SOLUTION MANUAL FOR q q
Auditing & Assurance Services A Systematic Approach 12e Messier
q q q q q q q q
Chapter 1-21
q q
CHAPTER 1 q
AN INTRODUCTION TO ASSURANCE AND FINANCIAL
q q q q q
STATEMENT AUDITING
q q
Answers to Review Questions
q q q
1-1 The qstudy qof qauditing qis qmore qconceptual qin qnature qas qcompared qto qother qaccounting
qcourses. qRather qthan qfocusing qon qlearning qthe qrules, qtechniques, qand qcomputations
qrequired qto qprepare qfinancial qstatements, qauditing qemphasizes qlearning qa qframework qof
qanalytical qand qlogical qskills. qThis qframework qenables qauditors qto qevaluate qthe qrelevance
qand q reliability qof qthe qsystems qand qprocesses qresponsible qfor qfinancial qinformation qas
qwell qas qthe qinformation qitself. qTo qbe qsuccessful, qstudents qmust qlearn qthe qframework qand
qthen qlearn qto quse qlogic qand qcommon qsense qin qapplying qauditing qconcepts qto qvarious
qcircumstances qand qsituations. qUnderstanding qauditing qcan qimprove qthe qdecision-making
qability qof qconsultants, qbusiness qmanagers, qand qaccountants qby qproviding qa qframework qfor
qevaluating qthe qusefulness qand qreliability qof qinformation—an qimportant qtask qin qmany
qdifferent qbusiness qcontexts.
1-2 There qis qa qdemand qfor qauditing qin qa qfree-market qeconomy qbecause qthe qagency
qrelationship qbetween qan qabsentee qowner qand qa qmanager qproduces qa qnatural qconflict qof
qinterest qdue qto q the qinformation qasymmetry qthat qexists qbetween qthese qtwo qparties. qAs qa
qresult, qthe qagent qagrees qto qbe qmonitored qas qpart qof qhis/her qemployment qcontract.
qAuditing qappears qto qbe qa qcost-effective qform qof qmonitoring. qThe qempirical qevidence
qsuggests qthat qauditing qwas qdemanded qprior qto qgovernment qregulation. qIn q1926, qbefore qit
qwas qrequired qby qlaw, qindependent qauditors qaudited q82 qpercent qof qthe qcompanies qon qthe
qNew qYork qStock qExchange. qAdditionally, qmany qprivate qcompanies qand qmunicipalities
qnot qsubject qto qgovernment qregulations, qsuch qas qthe qSecurities qAct qof q1933 qand qSecurities
qExchange qAct q of q1934, qalso qpurchase qvarious qforms qof qauditing qand qassurance qservices.
qMany qprivate qcompanies qseek qout qfinancial qstatement qaudits qin qorder qto qsecure qfinancing
qfor qtheir qoperations. qCompanies qpreparing qto qgo qpublic qalso qbenefit qfrom qhaving qan
qaudit.
1-3 The qagency qrelationship qbetween qan qowner qand qmanager qproduces qa qnatural qconflict qof
qinterest qbecause qof qdifferences qin qthe qtwo qparties’ qgoals qand qbecause qof qthe qinformation
qasymmetry qthat qexists qbetween qthem. qThat qis, qthe qmanager qlikely qhas qdifferent qgoals qthan
qthe qowner, qand qgenerally qhas qmore qinformation qabout qthe q"true" qfinancial qposition qand
qresults qof qoperations qof qthe qentity qthan qthe qabsentee qowner qdoes. qIf qboth qparties qseek qto
qmaximize qtheir qown qself-interest, qthe qmanager qmay qnot qact qin qthe qbest qinterest qof qthe
qowner qand qmay qmanipulate qthe qinformation qprovided qto qthe qowner qaccordingly.
17-1
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McGraw Hill Education.
