SOLUTION MANUAL for Auditing & Assurance Services A
v v v v v v v
v Systematic Approach v v
12th Edition by William Messier Jr, Steven Glover,
v v v v v v v v
Chapters 1 - 21 / Complete
v v v v v
1
,• Table of Contents v v
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
v v v v v v v v v
Chapter 2: The Financial Statement Auditing Environment
v v v v v v
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
v v v v v v v v v
Chapter 4: Risk Assessment
v v v
Chapter 5: Evidence and Documentation
v v v v
Chapter 6: Internal Control in a Financial Statement Audit
v v v v v v v v
Chapter 7: Auditing Internal Control over Financial Reporting
v v v v v v v
Chapter 8: Audit Sampling: An Overview and Application to Tests of Controls
v v v v v v v v v v v
Chapter 9: Audit Sampling: An Application to Substantive Tests of Account Balances
v v v v v v v v v v v
Chapter 10: Auditing the Revenue Process
v v v v v
Chapter 11: Auditing the Purchasing Process
v v v v v
Chapter 12: Auditing the Human Resource Management Process
v v v v v v v
Chapter 13: Auditing the Inventory Management Process
v v v v v v
Chapter 14: Auditing the Financing/Investing Process:Prepaid Expenses, Intangible Assets, and Property, Plant, and
v v v v v v v v v v v v
Equipment
v
Chapter 15: Auditing the Financing/Investing Process:Long-Term Liabilities, Stockholders’ Equity, and Income Statement
v v v v v v v v v v v
Accounts
v
Chapter 16: Auditing the Financing/Investing Process: Cashand Investments
v v v v v v v
Chapter 17: Completing the Audit Engagement
v v v v v
Chapter 18: Reports on Audited Financial Statements
v v v v v v
Chapter 19: Professional Conduct, Independence, and Quality Management
v v v v v v v
Chapter 20: Legal Liability
v v v
Chapter 21: Assurance, Attestation, and Internal Auditing Services
v v v v v v v
2
,CHAPTER 1 v
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
v v v v v v v
Answers to Review Questions v v v
1-1 The study of auditing is more conceptual in nature compared to other accounting courses.
v v v v v v v v v v v v v
Rather than focusing on learning the rules, techniques, and computations required to prepare
v v v v v v v v v v v v v
financial statements, auditing emphasizes learning a framework of analytical and logicalskills to
v v v v v v v v v v v v v
evaluate the relevance and reliability of the systems and processes responsible for financial
v v v v v v v v v v v v v
information, as well as the information itself. To be successful, students must learn the framework
v v v v v v v v v v v v v v v
and then learn to use logic and common sense in applying auditing concepts to various
v v v v v v v v v v v v v v v
circumstances and situations.
v v v
Understanding auditing can improve the decision making ability of consultants, business v v v v v v v v v v
managers, and accountants by providing a framework for evaluating the usefulness and
v v v v v v v v v v v v
reliability of information.
v v v
1-2 There is a demand for auditing in a free-market economy because the agency relationship v v v v v v v v v v v v v
between an absentee owner and a manager produces a natural conflict of interest due to the
v v v v v v v v v v v v v v v v
information asymmetry that exists between the owner and manager. As a result, theagent agrees
v v v v v v v v v v v v v v v
to be monitored as part of his/her employment contract. Auditing appears to be acost-effective
v v v v v v v v v v v v v v v
form of monitoring.
v v v
The empirical evidence suggests auditing was demanded prior to government regulation
v v v v v v v v v v
such as statutory audit requirements. Additionally, many private companies and other entities not
v v v v v v v v v v v v v
subject to government auditing regulations also demand auditing.
v v v v v v v v
1-3 The agency relationship between an owner and manager produces a natural conflict of
v v v v v v v v v v v v
interest because of differences in the two parties’ goals and because of information asymmetry
v v v v v v v v v v v v v v
that exists between them. That is, the manager generally has more information about the ‘true’
v v v v v v v v v v v v v v v
financial position and results of operations of the entity than the absentee owner does. If both
v v v v v v v v v v v v v v v v
parties seek to maximize their own self-interest, it is likely that the manager will not act in the best
v v v v v v v v v v v v v v v v v v v
interest of the owner and may manipulate the information provided to the owner accordingly.
