Chapter d17 d- dCompleting dthe dAudit
Engagement
SOLUTION MANUAL FOR d d
Auditing & Assurance Services A Systematic Approach 12e Messier
d d d d d d d d
Chapter 1-21
d d
CHAPTER 1 d
AN INTRODUCTION TO ASSURANCE AND FINANCIAL
d d d d d
STATEMENT AUDITING
d d
Answers to Review Questions
d d d
1-1 The dstudy dof dauditing dis dmore dconceptual din dnature das dcompared dto dother daccounting
dcourses. dRather dthan dfocusing don dlearning dthe drules, dtechniques, dand dcomputations
drequired dto dprepare dfinancial dstatements, dauditing demphasizes dlearning da dframework dof
danalytical dand dlogical dskills. dThis dframework denables dauditors dto devaluate dthe drelevance
dand d reliability dof dthe dsystems dand dprocesses dresponsible dfor dfinancial dinformation das
dwell das dthe dinformation ditself. dTo dbe dsuccessful, dstudents dmust dlearn dthe dframework dand
dthen dlearn dto duse dlogic dand dcommon dsense din dapplying dauditing dconcepts dto dvarious
dcircumstances dand dsituations. dUnderstanding dauditing dcan dimprove dthe ddecision-making
dability dof dconsultants, dbusiness dmanagers, dand daccountants dby dproviding da dframework dfor
devaluating dthe dusefulness dand dreliability dof dinformation—an dimportant dtask din dmany
ddifferent dbusiness dcontexts.
1-2 There dis da ddemand dfor dauditing din da dfree-market deconomy dbecause dthe dagency
drelationship dbetween dan dabsentee downer dand da dmanager dproduces da dnatural dconflict dof
dinterest ddue dto d the dinformation dasymmetry dthat dexists dbetween dthese dtwo dparties. dAs da
dresult, dthe dagent dagrees dto dbe dmonitored das dpart dof dhis/her demployment dcontract.
dAuditing dappears dto dbe da dcost-effective dform dof dmonitoring. dThe dempirical devidence
dsuggests dthat dauditing dwas ddemanded dprior dto dgovernment dregulation. dIn d1926, dbefore dit
dwas drequired dby dlaw, dindependent dauditors daudited d82 dpercent dof dthe dcompanies don dthe
dNew dYork dStock dExchange. dAdditionally, dmany dprivate dcompanies dand dmunicipalities
dnot dsubject dto dgovernment dregulations, dsuch das dthe dSecurities dAct dof d1933 dand dSecurities
dExchange dAct d of d1934, dalso dpurchase dvarious dforms dof dauditing dand dassurance dservices.
dMany dprivate dcompanies dseek dout dfinancial dstatement daudits din dorder dto dsecure dfinancing
dfor dtheir doperations. dCompanies dpreparing dto dgo dpublic dalso dbenefit dfrom dhaving dan
daudit.
1-3 The dagency drelationship dbetween dan downer dand dmanager dproduces da dnatural dconflict dof
dinterest dbecause dof ddifferences din dthe dtwo dparties’ dgoals dand dbecause dof dthe dinformation
dasymmetry dthat dexists dbetween dthem. dThat dis, dthe dmanager dlikely dhas ddifferent dgoals dthan
dthe downer, dand dgenerally dhas dmore dinformation dabout dthe d"true" dfinancial dposition dand
dresults dof doperations dof dthe dentity dthan dthe dabsentee downer ddoes. dIf dboth dparties dseek dto
dmaximize dtheir down dself-interest, dthe dmanager dmay dnot dact din dthe dbest dinterest dof dthe
downer dand dmay dmanipulate dthe dinformation dprovided dto dthe downer daccordingly.
17-1
Copyright d©2022 dMcGraw dHill dEducation. dAll drights dreserved. dNo dreproduction dor ddistribution dwithout dthe dprior dwritten
dconsent dof d McGraw dHill dEducation.
