Solution Manual for Auditing & Assurance Services A Systematic
Approach 12th Edition by William Messier Jr, Steven Glover, Douglas
Prawit
,SOLUTION MANUAL FOR Y Y
Auditing & Assurance Services A Systematic Approach 12e M
Y Y Y Y Y Y Y Y
essier Chapter 1-21
Y Y
CHAPTER 1 Y
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEM
Y Y Y Y Y Y
ENT AUDITING
Y
AnswersYtoYReviewYQuestions
1-1 TheY studyY ofY auditingY isY moreY conceptualY inY natureY asY comparedY toY otherY accountin
gY courses.Y RatherY thanY focusingY onY learningY theY rules,Y techniques,Y andY computati
onsY requiredY toYprepareYfinancialY statements,YauditingY emphasizesYlearningY aYfram
eworkY ofYanalyticalYandY logicalY skills.YThisYframeworkYenablesY auditorsYtoY evaluateY
theY relevanceYandY reliabilityYofY theY systemsY andY processesYresponsibleY forY financial
Y informationY asY wellY asY theY informationY itself.Y ToY beY successful,Y studentsY mustY lea
rnY theY frameworkY andY thenY learnY toY useY logicY andY commonY senseY inY applyingY au
ditingY conceptsY toY variousY circumstancesY andY situations.Y UnderstandingY auditingY
canY improveY theY decision-
makingY abilityY ofY consultants,Y businessY managers,Y andY accountantsYbyYprovidingYaYf
rameworkYforYevaluatingYtheYusefulnessYandYreliabilityYofY information—
anYimportantYtaskYinYmanyYdifferentYbusinessYcontexts.
1-2 ThereY isY aY demandY forY auditingY inY aY free-
marketY economyY becauseY theY agencyY relationshipY betweenY anY absenteeY ownerY and
Y aY managerY producesY aY naturalY conflictY ofY interestY dueY toY theY informationY asymme
tryY thatY existsY betweenY theseY twoY parties.Y AsYaYresult,YtheYagentYagreesYtoYbeYmonit
oredYasYpartYofYhis/herYemploymentYcontract.Y AuditingY appearsY toY beY aY cost-
effectiveY formY ofY monitoring.Y TheY empiricalY evidenceY suggestsY thatY auditingY wasY d
emandedY priorY toY governmentY regulation.Y InY 1926,Y beforeY itY wasY requiredY byY law,Y i
ndependentY auditorsY auditedY 82Y percentY ofY theY companiesY onY theY NewY YorkY Stock
Y Exchange.Y Additionally,Y manyY privateY companiesY andY municipalitiesY notY subjectY t
oY governmentY regulations,Y suchY asY theY SecuritiesY ActY ofY1933YandYSecuritiesYExcha
ngeYActY ofY1934,YalsoYpurchaseYvariousYformsYofYauditingY andY assuranceY services.Y M
anyY privateY companiesYseekY outY financialY statementY auditsY inY orderY toY secureY fina
ncingY forY theirY operations.Y CompaniesY preparingY toY goY publicY alsoYbenefitYfromYha
vingYanYaudit.
1-3 TheY agencyY relationshipY betweenY anY ownerY andY managerY producesYaY naturalY conflic
tY ofY interestY becauseY ofY differencesY inY theY twoY parties’Y goalsY andY becauseY ofY theY in
formationY asymmetryY thatY existsY betweenY them.Y ThatY is,Y theY managerY likelyY has
Y differentY goalsY thanY theY owner,Y andY generallyY hasY moreY informationY aboutY theY "tr
ue"Y financialY positionY andY resultsY ofY operationsY ofY theY entityY thanY theY absenteeY
ownerY does.Y IfY bothY partiesY seekY toY maximizeY theirY ownY self-
interest,Y theY managerY mayY notY actYinYtheYbestYinterestYofYtheYownerYandYmayYmanip
ulateYtheYinformationYprovidedYtoY theYownerYaccordingly.
,1-4 IndependenceYisY aYbedrockY principleY forYauditors.Y IfY anY auditorY isY notY independentY
ofY theYclient,Y usersYmayY loseY confidenceY inYtheYauditor’sY abilityYtoY reportY objectivel
yY andY truthfullyYonYtheYfinancialY statements,YandY theYauditor’sYworkYlosesYitsYvalue.Y
FromY anY agencyYperspective,YifYtheYprincipalY (owner)YknowsYthatY theYauditorYisYnot
Y independent,Y theY ownerY willY notY trustY theY auditor’sY work.Y Thus,Y theY agentY willY
notY hireY theY auditorY becauseY theY auditor’sY reportY willY notY beY effectiveY inY reducing
Y informationY riskY fromY theY perspectiveY ofY theY owner.Y AuditorY independenceY isY also
Y aY regulatoryYrequirement.