v v v v v v v v v v v v v v
1-4 Independence is an important standard for auditors. If an auditor is not independent ofthe v v v v v v v v v v v v v v
client, users may lose confidence in the auditor’s ability to report truthfully on the financial
v v v v v v v v v v v v v v v
statements, and the auditor’s work loses its value. From an agency perspective, if the principal
v v v v v v v v v v v v v v v
(owner) knows that the auditor is not independent, the owner will not trust the auditor’s work.
v v v v v v v v v v v v v v v v
Thus, the agent will not hire the auditor because the auditor’s report will not be effective inreducing
v v v v v v v v v v v v v v v v v
information risk from the perspective of the owner.
v v v v v v v v
1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and v v v v v v v v v v
evaluating evidence regarding assertions about economic actions and events to ascertain the
v v v v v v v v v v v v
degree of correspondence between those assertions and established criteria and
v v v v v v v v v v
communicating the results to interested users.
v v v v v v
Assurance is engagement in which a practitioner expresses a conclusion designed to v v v v v v v v v v v
enhance the degree of confidence of the intended users other than the responsible party aboutthe
v v v v v v v v v v v v v v v v
outcome of the evaluation or measurement of a subject matter against criteria.
v v v v v v v v v v v v
Examples of assurance services are assurance (audit) of financial statements, assurance v v v v v v v v v v
of prospective financial information, assurance of reporting on internal control,assurance of
v v v v v v v v v v v v
sustainability reporting, and assurance of electronic commerce.
v v v v v v v
3
, 1-6 The phrase systematic process implies that there should be a well-planned, logical
v v v v v v v v v v v
approach for conducting an audit that involves objectively obtaining and evaluating evidence.
v v v v v v v v v v v v
1-7 Materiality: "Omissions or misstatements of items are material if they could, individuallyor v v v v v v v v v v v v
collectively, influence the economic decisions of users taken on the basis of the financial
v v v v v v v v v v v v v v
statements. Materiality depends on the size and nature of the omission or misstatement judged in
v v v v v v v v v v v v v v v
the surrounding circumstances. The size or nature of the item, or a combination of both, couldbe the
v v v v v v v v v v v v v v v v v v
determining factor." (IASB).
v v v
Audit risk is defined as the risk that the auditor expresses an inappropriate audit opinion
v v v v v v v v v v v v v v
when the financial statements are materially misstated (ISA 200).
v v v v v v v v v
The audit report states that the auditor obtains “reasonable assurance” whether the
v v v v v v v v v v v
financial statements are free from “material” misstatement. The term reasonable assurance
v v v v v v v v v v v
informs the reader that there is some level of risk that the audit did not detect all material
v v v v v v v v v v v v v v v v v v
misstatements. In addition, the auditor’s opinion commonly uses the wording that the financial
v v v v v v v v v v v v v
statements present fairly, “in all material respects.” These phrases communicate to third partiesthat
v v v v v v v v v v v v v v
the audit report is limited to material information.
v v v v v v v v
1-8 On most audits, it is not feasible or cost-effective to audit all transactions. For example, in a
v v v v v v v v v v v v v v v v
small business, the auditor might be able to examine all transactions that occurred during the
v v v v v v v v v v v v v v v
period. However, it is unlikely that the owner of the business could afford to pay for such an
v v v v v v v v v v v v v v v v v v
extensive audit. For a large organization, the sheer volume of transactions prevents the auditor
v v v v v v v v v v v v v v
from examining every transaction. Thus, there is a trade-off between the exactness or precisionof
v v v v v v v v v v v v v v v
the audit and its cost.
