SOLUTIONS MANUAL
** All Chapters included
** Answers to Review Questions & MCQs
** Solutions to Problems & Discussion Case
** Excel Answer Keys & Notes
,Table of Contents are given below
CHAPTER 1 An Introduction to Assurance and Financial Statement Auditing
CHAPTER 2 The Financial Statement Auditing Environment
CHAPTER 3 Professional Conduct & Legal Liability
CHAPTER 4 Audit Planning, Types of Audit Tests, and Materiality
CHAPTER 5 Risk Assessment
CHAPTER 6 Evidence and Documentation
CHAPTER 7 Internal Control in a Financial Statement Audit
CHAPTER 8 Auditing Internal Control Over Financial Reporting
CHAPTER 9 Audit Sampling: An Overview and Application to Tests of Controls
CHAPTER 10 Audit Sampling: An Application to Substantive Tests of Account Balances
CHAPTER 11 Auditing the Revenue Process
CHAPTER 12 Auditing the Purchasing Process
CHAPTER 13 Auditing the Human Resource Management Process
CHAPTER 14 Auditing the Inventory Management Process
CHAPTER 15 Auditing the Financing/Investing Process: Prepaid Expenses, Intangible
Assets, Property, Plant, Equipment, and Goodwill
CHAPTER 16 Auditing the Financing/Investing Process: Long-Term Liabilities,
Shareholders’ Equity, and Income Statement Accounts
CHAPTER 17 Auditing the Financing/Investing Process: Cash and Investments
CHAPTER 18 Completing the Audit Engagement
CHAPTER 19 Reports on Audited Financial Statements
CHAPTER 20 Assurance, Attestation, and Internal Auditing Services
, 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 financial accounting.
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 accountants, business managers,
consultants, and other business decision makers by providing a framework for evaluating
the usefulness and reliability of information and for understanding how users use financial
statements—important tasks 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 (principle) and a manager (agent) 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 and reliable 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 are 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 to provide assurance to
the users of their financial statements. Furthermore, many private companies seek out
financial statement audits to secure financing for their operations as demanded by lenders.
Companies preparing to go public also benefit from having an audit to ensure they are ready
for subsequent auditing requirements.
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 between them. That is, the manager likely has different goals than the
owner. For instance, the owner is interested in maximizing the company’s value, whereas
the manager may seek to maximize their remuneration. Generally, the manager 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, the manager
may not act in the best interest of the owner and may manipulate the information provided to
the owner accordingly.
1-4 Independence is a bedrock principle (a principle that forms the basis for others) for
auditors, it is also a regulatory requirement. If an auditor is not independent of the client,
1-1
, users may lose confidence in the auditor’s ability to report objectively and truthfully on the
client’s financial statements, and the auditor’s work loses its value and reliability for
decision making. 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. Alternatively, the owner may hire an auditor whose
interests are aligned with their own, thus, reducing the value provided by the audit and
potentially cheating management.
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 a subject matter, or an assertion
about a subject matter, that is the responsibility of another party.
Assurance services are independent professional services that improve the reliability of
information, or its context, for decision makers.
1-6 The phrase systematic process implies that there should be a well-planned, logical approach
for conducting an audit that involves objectively obtaining and evaluating evidence. It
requires organizing a plan for gathering evidence and documenting steps taken during the
audit to evaluate the relevance and reliability and sufficiency of the evidence.
1-7 Audit risk is defined as the risk that the auditor fails to appropriately modify their opinion
on financial statements that are materially misstated (AS 1101). Discussions about
materiality note that “Misstatements, including omissions, are considered to be material if
they, individually or in the aggregate, could reasonably be expected to influence the
economic decisions of users taken on the basis of the financial statements.” (Canadian
Auditing Standard 320).
The auditor's standard 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 misstatement could be present in
the financial statements and the auditor will fail to detect and/or report it.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 way the
auditor communicates the notion of materiality to the users of the auditor’s report.