,Chapter d17 d- dCompleting dthe dAudit
Engagement
1-4 Independence dis da dbedrock dprinciple dfor dauditors. dIf dan dauditor dis dnot dindependent dof dthe
dclient, dusers dmay dlose dconfidence din dthe dauditor’s dability dto dreport dobjectively dand
d truthfully don dthe dfinancial dstatements, dand dthe dauditor’s dwork dloses dits dvalue. dFrom dan
dagency dperspective, dif dthe dprincipal d(owner) dknows dthat dthe dauditor dis dnot dindependent,
dthe downer dwill dnot dtrust dthe dauditor’s dwork. dThus, dthe dagent dwill dnot dhire dthe dauditor
dbecause dthe dauditor’s dreport dwill dnot dbe deffective din dreducing dinformation drisk dfrom dthe
dperspective dof dthe downer. dAuditor dindependence dis dalso da dregulatory drequirement.
1-5 Auditing d(broadly ddefined) dis da dsystematic dprocess dof d(1) dobjectively dobtaining dand
devaluating devidence dregarding dassertions dabout deconomic dactions dand devents dto dascertain
dthe ddegree dof dcorrespondence dbetween dthose dassertions dand destablished dcriteria dand d(2)
dcommunicating dthe dresults dto dinterested dusers.
Attest dservices doccur dwhen da dpractitioner dissues da dreport don dsubject dmatter, dor dan
dassertion dabout dsubject dmatter, dthat dis dthe dresponsibility dof danother dparty.
Assurance dservices dare dindependent dprofessional dservices dthat dimprove dthe dquality dof
dinformation, dor dits dcontext, dfor ddecision dmakers.
1-6 Auditing d is d a d specific d form d of d ―attest d service,‖ d which d in d turn d is d a d specific d category d of
―assurance dservice.‖ dIn dother dwords, dthe dphrase d―assurance dservices‖ dconstitutes dthe
dbroadest dcategory dof dprofessional dservices dprovided dby dCPAs dthat dserve dto dimprove dthe
dquality dor dcontext dof dinformation dfor ddecision dmaking dfor dother dparties. dAttest dservices
dconstitute da dmore dspecific dcategory dof dassurance dthat dCPAs dcan dprovide. dThese dservices
dare dintended dto dreduce dinformation drisk dto dparties drelying don dinformation dprovided dby da
dparty dthat dis dcreating, dor dmaking dassertions dabout, dsubject dmatter dof dinterest. dCPAs dcan
dprovide dattest dservices drelating dto da dwide dvariety dof dsubject dmatter d(or dassertions dabout
dthat dsubject dmatter) dto dreduce dthe dinformation drisk dto dthird dparties. dOne dsuch dsubject
dmatter dis da dset dof dfinancial dstatements. dWhen da dCPA dprovides da dvery din-depth, ddetailed
dattest dservice dthat dfollows drelevant dstandards dto dconstitute da dcomplete dexamination dof da
dset dof dfinancial dstatements dand drelated dassertions, dthis dis dcalled da dfinancial dstatement
d―audit.‖
1-7 Audit drisk dis ddefined das dthe drisk dthat dthe dauditor dmay dunknowingly dfail dto dappropriately
dmodify dhis dor dher dopinion don dfinancial dstatements dthat dare dmaterially dmisstated d(AS
d1101). dMateriality dis ddefined das d"the dmagnitude dof dan domission dor dmisstatement dof
daccounting dinformation dthat, din dthe dlight dof dsurrounding dcircumstances, dmakes dit
dprobable dthat dthe djudgment dof da dreasonable dperson drelying don dthe dinformation dwould
dhave dbeen dchanged dor dinfluenced dby dthe domission dor dmisstatement" d(FASB dStatement dof
dFinancial dAccounting dConcepts dNo. d8, dChapter d3: dQualitative dCharacteristics dof dUseful
dAccounting dInformation, dwhich dis dpending drevision dat dthe dtime dof dthe dwriting dof dthis
dbook dper dthe dBoard’s d November d2017 ddecision dto drevert dto da ddefinition dof dmateriality
dsimilar dto dthe done dfound din dsuperseded dConcept dNo. d2).
