SOLUTION MANUAL for Auditing & Assurance Services A
Systematic Approach
12th Edition by William Messier Jr, Steven Glover,
Chapters 1 - 21 / Complete
1
,• Table of Contents
, ,
Chapter,1:,An,Introduction,to,Assurance,and,Financial,Statement,Auditing
Chapter,2:,The,Financial,Statement,Auditing,Environment
Chapter,3:,Audit,Planning,,Types,of,Audit,Tests,,and,Materiality
Chapter,4:,Risk,Assessment
Chapter,5:,Evidence,and,Documentation
Chapter,6:,Internal,Control,in,a,Financial,Statement,Audit
Chapter,7:,Auditing,Internal,Control,over,Financial,Reporting
Chapter,8:,Audit,Sampling:,An,Overview,and,Application,to,Tests,of,Controls
Chapter,9:,Audit,Sampling:,An,Application,to,Substantive,Tests,of,Account,Balances
Chapter,10:,Auditing,the,Revenue,Process
Chapter,11:,Auditing,the,Purchasing,Process
Chapter,12:,Auditing,the,Human,Resource,Management,Process
Chapter,13:,Auditing,the,Inventory,Management,Process
Chapter,14:,Auditing,the,Financing/Investing,Process:Prepaid,Expenses,,Intangible,Assets,,and,Property,,Plant,,and,Equip
ment
Chapter,15:,Auditing,the,Financing/Investing,Process:Long-
Term,Liabilities,,Stockholders’,Equity,,and,Income,Statement,Accounts
Chapter,16:,Auditing,the,Financing/Investing,Process:,Cashand,Investments
Chapter,17:,Completing,the,Audit,Engagement
Chapter,18:,Reports,on,Audited,Financial,Statements
Chapter,19:,Professional,Conduct,,Independence,,and,Quality,Management
Chapter,20:,Legal,Liability
Chapter,21:,Assurance,,Attestation,,and,Internal,Auditing,Services
2
,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,compared,to,other,accounting,courses.,
Rather,than,focusing,on,learning,the,rules,,techniques,,and,computations,required,to,prepare,finan
cial,statements,,auditing,emphasizes,learning,a,framework,of,analytical,and,logical,skills,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,consultants,,business,ma
nagers,,and,accountants,by,providing,a,framework,for,evaluating,the,usefulness,and,reliabi
lity,of,information.
1-2 There,is,a,demand,for,auditing,in,a,free-
market,economy,because,the,agency,relationship,between,an,absentee,owner,and,a,manager,pr
oduces,a,natural,conflict,of,interest,due,to,the,information,asymmetry,that,exists,between,the,own
er,and,manager.,As,a,result,,the,agent,agrees,to,be,monitored,as,part,of,his/her,employment,contr
act.,Auditing,appears,to,be,a,cost-effective,form,of,monitoring.
The,empirical,evidence,suggests,auditing,was,demanded,prior,to,government,regulation,su
ch,as,statutory,audit,requirements.,Additionally,,many,private,companies,and,other,entities,not,sub
ject,to,government,auditing,regulations,also,demand,auditing.
1-3 The,agency,relationship,between,an,owner,and,manager,produces,a,natural,conflict,of,int
erest,because,of,differences,in,the,two,parties’,goals,and,because,of,information,asymmetry,that,e
xists,between,them.,That,is,,the,manager,generally,has,more,information,about,the,‘true’,financial,
position,and,results,of,operations,of,the,entity,than,the,absentee,owner,does.,If,both,parties,seek,t
o,maximize,their,own,self-
interest,,it,is,likely,that,the,manager,will,not,act,in,the,best,interest,of,the,owner,and,may,manipulate
,the,information ,provided,to,the,owner,accordingly.
1-4 Independence,is,an,important,standard,for,auditors.,If,an,auditor,is,not,independent,of,the,
client,,users,may,lose,confidence,in,the,auditor’s,ability,to,report,truthfully,on,the,financial,statemen
ts,,and,the,auditor’s,work,loses,its,value.,From,an,agency,perspective,,if,the,principal,(owner),know
s,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,i
nformation,risk,from,the,perspective,of,the,owner.
