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 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.
,1-4 Independence Vis V a Vbedrock V principle Vfor Vauditors. VIf V an V auditor Vis V not
V independent V of V the V client, V users V may V lose V confidence V in Vthe V auditor’s V ability
V to V report V objectively V and V truthfully Von V the Vfinancial V statements, Vand V the
Vauditor’s Vwork Vloses Vits Vvalue. VFrom V an V agency V perspective, Vif V the Vprincipal
V (owner) V knows Vthat V the Vauditor Vis Vnot V independent, V the V owner V will V not
V trust V the V auditor’s V work. V Thus, V the V agent V will V not V hire V the V auditor
V because V the V auditor’s V report V will V not V be V effective V in V reducing V information
V risk V from V the V perspective V of V the V owner. V Auditor V independence V is V also V a
V regulatory Vrequirement.
1-5 Auditing V (broadly V defined) V is V a V systematic V process V of V (1) V objectively
V obtaining V and V evaluating V evidence V regarding V assertions V about V economic
V actions V and V events V to V ascertain V the V degree V of V correspondence V between
V those V assertions V and V established V criteria Vand V(2) Vcommunicating Vthe Vresults
Vto Vinterested Vusers.
Attest V services V occur V when V a V practitioner V issues V a V report V on V subject
V matter, V or V an V assertion Vabout Vsubject Vmatter, Vthat Vis Vthe Vresponsibility Vof
Vanother Vparty.
Assurance V services V are V independent V professional V services V that V improve V the
V quality V of Vinformation, Vor Vits Vcontext, Vfor Vdecision Vmakers.
1-6 Auditing V is V a V specific V form V of V ―attest V service,‖ V which V in V turn V is V a V specific
V category V of
―assurance V service.‖ V In V other V words, V the V phrase V ―assurance V services‖
V constitutes V the V broadest V category V of V professional V services V provided V by V CPAs
V that V serve V to V improve V the V quality V or V context V of V information V for V decision
V making V for V other V parties. V Attest V services V constitute V a V more V specific V category
V of V assurance V that V CPAs V can V provide. V These V services Vare V intended V to V reduce
Vinformation V risk Vto V parties Vrelying V on V information V provided V by V a V party V that V is
Vcreating, V or V making V assertions V about, V subject V matter V of V interest. V CPAs V can
V provide V attest V services V relating V to V a V wide V variety V of V subject V matter V (or
V assertions V about V that V subject V matter) V to V reduce V the V information V risk V to
V third V parties. V One V such V subject V matter V is V a V set V of V financial V statements. V When V a
V CPA V provides V a V very V in-depth, V detailed V attest V service V that V follows V relevant
V standards V to V constitute V a V complete V examination V of V a V set V of V financial
V statements V and V related V assertions, Vthis Vis Vcalled Va Vfinancial Vstatement
V―audit.‖
1-7 Audit V risk V is V defined V as V the V risk V that V the V auditor V may V unknowingly
V fail V to V appropriately V modify V his V or V her V opinion V on V financial V statements V that
V are V materially V misstated V (AS V 1101). V Materiality V is V defined V as V "the
V magnitude V of V an V omission V or V misstatement V of V accounting V information
V that, V in V the V light V of V surrounding V circumstances, V makes V it V probable V that
V the V judgment V of V a V reasonable V person V relying V on V the V information Vwould Vhave
V been V changed V or V influenced V by V the V omission V or V misstatement" V (FASB
V Statement V of V Financial V Accounting V Concepts V No. V 8, V Chapter V 3: V Qualitative
V Characteristics V of V Useful V Accounting V Information, V which V is V pending V revision
V at V the V time V of V the V writing V of V this V book V per V the V Board’s V November
V 2017 V decision Vto Vrevert Vto Va Vdefinition Vof Vmateriality Vsimilar Vto Vthe Vone Vfound
Vin Vsuperseded V Concept VNo. V2).
The V concept V of V materiality V is V reflected V in V the V wording V of V the V auditor's
, V standard V audit V report V through V the V phrase V "the V financial V statements V present
V fairly V in V all V material Vrespects." VThis Vis Vthe Vmanner Vin Vwhich Vthe Vauditor
V communicates V the V notion V of V materiality V to V the V users V of V the V auditor's
V report. V The V auditor's V standard V report V states Vthat Vthe Vaudit Vprovides Vonly
V reasonable V assurance Vthat Vthe Vfinancial Vstatements
Approach 12th Edition by William Messier Jr, Steven Glover, Douglas
Prawit
,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.
