SOLUTION MANUAL for Auditing & Assurance Services A
g g g g g g g
g Systematic Approach g g
12th Edition by William Messier Jr, Steven Glover,
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Chapters 1 - 21 / Complete
g g g g g
1
,• Table of Contents g g
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
g g g g g g g g g
Chapter 2: The Financial Statement Auditing Environment
g g g g g g
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
g g g g g g g g g
Chapter 4: Risk Assessment
g g g
Chapter 5: Evidence and Documentation
g g g g
Chapter 6: Internal Control in a Financial Statement Audit
g g g g g g g g
Chapter 7: Auditing Internal Control over Financial Reporting
g g g g g g g
Chapter 8: Audit Sampling: An Overview and Application to Tests of Controls
g g g g g g g g g g g
Chapter 9: Audit Sampling: An Application to Substantive Tests of Account Balances
g g g g g g g g g g g
Chapter 10: Auditing the Revenue Process
g g g g g
Chapter 11: Auditing the Purchasing Process
g g g g g
Chapter 12: Auditing the Human Resource Management Process
g g g g g g g
Chapter 13: Auditing the Inventory Management Process
g g g g g g
Chapter 14: Auditing the Financing/Investing Process:Prepaid Expenses, Intangible Assets, and Property, Plant, and
g g g g g g g g g g g g
Equipment
g
Chapter 15: Auditing the Financing/Investing Process:Long-Term Liabilities, Stockholders’ Equity, and Income Statement
g g g g g g g g g g g
Accounts
g
Chapter 16: Auditing the Financing/Investing Process: Cashand Investments
g g g g g g g
Chapter 17: Completing the Audit Engagement
g g g g g
Chapter 18: Reports on Audited Financial Statements
g g g g g g
Chapter 19: Professional Conduct, Independence, and Quality Management
g g g g g g g
Chapter 20: Legal Liability
g g g
Chapter 21: Assurance, Attestation, and Internal Auditing Services
g g g g g g g
2
,CHAPTER 1 g
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
g g g g g g g
Answers to Review Questions g g g
1-1 The study of auditing is more conceptual in nature compared to other accounting courses.
g g g g g g g g g g g g g
Rather than focusing on learning the rules, techniques, and computations required to prepare
g g g g g g g g g g g g g
financial statements, auditing emphasizes learning a framework of analytical and logicalskills to
g g g g g g g g g g g g g
evaluate the relevance and reliability of the systems and processes responsible for financial
g g g g g g g g g g g g g
information, as well as the information itself. To be successful, students must learn the framework
g g g g g g g g g g g g g g g
and then learn to use logic and common sense in applying auditing concepts to various
g g g g g g g g g g g g g g g
circumstances and situations.
g g g
Understanding auditing can improve the decision making ability of consultants, business g g g g g g g g g g
managers, and accountants by providing a framework for evaluating the usefulness and
g g g g g g g g g g g g
reliability of information.
g g g
1-2 There is a demand for auditing in a free-market economy because the agency relationship
g g g g g g g g g g g g g
between an absentee owner and a manager produces a natural conflict of interest due to the
g g g g g g g g g g g g g g g g
information asymmetry that exists between the owner and manager. As a result, theagent agrees
g g g g g g g g g g g g g g g
to be monitored as part of his/her employment contract. Auditing appears to be acost-effective
g g g g g g g g g g g g g g g
form of monitoring.
g g g
The empirical evidence suggests auditing was demanded prior to government regulation
g g g g g g g g g g
such as statutory audit requirements. Additionally, many private companies and other entities not
g g g g g g g g g g g g g
subject to government auditing regulations also demand auditing.
g g g g g g g g
1-3 The agency relationship between an owner and manager produces a natural conflict of
g g g g g g g g g g g g
interest because of differences in the two parties’ goals and because of information asymmetry
g g g g g g g g g g g g g g
that exists between them. That is, the manager generally has more information about the ‘true’
g g g g g g g g g g g g g g g
financial position and results of operations of the entity than the absentee owner does. If both
g g g g g g g g g g g g g g g g
parties seek to maximize their own self-interest, it is likely that the manager will not act in the best
g g g g g g g g g g g g g g g g g g g
interest of the owner and may manipulate the information provided to the owner accordingly.
g g g g g g g g g g g g g g
1-4 Independence is an important standard for auditors. If an auditor is not independent ofthe g g g g g g g g g g g g g g
client, users may lose confidence in the auditor’s ability to report truthfully on the financial
g g g g g g g g g g g g g g g
statements, and the auditor’s work loses its value. From an agency perspective, if the principal
g g g g g g g g g g g g g g g
(owner) knows that the auditor is not independent, the owner will not trust the auditor’s work.
