1 BUSI0006 – Auditing Ch. 1 – Audit and Assurance Services
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BUSI0006 –Auditing
Ch. 1 –Audit and Assurance Services
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1-18
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1-18 - Question
LenderCPA Service
Cost of service
Loan amount
Annual interest rate
Existing loan
None $0 $4.5 million
5.5%
United National Bank
Review $20,000 $4.5 million
4.5%
First City Bank
Audit $45,000 $4.5 million
3.5%
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1-18 (a) Explain why the interest rate for the loan
that requires a review report is lower thanthat for the loan that did not require a review.Review report:
provides moderate assurance lowers information risk
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1-18 (a)
Explain why the interest rate for the loan that requires an audit report is lower thanthe interest rate for the other two loans.Audit report:
provides further assurance even lowers the information risk
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1-18 (b)
Calculate Busch Corporation’s annual costs under each loan agreement, including interest and costs for the CPA firm’s services.
Indicate whether Busch Corporation should keep its existing loan, accept the offer from United National Bank, or accept the offer from First City Bank.
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1-18 (b)…
LenderCPA Service
Cost of service
Loan amount
Annual interest rate
Annual interest
Annual loan cost
Existing loan
None $0 $4.5 million
5.5%
United National Bank
Review $20,000 $4.5 million
4.5%
First City Bank
Audit $45,000 $4.5 million
3.5%
additional audit cost is less than the reduction in interest due to lower information risk
$247,500 $247,500
$202,500 $222,500
$157,500 $202,500First City Bank
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18-1 (c)
Assume the United National Bank has offered the loan at a rate of 4% with a review, and the cost of the audit has increased to $55,000 due to new auditing standards requirements.
Indicate whether Busch should keep its existing loan, accept the offer from United National Bank, or accept the offer from First City Bank.
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1-18 (c)…
LenderCPA Service
Cost of service
Loan amount
Annual interest rate
Annual interest
Annual loan cost
Existing loan
None $0 $4.5 million
5.5%
United National Bank
Review $20,000 $4.5 million
First City Bank
Audit $4.5 million
3.5%
higher audit cost and reduced interest rate
$247,500 $247,500
$180,000 $200,000
$157,500 $212,500
4.5%4%
$45,000$55,000
United National Bank
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18-1 (d) Discuss why Busch may desire to have an audit,
ignoring the potential reduction in interest costs. provide Busch’s management with assurance about
annual financial information used for decision-makingpurposes
may detect errors or fraud provide management with information about the
effectiveness of controlsmay result in recommendations to management that
will improve efficiency or effectiveness
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1-20
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1-20 – Question
Danville Bus Services (“Bus Co.,”) has an outstanding loan of $380,000 from National Bank.
Missed a loan payment Gregor Olson (“Olson”) working in the
Bank concerned about whether Bus Co., will be able to repay the full amount of the loan.
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1-20 – Question…
Collateral 20 large buses @$25,000 Olson has to make sure that these buses
still existHire an auditor to count the busesEngages Annaliese Haraldsson (“Anna”),
CPA (auditing automobile, bus and trucking companies)
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1-20 – Question… Anna has to investigate and write a report:
Which of the 20 registered buses is parked in Bus Co.,’s parking lot on the night of Aug 31, 2008
If Bus Co., actually owns or is responsible for maintaining the buses
The physical condition of each bus, using the guidelines poor, good and excellent
Fair market value use “blue book” “Blue book” “Kelley Blue Book” a US
automotive vehicle valuation company that gives used vehicle pricing information
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1-20 (a)
For each of the following parts of the definition of auditing, state which part of the preceding narrative fits the definition:
1. Information2. Established criteria3. Accumulating and evaluating evidence4. Competent, independent person5. Reporting results
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1-20 (a) – (1) Information
Issue a report about qualitative and quantitative information for the buses
Information concernedBusesValue of buses
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1-20 (a) – (2) Established criteria
Four established criteriaExistence of the buses on the night of August
31, 2008Ownership of each bus by Bus Co.,Physical condition of each busFair market value of each bus
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1-20 (a) – (3) Accumulating and evaluating evidence Four types of evidence Existence
Count the buses Ownership
Use registrations documents held by Olson for comparison to the serial number on each bus
Physical condition Examine the buses to determine each bus (can
examine the bus’s condition herself or hire an expert)
Fair market value Examine the “blue book”
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1-20 (a) – (4) Competent, independent person Annaliese HaraldssonCPAspends most of her time auditing used
automobile, bus, and truck dealershipshas experience that is consistent with the
nature of the engagement
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1-20 (a) – (5) Reporting results
Report results include: which of the 20 buses are parked in Bus
Co.,'s parking lot the night of August 31, 2008
whether all of the buses are owned by Bus Co.,
the condition of each bus, using established guidelines
fair market value of each bus using the current “blue book” for buses
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1-20 (b) What difficulties might Anna encounter
when performing this audit? Evaluating the condition
Using the guidelines of poor, good, and excellent highly subjective
If she uses a different criterion than the “blue book”, the fair market value will not be meaningful. Her experience will be essential in using this guideline.
Determining the fair market value unless it is clearly defined in the “blue book” for
each condition
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1-21
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Financial statement audit
To determine whether the financial statements are stated in accordance with specified criteria
E.g. US GAAP / IAS
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Operational audit
Evaluates the efficiency and effectiveness of any part of an organization’s operating procedures and methods
Management normally expects recommendations for improving operations
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Compliance audit
To determine whether the company is following specific procedures, rules or regulations set by some higher authority
E.g. review wage rates for compliance with minimum wage laws
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Compliance
Operational
Operational
Operational
Compliance
Financial statement
Financial statement
Financial statement
Financial statementCompliance
Compliance
Operational
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