Solution Manual for Auditing & Assurance Services A Systematic Approach 12th Editiont

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,• TableofContents V




Chapter1:AnIntroductiontoAssuranceandFinancialStatementAuditing
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Chapter 2: The Financial StatementfAuditing Environment
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Chapter3:AuditPlanning,TypesofAuditTests,andMateriality
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Chapter4: Risk Assessment
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Chapter5:EvidenceandDocumentation
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Chapter 6: Internal Control infa Financial StatementfAudit
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V Chapter7:AuditingInternalControloverFinancialReporting
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Chapter8:AuditSampling:AnOverviewandApplicationftofTests ofControls
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V Chapter9:AuditSampling:AnApplicationtoSubstantiveTestsofAccountBalances
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Chapter10: Auditingfthe Revenue Process
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Chapter11:AuditingfthePurchasingProcess
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Chapter12:AuditingtheHumanfResourceManagementProcess
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Chapter 13: Auditing the Inventory Management Process
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Chapter14:AuditingtheFinancing/InvestingProcess:PrepaidExpenses, IntangibleAssets,andProperty,Plant,andEquip ment
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Chapter15:AuditingftheFinancing/InvestingProcess:Long-
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Term Liabilities, Stockholders’Equity, and Income Statement Accounts
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V Chapter16:AuditingtheFinancing/InvestingProcess:CashandInvestments
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Chapter17: CompletingthefAuditfEngagement
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Chapter18:ReportsonfAuditedFinancialStatements
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Chapter19:ProfessionalConduct,Independence,andQualityManagement
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Chapter20: Legal Liability
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Chapter21:Assurance,Attestation,andInternalAuditingServices
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,CHAPTERf1

AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
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AnswerstoReviewQuestions V V V




1-1 Thestudyof auditingis more conceptualin nature compared to other accounting courses. R ather V V V V V V V V V V V V V V V




than focusing on learning the rules, techniques, and computations required tofpreparefinancia
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lstatements,auditingemphasizes learningaframeworkfofanalyticalandlogicalskillsfto evaluatethe
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Vrelevanceandreliabilityofthesystemsandprocessesresponsibleforfinancialinformation,aswell V V V V V V V V V V V V V




asfthe information itself. To be successful, students mustflearn the framework and then learnto usefl
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ogicfandcommonsenseinapplyingauditingconceptstofvariousfcircumstances andsituations.
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Understanding auditing canimprovefthedecision making ability ofconsultants, businessma V V V V V V




nagers, and accountants by providing a frameworkffor evaluating the usefulness andreliabil
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ityofinformation.
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1-2 Thereisademandforauditinginafree- V V V V V V V V




market economy because the agency relationship between an absentee owner and a manager pro duces a
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natural conflict ofinterestfdue to thefinformation asymmetry that exists between the owner and manager.
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As a result, theagentfagrees to be monitored asfpart of his/her employmentfcontract. Auditingappearsto
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befacost-effectiveform of monitoring.
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Theempirical evidence suggestsauditing was demandedprior togovernmentfregulationsuc h V V V V V V




as statutory auditfrequirements. Additionally, many private companies and other entities not subje
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ctftogovernment auditingregulations alsodemandauditing.
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1-3 The agency relationship between an owner and manager produces a natural conflict of inte rest V V V V V V V V V V V V V V




because of differencesfin the two parties‘ goals and because of informationfasymmetrythatfexi sts
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between them. That is, the manager generally hasfmore information aboutfthe ‗true‘financial po sition
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and resultsfof operations ofthefentity than the absentee owner does. If both parties seek to m aximizetheir
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ownself-
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interest, itfisflikely thatfthe manager will not act in the best interestfof the owner and may manipulate t
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heinformation provided totheowner accordingly.
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1-4 Independence isfanimportantfstandard for auditors. If an auditor is notindependent ofthe c lient, V V V V V V V V V V V V V




users maylosefconfidence in the auditor‘s ability to report truthfully on the financial statements
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,and theauditor‘s workflosesitsvalue.From anagency perspective, ifthe principal (owner)knowsft
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hatftheauditorisnotfindependent,theownerwillnottrustthefauditor‘swork.
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Thus,theagentwillnot hire theauditor becausethefauditor‘s reportfwillnotfbeeffectiveinreducing inf
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Vormation riskffromthefperspective of the owner. V V V V V




