1-
rx
rx 21 / Co
rx rx
mplet
e
1
,• Table of Contents rx rx
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
rx rx rx rx rx rx rx rx rx
Chapter 2: The Financial Statement Auditing Environment
rx rx rx rx rx rx
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
rx rx rx rx rx rx rx rx rx
Chapter 4: Risk Assessment
rx rx rx
Chapter 5: Evidence and Documentation
rx rx rx rx
Chapter 6: Internal Control in a Financial Statement Audit
rx rx rx rx rx rx rx rx
Chapter 7: Auditing Internal Control over Financial Reporting
rx rx rx rx rx rx rx
Chapter 8: Audit Sampling: An Overview and Application to Tests of Controls
rx rx rx rx rx rx rx rx rx rx rx
Chapter 9: Audit Sampling: An Application to Substantive Tests of Account Balances
rx rx rx rx rx rx rx rx rx rx rx
Chapter 10: Auditing the Revenue Process
rx rx rx rx rx
Chapter 11: Auditing the Purchasing Process
rx rx rx rx rx
Chapter 12: Auditing the Human Resource Management Process
rx rx rx rx rx rx rx
Chapter 13: Auditing the Inventory Management Process
rx rx rx rx rx rx
Chapter 14: Auditing the Financing/Investing Process:Prepaid Expenses, Intangible Assets, and Property, Plant, and
rx rx rx rx rx rx rx rx rx rx rx rx
Equipment
Chapter 15: Auditing the Financing/Investing Process:Long-
rx rx rx rx rx
Term Liabilities, Stockholders’ Equity, and Income Statement Accounts
rx rx rx rx rx rx rx
Chapter 16: Auditing the Financing/Investing Process: Cashand Investments
rx rx rx rx rx rx rx
2
,Chapter 17: Completing the Audit Engagement
rx rx rx rx rx
Chapter 18: Reports on Audited Financial Statements
rx rx rx rx rx rx
Chapter 19: Professional Conduct, Independence, and Quality Management
rx rx rx rx rx rx rx
Chapter 20: Legal Liability
rx rx rx
Chapter 21: Assurance, Attestation, and Internal Auditing Services
rx rx rx rx rx rx rx
CHAPTER 1 rx
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
r x r x r x r x r x r x r x
Answers to Review Questions rx rx rx
1-1 The study of auditing is more conceptual in nature compared to other accounting courses. R
rx rx rx rx rx rx rx rx rx rx rx rx rx rx
ather than focusing on learning the rules, techniques, and computations required to prepare financia
rx rx rx rx rx rx rx rx rx rx rx rx rx
l statements, auditing emphasizes learning a framework of analytical and logicalskills to evaluate the re
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
levance and reliability of the systems and processes responsible for financial information, as well as th
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
e information itself. To be successful, students must learn the framework and then learn to use logic a
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
nd common sense in applying auditing concepts to various circumstances and situations.
rx rx rx rx rx rx rx rx rx rx rx
Understanding auditing can improve the decision making ability of consultants, businessman rx rx rx rx rx rx rx rx rx rx rx
agers, and accountants by providing a framework for evaluating the usefulness andreliability
rx rx rx rx rx rx rx rx rx rx rx rx
rx of information.rx
1-2 There is a demand for auditing in a free-rx rx rx rx rx rx rx rx
market economy because the agency relationship between an absentee owner and a manager pro
rx rx rx rx rx rx rx rx rx rx rx rx rx
duces a natural conflict of interest due to the information asymmetry that exists between the owner
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
and manager. As a result, theagent agrees to be monitored as part of his/her employment contract.
