Solution Manual for Auditing & Assurance Services A Systematic
Q Q Q Q Q Q Q Q Q Q
Approach 12th Edition by William Messier Jr, Steven Glover, Douglas
Q Q Q Q Q Q Q Q Q Q Q
Prawit QQ
,SOLUTION MANUAL FOR Q Q
Auditing & Assurance Services A Systematic Approach 12e
Q Q Q Q Q Q Q
QMessier Chapter 1-21 Q Q
CHAPTER 1 Q
AN INTRODUCTION TO ASSURANCE AND FINANCIAL
Q Q Q Q Q
STATEMENT AUDITING
Q Q
Answers to Review Questions
Q Q Q
1-1 The study of auditing is more conceptual in nature as compared to other
Q Q Q Q Q Q Q Q Q Q Q Q
accounting courses. Rather than focusing on learning the rules, techniques,
Q Q Q Q Q Q Q Q Q Q
Qand computations required to prepare financial statements, auditing emphasizes
Q Q Q Q Q Q Q Q
learning a framework of analytical and logical skills. This framework enables
Q Q Q Q Q Q Q Q Q Q Q
auditors to evaluate the relevance and reliability of the systems and processes
Q Q Q Q Q Q Q Q Q Q Q Q
responsible for financial information as well as the information itself. To be
Q Q Q Q Q Q Q Q Q Q Q Q
Qsuccessful, students must learn the framework and then learn to use logic
Q Q Q Q Q Q Q Q Q Q Q
Qand common sense in applying auditing concepts to various circumstances
Q Q Q Q Q Q Q Q Q
Qand situations. Understanding auditing can improve the decision-making
Q Q Q Q Q Q Q
Qability of consultants, business managers, and accountants by providing a
Q Q Q Q Q Q Q Q Q
framework for evaluating the usefulness and reliability of information—an
Q Q Q Q Q Q Q Q Q
important task in many different business contexts.
Q Q Q Q Q Q Q
1-2 There is a demand for auditing in a free-market economy because the agency
Q Q Q Q Q Q Q Q Q Q Q Q
Qrelationship between an absentee owner and a manager produces a natural
Q Q Q Q Q Q Q Q Q Q
Qconflict of interest due to the information asymmetry that exists between these
Q Q Q Q Q Q Q Q Q Q Q
two parties. As a result, the agent agrees to be monitored as part of his/her
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
employment contract. Auditing appears to be a cost-effective form of
Q Q Q Q Q Q Q Q Q Q
Qmonitoring. The empirical evidence suggests that auditing was demanded prior
Q Q Q Q Q Q Q Q Q
to government regulation. In 1926, before it was required by law, independent
Q Q Q Q Q Q Q Q Q Q Q Q
auditors audited 82 percent of the companies on the New York Stock
Q Q Q Q Q Q Q Q Q Q Q Q
QExchange. Additionally, many private companies and municipalities not subject
Q Q Q Q Q Q Q Q
Qto government regulations, such as the Securities Act of 1933 and Securities
Q Q Q Q Q Q Q Q Q Q Q
Exchange Act of 1934, also purchase various forms of auditing and assurance
Q Q Q Q Q Q Q Q Q Q Q Q
services. Many private companies seek out financial statement audits in order
Q Q Q Q Q Q Q Q Q Q Q
Qto secure financing for their operations. Companies preparing to go public
Q Q Q Q Q Q Q Q Q Q
Q also benefit from having an audit.
Q Q Q Q Q
1-3 The agency relationship between an owner and manager produces a natural
Q Q Q Q Q Q Q Q Q Q
Qconflict of interest because of differences in the two parties’ goals and because
Q Q Q Q Q Q Q Q Q Q Q Q
Qof the information asymmetry that exists between them. That is, the
Q Q Q Q Q Q Q Q Q Q
Qmanager likely has different goals than the owner, and generally has more
Q Q Q Q Q Q Q Q Q Q Q
information about the "true" financial position and results of operations of
Q Q Q Q Q Q Q Q Q Q Q
Qthe entity than the absentee owner does. If both parties seek to maximize
Q Q Q Q Q Q Q Q Q Q Q Q
Qtheir own self-interest, the manager may not act in the best interest of the
Q Q Q Q Q Q Q Q Q Q Q Q Q
owner and may manipulate the information provided to the owner accordingly.
