Answer chapter 1 1-2 There is a demand for auditing in a free-market economy because the agency relationship between an absentee

owner and a manager produces a natural conflict of interest due to the information asymmetry that exists between the owner and manager. As a result, the agent agrees to be monitored as part of his/her employment contract. Auditing appears to be a cost-effective form of monitoring. The empirical evidence suggests auditing was demanded prior to government regulation such as statutory audit requirements. Additionally, many private companies and other entities not subject to government auditing regulations also demand auditing. 1-4 Independence is an important standard for auditors. If an auditor is not independent of the client, users may lose confidence in the auditors ability to report truthfully on the financial statements, and the auditors work loses its value. From an agency perspective, if the principal (owner) knows that the auditor is not independent, the owner will not trust the auditors work. Thus, the agent will not hire the auditor because the auditors report will not be effective in reducing information risk from the perspective of the owner. 1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. Assurance is engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. Examples of assurance services are assurance (audit) of financial statements, assurance of prospective financial information, assurance of reporting on internal control, assurance of sustainability reporting, and assurance of electronic commerce.

Answer chapter 2 2-1 During the late 1990s and early 2000s, firms aggressively sought opportunities to expand their operations in non-audit services such as consulting. This expansion from their core audit practice, combined with allegations of auditors refusing to challenge managements actions (including widespread earnings management), resulted in tension between regulators and the accounting profession. Auditors independence issues gained renewed focus. Major audit firms started reorganizing their portfolio of non-audit services offered. IFAC as well as regulators issued new rules on auditor independence. However, subsequent financial fiascos such as those at Ahold, Enron, Parmalat, WorldCom, Tyco, and many others, caused investors to doubt the fundamental integrity of the financial reporting system. Under pressure to restore the publics confidence, both the auditors and their professional organizations (e.g. IFAC and IAASB), and regulators took action, resulting in more public oversight of the profession and stricter regulations. The responsiveness of the profession to the needs of the public, investors and regulators will be crucial for future regulatory measures. 2-11 Auditing can be classified into four types: 1. Internal auditor which is work for the company 2. External auditor 3. Government auditor 4. Forensic auditor 2-14