g g g g g g g g g g g g g g g g
Thus, the agent will not hire the auditor because the auditor’s report will not be effective inreducing
g g g g g g g g g g g g g g g g g
information risk from the perspective of the owner.
g g g g g g g g
1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and g g g g g g g g g g
evaluating evidence regarding assertions about economic actions and events to ascertain the
g g g g g g g g g g g g
degree of correspondence between those assertions and established criteria and
g g g g g g g g g g
communicating the results to interested users.
g g g g g g
Assurance is engagement in which a practitioner expresses a conclusion designed to g g g g g g g g g g g
enhance the degree of confidence of the intended users other than the responsible party aboutthe
g g g g g g g g g g g g g g g g
outcome of the evaluation or measurement of a subject matter against criteria.
g g g g g g g g g g g g
Examples of assurance services are assurance (audit) of financial statements, assurance g g g g g g g g g g
of prospective financial information, assurance of reporting on internal control,assurance of
g g g g g g g g g g g g
sustainability reporting, and assurance of electronic commerce.
g g g g g g g
3
, 1-6 The phrase systematic process implies that there should be a well-planned, logical
g g g g g g g g g g g
approach for conducting an audit that involves objectively obtaining and evaluating evidence.
g g g g g g g g g g g g
1-7 Materiality: "Omissions or misstatements of items are material if they could, individuallyor g g g g g g g g g g g g
collectively, influence the economic decisions of users taken on the basis of the financial
g g g g g g g g g g g g g g
statements. Materiality depends on the size and nature of the omission or misstatement judged in
g g g g g g g g g g g g g g g
the surrounding circumstances. The size or nature of the item, or a combination of both, couldbe the
g g g g g g g g g g g g g g g g g g
determining factor." (IASB).
g g g
Audit risk is defined as the risk that the auditor expresses an inappropriate audit opinion
g g g g g g g g g g g g g g
when the financial statements are materially misstated (ISA 200).
g g g g g g g g g
The audit report states that the auditor obtains “reasonable assurance” whether the
g g g g g g g g g g g
financial statements are free from “material” misstatement. The term reasonable assurance
g g g g g g g g g g g
informs the reader that there is some level of risk that the audit did not detect all material
g g g g g g g g g g g g g g g g g g
misstatements. In addition, the auditor’s opinion commonly uses the wording that the financial
g g g g g g g g g g g g g
statements present fairly, “in all material respects.” These phrases communicate to third partiesthat
g g g g g g g g g g g g g g
the audit report is limited to material information.
g g g g g g g g
1-8 On most audits, it is not feasible or cost-effective to audit all transactions. For example, in a
g g g g g g g g g g g g g g g g
small business, the auditor might be able to examine all transactions that occurred during the
g g g g g g g g g g g g g g g
period. However, it is unlikely that the owner of the business could afford to pay for such an
g g g g g g g g g g g g g g g g g g
extensive audit. For a large organization, the sheer volume of transactions prevents the auditor
g g g g g g g g g g g g g g
from examining every transaction. Thus, there is a trade-off between the exactness or precisionof
g g g g g g g g g g g g g g g
the audit and its cost.
g g g g g
1-9 The major phases of the audit are:
g g g g g g
• Client acceptance/continuance and establishing engagement terms g g g g g
• Preplanning
• Assess risks and establish materiality g g g g
• Plan the audit g g
• Consider internal control g g
• Audit business processes and related accounts g g g g g
• Complete the audit g g
• Evaluate results and issue audit report g g g g g
1-10 The auditor’s understanding of the entity and its environment includes knowledge
g g g g g g g g g g
about: (1) the nature of the entity, (2) its objectives and strategies, (3) its industry, regulatory,and
g g g g g g g g g g g g g g g g g
other external factors, (4) its management, (5) its governance, (6) its measurement and
g g g g g g g g g g g g g
performance process, and (7) its business processes.
g g g g g g g
1-11 Sometimes auditors will face situations where no standard audit procedure exists, suchas g g g g g g g g g g g g
the example from the text of verifying the inventory of reindeer. Such circumstances require that
g g g g g g g g g g g g g g g
the auditor possess creativity and innovation when planning and administering audit procedures
g g g g g g g g g g g g
where little or no precedent exists. Every client is different, and applying auditing concepts in
g g g g g g g g g g g g g g g
different situations requires logic and common sense, and frequently creativity and innovation.
