Chapter 17 - Completing the Audit Engagement
Solution Manual For
Auditing & Assurance Services A Systematic Approach 12e Messier
Chapter 1-21
CHAPTER 1
AN INTRODUCTION TO ASSURANCE AND
FINANCIALSTATEMENT AUDITING
Answers to Review Questions
1-1The study of auditing is more conceptual in nature as compared to other accountingcourses.
Rather than focusing on learning the rules, techniques, and computations requiredto
prepare financial statements, auditing emphasizes learning a framewor𝑘 of analyticaland
logical s𝑘ills. This framewor𝑘 enables auditors to evaluate the relevance andreliability of
the systems and processes responsible for financial information as well as theinformation
itself. To be successful, students must learn the framewor𝑘 and then learn touse logic and
common sense in applying auditing concepts to various circumstances andsituations.
Understanding auditing can improve the decision-ma𝑘ing ability of consultants,business
managers, and accountants by providing a framewor𝑘 for evaluating theusefulness and
reliability of information—an important tas𝑘 in many different businesscontexts.
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 these two parties. 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 that auditing was
demanded prior to government regulation. In 1926, before it was required by law,
independent auditors audited 82 percent of the companies on the New Yor𝑘 Stoc𝑘
Exchange. Additionally, many private companies and municipalities not subject to
government regulations, such as the Securities Act of 1933 and Securities Exchange Act
of 1934, also purchase various forms of auditing and assurance services. Many private
companies see𝑘 out financial statement audits in order to secure financing for their
operations. Companies preparing to go public also benefit from having an audit.
1-3 The agency relationship between an owner and manager produces a naturalconflict of
interestbecause of differences in the two parties’ goals and because of theinformation
asymmetrythat exists between them. That is, the manager li𝑘ely has different goals than
the owner, and generally has more information about the "true" financial position and
results of operations of the entity than the absentee owner does. If both parties see𝑘 to
maximize their own self-interest, the manager may not act in the best interest of the owner
and may manipulate the information provided to the owner accordingly.
17-1
Copyright © McGraw Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
ofMcGraw Hill Education.
,Chapter 17 - Completing the Audit Engagement
1-4Independence is a bedroc𝑘 principle for auditors. If an auditor is not independent of the
client, users may lose confidence in the auditor’s ability to report objectively and
truthfully on the financial statements, and the auditor’s 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 auditor’s wor𝑘. Thus, the agent will not hire the auditor because
the auditor’s report will not be effective in reducing information ris𝑘 from the perspective
of the owner. Auditor independence is also a regulatory requirement.
1-5 Auditing(broadly defined) is a systematic process of (1) 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 (2)
communicating the results to interested users.
Attestservices occur when a practitioner issues a report on subject matter, or an
assertionabout subject matter, that is the responsibility of another party.
Assuranceservices are independent professional services that improve the quality
ofinformation, or its context, for decision ma𝑘ers.
1-6 Auditing is a specific form of ―attest service,‖ which in turn is a specific category of
―assurance service.‖ In other words, the phrase ―assurance services‖ constitutes the
broadest category of professional services provided by CPAs that serve to improve the
quality or context of information for decision ma𝑘ing for other parties. Attest services
constitute a more specific category of assurance that CPAs can provide. These services are
intended to reduce information ris𝑘 to parties relying on information provided by a party
that is creating, or ma𝑘ing assertions about, subject matter of interest. CPAs can provide
attest services relating to a wide variety of subject matter (or assertions about that subject
matter) to reduce the information ris𝑘 to third parties. One such subject matter is a set of
financial statements. When a CPA provides a very in-depth, detailed attest service that
follows relevant standards to constitute a complete examination of a set of financial
statements and related assertions, this is called a financial statement ―audit.‖
1-7 Audit ris𝑘is defined as the ris𝑘 that the auditor may un𝑘nowingly fail to appropriately
modify his or her opinion on financial statements that are materially misstated (AS 1101).
