Complete Solutions Auditing & Assurance Services 4ce
Messier All Chapters Solutions included - Chapter 1 - 21
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—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 (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 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. Furthermore, 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.
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 for auditors, it is also a regulatory requirement. 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 client’s financial statements, and the auditor’s work
loses its value. From an agency perspective, if the principal (owner) knows that the auditor
1-1
.
Messier All Chapters Solutions included - Chapter 1 - 21
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—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 (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 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. Furthermore, 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.
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 for auditors, it is also a regulatory requirement. 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 client’s financial statements, and the auditor’s work
loses its value. From an agency perspective, if the principal (owner) knows that the auditor
1-1
.