The dconcept dof dmateriality dis dreflected din dthe dwording dof dthe dauditor's dstandard daudit
dreport dthrough dthe dphrase d"the dfinancial dstatements dpresent dfairly din dall dmaterial
drespects." dThis dis dthe dmanner din dwhich dthe dauditor dcommunicates dthe dnotion dof
dmateriality dto dthe d users dof dthe dauditor's dreport. dThe dauditor's dstandard dreport dstates dthat
dthe daudit dprovides donly dreasonable dassurance dthat dthe dfinancial dstatements ddo dnot
dcontain dmaterial dmisstatements. dThe dterm d"reasonable dassurance" dimplies dthat dthere dis
dsome drisk dthat da dmaterial d misstatement d could d be d present d in d the d financial d statements d and
d the d auditor d will d fail
17-2
Copyright d©2022 dMcGraw dHill dEducation. dAll drights dreserved. dNo dreproduction dor ddistribution dwithout dthe dprior dwritten
dconsent dof d McGraw dHill dEducation.
,Chapter d17 d- dCompleting dthe dAudit
Engagement
to ddetect dit.
1-8 The dmajor dphases dof dthe daudit dare:
Client dacceptance/continuance
Preliminary dengagement dactivities
Plan dthe daudit
Consider dand daudit dinternal dcontrol
Audit dbusiness dprocesses dand drelated daccounts
Complete dthe daudit
Evaluate dresults dand dissue daudit dreport
1-9 Plan dthe daudit: dDuring dthis dphase dof dthe daudit, dthe dauditor duses dknowledge dabout dthe
dclient dand dany dcontrols din dplace dto dplan dthe daudit dand dperform dpreliminary danalytical
dprocedures. dThe doutcome dof dthe dplanning dprocess dis da dwritten daudit dplan dthat dsets dforth
dthe dnature, dextent, dand dtiming dof dthe daudit dprocedures dto dbe dperformed. dThe dpurpose dof
dthis dphase dis dto dplan dan deffective dand defficient daudit.
1-10 The dauditor's dstandard dunqualified dreport dfor da dpublic dcompany dclient dincludes dthe
dfollowing dsections: d(1) dopinion don dthe dfinancial dstatements, d(2) dbasis dfor dopinion, dand d(3)
dcritical daudit dmatters, das dillustrated din dthis dchapter.
1-11 The demergence dof dadvanced daudit dtechnologies dwill dhelp dremove dmany dof dthe dtedious
dtasks dthat dare dusually dperformed dby djunior dauditors. dThus, dauditors dof dall dpositions dand
dexperience dwill dbe drequired dto dspend dadditional dtime dreasoning dthrough dfundamental
dbusiness, daccounting, dand dauditing dconcepts. dAn dauditors’ dknowledge din dthese dareas dwill
denable dthem dto dprovide dgreater dbenefit dto dclients dby dasking dthe dright dquestions dand
didentifying dnew, dmore deffective dways dto dcollect, danalyze, dand dinterpret dresults. dIn dusing
daudit ddata danalytics, dfor dexample, dauditors dmust dunderstand dthe dclient dand dits dindustry, das
dwell das dthe dfundamentals dof daccounting dand dauditing, din dorder dto dask dthe dright dquestions
din dquerying dthe ddata dand din dinterpreting dthe dresults dobtained.
1-12 Auditors dfrequently dface dsituations dwhere dno dstandard daudit dprocedure dexists, dsuch das
dthe dexample dfrom dthe dtext dof dverifying dthe dinventory dof dcattle. dSuch dcircumstances
drequire dthat dthe dauditor dexercise dcreativity dand dinnovation dwhen dplanning dand
dadministering daudit dprocedures dwhere dlittle dor dno dguidance dor dprecedent dexists. dEvery
dclient dis ddifferent, dand dapplying dauditing dconcepts din ddifferent dsituations drequires dlogic
dand dcommon dsense, dand dfrequently dcreativity dand dinnovation.
Answers to Multiple-Choice Questions
d d d
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 d©2022 dMcGraw dHill dEducation. dAll drights dreserved. dNo dreproduction dor ddistribution dwithout dthe dprior dwritten
dconsent dof d McGraw dHill dEducation.
