SOLUTION MANUAL
FOR AUDITING.&
ASSURANCE SERVICES
A SYSTEMATIC
APPROACH
12TH EDITION BY
WILLIAM MESSIER JR,
STEVEN GLOVER,
CHAPTERS 1 - 21 /
COMPLETE
1
,• TABLE OF CONTENTS
CHAPTER 1: AN INTRODUCTION TO ASSURANCE AND
FINANCIAL STATEMENT AUDITING.
CHAPTER 2: THE FINANCIAL STATEMENT
AUDITING.ENVIRONMENT
CHAPTER 3: AUDIT PLANNING, TYPES OF AUDIT TESTS,
AND MATERIALITY
CHAPTER 4: RISK ASSESSMENT
CHAPTER 5: EVIDENCE AND DOCUMENTATION
CHAPTER 6: INTERNAL CONTROL IN A FINANCIAL
STATEMENT AUDIT CHAPTER 7: AUDITING.INTERNAL
CONTROL OVER FINANCIAL REPORTING
CHAPTER 8: AUDIT SAMPLING: AN OVERVIEW AND APPLICATION TO
TESTS OF CONTROLS CHAPTER 9: AUDIT SAMPLING: AN APPLICATION
TO SUBSTANTIVE TESTS OF ACCOUNT BALANCES CHAPTER 10:
AUDITING.THE REVENUE PROCESS
CHAPTER 11: AUDITING.THE PURCHASING PROCESS
CHAPTER 12: AUDITING.THE HUMAN RESOURCE
MANAGEMENT PROCESS CHAPTER 13: AUDITING.THE
INVENTORY MANAGEMENT PROCESS
CHAPTER 14: AUDITING.THE FINANCING/INVESTING PROCESS:PREPAID EXPENSES, INTANGIBLE
ASSETS, AND PROPERTY, PLANT, AND EQUIPMENT
CHAPTER 15: AUDITING.THE FINANCING/INVESTING PROCESS:LONG-TERM LIABILITIES,
2
,STOCKHOLDERS‘ EQUITY, AND INCOME STATEMENT ACCOUNTS
CHAPTER 16: AUDITING.THE FINANCING/INVESTING PROCESS:
CASHAND INVESTMENTS CHAPTER 17: COMPLETING THE
AUDIT ENGAGEMENT
CHAPTER 18: REPORTS ON AUDITED FINANCIAL STATEMENTS
CHAPTER 19: PROFESSIONAL CONDUCT, INDEPENDENCE, AND
QUALITY MANAGEMENT CHAPTER 20: LEGAL LIABILITY
CHAPTER 21: ASSURANCE, ATTESTATION, AND INTERNAL AUDITING.SERVICES
3
, CHAPTER 1
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
ANSWERS TO REVIEW QUESTIONS
1-1 The Study Of Auditing.Is More Conceptual In Nature Compared To Other Accounting
Courses. Rather Than Focusing On Learning The Rules, Techniques, And Computations Required To
Prepare Financial Statements, Auditing.Emphasies Learning A Framework Of Analytical And Logical
Skills To Evaluate The Relevance And Reliability Of The Systems And Processes Responsible For
Financial Information, As Well As The Information Itself. To Be Successful, Students Must Learn The
Framework And Then Learn To Use Logic And Common Sense In Applying Auditing.Concepts To
Various Circumstances And Situations.
Understanding Auditing.Can Improve The Decis ion Making Ability Of Consultants, Bus iness
Managers, And Accountants By Providing A Framework For Evaluating The Us efulness And
Reliability Of Information.
1-2 There Is A Demand For Auditing.In A Free-Market Economy Because The Agency
Relationship Between An Absentee Owner And A Manager Produces A Natural Conflict Of Interest
Due To The Information Asymmetry That Exists Between The Owner And Manager. As A Result, The
Agent Agrees To Be Monitored As Part Of His/Her Employment Contract. Auditing.Appears To Be A
Cost-Effective Form Of Monitoring.