,1-4 Independence qis qa qbedrock qprinciple qfor qauditors. qIf qan qauditor qis qnot qindependent qof qthe
qclient, qusers qmay qlose qconfidence qin qthe qauditor’s qability qto qreport qobjectively qand
q truthfully qon qthe qfinancial qstatements, qand qthe qauditor’s qwork qloses qits qvalue. qFrom qan
qagency qperspective, qif qthe qprincipal q(owner) qknows qthat qthe qauditor qis qnot qindependent,
qthe qowner qwill qnot qtrust qthe qauditor’s qwork. qThus, qthe qagent qwill qnot qhire qthe qauditor
qbecause qthe qauditor’s qreport qwill qnot qbe qeffective qin qreducing qinformation qrisk qfrom qthe
qperspective qof qthe qowner. qAuditor qindependence qis qalso qa qregulatory qrequirement.
1-5 Auditing q(broadly qdefined) qis qa qsystematic qprocess qof q(1) qobjectively qobtaining qand
qevaluating qevidence qregarding qassertions qabout qeconomic qactions qand qevents qto qascertain
qthe qdegree qof qcorrespondence qbetween qthose qassertions qand qestablished qcriteria qand q(2)
qcommunicating qthe qresults qto qinterested qusers.
Attest qservices qoccur qwhen qa qpractitioner qissues qa qreport qon qsubject qmatter, qor qan
qassertion qabout qsubject qmatter, qthat qis qthe qresponsibility qof qanother qparty.
Assurance qservices qare qindependent qprofessional qservices qthat qimprove qthe qquality qof
qinformation, qor qits qcontext, qfor qdecision qmakers.
1-6 Auditing q is q a q specific q form q of q ―attest q service,‖ q which q in q turn q is q a q specific q category q of
―assurance qservice.‖ qIn qother qwords, qthe qphrase q―assurance qservices‖ qconstitutes qthe
qbroadest qcategory qof qprofessional qservices qprovided qby qCPAs qthat qserve qto qimprove qthe
qquality qor qcontext qof qinformation qfor qdecision qmaking qfor qother qparties. qAttest qservices
qconstitute qa qmore qspecific qcategory qof qassurance qthat qCPAs qcan qprovide. qThese qservices
qare qintended qto qreduce qinformation qrisk qto qparties qrelying qon qinformation qprovided qby qa
qparty qthat qis qcreating, qor qmaking qassertions qabout, qsubject qmatter qof qinterest. qCPAs qcan
qprovide qattest qservices qrelating qto qa qwide qvariety qof qsubject qmatter q(or qassertions qabout
qthat qsubject qmatter) qto qreduce qthe qinformation qrisk qto qthird qparties. qOne qsuch qsubject
qmatter qis qa qset qof qfinancial qstatements. qWhen qa qCPA qprovides qa qvery qin-depth, qdetailed
qattest qservice qthat qfollows qrelevant qstandards qto qconstitute qa qcomplete qexamination qof qa
qset qof qfinancial qstatements qand qrelated qassertions, qthis qis qcalled qa qfinancial qstatement
q―audit.‖
1-7 Audit qrisk qis qdefined qas qthe qrisk qthat qthe qauditor qmay qunknowingly qfail qto qappropriately
qmodify qhis qor qher qopinion qon qfinancial qstatements qthat qare qmaterially qmisstated q(AS
q1101). qMateriality qis qdefined qas q"the qmagnitude qof qan qomission qor qmisstatement qof
qaccounting qinformation qthat, qin qthe qlight qof qsurrounding qcircumstances, qmakes qit
qprobable qthat qthe qjudgment qof qa qreasonable qperson qrelying qon qthe qinformation qwould
qhave qbeen qchanged qor qinfluenced qby qthe qomission qor qmisstatement" q(FASB qStatement qof
qFinancial qAccounting qConcepts qNo. q8, qChapter q3: qQualitative qCharacteristics qof qUseful
qAccounting qInformation, qwhich qis qpending qrevision qat qthe qtime qof qthe qwriting qof qthis
qbook qper qthe qBoard’s q November q2017 qdecision qto qrevert qto qa qdefinition qof qmateriality
qsimilar qto qthe qone qfound qin qsuperseded qConcept qNo. q2).
