Chapters17s-sCompletingsthesAuditsEngagement
SOLUTION MANUAL FOR s s
Auditing & Assurance Services A Systematic Approach 12e Messier C
s s s s s s s s s
hapter 1-21 s
CHAPTER 1 s
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATE
s s s s s s
MENT AUDITING s
Answers to Review Questions
s s s
1-1 Thesstudysofsauditingsissmoresconceptualsinsnaturesasscomparedstosothersaccountingscourses.s
Rathersthansfocusingsonslearningsthesrules,stechniques,sandscomputationssrequiredstosprepares
financialsstatements,sauditingsemphasizesslearningsasframeworksofsanalyticalsandslogicalsskill
s.sThissframeworksenablessauditorsstosevaluatesthesrelevancesands reliabilitysofsthessystemssan
dsprocessessresponsiblesforsfinancialsinformationsasswellsassthesinformationsitself.sTosbessucc
essful,sstudentssmustslearnsthesframeworksandsthenslearnstosuseslogicsandscommonssensesinsap
plyingsauditingsconceptsstosvariousscircumstancessandssituations.sUnderstandingsauditingsca
nsimprovesthesdecision-
makingsabilitysofsconsultants,sbusinesssmanagers,sandsaccountantssbysprovidingsasframework
sforsevaluatingsthesusefulnesssandsreliabilitysofsinformation—
ansimportantstasksinsmanysdifferentsbusinessscontexts.
1-2 Theresissasdemandsforsauditingsinsasfree-
marketseconomysbecausesthesagencysrelationshipsbetweensansabsenteesownersandsasmanagers
producessasnaturalsconflictsofsinterestsduestos thesinformationsasymmetrysthatsexistssbetweenst
hesestwosparties.sAssasresult,sthesagentsagreesstosbesmonitoredsasspartsofshis/hersemploymentsc
ontract.sAuditingsappearsstosbesascost-
effectivesformsofsmonitoring.sThesempiricalsevidencessuggestssthatsauditingswassdemandedsp
riorstosgovernmentsregulation.sIns1926,sbeforesitswassrequiredsbyslaw,sindependentsauditorssa
uditeds82spercentsofsthescompaniessonsthesNewsYorksStocksExchange.sAdditionally,smanyspri
vatescompaniessandsmunicipalitiessnotssubjectstosgovernmentsregulations,ssuchsassthesSecuriti
essActsofs1933sandsSecuritiessExchangesActs ofs1934,salsospurchasesvarioussformssofsauditings
andsassurancesservices.sManysprivatescompaniessseeksoutsfinancialsstatementsauditssinsorderst
ossecuresfinancingsforstheirsoperations.sCompaniesspreparingstosgospublicsalsosbenefitsfromsh
avingsansaudit.
1-3 Thesagencysrelationshipsbetweensansownersandsmanagersproducessasnaturalsconflictsofsinteres
tsbecausesofsdifferencessinsthestwosparties’sgoalssandsbecausesofsthesinformationsasymmetrysth
atsexistssbetweensthem.sThatsis,sthesmanagerslikelyshassdifferentsgoalssthansthesowner,sandsgen
erallyshassmoresinformationsaboutsthes"true"sfinancialspositionsandsresultssofsoperationssofsthe
sentitysthansthesabsenteesownersdoes.sIfsbothspartiessseekstosmaximizestheirsownsself-
interest,sthesmanagersmaysnotsactsinsthesbestsinterestsofsthesownersandsmaysmanipulatesthesinfo
rmationsprovidedstosthesownersaccordingly.
17-1
Copyrights©2022sMcGrawsHillsEducation.sAllsrightssreserved.sNosreproductionsorsdistributionswithoutsthespriorswrittensconsentsofs
McGrawsHillsEducation.
