SolutionManualforAuditing&AssuranceServicesASystematic
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Approach 12thEditionbyWilliamMessierJr,StevenGlover,Douglas
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Prawit jk jk
,SOLUTION MANUAL FOR jk jk
Auditing & Assurance Services A Systematic Approach 12e
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jMessier Chapter 1-21
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CHAPTER1 jk
AN INTRODUCTION TO ASSURANCE AND FINANCIAL
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STATEMENT AUDITING
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AnswerstoReviewQuestions jk jk jk
1-1 The study of auditing is more conceptual in nature as compared to other accounting
jk jk jk jk jk jk jk jk jk jk jk jk jk
j courses. Rather than focusing on learning the rules, techniques, and
k j k j k j k j k j k j k j k j k j k
computations required to prepare financial statements, auditing emphasizes
j k j k jk jk jk jk jk jk
learning a framework of analytical and logical skills. This framework enables
jk jk jk j k jk jk jk jk jk jk jk
auditors to evaluate the relevance and reliability of the systems and processes
jk jk jk jk j k jk j k jk jk jk jk jk
responsible for financial information as well as the information itself. To be
jk jk jk j k j k j k j k j k j k j k j k j k
successful, students must learn the framework and then learn to use logic
j k j k j k j k j k j k j k j k j k j k j k j k
and common sense in applying auditing concepts to various circumstances
j k j k j k j k j k j k j k j k j k j k
and situations. Understanding auditing can improve the decision-making
j k j k j k j k j k j k jk jk
ability of consultants, business managers, and accountants by providing a
j k jk jk jk jk jk j k jk jk jk
framework for evaluating the usefulness and reliability of
jk information—an jk jk jk jk jk jk jk j k
important task in many different business contexts.
jk jk jk jk jk jk jk
1-2 There is a demand for auditing in a free-market economy because the agency
jk jk jk j k jk jk j k jk jk jk jk jk
relationship between an absentee owner and a manager produces a natural
j k jk jk j k jk j k j k j k j k jk jk
conflict of interest due to the information asymmetry that exists between these
j k j k jk jk jk j k jk jk jk jk jk jk
two parties. As a result, the agent agrees to be monitored as part of his/her
jk jk j k jk jk jk jk jk jk jk jk jk jk jk jk
employment contract. Auditing appears to be a cost-effective form of
jk jk j k j k j k j k j k j k j k j k
monitoring. The empirical evidence suggests that auditing was demanded prior
j k j k j k j k j k jk jk jk jk jk
to government regulation. In 1926, before it was required by law, independent
jk jk jk jk jk j k jk jk jk jk jk jk
auditors audited 82 percent of the companies on the New York Stock Exchange.
jk jk jk jk jk jk j k j k j k j k j k j k j k
Additionally, many private companies
j k and municipalities not subject to j k j k j k j k j k jk jk jk
government regulations, such as the Securities Act of 1933 and Securities
j k jk jk j k jk jk jk j k jk jk jk
Exchange Act of 1934, also purchase various forms of auditing and assurance
jk jk j k jk jk jk jk jk jk jk j k jk
services. Many private companies seek out financial statement audits in order to
jk jk jk jk jk jk jk jk jk j k j k j k
secure financing for their operations. Companies preparing to go public also
j k j k j k j k jk j k j k j k j k j k j k
benefit from having an audit.
jk jk jk jk jk
1-3 The agency relationship between an owner and manager produces a natural
jk jk jk jk jk jk jk jk jk jk
conflict of interest because of differences in the two parties’ goals and because
j k j k j k j k j k j k j k j k j k j k j k jk j k
of the information asymmetry that exists between them. That is, the
j k j k j k j k j k j k j k j k j k j k j k
j manager likely has different goals than the owner, and generally has more
k j k j k j k jk jk jk jk jk jk jk jk
information about the "true" financial position and results of operations of
jk jk jk jk j k j k j k j k j k j k j k
the entity than the absentee owner does. If both parties seek to maximize
j k j k j k j k j k j k j k jk j k j k j k jk j k
their own self-interest, the manager may not act in the best interest of the owner
j k j k j k jk jk j k jk j k jk jk jk jk jk jk jk
and may manipulate the information provided to the owner accordingly.