, Chapter d17 d- dCompleting dthe dAudit
Engagement
1-18 c
Solutions to Problems d d
1-24 There dare dtwo dmajor dfactors dthat dmay dmake dan daudit dnecessary dfor dGreenbloom dGarden
dCenters. dFirst, dthe dcompany dmay drequire dlong-term dfinancing dfor dits dexpansion dinto dother
dcities din dFlorida. dEntities dsuch das dbanks dor dinsurance dcompanies dare dlikely dto dbe dthe
dsources dof dthe dcompany's ddebt dfinancing. dThese dentities dnormally drequire daudited
dfinancial dstatements dbefore dlending dsignificant dfunds dand dgenerally drequire daudited
dfinancial dstatements dduring dthe dtime dperiod dthe ddebt dis doutstanding. dThere dis dinformation
dasymmetry dbetween dthe dlender dof dfunds dand dthe downer dof dthe dbusiness, dand dthis
dasymmetry dresults din dinformation drisk dto dthe dlender. dEven dif dthe dbusiness dcould dget
dfunding dwithout dan daudit, da dclean daudit dreport dby da dreputable dauditor dmight dvery dwell
dreduce dthe dlender’s dinformation drisk dand dmake dthe dterms dof dthe dloan dmore dfavorable dto
dthe downer. dSecond, das dthe dcompany dgrows, dthe dfamily dwill dlose dcontrol dover dthe dday-to-
day doperations dof dthe dstores. dAn daudit dcan dprovide dan dadditional dmonitoring dactivity dfor
dthe dfamily din dcontrolling dthe dexpanded doperations dof dthe dcompany.
1-25 a. Evidence dthat dassists dthe dauditor din devaluating dfinancial dstatement dassertions
d
consists d of dthe dunderlying daccounting ddata dand dany dadditional dinformation
d
davailable dto dthe dauditor, dwhether doriginating dfrom dthe dclient dor dexternally.
b. Management dmakes dassertions dabout dcomponents dof dthe dfinancial dstatements. dFor
dexample, dan dentity's dfinancial dstatements dmay dcontain da dline ditem dthat daccounts
dreceivable damount dto d$1,750,000. dIn dthis dinstance, dmanagement dis dasserting, damong
dother dthings, dthat dthe dreceivables dexist, dthe dentity downs dthe dreceivables, dand dthe
dreceivables dare dproperly dvalued. dAudit devidence dhelps dthe dauditor ddetermine
dwhether dmanagement’s dassertions dare dbeing dmet. dIf dthe dauditor dis dcomfortable dthat
dhe dor dshe dcan dprovide dreasonable dassurance dthat dall dassertions dare dmet dfor dall
daccounts, dhe dor dshe dcan dissue da dclean daudit dreport. dIn dshort, dthe dassertions dare da
dconceptual dtool dto dhelp dthe dauditor densure dthat dshe dor dhe dhas d―covered dall dthe
dbases.‖
c. In dsearching dfor dand devaluating devidence, dthe dauditor dshould dbe dconcerned dwith dthe
drelevance dand dreliability dof devidence. dIf dthe dauditor dmistakenly drelies don devidence
dthat ddoes dnot drelate dto dthe dassertion dbeing dtested, dan dincorrect dconclusion dmay dbe
dreached dabout dthe dmanagement dassertion. dReliability drefers dto dthe dability dof
devidence dto dsignal dthe dtrue dstate dof dthe dassertion, di.e., dwhether dit dis dactually dbeing
dmet dor dnot.
1-26 a. d As dthe dchapter dexplains, d a dfinancial d statement d audit d reduces d the d information
risk dbornd by dinvestors dand dcreditors, dbecause dan daudit dreduces dthe drisk dthat dthe
dcompany’s d financial d statements d are d materially d misstated. d In d this d example,
d Community d Bank d can drely don dinformation din dYoung’s dfinancial dstatements dto dmake
ddecisions don dwhether dto dprovide d a d loan, d with d assurance d that d the d information
d (which d is d produced d by d Young dCompany) d is d fairly d presented. d The d risk d the
d bank d faces d in d providing d a d loan d is d thus dreduced d by d a d clean d audit d opinion d on
d Young’s d financials, d leading d to d a d lower d interest
rate.
17-4
Copyright d©2022 dMcGraw dHill dEducation. dAll drights dreserved. dNo dreproduction dor ddistribution dwithout dthe dprior dwritten
dconsent dof d McGraw dHill dEducation.