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
Auditing appears to be acost-effective form of monitoring. rx rx rx rx rx rx rx rx
The empirical evidence suggests auditing was demanded prior to government regulationsuch
rx rx rx rx rx rx rx rx rx rx rx
rx as statutory audit requirements. Additionally, many private companies and other entities not subject
rx rx rx rx rx rx rx rx rx rx rx rx
rx to government auditing regulations also demand auditing.
rx rx rx rx rx rx
3
, 1-3 The agency relationship between an owner and manager produces a natural conflict of inter
rx rx rx rx rx rx rx rx rx rx rx rx rx
est because of differences in the two parties’ goals and because of information asymmetrythat exist
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
s between them. That is, the manager generally has more information about the ‘true’financial positi
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
on and results of operations of the entity than the absentee owner does. If both parties seek to maxi
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
mize their own self- rx rx rx
interest, it is likely that the manager will not act in the best interest of the owner and may manipulate
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
the information provided to the owner accordingly.
rx rx rx rx rx rx
1-4 Independence is an important standard for auditors. If an auditor is not independent ofthe rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
client, users may lose confidence in the auditor’s ability to report truthfully on the financial statement
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
s, and the auditor’s work loses its value. From an agency perspective, if the principal (owner) knows th
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
at the auditor is not independent, the owner will not trust the auditor’s work.
rx rx rx rx rx rx rx rx rx rx rx rx rx
Thus, the agent will not hire the auditor because the auditor’s report will not be effective inreducing inf
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
ormation risk from the perspective of the owner. rx rx rx rx rx rx rx
1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and evaluating
rx rx rx rx rx rx rx rx rx rx rx rx
evidence regarding assertions about economic actions and events to ascertain thedegree of corres
rx rx rx rx rx rx rx rx rx rx rx rx rx
pondence between those assertions and established criteria and communicating the results to int
rx rx rx rx rx rx rx rx rx rx rx rx
erested users. rx
Assurance is engagement in which a practitioner expresses a conclusion designed to enhanc rx rx rx rx rx rx rx rx rx rx rx rx
e the degree of confidence of the intended users other than the responsible party aboutthe outcome o
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
f the evaluation or measurement of a subject matter against criteria.
rx rx rx rx rx rx rx rx rx rx
Examples of assurance services are assurance (audit) of financial statements, assurance of pr
rx rx rx rx rx rx rx rx rx rx rx rx
ospective financial information, assurance of reporting on internal control,assurance of sustainability r
rx rx rx rx rx rx rx rx rx rx rx rx
eporting, and assurance of electronic commerce. rx rx rx rx rx
4
rx
rx 21 / Co
rx rx
mplet
e
1
,• Table of Contents rx rx
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
rx rx rx rx rx rx rx rx rx
Chapter 2: The Financial Statement Auditing Environment
rx rx rx rx rx rx
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
rx rx rx rx rx rx rx rx rx
Chapter 4: Risk Assessment
rx rx rx
Chapter 5: Evidence and Documentation
rx rx rx rx
Chapter 6: Internal Control in a Financial Statement Audit
rx rx rx rx rx rx rx rx
Chapter 7: Auditing Internal Control over Financial Reporting
rx rx rx rx rx rx rx
Chapter 8: Audit Sampling: An Overview and Application to Tests of Controls
rx rx rx rx rx rx rx rx rx rx rx
Chapter 9: Audit Sampling: An Application to Substantive Tests of Account Balances
rx rx rx rx rx rx rx rx rx rx rx
Chapter 10: Auditing the Revenue Process
rx rx rx rx rx
Chapter 11: Auditing the Purchasing Process
rx rx rx rx rx
Chapter 12: Auditing the Human Resource Management Process
rx rx rx rx rx rx rx
Chapter 13: Auditing the Inventory Management Process
rx rx rx rx rx rx
Chapter 14: Auditing the Financing/Investing Process:Prepaid Expenses, Intangible Assets, and Property, Plant, and
rx rx rx rx rx rx rx rx rx rx rx rx
Equipment
Chapter 15: Auditing the Financing/Investing Process:Long-
rx rx rx rx rx
Term Liabilities, Stockholders’ Equity, and Income Statement Accounts
rx rx rx rx rx rx rx
Chapter 16: Auditing the Financing/Investing Process: Cashand Investments
rx rx rx rx rx rx rx
2
,Chapter 17: Completing the Audit Engagement
rx rx rx rx rx
Chapter 18: Reports on Audited Financial Statements
rx rx rx rx rx rx
Chapter 19: Professional Conduct, Independence, and Quality Management
rx rx rx rx rx rx rx
Chapter 20: Legal Liability
rx rx rx
Chapter 21: Assurance, Attestation, and Internal Auditing Services
rx rx rx rx rx rx rx
CHAPTER 1 rx
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
r x r x r x r x r x r x r x
Answers to Review Questions rx rx rx
1-1 The study of auditing is more conceptual in nature compared to other accounting courses. R
rx rx rx rx rx rx rx rx rx rx rx rx rx rx
ather than focusing on learning the rules, techniques, and computations required to prepare financia
rx rx rx rx rx rx rx rx rx rx rx rx rx
l statements, auditing emphasizes learning a framework of analytical and logicalskills to evaluate the re
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
levance and reliability of the systems and processes responsible for financial information, as well as th
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
e information itself. To be successful, students must learn the framework and then learn to use logic a
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
nd common sense in applying auditing concepts to various circumstances and situations.
