Solution Manual for Auditing An International Approach 8th Edition Wally Smieliauskas, Amy Kwan, Kathleen Cogliano, Catherine Barrette Chapter 1-21 with appendix A-C
CHAPTER 1 Introduction to Auditing SOLUTIONS FOR REVIEW CHECKPOINTS 1-1.
In this example of a three-party accountability structure, the owner is the 'third party', the hired manager is the 'first party' and the auditor is the 'second party'. The owner is looking out for his/her own longer-term economic interests, but has to rely on the actions and information provided by the hired manager, who may have shorter term concerns (like his/her own compensation and job prospects) and thus act self-interestedly. The owner is accountable for financing the business and treating the manager fairly, particularly in terms of compensating his/her efforts and successes appropriately. The manager is accountable for giving reliable and fair reports of the business profit performance to the owner. Give the potential conflicts between the interests of the first and third parties, there is information risk - the risk that the financial statement information will not be a full and fair representation of the transactions and events that really occurred, and will not be reliable for economic decisions that the owner may base upon it. The auditor is accountable for objectively verifying the fairness and reliability of the information and providing an independent opinion on how well the information reflects the underlying realities of the entity's operations. The auditor's opinion can benefit both the first and third parties the owner directly by lowering information risk, and the manager indirectly because if the owner has more basis to trust the manager not to act against the owner's interests the owner will be more willing to share the profits with the manager (this is referred to as lowering "agency costs," which are charged by the owner/principal and incurred by the manager/agent if the owner does not trust the manager). For the auditor's opinion to have value in giving the owner some comfort (i.e., "assurance") that the manager's information can be relied on, the auditor must have no personal interest in either side and be able remain objective.
1-2.
The concept of reasonable assurance describes a mental attitude that the auditor gains from the conclusions drawn from audit examination findings. Based on the examination, if the auditor comes to believe the financial statements are reliable and fair to the interests of third party users, this belief forms the basis of the opinion the auditor will communicate to financial statement users in the Auditor's Report. An 'audit opinion' provides a high level of assurance to the user that the auditor believes that the information risk is low, and has evidence to support that belief.
1-3
Auditors add credibility to financial information provided by the accountable party such as management (i.e. auditors make the financial or other information more likely to be true or representationally faithful). Other common ways of characterizing this property of audited numbers is that the numbers are more accurate, have higher assurance, or are more reliable. These relate to different dimension of truthfulness, as we discuss later in the text.
1-4
By obtaining more accurate or reliable information about the company, Aunt Zhang can obtain a more accurate valuation of the company. This more accurate valuation gives Aunt Zhang more confidence that she will get her money’s worth in the investment. The preceding assumes Aunt Zhang is risk averse—a common assumption about economic behavior. th
Smieliauskas, Auditing: An International Approach, 8 Edition Solutions Manual
Page 1-1 © 2019, McGraw-Hill Education. All Rights Reserved