Solution Manual for Auditing & Assurance Services A Systematic Approach 12th Edition

SOLUTION MANUAL for Auditing & Assurance Services A
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Systematic Approach
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12th Edition by William Messier Jr, Steven Glover,
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Chapters 1 - 21 / Complete
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,• Table of Contents L L




Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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Chapter 2: The Financial Statement Auditing Environment
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Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
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Chapter 4: Risk Assessment
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Chapter 5: Evidence and Documentation
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Chapter 6: Internal Control in a Financial Statement Audit
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Chapter 7: Auditing Internal Control over Financial Reporting
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Chapter 8: Audit Sampling: An Overview and Application to Tests of Controls
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Chapter 9: Audit Sampling: An Application to Substantive Tests of Account Balances
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Chapter 10: Auditing the Revenue Process
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Chapter 11: Auditing the Purchasing Process
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Chapter 12: Auditing the Human Resource Management Process
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Chapter 13: Auditing the Inventory Management Process
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Chapter 14: Auditing the Financing/Investing Process:Prepaid Expenses, Intangible Assets, and Property, Plant, and
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Equipment
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Chapter 15: Auditing the Financing/Investing Process:Long-Term Liabilities, Stockholders’ Equity, and Income Statemen
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Accounts
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Chapter 16: Auditing the Financing/Investing Process: Cashand Investments
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Chapter 17: Completing the Audit Engagement
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Chapter 18: Reports on Audited Financial Statements
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Chapter 19: Professional Conduct, Independence, and Quality Management
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Chapter 20: Legal Liability
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Chapter 21: Assurance, Attestation, and Internal Auditing Services
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,CHAPTER 1 L




AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
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Answers to Review Questions L L L




1-1 The study of auditing is more conceptual in nature compared to other accounting courses.
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Rather than focusing on learning the rules, techniques, and computations required to prepare
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financial statements, auditing emphasizes learning a framework of analytical and logicalskills to
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evaluate the relevance and reliability of the systems and processes responsible for financial
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information, as well as the information itself. To be successful, students must learn the framework
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and then learn to use logic and common sense in applying auditing concepts to various
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circumstances and situations.
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Understanding auditing can improve the decision making ability of consultants, L L L L L L L L L




business managers, and accountants by providing a framework for evaluating the
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usefulness andreliability of information.
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1-2 There is a demand for auditing in a free-market economy because the agency relationship L L L L L L L L L L L L L




between an absentee owner and a manager produces a natural conflict of interest due to the
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information asymmetry that exists between the owner and manager. As a result, theagent agrees
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to be monitored as part of his/her employment contract. Auditing appears to be acost-effective
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form of monitoring.
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The empirical evidence suggests auditing was demanded prior to government
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regulationsuch as statutory audit requirements. Additionally, many private companies and other
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entities not subject to government auditing regulations also demand auditing.
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1-3 The agency relationship between an owner and manager produces a natural conflict of
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interest because of differences in the two parties’ goals and because of information
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asymmetrythat exists between them. That is, the manager generally has more information about
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the ‘true’financial position and results of operations of the entity than the absentee owner does. If
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both parties seek to maximize their own self-interest, it is likely that the manager will not act in the
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best interest of the owner and may manipulate the information provided to the owner accordingly.
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1-4 Independence is an important standard for auditors. If an auditor is not independent ofthe L L L L L L L L L L L L L L




client, users may lose confidence in the auditor’s ability to report truthfully on the financial
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statements, and the auditor’s work loses its value. From an agency perspective, if the principal
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(owner) knows that the auditor is not independent, the owner will not trust the auditor’s work.
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Thus, the agent will not hire the auditor because the auditor’s report will not be effective inreducing
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information risk from the perspective of the owner.
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1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and L L L L L L L L L L




evaluating evidence regarding assertions about economic actions and events to ascertain
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thedegree of correspondence between those assertions and established criteria and
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communicating the results to interested users.
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Assurance is engagement in which a practitioner expresses a conclusion designed to L L L L L L L L L L L




enhance the degree of confidence of the intended users other than the responsible party aboutthe
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outcome of the evaluation or measurement of a subject matter against criteria.
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Examples of assurance services are assurance (audit) of financial statements, assurance L L L L L L L L L L




of prospective financial information, assurance of reporting on internal control,assurance of
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sustainability reporting, and assurance of electronic commerce.
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, 1-6 The phrase systematic process implies that there should be a well-planned, logical
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approach for conducting an audit that involves objectively obtaining and evaluating evidence.
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1-7 Materiality: "Omissions or misstatements of items are material if they could, individuallyor L L L L L L L L L L L L




collectively, influence the economic decisions of users taken on the basis of the financial
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statements. Materiality depends on the size and nature of the omission or misstatement judged in
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the surrounding circumstances. The size or nature of the item, or a combination of both, couldbe the
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determining factor." (IASB).
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Audit risk is defined as the risk that the auditor expresses an inappropriate audit
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opinionwhen the financial statements are materially misstated (ISA 200).
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The audit report states that the auditor obtains “reasonable assurance” whether the
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financial statements are free from “material” misstatement. The term reasonable assurance
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informs the reader that there is some level of risk that the audit did not detect all material
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misstatements. In addition, the auditor’s opinion commonly uses the wording that the financial
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statements present fairly, “in all material respects.” These phrases communicate to third partiesthat
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the audit report is limited to material information.
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1-8 On most audits, it is not feasible or cost-effective to audit all transactions. For example, in a
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small business, the auditor might be able to examine all transactions that occurred during the
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period. However, it is unlikely that the owner of the business could afford to pay for such an
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extensive audit. For a large organization, the sheer volume of transactions prevents the auditor
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from examining every transaction. Thus, there is a trade-off between the exactness or precisionof
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the audit and its cost.
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1-9 The major phases of the audit are:
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 Client acceptance/continuance and establishing engagement terms L L L L L




 Preplanning
 Assess risks and establish materiality L L L L




 Plan the audit L L




 Consider internal control L L




 Audit business processes and related accounts L L L L L




 Complete the audit L L




 Evaluate results and issue audit report L L L L L




1-10 The auditor’s understanding of the entity and its environment includes knowledge
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about: (1) the nature of the entity, (2) its objectives and strategies, (3) its industry, regulatory,and
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other external factors, (4) its management, (5) its governance, (6) its measurement and
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performance process, and (7) its business processes.
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1-11 Sometimes auditors will face situations where no standard audit procedure exists, suchas L L L L L L L L L L L L




the example from the text of verifying the inventory of reindeer. Such circumstances require that
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the auditor possess creativity and innovation when planning and administering audit procedures
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where little or no precedent exists. Every client is different, and applying auditing concepts in
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different situations requires logic and common sense, and frequently creativity and innovation.
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Solutions to Problems L L




1-12 The memo should cite the following facts:
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 There is a historical relationship between accounting and auditing. L L L L L L L L




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