,1-4 Independence Vis V a Vbedrock V principle Vfor Vauditors. VIf V an V auditor Vis V not
V independent V of V the V client, V users V may V lose V confidence V in Vthe V auditor’s V ability
V to V report V objectively V and V truthfully Von V the Vfinancial V statements, Vand V the
Vauditor’s Vwork Vloses Vits Vvalue. VFrom V an V agency V perspective, Vif V the Vprincipal
V (owner) V knows Vthat V the Vauditor Vis Vnot V independent, V the V owner V will V not
V trust V the V auditor’s V work. V Thus, V the V agent V will V not V hire V the V auditor
V because V the V auditor’s V report V will V not V be V effective V in V reducing V information
V risk V from V the V perspective V of V the V owner. V Auditor V independence V is V also V a
V regulatory Vrequirement.
1-5 Auditing V (broadly V defined) V is V a V systematic V process V of V (1) V objectively
V obtaining V and V evaluating V evidence V regarding V assertions V about V economic
V actions V and V events V to V ascertain V the V degree V of V correspondence V between
V those V assertions V and V established V criteria Vand V(2) Vcommunicating Vthe Vresults
Vto Vinterested Vusers.
Attest V services V occur V when V a V practitioner V issues V a V report V on V subject
V matter, V or V an V assertion Vabout Vsubject Vmatter, Vthat Vis Vthe Vresponsibility Vof
Vanother Vparty.
Assurance V services V are V independent V professional V services V that V improve V the
V quality V of Vinformation, Vor Vits Vcontext, Vfor Vdecision Vmakers.
1-6 Auditing V is V a V specific V form V of V ―attest V service,‖ V which V in V turn V is V a V specific
V category V of
―assurance V service.‖ V In V other V words, V the V phrase V ―assurance V services‖
V constitutes V the V broadest V category V of V professional V services V provided V by V CPAs
V that V serve V to V improve V the V quality V or V context V of V information V for V decision
V making V for V other V parties. V Attest V services V constitute V a V more V specific V category
V of V assurance V that V CPAs V can V provide. V These V services Vare V intended V to V reduce
Vinformation V risk Vto V parties Vrelying V on V information V provided V by V a V party V that V is
Vcreating, V or V making V assertions V about, V subject V matter V of V interest. V CPAs V can
V provide V attest V services V relating V to V a V wide V variety V of V subject V matter V (or
V assertions V about V that V subject V matter) V to V reduce V the V information V risk V to
V third V parties. V One V such V subject V matter V is V a V set V of V financial V statements. V When V a
V CPA V provides V a V very V in-depth, V detailed V attest V service V that V follows V relevant
V standards V to V constitute V a V complete V examination V of V a V set V of V financial
V statements V and V related V assertions, Vthis Vis Vcalled Va Vfinancial Vstatement
V―audit.‖
1-7 Audit V risk V is V defined V as V the V risk V that V the V auditor V may V unknowingly
V fail V to V appropriately V modify V his V or V her V opinion V on V financial V statements V that
V are V materially V misstated V (AS V 1101). V Materiality V is V defined V as V "the
V magnitude V of V an V omission V or V misstatement V of V accounting V information
V that, V in V the V light V of V surrounding V circumstances, V makes V it V probable V that
V the V judgment V of V a V reasonable V person V relying V on V the V information Vwould Vhave
V been V changed V or V influenced V by V the V omission V or V misstatement" V (FASB
V Statement V of V Financial V Accounting V Concepts V No. V 8, V Chapter V 3: V Qualitative
V Characteristics V of V Useful V Accounting V Information, V which V is V pending V revision
V at V the V time V of V the V writing V of V this V book V per V the V Board’s V November
V 2017 V decision Vto Vrevert Vto Va Vdefinition Vof Vmateriality Vsimilar Vto Vthe Vone Vfound
Vin Vsuperseded V Concept VNo. V2).
The V concept V of V materiality V is V reflected V in V the V wording V of V the V auditor's
, V standard V audit V report V through V the V phrase V "the V financial V statements V present
V fairly V in V all V material Vrespects." VThis Vis Vthe Vmanner Vin Vwhich Vthe Vauditor
V communicates V the V notion V of V materiality V to V the V users V of V the V auditor's
V report. V The V auditor's V standard V report V states Vthat Vthe Vaudit Vprovides Vonly
V reasonable V assurance Vthat Vthe Vfinancial Vstatements