rx rx rx rx rx rx rx rx rx rx rx
Understanding auditing can improve the decision making ability of consultants, businessman rx rx rx rx rx rx rx rx rx rx rx
agers, and accountants by providing a framework for evaluating the usefulness andreliability
rx rx rx rx rx rx rx rx rx rx rx rx
rx of information.rx
1-2 There is a demand for auditing in a free-rx rx rx rx rx rx rx rx
market economy because the agency relationship between an absentee owner and a manager pro
rx rx rx rx rx rx rx rx rx rx rx rx rx
duces a natural conflict of interest due to the information asymmetry that exists between the owner
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
and manager. As a result, theagent agrees to be monitored as part of his/her employment contract.
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
Auditing appears to be acost-effective form of monitoring. rx rx rx rx rx rx rx rx
The empirical evidence suggests auditing was demanded prior to government regulationsuch
rx rx rx rx rx rx rx rx rx rx rx
rx as statutory audit requirements. Additionally, many private companies and other entities not subject
rx rx rx rx rx rx rx rx rx rx rx rx
rx to government auditing regulations also demand auditing.
rx rx rx rx rx rx
3
, 1-3 The agency relationship between an owner and manager produces a natural conflict of inter
rx rx rx rx rx rx rx rx rx rx rx rx rx
est because of differences in the two parties’ goals and because of information asymmetrythat exist
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
s between them. That is, the manager generally has more information about the ‘true’financial positi
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
on and results of operations of the entity than the absentee owner does. If both parties seek to maxi
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
mize their own self- rx rx rx
interest, it is likely that the manager will not act in the best interest of the owner and may manipulate
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
the information provided to the owner accordingly.
rx rx rx rx rx rx
1-4 Independence is an important standard for auditors. If an auditor is not independent ofthe rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
client, users may lose confidence in the auditor’s ability to report truthfully on the financial statement
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
s, and the auditor’s work loses its value. From an agency perspective, if the principal (owner) knows th
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
at the auditor is not independent, the owner will not trust the auditor’s work.
rx rx rx rx rx rx rx rx rx rx rx rx rx
Thus, the agent will not hire the auditor because the auditor’s report will not be effective inreducing inf
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
ormation risk from the perspective of the owner. rx rx rx rx rx rx rx
1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and evaluating
rx rx rx rx rx rx rx rx rx rx rx rx
evidence regarding assertions about economic actions and events to ascertain thedegree of corres
rx rx rx rx rx rx rx rx rx rx rx rx rx
pondence between those assertions and established criteria and communicating the results to int
rx rx rx rx rx rx rx rx rx rx rx rx
erested users. rx
Assurance is engagement in which a practitioner expresses a conclusion designed to enhanc rx rx rx rx rx rx rx rx rx rx rx rx
e the degree of confidence of the intended users other than the responsible party aboutthe outcome o
rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx rx
f the evaluation or measurement of a subject matter against criteria.
rx rx rx rx rx rx rx rx rx rx
Examples of assurance services are assurance (audit) of financial statements, assurance of pr
rx rx rx rx rx rx rx rx rx rx rx rx
ospective financial information, assurance of reporting on internal control,assurance of sustainability r
rx rx rx rx rx rx rx rx rx rx rx rx
eporting, and assurance of electronic commerce. rx rx rx rx rx
4
