Solution manual
Auditing assurance services a systematic approach
12th edition by William Messier Jr and glover
All Chapters 1-21 Covered
,SOLUTION MANUAL FOR n n
Auditing & Assurance Services A Systematic Approach 12e Messier C
n n n n n n n n n
hapter 1-21 n
CHAPTER 1 n
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT A
n n n n n n n
UDITING
Answers to Review Questions
n n n
1-1 Thenstudynofnauditingnisnmorenconceptualninnnaturenasncomparedntonothernaccountingncours
es.nRathernthannfocusingnonnlearningnthenrules,ntechniques,nandncomputationsnrequiredntonp
reparenfinancialnstatements,nauditingnemphasizesnlearningnanframeworknofnanalyticalnandnlo
gicalnskills.nThisnframeworknenablesnauditorsntonevaluatenthenrelevancenandn reliabilitynofnth
ensystemsnandnprocessesnresponsiblenfornfinancialninformationnasnwellnasntheninformationnit
self.nTonbensuccessful,nstudentsnmustnlearnnthenframeworknandnthennlearnntonusenlogicnandn
commonnsenseninnapplyingnauditingnconceptsntonvariousncircumstancesnandnsituations.nUn
derstandingnauditingncannimproventhendecision-
makingnabilitynofnconsultants,nbusinessnmanagers,nandnaccountantsnbynprovidingnanframew
orknfornevaluatingnthenusefulnessnandnreliabilitynofninformation—
annimportantntaskninnmanyndifferentnbusinessncontexts.
1-2 Therenisnandemandnfornauditingninnanfree-
marketneconomynbecausenthenagencynrelationshipnbetweennannabsenteenownernandnanman
agernproducesnannaturalnconflictnofninterestnduenton theninformationnasymmetrynthatnexistsnb
etweennthesentwonparties.nAsnanresult,nthenagentnagreesntonbenmonitorednasnpartnofnhis/hern
employmentncontract.nAuditingnappearsntonbenancost-
effectivenformnofnmonitoring.nThenempiricalnevidencensuggestsnthatnauditingnwasndemanded
npriorntongovernmentnregulation.nInn1926,nbeforenitnwasnrequirednbynlaw,nindependentnaudito
rsnauditedn82npercentnofnthencompaniesnonnthenNewnYorknStocknExchange.nAdditionally,nma
nynprivatencompaniesnandnmunicipalitiesnnotnsubjectntongovernmentnregulations,nsuchnasnth
enSecuritiesnActnofn1933nandnSecuritiesnExchangenActn ofn1934,nalsonpurchasenvariousnform
snofnauditingnandnassurancenservices.nManynprivatencompaniesnseeknoutnfinancialnstatemen
tnauditsninnorderntonsecurenfinancingnforntheirnoperations.nCompaniesnpreparingntongonpublicn
alsonbenefitnfromnhavingnannaudit.
1-3 Thenagencynrelationshipnbetweennannownernandnmanagernproducesnannaturalnconflictnofnint
erestnbecausenofndifferencesninnthentwonparties’ngoalsnandnbecausenofntheninformationnasy
mmetrynthatnexistsnbetweennthem.nThatnis,nthenmanagernlikelynhasndifferentngoalsnthanntheno
wner,nandngenerallynhasnmoreninformationnaboutnthen"true"nfinancialnpositionnandnresultsnofn
,operationsnofnthenentitynthannthenabsenteenownerndoes.nIfnbothnpartiesnseekntonmaximizenth
eirnownnself-
interest,nthenmanagernmaynnotnactninnthenbestninterestnofnthenownernandnmaynmanipulatenth
eninformationnprovidedntonthenownernaccordingly.
, 1-4 Independencenisnanbedrocknprinciplenfornauditors.nIfnannauditornisnnotnindependentnofnthencli
ent,nusersnmaynlosenconfidenceninnthenauditor’snabilityntonreportnobjectivelynandn truthfullyno
nnthenfinancialnstatements,nandnthenauditor’snworknlosesnitsnvalue.nFromnannagencynperspec
tive,nifnthenprincipaln(owner)nknowsnthatnthenauditornisnnotnindependent,nthenownernwillnnotnt
rustnthenauditor’snwork.nThus,nthenagentnwillnnotnhirenthenauditornbecausenthenauditor’snrepo
rtnwillnnotnbeneffectiveninnreducingninformationnrisknfromnthenperspectivenofnthenowner.nAudit
ornindependencenisnalsonanregulatorynrequirement.
