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
Equipment
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 financial 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
managers, and accountants by providing a framework for evaluating the usefulness and
reliability 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 produces a natural conflict of interest
due to the information asymmetry that exists between the owner and manager. As a result, the
agent agrees to be monitored as part of his/her employment contract. Auditing appears to be a
cost-effective form of monitoring.
The empirical evidence suggests auditing was demanded prior to government regulation
such as statutory audit requirements. Additionally, many private companies and other entities
not subject to government auditing regulations also demand auditing.
1-3 The agency relationship between an owner and manager produces a natural conflict of
interest because of differences in the two parties’ goals and because of information asymmetry
that exists 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 to 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
statements, and the auditor’s work loses its value. From an agency perspective, if the principal
(owner) knows 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 information risk from the perspective of the owner.
1-5 Auditing f(broadly fdefined) fis fa fsystematic fprocess fof fobjectively fobtaining fand
fevaluating fevidence fregarding fassertions fabout feconomic factions fand fevents fto fascertain
fthefdegree fof fcorrespondence fbetween fthose fassertions fand festablished fcriteria fand
fcommunicating fthe fresults fto finterested f users.
Assurance fis fengagement fin fwhich fa fpractitioner fexpresses fa fconclusion fdesigned
fto fenhance fthe fdegree fof fconfidence fof fthe fintended fusers fother fthan fthe fresponsible fparty
faboutfthe foutcome fof fthe fevaluation for fmeasurement fof fa fsubject fmatter fagainst fcriteria.
Examples fof fassurance fservices fare fassurance f(audit) fof ffinancial fstatements,
fassurance fof fprospective ffinancial finformation, fassurance fof freporting fon finternal fcontrol,
fassurance fof fsustainability freporting, fand fassurance fof felectronic fcommerce.
3
, 1-6 The fphrase fsystematic fprocess fimplies fthat fthere fshould fbe fa fwell-planned,
flogical fapproach ffor fconducting fan faudit fthat finvolves fobjectively fobtaining fand fevaluating
fevidence.
1-7 Materiality: f"Omissions for fmisstatements fof fitems fare fmaterial fif fthey fcould,
findividuallyfor fcollectively, finfluence fthe feconomic fdecisions fof fusers ftaken fon fthe fbasis fof
fthe ffinancial fstatements. fMateriality fdepends fon fthe fsize fand fnature fof fthe fomission for
fmisstatement fjudged fin fthe fsurrounding fcircumstances. fThe fsize for fnature fof fthe fitem, for fa
fcombination fof fboth, fcouldfbe fthe f determining ffactor." f(IASB).
Audit frisk fis fdefined fas fthe frisk fthat fthe fauditor fexpresses fan finappropriate faudit
fopinionfwhen fthe ffinancial fstatements fare f materially f misstated f(ISA f200).
The faudit freport fstates fthat fthe fauditor fobtains f“reasonable fassurance” fwhether fthe
ffinancial fstatements fare ffree ffrom f“material” fmisstatement. fThe fterm freasonable fassurance
finforms fthe freader fthat fthere fis fsome flevel fof frisk fthat fthe faudit fdid fnot fdetect fall fmaterial
fmisstatements. fIn faddition, fthe fauditor’s fopinion fcommonly fuses fthe fwording fthat fthe
ffinancial fstatements fpresent ffairly, f“in fall fmaterial frespects.” fThese fphrases fcommunicate fto
fthird fpartiesfthat fthe faudit freport fis flimited fto f material finformation.
1-8 On fmost faudits, fit fis fnot ffeasible for fcost-effective fto faudit fall ftransactions. fFor
fexample, fin fa fsmall fbusiness, fthe fauditor fmight fbe fable fto fexamine fall ftransactions fthat
foccurred fduring fthe fperiod. fHowever, fit fis funlikely fthat fthe fowner fof fthe fbusiness fcould
fafford fto fpay ffor fsuch fan fextensive faudit. fFor fa flarge forganization, fthe fsheer fvolume fof
ftransactions fprevents fthe fauditor ffrom fexamining fevery ftransaction. fThus, fthere fis fa ftrade-
off fbetween fthe fexactness for fprecisionfof fthe faudit f and fits f cost.
