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
2
,Chapter 19: Professional Conduct, Independence, and Quality Management
Chapter 20: Legal Liability
Chapter 21: Assurance, Attestation, and Internal Auditing Services
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
3
, 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 (broadly defined) is a systematic process of objectively obtaining and
evaluating evidence regarding assertions about economic actions and events to
ascertain the degree of correspondence between those assertions and established
criteria and communicating the results to interested users.
Assurance is engagement in which a practitioner expresses a conclusion designed
to enhance the degree of confidence of the intended users other than the responsible
party about the outcome of the evaluation or measurement of a subject matter against
criteria.
Examples of assurance services are assurance (audit) of financial statements,
assurance of prospective financial information, assurance of reporting on internal control,
assurance of sustainability reporting, and assurance of electronic commerce.
4
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
2
,Chapter 19: Professional Conduct, Independence, and Quality Management
Chapter 20: Legal Liability
Chapter 21: Assurance, Attestation, and Internal Auditing Services
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
3
, 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 (broadly defined) is a systematic process of objectively obtaining and
evaluating evidence regarding assertions about economic actions and events to
ascertain the degree of correspondence between those assertions and established
criteria and communicating the results to interested users.
Assurance is engagement in which a practitioner expresses a conclusion designed
to enhance the degree of confidence of the intended users other than the responsible
party about the outcome of the evaluation or measurement of a subject matter against
criteria.
Examples of assurance services are assurance (audit) of financial statements,
assurance of prospective financial information, assurance of reporting on internal control,
assurance of sustainability reporting, and assurance of electronic commerce.
4
