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, 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
2
,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 emphasizes 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 decision making ability of consultants, business
managers, and accountants by providing a framework for evaluating the usefulness 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 maximize 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 d(broadly ddefined) dis da dsystematic dprocess dof dobjectively dobtaining
dand devaluating devidence dregarding dassertions dabout deconomic dactions dand devents dto
dascertain dtheddegree dof dcorrespondence dbetween dthose dassertions dand destablished
dcriteria dand dcommunicating dthe dresults dto dinterested d users.
Assurance dis dengagement din dwhich da dpractitioner dexpresses da dconclusion
ddesigned dto denhance dthe ddegree dof dconfidence dof dthe dintended dusers dother dthan dthe
dresponsible dparty daboutdthe doutcome dof dthe devaluation dor dmeasurement dof da dsubject
dmatter dagainst dcriteria.
Examples dof dassurance dservices dare dassurance d(audit) dof dfinancial dstatements,
dassurance dof dprospective dfinancial dinformation, dassurance dof dreporting don dinternal
3
, dcontrol,dassurance dof dsustainability dreporting, dand dassurance dof delectronic dcommerce.
4
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, 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
2
,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 emphasizes 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 decision making ability of consultants, business
managers, and accountants by providing a framework for evaluating the usefulness 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 maximize 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 d(broadly ddefined) dis da dsystematic dprocess dof dobjectively dobtaining
dand devaluating devidence dregarding dassertions dabout deconomic dactions dand devents dto
dascertain dtheddegree dof dcorrespondence dbetween dthose dassertions dand destablished
dcriteria dand dcommunicating dthe dresults dto dinterested d users.
Assurance dis dengagement din dwhich da dpractitioner dexpresses da dconclusion
ddesigned dto denhance dthe ddegree dof dconfidence dof dthe dintended dusers dother dthan dthe
dresponsible dparty daboutdthe doutcome dof dthe devaluation dor dmeasurement dof da dsubject
dmatter dagainst dcriteria.
Examples dof dassurance dservices dare dassurance d(audit) dof dfinancial dstatements,
dassurance dof dprospective dfinancial dinformation, dassurance dof dreporting don dinternal
3
, dcontrol,dassurance dof dsustainability dreporting, dand dassurance dof delectronic dcommerce.
4