1-9 The fmajor fphases fof fthe faudit fare:
• Client f acceptance/continuance f and f establishing f engagement f terms
• Preplanning
• Assess frisks fand festablish fmateriality
• Plan fthe faudit
• Consider finternal fcontrol
• Audit fbusiness fprocesses fand frelated faccounts
• Complete fthe faudit
• Evaluate fresults fand fissue faudit freport
1-10 The fauditor’s funderstanding fof fthe fentity fand fits fenvironment fincludes
fknowledge fabout: f(1) fthe fnature fof fthe fentity, f(2) fits fobjectives fand fstrategies, f(3) fits
findustry, fregulatory,fand fother fexternal ffactors, f(4) fits fmanagement, f(5) fits fgovernance,
f(6) fits fmeasurement fand fperformance fprocess, fand f(7) fits fbusiness f processes.
1-11 Sometimes fauditors fwill fface fsituations fwhere fno fstandard faudit fprocedure fexists,
fsuchfas fthe fexample ffrom fthe ftext fof fverifying fthe finventory fof freindeer. fSuch
fcircumstances frequire fthat fthe fauditor fpossess fcreativity fand finnovation fwhen fplanning
fand fadministering faudit fprocedures fwhere flittle for fno fprecedent fexists. fEvery fclient fis
fdifferent, fand fapplying fauditing fconcepts fin fdifferent fsituations frequires flogic fand fcommon
fsense, fand ffrequently fcreativity fand finnovation.
Solutions fto fProblems
1-12 The fmemo fshould fcite fthe ffollowing ffacts:
• There fis fa fhistorical frelationship fbetween faccounting fand fauditing.
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
Equipment
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 financial 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
managers, and accountants by providing a framework for evaluating the usefulness and
reliability 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 produces a natural conflict of interest
due to the information asymmetry that exists between the owner and manager. As a result, the
agent agrees to be monitored as part of his/her employment contract. Auditing appears to be a
cost-effective form of monitoring.
The empirical evidence suggests auditing was demanded prior to government regulation
such as statutory audit requirements. Additionally, many private companies and other entities
not subject to government auditing regulations also demand auditing.
1-3 The agency relationship between an owner and manager produces a natural conflict of
interest because of differences in the two parties’ goals and because of information asymmetry
that exists 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 to 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
statements, and the auditor’s work loses its value. From an agency perspective, if the principal
(owner) knows 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 information risk from the perspective of the owner.
1-5 Auditing f(broadly fdefined) fis fa fsystematic fprocess fof fobjectively fobtaining fand
fevaluating fevidence fregarding fassertions fabout feconomic factions fand fevents fto fascertain
fthefdegree fof fcorrespondence fbetween fthose fassertions fand festablished fcriteria fand
fcommunicating fthe fresults fto finterested f users.
Assurance fis fengagement fin fwhich fa fpractitioner fexpresses fa fconclusion fdesigned
fto fenhance fthe fdegree fof fconfidence fof fthe fintended fusers fother fthan fthe fresponsible fparty
faboutfthe foutcome fof fthe fevaluation for fmeasurement fof fa fsubject fmatter fagainst fcriteria.
Examples fof fassurance fservices fare fassurance f(audit) fof ffinancial fstatements,
fassurance fof fprospective ffinancial finformation, fassurance fof freporting fon finternal fcontrol,
fassurance fof fsustainability freporting, fand fassurance fof felectronic fcommerce.
3
, 1-6 The fphrase fsystematic fprocess fimplies fthat fthere fshould fbe fa fwell-planned,
flogical fapproach ffor fconducting fan faudit fthat finvolves fobjectively fobtaining fand fevaluating
fevidence.