Engagement
SOLUTION MANUAL FOR d d
Auditing & Assurance Services A Systematic Approach 12e Messier
d d d d d d d d
Chapter 1-21
d d
CHAPTER 1 d
AN INTRODUCTION TO ASSURANCE AND FINANCIAL
d d d d d
STATEMENT AUDITING
d d
Answers to Review Questions
d d d
1-1 The dstudy dof dauditing dis dmore dconceptual din dnature das dcompared dto dother daccounting
dcourses. dRather dthan dfocusing don dlearning dthe drules, dtechniques, dand dcomputations
drequired dto dprepare dfinancial dstatements, dauditing demphasizes dlearning da dframework dof
danalytical dand dlogical dskills. dThis dframework denables dauditors dto devaluate dthe drelevance
dand d reliability dof dthe dsystems dand dprocesses dresponsible dfor dfinancial dinformation das
dwell das dthe dinformation ditself. dTo dbe dsuccessful, dstudents dmust dlearn dthe dframework dand
dthen dlearn dto duse dlogic dand dcommon dsense din dapplying dauditing dconcepts dto dvarious
dcircumstances dand dsituations. dUnderstanding dauditing dcan dimprove dthe ddecision-making
dability dof dconsultants, dbusiness dmanagers, dand daccountants dby dproviding da dframework dfor
devaluating dthe dusefulness dand dreliability dof dinformation—an dimportant dtask din dmany
ddifferent dbusiness dcontexts.
1-2 There dis da ddemand dfor dauditing din da dfree-market deconomy dbecause dthe dagency
drelationship dbetween dan dabsentee downer dand da dmanager dproduces da dnatural dconflict dof
dinterest ddue dto d the dinformation dasymmetry dthat dexists dbetween dthese dtwo dparties. dAs da
dresult, dthe dagent dagrees dto dbe dmonitored das dpart dof dhis/her demployment dcontract.
dAuditing dappears dto dbe da dcost-effective dform dof dmonitoring. dThe dempirical devidence
dsuggests dthat dauditing dwas ddemanded dprior dto dgovernment dregulation. dIn d1926, dbefore dit
dwas drequired dby dlaw, dindependent dauditors daudited d82 dpercent dof dthe dcompanies don dthe
dNew dYork dStock dExchange. dAdditionally, dmany dprivate dcompanies dand dmunicipalities
dnot dsubject dto dgovernment dregulations, dsuch das dthe dSecurities dAct dof d1933 dand dSecurities
dExchange dAct d of d1934, dalso dpurchase dvarious dforms dof dauditing dand dassurance dservices.
dMany dprivate dcompanies dseek dout dfinancial dstatement daudits din dorder dto dsecure dfinancing
dfor dtheir doperations. dCompanies dpreparing dto dgo dpublic dalso dbenefit dfrom dhaving dan
daudit.
1-3 The dagency drelationship dbetween dan downer dand dmanager dproduces da dnatural dconflict dof
dinterest dbecause dof ddifferences din dthe dtwo dparties’ dgoals dand dbecause dof dthe dinformation
dasymmetry dthat dexists dbetween dthem. dThat dis, dthe dmanager dlikely dhas ddifferent dgoals dthan
dthe downer, dand dgenerally dhas dmore dinformation dabout dthe d"true" dfinancial dposition dand
dresults dof doperations dof dthe dentity dthan dthe dabsentee downer ddoes. dIf dboth dparties dseek dto
dmaximize dtheir down dself-interest, dthe dmanager dmay dnot dact din dthe dbest dinterest dof dthe
downer dand dmay dmanipulate dthe dinformation dprovided dto dthe downer daccordingly.
17-1
Copyright d©2022 dMcGraw dHill dEducation. dAll drights dreserved. dNo dreproduction dor ddistribution dwithout dthe dprior dwritten
dconsent dof d McGraw dHill dEducation.