1-8 The major phases of the audit are:
1. Client acceptance/continuance
2. Preliminary engagement activities
3. Plan the audit
4. Consider and audit internal control
5. Audit business processes and related accounts
6. Complete the audit
7. Evaluate results and issue audit report
1-2
** All Chapters included
** Answers to Review Questions & MCQs
** Solutions to Problems & Discussion Case
** Excel Answer Keys & Notes
,Table of Contents are given below
CHAPTER 1 An Introduction to Assurance and Financial Statement Auditing
CHAPTER 2 The Financial Statement Auditing Environment
CHAPTER 3 Professional Conduct & Legal Liability
CHAPTER 4 Audit Planning, Types of Audit Tests, and Materiality
CHAPTER 5 Risk Assessment
CHAPTER 6 Evidence and Documentation
CHAPTER 7 Internal Control in a Financial Statement Audit
CHAPTER 8 Auditing Internal Control Over Financial Reporting
CHAPTER 9 Audit Sampling: An Overview and Application to Tests of Controls
CHAPTER 10 Audit Sampling: An Application to Substantive Tests of Account Balances
CHAPTER 11 Auditing the Revenue Process
CHAPTER 12 Auditing the Purchasing Process
CHAPTER 13 Auditing the Human Resource Management Process
CHAPTER 14 Auditing the Inventory Management Process
CHAPTER 15 Auditing the Financing/Investing Process: Prepaid Expenses, Intangible
Assets, Property, Plant, Equipment, and Goodwill
CHAPTER 16 Auditing the Financing/Investing Process: Long-Term Liabilities,
Shareholders’ Equity, and Income Statement Accounts
CHAPTER 17 Auditing the Financing/Investing Process: Cash and Investments
CHAPTER 18 Completing the Audit Engagement
CHAPTER 19 Reports on Audited Financial Statements
CHAPTER 20 Assurance, Attestation, and Internal Auditing Services
, 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 financial accounting.
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 accountants, business managers,
consultants, and other business decision makers by providing a framework for evaluating
the usefulness and reliability of information and for understanding how users use financial
statements—important tasks 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 (principle) and a manager (agent) 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 and reliable 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 are 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 to provide assurance to
the users of their financial statements. Furthermore, many private companies seek out
financial statement audits to secure financing for their operations as demanded by lenders.
Companies preparing to go public also benefit from having an audit to ensure they are ready
for subsequent auditing requirements.
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 between them. That is, the manager likely has different goals than the
owner. For instance, the owner is interested in maximizing the company’s value, whereas
the manager may seek to maximize their remuneration. Generally, the manager 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, the manager
may not act in the best interest of the owner and may manipulate the information provided to
the owner accordingly.
1-4 Independence is a bedrock principle (a principle that forms the basis for others) for
auditors, it is also a regulatory requirement. If an auditor is not independent of the client,
1-1
, users may lose confidence in the auditor’s ability to report objectively and truthfully on the
client’s financial statements, and the auditor’s work loses its value and reliability for
decision making. 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. Alternatively, the owner may hire an auditor whose
interests are aligned with their own, thus, reducing the value provided by the audit and
potentially cheating management.
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 a subject matter, or an assertion
about a subject matter, that is the responsibility of another party.
Assurance services are independent professional services that improve the reliability of
information, or its context, for decision makers.
1-6 The phrase systematic process implies that there should be a well-planned, logical approach
for conducting an audit that involves objectively obtaining and evaluating evidence. It
requires organizing a plan for gathering evidence and documenting steps taken during the
audit to evaluate the relevance and reliability and sufficiency of the evidence.
1-7 Audit risk is defined as the risk that the auditor fails to appropriately modify their opinion
on financial statements that are materially misstated (AS 1101). Discussions about
materiality note that “Misstatements, including omissions, are considered to be material if
they, individually or in the aggregate, could reasonably be expected to influence the
economic decisions of users taken on the basis of the financial statements.” (Canadian
Auditing Standard 320).
The auditor's standard 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 misstatement could be present in
the financial statements and the auditor will fail to detect and/or report it.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 way the
auditor communicates the notion of materiality to the users of the auditor’s report.
1-8 The major phases of the audit are:
1. Client acceptance/continuance
2. Preliminary engagement activities
3. Plan the audit
4. Consider and audit internal control
5. Audit business processes and related accounts
6. Complete the audit
7. Evaluate results and issue audit report
1-2