,Chapters17s-sCompletingsthesAuditsEngagement
1-4 Independencesissasbedrocksprinciplesforsauditors.sIfsansauditorsissnotsindependentsofsthesclient,
suserssmayslosesconfidencesinsthesauditor’ssabilitystosreportsobjectivelysands truthfullysonsthesfi
nancialsstatements,sandsthesauditor’ssworkslosessitssvalue.sFromsansagencysperspective,sifsthes
principals(owner)sknowssthatsthesauditorsissnotsindependent,sthesownerswillsnotstruststhesaudit
or’sswork.sThus,sthesagentswillsnotshiresthesauditorsbecausesthesauditor’ssreportswillsnotsbeseffe
ctivesinsreducingsinformationsrisksfromsthesperspectivesofsthesowner.sAuditorsindependencesis
salsosasregulatorysrequirement.
1-5 Auditings(broadlysdefined)sissassystematicsprocesssofs(1)sobjectivelysobtainingsandsevaluatin
gsevidencesregardingsassertionssaboutseconomicsactionssandseventsstosascertainsthesdegreesofs
correspondencesbetweensthosesassertionssandsestablishedscriteriasands(2)scommunicatingsthes
resultsstosinterestedsusers.
Attestsservicessoccurswhensaspractitionersissuessasreportsonssubjectsmatter,sorsansassertionsabo
utssubjectsmatter,sthatsissthesresponsibilitysofsanothersparty.
Assurancesservicessaresindependentsprofessionalsservicessthatsimprovesthesqualitysofsinform
ation,sorsitsscontext,sforsdecisionsmakers.
1-6 Auditings iss as specifics forms ofs ―attests service,‖s whichs ins turns iss as specifics categorys of
―assurancesservice.‖sInsotherswords,sthesphrases―assurancesservices‖sconstitutessthesbroade
stscategorysofsprofessionalsservicessprovidedsbysCPAssthatsservestosimprovesthesqualitysorscon
textsofsinformationsforsdecisionsmakingsforsothersparties.sAttestsservicessconstitutesasmoresspe
cificscategorysofsassurancesthatsCPAsscansprovide.sThesesservicessaresintendedstosreducesinfor
mationsriskstospartiessrelyingsonsinformationsprovidedsbysaspartysthatsisscreating,sorsmakingsas
sertionssabout,ssubjectsmattersofsinterest.sCPAsscansprovidesattestsservicessrelatingstosaswidesv
arietysofssubjectsmatters(orsassertionssaboutsthatssubjectsmatter)stosreducesthesinformationsrisks
tosthirdsparties.sOnessuchssubjectsmattersissassetsofsfinancialsstatements.sWhensasCPAsprovides
sasverysin-
depth,sdetailedsattestsservicesthatsfollowssrelevantsstandardsstosconstitutesascompletesexamina
tionsofsassetsofsfinancialsstatementssandsrelatedsassertions,sthississcalledsasfinancialsstatements
―audit.‖
1-7 Auditsrisksissdefinedsassthesrisksthatsthesauditorsmaysunknowinglysfailstosappropriatelysmodif
yshissorshersopinionsonsfinancialsstatementssthatsaresmateriallysmisstateds(ASs1101).sMaterial
itysissdefinedsass"thesmagnitudesofsansomissionsorsmisstatementsofsaccountingsinformationsth
at,sinstheslightsofssurroundingscircumstances,smakessitsprobablesthatsthesjudgmentsofsasreasona
blespersonsrelyingsonsthesinformationswouldshavesbeenschangedsorsinfluencedsbysthesomissio
nsorsmisstatement"s(FASBsStatementsofsFinancialsAccountingsConceptssNo.s8,sChapters3:sQu
alitativesCharacteristicssofsUsefulsAccountingsInformation,swhichsisspendingsrevisionsatsthesti
mesofstheswritingsofsthissbookspersthesBoard’ss Novembers2017sdecisionstosrevertstosasdefiniti
onsofsmaterialityssimilarstosthesonesfoundsinssupersededsConceptsNo.s2).