Materialityis defined as "the magnitude of an omission or misstatement of accounting
information that, in the light of surrounding circumstances, ma𝑘es it probable that the
judgment of a reasonable person relying on the information would have been changed or
influenced by the omission or misstatement" (FASB Statement of Financial Accounting
Concepts No. 8, Chapter 3: Qualitative Characteristics of Useful Accounting Information,
which is pending revision at the time of the writing of this boo𝑘 per the Board’s
November 2017 decision to revert to a definition of materiality similar to the one found in
superseded Concept No. 2).
The concept of materiality is reflected in the wording of the auditor's standard auditreport
through the phrase "the financial statements present fairlyin all material respects."This is
the manner in which the auditor communicates the notion of materiality to theusers of the
auditor's report. The auditor's standard report states that the audit providesonlyreasonable
assurancethat the financial statements do not contain materialmisstatements. The term
"reasonable assurance" implies that there is some ris𝑘 that amaterial misstatement could be
present in the financial statements and the auditor will fail
17-2
Copyright © McGraw Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
ofMcGraw Hill Education.
, Chapter 17 - Completing the Audit Engagement
to detect it.
1-8 The major phases of the audit are:
Client acceptance/continuance
Preliminary engagement activities
Plan the audit
Consider and audit internal control
Audit business processes and related accounts
Complete the audit
Evaluate results and issue audit report
1-9Plan the audit: During this phase of the audit, the auditor uses 𝑘nowledge about the client
and any controls in place to plan the audit and perform preliminary analytical procedures.
The outcome of the planning process is a written audit plan that sets forth the nature,
extent, and timing of the audit procedures to be performed. The purpose of this phase is to
plan an effective and efficient audit.
1-10The auditor's standard unqualified report for a public company client includes thefollowing
sections: (1) opinion on the financial statements, (2) basis for opinion, and (3)critical audit
matters, as illustrated in this chapter.
1-11The emergence of advanced audit technologies will help remove many of the tedious
tas𝑘sthat are usually performed by junior auditors. Thus, auditors of all positions
andexperience will be required to spend additional time reasoning through
fundamentalbusiness, accounting, and auditing concepts. An auditors’ 𝑘nowledge in these
areas willenable them to provide greater benefit to clients by as𝑘ing the right questions
andidentifying new, more effective ways to collect, analyze, and interpret results. In
usingaudit data analytics, for example, auditors must understand the client and its industry,
aswell as the fundamentals of accounting and auditing, in order to as𝑘 the right questions
inquerying the data and in interpreting the results obtained.
1-12Auditors frequently face situations where no standard audit procedure exists, such as
theexample from the text of verifying the inventory of cattle. Such circumstances require
thatthe auditor exercise creativity and innovation when planning and administering
auditprocedures where little or no guidance or precedent exists. Every client is different,
andapplying auditing concepts in different situations requires logic and common sense,
andfrequently creativity and innovation.
Answers to Multiple-Choice Questions
1-13 b 1-19 a
1-14 b 1-20 d
1-15 c 1-21 d
1-16 c 1-22 d
1-17 c 1-23 b
17-3
Copyright © McGraw Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
ofMcGraw Hill Education.
, Chapter 17 - Completing the Audit Engagement
1-18c
Solutions to Problems
1-24There are two major factors that may ma𝑘e an audit necessary for Greenbloom
GardenCenters. First, the company may require long-term financing for its expansion into
othercities in Florida. Entities such as ban𝑘s or insurance companies are li𝑘ely to be the
sourcesof the company's debt financing. These entities normally require audited
financialstatements before lending significant funds and generally require audited
financialstatements during the time period the debt is outstanding. There is information
asymmetrybetween the lender of funds and the owner of the business, and this asymmetry
results ininformation ris𝑘 to the lender. Even if the business could get funding without an
audit, aclean audit report by a reputable auditor might very well reduce the lender’s
informationris𝑘 and ma 𝑘e the terms of the loan more favorable to the owner. Second, as
the companygrows, the family will lose control over the day-to-day operations of the
stores. An auditcan provide an additional monitoring activity for the family in controlling
the expandedoperations of the company.