1-5 Auditing,(broadly,defined),is,a,systematic,process,of,objectively,obtaining,and,evaluatin
g,evidence,regarding,assertions,about,economic,actions,and,events,to,ascertain,the,degree,of,co
rrespondence,between,those,assertions,and,established,criteria,and,communicating,the,results,
to,interested,users.
Assurance,is,engagement,in,which,a,practitioner,expresses,a,conclusion,designed,to,enh
ance,the,degree,of,confidence,of,the,intended,users,other,than,the,responsible,party,about,the,outco
me,of,the,evaluation,or,measurement,of,a,subject,matter,against,criteria.
Examples,of,assurance,services,are,assurance,(audit),of,financial,statements,,assurance,
of,prospective,financial,information,,assurance,of,reporting,on,internal,control,,assurance,of,sustain
ability,reporting,,and,assurance,of,electronic,commerce.
3
, 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,evaluati
ng,evidence.
1-7 Materiality:,"Omissions,or,misstatements,of,items,are,material,if,they,could,,individually,or,
collectively,,influence,the,economic,decisions,of,users,taken,on,the,basis,of,the,financial,statement
s.,Materiality,depends,on,the,size,and,nature,of,the,omission,or,misstatement ,judged,in,the,surroun
ding,circumstances.,The,size,or,nature,of,the,item,,or,a,combination,of,both,,could,be,the,determinin
g,factor.",(IASB).
Audit,risk,is,defined,as,the,risk,that,the,auditor,expresses,an,inappropriate,audit,opinion,whe
n,the,financial,statements,are,materially, misstated,(ISA,200).
The,audit,report,states,that,the,auditor,obtains,“reasonable,assurance”,whether,the,financi
al,statements,are,free,from,“material”,misstatement.,The,term,reasonable,assurance,informs,the,r
eader,that,there,is,some,level,of,risk,that,the,audit,did,not,detect,all,material,misstatements.,In,additi
on,,the,auditor’s,opinion,commonly,uses,the,wording,that,the,financial,statements,present,fairly,,“in,
all,material,respects.”,These,phrases,communicate,to,third,parties,that,the,audit,report,is,limited,to,
material,information.
1-8 On,most,audits,,it,is,not,feasible,or,cost-
effective,to,audit,all,transactions.,For,example,,in,a,small,business,,the,auditor,might,be,able,to,exa
mine,all,transactions,that,occurred,during,the,period.,However,,it,is,unlikely,that,the,owner,of,the,bu
siness,could,afford,to,pay,for,such,an,extensive,audit.,For,a,large,organization,,the,sheer,volume,of,
transactions,prevents,the,auditor,from,examining,every,transaction.,Thus,,there,is,a,trade-
off,between,the,exactness,or,precision,of,the,audit,and,its,cost.
1-9 The,major,phases,of,the,audit,are:
Client, acceptance/continuance, and, establishing, engagement, terms
Preplanning
Assess,risks,and,establish,materiality
Plan,the,audit
Consider,internal,control
Audit,business,processes,and,related,accounts
Complete,the,audit
Evaluate,results,and,issue,audit,report
1-10 The,auditor’s,understanding,of,the,entity,and,its,environment,includes,knowledge,abo
ut:,(1),the,nature,of,the,entity,,(2),its,objectives,and,strategies,,(3),its,industry,,regulatory,,and,oth
er,external,factors,,(4),its,management,,(5),its,governance,,(6),its,measurement,and,performan
ce,process,,and,(7),its,business, processes.
1-11 Sometimes,auditors,will,face,situations,where,no,standard,audit,procedure,exists,,such,as,t
he,example,from,the,text,of,verifying,the,inventory,of,reindeer.,Such,circumstances,require,that,the
,auditor,possess,creativity ,and,innovation,when,planning,and,administering,audit,procedures,wher
e,little,or,no,precedent,exists.,Every,client,is,different,,and,applying,auditing,concepts,in,different,sit
uations,requires,logic,and,common,sense,,and,frequently,creativity,and,innovation.
Solutions,to,Problems
1-12 The,memo,should,cite,the,following,facts:
There,is,a,historical,relationship,between,accounting,and,auditing.