1-5 AuditingY (broadlyY defined)Y isY aY systematicY processY ofY (1)Y objectivelyY obtainingY an
dY evaluatingY evidenceY regardingY assertionsY aboutY economicY actionsY andY eventsY toY
ascertainY theY degreeY ofY correspondenceY betweenY thoseY assertionsY andY establishe
dY criteriaYandY(2)YcommunicatingYtheYresultsYtoYinterestedYusers.
AttestY servicesY occurY whenY aY practitionerY issuesY aY reportY onY subjectY matter,Y orY a
nY assertionYaboutYsubjectYmatter,YthatYisYtheYresponsibilityYofYanotherYparty.
AssuranceY servicesY areY independentY professionalY servicesY thatY improveY theY qualit
yY ofYinformation,YorYitsYcontext,YforYdecisionYmakers.
1-6 AuditingY isY aY specificY formY ofY ―attestY service,‖Y whichY inY turnY isY aY specificY categoryY o
f
―assuranceY service.‖Y InY otherY words,Y theY phraseY ―assuranceY services‖Y constitute
sY theY broadestY categoryY ofY professionalY servicesY providedY byY CPAsY thatY serveY toY i
mproveY theY qualityY orY contextY ofY informationY forY decisionY makingY forY otherY parties
.Y AttestY servicesY constituteY aY moreY specificY categoryY ofY assuranceY thatY CPAsY canY p
rovide.YTheseYservicesYareYintendedYtoY reduceYinformationY riskYtoYpartiesYrelyingY on
Y informationY providedY byY aY partyYthatY isY creating,Y orY makingY assertionsY about,Y subj
ectY matterY ofY interest.Y CPAsY canY provideY attestY servicesY relatingY toY aY wideY vari
etyY ofY subjectY matterY (orY assertionsY aboutY thatY subjectY matter)Y toY reduceY theY inf
ormationY riskYtoY thirdYparties.Y OneY suchY subjectY matterYisY aY setY ofY financialYstateme
nts.Y WhenY aY CPAY providesY aY veryY in-
depth,Y detailedY attestY serviceY thatY followsY relevantY standardsY toY constituteY aY comp
leteY examinationY ofY aY setY ofY financialY statementsY andY relatedY assertions,YthisYisYc
alledYaYfinancialYstatementY―audit.‖
1-7 AuditY riskY isY definedY asY theY riskY thatY theY auditorY mayY unknowinglyY failY toY app
ropriatelyY modifyY hisY orY herY opinionY onY financialY statementsY thatY areY materiallyY
misstatedY (ASY 1101).Y MaterialityY isY definedY asY "theY magnitudeY ofY anY omissionY o
rY misstatementY ofY accountingY informationY that,Y inY theY lightY ofY surroundingY circu
mstances,Y makesY itY probableY thatY theY judgmentY ofY aY reasonableY personY relyingY on
Y theYinformationYwouldY haveY beenY changedY orY influencedY byY theY omissionY orY missta
tement"Y (FASBY StatementY ofY FinancialY AccountingY ConceptsY No.Y 8,Y ChapterY 3:Y Qual
itativeY CharacteristicsY ofY UsefulY AccountingY Information,Y whichY isY pendingY revisio
nY atY theY timeY ofY theY writingY ofY thisY bookY perY theY Board’sY NovemberY 2017Y decis
ionYtoYrevertYtoYaYdefinitionYofYmaterialityYsimilarYtoYtheYoneYfoundYinYsupersededY Co
nceptYNo.Y2).
