SOLUTION MANUAL for Auditing & Assurance Services A
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b Systematic Approach b b
12th Edition by William Messier Jr, Steven Glover,
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Chapters 1 - 21 / Complete
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1
,• Table of Contents b b
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
b b b b b b b b b
Chapter 2: The Financial Statement Auditing Environment
b b b b b b
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
b b b b b b b b b
Chapter 4: Risk Assessment
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Chapter 5: Evidence and Documentation
b b b b
Chapter 6: Internal Control in a Financial Statement Audit
b b b b b b b b
Chapter 7: Auditing Internal Control over Financial Reporting
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Chapter 8: Audit Sampling: An Overview and Application to Tests of Controls
b b b b b b b b b b b
Chapter 9: Audit Sampling: An Application to Substantive Tests of Account Balances
b b b b b b b b b b b
Chapter 10: Auditing the Revenue Process
b b b b b
Chapter 11: Auditing the Purchasing Process
b b b b b
Chapter 12: Auditing the Human Resource Management Process
b b b b b b b
Chapter 13: Auditing the Inventory Management Process
b b b b b b
Chapter 14: Auditing the Financing/Investing Process:Prepaid Expenses, Intangible Assets, and Property, Plant, and
b b b b b b b b b b b b
Equipment
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Chapter 15: Auditing the Financing/Investing Process:Long-Term Liabilities, Stockholders’ Equity, and Income Statement
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Accounts
b
Chapter 16: Auditing the Financing/Investing Process: Cashand Investments
b b b b b b b
Chapter 17: Completing the Audit Engagement
b b b b b
Chapter 18: Reports on Audited Financial Statements
b b b b b b
Chapter 19: Professional Conduct, Independence, and Quality Management
b b b b b b b
Chapter 20: Legal Liability
b b b
Chapter 21: Assurance, Attestation, and Internal Auditing Services
b b b b b b b
2
,CHAPTER 1 b
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
b b b b b b b
Answers to Review Questions b b b
1-1 The study of auditing is more conceptual in nature compared to other accounting courses.
b b b b b b b b b b b b b
Rather than focusing on learning the rules, techniques, and computations required to prepare
b b b b b b b b b b b b b
financial statements, auditing emphasizes learning a framework of analytical and logicalskills to
b b b b b b b b b b b b b
evaluate the relevance and reliability of the systems and processes responsible for financial
b b b b b b b b b b b b b
information, as well as the information itself. To be successful, students must learn the framework
b b b b b b b b b b b b b b b
and then learn to use logic and common sense in applying auditing concepts to various
b b b b b b b b b b b b b b b
circumstances and situations.
b b b
Understanding auditing can improve the decision making ability of consultants, business b b b b b b b b b b
managers, and accountants by providing a framework for evaluating the usefulness and
b b b b b b b b b b b b
reliability of information.
b b b
1-2 There is a demand for auditing in a free-market economy because the agency relationship b b b b b b b b b b b b b
between an absentee owner and a manager produces a natural conflict of interest due to the
b b b b b b b b b b b b b b b b
information asymmetry that exists between the owner and manager. As a result, theagent agrees
b b b b b b b b b b b b b b b
to be monitored as part of his/her employment contract. Auditing appears to be acost-effective
b b b b b b b b b b b b b b b
form of monitoring.
b b b
The empirical evidence suggests auditing was demanded prior to government regulation
b b b b b b b b b b
such as statutory audit requirements. Additionally, many private companies and other entities not
b b b b b b b b b b b b b
subject to government auditing regulations also demand auditing.
b b b b b b b b
1-3 The agency relationship between an owner and manager produces a natural conflict of
b b b b b b b b b b b b
interest because of differences in the two parties’ goals and because of information asymmetry
b b b b b b b b b b b b b b
that exists between them. That is, the manager generally has more information about the ‘true’
b b b b b b b b b b b b b b b
financial position and results of operations of the entity than the absentee owner does. If both
b b b b b b b b b b b b b b b b
parties seek to maximize their own self-interest, it is likely that the manager will not act in the best
b b b b b b b b b b b b b b b b b b b
interest of the owner and may manipulate the information provided to the owner accordingly.
b b b b b b b b b b b b b b
1-4 Independence is an important standard for auditors. If an auditor is not independent ofthe b b b b b b b b b b b b b b
client, users may lose confidence in the auditor’s ability to report truthfully on the financial
b b b b b b b b b b b b b b b
statements, and the auditor’s work loses its value. From an agency perspective, if the principal
b b b b b b b b b b b b b b b
(owner) knows that the auditor is not independent, the owner will not trust the auditor’s work.