Thesconceptsofsmaterialitysissreflectedsinstheswordingsofsthesauditor'ssstandardsauditsreportst
hroughsthesphrases"thesfinancialsstatementsspresentsfairlysinsallsmaterialsrespects."sThississthes
mannersinswhichsthesauditorscommunicatessthesnotionsofsmaterialitystosthes userssofsthesaudito
r'ssreport.sThesauditor'ssstandardsreportsstatessthatsthesauditsprovidessonlysreasonablesassuran
cesthatsthesfinancialsstatementssdosnotscontainsmaterialsmisstatements.sThesterms"reasonablesa
ssurance"simpliessthatstheresisssomesrisksthatsasmaterialsmisstatementscouldsbespresentsinsthesf
inancialsstatementss andsthesauditorswillsfail
17-2
Copyrights©2022sMcGrawsHillsEducation.sAllsrightssreserved.sNosreproductionsorsdistributionswithoutsthespriorswrittensconsentsofs
McGrawsHillsEducation.
,Chapters17s-sCompletingsthesAuditsEngagement
tosdetectsit.
1-8 Thesmajorsphasessofsthesauditsare:
Clientsacceptance/continuance
Preliminarysengagementsactivities
Plansthesaudit
Considersandsauditsinternalscontrol
Auditsbusinesssprocessessandsrelatedsaccounts
Completesthesaudit
Evaluatesresultssandsissuesauditsreport
1-9 Plansthesaudit:sDuringsthissphasesofsthesaudit,sthesauditorsusessknowledgesaboutsthesclientsands
anyscontrolssinsplacestosplansthesauditsandsperformspreliminarysanalyticalsprocedures.sThesout
comesofsthesplanningsprocesssissaswrittensauditsplansthatssetssforthsthesnature,sextent,sandstimin
gsofsthesauditsproceduresstosbesperformed.sThespurposesofsthissphasesisstosplansanseffectivesand
sefficientsaudit.
1-10 Thesauditor'ssstandardsunqualifiedsreportsforsaspublicscompanysclientsincludessthesfollowingss
ections:s(1)sopinionsonsthesfinancialsstatements,s(2)sbasissforsopinion,sands(3)scriticalsauditsma
tters,sassillustratedsinsthisschapter.
1-11 Thesemergencesofsadvancedsauditstechnologiesswillshelpsremovesmanysofsthestediousstaskssth
atsaresusuallysperformedsbysjuniorsauditors.sThus,sauditorssofsallspositionssandsexperienceswill
sbesrequiredstosspendsadditionalstimesreasoningsthroughsfundamentalsbusiness,saccounting,san
dsauditingsconcepts.sAnsauditors’sknowledgesinsthesesareasswillsenablesthemstosprovidesgreate
rsbenefitstosclientssbysaskingsthesrightsquestionssandsidentifyingsnew,smoreseffectiveswaysstosc
ollect,sanalyze,sandsinterpretsresults.sInsusingsauditsdatasanalytics,sforsexample,sauditorssmusts
understandsthesclientsandsitssindustry,sasswellsassthesfundamentalssofsaccountingsandsauditing,s
insorderstosasksthesrightsquestionssinsqueryingsthesdatasandsinsinterpretingsthesresultssobtained.
1-12 Auditorssfrequentlysfacessituationsswheresnosstandardsauditsproceduresexists,ssuchsassthesexa
mplesfromsthestextsofsverifyingsthesinventorysofscattle.sSuchscircumstancessrequiresthatsthesau
ditorsexercisescreativitysandsinnovationswhensplanningsandsadministeringsauditsproceduress
whereslittlesorsnosguidancesorsprecedentsexists.sEverysclientsissdifferent,sandsapplyingsauditin
gsconceptssinsdifferentssituationssrequiresslogicsandscommonssense,sandsfrequentlyscreativitys
andsinnovation.
Answers to Multiple-Choice Questions
s s s
1-13 b 1-19 a
1-14 b 1-20 d
1-15 c 1-21 d
1-16 c 1-22 d
1-17 c 1-23 b
17-3
Copyrights©2022sMcGrawsHillsEducation.sAllsrightssreserved.sNosreproductionsorsdistributionswithoutsthespriorswrittensconsentsofs
McGrawsHillsEducation.