The Empirical Evidence Suggests Auditing.Was Demanded Prior To Government Regulation
Such As Statutory Audit Requirements. Additionally, Many Private Companies And Other Entities Not
Subject To Government Auditing.Regulations Also Demand Auditing.
1-3 The Agency Relationship Between An Owner And Manager Produces A Natural Conflict Of
Interest Because Of Differences In The Two Parties‘ Goals And Because Of Information Asymmetry
That Exists Between Them. That Is, The Manager Generally Has More Information About The ‗True‘
Financial Position And Results Of Operations Of The Entity Than The Absentee Owner Does. If Both
Parties Seek To Maximie Their Own Self-Interest, It Is Likely That The Manager Will Not Act In The
Best Interest Of The Owner And May Manipulate The Information Provided To The Owner
Accordingly.
1-4 Independence Is An Important Standard For Auditors. If An Auditor Is Not Independent Of
The Client, Users May Lose Confidence In The Auditor‘s Ability To Report Truthfully On The
Financial Statements, And The Auditor‘s Work Loses Its Value. From An Agency Perspective, If The
Principal (Owner) Knows That The Auditor Is Not Independent, The Owner Will Not Trust The
Auditor‘s Work.
Thus, The Agent Will Not Hire The Auditor Because The Auditor‘s Report Will Not Be Effective In
Reducing Information Risk From The Perspective Of The Owner.
1-5 Auditing.(Broadly Defined) Is A Systematic Process Of Objectively Obtaining And
Evaluating Evidence Regarding Assertions About Economic Actions And Events To Ascertain The
Degree Of Correspondence Between Those Assertions And Established Criteria And Communicating
The Results To Interested Users.
Assurance Is Engagement In Which A Practitioner Expresses A Conclusion Designed To
Enhance The Degree Of Confidence Of The Intended Users Other Than The Responsible Party About
The Outcome Of The Evaluation Or Measurement Of A Subject Matter Against Criteria.
Examples Of Assurance Services Are Assurance (Audit) Of Financial Statements, Assurance Of
Prospective Financial Information, Assurance Of Reporting On Internal Control, Assurance Of
4
FOR AUDITING.&
ASSURANCE SERVICES
A SYSTEMATIC
APPROACH
12TH EDITION BY
WILLIAM MESSIER JR,
STEVEN GLOVER,
CHAPTERS 1 - 21 /
COMPLETE
1
,• TABLE OF CONTENTS
CHAPTER 1: AN INTRODUCTION TO ASSURANCE AND
FINANCIAL STATEMENT AUDITING.
CHAPTER 2: THE FINANCIAL STATEMENT
AUDITING.ENVIRONMENT
CHAPTER 3: AUDIT PLANNING, TYPES OF AUDIT TESTS,
AND MATERIALITY
CHAPTER 4: RISK ASSESSMENT
CHAPTER 5: EVIDENCE AND DOCUMENTATION
CHAPTER 6: INTERNAL CONTROL IN A FINANCIAL
STATEMENT AUDIT CHAPTER 7: AUDITING.INTERNAL
CONTROL OVER FINANCIAL REPORTING
CHAPTER 8: AUDIT SAMPLING: AN OVERVIEW AND APPLICATION TO
TESTS OF CONTROLS CHAPTER 9: AUDIT SAMPLING: AN APPLICATION
TO SUBSTANTIVE TESTS OF ACCOUNT BALANCES CHAPTER 10:
AUDITING.THE REVENUE PROCESS
CHAPTER 11: AUDITING.THE PURCHASING PROCESS
CHAPTER 12: AUDITING.THE HUMAN RESOURCE
MANAGEMENT PROCESS CHAPTER 13: AUDITING.THE
INVENTORY MANAGEMENT PROCESS
CHAPTER 14: AUDITING.THE FINANCING/INVESTING PROCESS:PREPAID EXPENSES, INTANGIBLE
ASSETS, AND PROPERTY, PLANT, AND EQUIPMENT
CHAPTER 15: AUDITING.THE FINANCING/INVESTING PROCESS:LONG-TERM LIABILITIES,
2
,STOCKHOLDERS‘ EQUITY, AND INCOME STATEMENT ACCOUNTS
CHAPTER 16: AUDITING.THE FINANCING/INVESTING PROCESS:
CASHAND INVESTMENTS CHAPTER 17: COMPLETING THE
AUDIT ENGAGEMENT
CHAPTER 18: REPORTS ON AUDITED FINANCIAL STATEMENTS
CHAPTER 19: PROFESSIONAL CONDUCT, INDEPENDENCE, AND
