Auditing And Assurance Services 5th Edition Louwers .

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Auditing and Assurance Services 5th Edition Louwers Solutions ManualFull Download: l/Chapter 02 - Professional StandardsCHAPTER 02Professional StandardsLEARNING , Problems,and Simulations1.Understand the development and sourceof generally accepted auditing standards.1, 2, 3, 452(*)2.Describe the fundamental principle ofresponsibilities and how this principlerelates to the characteristics andqualifications of auditors.5, 6, 727, 29, 35, 39,40,53, 54, 55, 61(*),63(*), 64(*), 65(*),66(*)3.Describe the fundamental principle ofperformance and identify major activitiesperformed in an audit.8, 9, 10, 11, 12,13, 14, 15, 16,17, 1826, 30, 31, 32,33, 34, 36, 37,42, 43, 44, 4556, 57, 58, 59, 60,61(*), 63(*), 64(*),65(*), 66(*)4.Understand the fundamental principle ofreporting and identify the basic contentsof the auditors’ report.19, 2041, 49, 50, 5162, 63(*), 64(*)65(*), 66(*)5.Understand the role of a system of qualitycontrol and AICPA and PCAOBmonitoring efforts in enabling publicaccounting firms to meet appropriatelevels of professional quality.21, 22, 23, 24,2528, 38, 4652(*), 67, 68, 696.(Appendix) Identify the need forattestation standards and the use of thesestandards in attestation engagements.47, 4870(*) Item relates to multiple learning objectives2-1Full download all chapters instantly please go to Solutions Manual, Test Bank site: testbanklive.com

Chapter 02 - Professional StandardsSOLUTIONS FOR REVIEW CHECKPOINTS2.1Generally accepted auditing standards (GAAS) are auditing standards that identify necessaryqualifications and characteristics of auditors and guide the conduct of the audit examination.Currently, the PCAOB is responsible for developing standards for the audits of public entities, and theAICPA is responsible for developing standards for the audits of nonpublic entities.2.2The AICPA (through the Auditing Standards Board) has responsibility for setting standards for the auditsof nonpublic entities. This is done through the issuance of Statements on Auditing Standards.The PCAOB has responsibility for setting standards for the audits of public entities. This is done throughthe PCAOB’s issuance of Auditing Standards.The SEC does not have responsibility for setting auditing standards per se but must approve all PCAOBstandards.2.3The two sources of auditing standards for the audits of public entities area.b.2.42.5A pronouncement issued by the AICPA prior to April 2003 that has not been amended orsuperseded by the PCAOB (Interim Auditing Standard).A pronouncement issued by the PCAOB that has been approved by the SEC (Auditing Standards).The three fundamental principles are:a.Responsibilities, which involve having appropriate competence and capabilities, complying withrelevant ethical requirements, maintaining professional skepticism, and exercising professionaljudgment.b.Performance, which requires auditors to obtain reasonable assurance about whether the financialstatements as a whole are free of material misstatement by (1) planning the work and properlysupervising assistants, (2) determining and applying appropriate material levels, (3) identifying andassessing the risk of material misstatement, and (4) obtaining sufficient appropriate audit evidence.c.Reporting, which requires the auditor to express an opinion (or state that an opinion cannot beexpressed) as to whether the financial statements are presented fairly in accordance with the applicablefinancial reporting framework.Independence in fact represents auditors’ mental attitudes (do auditors truly act in an unbiased andimpartial fashion with respect to the client and fairness of its financial statements?). Independence inappearance relates to financial statement users’ perceptions of auditors’ independence.Auditors can be independent in fact but not perceived to be independent. For example, ownership of a smallinterest in a public client would probably not influence auditors’ behavior with respect to the client.However, it is likely that third-party users would not perceive auditors to be independent.2.6Due care reflects a level of performance that would be exercised by reasonable auditors in similarcircumstances. Auditors are expected to have the skills and knowledge of others in their profession (knownas that of a prudent auditor) and are not expected to be infallible.2-2