Q Q Q Q Q Q Q Q Q Q Q
,1-4 Independence is a bedrock principle for auditors. If an auditor is not independent
Q Q Q Q Q Q Q Q Q Q Q Q
Qof the client, users may lose confidence in the auditor’s ability to report
Q Q Q Q Q Q Q Q Q Q Q Q
Qobjectively and truthfully on the financial statements, and the auditor’s work
Q Q Q Q Q Q Q Q Q Q
Qloses its value. From an agency perspective, if the principal (owner) knows that
Q Q Q Q Q Q Q Q Q Q Q Q
Qthe auditor is not independent, the owner will not trust the auditor’s work.
Q Q Q Q Q Q Q Q Q Q Q Q
QThus, the agent will not hire the auditor because the auditor’s report will
Q Q Q Q Q Q Q Q Q Q Q Q
Qnot be effective in reducing information risk from the perspective of the
Q Q Q Q Q Q Q Q Q Q Q
Qowner. Auditor independence is also a regulatory requirement.
Q Q Q Q Q Q Q
1-5 Auditing (broadly defined) is a systematic process of (1) objectively obtaining
Q Q Q Q Q Q Q Q Q Q
Qand evaluating evidence regarding assertions about economic actions and
Q Q Q Q Q Q Q Q
Qevents to ascertain the degree of correspondence between those assertions
Q Q Q Q Q Q Q Q Q
Q and established criteria and (2) communicating the results to interested users.
Q Q Q Q Q Q Q Q Q Q
Attest services occur when a practitioner issues a report on subject matter,
Q Q Q Q Q Q Q Q Q Q Q
Qor an assertion about subject matter, that is the responsibility of another party.
Q Q Q Q Q Q Q Q Q Q Q Q
Assurance services are independent professional services that improve the
Q Q Q Q Q Q Q Q
Qquality of information, or its context, for decision makers.
Q Q Q Q Q Q Q Q
1-6 Auditing is a specific form of ―attest service,‖ which in turn is a specific
Q Q Q Q Q Q Q Q Q Q Q Q Q
Qcategory of Q
―assurance service.‖ In other words, the phrase ―assurance services‖
Q Q Q Q Q Q Q Q
Qconstitutes the broadest category of professional services provided by CPAs
Q Q Q Q Q Q Q Q Q
Qthat serve to improve the quality or context of information for decision
Q Q Q Q Q Q Q Q Q Q Q
Qmaking for other parties. Attest services constitute a more specific category of
Q Q Q Q Q Q Q Q Q Q Q
Qassurance that CPAs can provide. These services are intended to reduce
Q Q Q Q Q Q Q Q Q Q
information risk to parties relying on information provided by a party that is
Q Q Q Q Q Q Q Q Q Q Q Q Q
creating, or making assertions about, subject matter of interest. CPAs can
Q Q Q Q Q Q Q Q Q Q Q
Qprovide attest services relating to a wide variety of subject matter (or
Q Q Q Q Q Q Q Q Q Q Q
Qassertions about that subject matter) to reduce the information risk to third
Q Q Q Q Q Q Q Q Q Q Q
parties. One such subject matter is a set of financial statements. When a CPA
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
provides a very in-depth, detailed attest service that follows relevant standards
Q Q Q Q Q Q Q Q Q Q Q
Qto constitute a complete examination of a set of financial statements and
Q Q Q Q Q Q Q Q Q Q Q
Qrelated assertions, this is called a financial statement ―audit.‖
Q Q Q Q Q Q Q Q
1-7 Audit risk is defined as the risk that the auditor may unknowingly fail
Q Q Q Q Q Q Q Q Q Q Q Q
Qto appropriately modify his or her opinion on financial statements that are
Q Q Q Q Q Q Q Q Q Q Q
materially misstated (AS 1101). Materiality is defined as "the magnitude
Q Q Q Q Q Q Q Q Q Q
Qof an omission or misstatement of accounting information that, in the
Q Q Q Q Q Q Q Q Q Q
Qlight of surrounding circumstances, makes it probable that the judgment of a
Q Q Q Q Q Q Q Q Q Q Q
Qreasonable person relying on the information would have been changed or
Q Q Q Q Q Q Q Q Q Q
influenced by the omission or misstatement" (FASB Statement of Financial
Q Q Q Q Q Q Q Q Q Q
QAccounting Concepts No. 8, Chapter 3: Qualitative Characteristics of Useful
Q Q Q Q Q Q Q Q Q
QAccounting Information, which is pending revision at the time of the
Q Q Q Q Q Q Q Q Q Q
Qwriting of this book per the Board’s November 2017 decision to revert to a
Q Q Q Q Q Q Q Q Q Q Q Q Q
definition of materiality similar to the one found in superseded Concept No. 2).