TheY conceptY ofY materialityY isY reflectedY inY theY wordingY ofY theY auditor'sY standar
dY auditY reportY throughY theY phraseY "theY financialY statementsY presentY fairlyY inY allY
materialYrespects."Y ThisYisYtheYmannerY inY whichY theYauditorY communicatesYtheYnotio
nY ofY materialityY toY theY usersY ofY theY auditor'sY report.Y TheY auditor'sY standardY rep
ortY statesYthatYtheYauditYprovidesYonlyYreasonableYassuranceYthatYtheYfinancialYstate
ments
, doYnotYcontainYmaterialYmisstatements.YTheYtermY"reasonableYassurance"YimpliesYtha
tY thereY isY someY riskY thatY aY materialY misstatementY couldY beY presentY inY theY fina
ncialY statementsYandYtheYauditorYwillYfail
Approach 12th Edition by William Messier Jr, Steven Glover, Douglas
Prawit
,SOLUTION MANUAL FOR Y Y
Auditing & Assurance Services A Systematic Approach 12e M
Y Y Y Y Y Y Y Y
essier Chapter 1-21
Y Y
CHAPTER 1 Y
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEM
Y Y Y Y Y Y
ENT AUDITING
Y
AnswersYtoYReviewYQuestions
1-1 TheY studyY ofY auditingY isY moreY conceptualY inY natureY asY comparedY toY otherY accountin
gY courses.Y RatherY thanY focusingY onY learningY theY rules,Y techniques,Y andY computati
onsY requiredY toYprepareYfinancialY statements,YauditingY emphasizesYlearningY aYfram
eworkY ofYanalyticalYandY logicalY skills.YThisYframeworkYenablesY auditorsYtoY evaluateY
theY relevanceYandY reliabilityYofY theY systemsY andY processesYresponsibleY forY financial
Y informationY asY wellY asY theY informationY itself.Y ToY beY successful,Y studentsY mustY lea
rnY theY frameworkY andY thenY learnY toY useY logicY andY commonY senseY inY applyingY au
ditingY conceptsY toY variousY circumstancesY andY situations.Y UnderstandingY auditingY
canY improveY theY decision-
makingY abilityY ofY consultants,Y businessY managers,Y andY accountantsYbyYprovidingYaYf
rameworkYforYevaluatingYtheYusefulnessYandYreliabilityYofY information—
anYimportantYtaskYinYmanyYdifferentYbusinessYcontexts.
1-2 ThereY isY aY demandY forY auditingY inY aY free-
marketY economyY becauseY theY agencyY relationshipY betweenY anY absenteeY ownerY and
Y aY managerY producesY aY naturalY conflictY ofY interestY dueY toY theY informationY asymme
tryY thatY existsY betweenY theseY twoY parties.Y AsYaYresult,YtheYagentYagreesYtoYbeYmonit
oredYasYpartYofYhis/herYemploymentYcontract.Y AuditingY appearsY toY beY aY cost-
effectiveY formY ofY monitoring.Y TheY empiricalY evidenceY suggestsY thatY auditingY wasY d
emandedY priorY toY governmentY regulation.Y InY 1926,Y beforeY itY wasY requiredY byY law,Y i
ndependentY auditorsY auditedY 82Y percentY ofY theY companiesY onY theY NewY YorkY Stock
Y Exchange.Y Additionally,Y manyY privateY companiesY andY municipalitiesY notY subjectY t
oY governmentY regulations,Y suchY asY theY SecuritiesY ActY ofY1933YandYSecuritiesYExcha
ngeYActY ofY1934,YalsoYpurchaseYvariousYformsYofYauditingY andY assuranceY services.Y M
anyY privateY companiesYseekY outY financialY statementY auditsY inY orderY toY secureY fina
ncingY forY theirY operations.Y CompaniesY preparingY toY goY publicY alsoYbenefitYfromYha
vingYanYaudit.
1-3 TheY agencyY relationshipY betweenY anY ownerY andY managerY producesYaY naturalY conflic
tY ofY interestY becauseY ofY differencesY inY theY twoY parties’Y goalsY andY becauseY ofY theY in
formationY asymmetryY thatY existsY betweenY them.Y ThatY is,Y theY managerY likelyY has
Y differentY goalsY thanY theY owner,Y andY generallyY hasY moreY informationY aboutY theY "tr
ue"Y financialY positionY andY resultsY ofY operationsY ofY theY entityY thanY theY absenteeY
ownerY does.Y IfY bothY partiesY seekY toY maximizeY theirY ownY self-
interest,Y theY managerY mayY notY actYinYtheYbestYinterestYofYtheYownerYandYmayYmanip
ulateYtheYinformationYprovidedYtoY theYownerYaccordingly.
,1-4 IndependenceYisY aYbedrockY principleY forYauditors.Y IfY anY auditorY isY notY independentY
ofY theYclient,Y usersYmayY loseY confidenceY inYtheYauditor’sY abilityYtoY reportY objectivel
yY andY truthfullyYonYtheYfinancialY statements,YandY theYauditor’sYworkYlosesYitsYvalue.Y
FromY anY agencyYperspective,YifYtheYprincipalY (owner)YknowsYthatY theYauditorYisYnot
Y independent,Y theY ownerY willY notY trustY theY auditor’sY work.Y Thus,Y theY agentY willY
notY hireY theY auditorY becauseY theY auditor’sY reportY willY notY beY effectiveY inY reducing
Y informationY riskY fromY theY perspectiveY ofY theY owner.Y AuditorY independenceY isY also
Y aY regulatoryYrequirement.