Chapter 02 - Professional Standards2.7Professional skepticism is a state of mind that is characterized by appropriate questioning and a criticalassessment of audit evidence.Professional judgment is the auditors’ application of relevant training, knowledge, and experience inmaking informed decisions about appropriate courses of action during the audit engagement.Auditors are required to demonstrate professional skepticism and professional judgment throughout theentire audit process.2.8Reasonable assurance recognizes that a GAAS audit may not detect all material misstatements andauditors are not “insurers” or “guarantors” regarding the fairness of the entity’s financial statements. Thefollowing characteristics of an audit do not permit auditors to provide absolute assurance: Mistakes and misinterpretations may occur. Management judgments and estimates affect financial reporting. Audit procedures cannot always be relied upon to detect misstatements. Audit engagements must be conducted within a reasonable period of time to achieve a balancebetween benefit and cost.2.9Three elements of planning and supervision considered essential in audit practice are A written audit plan. An understanding of the client’s (auditee’s) business. Policies to allow an audit team member to document disagreements with accounting or auditingconclusions and disassociate him or herself from the matter.2.10The timing of the auditors’ appointment is important because they need time to properly plan the audit andperform the necessary work without undue pressure from tight deadlines.2.11Materiality is the dollar amount that would influence the lending or investing decisions of users; thisconcept recognizes that auditors should focus on matters that are important to financial statement users.Materiality should be considered in planning the audit, performing the audit, and evaluating the effect ofmisstatements on the entity’s financial statements.2.12Auditors obtain an understanding of a client, including its internal control, as a part of the control riskassessment process primarily in order to plan the nature, timing and extent of substantive audit procedures.A secondary purpose is for auditors to perform their responsibilities for reporting on client’s internalcontrols under Auditing Standard No. 5.2.13Because the client’s internal control is more effective (a lower level of control risk), auditors may use lesseffective substantive procedures (a higher level of detection risk). Conversely, when the client’s internalcontrol is less effective (a higher level of control risk), auditors must use more effective substantiveprocedures (a lower level of detection risk).2.14Audit evidence is defined as the information used by auditors in arriving at the conclusion on which theaudit opinion is based.2.15External documentary evidence is audit evidence obtained from another party to an arm’s-length transactionor from outside independent agencies. External evidence is received directly by auditors and is notprocessed through the client’s information processing system.External-internal documentary evidence is documentary material that originates outside the bounds of theclient’s information processing system but which has been received and processed by the client.2-3

Chapter 02 - Professional StandardsInternal documentary evidence consists of documentary material that is produced, circulates, and is finallystored within the client’s information processing system. Such evidence is either not circulated to outsideparties at all or is several steps removed from third-party attention.2.16Relevance refers to the nature of information provided by the audit evidence; that is, what assertion(s)related to the account balance or class of transactions does the evidence support? Reliability refers to theextent of trust that auditors can place in evidence and is primarily influenced by the source of the evidence.The appropriateness of audit evidence is related to both relevance and reliability; that is, as evidence ismore relevant and reliable, it is considered to have a higher level of appropriateness.2.17In general, evidence that is completely external in nature is most reliable because the client has notinfluenced its processing. In contrast, evidence that is completely internal in nature is least reliable, becauseit may represent a fictitious transaction created or modified by client personnel to enhance perceptions ofthe client’s financial statements.2.18Because auditors need to achieve lower levels of detection risk, more appropriate evidence needs to beobtained. Thus, auditors should gather higher quality evidence (more reliable evidence). For example,auditors may choose to obtain evidence from external sources rather than internal sources.In addition, for lower levels of detection risk, auditors need to gather more sufficient evidence. Becausesufficiency relates to the quantity of evidence, a higher number of transactions or components of an accountbalance should be examined.2.19A financial reporting framework is a set of criteria used to determine the measurement, recognition,presentation, and disclosure of material items in the financial statements. The financial reportingframework is related to auditors’ reporting responsibilities because this framework serves as the basisagainst which the financial statements are evaluated and the auditors’ opinion on the financial statements isexpressed.2.20Four types of opinions and their conclusions:TypeConclusionUnqualified opinionFinancial statements are presented in conformity with GAAP.Adverse opinionFinancial statements are not presented in conformity with GAAP.Qualified opinionFinancial statements are presented in conformity with GAAPexcept for one or more departures or issues of concern.Disclaimer of opinionAn opinion cannot be issued on the financial statements.2.21A system of quality control provides firms with reasonable assurance that the firm and its personnel (a)comply with professional standards and applicable regulatory and legal requirements and (b) issue reportsthat are appropriate in the circumstances.2-4