, Chapters17s-sCompletingsthesAuditsEngagement
1-18 c
Solutions to Problems
s s
1-24 TheresarestwosmajorsfactorssthatsmaysmakesansauditsnecessarysforsGreenbloomsGardensCenter
s.sFirst,sthescompanysmaysrequireslong-
termsfinancingsforsitssexpansionsintosotherscitiessinsFlorida.sEntitiesssuchsassbankssorsinsuranc
escompaniessareslikelystosbesthessourcessofsthescompany'ssdebtsfinancing.sThesesentitiessnorm
allysrequiresauditedsfinancialsstatementssbeforeslendingssignificantsfundssandsgenerallysrequir
esauditedsfinancialsstatementssduringsthestimesperiodsthesdebtsissoutstanding.sTheresissinforma
tionsasymmetrysbetweenstheslendersofsfundssandsthesownersofsthesbusiness,sandsthissasymmetr
ysresultssinsinformationsriskstostheslender.sEvensifsthesbusinessscouldsgetsfundingswithoutsansa
udit,sascleansauditsreportsbysasreputablesauditorsmightsveryswellsreducestheslender’ssinformatio
nsrisksandsmakesthestermssofsthesloansmoresfavorablestosthesowner.sSecond,sassthescompanysgr
ows,sthesfamilyswillslosescontrolsoversthesday-to-
daysoperationssofsthesstores.sAnsauditscansprovidesansadditionalsmonitoringsactivitysforsthesfa
milysinscontrollingsthesexpandedsoperationssofsthescompany.
1-25 a.s Evidencesthatsassistssthesauditorsinsevaluatingsfinancialsstatementsassertionssconsistss ofst
hesunderlyingsaccountingsdatasandsanysadditionalsinformationsavailablestosthesauditor,sw
hethersoriginatingsfromsthesclientsorsexternally.
b. Managementsmakessassertionssaboutscomponentssofsthesfinancialsstatements.sForsexamp
le,sansentity'ssfinancialsstatementssmayscontainsaslinesitemsthatsaccountssreceivablesamou
ntstos$1,750,000.sInsthissinstance,smanagementsissasserting,samongsothersthings,sthatsthesr
eceivablessexist,sthesentitysownssthesreceivables,sandsthesreceivablessaresproperlysvalued
.sAuditsevidenceshelpssthesauditorsdetermineswhethersmanagement’ssassertionssaresbeing
smet.sIfsthesauditorsisscomfortablesthatshesorsshescansprovidesreasonablesassurancesthatsalls
assertionssaresmetsforsallsaccounts,shesorsshescansissuesascleansauditsreport.sInsshort,sthesas
sertionssaresasconceptualstoolstoshelpsthesauditorsensuresthatsshesorsheshass―coveredsallsth
esbases.‖
c. Inssearchingsforsandsevaluatingsevidence,sthesauditorsshouldsbesconcernedswithsthesrelev
ancesandsreliabilitysofsevidence.sIfsthesauditorsmistakenlysreliessonsevidencesthatsdoessno
tsrelatestosthesassertionsbeingstested,sansincorrectsconclusionsmaysbesreachedsaboutsthesm
anagementsassertion.sReliabilitysrefersstosthesabilitysofsevidencestossignalsthestruesstatesof
sthesassertion,si.e.,swhethersitsissactuallysbeingsmetsorsnot.
1-26 a.s Asstheschaptersexplains,s asfinancials statements audits reducess thes informations risksbor
n
bysinvestorssandscreditors,sbecausesansauditsreducessthesrisksthatsthescompany’ss financia
ls statementss ares materiallys misstated.s Ins thiss example,s Communitys Banks cansrelysonsinfor
mationsinsYoung’ssfinancialsstatementsstosmakesdecisionssonswhetherstosprovides as loan,s wit
hs assurances thats thes informations (whichs iss produceds bys YoungsCompany)s iss fairlys prese
nted.s Thes risks thes banks facess ins providings as loans iss thussreduceds bys as cleans audits opini
ons ons Young’ss financials,s leadings tos as lowers interest
rate.