jk jk jk jk jk jk jk j k k
j jk
,1-4 Independence is a bedrock principle for auditors. If an auditor is not independent of jk jk jk jk jk jk jk jk jk jk jk jk jk
j the client, users may lose confidence in the auditor’s ability to report objectively
k jk jk jk jk jk jk jk jk jk jk jk jk
and truthfully on the financial statements, and the auditor’s work loses its value.
jk j k jk jk jk jk jk jk jk jk jk jk jk
From an agency perspective, if the principal (owner) knows that the auditor is not
jk jk j k jk jk jk jk jk jk jk jk jk jk jk
j independent, the owner will not trust the auditor’s work. Thus, the agent
k j k j k j k j k j k j k j k j k j k j k j k
will not hire the auditor because the auditor’s report will not be effective in
j k j k j k j k j k j k j k j k j k j k j k j k j k j k
reducing information risk from the perspective of the owner. Auditor
j k j k j k j k j k j k j k j k jk j k
independence is also a regulatoryrequirement.
j k j k j k j k j k k
j
1-5 Auditing (broadly defined) is a systematic process of (1) objectively obtaining
j k j k j k j k j k j k j k j k j k j k
and evaluating evidence regarding assertions about economic actions and events
j k j k jk jk jk jk jk jk jk jk
to ascertain the degree of correspondence between those assertions and
jk j k j k j k j k j k j k j k j k j k
established criteria and (2) communicating the results to interested users.
j k j k jk jk jk jk jk jk jk jk
Attest services occur when a practitioner issues a report on subject matter,
j k j k j k j k j k j k j k j k j k j k j k
or an assertion about subject matter, that is the responsibility of another party.
j k j k j k jk jk jk jk jk jk jk jk jk jk
Assurance services are independent professional services that improve the j k j k jk j k j k j k j k j k
quality of information, or its context, for decision makers.
j k j k jk jk jk jk jk jk jk
1-6 Auditing is a specific form of ―attest service,‖ which in turn is a specific
j k j k j k j k j k j k j k j k j k j k j k j k j k
category of
j k j k
―assurance service.‖ In other words, the phrase ―assurance services‖ j k j k j k j k j k j k j k j k
constitutes the broadest category of professional services provided by CPAs
j k j k jk j k j k j k j k j k j k j k
that serve to improve the quality or context of information for decision making
j k j k j k j k jk jk jk j k jk jk jk j k j k
for other parties. Attest services constitute a more specific category of
j k j k j k j k j k j k j k j k j k j k j k
assurance that CPAs can
j k provide. These services are intended to reduce j k j k j k j k jk jk jk jk jk jk
information risk to parties relying on information provided by a party that is
jk jk jk jk jk jk j k jk jk jk jk jk jk
creating, or making assertions about, subject matter of interest. CPAs can
jk jk jk jk jk jk j k j k j k j k j k
j provide attest services relating to a wide variety of subject matter (or
k j k j k j k j k j k j k j k j k j k j k j k
assertions about that subject matter) to reduce the information risk to third
j k j k j k j k j k j k j k j k j k j k jk jk
parties. One such subject matter is a set of financial statements. When a CPA
jk jk jk jk jk jk jk jk jk jk jk jk jk j k
provides a very in-depth, detailed attest service that follows relevant standards to
jk jk jk jk jk jk jk jk jk jk jk j k
j constitute a complete examination of a set of financial statements and
k j k j k j k j k j k j k j k j k j k j k
jrelated assertions, this is called a financial statement ―audit.‖
k j k jk jk jk jk jk jk jk
1-7 Audit risk is defined as the risk that the auditor may unknowingly fail
j k j k j k j k j k j k j k j k j k j k j k j k
j to appropriately modify his or her opinion on financial statements that are
k j k j k j k j k j k j k j k j k j k j k j k
materially misstated (AS 1101). Materiality is defined as "the magnitude
j k j k j k j k j k j k j k j k j k j k
of an omission or misstatement of accounting information that, in the
j k j k j k j k j k j k j k j k j k j k j k
light of surrounding circumstances, makes it probable that the judgment of a
j k j k j k j k j k j k j k j k j k j k j k j k
reasonable person relying on the information would have been changed or
j k j k j k j k jk jk jk jk jk jk jk
influenced by the omission or misstatement" (FASB Statement of Financial
jk jk jk jk jk j k j k j k j k j k
Accounting Concepts No. 8, Chapter 3: Qualitative Characteristics of Useful
j k j k j k j k j k j k j k j k j k j k
Accounting Information, which is pending revision at the time of the
j k j k j k j k j k j k j k j k j k j k j k
writing of this book per the Board’s November 2017 decision to revert to a
j k j k j k j k j k j k j k j k j k j k jk jk jk jk
definition of materiality similar to the one found in superseded Concept No. 2).