Chapter 02 - Professional StandardsThe six elements of a system of quality control are: Leadership responsibilities for quality within the firm (“tone at the top”). Relevant ethical requirements. Acceptance and continuance of client relationships and specific engagements. Human resources. Engagement performance. Monitoring.2.22In deciding whether to accept or continue an engagement with a client, firms should consider: The integrity of the client and the identity and business reputation of its owners, key management,related parties, and those charged with governance.Whether the firm possesses the competency, capability, and resources to perform the engagement.Whether the firm can comply with the necessary legal and ethical requirements.If firms decide to withdraw from an engagement, the firm should document significant issues,consultations, conclusions, and the basis for any conclusions related to the decision to withdraw.2.23Typically, firms that audit nonpublic entities have peer reviews conducted through the AICPA’s Center forPublic Company Audit Firms Peer Review Program. While firms that are subject to PCAOB reviewrequirements can elect to have peer reviews conducted under this program, most choose not to do so.2.24The PCAOB’s monitoring role for firms providing auditing services to public entities includes registeringpublic accounting firms and conducting inspections of registered public accounting firms (similar to peerreviews).2.25The frequency of PCAOB inspections depends upon the number of audits conducted by member firms. Forfirms performing audits for more than 100 public entities, inspections are required on an annual basis. Forthose performing audits for 100 or fewer public entities, inspections are conducted every three years.SOLUTIONS FOR MULTIPLE-CHOICE QUESTIONS2.26a.b.CorrectIncorrectGathering audit evidence is a component of the performance principle.While reasonable assurance is related to gathering audit evidence, this is not oneof the categories of principlesThe reporting principle relates to the contents of the auditors’ reportThe responsibilities principle relates to the personal integrity and professionalqualifications of ctIncorrectIncorrectCorrectThis practice relates to accountants’ competence and capabilities, not due care.This practice relates to the reporting principle.Sufficiency of evidence relates to the performance principle and not due care.These practices are a part of due tGAAS relates to the conduct of audit engagements, not overall professionalservices.Standards within a system of quality control are firm- (rather than auditor-)related.Generally accepted accounting practices are not an element related toprofessional services.International auditing standards govern the conduct of audits performed acrossinternational borders.2-5