Q Q Q Q Q Q Q Q Q Q Q Q Q
The concept of materiality is reflected in the wording of the auditor's
Q Q Q Q Q Q Q Q Q Q Q
Qstandard audit report through the phrase "the financial statements present
Q Q Q Q Q Q Q Q Q
Qfairly in all material respects." This is the manner in which the auditor
Q Q Q Q Q Q Q Q Q Q Q Q
communicates the notion of materiality to the users of the auditor's report.
Q Q Q Q Q Q Q Q Q Q Q Q
QThe auditor's standard report states that the audit provides only reasonable
Q Q Q Q Q Q Q Q Q Q
assurance that the financial statements
Q Q Q Q Q
, do not contain material misstatements. The term "reasonable assurance" implies
Q Q Q Q Q Q Q Q Q
that there is some risk that a material misstatement could be present in
Q Q Q Q Q Q Q Q Q Q Q Q Q
Qthe financial statements and the auditor will fail
Q Q Q Q Q Q Q
Q Q Q Q Q Q Q Q Q Q
Approach 12th Edition by William Messier Jr, Steven Glover, Douglas
Q Q Q Q Q Q Q Q Q Q Q
Prawit QQ
,SOLUTION MANUAL FOR Q Q
Auditing & Assurance Services A Systematic Approach 12e
Q Q Q Q Q Q Q
QMessier Chapter 1-21 Q Q
CHAPTER 1 Q
AN INTRODUCTION TO ASSURANCE AND FINANCIAL
Q Q Q Q Q
STATEMENT AUDITING
Q Q
Answers to Review Questions
Q Q Q
1-1 The study of auditing is more conceptual in nature as compared to other
Q Q Q Q Q Q Q Q Q Q Q Q
accounting courses. Rather than focusing on learning the rules, techniques,
Q Q Q Q Q Q Q Q Q Q
Qand computations required to prepare financial statements, auditing emphasizes
Q Q Q Q Q Q Q Q
learning a framework of analytical and logical skills. This framework enables
Q Q Q Q Q Q Q Q Q Q Q
auditors to evaluate the relevance and reliability of the systems and processes
Q Q Q Q Q Q Q Q Q Q Q Q
responsible for financial information as well as the information itself. To be
Q Q Q Q Q Q Q Q Q Q Q Q
Qsuccessful, students must learn the framework and then learn to use logic
Q Q Q Q Q Q Q Q Q Q Q
Qand common sense in applying auditing concepts to various circumstances
Q Q Q Q Q Q Q Q Q
Qand situations. Understanding auditing can improve the decision-making
Q Q Q Q Q Q Q
Qability of consultants, business managers, and accountants by providing a
Q Q Q Q Q Q Q Q Q
framework for evaluating the usefulness and reliability of information—an
Q Q Q Q Q Q Q Q Q
important task in many different business contexts.