jk jk jk jk jk jk jk jk jk jk j k jk jk
The concept of materiality is reflected in the wording of the auditor's
j k j k j k j k j k j k j k j k j k j k j k
standard audit report through the phrase "the financial statements present
j k j k j k j k j k j k j k j k j k j k
fairly in all
j k material respects." This is the manner in which the auditor
j k j k j k jk jk jk jk jk jk jk jk jk
communicates the notion of materiality to the users of the auditor's report.
jk jk jk j k j k j k j k j k j k j k j k j k
j The auditor's standard report states that the audit provides only reasonable
k j k j k j k j k jk jk jk jk jk jk
assurance that the financial statements
jk jk jk jk jk
, do not contain material misstatements. The term "reasonable assurance" implies that
jk jk jk jk jk jk jk jk jk jk
j there is some risk that a material misstatement could be present in
k j k j k j k j k j k j k j k j k j k j k j k
jthe financial statements and the auditor will fail
k j k j k jk jk jk jk jk
jk jk jk jk jk jk jk jk jk jk
Approach 12thEditionbyWilliamMessierJr,StevenGlover,Douglas
jk j k jk jk jk jk jk jk jk jk jk
Prawit jk jk
,SOLUTION MANUAL FOR jk jk
Auditing & Assurance Services A Systematic Approach 12e
jk jk jk jk jk jk jk
jMessier Chapter 1-21
k jk jk
CHAPTER1 jk
AN INTRODUCTION TO ASSURANCE AND FINANCIAL
jk jk jk jk jk
STATEMENT AUDITING
j k jk
AnswerstoReviewQuestions jk jk jk
1-1 The study of auditing is more conceptual in nature as compared to other accounting
jk jk jk jk jk jk jk jk jk jk jk jk jk
j courses. Rather than focusing on learning the rules, techniques, and
k j k j k j k j k j k j k j k j k j k
computations required to prepare financial statements, auditing emphasizes
j k j k jk jk jk jk jk jk
learning a framework of analytical and logical skills. This framework enables
jk jk jk j k jk jk jk jk jk jk jk
auditors to evaluate the relevance and reliability of the systems and processes
jk jk jk jk j k jk j k jk jk jk jk jk
responsible for financial information as well as the information itself. To be
jk jk jk j k j k j k j k j k j k j k j k j k
successful, students must learn the framework and then learn to use logic
j k j k j k j k j k j k j k j k j k j k j k j k
and common sense in applying auditing concepts to various circumstances
j k j k j k j k j k j k j k j k j k j k
and situations. Understanding auditing can improve the decision-making
j k j k j k j k j k j k jk jk
ability of consultants, business managers, and accountants by providing a
j k jk jk jk jk jk j k jk jk jk
framework for evaluating the usefulness and reliability of
jk information—an jk jk jk jk jk jk jk j k
important task in many different business contexts.