,Chapter d17 d- dCompleting dthe dAudit
Engagement
1-4 Independence dis da dbedrock dprinciple dfor dauditors. dIf dan dauditor dis dnot dindependent dof dthe
dclient, dusers dmay dlose dconfidence din dthe dauditor’s dability dto dreport dobjectively dand
d truthfully don dthe dfinancial dstatements, dand dthe dauditor’s dwork dloses dits dvalue. dFrom dan
dagency dperspective, dif dthe dprincipal d(owner) dknows dthat dthe dauditor dis dnot dindependent,
dthe downer dwill dnot dtrust dthe dauditor’s dwork. dThus, dthe dagent dwill dnot dhire dthe dauditor
dbecause dthe dauditor’s dreport dwill dnot dbe deffective din dreducing dinformation drisk dfrom dthe
dperspective dof dthe downer. dAuditor dindependence dis dalso da dregulatory drequirement.
1-5 Auditing d(broadly ddefined) dis da dsystematic dprocess dof d(1) dobjectively dobtaining dand
devaluating devidence dregarding dassertions dabout deconomic dactions dand devents dto dascertain
dthe ddegree dof dcorrespondence dbetween dthose dassertions dand destablished dcriteria dand d(2)
dcommunicating dthe dresults dto dinterested dusers.
Attest dservices doccur dwhen da dpractitioner dissues da dreport don dsubject dmatter, dor dan
dassertion dabout dsubject dmatter, dthat dis dthe dresponsibility dof danother dparty.
Assurance dservices dare dindependent dprofessional dservices dthat dimprove dthe dquality dof
dinformation, dor dits dcontext, dfor ddecision dmakers.
1-6 Auditing d is d a d specific d form d of d ―attest d service,‖ d which d in d turn d is d a d specific d category d of
―assurance dservice.‖ dIn dother dwords, dthe dphrase d―assurance dservices‖ dconstitutes dthe
dbroadest dcategory dof dprofessional dservices dprovided dby dCPAs dthat dserve dto dimprove dthe
dquality dor dcontext dof dinformation dfor ddecision dmaking dfor dother dparties. dAttest dservices
dconstitute da dmore dspecific dcategory dof dassurance dthat dCPAs dcan dprovide. dThese dservices
dare dintended dto dreduce dinformation drisk dto dparties drelying don dinformation dprovided dby da
dparty dthat dis dcreating, dor dmaking dassertions dabout, dsubject dmatter dof dinterest. dCPAs dcan
dprovide dattest dservices drelating dto da dwide dvariety dof dsubject dmatter d(or dassertions dabout
dthat dsubject dmatter) dto dreduce dthe dinformation drisk dto dthird dparties. dOne dsuch dsubject
dmatter dis da dset dof dfinancial dstatements. dWhen da dCPA dprovides da dvery din-depth, ddetailed
dattest dservice dthat dfollows drelevant dstandards dto dconstitute da dcomplete dexamination dof da
dset dof dfinancial dstatements dand drelated dassertions, dthis dis dcalled da dfinancial dstatement
d―audit.‖
1-7 Audit drisk dis ddefined das dthe drisk dthat dthe dauditor dmay dunknowingly dfail dto dappropriately
dmodify dhis dor dher dopinion don dfinancial dstatements dthat dare dmaterially dmisstated d(AS
d1101). dMateriality dis ddefined das d"the dmagnitude dof dan domission dor dmisstatement dof
daccounting dinformation dthat, din dthe dlight dof dsurrounding dcircumstances, dmakes dit
dprobable dthat dthe djudgment dof da dreasonable dperson drelying don dthe dinformation dwould
dhave dbeen dchanged dor dinfluenced dby dthe domission dor dmisstatement" d(FASB dStatement dof
dFinancial dAccounting dConcepts dNo. d8, dChapter d3: dQualitative dCharacteristics dof dUseful
dAccounting dInformation, dwhich dis dpending drevision dat dthe dtime dof dthe dwriting dof dthis
dbook dper dthe dBoard’s d November d2017 ddecision dto drevert dto da ddefinition dof dmateriality
dsimilar dto dthe done dfound din dsuperseded dConcept dNo. d2).
