Solution Manual for Auditing & Assurance Services A
Systematic Approach 12th Edition by William Messier Jr,
Steven Glover, Douglas Prawit
Solution Manual for Auditing & Assurance Services A Systematic
Approach 12th Edition by William Messier Jr, Steven Glover, Douglas
Prawit
,Downloaded by Paul Wilson ()
,SOLUTION MANUAL FOR
Auditing & Assurance Services A Systematic Approach 12e
Messier Chapter 1-21
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 as 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. This framework enables auditors 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—an important task in many different business contexts.
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 these two parties.
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 that auditing was demanded prior to government regulation. In 1926,
before it was required by law, independent auditors audited 82 percent of the
companies on the New York Stock Exchange. Additionally, many private companies
and municipalities not subject to government regulations, such as the Securities Act
of 1933 and Securities Exchange Act of 1934, also purchase various forms of auditing
and assurance services. Many private companies seek out financial statement audits
in order to secure financing for their operations. Companies preparing to go public
also benefit from having an audit.
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 the
information asymmetry that exists between them. That is, the manager likely has
different goals than the owner, and 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, the manager may not
act in the best interest of the owner and may manipulate the information provided to
the owner accordingly.
Downloaded by Paul Wilson ()
, 1-4 Independence is a bedrock principle for auditors. If an auditor is not independent of
the client, users may lose confidence in the auditor’s ability to report objectively and
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. Auditor independence is also a
regulatory requirement.
1-5 Auditing (broadly defined) is a systematic process of (1) 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 (2) communicating the results to interested users.
Attest services occur when a practitioner issues a report on subject matter, or an
assertion about subject matter, that is the responsibility of another party.
Assurance services are independent professional services that improve the quality
of information, or its context, for decision makers.
1-6 Auditing is a specific form of ―attest service,‖ which in turn is a specific category of
―assurance service.‖ In other words, the phrase ―assurance services‖ constitutes
the broadest category of professional services provided by CPAs that serve to
improve the quality or context of information for decision making for other parties.
Attest services constitute a more specific category of assurance that CPAs can
provide. These services are intended to reduce information risk to parties relying on
information provided by a party that is creating, or making assertions about, subject
matter of interest. CPAs can provide attest services relating to a wide variety of
subject matter (or assertions about that subject matter) to reduce the information
risk to third parties. One such subject matter is a set of financial statements. When a
CPA provides a very in-depth, detailed attest service that follows relevant standards
to constitute a complete examination of a set of financial statements and related
assertions, this is called a financial statement ―audit.‖
1-7 Audit risk is defined as the risk that the auditor may unknowingly fail to
appropriately modify his or her opinion on financial statements that are materially
misstated (AS 1101). Materiality is defined as "the magnitude of an omission or
misstatement of accounting information that, in the light of surrounding
circumstances, makes it probable that the judgment of a reasonable person relying
on the information would have been changed or influenced by the omission or
misstatement" (FASB Statement of Financial Accounting Concepts No. 8, Chapter 3:
Qualitative Characteristics of Useful Accounting Information, which is pending
revision at the time of the writing of this book per the Board’s November 2017
decision to revert to a definition of materiality similar to the one found in superseded
Concept No. 2).
The concept of materiality is reflected in the wording of the auditor's standard
audit report through the phrase "the financial statements present fairly in all
material respects." This is the manner in which the auditor communicates the notion
of materiality to the users of the auditor's report. The auditor's standard report
states that the audit provides only reasonable assurance that the financial statements
Downloaded by Paul Wilson ()
Systematic Approach 12th Edition by William Messier Jr,
Steven Glover, Douglas Prawit
Solution Manual for Auditing & Assurance Services A Systematic
Approach 12th Edition by William Messier Jr, Steven Glover, Douglas
Prawit
,Downloaded by Paul Wilson ()
,SOLUTION MANUAL FOR
Auditing & Assurance Services A Systematic Approach 12e
Messier Chapter 1-21
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 as 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. This framework enables auditors 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—an important task in many different business contexts.
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 these two parties.
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 that auditing was demanded prior to government regulation. In 1926,
before it was required by law, independent auditors audited 82 percent of the
companies on the New York Stock Exchange. Additionally, many private companies
and municipalities not subject to government regulations, such as the Securities Act
of 1933 and Securities Exchange Act of 1934, also purchase various forms of auditing
and assurance services. Many private companies seek out financial statement audits
in order to secure financing for their operations. Companies preparing to go public
also benefit from having an audit.
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 the
information asymmetry that exists between them. That is, the manager likely has
different goals than the owner, and 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, the manager may not
act in the best interest of the owner and may manipulate the information provided to
the owner accordingly.
Downloaded by Paul Wilson ()
, 1-4 Independence is a bedrock principle for auditors. If an auditor is not independent of
the client, users may lose confidence in the auditor’s ability to report objectively and
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. Auditor independence is also a
regulatory requirement.
1-5 Auditing (broadly defined) is a systematic process of (1) 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 (2) communicating the results to interested users.
Attest services occur when a practitioner issues a report on subject matter, or an
assertion about subject matter, that is the responsibility of another party.
Assurance services are independent professional services that improve the quality
of information, or its context, for decision makers.
1-6 Auditing is a specific form of ―attest service,‖ which in turn is a specific category of
―assurance service.‖ In other words, the phrase ―assurance services‖ constitutes
the broadest category of professional services provided by CPAs that serve to
improve the quality or context of information for decision making for other parties.
Attest services constitute a more specific category of assurance that CPAs can
provide. These services are intended to reduce information risk to parties relying on
information provided by a party that is creating, or making assertions about, subject
matter of interest. CPAs can provide attest services relating to a wide variety of
subject matter (or assertions about that subject matter) to reduce the information
risk to third parties. One such subject matter is a set of financial statements. When a
CPA provides a very in-depth, detailed attest service that follows relevant standards
to constitute a complete examination of a set of financial statements and related
assertions, this is called a financial statement ―audit.‖
1-7 Audit risk is defined as the risk that the auditor may unknowingly fail to
appropriately modify his or her opinion on financial statements that are materially
misstated (AS 1101). Materiality is defined as "the magnitude of an omission or
misstatement of accounting information that, in the light of surrounding
circumstances, makes it probable that the judgment of a reasonable person relying
on the information would have been changed or influenced by the omission or
misstatement" (FASB Statement of Financial Accounting Concepts No. 8, Chapter 3:
Qualitative Characteristics of Useful Accounting Information, which is pending
revision at the time of the writing of this book per the Board’s November 2017
decision to revert to a definition of materiality similar to the one found in superseded
Concept No. 2).
The concept of materiality is reflected in the wording of the auditor's standard
audit report through the phrase "the financial statements present fairly in all
material respects." This is the manner in which the auditor communicates the notion
of materiality to the users of the auditor's report. The auditor's standard report
states that the audit provides only reasonable assurance that the financial statements
Downloaded by Paul Wilson ()