The qconcept qof qmateriality qis qreflected qin qthe qwording qof qthe qauditor's qstandard qaudit
qreport qthrough qthe qphrase q"the qfinancial qstatements qpresent qfairly qin qall qmaterial
qrespects." qThis qis qthe qmanner qin qwhich qthe qauditor qcommunicates qthe qnotion qof
qmateriality qto qthe q users qof qthe qauditor's qreport. qThe qauditor's qstandard qreport qstates qthat
qthe qaudit qprovides qonly qreasonable qassurance qthat qthe qfinancial qstatements qdo qnot
qcontain qmaterial qmisstatements. qThe qterm q"reasonable qassurance" qimplies qthat qthere qis
qsome qrisk qthat qa qmaterial q misstatement q could q be q present q in q the q financial q statements q and
q the q auditor q will q fail
17-2
Copyright ©2022 McGraw Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw Hill Education.
, to qdetect qit.
1-8 The qmajor qphases qof qthe qaudit qare:
• Client qacceptance/continuance
• Preliminary qengagement qactivities
• Plan qthe qaudit
• Consider qand qaudit qinternal qcontrol
• Audit qbusiness qprocesses qand qrelated qaccounts
• Complete qthe qaudit
• Evaluate qresults qand qissue qaudit qreport
1-9 Plan qthe qaudit: qDuring qthis qphase qof qthe qaudit, qthe qauditor quses qknowledge qabout qthe
qclient qand qany qcontrols qin qplace qto qplan qthe qaudit qand qperform qpreliminary qanalytical
qprocedures. qThe qoutcome qof qthe qplanning qprocess qis qa qwritten qaudit qplan qthat qsets qforth
qthe qnature, qextent, qand qtiming qof qthe qaudit qprocedures qto qbe qperformed. qThe qpurpose qof
qthis qphase qis qto qplan qan qeffective qand qefficient qaudit.
1-10 The qauditor's qstandard qunqualified qreport qfor qa qpublic qcompany qclient qincludes qthe
qfollowing qsections: q(1) qopinion qon qthe qfinancial qstatements, q(2) qbasis qfor qopinion, qand q(3)
qcritical qaudit qmatters, qas qillustrated qin qthis qchapter.
1-11 The qemergence qof qadvanced qaudit qtechnologies qwill qhelp qremove qmany qof qthe qtedious
qtasks qthat qare qusually qperformed qby qjunior qauditors. qThus, qauditors qof qall qpositions qand
qexperience qwill qbe qrequired qto qspend qadditional qtime qreasoning qthrough qfundamental
qbusiness, qaccounting, qand qauditing qconcepts. qAn qauditors’ qknowledge qin qthese qareas qwill
qenable qthem qto qprovide qgreater qbenefit qto qclients qby qasking qthe qright qquestions qand
qidentifying qnew, qmore qeffective qways qto qcollect, qanalyze, qand qinterpret qresults. qIn qusing
qaudit qdata qanalytics, qfor qexample, qauditors qmust qunderstand qthe qclient qand qits qindustry, qas
qwell qas qthe qfundamentals qof qaccounting qand qauditing, qin qorder qto qask qthe qright qquestions
qin qquerying qthe qdata qand qin qinterpreting qthe qresults qobtained.
1-12 Auditors qfrequently qface qsituations qwhere qno qstandard qaudit qprocedure qexists, qsuch qas
qthe qexample qfrom qthe qtext qof qverifying qthe qinventory qof qcattle. qSuch qcircumstances
qrequire qthat qthe qauditor qexercise qcreativity qand qinnovation qwhen qplanning qand
qadministering qaudit qprocedures qwhere qlittle qor qno qguidance qor qprecedent qexists. qEvery
qclient qis qdifferent, qand qapplying qauditing qconcepts qin qdifferent qsituations qrequires qlogic
qand qcommon qsense, qand qfrequently qcreativity qand qinnovation.
Answers to Multiple-Choice Questions
q q q
1-13 b 1-19 a
1-14 b 1-20 d
1-15 c 1-21 d
1-16 c 1-22 d
1-17 c 1-23 b
17-3
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McGraw Hill Education.
