Solution Manual for Auditing & Assurance Services A Systematic Approach 12th Edition by William Messier Jr, Steven Glover, Douglas Prawit All Chapters 1-21 Complete Latest Newest Version

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

,SOLUTION MANUAL FOR F2 F 2




Auditing & Assurance Services A Systematic Approach 12e Messie
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r Chapter 1-21
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CHAPTER1 F
2




AN INTRODUCTION TO ASSURANCE AND FINANCIAL STAT
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EMENT AUDITING F2




Answers toR eview Questions F2 F2 F2




1-1 The study of auditing is more conceptual in nature as compared to other accounting cou
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rses. Rather than focusing on learning the rules, techniques, and computations requ
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ired to prepare financial statements, auditing emphasizes learning a framework of analyti
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cal and logical skills. This framework enables auditors to evaluate the relevance and relia
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bility of the systems and processes responsible for financial information as well as the i
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nformation itself. To be successful, students must learn the framework and then lear F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2




n to use logic and common sense in applying auditing concepts to various circumsta
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nces and situations. Understanding auditing can improve the decision-
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making ability of consultants, business managers, and accountants by providing a frame
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work 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- F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2




market economy because the agency relationship between an absentee owner and a ma
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nager produces a natural conflict of interest due to the information asymmetry that exi
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sts between these two parties. As a result, the agent agrees to be monitored as part of his/h
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er employment contract. Auditing appears to be a cost-
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effective form of monitoring. The empirical evidence suggests that auditing was dema
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nded prior to government regulation. In 1926, before it was required by law, independen
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t auditors audited 82 percent of the companies on the New York Stock Exchange. Add
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itionally, many private companies and municipalities not subject to government regula
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tions, such as the Securities Act of 1933 and Securities Exchange Act of 1934, also purcha
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se various forms of auditing and assurance services. Many private companies seek out fin
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ancial statement audits in order to secure financing for their operations. Companies pr
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eparing to go public also benefit from having an audit. F 2 F 2 F 2 F 2 F2 F2 F2 F2 F2




1-3 The agency relationship between an owner and manager produces a natural conflict of int
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erest because of differences in the two parties’ goals and because of the information asy
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mmetry that exists between them. That is, the manager likely has different goals t
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han the owner, and generally has more information about the "true" financial position a
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nd results of operations of the entity than the absentee owner does. If both parties
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2seek to maximize their own self-F 2 F 2 F 2 F 2 F 2




interest, the manager may not act in the best interest of the owner and may manipulate t
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he information provided to the owner accordingly.
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,1-4 Independence is a bedrock principle for auditors. If an auditor is not independent of the F2 F2 F2 F2 F2 F2 F2 F2 F 2 F2 F2 F2 F2 F 2 F2




client, users may lose confidence in the auditor’s ability to report objectively and truthfu
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lly on the financial statements, and the auditor’s work loses its value. From an agency pers
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pective, if the principal (owner) knows that the auditor is not independent, the owner
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will not trust the auditor’s work. Thus, the agent will not hire the auditor because
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2the auditor’s report will not be effective in reducing information risk from the perspe
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ctive of the owner. Auditor independence is also a regulatory requirement.
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1-5 Auditing (broadly defined) is a systematic process of (1) objectively obtaining and ev F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2




aluating evidence regarding assertions about economic actions and events to ascertain t
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he degree of correspondence between those assertions and established criteria and (
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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 a
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ssertion about subject matter, that is the responsibility of another party.F2 F2 F2 F2 F2 F2 F2 F2 F2 F2




Assurance services are independent professional services that improve the quality of i F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2 F2




nformation, or its context, for decision makers. F2 F2 F2 F2 F2 F2




1-6 Auditing is a specific form of ―attest service,‖ which in turn is a specific category of
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―assurance service.‖ In other words, the phrase ―assurance services‖ constitutes t F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2




he broadest category of professional services provided by CPAs that serve to improve t
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he quality or context of information for decision making for other parties. Attest servic
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es constitute a more specific category of assurance that CPAs can provide. These servi
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ces are intended to reduce information risk to parties relying on information provided by
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a party that is creating, or making assertions about, subject matter of interest. CPAs c
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an provide attest services relating to a wide variety of subject matter (or asserti
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ons about that subject matter) to reduce the information risk to third parties. One su
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ch subject matter is a set of financial statements. When a CPA provides a very in-
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depth, detailed attest service that follows relevant standards to constitute a complete
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examination of a set of financial statements and related assertions, this is called a fi F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2 F 2 F2 F2 F2 F2 F2




nancial statement ―audit.‖ F2 F2




1-7 Audit risk is defined as the risk that the auditor may unknowingly fail to appr
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opriately modify his or her opinion on financial statements that are materially misstat
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ed (AS 1101). Materiality is defined as "the magnitude of an omission or misstate
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ment of accounting information that, in the light of surrounding circumstances, m
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akes it probable that the judgment of a reasonable person relying on the information
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would have been changed or influenced by the omission or misstatement" (FASB Statem
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ent of Financial Accounting Concepts No. 8, Chapter 3: Qualitative Characteristics of
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2Useful Accounting Information, which is pending revision at the time of the writ
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ing of this book per the Board’s November 2017 decision to revert to a definition of m
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ateriality similar to the one found in superseded Concept No. 2). F2 F2 F2 F2 F2 F2 F2 F 2 F2 F2




The concept of materiality is reflected in the wording of the auditor's standard
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audit 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 materiality
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Fto the users of the auditor's report. The auditor's standard report states that the
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audit provides only reasonable assurance that the financial statements
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, do not contain material misstatements. The term "reasonable assurance" implies that there
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is some risk that a material misstatement could be present in the financial state
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ments and the auditor will fail
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