b b b b b b b b b b b b b b b b
Thus, the agent will not hire the auditor because the auditor’s report will not be effective inreducing
b b b b b b b b b b b b b b b b b
information risk from the perspective of the owner.
b b b b b b b b
1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and b b b b b b b b b b
evaluating evidence regarding assertions about economic actions and events to ascertain the
b b b b b b b b b b b b
degree of correspondence between those assertions and established criteria and
b b b b b b b b b b
communicating the results to interested users.
b b b b b b
Assurance is engagement in which a practitioner expresses a conclusion designed to b b b b b b b b b b b
enhance the degree of confidence of the intended users other than the responsible party aboutthe
b b b b b b b b b b b b b b b b
outcome of the evaluation or measurement of a subject matter against criteria.
b b b b b b b b b b b b
Examples of assurance services are assurance (audit) of financial statements, assurance b b b b b b b b b b
of prospective financial information, assurance of reporting on internal control,assurance of
b b b b b b b b b b b b
sustainability reporting, and assurance of electronic commerce.
b b b b b b b
3
, 1-6 The phrase systematic process implies that there should be a well-planned, logical
b b b b b b b b b b b
approach for conducting an audit that involves objectively obtaining and evaluating evidence.
b b b b b b b b b b b b
1-7 Materiality: "Omissions or misstatements of items are material if they could, individuallyor b b b b b b b b b b b b
collectively, influence the economic decisions of users taken on the basis of the financial
b b b b b b b b b b b b b b
statements. Materiality depends on the size and nature of the omission or misstatement judged in
b b b b b b b b b b b b b b b
the surrounding circumstances. The size or nature of the item, or a combination of both, couldbe the
b b b b b b b b b b b b b b b b b b
determining factor." (IASB).
b b b
Audit risk is defined as the risk that the auditor expresses an inappropriate audit opinion
b b b b b b b b b b b b b b
when the financial statements are materially misstated (ISA 200).
b b b b b b b b b
The audit report states that the auditor obtains “reasonable assurance” whether the
b b b b b b b b b b b
financial statements are free from “material” misstatement. The term reasonable assurance
b b b b b b b b b b b
informs the reader that there is some level of risk that the audit did not detect all material
b b b b b b b b b b b b b b b b b b
misstatements. In addition, the auditor’s opinion commonly uses the wording that the financial
b b b b b b b b b b b b b
statements present fairly, “in all material respects.” These phrases communicate to third partiesthat
b b b b b b b b b b b b b b
the audit report is limited to material information.
b b b b b b b b
1-8 On most audits, it is not feasible or cost-effective to audit all transactions. For example, in a
b b b b b b b b b b b b b b b b
small business, the auditor might be able to examine all transactions that occurred during the
b b b b b b b b b b b b b b b
period. However, it is unlikely that the owner of the business could afford to pay for such an
b b b b b b b b b b b b b b b b b b
extensive audit. For a large organization, the sheer volume of transactions prevents the auditor
b b b b b b b b b b b b b b
from examining every transaction. Thus, there is a trade-off between the exactness or precisionof
b b b b b b b b b b b b b b b
the audit and its cost.
b b b b b
1-9 The major phases of the audit are:
b b b b b b
• Client acceptance/continuance and establishing engagement terms b b b b b
• Preplanning
• Assess risks and establish materiality b b b b
• Plan the audit b b
• Consider internal control b b
• Audit business processes and related accounts b b b b b
• Complete the audit b b
• Evaluate results and issue audit report b b b b b
1-10 The auditor’s understanding of the entity and its environment includes knowledge
b b b b b b b b b b
about: (1) the nature of the entity, (2) its objectives and strategies, (3) its industry, regulatory,and
b b b b b b b b b b b b b b b b b
other external factors, (4) its management, (5) its governance, (6) its measurement and
b b b b b b b b b b b b b
performance process, and (7) its business processes.
b b b b b b b
1-11 Sometimes auditors will face situations where no standard audit procedure exists, suchas b b b b b b b b b b b b
the example from the text of verifying the inventory of reindeer. Such circumstances require that
b b b b b b b b b b b b b b b
the auditor possess creativity and innovation when planning and administering audit procedures
b b b b b b b b b b b b
where little or no precedent exists. Every client is different, and applying auditing concepts in
b b b b b b b b b b b b b b b
different situations requires logic and common sense, and frequently creativity and innovation.