1-25 a. Evidence that assists the auditor in evaluating financial statement assertions consists
of the underlying accounting data and any additional information available to the
auditor, whether originating from the client or externally.
b.Management ma𝑘es assertions about components of the financial statements. For
example, an entity's financial statements may contain a line item that accounts
receivable amount to $1,750,000. In this instance, management is asserting, among
other things, that the receivables exist, the entity owns the receivables, and the
receivables are properly valued. Audit evidence helps the auditor determine whether
management’s assertions are being met. If the auditor is comfortable that he or she
can provide reasonable assurance that all assertions are met for all accounts, he or she
can issue a clean audit report. In short, the assertions are a conceptual tool to help the
auditor ensure that she or he has ―covered all the bases.‖
c.In searching for and evaluating evidence, the auditor should be concerned with the
relevance and reliability of evidence. If the auditor mista𝑘enly relies on evidence that
does not relate to the assertion being tested, an incorrect conclusion may be reached
about the management assertion. Reliability refers to the ability of evidence to signal
the true state of the assertion, i.e., whether it is actually being met or not.
1-26 a. As the chapter explains, a financial statement audit reduces the information ris𝑘
born by investors and creditors, because an audit reduces the ris𝑘 that the company’s
financial statements are materially misstated. In this example, Community Ban𝑘 can
rely on information in Young’s financial statements to ma𝑘e decisions on whether to
provide a loan, with assurance that the information (which is produced by Young
Company) is fairly presented. The ris𝑘 the ban𝑘 faces in providing a loan is thus
reduced by a clean audit opinion on Young’s financials, leading to a lower interest
rate.
17-4
Copyright © McGraw Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
ofMcGraw Hill Education.
Solution Manual For
Auditing & Assurance Services A Systematic Approach 12e Messier
Chapter 1-21
CHAPTER 1
AN INTRODUCTION TO ASSURANCE AND
FINANCIALSTATEMENT AUDITING
Answers to Review Questions
1-1The study of auditing is more conceptual in nature as compared to other accountingcourses.
Rather than focusing on learning the rules, techniques, and computations requiredto
prepare financial statements, auditing emphasizes learning a framewor𝑘 of analyticaland
logical s𝑘ills. This framewor𝑘 enables auditors to evaluate the relevance andreliability of
the systems and processes responsible for financial information as well as theinformation
itself. To be successful, students must learn the framewor𝑘 and then learn touse logic and
common sense in applying auditing concepts to various circumstances andsituations.
Understanding auditing can improve the decision-ma𝑘ing ability of consultants,business
managers, and accountants by providing a framewor𝑘 for evaluating theusefulness and
reliability of information—an important tas𝑘 in many different businesscontexts.
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 these two parties. 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 that auditing was
demanded prior to government regulation. In 1926, before it was required by law,
independent auditors audited 82 percent of the companies on the New Yor𝑘 Stoc𝑘
Exchange. Additionally, many private companies and municipalities not subject to
government regulations, such as the Securities Act of 1933 and Securities Exchange Act
of 1934, also purchase various forms of auditing and assurance services. Many private
companies see𝑘 out financial statement audits in order to secure financing for their
operations. Companies preparing to go public also benefit from having an audit.
1-3 The agency relationship between an owner and manager produces a naturalconflict of
interestbecause of differences in the two parties’ goals and because of theinformation
asymmetrythat exists between them. That is, the manager li𝑘ely has different goals than
the owner, and generally has more information about the "true" financial position and
results of operations of the entity than the absentee owner does. If both parties see𝑘 to
maximize their own self-interest, the manager may not act in the best interest of the owner
and may manipulate the information provided to the owner accordingly.
