Solution Manual For Auditing & Assurance Services: A Systematic Approach, 12th Edition By William Messier Jr, Steven Glover, Verified Chapters 1 - 21, Complete Newest Version

,• Table of Contents h h




Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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Chapter 2: The Financial Statement Auditing Environment
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Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
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Chapter 4: Risk Assessment
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Chapter 5: Evidence and Documentation
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Chapter 6: Internal Control in a Financial Statement Audit
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Chapter 7: Auditing Internal Control over Financial Reporting
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Chapter 8: Audit Sampling: An Overview and Application to Tests of Controls
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Chapter 9: Audit Sampling: An Application to Substantive Tests of Account Balances
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Chapter 10: Auditing the Revenue Process
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Chapter 11: Auditing the Purchasing Process
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Chapter 12: Auditing the Human Resource Management Process
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Chapter 13: Auditing the Inventory Management Process
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Chapter 14: Auditing the Financing/Investing Process:Prepaid Expenses, Intangible Assets, and Property, Plant, and
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Equipment
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Chapter 15: Auditing the Financing/Investing Process:Long-Term Liabilities, Stockholders’ Equity, and Income Statement
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Accounts
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Chapter 16: Auditing the Financing/Investing Process: Cashand Investments
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Chapter 17: Completing the Audit Engagement
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Chapter 18: Reports on Audited Financial Statements
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Chapter 19: Professional Conduct, Independence, and Quality Management
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Chapter 20: Legal Liability
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Chapter 21: Assurance, Attestation, and Internal Auditing Services
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,CHAPTER 1 h




AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
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Answersto ReviewQuestions h h h




1-1 The study of auditing is more conceptual in nature compared to other accounting courses. h h h h h h h h h h h h h




Rather than focusing on learning the rules, techniques, and computations required to prepare
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financialstatements, auditing emphasizes learning aframework of analytical andlogicalskills to
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evaluate the relevance and reliability of the systems and processes responsible for financial
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information, as well as the information itself. To be successful, students must learn the framework and
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then learn to use logic and common sense in applying auditing concepts to various circumstances and
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situations.
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Understanding auditing can improve the decision making ability of consultants, h h h h h h h h h




businessmanagers, and accountants by providing a framework for evaluating the usefulness
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andreliability of information.
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1-2 There is a demand for auditing in a free-market economy because the agency relationship h h h h h h h h h h h h h




between an absentee owner and a manager produces a natural conflict of interest due to the
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information asymmetry that exists between the owner and manager. As a result, theagent agrees to
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be monitored as part of his/her employment contract. Auditing appears to be acost-effective form of
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monitoring.
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The empirical evidence suggests auditing was demanded prior togovernment regulationsuch h h h h h h h h h h h




as statutory audit requirements. Additionally, many private companies and other entities not subject
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to government auditing regulations also demand auditing.
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1-3 The agency relationship between an owner and manager produces a natural conflict of h h h h h h h h h h h h




interest because of differences in the two parties‘ goals and because of information asymmetrythat
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exists between them. That is, the manager generally has more information about the ‗true‘financial
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position and results of operations of the entity than the absentee owner does. If both parties seek to
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maximize their own self-interest, it is likely that the manager will not act in the best interest of the owner
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and may manipulate the information provided to the owner accordingly.
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1-4 Independence is an important standard for auditors. If an auditor is not independent ofthe h h h h h h h h h h h h h h




client, users may lose confidence in the auditor‘s ability to report truthfully on the financial statements,
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and the auditor‘s work loses its value. From an agency perspective, if the principal (owner) knows that
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the auditor is not independent, the owner will not trust the auditor‘s work.
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Thus, the agent will not hire the auditor because the auditor‘s report will not be effective inreducing
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information risk from the perspective of the owner.
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1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and evaluating h h h h h h h h h h h




evidenceregarding assertions about economic actions and events toascertainthedegree of
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correspondence between those assertions and established criteria and communicating the
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results to interested users.
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Assurance is engagement in which a practitioner expresses a conclusion designed to h h h h h h h h h h h




enhance the degree of confidence of the intended users other than the responsible party aboutthe
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outcome of the evaluation or measurement of a subject matter against criteria.
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Examples of assurance services are assurance (audit) of financial statements, assurance of h h h h h h h h h h h




prospectivefinancialinformation, assurance of reporting oninternalcontrol,assurance of
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sustainability reporting, and assurance of electronic commerce.
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, 1-6 The phrase systematic process implies that there should be a well-planned, logicalh h h h h h h h h h h




approachforconducting an audit that involves objectively obtainingandevaluating evidence.
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1-7 Materiality: "Omissions or misstatements of items are material if they could, individuallyor h h h h h h h h h h h h




collectively, influence the economic decisions of users taken on the basis of the financial statements.
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Materiality depends on the size and nature of the omission or misstatement judged in the surrounding
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circumstances. The size or nature of the item, or a combination of both, couldbe the determining factor."
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(IASB).
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Auditriskis defined as the risk that the auditor expresses an inappropriate audit opinionwhen h h h h h h h h h h h h h h h




the financial statements are materially misstated (ISA 200).
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The audit report states that the auditor obtains ―reasonable assurance‖ whether the financial
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statements are free from “material” misstatement. The term reasonable assurance informs the
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reader that there is some level of risk that the audit did not detect all material misstatements. In
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addition, the auditor‘s opinion commonly uses the wording that the financial statements present fairly,
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―inall material respects.‖ These phrases communicate tothird partiesthat the audit report is limited to
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material information.
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1-8 On most audits, it is not feasible or cost-effective to audit all transactions. For example, in a
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small business, the auditor might be able to examine all transactions that occurred during the period.
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However, it is unlikely that the owner of the business could afford to pay for such an extensive audit. For
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a large organization, the sheer volume of transactions prevents the auditor from examining every
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transaction. Thus, there is a trade-off between the exactness or precisionof the audit and its cost.
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1-9 The major phases of the audit are: h h h h h h




 Client acceptance/continuance and establishing engagement terms h h h h h




 Preplanning
 Assess risks and establish materiality h h h h




 Plan the audit h h




 Considerinternal control h h




 Audit business processes andrelatedaccounts h h h h h




 Complete theaudit h h




 Evaluate results and issue audit report h h h h h




1-10 The auditor‘s understanding of the entity and its environment includes knowledge h h h h h h h h h h




about: (1) the nature of the entity, (2) its objectives and strategies, (3)its industry, regulatory,and
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other external factors, (4) its management, (5) its governance, (6) its measurement and
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performance process, and (7) its business processes.
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1-11 Sometimes auditors willfacesituations wherenostandard audit procedureexists, suchas the h h h h h h h h h h h h h




example from the text of verifying the inventory of reindeer. Such circumstances require that the
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auditor possess creativity and innovation when planning and administering audit procedures where
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little or no precedent exists. Every client is different, and applying auditing concepts in different
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situations requires logic and common sense, and frequently creativity and innovation.
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SolutionstoProblems h h




1-12 The memo should cite the following facts: h h h h h h




 Thereis a historical relationship between accounting andauditing. h h h h h h h h