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
Chapter |19: |Professional |Conduct, |Independence, |and |Quality |Management
Chapter |20: |Legal |Liability
Chapter |21: |Assurance, |Attestation, |and |Internal |Auditing |Services
2
,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 |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.
3
, 1-6 The |phrase |systematic |process |implies |that |there |should |be |a |well-planned, |logical
|approach |for |conducting |an |audit |that |involves |objectively |obtaining |and |evaluating |evidence.
1-7 Materiality: |"Omissions |or |misstatements |of |items |are |material |if |they |could, |individually
|or |collectively, |influence |the |economic |decisions |of |users |taken |on |the |basis |of |the |financial
|statements. |Materiality |depends |on |the |size |and |nature |of |the |omission |or |misstatement |judged
|in |the |surrounding |circumstances. |The |size |or |nature |of |the |item, |or |a |combination |of |both, |could
|be |the | determining |factor." |(IASB).
Audit |risk |is |defined |as |the |risk |that |the |auditor |expresses |an |inappropriate |audit |opinion
|when |the |financial |statements |are | materially | misstated |(ISA |200).
The |audit |report |states |that |the |auditor |obtains |“reasonable |assurance” |whether |the
|financial |statements |are |free |from |“material” |misstatement. |The |term |reasonable |assurance
|informs |the |reader |that |there |is |some |level |of |risk |that |the |audit |did |not |detect |all |material
|misstatements. |In |addition, |the |auditor’s |opinion |commonly |uses |the |wording |that |the |financial
|statements |present |fairly, |“in |all |material |respects.” |These |phrases |communicate |to |third |parties
|that | the |audit | report | is |limited |to | material |information.
1-8 On |most |audits, |it |is |not |feasible |or |cost-effective |to |audit |all |transactions. |For |example,
|in |a |small |business, |the |auditor |might |be |able |to |examine |all |transactions |that |occurred |during
|the |period. |However, |it |is |unlikely |that |the |owner |of |the |business |could |afford |to |pay |for |such |an
|extensive |audit. |For |a |large |organization, |the |sheer |volume |of |transactions |prevents |the |auditor
|from |examining |every |transaction. |Thus, |there |is |a |trade-off |between |the |exactness |or |precision
|of |the |audit | and |its | cost.
1-9 The |major |phases |of |the |audit |are:
Client | acceptance/continuance | and | establishing | engagement | terms
Preplanning
Assess |risks |and |establish |materiality
Plan |the |audit
Consider |internal |control
Audit |business |processes |and |related |accounts
Complete |the |audit
Evaluate |results |and |issue |audit |report
1-10 The |auditor’s |understanding |of |the |entity |and |its |environment |includes |knowledge
|about: |(1) |the |nature |of |the |entity, |(2) |its |objectives |and |strategies, |(3) |its |industry, |regulatory,
|and |other |external |factors, |(4) |its |management, |(5) |its |governance, |(6) |its |measurement |and
|performance |process, | and |(7) |its | business | processes.
1-11 Sometimes |auditors |will |face |situations |where |no |standard |audit |procedure |exists, |such
|as |the |example |from |the |text |of |verifying |the |inventory |of |reindeer. |Such |circumstances |require
|that |the |auditor |possess |creativity |and |innovation |when |planning |and |administering |audit
|procedures |where |little |or |no |precedent |exists. |Every |client |is |different, |and |applying |auditing
|concepts |in |different |situations |requires |logic |and |common |sense, |and |frequently |creativity |and
|innovation.
Solutions |to |Problems
1-12 The |memo |should |cite |the |following |facts:
There |is |a |historical |relationship |between |accounting |and |auditing.
4
| | | | | | |
| 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
Chapter |19: |Professional |Conduct, |Independence, |and |Quality |Management
Chapter |20: |Legal |Liability
Chapter |21: |Assurance, |Attestation, |and |Internal |Auditing |Services
2
,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 |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.
3
, 1-6 The |phrase |systematic |process |implies |that |there |should |be |a |well-planned, |logical
|approach |for |conducting |an |audit |that |involves |objectively |obtaining |and |evaluating |evidence.
1-7 Materiality: |"Omissions |or |misstatements |of |items |are |material |if |they |could, |individually
|or |collectively, |influence |the |economic |decisions |of |users |taken |on |the |basis |of |the |financial
|statements. |Materiality |depends |on |the |size |and |nature |of |the |omission |or |misstatement |judged
|in |the |surrounding |circumstances. |The |size |or |nature |of |the |item, |or |a |combination |of |both, |could
|be |the | determining |factor." |(IASB).
Audit |risk |is |defined |as |the |risk |that |the |auditor |expresses |an |inappropriate |audit |opinion
|when |the |financial |statements |are | materially | misstated |(ISA |200).
The |audit |report |states |that |the |auditor |obtains |“reasonable |assurance” |whether |the
|financial |statements |are |free |from |“material” |misstatement. |The |term |reasonable |assurance
|informs |the |reader |that |there |is |some |level |of |risk |that |the |audit |did |not |detect |all |material
|misstatements. |In |addition, |the |auditor’s |opinion |commonly |uses |the |wording |that |the |financial
|statements |present |fairly, |“in |all |material |respects.” |These |phrases |communicate |to |third |parties
|that | the |audit | report | is |limited |to | material |information.
1-8 On |most |audits, |it |is |not |feasible |or |cost-effective |to |audit |all |transactions. |For |example,
|in |a |small |business, |the |auditor |might |be |able |to |examine |all |transactions |that |occurred |during
|the |period. |However, |it |is |unlikely |that |the |owner |of |the |business |could |afford |to |pay |for |such |an
|extensive |audit. |For |a |large |organization, |the |sheer |volume |of |transactions |prevents |the |auditor
|from |examining |every |transaction. |Thus, |there |is |a |trade-off |between |the |exactness |or |precision
|of |the |audit | and |its | cost.
1-9 The |major |phases |of |the |audit |are:
Client | acceptance/continuance | and | establishing | engagement | terms
Preplanning
Assess |risks |and |establish |materiality
Plan |the |audit
Consider |internal |control
Audit |business |processes |and |related |accounts
Complete |the |audit
Evaluate |results |and |issue |audit |report
1-10 The |auditor’s |understanding |of |the |entity |and |its |environment |includes |knowledge
|about: |(1) |the |nature |of |the |entity, |(2) |its |objectives |and |strategies, |(3) |its |industry, |regulatory,
|and |other |external |factors, |(4) |its |management, |(5) |its |governance, |(6) |its |measurement |and
|performance |process, | and |(7) |its | business | processes.
1-11 Sometimes |auditors |will |face |situations |where |no |standard |audit |procedure |exists, |such
|as |the |example |from |the |text |of |verifying |the |inventory |of |reindeer. |Such |circumstances |require
|that |the |auditor |possess |creativity |and |innovation |when |planning |and |administering |audit
|procedures |where |little |or |no |precedent |exists. |Every |client |is |different, |and |applying |auditing
|concepts |in |different |situations |requires |logic |and |common |sense, |and |frequently |creativity |and
|innovation.
Solutions |to |Problems
1-12 The |memo |should |cite |the |following |facts:
There |is |a |historical |relationship |between |accounting |and |auditing.
4