17-4
Copyrights©2022sMcGrawsHillsEducation.sAllsrightssreserved.sNosreproductionsorsdistributionswithoutsthespriorswrittensconsentsofs
McGrawsHillsEducation.
SOLUTION MANUAL FOR s s
Auditing & Assurance Services A Systematic Approach 12e Messier C
s s s s s s s s s
hapter 1-21 s
CHAPTER 1 s
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATE
s s s s s s
MENT AUDITING s
Answers to Review Questions
s s s
1-1 Thesstudysofsauditingsissmoresconceptualsinsnaturesasscomparedstosothersaccountingscourses.s
Rathersthansfocusingsonslearningsthesrules,stechniques,sandscomputationssrequiredstosprepares
financialsstatements,sauditingsemphasizesslearningsasframeworksofsanalyticalsandslogicalsskill
s.sThissframeworksenablessauditorsstosevaluatesthesrelevancesands reliabilitysofsthessystemssan
dsprocessessresponsiblesforsfinancialsinformationsasswellsassthesinformationsitself.sTosbessucc
essful,sstudentssmustslearnsthesframeworksandsthenslearnstosuseslogicsandscommonssensesinsap
plyingsauditingsconceptsstosvariousscircumstancessandssituations.sUnderstandingsauditingsca
nsimprovesthesdecision-
makingsabilitysofsconsultants,sbusinesssmanagers,sandsaccountantssbysprovidingsasframework
sforsevaluatingsthesusefulnesssandsreliabilitysofsinformation—
ansimportantstasksinsmanysdifferentsbusinessscontexts.
1-2 Theresissasdemandsforsauditingsinsasfree-
marketseconomysbecausesthesagencysrelationshipsbetweensansabsenteesownersandsasmanagers
producessasnaturalsconflictsofsinterestsduestos thesinformationsasymmetrysthatsexistssbetweenst
hesestwosparties.sAssasresult,sthesagentsagreesstosbesmonitoredsasspartsofshis/hersemploymentsc
ontract.sAuditingsappearsstosbesascost-
effectivesformsofsmonitoring.sThesempiricalsevidencessuggestssthatsauditingswassdemandedsp
riorstosgovernmentsregulation.sIns1926,sbeforesitswassrequiredsbyslaw,sindependentsauditorssa
uditeds82spercentsofsthescompaniessonsthesNewsYorksStocksExchange.sAdditionally,smanyspri
vatescompaniessandsmunicipalitiessnotssubjectstosgovernmentsregulations,ssuchsassthesSecuriti
essActsofs1933sandsSecuritiessExchangesActs ofs1934,salsospurchasesvarioussformssofsauditings
andsassurancesservices.sManysprivatescompaniessseeksoutsfinancialsstatementsauditssinsorderst
ossecuresfinancingsforstheirsoperations.sCompaniesspreparingstosgospublicsalsosbenefitsfromsh
avingsansaudit.
1-3 Thesagencysrelationshipsbetweensansownersandsmanagersproducessasnaturalsconflictsofsinteres
tsbecausesofsdifferencessinsthestwosparties’sgoalssandsbecausesofsthesinformationsasymmetrysth
atsexistssbetweensthem.sThatsis,sthesmanagerslikelyshassdifferentsgoalssthansthesowner,sandsgen
erallyshassmoresinformationsaboutsthes"true"sfinancialspositionsandsresultssofsoperationssofsthe
sentitysthansthesabsenteesownersdoes.sIfsbothspartiessseekstosmaximizestheirsownsself-
interest,sthesmanagersmaysnotsactsinsthesbestsinterestsofsthesownersandsmaysmanipulatesthesinfo
rmationsprovidedstosthesownersaccordingly.
17-1
Copyrights©2022sMcGrawsHillsEducation.sAllsrightssreserved.sNosreproductionsorsdistributionswithoutsthespriorswrittensconsentsofs
McGrawsHillsEducation.