1-7 Materiality: f"Omissions for fmisstatements fof fitems fare fmaterial fif fthey fcould,
findividuallyfor fcollectively, finfluence fthe feconomic fdecisions fof fusers ftaken fon fthe fbasis fof
fthe ffinancial fstatements. fMateriality fdepends fon fthe fsize fand fnature fof fthe fomission for
fmisstatement fjudged fin fthe fsurrounding fcircumstances. fThe fsize for fnature fof fthe fitem, for fa
fcombination fof fboth, fcouldfbe fthe f determining ffactor." f(IASB).
Audit frisk fis fdefined fas fthe frisk fthat fthe fauditor fexpresses fan finappropriate faudit
fopinionfwhen fthe ffinancial fstatements fare f materially f misstated f(ISA f200).
The faudit freport fstates fthat fthe fauditor fobtains f“reasonable fassurance” fwhether fthe
ffinancial fstatements fare ffree ffrom f“material” fmisstatement. fThe fterm freasonable fassurance
finforms fthe freader fthat fthere fis fsome flevel fof frisk fthat fthe faudit fdid fnot fdetect fall fmaterial
fmisstatements. fIn faddition, fthe fauditor’s fopinion fcommonly fuses fthe fwording fthat fthe
ffinancial fstatements fpresent ffairly, f“in fall fmaterial frespects.” fThese fphrases fcommunicate fto
fthird fpartiesfthat fthe faudit freport fis flimited fto f material finformation.
1-8 On fmost faudits, fit fis fnot ffeasible for fcost-effective fto faudit fall ftransactions. fFor
fexample, fin fa fsmall fbusiness, fthe fauditor fmight fbe fable fto fexamine fall ftransactions fthat
foccurred fduring fthe fperiod. fHowever, fit fis funlikely fthat fthe fowner fof fthe fbusiness fcould
fafford fto fpay ffor fsuch fan fextensive faudit. fFor fa flarge forganization, fthe fsheer fvolume fof
ftransactions fprevents fthe fauditor ffrom fexamining fevery ftransaction. fThus, fthere fis fa ftrade-
off fbetween fthe fexactness for fprecisionfof fthe faudit f and fits f cost.
1-9 The fmajor fphases fof fthe faudit fare:
• Client f acceptance/continuance f and f establishing f engagement f terms
• Preplanning
• Assess frisks fand festablish fmateriality
• Plan fthe faudit
• Consider finternal fcontrol
• Audit fbusiness fprocesses fand frelated faccounts
• Complete fthe faudit
• Evaluate fresults fand fissue faudit freport
1-10 The fauditor’s funderstanding fof fthe fentity fand fits fenvironment fincludes
fknowledge fabout: f(1) fthe fnature fof fthe fentity, f(2) fits fobjectives fand fstrategies, f(3) fits
findustry, fregulatory,fand fother fexternal ffactors, f(4) fits fmanagement, f(5) fits fgovernance,
f(6) fits fmeasurement fand fperformance fprocess, fand f(7) fits fbusiness f processes.
1-11 Sometimes fauditors fwill fface fsituations fwhere fno fstandard faudit fprocedure fexists,
fsuchfas fthe fexample ffrom fthe ftext fof fverifying fthe finventory fof freindeer. fSuch
fcircumstances frequire fthat fthe fauditor fpossess fcreativity fand finnovation fwhen fplanning
fand fadministering faudit fprocedures fwhere flittle for fno fprecedent fexists. fEvery fclient fis
fdifferent, fand fapplying fauditing fconcepts fin fdifferent fsituations frequires flogic fand fcommon
fsense, fand ffrequently fcreativity fand finnovation.
Solutions fto fProblems
1-12 The fmemo fshould fcite fthe ffollowing ffacts:
• There fis fa fhistorical frelationship fbetween faccounting fand fauditing.
4