g g g g g g g g g g g g
Solutions to Problems g g
1-12 The memo should cite the following facts:
g g g g g g
• There is a historical relationship between accounting and auditing. g g g g g g g g
4
g g g g g g g
g Systematic Approach g g
12th Edition by William Messier Jr, Steven Glover,
g g g g g g g g
Chapters 1 - 21 / Complete
g g g g g
1
,• Table of Contents g g
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
g g g g g g g g g
Chapter 2: The Financial Statement Auditing Environment
g g g g g g
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
g g g g g g g g g
Chapter 4: Risk Assessment
g g g
Chapter 5: Evidence and Documentation
g g g g
Chapter 6: Internal Control in a Financial Statement Audit
g g g g g g g g
Chapter 7: Auditing Internal Control over Financial Reporting
g g g g g g g
Chapter 8: Audit Sampling: An Overview and Application to Tests of Controls
g g g g g g g g g g g
Chapter 9: Audit Sampling: An Application to Substantive Tests of Account Balances
g g g g g g g g g g g
Chapter 10: Auditing the Revenue Process
g g g g g
Chapter 11: Auditing the Purchasing Process
g g g g g
Chapter 12: Auditing the Human Resource Management Process
g g g g g g g
Chapter 13: Auditing the Inventory Management Process
g g g g g g
Chapter 14: Auditing the Financing/Investing Process:Prepaid Expenses, Intangible Assets, and Property, Plant, and
g g g g g g g g g g g g
Equipment
g
Chapter 15: Auditing the Financing/Investing Process:Long-Term Liabilities, Stockholders’ Equity, and Income Statement
g g g g g g g g g g g
Accounts
g
Chapter 16: Auditing the Financing/Investing Process: Cashand Investments
g g g g g g g
Chapter 17: Completing the Audit Engagement
g g g g g
Chapter 18: Reports on Audited Financial Statements
g g g g g g
Chapter 19: Professional Conduct, Independence, and Quality Management
g g g g g g g
Chapter 20: Legal Liability
g g g
Chapter 21: Assurance, Attestation, and Internal Auditing Services
g g g g g g g
2
,CHAPTER 1 g
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
g g g g g g g
Answers to Review Questions g g g
1-1 The study of auditing is more conceptual in nature compared to other accounting courses.
g g g g g g g g g g g g g
Rather than focusing on learning the rules, techniques, and computations required to prepare
g g g g g g g g g g g g g
financial statements, auditing emphasizes learning a framework of analytical and logicalskills to
g g g g g g g g g g g g g
evaluate the relevance and reliability of the systems and processes responsible for financial
g g g g g g g g g g g g g
information, as well as the information itself. To be successful, students must learn the framework
g g g g g g g g g g g g g g g
and then learn to use logic and common sense in applying auditing concepts to various
g g g g g g g g g g g g g g g
circumstances and situations.
g g g
Understanding auditing can improve the decision making ability of consultants, business g g g g g g g g g g
managers, and accountants by providing a framework for evaluating the usefulness and
g g g g g g g g g g g g
reliability of information.
g g g
1-2 There is a demand for auditing in a free-market economy because the agency relationship
g g g g g g g g g g g g g
between an absentee owner and a manager produces a natural conflict of interest due to the
g g g g g g g g g g g g g g g g
information asymmetry that exists between the owner and manager. As a result, theagent agrees
g g g g g g g g g g g g g g g
to be monitored as part of his/her employment contract. Auditing appears to be acost-effective
g g g g g g g g g g g g g g g
form of monitoring.
g g g
The empirical evidence suggests auditing was demanded prior to government regulation
g g g g g g g g g g
such as statutory audit requirements. Additionally, many private companies and other entities not
g g g g g g g g g g g g g
subject to government auditing regulations also demand auditing.
g g g g g g g g
1-3 The agency relationship between an owner and manager produces a natural conflict of
g g g g g g g g g g g g
interest because of differences in the two parties’ goals and because of information asymmetry
g g g g g g g g g g g g g g
that exists between them. That is, the manager generally has more information about the ‘true’
g g g g g g g g g g g g g g g
financial position and results of operations of the entity than the absentee owner does. If both
g g g g g g g g g g g g g g g g
parties seek to maximize their own self-interest, it is likely that the manager will not act in the best
g g g g g g g g g g g g g g g g g g g
interest of the owner and may manipulate the information provided to the owner accordingly.
g g g g g g g g g g g g g g
1-4 Independence is an important standard for auditors. If an auditor is not independent ofthe g g g g g g g g g g g g g g
client, users may lose confidence in the auditor’s ability to report truthfully on the financial
g g g g g g g g g g g g g g g
statements, and the auditor’s work loses its value. From an agency perspective, if the principal
g g g g g g g g g g g g g g g
(owner) knows that the auditor is not independent, the owner will not trust the auditor’s work.
