1
Solutions Manual for Auditing A Risk Based Approach 12th US
Edition Zehms
Solutions for Chapter 1
Solutions Manual Reconciliation from 11e to 12e
Question # for 11e Deleted/replaced/updated/new? Question # for 12e
1 1
2 Deleted & replaced with 2
question about regulatory
enforcement
3 3
4 4
5 5
6 6
7 7
8 Updated from a generic 8
question to one specifically
focused on the Theranos
fraud.
9 9
10 10
11 11
12 12
13 13
14 14
15 15
16 16
17 17
18 18
19 19
20 20
21 21
22 Updated to reflect 2021 22
IESB Code of Ethics.
23 23
24 24
25 25
26 26
27 27
28 28
29 29
1-1
,2
30 30
40 Changed order of learning 31
objectives; same question
41 Changed order of learning 32
objectives; same question
42 Changed order of learning 33
objectives; same question
31 34
32 Updated – added 35
additional content on
poor judgments as
documented in a PCAOB
enforcement release
33 36
34 37
35 38
36 39
37 40
38 41
39 42
New fraud case about 43
Elizabeth Holmes &
Theranos
43 44
44 45
45 46
46 47
47 48
48 49
49 50
50 Updated to a 2021 51
PCAOB enforcement case
illustrating the same
points.
New case investigating the 52
outcome of the
Holmes/Theranos trial.
New case simulation on 53
data analytics and CPA
exam written
communication.
51 Deleted Academic
Research case; eliminating
this feature.
1-2
,3
52 Deleted Academic
Research case;
eliminating this feature.
Answers to Check Your Basic Knowledge Questions
1-1 T
1-2 F
1-3 d
1-4 b
1-5 T
1-6 F
1-7 a
1-8 b
1-9 T
1-10 F
1-11 d
1-12 c
1-13 T
1-14 T
1-15 b
1-16 d
1-17 T
1-18 F
1-19 d
1-20 c
1-21 T
1-22 T
1-23 b
1-24 a
Review Questions and Short Cases
1-1
The objective of external auditing is to provide opinions on the reliability of the
financial statements and, as part of an integrated audit, provide opinions on internal
control effectiveness. The value of the external auditing profession is affirmed when the
public has confidence in its objectivity and the accuracy of its opinions. The capital
markets depend on accurate, reliable, and objective (neutral) data that portray the
economic nature of an entity’s business and in turn provide a base to judge current
progress toward long-term objectives. If the market does not receive reliable data,
investors lose confidence in the system, make poor decisions, and may lose a great deal
of money; ultimately, the system may fail. By providing an independent audit
1-3
, 4
opinion, the capital markets have assurance that the financial data that they are basing
their decisions on are accurate.
1-2
The economy benefits from regulatory enforcement because people know that the
government is devoting resources to protecting them, which makes people more likely to
invest with confidence. By investing with confidence, investors make capital available to
companies who can use that capital in profitable ways that benefit the entire society
through products/services, jobs, and taxes. The economy benefits from the auditing
profession because the assurance that audits provide also makes people more likely to
invest with confidence.
1-3
Audit services are demanded because there is:
● Potential bias in providing information
● Remoteness between a user and the organization or trading partner
● Such complexity in the transaction, information, or processing systems that it is
difficult to determine their proper presentation without a review by an independent
expert
● Need to limit negative consequences that arise from relying on inaccurate
information 1-4
The audit enhances the quality of financial statements because the user has assurance
that an independent, qualified professional has examined the financial statements and has
rendered an opinion on their fairness. The independence and expertise of the auditor
serve as a quality control function to overcome the potential bias of management in
presenting the financial statements in a manner that most flatters an assessment of their
performance. The audit is designed to add credibility to the financial statements.
An audit does not necessarily guarantee a fair presentation of a company's financial
statements, although it does increase the likelihood that there are no material
misstatements in the company's financial statements. The audit provides reasonable, but
not absolute, assurance about the accuracy of the financial statements. The caveats about
fairness exist for two reasons:
● Fairness is judged within the applicable financial reporting framework. Some
question whether GAAP or IFRS results in the fairest possible presentations in
all situations.
● Although designed to detect material fraud, it might be possible that a well-
executed audit may still fail to detect fraud.
