Solution Manual for Auditing & Assurance Services A Systematic Approach 12th Edition by William Messier Jr, Steven Glover, Douglas Prawit

Chapter 17 - Completing the Audit
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Engagement


SOLUTION MANUAL FOR c1 c1



Auditing & Assurance Services A Systematic Approach 12e Messier
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Chapter 1-21
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CHAPTER 1 c1



AN INTRODUCTION TO ASSURANCE AND FINANCIAL
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STATEMENT AUDITING
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Answers to Review Questions
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1-1 The study of auditing is more conceptual in nature as compared to other accounting
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courses. Rather than focusing on learning the rules, techniques, and computations
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required to prepare financial statements, auditing emphasizes learning a framework of
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analytical and logical skills. This framework enables auditors to evaluate the
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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
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the framework and then learn to use logic and common sense in applying auditing
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concepts to various circumstances and situations. Understanding auditing can improve
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the decision-making ability of consultants, business managers, and accountants by
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providing a framework for evaluating the usefulness and reliability of information—
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an important task in many different business contexts.
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1-2 There is a demand for auditing in a free-market economy because the agency
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relationship between an absentee owner and a manager produces a natural conflict of
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interest due to the information asymmetry that exists between these two parties. As
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a result, the agent agrees to be monitored as part of his/her employment contract.
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Auditing appears to be a cost-effective form of monitoring. The empirical evidence
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suggests that auditing was demanded prior to government regulation. In 1926, before
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it was required by law, independent auditors audited 82 percent of the companies on
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the New York Stock Exchange. Additionally, many private companies and
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municipalities not subject to government regulations, such as the Securities Act of
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1933 and Securities Exchange Act of 1934, also purchase various forms of auditing
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and assurance services. Many private companies seek out financial statement audits
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in order to secure financing for their operations. Companies preparing to go public
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also benefit from having an audit.
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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 the
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information asymmetry that exists between them. That is, the manager likely has
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different goals than the owner, and generally has more information about the "true"
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financial position and results of operations of the entity than the absentee owner
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does. If both parties seek to maximize their own self-interest, the manager may not
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act in the best interest of the owner and may manipulate the information provided to
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the owner accordingly.
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17-1
Copyright c1©2022 c1McGraw c1Hill c1Education. c1All c1rights c1reserved. c1No c1reproduction c1or c1distribution c1without c1the c1prior c1written
c1consent c1of c 1 McGraw c1Hill c1Education.

,Chapter 17 - Completing the Audit
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Engagement

1-4 Independence is a bedrock principle for auditors. If an auditor is not independent of
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the client, users may lose confidence in the auditor’s ability to report objectively and
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truthfully on the financial statements, and the auditor’s work loses its value. From
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an agency perspective, if the principal (owner) knows that the auditor is not
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independent, the owner will not trust the auditor’s work. Thus, the agent will not
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hire the auditor because the auditor’s report will not be effective in reducing
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information risk from the perspective of the owner. Auditor independence is also a
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regulatory requirement.
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1-5 Auditing (broadly defined) is a systematic process of (1) objectively obtaining and
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evaluating evidence regarding assertions about economic actions and events to
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ascertain the degree of correspondence between those assertions and established
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criteria and (2) communicating the results to interested users.
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Attest services occur when a practitioner issues a report on subject matter, or an
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assertion about subject matter, that is the responsibility of another party.
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Assurance services are independent professional services that improve the quality of
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information, or its context, for decision makers.
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1-6 Auditing is a specific form of ―attest service,‖ which in turn is a specific categ
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of
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―assurance service.‖ In other words, the phrase ―assurance services‖ constitutes the
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broadest category of professional services provided by CPAs that serve to improve
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the quality or context of information for decision making for other parties. Attest
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services constitute a more specific category of assurance that CPAs can provide.
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These services are intended to reduce information risk to parties relying on
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information provided by a party that is creating, or making assertions about, subject
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matter of interest. CPAs can provide attest services relating to a wide variety of
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subject matter (or assertions about that subject matter) to reduce the information risk
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to third parties. One such subject matter is a set of financial statements. When a
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CPA provides a very in-depth, detailed attest service that follows relevant standards
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to constitute a complete examination of a set of financial statements and related
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assertions, this is called a financial statement ―audit.‖
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1-7 Audit risk is defined as the risk that the auditor may unknowingly fail to
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appropriately modify his or her opinion on financial statements that are materially
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misstated (AS 1101). Materiality is defined as "the magnitude of an omission or
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misstatement of accounting information that, in the light of surrounding
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circumstances, makes it probable that the judgment of a reasonable person relying on
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the information would have been changed or influenced by the omission or
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misstatement" (FASB Statement of Financial Accounting Concepts No. 8, Chapter 3:
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Qualitative Characteristics of Useful Accounting Information, which is pending
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revision at the time of the writing of this book per the Board’s November 2017
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decision to revert to a definition of materiality similar to the one found in superseded
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Concept No. 2).
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The concept of materiality is reflected in the wording of the auditor's standard audit
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report through the phrase "the financial statements present fairly in all material
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respects." This is the manner in which the auditor communicates the notion of
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materiality to the users of the auditor's report. The auditor's standard report states
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that the audit provides only reasonable assurance that the financial statements do not
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17-2
Copyright c1©2022 c1McGraw c1Hill c1Education. c1All c1rights c1reserved. c1No c1reproduction c1or c1distribution c1without c1the c1prior c1written
c1consent c1of c 1 McGraw c1Hill c1Education.