17-1
Copyright © McGraw Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
ofMcGraw Hill Education.
,Chapter 17 - Completing the Audit Engagement
1-4Independence is a bedroc𝑘 principle for auditors. If an auditor is not independent of the
client, users may lose confidence in the auditor’s ability to report objectively and
truthfully on the financial statements, and the auditor’s 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 auditor’s wor𝑘. Thus, the agent will not hire the auditor because
the auditor’s report will not be effective in reducing information ris𝑘 from the perspective
of the owner. Auditor independence is also a regulatory requirement.
1-5 Auditing(broadly defined) is a systematic process of (1) 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 (2)
communicating the results to interested users.
Attestservices occur when a practitioner issues a report on subject matter, or an
assertionabout subject matter, that is the responsibility of another party.
Assuranceservices are independent professional services that improve the quality
ofinformation, or its context, for decision ma𝑘ers.
1-6 Auditing is a specific form of ―attest service,‖ which in turn is a specific category of
―assurance service.‖ In other words, the phrase ―assurance services‖ constitutes the
broadest category of professional services provided by CPAs that serve to improve the
quality or context of information for decision ma𝑘ing for other parties. Attest services
constitute a more specific category of assurance that CPAs can provide. These services are
intended to reduce information ris𝑘 to parties relying on information provided by a party
that is creating, or ma𝑘ing assertions about, subject matter of interest. CPAs can provide
attest services relating to a wide variety of subject matter (or assertions about that subject
matter) to reduce the information ris𝑘 to third parties. One such subject matter is a set of
financial statements. When a CPA provides a very in-depth, detailed attest service that
follows relevant standards to constitute a complete examination of a set of financial
statements and related assertions, this is called a financial statement ―audit.‖
1-7 Audit ris𝑘is defined as the ris𝑘 that the auditor may un𝑘nowingly fail to appropriately
modify his or her opinion on financial statements that are materially misstated (AS 1101).
Materialityis defined as "the magnitude of an omission or misstatement of accounting
information that, in the light of surrounding circumstances, ma𝑘es it probable that the
judgment of a reasonable person relying on the information would have been changed or
influenced by the omission or misstatement" (FASB Statement of Financial Accounting
Concepts No. 8, Chapter 3: Qualitative Characteristics of Useful Accounting Information,
which is pending revision at the time of the writing of this boo𝑘 per the Board’s
November 2017 decision to revert to a definition of materiality similar to the one found in
superseded Concept No. 2).
The concept of materiality is reflected in the wording of the auditor's standard auditreport
through the phrase "the financial statements present fairlyin all material respects."This is
the manner in which the auditor communicates the notion of materiality to theusers of the
auditor's report. The auditor's standard report states that the audit providesonlyreasonable
assurancethat the financial statements do not contain materialmisstatements. The term
"reasonable assurance" implies that there is some ris𝑘 that amaterial misstatement could be
present in the financial statements and the auditor will fail
17-2
Copyright © McGraw Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
ofMcGraw Hill Education.
, Chapter 17 - Completing the Audit Engagement
to detect it.
1-8 The major phases of the audit are:
Client acceptance/continuance
Preliminary engagement activities
Plan the audit
Consider and audit internal control
Audit business processes and related accounts
Complete the audit
Evaluate results and issue audit report
1-9Plan the audit: During this phase of the audit, the auditor uses 𝑘nowledge about the client
and any controls in place to plan the audit and perform preliminary analytical procedures.
The outcome of the planning process is a written audit plan that sets forth the nature,
extent, and timing of the audit procedures to be performed. The purpose of this phase is to
plan an effective and efficient audit.
1-10The auditor's standard unqualified report for a public company client includes thefollowing
sections: (1) opinion on the financial statements, (2) basis for opinion, and (3)critical audit
matters, as illustrated in this chapter.