,Chapters17s-sCompletingsthesAuditsEngagement
1-4 Independencesissasbedrocksprinciplesforsauditors.sIfsansauditorsissnotsindependentsofsthesclient,
suserssmayslosesconfidencesinsthesauditor’ssabilitystosreportsobjectivelysands truthfullysonsthesfi
nancialsstatements,sandsthesauditor’ssworkslosessitssvalue.sFromsansagencysperspective,sifsthes
principals(owner)sknowssthatsthesauditorsissnotsindependent,sthesownerswillsnotstruststhesaudit
or’sswork.sThus,sthesagentswillsnotshiresthesauditorsbecausesthesauditor’ssreportswillsnotsbeseffe
ctivesinsreducingsinformationsrisksfromsthesperspectivesofsthesowner.sAuditorsindependencesis
salsosasregulatorysrequirement.
1-5 Auditings(broadlysdefined)sissassystematicsprocesssofs(1)sobjectivelysobtainingsandsevaluatin
gsevidencesregardingsassertionssaboutseconomicsactionssandseventsstosascertainsthesdegreesofs
correspondencesbetweensthosesassertionssandsestablishedscriteriasands(2)scommunicatingsthes
resultsstosinterestedsusers.
Attestsservicessoccurswhensaspractitionersissuessasreportsonssubjectsmatter,sorsansassertionsabo
utssubjectsmatter,sthatsissthesresponsibilitysofsanothersparty.
Assurancesservicessaresindependentsprofessionalsservicessthatsimprovesthesqualitysofsinform
ation,sorsitsscontext,sforsdecisionsmakers.
1-6 Auditings iss as specifics forms ofs ―attests service,‖s whichs ins turns iss as specifics categorys of
―assurancesservice.‖sInsotherswords,sthesphrases―assurancesservices‖sconstitutessthesbroade
stscategorysofsprofessionalsservicessprovidedsbysCPAssthatsservestosimprovesthesqualitysorscon
textsofsinformationsforsdecisionsmakingsforsothersparties.sAttestsservicessconstitutesasmoresspe
cificscategorysofsassurancesthatsCPAsscansprovide.sThesesservicessaresintendedstosreducesinfor
mationsriskstospartiessrelyingsonsinformationsprovidedsbysaspartysthatsisscreating,sorsmakingsas
sertionssabout,ssubjectsmattersofsinterest.sCPAsscansprovidesattestsservicessrelatingstosaswidesv
arietysofssubjectsmatters(orsassertionssaboutsthatssubjectsmatter)stosreducesthesinformationsrisks
tosthirdsparties.sOnessuchssubjectsmattersissassetsofsfinancialsstatements.sWhensasCPAsprovides
sasverysin-
depth,sdetailedsattestsservicesthatsfollowssrelevantsstandardsstosconstitutesascompletesexamina
tionsofsassetsofsfinancialsstatementssandsrelatedsassertions,sthississcalledsasfinancialsstatements
―audit.‖
1-7 Auditsrisksissdefinedsassthesrisksthatsthesauditorsmaysunknowinglysfailstosappropriatelysmodif
yshissorshersopinionsonsfinancialsstatementssthatsaresmateriallysmisstateds(ASs1101).sMaterial
itysissdefinedsass"thesmagnitudesofsansomissionsorsmisstatementsofsaccountingsinformationsth
at,sinstheslightsofssurroundingscircumstances,smakessitsprobablesthatsthesjudgmentsofsasreasona
blespersonsrelyingsonsthesinformationswouldshavesbeenschangedsorsinfluencedsbysthesomissio
nsorsmisstatement"s(FASBsStatementsofsFinancialsAccountingsConceptssNo.s8,sChapters3:sQu
alitativesCharacteristicssofsUsefulsAccountingsInformation,swhichsisspendingsrevisionsatsthesti
mesofstheswritingsofsthissbookspersthesBoard’ss Novembers2017sdecisionstosrevertstosasdefiniti
onsofsmaterialityssimilarstosthesonesfoundsinssupersededsConceptsNo.s2).