,Chapter 17 - Completing the Audit
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Engagement

c1 contain material misstatements. The term "reasonable assurance" implies that there is
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c1 some risk that a material misstatement could be present in the financial statements
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c1 and the auditor will fail
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17-3
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c1consent c1of c 1 McGraw c1Hill c1Education.

, Chapter 17 - Completing the Audit
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Engagement

to detect it.
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1-8 The major phases of the audit are:
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 Client acceptance/continuance c1


 Preliminary engagement activities c1 c1


 Plan the audit c1 c1


 Consider and audit internal control c1 c1 c1 c1


 Audit business processes and related accountsc1 c1 c1 c1 c1


 Complete the audit c1 c1


 Evaluate results and issue audit report c1 c1 c1 c1 c1




1-9 Plan the audit: During this phase of the audit, the auditor uses knowledge about the
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client and any controls in place to plan the audit and perform preliminary analytical
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procedures. The outcome of the planning process is a written audit plan that sets
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forth the nature, extent, and timing of the audit procedures to be performed. The
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purpose of this phase is to plan an effective and efficient audit.
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1-10 The auditor's standard unqualified report for a public company client includes the
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following sections: (1) opinion on the financial statements, (2) basis for opinion, and
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(3) critical audit matters, as illustrated in this chapter.
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1-11 The emergence of advanced audit technologies will help remove many of the tedious
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tasks that are usually performed by junior auditors. Thus, auditors of all positions
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and experience will be required to spend additional time reasoning through
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fundamental business, accounting, and auditing concepts. An auditors’ knowledge in
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these areas will enable them to provide greater benefit to clients by asking the right
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questions and identifying new, more effective ways to collect, analyze, and interpret
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results. In using audit data analytics, for example, auditors must understand the client
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and its industry, as well as the fundamentals of accounting and auditing, in order to
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ask the right questions in querying the data and in interpreting the results obtained.
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1-12 Auditors frequently face situations where no standard audit procedure exists, such as
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the example from the text of verifying the inventory of cattle. Such circumstances
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require that the auditor exercise creativity and innovation when planning and
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administering audit procedures where little or no guidance or precedent exists. Every
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client is different, and applying auditing concepts in different situations requires
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logic and common sense, and frequently creativity and innovation.
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Answers to Multiple-Choice Questions
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1-13 b 1-19 a
1-14 b 1-20 d
1-15 c 1-21 d
1-16 c 1-22 d
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17-4
Copyright c1©2022 c1McGraw c1Hill c1Education. c1All c1rights c1reserved. c1No c1reproduction c1or c1distribution c1without c1the c1prior c1written
c1consent c1of c 1 McGraw c1Hill c1Education.