Solution Manual for Auditing & Assurance Services A Systematic
A A A A A A A A A
Ap AA
proach 12th Edition by William Messier Jr, Steven Glover, Douglas
A A A A A A A A A A
Pr AA
awit
,
,SOLUTION MANUAL FOR A A
Auditing & Assurance Services A Systematic Approach 12e M
A A A A A A A A
essier Chapter 1-21
A A
CHAPTER 1 A
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEM
A A A A A A
ENT AUDITING
A
Answers to Review Questions
A A A
1-1 TheA studyA ofA auditingA isA moreAconceptualA inA natureAasA comparedA toAotherA accountin
gA courses.A RatherA thanA focusingA onA learningA theA rules,A techniques,A andA computatio
nsA requiredAtoAprepareAfinancialA statements,AauditingAemphasizesAlearningAaAframew
orkA ofAanalyticalA andAlogicalAskills.AThisAframeworkAenablesA auditorsAtoA evaluateAthe
A relevanceA andA reliabilityA ofA theA systemsA andA processesA responsibleA forA financialA inf
ormationA asA wellA asA theA informationA itself.A ToA beA successful,A studentsA mustA learnA t
heA frameworkA andA thenA learnA toA useA logicA andA commonA senseA inA applyingA auditing
A conceptsA toA variousA circumstancesA andA situations.A UnderstandingA auditingA canA i
mproveA theA decision-
makingA abilityA ofA consultants,A businessA managers,A andA accountantsAbyAprovidingAaAfr
ameworkAforAevaluatingAtheAusefulnessAandAreliabilityAofA information—
anAimportantAtaskAinAmanyAdifferentAbusinessAcontexts.
1-2 ThereA isA aA demandA forA auditingA inA aA free-
marketA economyA becauseA theA agencyA relationshipA betweenA anA absenteeA ownerA andA
aA managerA producesA aA naturalA conflictA ofA interestA dueA toA theAinformationA asymmetr
yA thatA existsA betweenA theseA twoA parties.A AsAaAresult,AtheAagentAagreesAtoAbeAmonitore
dAasApartAofAhis/herAemploymentAcontract.A AuditingA appearsA toA beA aA cost-
effectiveA formA ofA monitoring.A TheA empiricalA evidenceA suggestsAthatA auditingA wasAd
emandedA priorAtoA governmentA regulation.A InA 1926,A beforeAitA wasArequiredA byA law,A i
ndependentAauditorsAauditedA 82A percentAofA theA companiesA onA theA NewA YorkA StockA
Exchange.A Additionally,A manyA privateA companiesA andA municipalitiesA notA subjectA toA
governmentA regulations,A suchA asA theASecuritiesA ActA ofA1933AandASecuritiesAExchange
AActA ofA1934,AalsoApurchaseAvariousAformsAofAauditingA andA assuranceA services.A ManyA
privateA companiesAseekA outA financialA statementA auditsA inA orderA toA secureA financingA
forA theirA operations.A CompaniesA preparingA toA goA publicA alsoAbenefitAfromAhavingAanA
audit.
1-3 TheA agencyA relationshipA betweenA anA ownerA andA managerA producesAaAnaturalA conflic
tA ofA interestA becauseA ofA differencesA inA theA twoA parties’A goalsA andA becauseA ofA theA inf
ormationA asymmetryA thatA existsA betweenA them.A ThatA is,A theA managerA likelyA hasA d
ifferentA goalsAthanA theAowner,A andA generallyAhasAmoreA informationA aboutA theA "true"
A financialA positionA andA resultsA ofA operationsA ofA theA entityA thanA theA absenteeA own
erA does.A IfA bothA partiesA seekA toA maximizeA theirA ownA self-
interest,A theA managerA mayA notA actAinAtheAbestAinterestAofAtheAownerAandAmayAmanip
ulateAtheAinformationAprovidedAtoA theAownerAaccordingly.
, 1-4 IndependenceAisA aAbedrockAprincipleAforAauditors.AIfAanA auditorAisA notA independentAo
fA theAclient,AusersAmayAloseAconfidenceAinAtheAauditor’sA abilityAtoAreportAobjectivelyAa
ndA truthfullyAonAtheAfinancialAstatements,AandAtheAauditor’sAworkAlosesAitsAvalue.AFro
mAanA agencyAperspective,AifAtheAprincipalA(owner)AknowsAthatAtheAauditorAisAnotA ind
ependent,A theA ownerA willA notA trustA theA auditor’sA work.A Thus,A theA agentA willA notA h
ireA theA auditorA becauseA theA auditor’sA reportA willA notA beA effectiveA inA reducingA infor
mationA riskA fromA theA perspectiveA ofA theA owner.A AuditorA independenceA isA alsoA aA reg
ulatoryArequirement.