Q Q Q Q Q Q Q
1-2 There is a demand for auditing in a free-market economy because the agency
Q Q Q Q Q Q Q Q Q Q Q Q
Qrelationship between an absentee owner and a manager produces a natural
Q Q Q Q Q Q Q Q Q Q
Qconflict of interest due to the information asymmetry that exists between these
Q Q Q Q Q Q Q Q Q Q Q
two parties. As a result, the agent agrees to be monitored as part of his/her
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
employment contract. Auditing appears to be a cost-effective form of
Q Q Q Q Q Q Q Q Q Q
Qmonitoring. The empirical evidence suggests that auditing was demanded prior
Q Q Q Q Q Q Q Q Q
to government regulation. In 1926, before it was required by law, independent
Q Q Q Q Q Q Q Q Q Q Q Q
auditors audited 82 percent of the companies on the New York Stock
Q Q Q Q Q Q Q Q Q Q Q Q
QExchange. Additionally, many private companies and municipalities not subject
Q Q Q Q Q Q Q Q
Qto government regulations, such as the Securities Act of 1933 and Securities
Q Q Q Q Q Q Q Q Q Q Q
Exchange Act of 1934, also purchase various forms of auditing and assurance
Q Q Q Q Q Q Q Q Q Q Q Q
services. Many private companies seek out financial statement audits in order
Q Q Q Q Q Q Q Q Q Q Q
Qto secure financing for their operations. Companies preparing to go public
Q Q Q Q Q Q Q Q Q Q
Q also benefit from having an audit.
Q Q Q Q Q
1-3 The agency relationship between an owner and manager produces a natural
Q Q Q Q Q Q Q Q Q Q
Qconflict of interest because of differences in the two parties’ goals and because
Q Q Q Q Q Q Q Q Q Q Q Q
Qof the information asymmetry that exists between them. That is, the
Q Q Q Q Q Q Q Q Q Q
Qmanager likely has different goals than the owner, and generally has more
Q Q Q Q Q Q Q Q Q Q Q
information about the "true" financial position and results of operations of
Q Q Q Q Q Q Q Q Q Q Q
Qthe entity than the absentee owner does. If both parties seek to maximize
Q Q Q Q Q Q Q Q Q Q Q Q
Qtheir own self-interest, the manager may not act in the best interest of the
Q Q Q Q Q Q Q Q Q Q Q Q Q
owner and may manipulate the information provided to the owner accordingly.
Q Q Q Q Q Q Q Q Q Q Q
,1-4 Independence is a bedrock principle for auditors. If an auditor is not independent
Q Q Q Q Q Q Q Q Q Q Q Q
Qof the client, users may lose confidence in the auditor’s ability to report
Q Q Q Q Q Q Q Q Q Q Q Q
Qobjectively and truthfully on the financial statements, and the auditor’s work
Q Q Q Q Q Q Q Q Q Q
Qloses its value. From an agency perspective, if the principal (owner) knows that
Q Q Q Q Q Q Q Q Q Q Q Q
Qthe auditor is not independent, the owner will not trust the auditor’s work.
Q Q Q Q Q Q Q Q Q Q Q Q
QThus, the agent will not hire the auditor because the auditor’s report will
Q Q Q Q Q Q Q Q Q Q Q Q
Qnot be effective in reducing information risk from the perspective of the
Q Q Q Q Q Q Q Q Q Q Q
Qowner. Auditor independence is also a regulatory requirement.
Q Q Q Q Q Q Q
1-5 Auditing (broadly defined) is a systematic process of (1) objectively obtaining
Q Q Q Q Q Q Q Q Q Q
Qand evaluating evidence regarding assertions about economic actions and
Q Q Q Q Q Q Q Q
Qevents to ascertain the degree of correspondence between those assertions
Q Q Q Q Q Q Q Q Q
Q and established criteria and (2) communicating the results to interested users.
Q Q Q Q Q Q Q Q Q Q
Attest services occur when a practitioner issues a report on subject matter,
Q Q Q Q Q Q Q Q Q Q Q
Qor an assertion about subject matter, that is the responsibility of another party.