g g g g g g g g g g g g g g g g
Thus, the agent will not hire the auditor because the auditor’s report will not be effective inreducing
g g g g g g g g g g g g g g g g g
information risk from the perspective of the owner.
g g g g g g g g
1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and g g g g g g g g g g
evaluating evidence regarding assertions about economic actions and events to ascertain the
g g g g g g g g g g g g
degree of correspondence between those assertions and established criteria and
g g g g g g g g g g
communicating the results to interested users.
g g g g g g
Assurance is engagement in which a practitioner expresses a conclusion designed to g g g g g g g g g g g
enhance the degree of confidence of the intended users other than the responsible party aboutthe
g g g g g g g g g g g g g g g g
outcome of the evaluation or measurement of a subject matter against criteria.
g g g g g g g g g g g g
Examples of assurance services are assurance (audit) of financial statements, assurance g g g g g g g g g g
of prospective financial information, assurance of reporting on internal control,assurance of
g g g g g g g g g g g g
sustainability reporting, and assurance of electronic commerce.
g g g g g g g
3
, 1-6 The phrase systematic process implies that there should be a well-planned, logical
g g g g g g g g g g g
approach for conducting an audit that involves objectively obtaining and evaluating evidence.
g g g g g g g g g g g g
1-7 Materiality: "Omissions or misstatements of items are material if they could, individuallyor g g g g g g g g g g g g
collectively, influence the economic decisions of users taken on the basis of the financial
g g g g g g g g g g g g g g
statements. Materiality depends on the size and nature of the omission or misstatement judged in
g g g g g g g g g g g g g g g
the surrounding circumstances. The size or nature of the item, or a combination of both, couldbe the
g g g g g g g g g g g g g g g g g g
determining factor." (IASB).
g g g
Audit risk is defined as the risk that the auditor expresses an inappropriate audit opinion
g g g g g g g g g g g g g g
when the financial statements are materially misstated (ISA 200).
g g g g g g g g g
The audit report states that the auditor obtains “reasonable assurance” whether the
g g g g g g g g g g g
financial statements are free from “material” misstatement. The term reasonable assurance
g g g g g g g g g g g
informs the reader that there is some level of risk that the audit did not detect all material
g g g g g g g g g g g g g g g g g g
misstatements. In addition, the auditor’s opinion commonly uses the wording that the financial
g g g g g g g g g g g g g
statements present fairly, “in all material respects.” These phrases communicate to third partiesthat
g g g g g g g g g g g g g g
the audit report is limited to material information.
g g g g g g g g
1-8 On most audits, it is not feasible or cost-effective to audit all transactions. For example, in a
g g g g g g g g g g g g g g g g
small business, the auditor might be able to examine all transactions that occurred during the
g g g g g g g g g g g g g g g
period. However, it is unlikely that the owner of the business could afford to pay for such an
g g g g g g g g g g g g g g g g g g
extensive audit. For a large organization, the sheer volume of transactions prevents the auditor
g g g g g g g g g g g g g g
from examining every transaction. Thus, there is a trade-off between the exactness or precisionof
g g g g g g g g g g g g g g g
the audit and its cost.
g g g g g
1-9 The major phases of the audit are:
g g g g g g
• Client acceptance/continuance and establishing engagement terms g g g g g
• Preplanning
• Assess risks and establish materiality g g g g
• Plan the audit g g
• Consider internal control g g
• Audit business processes and related accounts g g g g g
• Complete the audit g g
• Evaluate results and issue audit report g g g g g
1-10 The auditor’s understanding of the entity and its environment includes knowledge
g g g g g g g g g g
about: (1) the nature of the entity, (2) its objectives and strategies, (3) its industry, regulatory,and
g g g g g g g g g g g g g g g g g
other external factors, (4) its management, (5) its governance, (6) its measurement and
g g g g g g g g g g g g g
performance process, and (7) its business processes.
g g g g g g g
1-11 Sometimes auditors will face situations where no standard audit procedure exists, suchas g g g g g g g g g g g g
the example from the text of verifying the inventory of reindeer. Such circumstances require that
g g g g g g g g g g g g g g g
the auditor possess creativity and innovation when planning and administering audit procedures
g g g g g g g g g g g g
where little or no precedent exists. Every client is different, and applying auditing concepts in
g g g g g g g g g g g g g g g
different situations requires logic and common sense, and frequently creativity and innovation.
g g g g g g g g g g g g
Solutions to Problems g g
1-12 The memo should cite the following facts:
g g g g g g
• There is a historical relationship between accounting and auditing. g g g g g g g g
4