4
Systematic Approach
12th Edition by William Messier Jr, Steven Glover,
Chapters 1 - 21 / Complete
1
,• Table of Contents
, ,
Chapter,1:,An,Introduction,to,Assurance,and,Financial,Statement,Auditing
Chapter,2:,The,Financial,Statement,Auditing,Environment
Chapter,3:,Audit,Planning,,Types,of,Audit,Tests,,and,Materiality
Chapter,4:,Risk,Assessment
Chapter,5:,Evidence,and,Documentation
Chapter,6:,Internal,Control,in,a,Financial,Statement,Audit
Chapter,7:,Auditing,Internal,Control,over,Financial,Reporting
Chapter,8:,Audit,Sampling:,An,Overview,and,Application,to,Tests,of,Controls
Chapter,9:,Audit,Sampling:,An,Application,to,Substantive,Tests,of,Account,Balances
Chapter,10:,Auditing,the,Revenue,Process
Chapter,11:,Auditing,the,Purchasing,Process
Chapter,12:,Auditing,the,Human,Resource,Management,Process
Chapter,13:,Auditing,the,Inventory,Management,Process
Chapter,14:,Auditing,the,Financing/Investing,Process:Prepaid,Expenses,,Intangible,Assets,,and,Property,,Plant,,and,Equip
ment
Chapter,15:,Auditing,the,Financing/Investing,Process:Long-
Term,Liabilities,,Stockholders’,Equity,,and,Income,Statement,Accounts
Chapter,16:,Auditing,the,Financing/Investing,Process:,Cashand,Investments
Chapter,17:,Completing,the,Audit,Engagement
Chapter,18:,Reports,on,Audited,Financial,Statements
Chapter,19:,Professional,Conduct,,Independence,,and,Quality,Management
Chapter,20:,Legal,Liability
Chapter,21:,Assurance,,Attestation,,and,Internal,Auditing,Services
2
,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,compared,to,other,accounting,courses.,
Rather,than,focusing,on,learning,the,rules,,techniques,,and,computations,required,to,prepare,finan
cial,statements,,auditing,emphasizes,learning,a,framework,of,analytical,and,logical,skills,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,consultants,,business,ma
nagers,,and,accountants,by,providing,a,framework,for,evaluating,the,usefulness,and,reliabi
lity,of,information.
1-2 There,is,a,demand,for,auditing,in,a,free-
market,economy,because,the,agency,relationship,between,an,absentee,owner,and,a,manager,pr
oduces,a,natural,conflict,of,interest,due,to,the,information,asymmetry,that,exists,between,the,own
er,and,manager.,As,a,result,,the,agent,agrees,to,be,monitored,as,part,of,his/her,employment,contr
act.,Auditing,appears,to,be,a,cost-effective,form,of,monitoring.
The,empirical,evidence,suggests,auditing,was,demanded,prior,to,government,regulation,su
ch,as,statutory,audit,requirements.,Additionally,,many,private,companies,and,other,entities,not,sub
ject,to,government,auditing,regulations,also,demand,auditing.
1-3 The,agency,relationship,between,an,owner,and,manager,produces,a,natural,conflict,of,int
erest,because,of,differences,in,the,two,parties’,goals,and,because,of,information,asymmetry,that,e
xists,between,them.,That,is,,the,manager,generally,has,more,information,about,the,‘true’,financial,
position,and,results,of,operations,of,the,entity,than,the,absentee,owner,does.,If,both,parties,seek,t
o,maximize,their,own,self-
interest,,it,is,likely,that,the,manager,will,not,act,in,the,best,interest,of,the,owner,and,may,manipulate
,the,information ,provided,to,the,owner,accordingly.
1-4 Independence,is,an,important,standard,for,auditors.,If,an,auditor,is,not,independent,of,the,
client,,users,may,lose,confidence,in,the,auditor’s,ability,to,report,truthfully,on,the,financial,statemen
ts,,and,the,auditor’s,work,loses,its,value.,From,an,agency,perspective,,if,the,principal,(owner),know
s,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,i
nformation,risk,from,the,perspective,of,the,owner.