1-5 Auditingn(broadlyndefined)nisnansystematicnprocessnofn(1)nobjectivelynobtainingnandnevaluati
ngnevidencenregardingnassertionsnaboutneconomicnactionsnandneventsntonascertainnthendegr
eenofncorrespondencenbetweennthosenassertionsnandnestablishedncriterianandn(2)ncommuni
catingnthenresultsntoninterestednusers.
Attestnservicesnoccurnwhennanpractitionernissuesnanreportnonnsubjectnmatter,nornannassertio
nnaboutnsubjectnmatter,nthatnisnthenresponsibilitynofnanothernparty.
Assurancenservicesnarenindependentnprofessionalnservicesnthatnimproventhenqualitynofninfo
rmation,nornitsncontext,nforndecisionnmakers.
1-6 Auditingn isn an specificn formn ofn ―attestn service,‖n whichn inn turnn isn an specificn categoryn of
―assurancenservice.‖nInnothernwords,nthenphrasen―assurancenservices‖nconstitutesnthenbr
oadestncategorynofnprofessionalnservicesnprovidednbynCPAsnthatnserventonimproventhenqualit
ynorncontextnofninformationnforndecisionnmakingnfornothernparties.nAttestnservicesnconstituten
anmorenspecificncategorynofnassurancenthatnCPAsncannprovide.nThesenservicesnarenintendedn
tonreduceninformationnriskntonpartiesnrelyingnonninformationnprovidednbynanpartynthatnisncreati
ng,nornmakingnassertionsnabout,nsubjectnmatternofninterest.nCPAsncannprovidenattestnservice
snrelatingntonanwidenvarietynofnsubjectnmattern(ornassertionsnaboutnthatnsubjectnmatter)ntonre
ducentheninformationnriskntonthirdnparties.nOnensuchnsubjectnmatternisnansetnofnfinancialnstat
ements.nWhennanCPAnprovidesnanverynin-
depth,ndetailednattestnservicenthatnfollowsnrelevantnstandardsntonconstitutenancompletenexa
minationnofnansetnofnfinancialnstatementsnandnrelatednassertions,nthisnisncallednanfinancialnst
atementn―audit.‖
1-7 Auditnrisknisndefinednasnthenrisknthatnthenauditornmaynunknowinglynfailntonappropriatelynmodi
fynhisnornhernopinionnonnfinancialnstatementsnthatnarenmateriallynmisstatedn(ASn1101).nMate
rialitynisndefinednasn"thenmagnitudenofnannomissionnornmisstatementnofnaccountingninformat
ionnthat,ninnthenlightnofnsurroundingncircumstances,nmakesnitnprobablenthatnthenjudgmentnofn
anreasonablenpersonnrelyingnonntheninformationnwouldnhavenbeennchangednorninfluencednbyn
thenomissionnornmisstatement"n(FASBnStatementnofnFinancialnAccountingnConceptsnNo.n8,n
Chaptern3:nQualitativenCharacteristicsnofnUsefulnAccountingnInformation,nwhichnisnpendingn
revisionnatnthentimenofnthenwritingnofnthisnbooknpernthenBoard’sn Novembern2017ndecisionnton
revertntonandefinitionnofnmaterialitynsimilarntonthenonenfoundninnsupersedednConceptnNo.n2).