1-5 AuditingY (broadlyY defined)Y isY aY systematicY processY ofY (1)Y objectivelyY obtainingY an
dY evaluatingY evidenceY regardingY assertionsY aboutY economicY actionsY andY eventsY toY
ascertainY theY degreeY ofY correspondenceY betweenY thoseY assertionsY andY establishe
dY criteriaYandY(2)YcommunicatingYtheYresultsYtoYinterestedYusers.
AttestY servicesY occurY whenY aY practitionerY issuesY aY reportY onY subjectY matter,Y orY a
nY assertionYaboutYsubjectYmatter,YthatYisYtheYresponsibilityYofYanotherYparty.
AssuranceY servicesY areY independentY professionalY servicesY thatY improveY theY qualit
yY ofYinformation,YorYitsYcontext,YforYdecisionYmakers.
1-6 AuditingY isY aY specificY formY ofY ―attestY service,‖Y whichY inY turnY isY aY specificY categoryY o
f
―assuranceY service.‖Y InY otherY words,Y theY phraseY ―assuranceY services‖Y constitute
sY theY broadestY categoryY ofY professionalY servicesY providedY byY CPAsY thatY serveY toY i
mproveY theY qualityY orY contextY ofY informationY forY decisionY makingY forY otherY parties
.Y AttestY servicesY constituteY aY moreY specificY categoryY ofY assuranceY thatY CPAsY canY p
rovide.YTheseYservicesYareYintendedYtoY reduceYinformationY riskYtoYpartiesYrelyingY on
Y informationY providedY byY aY partyYthatY isY creating,Y orY makingY assertionsY about,Y subj
ectY matterY ofY interest.Y CPAsY canY provideY attestY servicesY relatingY toY aY wideY vari
etyY ofY subjectY matterY (orY assertionsY aboutY thatY subjectY matter)Y toY reduceY theY inf
ormationY riskYtoY thirdYparties.Y OneY suchY subjectY matterYisY aY setY ofY financialYstateme
nts.Y WhenY aY CPAY providesY aY veryY in-
depth,Y detailedY attestY serviceY thatY followsY relevantY standardsY toY constituteY aY comp
leteY examinationY ofY aY setY ofY financialY statementsY andY relatedY assertions,YthisYisYc
alledYaYfinancialYstatementY―audit.‖
1-7 AuditY riskY isY definedY asY theY riskY thatY theY auditorY mayY unknowinglyY failY toY app
ropriatelyY modifyY hisY orY herY opinionY onY financialY statementsY thatY areY materiallyY
misstatedY (ASY 1101).Y MaterialityY isY definedY asY "theY magnitudeY ofY anY omissionY o
rY misstatementY ofY accountingY informationY that,Y inY theY lightY ofY surroundingY circu
mstances,Y makesY itY probableY thatY theY judgmentY ofY aY reasonableY personY relyingY on
Y theYinformationYwouldY haveY beenY changedY orY influencedY byY theY omissionY orY missta
tement"Y (FASBY StatementY ofY FinancialY AccountingY ConceptsY No.Y 8,Y ChapterY 3:Y Qual
itativeY CharacteristicsY ofY UsefulY AccountingY Information,Y whichY isY pendingY revisio
nY atY theY timeY ofY theY writingY ofY thisY bookY perY theY Board’sY NovemberY 2017Y decis
ionYtoYrevertYtoYaYdefinitionYofYmaterialityYsimilarYtoYtheYoneYfoundYinYsupersededY Co
nceptYNo.Y2).
TheY conceptY ofY materialityY isY reflectedY inY theY wordingY ofY theY auditor'sY standar
dY auditY reportY throughY theY phraseY "theY financialY statementsY presentY fairlyY inY allY
materialYrespects."Y ThisYisYtheYmannerY inY whichY theYauditorY communicatesYtheYnotio
nY ofY materialityY toY theY usersY ofY theY auditor'sY report.Y TheY auditor'sY standardY rep
ortY statesYthatYtheYauditYprovidesYonlyYreasonableYassuranceYthatYtheYfinancialYstate
ments
, doYnotYcontainYmaterialYmisstatements.YTheYtermY"reasonableYassurance"YimpliesYtha
tY thereY isY someY riskY thatY aY materialY misstatementY couldY beY presentY inY theY fina
ncialY statementsYandYtheYauditorYwillYfail