, 1-18 c
Solutions to Problemsq q
1-24 There qare qtwo qmajor qfactors qthat qmay qmake qan qaudit qnecessary qfor qGreenbloom qGarden
qCenters. qFirst, qthe qcompany qmay qrequire qlong-term qfinancing qfor qits qexpansion qinto qother
qcities qin qFlorida. qEntities qsuch qas qbanks qor qinsurance qcompanies qare qlikely qto qbe qthe
qsources qof qthe qcompany's qdebt qfinancing. qThese qentities qnormally qrequire qaudited
qfinancial qstatements qbefore qlending qsignificant qfunds qand qgenerally qrequire qaudited
qfinancial qstatements qduring qthe qtime qperiod qthe qdebt qis qoutstanding. qThere qis qinformation
qasymmetry qbetween qthe qlender qof qfunds qand qthe qowner qof qthe qbusiness, qand qthis
qasymmetry qresults qin qinformation qrisk qto qthe qlender. qEven qif qthe qbusiness qcould qget
qfunding qwithout qan qaudit, qa qclean qaudit qreport qby qa qreputable qauditor qmight qvery qwell
qreduce qthe qlender’s qinformation qrisk qand qmake qthe qterms qof qthe qloan qmore qfavorable qto
qthe qowner. qSecond, qas qthe qcompany qgrows, qthe qfamily qwill qlose qcontrol qover qthe qday-to-
day qoperations qof qthe qstores. qAn qaudit qcan qprovide qan qadditional qmonitoring qactivity qfor
qthe qfamily qin qcontrolling qthe qexpanded qoperations qof qthe qcompany.
1-25 a. Evidence qthat qassists qthe qauditor qin qevaluating qfinancial qstatement qassertions
q
consists q of qthe qunderlying qaccounting qdata qand qany qadditional qinformation
q
qavailable qto qthe qauditor, qwhether qoriginating qfrom qthe qclient qor qexternally.
b. Management qmakes qassertions qabout qcomponents qof qthe qfinancial qstatements. qFor
qexample, qan qentity's qfinancial qstatements qmay qcontain qa qline qitem qthat qaccounts
qreceivable qamount qto q$1,750,000. qIn qthis qinstance, qmanagement qis qasserting, qamong
qother qthings, qthat qthe qreceivables qexist, qthe qentity qowns qthe qreceivables, qand qthe
qreceivables qare qproperly qvalued. qAudit qevidence qhelps qthe qauditor qdetermine
qwhether qmanagement’s qassertions qare qbeing qmet. qIf qthe qauditor qis qcomfortable qthat
qhe qor qshe qcan qprovide qreasonable qassurance qthat qall qassertions qare qmet qfor qall
qaccounts, qhe qor qshe qcan qissue qa qclean qaudit qreport. qIn qshort, qthe qassertions qare qa
qconceptual qtool qto qhelp qthe qauditor qensure qthat qshe qor qhe qhas q―covered qall qthe
qbases.‖
c. In qsearching qfor qand qevaluating qevidence, qthe qauditor qshould qbe qconcerned qwith qthe
qrelevance qand qreliability qof qevidence. qIf qthe qauditor qmistakenly qrelies qon qevidence
qthat qdoes qnot qrelate qto qthe qassertion qbeing qtested, qan qincorrect qconclusion qmay qbe
qreached qabout qthe qmanagement qassertion. qReliability qrefers qto qthe qability qof
qevidence qto qsignal qthe qtrue qstate qof qthe qassertion, qi.e., qwhether qit qis qactually qbeing
qmet qor qnot.
1-26 a. q As qthe qchapter qexplains, q a qfinancial q statement q audit q reduces q the q information
risk qbornq by qinvestors qand qcreditors, qbecause qan qaudit qreduces qthe qrisk qthat qthe
qcompany’s q financial q statements q are q materially q misstated. q In q this q example,
q Community q Bank q can qrely qon qinformation qin qYoung’s qfinancial qstatements qto qmake
qdecisions qon qwhether qto qprovide q a q loan, q with q assurance q that q the q information
q (which q is q produced q by q Young qCompany) q is q fairly q presented. q The q risk q the
q bank q faces q in q providing q a q loan q is q thus qreduced q by q a q clean q audit q opinion q on
q Young’s q financials, q leading q to q a q lower q interest
rate.