1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and evaluatin V V V V V V V V V V V




gevidence regarding assertions aboutfeconomicfactionsfand eventstoascertain thedegree of cor
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respondence between those assertions and established criteria and communicating the results t
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ointerested users.
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Assurancefis engagement in which a practitioner expresses a conclusion designed to enha V V V V V V V V V V V




ncethedegreeofconfidence of theintended users other thantheresponsible party aboutthe outcom
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eoftheevaluationormeasurementfofasubjectmatteragainstfcriteria.
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Examples of assurance services arefassurance (audit) of financial statements, assurance o f V V V V V V V V V V V




prospective financial information, assurance of reporting oninternal control,assurance of sustaina bility
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reporting, andassurance of electronicfcommerce.
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, 1-6 The phrase systematic process impliesfthatfthere should befa well-
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planned,logical approachforconductinganauditfthatinvolvesobjectivelyfobtainingfandevaluati
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Vngevidence.

1-7 Materiality: "Omissions or misstatements of itemsfare material if they could, individuallyor c V V V V V V V V V V V




ollectively, influence the economic decisions of users taken on the basisfof the financial statements.
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Materiality depends on the sizefand nature of the omission or misstatement judged inthesurroundin g
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circumstances. The size or nature of theitem, oracombination of both, couldbefthe determining fac
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tor."(IASB).
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Auditfriskfisfdefined asthe riskfthat thefauditor expresses aninappropriate auditfopinionwhe V V V V V V




Vnthefinancialstatements arefmaterially misstated(ISA200).
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The auditfreportfstates thatfthe auditor obtains ―reasonable assurance‖ whether the financia l
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statements are freeffrom “material” misstatement. Thefterm reasonable assurance informs the rea der
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that there is some level of riskfthatfthe auditfdid notfdetect all material misstatements. In addition, the
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auditor‘s opinion commonly uses thefwording thatfthe financial statements present fairly, ―in all m aterial
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respects.‖ These phrases communicate tothird partiesfthat the audit reportfis limited to materi
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alinformation.
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1-8 Onmostaudits,itisnotffeasibleforcost- V V V V V V




effectivetoauditalltransactions. For example,in asmallbusiness,the auditormight beabletoexam ine all
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transactions that occurred during the period. However, itfis unlikely that the owner of the busin esscould
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affordto payforsuchan extensive audit.For alarge organization,thefsheervolume oftran
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sactionspreventstheauditorfromexaminingeverytransaction.Thus,thereisatrade-
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offbetweenthe exactnessorprecisionof theauditfandits cost.
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1-9 Themajorphasesofthefauditfare: V V V




 Client acceptance/continuanceand establishingengagementf terms V V V V V




 Preplanning
 Assessfrisksandestablishmateriality V V




 Planthefaudit
 Considerinternalcontrol V V




 Auditbusinessprocesses andrelatedaccounts V V V V




 Completethefaudit V




 Evaluateresultsandissueauditreport V V V




1-10 The auditor‘sfunderstanding of the entity and itsfenvironmentfincludes knowledge abo ut: V V V V V V V V V




(1) thenature of theentity, (2) itsobjectivesfand strategies, (3) its industry, regulatory,and othe r
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external factors, (4) its management, (5) its governance, (6) its measurementfand performance
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process, and(7)fits business processes.
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1-11 Sometimesfauditors will face situations wherenostandard audit procedureexists, suchas t he V V V V V V V V V




example from the text of verifying the inventory of reindeer. Such circumstances require that thef auditor
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possessfcreativity and innovation when planning and administering auditfprocedures wher e little or no
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precedent exists. Every clientfis different, and applying auditing concepts in differentfsit
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uationsfrequireslogicandcommonsense,andfrequentlycreativityandinnovation.
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SolutionstoProblems V V




1-12 Thememoshouldcitethefollowingfacts: V V V V




 Thereisahistoricalrelationshipfbetweenaccountingandauditing. V V V V




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