1-4
Solutions Manual for Auditing A Risk Based Approach 12th US
Edition Zehms
Solutions for Chapter 1
Solutions Manual Reconciliation from 11e to 12e
Question # for 11e Deleted/replaced/updated/new? Question # for 12e
1 1
2 Deleted & replaced with 2
question about regulatory
enforcement
3 3
4 4
5 5
6 6
7 7
8 Updated from a generic 8
question to one specifically
focused on the Theranos
fraud.
9 9
10 10
11 11
12 12
13 13
14 14
15 15
16 16
17 17
18 18
19 19
20 20
21 21
22 Updated to reflect 2021 22
IESB Code of Ethics.
23 23
24 24
25 25
26 26
27 27
28 28
29 29
1-1
,2
30 30
40 Changed order of learning 31
objectives; same question
41 Changed order of learning 32
objectives; same question
42 Changed order of learning 33
objectives; same question
31 34
32 Updated – added 35
additional content on
poor judgments as
documented in a PCAOB
enforcement release
33 36
34 37
35 38
36 39
37 40
38 41
39 42
New fraud case about 43
Elizabeth Holmes &
Theranos
43 44
44 45
45 46
46 47
47 48
48 49
49 50
50 Updated to a 2021 51
PCAOB enforcement case
illustrating the same
points.
New case investigating the 52
outcome of the
Holmes/Theranos trial.
New case simulation on 53
data analytics and CPA
exam written
communication.
51 Deleted Academic
Research case; eliminating
this feature.
1-2
,3
52 Deleted Academic
Research case;
eliminating this feature.
Answers to Check Your Basic Knowledge Questions
1-1 T
1-2 F
1-3 d
1-4 b
1-5 T
1-6 F
1-7 a
1-8 b
1-9 T
1-10 F
1-11 d
1-12 c
1-13 T
1-14 T
1-15 b
1-16 d
1-17 T
1-18 F
1-19 d
1-20 c
1-21 T
1-22 T
1-23 b
1-24 a
Review Questions and Short Cases
1-1
The objective of external auditing is to provide opinions on the reliability of the
financial statements and, as part of an integrated audit, provide opinions on internal
control effectiveness. The value of the external auditing profession is affirmed when the
public has confidence in its objectivity and the accuracy of its opinions. The capital
markets depend on accurate, reliable, and objective (neutral) data that portray the
economic nature of an entity’s business and in turn provide a base to judge current
progress toward long-term objectives. If the market does not receive reliable data,
investors lose confidence in the system, make poor decisions, and may lose a great deal
of money; ultimately, the system may fail. By providing an independent audit
1-3
, 4
opinion, the capital markets have assurance that the financial data that they are basing
their decisions on are accurate.
1-2
The economy benefits from regulatory enforcement because people know that the
government is devoting resources to protecting them, which makes people more likely to
invest with confidence. By investing with confidence, investors make capital available to
companies who can use that capital in profitable ways that benefit the entire society
through products/services, jobs, and taxes. The economy benefits from the auditing
profession because the assurance that audits provide also makes people more likely to
invest with confidence.
1-3
Audit services are demanded because there is:
● Potential bias in providing information
● Remoteness between a user and the organization or trading partner
● Such complexity in the transaction, information, or processing systems that it is
difficult to determine their proper presentation without a review by an independent
expert
● Need to limit negative consequences that arise from relying on inaccurate
information 1-4
The audit enhances the quality of financial statements because the user has assurance
that an independent, qualified professional has examined the financial statements and has
rendered an opinion on their fairness. The independence and expertise of the auditor
serve as a quality control function to overcome the potential bias of management in
presenting the financial statements in a manner that most flatters an assessment of their
performance. The audit is designed to add credibility to the financial statements.
An audit does not necessarily guarantee a fair presentation of a company's financial
statements, although it does increase the likelihood that there are no material
misstatements in the company's financial statements. The audit provides reasonable, but
not absolute, assurance about the accuracy of the financial statements. The caveats about
fairness exist for two reasons:
● Fairness is judged within the applicable financial reporting framework. Some
question whether GAAP or IFRS results in the fairest possible presentations in
all situations.
● Although designed to detect material fraud, it might be possible that a well-
executed audit may still fail to detect fraud.
1-4