17-4
Copyright ©2022 McGraw Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw Hill Education.
Auditing & Assurance Services A Systematic Approach 12e Messier
q q q q q q q q
Chapter 1-21
q q
CHAPTER 1 q
AN INTRODUCTION TO ASSURANCE AND FINANCIAL
q q q q q
STATEMENT AUDITING
q q
Answers to Review Questions
q q q
1-1 The qstudy qof qauditing qis qmore qconceptual qin qnature qas qcompared qto qother qaccounting
qcourses. qRather qthan qfocusing qon qlearning qthe qrules, qtechniques, qand qcomputations
qrequired qto qprepare qfinancial qstatements, qauditing qemphasizes qlearning qa qframework qof
qanalytical qand qlogical qskills. qThis qframework qenables qauditors qto qevaluate qthe qrelevance
qand q reliability qof qthe qsystems qand qprocesses qresponsible qfor qfinancial qinformation qas
qwell qas qthe qinformation qitself. qTo qbe qsuccessful, qstudents qmust qlearn qthe qframework qand
qthen qlearn qto quse qlogic qand qcommon qsense qin qapplying qauditing qconcepts qto qvarious
qcircumstances qand qsituations. qUnderstanding qauditing qcan qimprove qthe qdecision-making
qability qof qconsultants, qbusiness qmanagers, qand qaccountants qby qproviding qa qframework qfor
qevaluating qthe qusefulness qand qreliability qof qinformation—an qimportant qtask qin qmany
qdifferent qbusiness qcontexts.
1-2 There qis qa qdemand qfor qauditing qin qa qfree-market qeconomy qbecause qthe qagency
qrelationship qbetween qan qabsentee qowner qand qa qmanager qproduces qa qnatural qconflict qof
qinterest qdue qto q the qinformation qasymmetry qthat qexists qbetween qthese qtwo qparties. qAs qa
qresult, qthe qagent qagrees qto qbe qmonitored qas qpart qof qhis/her qemployment qcontract.
qAuditing qappears qto qbe qa qcost-effective qform qof qmonitoring. qThe qempirical qevidence
qsuggests qthat qauditing qwas qdemanded qprior qto qgovernment qregulation. qIn q1926, qbefore qit
qwas qrequired qby qlaw, qindependent qauditors qaudited q82 qpercent qof qthe qcompanies qon qthe
qNew qYork qStock qExchange. qAdditionally, qmany qprivate qcompanies qand qmunicipalities
qnot qsubject qto qgovernment qregulations, qsuch qas qthe qSecurities qAct qof q1933 qand qSecurities
qExchange qAct q of q1934, qalso qpurchase qvarious qforms qof qauditing qand qassurance qservices.
qMany qprivate qcompanies qseek qout qfinancial qstatement qaudits qin qorder qto qsecure qfinancing
qfor qtheir qoperations. qCompanies qpreparing qto qgo qpublic qalso qbenefit qfrom qhaving qan
qaudit.
1-3 The qagency qrelationship qbetween qan qowner qand qmanager qproduces qa qnatural qconflict qof
qinterest qbecause qof qdifferences qin qthe qtwo qparties’ qgoals qand qbecause qof qthe qinformation
qasymmetry qthat qexists qbetween qthem. qThat qis, qthe qmanager qlikely qhas qdifferent qgoals qthan
qthe qowner, qand qgenerally qhas qmore qinformation qabout qthe q"true" qfinancial qposition qand
qresults qof qoperations qof qthe qentity qthan qthe qabsentee qowner qdoes. qIf qboth qparties qseek qto
qmaximize qtheir qown qself-interest, qthe qmanager qmay qnot qact qin qthe qbest qinterest qof qthe
qowner qand qmay qmanipulate qthe qinformation qprovided qto qthe qowner qaccordingly.
17-1
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McGraw Hill Education.