b b b b b b b b b b b b
Solutions to Problems b b
1-12 The memo should cite the following facts:
b b b b b b
• There is a historical relationship between accounting and auditing. b b b b b b b b
4
b b b b b b b
b Systematic Approach b b
12th Edition by William Messier Jr, Steven Glover,
b b b b b b b b
Chapters 1 - 21 / Complete
b b b b b
1
,• Table of Contents b b
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
b b b b b b b b b
Chapter 2: The Financial Statement Auditing Environment
b b b b b b
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
b b b b b b b b b
Chapter 4: Risk Assessment
b b b
Chapter 5: Evidence and Documentation
b b b b
Chapter 6: Internal Control in a Financial Statement Audit
b b b b b b b b
Chapter 7: Auditing Internal Control over Financial Reporting
b b b b b b b
Chapter 8: Audit Sampling: An Overview and Application to Tests of Controls
b b b b b b b b b b b
Chapter 9: Audit Sampling: An Application to Substantive Tests of Account Balances
b b b b b b b b b b b
Chapter 10: Auditing the Revenue Process
b b b b b
Chapter 11: Auditing the Purchasing Process
b b b b b
Chapter 12: Auditing the Human Resource Management Process
b b b b b b b
Chapter 13: Auditing the Inventory Management Process
b b b b b b
Chapter 14: Auditing the Financing/Investing Process:Prepaid Expenses, Intangible Assets, and Property, Plant, and
b b b b b b b b b b b b
Equipment
b
Chapter 15: Auditing the Financing/Investing Process:Long-Term Liabilities, Stockholders’ Equity, and Income Statement
b b b b b b b b b b b
Accounts
b
Chapter 16: Auditing the Financing/Investing Process: Cashand Investments
b b b b b b b
Chapter 17: Completing the Audit Engagement
b b b b b
Chapter 18: Reports on Audited Financial Statements
b b b b b b
Chapter 19: Professional Conduct, Independence, and Quality Management
b b b b b b b
Chapter 20: Legal Liability
b b b
Chapter 21: Assurance, Attestation, and Internal Auditing Services
b b b b b b b
2
,CHAPTER 1 b
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
b b b b b b b
Answers to Review Questions b b b
1-1 The study of auditing is more conceptual in nature compared to other accounting courses.
b b b b b b b b b b b b b
Rather than focusing on learning the rules, techniques, and computations required to prepare
b b b b b b b b b b b b b
financial statements, auditing emphasizes learning a framework of analytical and logicalskills to
b b b b b b b b b b b b b
evaluate the relevance and reliability of the systems and processes responsible for financial
b b b b b b b b b b b b b
information, as well as the information itself. To be successful, students must learn the framework
b b b b b b b b b b b b b b b
and then learn to use logic and common sense in applying auditing concepts to various
b b b b b b b b b b b b b b b
circumstances and situations.
b b b
Understanding auditing can improve the decision making ability of consultants, business b b b b b b b b b b
managers, and accountants by providing a framework for evaluating the usefulness and
b b b b b b b b b b b b
reliability of information.
b b b
1-2 There is a demand for auditing in a free-market economy because the agency relationship b b b b b b b b b b b b b
between an absentee owner and a manager produces a natural conflict of interest due to the
b b b b b b b b b b b b b b b b
information asymmetry that exists between the owner and manager. As a result, theagent agrees
b b b b b b b b b b b b b b b
to be monitored as part of his/her employment contract. Auditing appears to be acost-effective
b b b b b b b b b b b b b b b
form of monitoring.
b b b
The empirical evidence suggests auditing was demanded prior to government regulation
b b b b b b b b b b
such as statutory audit requirements. Additionally, many private companies and other entities not
b b b b b b b b b b b b b
subject to government auditing regulations also demand auditing.
b b b b b b b b
1-3 The agency relationship between an owner and manager produces a natural conflict of
b b b b b b b b b b b b
interest because of differences in the two parties’ goals and because of information asymmetry
b b b b b b b b b b b b b b
that exists between them. That is, the manager generally has more information about the ‘true’
b b b b b b b b b b b b b b b
financial position and results of operations of the entity than the absentee owner does. If both
b b b b b b b b b b b b b b b b
parties seek to maximize their own self-interest, it is likely that the manager will not act in the best
b b b b b b b b b b b b b b b b b b b
interest of the owner and may manipulate the information provided to the owner accordingly.
b b b b b b b b b b b b b b
1-4 Independence is an important standard for auditors. If an auditor is not independent ofthe b b b b b b b b b b b b b b
client, users may lose confidence in the auditor’s ability to report truthfully on the financial
b b b b b b b b b b b b b b b
statements, and the auditor’s work loses its value. From an agency perspective, if the principal
b b b b b b b b b b b b b b b
(owner) knows that the auditor is not independent, the owner will not trust the auditor’s work.