Thesconceptsofsmaterialitysissreflectedsinstheswordingsofsthesauditor'ssstandardsauditsreportst
hroughsthesphrases"thesfinancialsstatementsspresentsfairlysinsallsmaterialsrespects."sThississthes
mannersinswhichsthesauditorscommunicatessthesnotionsofsmaterialitystosthes userssofsthesaudito
r'ssreport.sThesauditor'ssstandardsreportsstatessthatsthesauditsprovidessonlysreasonablesassuran
cesthatsthesfinancialsstatementssdosnotscontainsmaterialsmisstatements.sThesterms"reasonablesa
ssurance"simpliessthatstheresisssomesrisksthatsasmaterialsmisstatementscouldsbespresentsinsthesf
inancialsstatementss andsthesauditorswillsfail
17-2
Copyrights©2022sMcGrawsHillsEducation.sAllsrightssreserved.sNosreproductionsorsdistributionswithoutsthespriorswrittensconsentsofs
McGrawsHillsEducation.
,Chapters17s-sCompletingsthesAuditsEngagement
tosdetectsit.
1-8 Thesmajorsphasessofsthesauditsare:
Clientsacceptance/continuance
Preliminarysengagementsactivities
Plansthesaudit
Considersandsauditsinternalscontrol
Auditsbusinesssprocessessandsrelatedsaccounts
Completesthesaudit
Evaluatesresultssandsissuesauditsreport
1-9 Plansthesaudit:sDuringsthissphasesofsthesaudit,sthesauditorsusessknowledgesaboutsthesclientsands
anyscontrolssinsplacestosplansthesauditsandsperformspreliminarysanalyticalsprocedures.sThesout
comesofsthesplanningsprocesssissaswrittensauditsplansthatssetssforthsthesnature,sextent,sandstimin
gsofsthesauditsproceduresstosbesperformed.sThespurposesofsthissphasesisstosplansanseffectivesand
sefficientsaudit.
1-10 Thesauditor'ssstandardsunqualifiedsreportsforsaspublicscompanysclientsincludessthesfollowingss
ections:s(1)sopinionsonsthesfinancialsstatements,s(2)sbasissforsopinion,sands(3)scriticalsauditsma
tters,sassillustratedsinsthisschapter.
1-11 Thesemergencesofsadvancedsauditstechnologiesswillshelpsremovesmanysofsthestediousstaskssth
atsaresusuallysperformedsbysjuniorsauditors.sThus,sauditorssofsallspositionssandsexperienceswill
sbesrequiredstosspendsadditionalstimesreasoningsthroughsfundamentalsbusiness,saccounting,san
dsauditingsconcepts.sAnsauditors’sknowledgesinsthesesareasswillsenablesthemstosprovidesgreate
rsbenefitstosclientssbysaskingsthesrightsquestionssandsidentifyingsnew,smoreseffectiveswaysstosc
ollect,sanalyze,sandsinterpretsresults.sInsusingsauditsdatasanalytics,sforsexample,sauditorssmusts
understandsthesclientsandsitssindustry,sasswellsassthesfundamentalssofsaccountingsandsauditing,s
insorderstosasksthesrightsquestionssinsqueryingsthesdatasandsinsinterpretingsthesresultssobtained.
1-12 Auditorssfrequentlysfacessituationsswheresnosstandardsauditsproceduresexists,ssuchsassthesexa
mplesfromsthestextsofsverifyingsthesinventorysofscattle.sSuchscircumstancessrequiresthatsthesau
ditorsexercisescreativitysandsinnovationswhensplanningsandsadministeringsauditsproceduress
whereslittlesorsnosguidancesorsprecedentsexists.sEverysclientsissdifferent,sandsapplyingsauditin
gsconceptssinsdifferentssituationssrequiresslogicsandscommonssense,sandsfrequentlyscreativitys
andsinnovation.
Answers to Multiple-Choice Questions
s s s
1-13 b 1-19 a
1-14 b 1-20 d
1-15 c 1-21 d
1-16 c 1-22 d
1-17 c 1-23 b
17-3
Copyrights©2022sMcGrawsHillsEducation.sAllsrightssreserved.sNosreproductionsorsdistributionswithoutsthespriorswrittensconsentsofs
McGrawsHillsEducation.