,1-4 Independence qis qa qbedrock qprinciple qfor qauditors. qIf qan qauditor qis qnot qindependent qof qthe
qclient, qusers qmay qlose qconfidence qin qthe qauditor’s qability qto qreport qobjectively qand
q truthfully qon qthe qfinancial qstatements, qand qthe qauditor’s qwork qloses qits qvalue. qFrom qan
qagency qperspective, qif qthe qprincipal q(owner) qknows qthat qthe qauditor qis qnot qindependent,
qthe qowner qwill qnot qtrust qthe qauditor’s qwork. qThus, qthe qagent qwill qnot qhire qthe qauditor
qbecause qthe qauditor’s qreport qwill qnot qbe qeffective qin qreducing qinformation qrisk qfrom qthe
qperspective qof qthe qowner. qAuditor qindependence qis qalso qa qregulatory qrequirement.
1-5 Auditing q(broadly qdefined) qis qa qsystematic qprocess qof q(1) qobjectively qobtaining qand
qevaluating qevidence qregarding qassertions qabout qeconomic qactions qand qevents qto qascertain
qthe qdegree qof qcorrespondence qbetween qthose qassertions qand qestablished qcriteria qand q(2)
qcommunicating qthe qresults qto qinterested qusers.
Attest qservices qoccur qwhen qa qpractitioner qissues qa qreport qon qsubject qmatter, qor qan
qassertion qabout qsubject qmatter, qthat qis qthe qresponsibility qof qanother qparty.
Assurance qservices qare qindependent qprofessional qservices qthat qimprove qthe qquality qof
qinformation, qor qits qcontext, qfor qdecision qmakers.
1-6 Auditing q is q a q specific q form q of q ―attest q service,‖ q which q in q turn q is q a q specific q category q of
―assurance qservice.‖ qIn qother qwords, qthe qphrase q―assurance qservices‖ qconstitutes qthe
qbroadest qcategory qof qprofessional qservices qprovided qby qCPAs qthat qserve qto qimprove qthe
qquality qor qcontext qof qinformation qfor qdecision qmaking qfor qother qparties. qAttest qservices
qconstitute qa qmore qspecific qcategory qof qassurance qthat qCPAs qcan qprovide. qThese qservices
qare qintended qto qreduce qinformation qrisk qto qparties qrelying qon qinformation qprovided qby qa
qparty qthat qis qcreating, qor qmaking qassertions qabout, qsubject qmatter qof qinterest. qCPAs qcan
qprovide qattest qservices qrelating qto qa qwide qvariety qof qsubject qmatter q(or qassertions qabout
qthat qsubject qmatter) qto qreduce qthe qinformation qrisk qto qthird qparties. qOne qsuch qsubject
qmatter qis qa qset qof qfinancial qstatements. qWhen qa qCPA qprovides qa qvery qin-depth, qdetailed
qattest qservice qthat qfollows qrelevant qstandards qto qconstitute qa qcomplete qexamination qof qa
qset qof qfinancial qstatements qand qrelated qassertions, qthis qis qcalled qa qfinancial qstatement
q―audit.‖
1-7 Audit qrisk qis qdefined qas qthe qrisk qthat qthe qauditor qmay qunknowingly qfail qto qappropriately
qmodify qhis qor qher qopinion qon qfinancial qstatements qthat qare qmaterially qmisstated q(AS
q1101). qMateriality qis qdefined qas q"the qmagnitude qof qan qomission qor qmisstatement qof
qaccounting qinformation qthat, qin qthe qlight qof qsurrounding qcircumstances, qmakes qit
qprobable qthat qthe qjudgment qof qa qreasonable qperson qrelying qon qthe qinformation qwould
qhave qbeen qchanged qor qinfluenced qby qthe qomission qor qmisstatement" q(FASB qStatement qof
qFinancial qAccounting qConcepts qNo. q8, qChapter q3: qQualitative qCharacteristics qof qUseful
qAccounting qInformation, qwhich qis qpending qrevision qat qthe qtime qof qthe qwriting qof qthis
qbook qper qthe qBoard’s q November q2017 qdecision qto qrevert qto qa qdefinition qof qmateriality
qsimilar qto qthe qone qfound qin qsuperseded qConcept qNo. q2).