QUALITY MANAGEMENT CHAPTER 20: LEGAL LIABILITY
CHAPTER 21: ASSURANCE, ATTESTATION, AND INTERNAL AUDITING.SERVICES
3
, CHAPTER 1
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
ANSWERS TO REVIEW QUESTIONS
1-1 The Study Of Auditing.Is More Conceptual In Nature Compared To Other Accounting
Courses. Rather Than Focusing On Learning The Rules, Techniques, And Computations Required To
Prepare Financial Statements, Auditing.Emphasies Learning A Framework Of Analytical And Logical
Skills To Evaluate The Relevance And Reliability Of The Systems And Processes Responsible For
Financial Information, As Well As The Information Itself. To Be Successful, Students Must Learn The
Framework And Then Learn To Use Logic And Common Sense In Applying Auditing.Concepts To
Various Circumstances And Situations.
Understanding Auditing.Can Improve The Decis ion Making Ability Of Consultants, Bus iness
Managers, And Accountants By Providing A Framework For Evaluating The Us efulness And
Reliability Of Information.
1-2 There Is A Demand For Auditing.In A Free-Market Economy Because The Agency
Relationship Between An Absentee Owner And A Manager Produces A Natural Conflict Of Interest
Due To The Information Asymmetry That Exists Between The Owner And Manager. As A Result, The
Agent Agrees To Be Monitored As Part Of His/Her Employment Contract. Auditing.Appears To Be A
Cost-Effective Form Of Monitoring.
The Empirical Evidence Suggests Auditing.Was Demanded Prior To Government Regulation
Such As Statutory Audit Requirements. Additionally, Many Private Companies And Other Entities Not
Subject To Government Auditing.Regulations Also Demand Auditing.
1-3 The Agency Relationship Between An Owner And Manager Produces A Natural Conflict Of
Interest Because Of Differences In The Two Parties‘ Goals And Because Of Information Asymmetry
That Exists Between Them. That Is, The Manager Generally Has More Information About The ‗True‘
Financial Position And Results Of Operations Of The Entity Than The Absentee Owner Does. If Both
Parties Seek To Maximie Their Own Self-Interest, It Is Likely That The Manager Will Not Act In The
Best Interest Of The Owner And May Manipulate The Information Provided To The Owner
Accordingly.
1-4 Independence Is An Important Standard For Auditors. If An Auditor Is Not Independent Of
The Client, Users May Lose Confidence In The Auditor‘s Ability To Report Truthfully On The
Financial Statements, And The Auditor‘s Work Loses Its Value. From An Agency Perspective, If The
Principal (Owner) Knows That The Auditor Is Not Independent, The Owner Will Not Trust The
Auditor‘s Work.
Thus, The Agent Will Not Hire The Auditor Because The Auditor‘s Report Will Not Be Effective In
Reducing Information Risk From The Perspective Of The Owner.
1-5 Auditing.(Broadly Defined) Is A Systematic Process Of Objectively Obtaining And
Evaluating Evidence Regarding Assertions About Economic Actions And Events To Ascertain The
Degree Of Correspondence Between Those Assertions And Established Criteria And Communicating
The Results To Interested Users.
Assurance Is Engagement In Which A Practitioner Expresses A Conclusion Designed To
Enhance The Degree Of Confidence Of The Intended Users Other Than The Responsible Party About
The Outcome Of The Evaluation Or Measurement Of A Subject Matter Against Criteria.
Examples Of Assurance Services Are Assurance (Audit) Of Financial Statements, Assurance Of
Prospective Financial Information, Assurance Of Reporting On Internal Control, Assurance Of
4