Thenconceptnofnmaterialitynisnreflectedninnthenwordingnofnthenauditor'snstandardnauditnrep
ortnthroughnthenphrasen"thenfinancialnstatementsnpresentnfairlyninnallnmaterialnrespects."nThi
snisnthenmannerninnwhichnthenauditorncommunicatesnthennotionnofnmaterialityntonthen usersno
fnthenauditor'snreport.nThenauditor'snstandardnreportnstatesnthatnthenauditnprovidesnonlynreas
onablenassurancenthatnthenfinancialnstatementsndonnotncontainnmaterialnmisstatements.nTh
entermn"reasonablenassurance"nimpliesnthatntherenisnsomenrisknthatnanmaterialnmisstatemen
Auditing assurance services a systematic approach
12th edition by William Messier Jr and glover
All Chapters 1-21 Covered
,SOLUTION MANUAL FOR n n
Auditing & Assurance Services A Systematic Approach 12e Messier C
n n n n n n n n n
hapter 1-21 n
CHAPTER 1 n
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT A
n n n n n n n
UDITING
Answers to Review Questions
n n n
1-1 Thenstudynofnauditingnisnmorenconceptualninnnaturenasncomparedntonothernaccountingncours
es.nRathernthannfocusingnonnlearningnthenrules,ntechniques,nandncomputationsnrequiredntonp
reparenfinancialnstatements,nauditingnemphasizesnlearningnanframeworknofnanalyticalnandnlo
gicalnskills.nThisnframeworknenablesnauditorsntonevaluatenthenrelevancenandn reliabilitynofnth
ensystemsnandnprocessesnresponsiblenfornfinancialninformationnasnwellnasntheninformationnit
self.nTonbensuccessful,nstudentsnmustnlearnnthenframeworknandnthennlearnntonusenlogicnandn
commonnsenseninnapplyingnauditingnconceptsntonvariousncircumstancesnandnsituations.nUn
derstandingnauditingncannimproventhendecision-
makingnabilitynofnconsultants,nbusinessnmanagers,nandnaccountantsnbynprovidingnanframew
orknfornevaluatingnthenusefulnessnandnreliabilitynofninformation—
annimportantntaskninnmanyndifferentnbusinessncontexts.
1-2 Therenisnandemandnfornauditingninnanfree-
marketneconomynbecausenthenagencynrelationshipnbetweennannabsenteenownernandnanman
agernproducesnannaturalnconflictnofninterestnduenton theninformationnasymmetrynthatnexistsnb
etweennthesentwonparties.nAsnanresult,nthenagentnagreesntonbenmonitorednasnpartnofnhis/hern
employmentncontract.nAuditingnappearsntonbenancost-
effectivenformnofnmonitoring.nThenempiricalnevidencensuggestsnthatnauditingnwasndemanded
npriorntongovernmentnregulation.nInn1926,nbeforenitnwasnrequirednbynlaw,nindependentnaudito
rsnauditedn82npercentnofnthencompaniesnonnthenNewnYorknStocknExchange.nAdditionally,nma
nynprivatencompaniesnandnmunicipalitiesnnotnsubjectntongovernmentnregulations,nsuchnasnth
enSecuritiesnActnofn1933nandnSecuritiesnExchangenActn ofn1934,nalsonpurchasenvariousnform
snofnauditingnandnassurancenservices.nManynprivatencompaniesnseeknoutnfinancialnstatemen
tnauditsninnorderntonsecurenfinancingnforntheirnoperations.nCompaniesnpreparingntongonpublicn
alsonbenefitnfromnhavingnannaudit.
1-3 Thenagencynrelationshipnbetweennannownernandnmanagernproducesnannaturalnconflictnofnint
erestnbecausenofndifferencesninnthentwonparties’ngoalsnandnbecausenofntheninformationnasy
mmetrynthatnexistsnbetweennthem.nThatnis,nthenmanagernlikelynhasndifferentngoalsnthanntheno
wner,nandngenerallynhasnmoreninformationnaboutnthen"true"nfinancialnpositionnandnresultsnofn
,operationsnofnthenentitynthannthenabsenteenownerndoes.nIfnbothnpartiesnseekntonmaximizenth
eirnownnself-
interest,nthenmanagernmaynnotnactninnthenbestninterestnofnthenownernandnmaynmanipulatenth
eninformationnprovidedntonthenownernaccordingly.
, 1-4 Independencenisnanbedrocknprinciplenfornauditors.nIfnannauditornisnnotnindependentnofnthencli
ent,nusersnmaynlosenconfidenceninnthenauditor’snabilityntonreportnobjectivelynandn truthfullyno
nnthenfinancialnstatements,nandnthenauditor’snworknlosesnitsnvalue.nFromnannagencynperspec
tive,nifnthenprincipaln(owner)nknowsnthatnthenauditornisnnotnindependent,nthenownernwillnnotnt
rustnthenauditor’snwork.nThus,nthenagentnwillnnotnhirenthenauditornbecausenthenauditor’snrepo
rtnwillnnotnbeneffectiveninnreducingninformationnrisknfromnthenperspectivenofnthenowner.nAudit
ornindependencenisnalsonanregulatorynrequirement.
