Franklyn A Plus Pass
SOLUTION MANUAL for Auditing & Assurance Services:
A Systematic Approach 12th Edition, by Douglas F. Prawitt
William F. Messier Jr, Steven M. Glover
All Chapter Covered 1-21| Verified Manual & Accurate
Solutions for Exam Preparations| A+ PASS
Fr
an
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pl
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Pa
Page 1 of 267
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, Franklyn A Plus Pass
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 as 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. This framework
enables auditors 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—an important task in many different business contexts.
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 these two parties. 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 that auditing was demanded prior to government regulation. In 1926, before it was
required by law, independent auditors audited 82 percent of the companies on the New York Stock
Exchange. Additionally, many private companies and municipalities not subject to government
regulations, such as the Securities Act of 1933 and Securities Exchange Act of 1934, also purchase
various forms of auditing and assurance services. Many private companies seek out financial statement
audits in order to secure financing for their operations. Companies preparing to go public also benefit
from having an audit.
Fr
an
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 the information asymmetry that exists
kl
between them. That is, the manager likely has different goals than the owner, and generally has more
information about the "true" financial position and results of operations of the entity than the absentee
yn
owner does. If both parties seek to maximize their own self-interest, the manager may not act in the best
interest of the owner and may manipulate the information provided to the owner accordingly.
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A
1-4 Independence is a bedrock principle for auditors. If an auditor is not independent of the client,
users may lose confidence in the auditor’s ability to report objectively and truthfully on the financial
pl
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
us
not hire the auditor because the auditor’s report will not be effective in reducing information risk from the
perspective of the owner. Auditor independence is also a regulatory requirement.
Pa
Page 2 of 267
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, Franklyn A Plus Pass
1-5 Auditing (broadly defined) is a systematic process of (1) 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 (2) communicating the results to
interested users.
Attest services occur when a practitioner issues a report on subject matter, or an assertion about subject
matter, that is the responsibility of another party.
Assurance services are independent professional services that improve the quality of information, or its
context, for decision makers.
1-6 Auditing is a specific form of ―attest service, which in turn is a specific category of
―assurance service. In other words, the phrase ―assurance services constitutes the broadest category of
professional services provided by CPAs that serve to improve the quality or context of information for
decision making for other parties. Attest services constitute a more specific category of assurance that
CPAs can provide. These services are intended to reduce information risk to parties relying on
information provided by a party that is creating, or making assertions about, subject matter of interest.
CPAs can provide attest services relating to a wide variety of subject matter (or assertions about that
subject matter) to reduce the information risk to third parties. One such subject matter is a set of financial
statements. When a CPA provides a very in-depth, detailed attest service that follows relevant standards
to constitute a complete examination of a set of financial statements and related assertions, this is called a
financial statement ―audit.
1-7 Audit risk is defined as the risk that the auditor may unknowingly fail to appropriately modify his
or her opinion on financial statements that are materially misstated (AS 1101). Materiality is defined as
Fr
"the magnitude of an omission or misstatement of accounting information that, in the light of surrounding
circumstances, makes it probable that the judgment of a reasonable person relying on the information
an
would have been changed or influenced by the omission or misstatement" (FASB Statement of Financial
Accounting Concepts No. 8, Chapter 3: Qualitative Characteristics of Useful Accounting Information,
kl
which is pending revision at the time of the writing of this book per the Board’s November 2017 decision
to revert to a definition of materiality similar to the one found in superseded Concept No. 2).
yn
The concept of materiality is reflected in the wording of the auditor's standard audit report through the
phrase "the financial statements present fairly in all material respects." This is the manner in which the
e
auditor communicates the notion of materiality to the users of the auditor's report. The auditor's standard
A
report states that the audit provides only reasonable assurance that the financial statements do not contain
material misstatements. The term "reasonable assurance" implies that there is some risk that a material
pl
misstatement could be present in the financial statements and the auditor will fail
us
to detect it.
Pa
Page 3 of 267
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, Franklyn A Plus Pass
1-8 The major phases of the audit are:
• Client acceptance/continuance
• Preliminary engagement activities
• Plan the audit
• Consider and audit internal control
• Audit business processes and related accounts
• Complete the audit
• Evaluate results and issue audit report
1-9 Plan the audit: During this phase of the audit, the auditor uses knowledge about the client and any
controls in place to plan the audit and perform preliminary analytical procedures. The outcome of the
planning process is a written audit plan that sets forth the nature, extent, and timing of the audit
procedures to be performed. The purpose of this phase is to plan an effective and efficient audit.
1-10 The auditor's standard unqualified report for a public company client includes the following
sections: (1) opinion on the financial statements, (2) basis for opinion, and (3) critical audit matters, as
illustrated in this chapter.
1-11 The emergence of advanced audit technologies will help remove many of the tedious tasks that
Fr
are usually performed by junior auditors. Thus, auditors of all positions and experience will be required to
spend additional time reasoning through fundamental business, accounting, and auditing concepts. An
an
auditors’ knowledge in these areas will enable them to provide greater benefit to clients by asking the
right questions and identifying new, more effective ways to collect, analyze, and interpret results. In using
kl
audit data analytics, for example, auditors must understand the client and its industry, as well as the
fundamentals of accounting and auditing, in order to ask the right questions in querying the data and in
yn
interpreting the results obtained.
e
1-12 Auditors frequently face situations where no standard audit procedure exists, such as the example
A
from the text of verifying the inventory of cattle. Such circumstances require that the auditor exercise
creativity and innovation when planning and administering audit procedures where little or no guidance or
pl
precedent exists. Every client is different, and applying auditing concepts in different situations requires
us
logic and common sense, and frequently creativity and innovation.