Chapter 02 - Professional orrectIncorrectc.Correctd.IncorrectRelying more extensively on external evidence is related to the appropriateness(or quality) of evidence.Focusing on items with more significant financial effects on the financialstatements is related to materiality.Professional skepticism is characterized by appropriate questioning and a criticalassessment of audit evidence.Financial interests are most closely related to auditors’ independence.Auditors study internal control to determine the nature, timing, and extent ofsubstantive procedures.Consulting suggestions are secondary objectives in an audit.Information about the entity’s internal control is at best indirect evidence aboutassertions in the financial statements.Information about the entity’s internal control provides auditors with littleopportunity to learn about changes in accounting principles.External evidence is considered to be relatively reliable.Written representations should least affect auditors’ conclusions because theyhave not been validated or corroborated by external parties.Auditor-prepared evidence is considered to be the most reliable form ofevidence.Although a representation of a client employee, inquiry of the entity’s legalcounsel is considered more reliable than that of entity management.Inquiry of management should least affect auditors’ conclusions.Although very persuasive, auditors’ personal knowledge (choice d) provides themost persuasive evidenceObservation of a client’s procedures provides evidence on the effectiveness ofthe client’s internal control, but not the existence assertion for newly acquiredcomputer equipment.Auditors’ personal knowledge provides the most persuasive evidence.Inquires of client personnel are the least reliable form of evidence.While more reliable than inquiries (choice a), inspection of internal documentsis relatively low in terms of reliability.While sales invoices are documents created by external parties, the fact thatthese documents were received from client personnel decreases their reliability.Because the statements were received directly from outside parties, this is amore reliable form of evidence than choice (c).Documentation of this nature would not be related to independence.While the quality of the documentation and the conclusions included in thedocumentation might provide information about competence and capabilities,choice (c) is more appropriate.Initials of the preparer and reviewer provide evidence that the documentationwas reviewed, which relates to planning and supervision.While the quality of the documentation and the conclusions included in thedocumentation might provide information about sufficient appropriate evidence,choice (c) is more appropriate2-6

Chapter 02 - Professional Standards2.35NOTE TO INSTRUCTOR: Because this question asks students to identify the concept that is least relatedto due care, the response labeled “correct” is least related to due care and those labeled “incorrect” aremore related to due care.a.IncorrectDue care requires the level of skills and knowledge of others in the auditors’profession, which would require independence in fact.b.IncorrectSee choice (a).c.IncorrectDue care refers to the performance of a “prudent” auditor.d.CorrectReasonable assurance is related to the auditors’ responsibility for detectingmisstatements and procedures performed during the examination, not theconcept of due orrectIndependence confirmations would ensure that all firm personnel areindependent with respect to that firm’s clients, which is related to the “relevantethical requirements” element of a system of quality control. It would not relateto acceptance and continuance of client relationships and specific engagements(a), engagement performance (b), or monitoring The responsibility to issue a report is related to the reporting principle.The requirement to gather sufficient, appropriate evidence is related to theperformance principle.The auditors’ compliance with independence and due care is related to theresponsibilities principle.The responsibility to plan an audit and properly supervise assistants is related tothe performance ct2.372.40Internal documents are a relatively low quality of evidence.Written representations (and the related verbal inquiries) are the lowest qualityof evidence.While direct, external evidence is of reasonable quality, it is of lower qualitythan direct personal knowledge of the auditor (choice d).Direct, personal knowledge of auditors is the most appropriate form of evidence.While it may increase auditors’ knowledge about the client, obtaining anunderstanding of a client’s internal control does not directly influence auditors’competence and capabilities.Obtaining an understanding of a client’s internal control does not directlyinfluence auditors’ independence.Obtaining an understanding of a client’s internal control does not directly helpsatisfy the quality control standard about audit staff professional development.The primary purpose of obtaining an understanding of a client’s internal controlis to plan the nature, timing, and extent of substantive audit procedures on anengagement.Consultation with a specialist demonstrates due care if auditors do not haveexpertise in the area in question.Auditors are experts in financial matters, not areas of art (and other collectibles)valuation.GAAS applies to all audit engagements, including audit engagements for notfor-profit organizations.Because (a) is correct, (d) cannot be correct.2-7

Chapter 02 - Professional Standards2.41NOTE TO INSTRUCTOR: Because this question asks students to identify the topic that is not beenaddressed in the auditors’ report, the response labeled “correct” is not addressed in the auditors’ reportand those labeled “incorrect” are addressed in the auditors’ report.a.IncorrectThe responsibilities of the auditor and management are provided in theintroductory paragraph.b.CorrectAuditors provide reasonable (but not absolute) assurance in an audi

Auditing and Assurance Services 5th Edition Louwers Solutions Manual . 2.24 The PCAOB’s monitoring role for firms providing auditing services to public entities includes registering public accounting firms and conducting inspections o

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