1-5 AuditingA (broadlyA defined)A isA aA systematicA processA ofA (1)A objectivelyA obtainingA and
A evaluatingA evidenceA regardingA assertionsA aboutA economicA actionsA andA eventsA toA as
certainA theA degreeA ofA correspondenceA betweenA thoseA assertionsA andA establishedA c
riteriaAandA(2)AcommunicatingAtheAresultsAtoAinterestedAusers.
AttestA servicesA occurA whenA aA practitionerA issuesA aA reportA onA subjectA matter,A orA a
nA assertionAaboutAsubjectAmatter,AthatAisAtheAresponsibilityAofAanotherAparty.
AssuranceA servicesA areA independentA professionalA servicesA thatA improveA theA quality
A ofAinformation,AorAitsAcontext,AforAdecisionAmakers.
1-6 AuditingA isA aA specificA formA ofA ―attestA service,‖A whichA inA turnA isA aA specificA categoryA of
―assuranceA service.‖A InA otherA words,A theA phraseA ―assuranceA services‖A constitute
sA theA broadestA categoryA ofA professionalA servicesA providedA byA CPAsA thatA serveA toA i
mproveA theA qualityA orA contextA ofA informationA forA decisionA makingA forA otherA parties.
A AttestA servicesA constituteA aA moreA specificA categoryA ofA assuranceA thatA CPAsA canA pr
ovide.ATheseAservicesAareAintendedAtoA reduceAinformationAriskAtoApartiesArelyingAonA i
nformationAprovidedAbyAaApartyAthatAisAcreating,AorAmakingAassertionsAabout,Asubject
A matterA ofA interest.A CPAsA canA provideA attestA servicesA relatingA toA aA wideA varietyA
ofA subjectA matterA (orA assertionsA aboutA thatA subjectA matter)A toA reduceA theA informa
tionA riskAtoA thirdAparties.AOneA suchAsubjectA matterAisA aA setAofA financialAstatements.AW
henA aA CPAAprovidesAaAveryA in-
depth,AdetailedA attestA serviceA thatA followsA relevantA standardsA toA constituteA aA compl
eteA examinationA ofA aA setA ofA financialA statementsA andA relatedA assertions,AthisAisAcal
ledAaAfinancialAstatementA―audit.‖
1-7 AuditA riskA isA definedA asA theA riskA thatA theA auditorA mayA unknowinglyA failA toA appr
opriatelyA modifyA hisA orA herA opinionA onA financialA statementsA thatA areA materiallyA mi
sstatedA (ASA 1101).A MaterialityA isA definedA asA "theA magnitudeA ofA anA omissionA orA
misstatementA ofA accountingA informationA that,A inA theA lightA ofA surroundingA circums
tances,A makesA itA probableA thatA theA judgmentA ofA aA reasonableA personA relyingA onAthe
A informationAwouldAhaveAbeenA changedA orA influencedA byA theAomissionA orA misstatem
ent"A (FASBA StatementA ofA FinancialA AccountingA ConceptsA No.A 8,A ChapterA 3:A Qualitati
veA CharacteristicsA ofA UsefulA AccountingA Information,A whichA isA pendingA revisionA at
A theA timeA ofA theA writingA ofA thisA bookA perA theA Board’sA NovemberA 2017A decisionAt
oArevertAtoAaAdefinitionAofAmaterialityAsimilarAtoAtheAoneAfoundAinAsupersededA Concept
ANo.A2).