Pa
Page 4 of 267
ss
SOLUTION MANUAL for Auditing & Assurance Services:
A Systematic Approach 12th Edition, by Douglas F. Prawitt
William F. Messier Jr, Steven M. Glover
All Chapter Covered 1-21| Verified Manual & Accurate
Solutions for Exam Preparations| A+ PASS
Fr
an
kl
yn
e
A
pl
us
Pa
Page 1 of 267
ss
, Franklyn A Plus Pass
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 as 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. This framework
enables auditors 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—an important task in many different business contexts.
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 these two parties. 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 that auditing was demanded prior to government regulation. In 1926, before it was
required by law, independent auditors audited 82 percent of the companies on the New York Stock
Exchange. Additionally, many private companies and municipalities not subject to government
regulations, such as the Securities Act of 1933 and Securities Exchange Act of 1934, also purchase
various forms of auditing and assurance services. Many private companies seek out financial statement
audits in order to secure financing for their operations. Companies preparing to go public also benefit
from having an audit.
Fr
an
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 the information asymmetry that exists
kl
between them. That is, the manager likely has different goals than the owner, and generally has more
information about the "true" financial position and results of operations of the entity than the absentee
yn
owner does. If both parties seek to maximize their own self-interest, the manager may not act in the best
interest of the owner and may manipulate the information provided to the owner accordingly.
e
A
1-4 Independence is a bedrock principle for auditors. If an auditor is not independent of the client,
users may lose confidence in the auditor’s ability to report objectively and truthfully on the financial
pl
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
us
not hire the auditor because the auditor’s report will not be effective in reducing information risk from the
perspective of the owner. Auditor independence is also a regulatory requirement.
Pa
Page 2 of 267
ss
, Franklyn A Plus Pass
1-5 Auditing (broadly defined) is a systematic process of (1) 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 (2) communicating the results to
interested users.
Attest services occur when a practitioner issues a report on subject matter, or an assertion about subject
matter, that is the responsibility of another party.
Assurance services are independent professional services that improve the quality of information, or its
context, for decision makers.
1-6 Auditing is a specific form of ―attest service, which in turn is a specific category of
―assurance service. In other words, the phrase ―assurance services constitutes the broadest category of
professional services provided by CPAs that serve to improve the quality or context of information for
decision making for other parties. Attest services constitute a more specific category of assurance that
CPAs can provide. These services are intended to reduce information risk to parties relying on
information provided by a party that is creating, or making assertions about, subject matter of interest.
CPAs can provide attest services relating to a wide variety of subject matter (or assertions about that
subject matter) to reduce the information risk to third parties. One such subject matter is a set of financial
statements. When a CPA provides a very in-depth, detailed attest service that follows relevant standards
to constitute a complete examination of a set of financial statements and related assertions, this is called a
financial statement ―audit.
1-7 Audit risk is defined as the risk that the auditor may unknowingly fail to appropriately modify his
or her opinion on financial statements that are materially misstated (AS 1101). Materiality is defined as
Fr
"the magnitude of an omission or misstatement of accounting information that, in the light of surrounding
circumstances, makes it probable that the judgment of a reasonable person relying on the information
an
would have been changed or influenced by the omission or misstatement" (FASB Statement of Financial
Accounting Concepts No. 8, Chapter 3: Qualitative Characteristics of Useful Accounting Information,
kl
which is pending revision at the time of the writing of this book per the Board’s November 2017 decision
to revert to a definition of materiality similar to the one found in superseded Concept No. 2).
yn
The concept of materiality is reflected in the wording of the auditor's standard audit report through the
phrase "the financial statements present fairly in all material respects." This is the manner in which the
e
auditor communicates the notion of materiality to the users of the auditor's report. The auditor's standard
A
report states that the audit provides only reasonable assurance that the financial statements do not contain
material misstatements. The term "reasonable assurance" implies that there is some risk that a material
pl
misstatement could be present in the financial statements and the auditor will fail
us
to detect it.
Pa
Page 3 of 267
ss
, Franklyn A Plus Pass
1-8 The major phases of the audit are:
• Client acceptance/continuance
• Preliminary engagement activities
• Plan the audit
• Consider and audit internal control
• Audit business processes and related accounts
• Complete the audit
• Evaluate results and issue audit report
1-9 Plan the audit: During this phase of the audit, the auditor uses knowledge about the client and any
controls in place to plan the audit and perform preliminary analytical procedures. The outcome of the
planning process is a written audit plan that sets forth the nature, extent, and timing of the audit
procedures to be performed. The purpose of this phase is to plan an effective and efficient audit.
1-10 The auditor's standard unqualified report for a public company client includes the following
sections: (1) opinion on the financial statements, (2) basis for opinion, and (3) critical audit matters, as
illustrated in this chapter.
1-11 The emergence of advanced audit technologies will help remove many of the tedious tasks that
Fr
are usually performed by junior auditors. Thus, auditors of all positions and experience will be required to
spend additional time reasoning through fundamental business, accounting, and auditing concepts. An
an
auditors’ knowledge in these areas will enable them to provide greater benefit to clients by asking the
right questions and identifying new, more effective ways to collect, analyze, and interpret results. In using
kl
audit data analytics, for example, auditors must understand the client and its industry, as well as the
fundamentals of accounting and auditing, in order to ask the right questions in querying the data and in
yn
interpreting the results obtained.
e
1-12 Auditors frequently face situations where no standard audit procedure exists, such as the example
A
from the text of verifying the inventory of cattle. Such circumstances require that the auditor exercise
creativity and innovation when planning and administering audit procedures where little or no guidance or
pl
precedent exists. Every client is different, and applying auditing concepts in different situations requires
us
logic and common sense, and frequently creativity and innovation.
Pa
Page 4 of 267
ss