The dconcept dof dmateriality dis dreflected din dthe dwording dof dthe dauditor's dstandard daudit
dreport dthrough dthe dphrase d"the dfinancial dstatements dpresent dfairly din dall dmaterial
drespects." dThis dis dthe dmanner din dwhich dthe dauditor dcommunicates dthe dnotion dof
dmateriality dto dthe d users dof dthe dauditor's dreport. dThe dauditor's dstandard dreport dstates dthat
dthe daudit dprovides donly dreasonable dassurance dthat dthe dfinancial dstatements ddo dnot
dcontain dmaterial dmisstatements. dThe dterm d"reasonable dassurance" dimplies dthat dthere dis
dsome drisk dthat da dmaterial d misstatement d could d be d present d in d the d financial d statements d and
d the d auditor d will d fail
17-2
Copyright d©2022 dMcGraw dHill dEducation. dAll drights dreserved. dNo dreproduction dor ddistribution dwithout dthe dprior dwritten
dconsent dof d McGraw dHill dEducation.
,Chapter d17 d- dCompleting dthe dAudit
Engagement
to ddetect dit.
1-8 The dmajor dphases dof dthe daudit dare:
Client dacceptance/continuance
Preliminary dengagement dactivities
Plan dthe daudit
Consider dand daudit dinternal dcontrol
Audit dbusiness dprocesses dand drelated daccounts
Complete dthe daudit
Evaluate dresults dand dissue daudit dreport
1-9 Plan dthe daudit: dDuring dthis dphase dof dthe daudit, dthe dauditor duses dknowledge dabout dthe
dclient dand dany dcontrols din dplace dto dplan dthe daudit dand dperform dpreliminary danalytical
dprocedures. dThe doutcome dof dthe dplanning dprocess dis da dwritten daudit dplan dthat dsets dforth
dthe dnature, dextent, dand dtiming dof dthe daudit dprocedures dto dbe dperformed. dThe dpurpose dof
dthis dphase dis dto dplan dan deffective dand defficient daudit.
1-10 The dauditor's dstandard dunqualified dreport dfor da dpublic dcompany dclient dincludes dthe
dfollowing dsections: d(1) dopinion don dthe dfinancial dstatements, d(2) dbasis dfor dopinion, dand d(3)
dcritical daudit dmatters, das dillustrated din dthis dchapter.
1-11 The demergence dof dadvanced daudit dtechnologies dwill dhelp dremove dmany dof dthe dtedious
dtasks dthat dare dusually dperformed dby djunior dauditors. dThus, dauditors dof dall dpositions dand
dexperience dwill dbe drequired dto dspend dadditional dtime dreasoning dthrough dfundamental
dbusiness, daccounting, dand dauditing dconcepts. dAn dauditors’ dknowledge din dthese dareas dwill
denable dthem dto dprovide dgreater dbenefit dto dclients dby dasking dthe dright dquestions dand
didentifying dnew, dmore deffective dways dto dcollect, danalyze, dand dinterpret dresults. dIn dusing
daudit ddata danalytics, dfor dexample, dauditors dmust dunderstand dthe dclient dand dits dindustry, das
dwell das dthe dfundamentals dof daccounting dand dauditing, din dorder dto dask dthe dright dquestions
din dquerying dthe ddata dand din dinterpreting dthe dresults dobtained.
1-12 Auditors dfrequently dface dsituations dwhere dno dstandard daudit dprocedure dexists, dsuch das
dthe dexample dfrom dthe dtext dof dverifying dthe dinventory dof dcattle. dSuch dcircumstances
drequire dthat dthe dauditor dexercise dcreativity dand dinnovation dwhen dplanning dand
dadministering daudit dprocedures dwhere dlittle dor dno dguidance dor dprecedent dexists. dEvery
dclient dis ddifferent, dand dapplying dauditing dconcepts din ddifferent dsituations drequires dlogic
dand dcommon dsense, dand dfrequently dcreativity dand dinnovation.
Answers to Multiple-Choice Questions
d d d
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 d©2022 dMcGraw dHill dEducation. dAll drights dreserved. dNo dreproduction dor ddistribution dwithout dthe dprior dwritten
dconsent dof d McGraw dHill dEducation.