The qconcept qof qmateriality qis qreflected qin qthe qwording qof qthe qauditor's qstandard qaudit
qreport qthrough qthe qphrase q"the qfinancial qstatements qpresent qfairly qin qall qmaterial
qrespects." qThis qis qthe qmanner qin qwhich qthe qauditor qcommunicates qthe qnotion qof
qmateriality qto qthe q users qof qthe qauditor's qreport. qThe qauditor's qstandard qreport qstates qthat
qthe qaudit qprovides qonly qreasonable qassurance qthat qthe qfinancial qstatements qdo qnot
qcontain qmaterial qmisstatements. qThe qterm q"reasonable qassurance" qimplies qthat qthere qis
qsome qrisk qthat qa qmaterial q misstatement q could q be q present q in q the q financial q statements q and
q the q auditor q will q fail
17-2
Copyright ©2022 McGraw Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw Hill Education.
, to qdetect qit.
1-8 The qmajor qphases qof qthe qaudit qare:
• Client qacceptance/continuance
• Preliminary qengagement qactivities
• Plan qthe qaudit
• Consider qand qaudit qinternal qcontrol
• Audit qbusiness qprocesses qand qrelated qaccounts
• Complete qthe qaudit
• Evaluate qresults qand qissue qaudit qreport
1-9 Plan qthe qaudit: qDuring qthis qphase qof qthe qaudit, qthe qauditor quses qknowledge qabout qthe
qclient qand qany qcontrols qin qplace qto qplan qthe qaudit qand qperform qpreliminary qanalytical
qprocedures. qThe qoutcome qof qthe qplanning qprocess qis qa qwritten qaudit qplan qthat qsets qforth
qthe qnature, qextent, qand qtiming qof qthe qaudit qprocedures qto qbe qperformed. qThe qpurpose qof
qthis qphase qis qto qplan qan qeffective qand qefficient qaudit.
1-10 The qauditor's qstandard qunqualified qreport qfor qa qpublic qcompany qclient qincludes qthe
qfollowing qsections: q(1) qopinion qon qthe qfinancial qstatements, q(2) qbasis qfor qopinion, qand q(3)
qcritical qaudit qmatters, qas qillustrated qin qthis qchapter.
1-11 The qemergence qof qadvanced qaudit qtechnologies qwill qhelp qremove qmany qof qthe qtedious
qtasks qthat qare qusually qperformed qby qjunior qauditors. qThus, qauditors qof qall qpositions qand
qexperience qwill qbe qrequired qto qspend qadditional qtime qreasoning qthrough qfundamental
qbusiness, qaccounting, qand qauditing qconcepts. qAn qauditors’ qknowledge qin qthese qareas qwill
qenable qthem qto qprovide qgreater qbenefit qto qclients qby qasking qthe qright qquestions qand
qidentifying qnew, qmore qeffective qways qto qcollect, qanalyze, qand qinterpret qresults. qIn qusing
qaudit qdata qanalytics, qfor qexample, qauditors qmust qunderstand qthe qclient qand qits qindustry, qas
qwell qas qthe qfundamentals qof qaccounting qand qauditing, qin qorder qto qask qthe qright qquestions
qin qquerying qthe qdata qand qin qinterpreting qthe qresults qobtained.
1-12 Auditors qfrequently qface qsituations qwhere qno qstandard qaudit qprocedure qexists, qsuch qas
qthe qexample qfrom qthe qtext qof qverifying qthe qinventory qof qcattle. qSuch qcircumstances
qrequire qthat qthe qauditor qexercise qcreativity qand qinnovation qwhen qplanning qand
qadministering qaudit qprocedures qwhere qlittle qor qno qguidance qor qprecedent qexists. qEvery
qclient qis qdifferent, qand qapplying qauditing qconcepts qin qdifferent qsituations qrequires qlogic
qand qcommon qsense, qand qfrequently qcreativity qand qinnovation.
Answers to Multiple-Choice Questions
q q q
1-13 b 1-19 a
1-14 b 1-20 d
1-15 c 1-21 d
1-16 c 1-22 d
1-17 c 1-23 b
17-3
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McGraw Hill Education.
