ANNUAL LOAN COST
Existing loan
None
0
$ 455,000
$ 455,000
Southwest National Bank
Review
$ 45,000
$ 385,000
$ 430,000
First City Bank
Audit
$ 80,000
$ 315,000
$ 395,000
Monterrey should select the loan from Southwest National Bank due to the higher cost of the audit and the reduced interest rate for the loan from Southwest National Bank. The following is the calculation of total costs for each loan:
LENDER
CPA SERVICE
COST OF CPA SERVICES
ANNUAL INTEREST
ANNUAL LOAN COST
Existing loan
None
0
$ 455,000
$ 455,000
Southwest National Bank
Review
$ 45,000
$ 385,000
$ 430,000
First City Bank
Audit
$125,000
$ 315,000
$ 440,000
Monterrey may desire to have an audit because of the many other benefits that an audit provides. The audit will provide Monterrey’s management with assurance about annual financial information used for decision-making purposes. The audit may detect errors or fraud, and provide management with information about the
1-17 (continued)
effectiveness of controls. In addition, the audit may result in recommendations to management that will improve efficiency or effectiveness.
e. The auditor must have a thorough understanding of the client and its environment, including the client’s e-commerce technologies, industry, regulatory and operating environment, suppliers, customers, creditors, and business strategies and processes. This thorough analysis helps the auditor identify risks associated with the client’s strategies that may affect whether the financial statements are fairly stated. This strategic knowledge of the client’s business often helps the auditor identify ways to help the client improve business operations, thereby providing added value to the audit function.
1-18 a. The services provided by Consumers Union are very similar to assurance services provided by CPA firms. The services provided by Consumers Union and assurance services provided by CPA firms are designed to improve the quality of information for decision makers. CPAs are valued for their independence, and the reports provided by Consumers Union are valued because Consumers Union is independent of the products tested.
The concepts of information risk for the buyer of an automobile and for the user of financial statements are essentially the same. They are both concerned with the problem of unreliable information being provided. In the case of the auditor, the user is concerned about unreliable information being provided in the financial statements. The buyer of an automobile is likely to be concerned about the manufacturer or dealer providing unreliable information.
The four causes of information risk are essentially the same for a buyer of an automobile and a user of financial statements:
Remoteness of information It is difficult for a user to obtain much information about either an automobile manufacturer or the automobile itself without incurring considerable cost. The automobile buyer does have the advantage of possibly knowing other users who are satisfied or dissatisfied with a similar automobile, and the ability to perform online research of new vehicles.
Biases and motives of provider There is a conflict between the automobile buyer and the manufacturer. The buyer wants to buy a high quality product at minimum cost whereas the seller wants to maximize the selling price and quantity sold.
Voluminous data There is a large amount of available information about automobiles that users might like to have in
1-18 (continued)
order to evaluate an automobile. Either that information is not available or too costly to obtain.
Complex exchange transactions The acquisition of an automobile is expensive and certainly a complex decision because of all the components that go into making a good automobile and choosing between a large number of alternatives.
The three ways users of financial statements and buyers of automobiles reduce information risk are also similar:
User verifies information him or herself That can be obtained by driving different automobiles, examining the specifications of the automobiles, talking to other users and doing research in various magazines.
User shares information risk with management The manufacturer of a product has a responsibility to meet its warranties and to provide a reasonable product. The buyer of an automobile can return the automobile for correction of defects. In some cases a refund may be obtained.
Examine the information prepared by Consumer Reports This is similar to an audit in the sense that independent information is provided by an independent party. The information provided by Consumer Reports is comparable to that provided by a CPA firm in an audit of financial statements.