the client’s strategies thatmay affect whether the financial statements are fairly stated. Thisstrategic knowledge of the client’s business often helps the auditoridentify ways to help the client improve business operations, therebyproviding added value to the audit function.a.The services pr

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 t

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