TheA conceptA ofA materialityA isA reflectedA inA theA wordingA ofA theA auditor'sA standar
dA auditA reportA throughA theA phraseA "theA financialA statementsA presentA fairlyA inA allA m
aterialArespects."A ThisAisAtheAmannerAinAwhichAtheAauditorAcommunicatesAtheAnotionA
ofA materialityA toA theA usersA ofA theA auditor'sA report.A TheA auditor'sA standardA report
A statesAthatAtheAauditAprovidesAonlyA reasonableA assuranceA thatAtheAfinancialAstatemen
ts
A A A A A A A A A
Ap AA
proach 12th Edition by William Messier Jr, Steven Glover, Douglas
A A A A A A A A A A
Pr AA
awit
,
,SOLUTION MANUAL FOR A A
Auditing & Assurance Services A Systematic Approach 12e M
A A A A A A A A
essier Chapter 1-21
A A
CHAPTER 1 A
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEM
A A A A A A
ENT AUDITING
A
Answers to Review Questions
A A A
1-1 TheA studyA ofA auditingA isA moreAconceptualA inA natureAasA comparedA toAotherA accountin
gA courses.A RatherA thanA focusingA onA learningA theA rules,A techniques,A andA computatio
nsA requiredAtoAprepareAfinancialA statements,AauditingAemphasizesAlearningAaAframew
orkA ofAanalyticalA andAlogicalAskills.AThisAframeworkAenablesA auditorsAtoA evaluateAthe
A relevanceA andA reliabilityA ofA theA systemsA andA processesA responsibleA forA financialA inf
ormationA asA wellA asA theA informationA itself.A ToA beA successful,A studentsA mustA learnA t
heA frameworkA andA thenA learnA toA useA logicA andA commonA senseA inA applyingA auditing
A conceptsA toA variousA circumstancesA andA situations.A UnderstandingA auditingA canA i
mproveA theA decision-
makingA abilityA ofA consultants,A businessA managers,A andA accountantsAbyAprovidingAaAfr
ameworkAforAevaluatingAtheAusefulnessAandAreliabilityAofA information—
anAimportantAtaskAinAmanyAdifferentAbusinessAcontexts.
1-2 ThereA isA aA demandA forA auditingA inA aA free-
marketA economyA becauseA theA agencyA relationshipA betweenA anA absenteeA ownerA andA
aA managerA producesA aA naturalA conflictA ofA interestA dueA toA theAinformationA asymmetr
yA thatA existsA betweenA theseA twoA parties.A AsAaAresult,AtheAagentAagreesAtoAbeAmonitore
dAasApartAofAhis/herAemploymentAcontract.A AuditingA appearsA toA beA aA cost-
effectiveA formA ofA monitoring.A TheA empiricalA evidenceA suggestsAthatA auditingA wasAd
emandedA priorAtoA governmentA regulation.A InA 1926,A beforeAitA wasArequiredA byA law,A i
ndependentAauditorsAauditedA 82A percentAofA theA companiesA onA theA NewA YorkA StockA
Exchange.A Additionally,A manyA privateA companiesA andA municipalitiesA notA subjectA toA
governmentA regulations,A suchA asA theASecuritiesA ActA ofA1933AandASecuritiesAExchange
AActA ofA1934,AalsoApurchaseAvariousAformsAofAauditingA andA assuranceA services.A ManyA
privateA companiesAseekA outA financialA statementA auditsA inA orderA toA secureA financingA
forA theirA operations.A CompaniesA preparingA toA goA publicA alsoAbenefitAfromAhavingAanA
audit.
1-3 TheA agencyA relationshipA betweenA anA ownerA andA managerA producesAaAnaturalA conflic
tA ofA interestA becauseA ofA differencesA inA theA twoA parties’A goalsA andA becauseA ofA theA inf
ormationA asymmetryA thatA existsA betweenA them.A ThatA is,A theA managerA likelyA hasA d
ifferentA goalsAthanA theAowner,A andA generallyAhasAmoreA informationA aboutA theA "true"
A financialA positionA andA resultsA ofA operationsA ofA theA entityA thanA theA absenteeA own
erA does.A IfA bothA partiesA seekA toA maximizeA theirA ownA self-
interest,A theA managerA mayA notA actAinAtheAbestAinterestAofAtheAownerAandAmayAmanip
ulateAtheAinformationAprovidedAtoA theAownerAaccordingly.
, 1-4 IndependenceAisA aAbedrockAprincipleAforAauditors.AIfAanA auditorAisA notA independentAo
fA theAclient,AusersAmayAloseAconfidenceAinAtheAauditor’sA abilityAtoAreportAobjectivelyAa
ndA truthfullyAonAtheAfinancialAstatements,AandAtheAauditor’sAworkAlosesAitsAvalue.AFro
mAanA agencyAperspective,AifAtheAprincipalA(owner)AknowsAthatAtheAauditorAisAnotA ind
ependent,A theA ownerA willA notA trustA theA auditor’sA work.A Thus,A theA agentA willA notA h
ireA theA auditorA becauseA theA auditor’sA reportA willA notA beA effectiveA inA reducingA infor
mationA riskA fromA theA perspectiveA ofA theA owner.A AuditorA independenceA isA alsoA aA reg
ulatoryArequirement.