, 1-18 c
Solutions to Problemsq q
1-24 There qare qtwo qmajor qfactors qthat qmay qmake qan qaudit qnecessary qfor qGreenbloom qGarden
qCenters. qFirst, qthe qcompany qmay qrequire qlong-term qfinancing qfor qits qexpansion qinto qother
qcities qin qFlorida. qEntities qsuch qas qbanks qor qinsurance qcompanies qare qlikely qto qbe qthe
qsources qof qthe qcompany's qdebt qfinancing. qThese qentities qnormally qrequire qaudited
qfinancial qstatements qbefore qlending qsignificant qfunds qand qgenerally qrequire qaudited
qfinancial qstatements qduring qthe qtime qperiod qthe qdebt qis qoutstanding. qThere qis qinformation
qasymmetry qbetween qthe qlender qof qfunds qand qthe qowner qof qthe qbusiness, qand qthis
qasymmetry qresults qin qinformation qrisk qto qthe qlender. qEven qif qthe qbusiness qcould qget
qfunding qwithout qan qaudit, qa qclean qaudit qreport qby qa qreputable qauditor qmight qvery qwell
qreduce qthe qlender’s qinformation qrisk qand qmake qthe qterms qof qthe qloan qmore qfavorable qto
qthe qowner. qSecond, qas qthe qcompany qgrows, qthe qfamily qwill qlose qcontrol qover qthe qday-to-
day qoperations qof qthe qstores. qAn qaudit qcan qprovide qan qadditional qmonitoring qactivity qfor
qthe qfamily qin qcontrolling qthe qexpanded qoperations qof qthe qcompany.
1-25 a. Evidence qthat qassists qthe qauditor qin qevaluating qfinancial qstatement qassertions
q
consists q of qthe qunderlying qaccounting qdata qand qany qadditional qinformation
q
qavailable qto qthe qauditor, qwhether qoriginating qfrom qthe qclient qor qexternally.
b. Management qmakes qassertions qabout qcomponents qof qthe qfinancial qstatements. qFor
qexample, qan qentity's qfinancial qstatements qmay qcontain qa qline qitem qthat qaccounts
qreceivable qamount qto q$1,750,000. qIn qthis qinstance, qmanagement qis qasserting, qamong
qother qthings, qthat qthe qreceivables qexist, qthe qentity qowns qthe qreceivables, qand qthe
qreceivables qare qproperly qvalued. qAudit qevidence qhelps qthe qauditor qdetermine
qwhether qmanagement’s qassertions qare qbeing qmet. qIf qthe qauditor qis qcomfortable qthat
qhe qor qshe qcan qprovide qreasonable qassurance qthat qall qassertions qare qmet qfor qall
qaccounts, qhe qor qshe qcan qissue qa qclean qaudit qreport. qIn qshort, qthe qassertions qare qa
qconceptual qtool qto qhelp qthe qauditor qensure qthat qshe qor qhe qhas q―covered qall qthe
qbases.‖
c. In qsearching qfor qand qevaluating qevidence, qthe qauditor qshould qbe qconcerned qwith qthe
qrelevance qand qreliability qof qevidence. qIf qthe qauditor qmistakenly qrelies qon qevidence
qthat qdoes qnot qrelate qto qthe qassertion qbeing qtested, qan qincorrect qconclusion qmay qbe
qreached qabout qthe qmanagement qassertion. qReliability qrefers qto qthe qability qof
qevidence qto qsignal qthe qtrue qstate qof qthe qassertion, qi.e., qwhether qit qis qactually qbeing
qmet qor qnot.
1-26 a. q As qthe qchapter qexplains, q a qfinancial q statement q audit q reduces q the q information
risk qbornq by qinvestors qand qcreditors, qbecause qan qaudit qreduces qthe qrisk qthat qthe
qcompany’s q financial q statements q are q materially q misstated. q In q this q example,
q Community q Bank q can qrely qon qinformation qin qYoung’s qfinancial qstatements qto qmake
qdecisions qon qwhether qto qprovide q a q loan, q with q assurance q that q the q information
q (which q is q produced q by q Young qCompany) q is q fairly q presented. q The q risk q the
q bank q faces q in q providing q a q loan q is q thus qreduced q by q a q clean q audit q opinion q on
q Young’s q financials, q leading q to q a q lower q interest
rate.
17-4
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McGraw Hill Education.