Q Q Q Q Q Q Q Q Q Q Q Q
Assurance services are independent professional services that improve the
Q Q Q Q Q Q Q Q
Qquality of information, or its context, for decision makers.
Q Q Q Q Q Q Q Q
1-6 Auditing is a specific form of ―attest service,‖ which in turn is a specific
Q Q Q Q Q Q Q Q Q Q Q Q Q
Qcategory of Q
―assurance service.‖ In other words, the phrase ―assurance services‖
Q Q Q Q Q Q Q Q
Qconstitutes the broadest category of professional services provided by CPAs
Q Q Q Q Q Q Q Q Q
Qthat serve to improve the quality or context of information for decision
Q Q Q Q Q Q Q Q Q Q Q
Qmaking for other parties. Attest services constitute a more specific category of
Q Q Q Q Q Q Q Q Q Q Q
Qassurance that CPAs can provide. These services are intended to reduce
Q Q Q Q Q Q Q Q Q Q
information risk to parties relying on information provided by a party that is
Q Q Q Q Q Q Q Q Q Q Q Q Q
creating, or making assertions about, subject matter of interest. CPAs can
Q Q Q Q Q Q Q Q Q Q Q
Qprovide attest services relating to a wide variety of subject matter (or
Q Q Q Q Q Q Q Q Q Q Q
Qassertions about that subject matter) to reduce the information risk to third
Q Q Q Q Q Q Q Q Q Q Q
parties. One such subject matter is a set of financial statements. When a CPA
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
provides a very in-depth, detailed attest service that follows relevant standards
Q Q Q Q Q Q Q Q Q Q Q
Qto constitute a complete examination of a set of financial statements and
Q Q Q Q Q Q Q Q Q Q Q
Qrelated assertions, this is called a financial statement ―audit.‖
Q Q Q Q Q Q Q Q
1-7 Audit risk is defined as the risk that the auditor may unknowingly fail
Q Q Q Q Q Q Q Q Q Q Q Q
Qto appropriately modify his or her opinion on financial statements that are
Q Q Q Q Q Q Q Q Q Q Q
materially misstated (AS 1101). Materiality is defined as "the magnitude
Q Q Q Q Q Q Q Q Q Q
Qof an omission or misstatement of accounting information that, in the
Q Q Q Q Q Q Q Q Q Q
Qlight of surrounding circumstances, makes it probable that the judgment of a
Q Q Q Q Q Q Q Q Q Q Q
Qreasonable person relying on the information would have been changed or
Q Q Q Q Q Q Q Q Q Q
influenced by the omission or misstatement" (FASB Statement of Financial
Q Q Q Q Q Q Q Q Q Q
QAccounting Concepts No. 8, Chapter 3: Qualitative Characteristics of Useful
Q Q Q Q Q Q Q Q Q
QAccounting Information, which is pending revision at the time of the
Q Q Q Q Q Q Q Q Q Q
Qwriting of this book per the Board’s November 2017 decision to revert to a
Q Q Q Q Q Q Q Q Q Q Q Q Q
definition of materiality similar to the one found in superseded Concept No. 2).
Q Q Q Q Q Q Q Q Q Q Q Q Q
The concept of materiality is reflected in the wording of the auditor's
Q Q Q Q Q Q Q Q Q Q Q
Qstandard audit report through the phrase "the financial statements present
Q Q Q Q Q Q Q Q Q
Qfairly in all material respects." This is the manner in which the auditor
Q Q Q Q Q Q Q Q Q Q Q Q
communicates the notion of materiality to the users of the auditor's report.
Q Q Q Q Q Q Q Q Q Q Q Q
QThe auditor's standard report states that the audit provides only reasonable
Q Q Q Q Q Q Q Q Q Q
assurance that the financial statements
Q Q Q Q Q
, do not contain material misstatements. The term "reasonable assurance" implies
Q Q Q Q Q Q Q Q Q
that there is some risk that a material misstatement could be present in
Q Q Q Q Q Q Q Q Q Q Q Q Q
Qthe financial statements and the auditor will fail
Q Q Q Q Q Q Q