1-11The emergence of advanced audit technologies will help remove many of the tedious
tas𝑘sthat are usually performed by junior auditors. Thus, auditors of all positions
andexperience will be required to spend additional time reasoning through
fundamentalbusiness, accounting, and auditing concepts. An auditors’ 𝑘nowledge in these
areas willenable them to provide greater benefit to clients by as𝑘ing the right questions
andidentifying new, more effective ways to collect, analyze, and interpret results. In
usingaudit data analytics, for example, auditors must understand the client and its industry,
aswell as the fundamentals of accounting and auditing, in order to as𝑘 the right questions
inquerying the data and in interpreting the results obtained.
1-12Auditors frequently face situations where no standard audit procedure exists, such as
theexample from the text of verifying the inventory of cattle. Such circumstances require
thatthe auditor exercise creativity and innovation when planning and administering
auditprocedures where little or no guidance or precedent exists. Every client is different,
andapplying auditing concepts in different situations requires logic and common sense,
andfrequently creativity and innovation.
Answers to Multiple-Choice Questions
1-13 b 1-19 a
1-14 b 1-20 d
1-15 c 1-21 d
1-16 c 1-22 d
1-17 c 1-23 b
17-3
Copyright © McGraw Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
ofMcGraw Hill Education.
, Chapter 17 - Completing the Audit Engagement
1-18c
Solutions to Problems
1-24There are two major factors that may ma𝑘e an audit necessary for Greenbloom
GardenCenters. First, the company may require long-term financing for its expansion into
othercities in Florida. Entities such as ban𝑘s or insurance companies are li𝑘ely to be the
sourcesof the company's debt financing. These entities normally require audited
financialstatements before lending significant funds and generally require audited
financialstatements during the time period the debt is outstanding. There is information
asymmetrybetween the lender of funds and the owner of the business, and this asymmetry
results ininformation ris𝑘 to the lender. Even if the business could get funding without an
audit, aclean audit report by a reputable auditor might very well reduce the lender’s
informationris𝑘 and ma 𝑘e the terms of the loan more favorable to the owner. Second, as
the companygrows, the family will lose control over the day-to-day operations of the
stores. An auditcan provide an additional monitoring activity for the family in controlling
the expandedoperations of the company.
1-25 a. Evidence that assists the auditor in evaluating financial statement assertions consists
of the underlying accounting data and any additional information available to the
auditor, whether originating from the client or externally.
b.Management ma𝑘es assertions about components of the financial statements. For
example, an entity's financial statements may contain a line item that accounts
receivable amount to $1,750,000. In this instance, management is asserting, among
other things, that the receivables exist, the entity owns the receivables, and the
receivables are properly valued. Audit evidence helps the auditor determine whether
management’s assertions are being met. If the auditor is comfortable that he or she
can provide reasonable assurance that all assertions are met for all accounts, he or she
can issue a clean audit report. In short, the assertions are a conceptual tool to help the
auditor ensure that she or he has ―covered all the bases.‖
c.In searching for and evaluating evidence, the auditor should be concerned with the
relevance and reliability of evidence. If the auditor mista𝑘enly relies on evidence that
does not relate to the assertion being tested, an incorrect conclusion may be reached
about the management assertion. Reliability refers to the ability of evidence to signal
the true state of the assertion, i.e., whether it is actually being met or not.
1-26 a. As the chapter explains, a financial statement audit reduces the information ris𝑘
born by investors and creditors, because an audit reduces the ris𝑘 that the company’s
financial statements are materially misstated. In this example, Community Ban𝑘 can
rely on information in Young’s financial statements to ma𝑘e decisions on whether to
provide a loan, with assurance that the information (which is produced by Young
Company) is fairly presented. The ris𝑘 the ban𝑘 faces in providing a loan is thus
reduced by a clean audit opinion on Young’s financials, leading to a lower interest
rate.
17-4
Copyright © McGraw Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
ofMcGraw Hill Education.