1-5 Auditing,(broadly,defined),is,a,systematic,process,of,objectively,obtaining,and,evaluatin
g,evidence,regarding,assertions,about,economic,actions,and,events,to,ascertain,the,degree,of,co
rrespondence,between,those,assertions,and,established,criteria,and,communicating,the,results,
to,interested,users.
Assurance,is,engagement,in,which,a,practitioner,expresses,a,conclusion,designed,to,enh
ance,the,degree,of,confidence,of,the,intended,users,other,than,the,responsible,party,about,the,outco
me,of,the,evaluation,or,measurement,of,a,subject,matter,against,criteria.
Examples,of,assurance,services,are,assurance,(audit),of,financial,statements,,assurance,
of,prospective,financial,information,,assurance,of,reporting,on,internal,control,,assurance,of,sustain
ability,reporting,,and,assurance,of,electronic,commerce.
3
, 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,evaluati
ng,evidence.
1-7 Materiality:,"Omissions,or,misstatements,of,items,are,material,if,they,could,,individually,or,
collectively,,influence,the,economic,decisions,of,users,taken,on,the,basis,of,the,financial,statement
s.,Materiality,depends,on,the,size,and,nature,of,the,omission,or,misstatement ,judged,in,the,surroun
ding,circumstances.,The,size,or,nature,of,the,item,,or,a,combination,of,both,,could,be,the,determinin
g,factor.",(IASB).
Audit,risk,is,defined,as,the,risk,that,the,auditor,expresses,an,inappropriate,audit,opinion,whe
n,the,financial,statements,are,materially, misstated,(ISA,200).
The,audit,report,states,that,the,auditor,obtains,“reasonable,assurance”,whether,the,financi
al,statements,are,free,from,“material”,misstatement.,The,term,reasonable,assurance,informs,the,r
eader,that,there,is,some,level,of,risk,that,the,audit,did,not,detect,all,material,misstatements.,In,additi
on,,the,auditor’s,opinion,commonly,uses,the,wording,that,the,financial,statements,present,fairly,,“in,
all,material,respects.”,These,phrases,communicate,to,third,parties,that,the,audit,report,is,limited,to,
material,information.
1-8 On,most,audits,,it,is,not,feasible,or,cost-
effective,to,audit,all,transactions.,For,example,,in,a,small,business,,the,auditor,might,be,able,to,exa
mine,all,transactions,that,occurred,during,the,period.,However,,it,is,unlikely,that,the,owner,of,the,bu
siness,could,afford,to,pay,for,such,an,extensive,audit.,For,a,large,organization,,the,sheer,volume,of,
transactions,prevents,the,auditor,from,examining,every,transaction.,Thus,,there,is,a,trade-
off,between,the,exactness,or,precision,of,the,audit,and,its,cost.
1-9 The,major,phases,of,the,audit,are:
Client, acceptance/continuance, and, establishing, engagement, terms
Preplanning
Assess,risks,and,establish,materiality
Plan,the,audit
Consider,internal,control
Audit,business,processes,and,related,accounts
Complete,the,audit
Evaluate,results,and,issue,audit,report
1-10 The,auditor’s,understanding,of,the,entity,and,its,environment,includes,knowledge,abo
ut:,(1),the,nature,of,the,entity,,(2),its,objectives,and,strategies,,(3),its,industry,,regulatory,,and,oth
er,external,factors,,(4),its,management,,(5),its,governance,,(6),its,measurement,and,performan
ce,process,,and,(7),its,business, processes.
1-11 Sometimes,auditors,will,face,situations,where,no,standard,audit,procedure,exists,,such,as,t
he,example,from,the,text,of,verifying,the,inventory,of,reindeer.,Such,circumstances,require,that,the
,auditor,possess,creativity ,and,innovation,when,planning,and,administering,audit,procedures,wher
e,little,or,no,precedent,exists.,Every,client,is,different,,and,applying,auditing,concepts,in,different,sit
uations,requires,logic,and,common,sense,,and,frequently,creativity,and,innovation.
Solutions,to,Problems
1-12 The,memo,should,cite,the,following,facts:
There,is,a,historical,relationship,between,accounting,and,auditing.
4