1-5 AuditingA (broadlyA defined)A isA aA systematicA processA ofA (1)A objectivelyA obtainingA and
A evaluatingA evidenceA regardingA assertionsA aboutA economicA actionsA andA eventsA toA as
certainA theA degreeA ofA correspondenceA betweenA thoseA assertionsA andA establishedA c
riteriaAandA(2)AcommunicatingAtheAresultsAtoAinterestedAusers.
AttestA servicesA occurA whenA aA practitionerA issuesA aA reportA onA subjectA matter,A orA a
nA assertionAaboutAsubjectAmatter,AthatAisAtheAresponsibilityAofAanotherAparty.
AssuranceA servicesA areA independentA professionalA servicesA thatA improveA theA quality
A ofAinformation,AorAitsAcontext,AforAdecisionAmakers.
1-6 AuditingA isA aA specificA formA ofA ―attestA service,‖A whichA inA turnA isA aA specificA categoryA of
―assuranceA service.‖A InA otherA words,A theA phraseA ―assuranceA services‖A constitute
sA theA broadestA categoryA ofA professionalA servicesA providedA byA CPAsA thatA serveA toA i
mproveA theA qualityA orA contextA ofA informationA forA decisionA makingA forA otherA parties.
A AttestA servicesA constituteA aA moreA specificA categoryA ofA assuranceA thatA CPAsA canA pr
ovide.ATheseAservicesAareAintendedAtoA reduceAinformationAriskAtoApartiesArelyingAonA i
nformationAprovidedAbyAaApartyAthatAisAcreating,AorAmakingAassertionsAabout,Asubject
A matterA ofA interest.A CPAsA canA provideA attestA servicesA relatingA toA aA wideA varietyA
ofA subjectA matterA (orA assertionsA aboutA thatA subjectA matter)A toA reduceA theA informa
tionA riskAtoA thirdAparties.AOneA suchAsubjectA matterAisA aA setAofA financialAstatements.AW
henA aA CPAAprovidesAaAveryA in-
depth,AdetailedA attestA serviceA thatA followsA relevantA standardsA toA constituteA aA compl
eteA examinationA ofA aA setA ofA financialA statementsA andA relatedA assertions,AthisAisAcal
ledAaAfinancialAstatementA―audit.‖
1-7 AuditA riskA isA definedA asA theA riskA thatA theA auditorA mayA unknowinglyA failA toA appr
opriatelyA modifyA hisA orA herA opinionA onA financialA statementsA thatA areA materiallyA mi
sstatedA (ASA 1101).A MaterialityA isA definedA asA "theA magnitudeA ofA anA omissionA orA
misstatementA ofA accountingA informationA that,A inA theA lightA ofA surroundingA circums
tances,A makesA itA probableA thatA theA judgmentA ofA aA reasonableA personA relyingA onAthe
A informationAwouldAhaveAbeenA changedA orA influencedA byA theAomissionA orA misstatem
ent"A (FASBA StatementA ofA FinancialA AccountingA ConceptsA No.A 8,A ChapterA 3:A Qualitati
veA CharacteristicsA ofA UsefulA AccountingA Information,A whichA isA pendingA revisionA at
A theA timeA ofA theA writingA ofA thisA bookA perA theA Board’sA NovemberA 2017A decisionAt
oArevertAtoAaAdefinitionAofAmaterialityAsimilarAtoAtheAoneAfoundAinAsupersededA Concept
ANo.A2).
TheA conceptA ofA materialityA isA reflectedA inA theA wordingA ofA theA auditor'sA standar
dA auditA reportA throughA theA phraseA "theA financialA statementsA presentA fairlyA inA allA m
aterialArespects."A ThisAisAtheAmannerAinAwhichAtheAauditorAcommunicatesAtheAnotionA
ofA materialityA toA theA usersA ofA theA auditor'sA report.A TheA auditor'sA standardA report
A statesAthatAtheAauditAprovidesAonlyA reasonableA assuranceA thatAtheAfinancialAstatemen
ts