, Chapters17s-sCompletingsthesAuditsEngagement
1-18 c
Solutions to Problems
s s
1-24 TheresarestwosmajorsfactorssthatsmaysmakesansauditsnecessarysforsGreenbloomsGardensCenter
s.sFirst,sthescompanysmaysrequireslong-
termsfinancingsforsitssexpansionsintosotherscitiessinsFlorida.sEntitiesssuchsassbankssorsinsuranc
escompaniessareslikelystosbesthessourcessofsthescompany'ssdebtsfinancing.sThesesentitiessnorm
allysrequiresauditedsfinancialsstatementssbeforeslendingssignificantsfundssandsgenerallysrequir
esauditedsfinancialsstatementssduringsthestimesperiodsthesdebtsissoutstanding.sTheresissinforma
tionsasymmetrysbetweenstheslendersofsfundssandsthesownersofsthesbusiness,sandsthissasymmetr
ysresultssinsinformationsriskstostheslender.sEvensifsthesbusinessscouldsgetsfundingswithoutsansa
udit,sascleansauditsreportsbysasreputablesauditorsmightsveryswellsreducestheslender’ssinformatio
nsrisksandsmakesthestermssofsthesloansmoresfavorablestosthesowner.sSecond,sassthescompanysgr
ows,sthesfamilyswillslosescontrolsoversthesday-to-
daysoperationssofsthesstores.sAnsauditscansprovidesansadditionalsmonitoringsactivitysforsthesfa
milysinscontrollingsthesexpandedsoperationssofsthescompany.
1-25 a.s Evidencesthatsassistssthesauditorsinsevaluatingsfinancialsstatementsassertionssconsistss ofst
hesunderlyingsaccountingsdatasandsanysadditionalsinformationsavailablestosthesauditor,sw
hethersoriginatingsfromsthesclientsorsexternally.
b. Managementsmakessassertionssaboutscomponentssofsthesfinancialsstatements.sForsexamp
le,sansentity'ssfinancialsstatementssmayscontainsaslinesitemsthatsaccountssreceivablesamou
ntstos$1,750,000.sInsthissinstance,smanagementsissasserting,samongsothersthings,sthatsthesr
eceivablessexist,sthesentitysownssthesreceivables,sandsthesreceivablessaresproperlysvalued
.sAuditsevidenceshelpssthesauditorsdetermineswhethersmanagement’ssassertionssaresbeing
smet.sIfsthesauditorsisscomfortablesthatshesorsshescansprovidesreasonablesassurancesthatsalls
assertionssaresmetsforsallsaccounts,shesorsshescansissuesascleansauditsreport.sInsshort,sthesas
sertionssaresasconceptualstoolstoshelpsthesauditorsensuresthatsshesorsheshass―coveredsallsth
esbases.‖
c. Inssearchingsforsandsevaluatingsevidence,sthesauditorsshouldsbesconcernedswithsthesrelev
ancesandsreliabilitysofsevidence.sIfsthesauditorsmistakenlysreliessonsevidencesthatsdoessno
tsrelatestosthesassertionsbeingstested,sansincorrectsconclusionsmaysbesreachedsaboutsthesm
anagementsassertion.sReliabilitysrefersstosthesabilitysofsevidencestossignalsthestruesstatesof
sthesassertion,si.e.,swhethersitsissactuallysbeingsmetsorsnot.
1-26 a.s Asstheschaptersexplains,s asfinancials statements audits reducess thes informations risksbor
n
bysinvestorssandscreditors,sbecausesansauditsreducessthesrisksthatsthescompany’ss financia
ls statementss ares materiallys misstated.s Ins thiss example,s Communitys Banks cansrelysonsinfor
mationsinsYoung’ssfinancialsstatementsstosmakesdecisionssonswhetherstosprovides as loan,s wit
hs assurances thats thes informations (whichs iss produceds bys YoungsCompany)s iss fairlys prese
nted.s Thes risks thes banks facess ins providings as loans iss thussreduceds bys as cleans audits opini
ons ons Young’ss financials,s leadings tos as lowers interest
rate.
17-4
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