jk jk jk jk jk jk jk
1-2 There is a demand for auditing in a free-market economy because the agency
jk jk jk j k jk jk j k jk jk jk jk jk
relationship between an absentee owner and a manager produces a natural
j k jk jk j k jk j k j k j k j k jk jk
conflict of interest due to the information asymmetry that exists between these
j k j k jk jk jk j k jk jk jk jk jk jk
two parties. As a result, the agent agrees to be monitored as part of his/her
jk jk j k jk jk jk jk jk jk jk jk jk jk jk jk
employment contract. Auditing appears to be a cost-effective form of
jk jk j k j k j k j k j k j k j k j k
monitoring. The empirical evidence suggests that auditing was demanded prior
j k j k j k j k j k jk jk jk jk jk
to government regulation. In 1926, before it was required by law, independent
jk jk jk jk jk j k jk jk jk jk jk jk
auditors audited 82 percent of the companies on the New York Stock Exchange.
jk jk jk jk jk jk j k j k j k j k j k j k j k
Additionally, many private companies
j k and municipalities not subject to j k j k j k j k j k jk jk jk
government regulations, such as the Securities Act of 1933 and Securities
j k jk jk j k jk jk jk j k jk jk jk
Exchange Act of 1934, also purchase various forms of auditing and assurance
jk jk j k jk jk jk jk jk jk jk j k jk
services. Many private companies seek out financial statement audits in order to
jk jk jk jk jk jk jk jk jk j k j k j k
secure financing for their operations. Companies preparing to go public also
j k j k j k j k jk j k j k j k j k j k j k
benefit from having an audit.
jk jk jk jk jk
1-3 The agency relationship between an owner and manager produces a natural
jk jk jk jk jk jk jk jk jk jk
conflict of interest because of differences in the two parties’ goals and because
j k j k j k j k j k j k j k j k j k j k j k jk j k
of the information asymmetry that exists between them. That is, the
j k j k j k j k j k j k j k j k j k j k j k
j manager likely has different goals than the owner, and generally has more
k j k j k j k jk jk jk jk jk jk jk jk
information about the "true" financial position and results of operations of
jk jk jk jk j k j k j k j k j k j k j k
the entity than the absentee owner does. If both parties seek to maximize
j k j k j k j k j k j k j k jk j k j k j k jk j k
their own self-interest, the manager may not act in the best interest of the owner
j k j k j k jk jk j k jk j k jk jk jk jk jk jk jk
and may manipulate the information provided to the owner accordingly.
jk jk jk jk jk jk jk j k k
j jk
,1-4 Independence is a bedrock principle for auditors. If an auditor is not independent of jk jk jk jk jk jk jk jk jk jk jk jk jk
j the client, users may lose confidence in the auditor’s ability to report objectively
k jk jk jk jk jk jk jk jk jk jk jk jk
and truthfully on the financial statements, and the auditor’s work loses its value.
jk j k jk jk jk jk jk jk jk jk jk jk jk
From an agency perspective, if the principal (owner) knows that the auditor is not
jk jk j k jk jk jk jk jk jk jk jk jk jk jk
j independent, the owner will not trust the auditor’s work. Thus, the agent
k j k j k j k j k j k j k j k j k j k j k j k
will not hire the auditor because the auditor’s report will not be effective in
j k j k j k j k j k j k j k j k j k j k j k j k j k j k
reducing information risk from the perspective of the owner. Auditor
j k j k j k j k j k j k j k j k jk j k
independence is also a regulatoryrequirement.
j k j k j k j k j k k
j
1-5 Auditing (broadly defined) is a systematic process of (1) objectively obtaining
j k j k j k j k j k j k j k j k j k j k
and evaluating evidence regarding assertions about economic actions and events
j k j k jk jk jk jk jk jk jk jk
to ascertain the degree of correspondence between those assertions and
jk j k j k j k j k j k j k j k j k j k
established criteria and (2) communicating the results to interested users.
j k j k jk jk jk jk jk jk jk jk
Attest services occur when a practitioner issues a report on subject matter,
j k j k j k j k j k j k j k j k j k j k j k
or an assertion about subject matter, that is the responsibility of another party.
j k j k j k jk jk jk jk jk jk jk jk jk jk
Assurance services are independent professional services that improve the j k j k jk j k j k j k j k j k
quality of information, or its context, for decision makers.