b b b b b b b b b b b b b b b b
Thus, the agent will not hire the auditor because the auditor’s report will not be effective inreducing
b b b b b b b b b b b b b b b b b
information risk from the perspective of the owner.
b b b b b b b b
1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and b b b b b b b b b b
evaluating evidence regarding assertions about economic actions and events to ascertain the
b b b b b b b b b b b b
degree of correspondence between those assertions and established criteria and
b b b b b b b b b b
communicating the results to interested users.
b b b b b b
Assurance is engagement in which a practitioner expresses a conclusion designed to b b b b b b b b b b b
enhance the degree of confidence of the intended users other than the responsible party aboutthe
b b b b b b b b b b b b b b b b
outcome of the evaluation or measurement of a subject matter against criteria.
b b b b b b b b b b b b
Examples of assurance services are assurance (audit) of financial statements, assurance b b b b b b b b b b
of prospective financial information, assurance of reporting on internal control,assurance of
b b b b b b b b b b b b
sustainability reporting, and assurance of electronic commerce.
b b b b b b b
3
, 1-6 The phrase systematic process implies that there should be a well-planned, logical
b b b b b b b b b b b
approach for conducting an audit that involves objectively obtaining and evaluating evidence.
b b b b b b b b b b b b
1-7 Materiality: "Omissions or misstatements of items are material if they could, individuallyor b b b b b b b b b b b b
collectively, influence the economic decisions of users taken on the basis of the financial
b b b b b b b b b b b b b b
statements. Materiality depends on the size and nature of the omission or misstatement judged in
b b b b b b b b b b b b b b b
the surrounding circumstances. The size or nature of the item, or a combination of both, couldbe the
b b b b b b b b b b b b b b b b b b
determining factor." (IASB).
b b b
Audit risk is defined as the risk that the auditor expresses an inappropriate audit opinion
b b b b b b b b b b b b b b
when the financial statements are materially misstated (ISA 200).
b b b b b b b b b
The audit report states that the auditor obtains “reasonable assurance” whether the
b b b b b b b b b b b
financial statements are free from “material” misstatement. The term reasonable assurance
b b b b b b b b b b b
informs the reader that there is some level of risk that the audit did not detect all material
b b b b b b b b b b b b b b b b b b
misstatements. In addition, the auditor’s opinion commonly uses the wording that the financial
b b b b b b b b b b b b b
statements present fairly, “in all material respects.” These phrases communicate to third partiesthat
b b b b b b b b b b b b b b
the audit report is limited to material information.
b b b b b b b b
1-8 On most audits, it is not feasible or cost-effective to audit all transactions. For example, in a
b b b b b b b b b b b b b b b b
small business, the auditor might be able to examine all transactions that occurred during the
b b b b b b b b b b b b b b b
period. However, it is unlikely that the owner of the business could afford to pay for such an
b b b b b b b b b b b b b b b b b b
extensive audit. For a large organization, the sheer volume of transactions prevents the auditor
b b b b b b b b b b b b b b
from examining every transaction. Thus, there is a trade-off between the exactness or precisionof
b b b b b b b b b b b b b b b
the audit and its cost.
b b b b b
1-9 The major phases of the audit are:
b b b b b b
• Client acceptance/continuance and establishing engagement terms b b b b b
• Preplanning
• Assess risks and establish materiality b b b b
• Plan the audit b b
• Consider internal control b b
• Audit business processes and related accounts b b b b b
• Complete the audit b b
• Evaluate results and issue audit report b b b b b
1-10 The auditor’s understanding of the entity and its environment includes knowledge
b b b b b b b b b b
about: (1) the nature of the entity, (2) its objectives and strategies, (3) its industry, regulatory,and
b b b b b b b b b b b b b b b b b
other external factors, (4) its management, (5) its governance, (6) its measurement and
b b b b b b b b b b b b b
performance process, and (7) its business processes.
b b b b b b b
1-11 Sometimes auditors will face situations where no standard audit procedure exists, suchas b b b b b b b b b b b b
the example from the text of verifying the inventory of reindeer. Such circumstances require that
b b b b b b b b b b b b b b b
the auditor possess creativity and innovation when planning and administering audit procedures
b b b b b b b b b b b b
where little or no precedent exists. Every client is different, and applying auditing concepts in
b b b b b b b b b b b b b b b
different situations requires logic and common sense, and frequently creativity and innovation.
b b b b b b b b b b b b
Solutions to Problems b b
1-12 The memo should cite the following facts:
b b b b b b
• There is a historical relationship between accounting and auditing. b b b b b b b b
4