, Chapter d17 d- dCompleting dthe dAudit
Engagement
1-18 c
Solutions to Problems d d
1-24 There dare dtwo dmajor dfactors dthat dmay dmake dan daudit dnecessary dfor dGreenbloom dGarden
dCenters. dFirst, dthe dcompany dmay drequire dlong-term dfinancing dfor dits dexpansion dinto dother
dcities din dFlorida. dEntities dsuch das dbanks dor dinsurance dcompanies dare dlikely dto dbe dthe
dsources dof dthe dcompany's ddebt dfinancing. dThese dentities dnormally drequire daudited
dfinancial dstatements dbefore dlending dsignificant dfunds dand dgenerally drequire daudited
dfinancial dstatements dduring dthe dtime dperiod dthe ddebt dis doutstanding. dThere dis dinformation
dasymmetry dbetween dthe dlender dof dfunds dand dthe downer dof dthe dbusiness, dand dthis
dasymmetry dresults din dinformation drisk dto dthe dlender. dEven dif dthe dbusiness dcould dget
dfunding dwithout dan daudit, da dclean daudit dreport dby da dreputable dauditor dmight dvery dwell
dreduce dthe dlender’s dinformation drisk dand dmake dthe dterms dof dthe dloan dmore dfavorable dto
dthe downer. dSecond, das dthe dcompany dgrows, dthe dfamily dwill dlose dcontrol dover dthe dday-to-
day doperations dof dthe dstores. dAn daudit dcan dprovide dan dadditional dmonitoring dactivity dfor
dthe dfamily din dcontrolling dthe dexpanded doperations dof dthe dcompany.
1-25 a. Evidence dthat dassists dthe dauditor din devaluating dfinancial dstatement dassertions
d
consists d of dthe dunderlying daccounting ddata dand dany dadditional dinformation
d
davailable dto dthe dauditor, dwhether doriginating dfrom dthe dclient dor dexternally.
b. Management dmakes dassertions dabout dcomponents dof dthe dfinancial dstatements. dFor
dexample, dan dentity's dfinancial dstatements dmay dcontain da dline ditem dthat daccounts
dreceivable damount dto d$1,750,000. dIn dthis dinstance, dmanagement dis dasserting, damong
dother dthings, dthat dthe dreceivables dexist, dthe dentity downs dthe dreceivables, dand dthe
dreceivables dare dproperly dvalued. dAudit devidence dhelps dthe dauditor ddetermine
dwhether dmanagement’s dassertions dare dbeing dmet. dIf dthe dauditor dis dcomfortable dthat
dhe dor dshe dcan dprovide dreasonable dassurance dthat dall dassertions dare dmet dfor dall
daccounts, dhe dor dshe dcan dissue da dclean daudit dreport. dIn dshort, dthe dassertions dare da
dconceptual dtool dto dhelp dthe dauditor densure dthat dshe dor dhe dhas d―covered dall dthe
dbases.‖
c. In dsearching dfor dand devaluating devidence, dthe dauditor dshould dbe dconcerned dwith dthe
drelevance dand dreliability dof devidence. dIf dthe dauditor dmistakenly drelies don devidence
dthat ddoes dnot drelate dto dthe dassertion dbeing dtested, dan dincorrect dconclusion dmay dbe
dreached dabout dthe dmanagement dassertion. dReliability drefers dto dthe dability dof
devidence dto dsignal dthe dtrue dstate dof dthe dassertion, di.e., dwhether dit dis dactually dbeing
dmet dor dnot.
1-26 a. d As dthe dchapter dexplains, d a dfinancial d statement d audit d reduces d the d information
risk dbornd by dinvestors dand dcreditors, dbecause dan daudit dreduces dthe drisk dthat dthe
dcompany’s d financial d statements d are d materially d misstated. d In d this d example,
d Community d Bank d can drely don dinformation din dYoung’s dfinancial dstatements dto dmake
ddecisions don dwhether dto dprovide d a d loan, d with d assurance d that d the d information
d (which d is d produced d by d Young dCompany) d is d fairly d presented. d The d risk d the
d bank d faces d in d providing d a d loan d is d thus dreduced d by d a d clean d audit d opinion d on
d Young’s d financials, d leading d to d a d lower d interest
rate.
17-4
Copyright d©2022 dMcGraw dHill dEducation. dAll drights dreserved. dNo dreproduction dor ddistribution dwithout dthe dprior dwritten
dconsent dof d McGraw dHill dEducation.