j k j k jk jk jk jk jk jk jk
1-6 Auditing is a specific form of ―attest service,‖ which in turn is a specific
j k j k j k j k j k j k j k j k j k j k j k j k j k
category of
j k j k
―assurance service.‖ In other words, the phrase ―assurance services‖ j k j k j k j k j k j k j k j k
constitutes the broadest category of professional services provided by CPAs
j k j k jk j k j k j k j k j k j k j k
that serve to improve the quality or context of information for decision making
j k j k j k j k jk jk jk j k jk jk jk j k j k
for other parties. Attest services constitute a more specific category of
j k j k j k j k j k j k j k j k j k j k j k
assurance that CPAs can
j k provide. These services are intended to reduce j k j k j k j k jk jk jk jk jk jk
information risk to parties relying on information provided by a party that is
jk jk jk jk jk jk j k jk jk jk jk jk jk
creating, or making assertions about, subject matter of interest. CPAs can
jk jk jk jk jk jk j k j k j k j k j k
j provide attest services relating to a wide variety of subject matter (or
k j k j k j k j k j k j k j k j k j k j k j k
assertions about that subject matter) to reduce the information risk to third
j k j k j k j k j k j k j k j k j k j k jk jk
parties. One such subject matter is a set of financial statements. When a CPA
jk jk jk jk jk jk jk jk jk jk jk jk jk j k
provides a very in-depth, detailed attest service that follows relevant standards to
jk jk jk jk jk jk jk jk jk jk jk j k
j constitute a complete examination of a set of financial statements and
k j k j k j k j k j k j k j k j k j k j k
jrelated assertions, this is called a financial statement ―audit.‖
k j k jk jk jk jk jk jk jk
1-7 Audit risk is defined as the risk that the auditor may unknowingly fail
j k j k j k j k j k j k j k j k j k j k j k j k
j to appropriately modify his or her opinion on financial statements that are
k j k j k j k j k j k j k j k j k j k j k j k
materially misstated (AS 1101). Materiality is defined as "the magnitude
j k j k j k j k j k j k j k j k j k j k
of an omission or misstatement of accounting information that, in the
j k j k j k j k j k j k j k j k j k j k j k
light of surrounding circumstances, makes it probable that the judgment of a
j k j k j k j k j k j k j k j k j k j k j k j k
reasonable person relying on the information would have been changed or
j k j k j k j k jk jk jk jk jk jk jk
influenced by the omission or misstatement" (FASB Statement of Financial
jk jk jk jk jk j k j k j k j k j k
Accounting Concepts No. 8, Chapter 3: Qualitative Characteristics of Useful
j k j k j k j k j k j k j k j k j k j k
Accounting Information, which is pending revision at the time of the
j k j k j k j k j k j k j k j k j k j k j k
writing of this book per the Board’s November 2017 decision to revert to a
j k j k j k j k j k j k j k j k j k j k jk jk jk jk
definition of materiality similar to the one found in superseded Concept No. 2).
jk jk jk jk jk jk jk jk jk jk j k jk jk
The concept of materiality is reflected in the wording of the auditor's
j k j k j k j k j k j k j k j k j k j k j k
standard audit report through the phrase "the financial statements present
j k j k j k j k j k j k j k j k j k j k
fairly in all
j k material respects." This is the manner in which the auditor
j k j k j k jk jk jk jk jk jk jk jk jk
communicates the notion of materiality to the users of the auditor's report.
jk jk jk j k j k j k j k j k j k j k j k j k
j The auditor's standard report states that the audit provides only reasonable
k j k j k j k j k jk jk jk jk jk jk
assurance that the financial statements
jk jk jk jk jk
, do not contain material misstatements. The term "reasonable assurance" implies that
jk jk jk jk jk jk jk jk jk jk
j there is some risk that a material misstatement could be present in
k j k j k j k j k j k j k j k j k j k j k j k
jthe financial statements and the auditor will fail
k j k j k jk jk jk jk jk