1-5 Auditingn(broadlyndefined)nisnansystematicnprocessnofn(1)nobjectivelynobtainingnandnevaluati
ngnevidencenregardingnassertionsnaboutneconomicnactionsnandneventsntonascertainnthendegr
eenofncorrespondencenbetweennthosenassertionsnandnestablishedncriterianandn(2)ncommuni
catingnthenresultsntoninterestednusers.
Attestnservicesnoccurnwhennanpractitionernissuesnanreportnonnsubjectnmatter,nornannassertio
nnaboutnsubjectnmatter,nthatnisnthenresponsibilitynofnanothernparty.
Assurancenservicesnarenindependentnprofessionalnservicesnthatnimproventhenqualitynofninfo
rmation,nornitsncontext,nforndecisionnmakers.
1-6 Auditingn isn an specificn formn ofn ―attestn service,‖n whichn inn turnn isn an specificn categoryn of
―assurancenservice.‖nInnothernwords,nthenphrasen―assurancenservices‖nconstitutesnthenbr
oadestncategorynofnprofessionalnservicesnprovidednbynCPAsnthatnserventonimproventhenqualit
ynorncontextnofninformationnforndecisionnmakingnfornothernparties.nAttestnservicesnconstituten
anmorenspecificncategorynofnassurancenthatnCPAsncannprovide.nThesenservicesnarenintendedn
tonreduceninformationnriskntonpartiesnrelyingnonninformationnprovidednbynanpartynthatnisncreati
ng,nornmakingnassertionsnabout,nsubjectnmatternofninterest.nCPAsncannprovidenattestnservice
snrelatingntonanwidenvarietynofnsubjectnmattern(ornassertionsnaboutnthatnsubjectnmatter)ntonre
ducentheninformationnriskntonthirdnparties.nOnensuchnsubjectnmatternisnansetnofnfinancialnstat
ements.nWhennanCPAnprovidesnanverynin-
depth,ndetailednattestnservicenthatnfollowsnrelevantnstandardsntonconstitutenancompletenexa
minationnofnansetnofnfinancialnstatementsnandnrelatednassertions,nthisnisncallednanfinancialnst
atementn―audit.‖
1-7 Auditnrisknisndefinednasnthenrisknthatnthenauditornmaynunknowinglynfailntonappropriatelynmodi
fynhisnornhernopinionnonnfinancialnstatementsnthatnarenmateriallynmisstatedn(ASn1101).nMate
rialitynisndefinednasn"thenmagnitudenofnannomissionnornmisstatementnofnaccountingninformat
ionnthat,ninnthenlightnofnsurroundingncircumstances,nmakesnitnprobablenthatnthenjudgmentnofn
anreasonablenpersonnrelyingnonntheninformationnwouldnhavenbeennchangednorninfluencednbyn
thenomissionnornmisstatement"n(FASBnStatementnofnFinancialnAccountingnConceptsnNo.n8,n
Chaptern3:nQualitativenCharacteristicsnofnUsefulnAccountingnInformation,nwhichnisnpendingn
revisionnatnthentimenofnthenwritingnofnthisnbooknpernthenBoard’sn Novembern2017ndecisionnton
revertntonandefinitionnofnmaterialitynsimilarntonthenonenfoundninnsupersedednConceptnNo.n2).
Thenconceptnofnmaterialitynisnreflectedninnthenwordingnofnthenauditor'snstandardnauditnrep
ortnthroughnthenphrasen"thenfinancialnstatementsnpresentnfairlyninnallnmaterialnrespects."nThi
snisnthenmannerninnwhichnthenauditorncommunicatesnthennotionnofnmaterialityntonthen usersno
fnthenauditor'snreport.nThenauditor'snstandardnreportnstatesnthatnthenauditnprovidesnonlynreas
onablenassurancenthatnthenfinancialnstatementsndonnotncontainnmaterialnmisstatements.nTh
entermn"reasonablenassurance"nimpliesnthatntherenisnsomenrisknthatnanmaterialnmisstatemen