v v v v v
1-9 The major phases of the audit are: v v v v v v
• Client acceptance/continuance and establishing engagement terms v v v v v
• Preplanning
• Assess risks and establish materiality v v v v
• Plan the audit v v
• Consider internal control v v
• Audit business processes and related accounts v v v v v
• Complete the audit v v
• Evaluate results and issue audit report v v v v v
1-10 The auditor’s understanding of the entity and its environment includes knowledge
v v v v v v v v v v
about: (1) the nature of the entity, (2) its objectives and strategies, (3) its industry, regulatory,and
v v v v v v v v v v v v v v v v v
other external factors, (4) its management, (5) its governance, (6) its measurement and
v v v v v v v v v v v v v
performance process, and (7) its business processes.
v v v v v v v
1-11 Sometimes auditors will face situations where no standard audit procedure exists, suchas v v v v v v v v v v v v
the example from the text of verifying the inventory of reindeer. Such circumstances require that
v v v v v v v v v v v v v v v
the auditor possess creativity and innovation when planning and administering audit procedures
v v v v v v v v v v v v
where little or no precedent exists. Every client is different, and applying auditing concepts in
v v v v v v v v v v v v v v v
different situations requires logic and common sense, and frequently creativity and innovation.
v v v v v v v v v v v v
Solutions to Problems v v
1-12 The memo should cite the following facts:
v v v v v v
• There is a historical relationship between accounting and auditing. v v v v v v v v
4
v v v v v v v
v Systematic Approach v v
12th Edition by William Messier Jr, Steven Glover,
v v v v v v v v
Chapters 1 - 21 / Complete
v v v v v
1
,• Table of Contents v v
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
v v v v v v v v v
Chapter 2: The Financial Statement Auditing Environment
v v v v v v
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
v v v v v v v v v
Chapter 4: Risk Assessment
v v v
Chapter 5: Evidence and Documentation
v v v v
Chapter 6: Internal Control in a Financial Statement Audit
v v v v v v v v
Chapter 7: Auditing Internal Control over Financial Reporting
v v v v v v v
Chapter 8: Audit Sampling: An Overview and Application to Tests of Controls
v v v v v v v v v v v
Chapter 9: Audit Sampling: An Application to Substantive Tests of Account Balances
v v v v v v v v v v v
Chapter 10: Auditing the Revenue Process
v v v v v
Chapter 11: Auditing the Purchasing Process
v v v v v
Chapter 12: Auditing the Human Resource Management Process
v v v v v v v
Chapter 13: Auditing the Inventory Management Process
v v v v v v
Chapter 14: Auditing the Financing/Investing Process:Prepaid Expenses, Intangible Assets, and Property, Plant, and
v v v v v v v v v v v v
Equipment
v
Chapter 15: Auditing the Financing/Investing Process:Long-Term Liabilities, Stockholders’ Equity, and Income Statement
v v v v v v v v v v v
Accounts
v
Chapter 16: Auditing the Financing/Investing Process: Cashand Investments
v v v v v v v
Chapter 17: Completing the Audit Engagement
v v v v v
Chapter 18: Reports on Audited Financial Statements
v v v v v v
Chapter 19: Professional Conduct, Independence, and Quality Management
v v v v v v v
Chapter 20: Legal Liability
v v v
Chapter 21: Assurance, Attestation, and Internal Auditing Services
v v v v v v v
2
,CHAPTER 1 v
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
v v v v v v v
Answers to Review Questions v v v
1-1 The study of auditing is more conceptual in nature compared to other accounting courses.
v v v v v v v v v v v v v
Rather than focusing on learning the rules, techniques, and computations required to prepare
v v v v v v v v v v v v v
financial statements, auditing emphasizes learning a framework of analytical and logicalskills to
v v v v v v v v v v v v v
evaluate the relevance and reliability of the systems and processes responsible for financial
v v v v v v v v v v v v v
information, as well as the information itself. To be successful, students must learn the framework
v v v v v v v v v v v v v v v
and then learn to use logic and common sense in applying auditing concepts to various
v v v v v v v v v v v v v v v
circumstances and situations.
v v v
Understanding auditing can improve the decision making ability of consultants, business v v v v v v v v v v
managers, and accountants by providing a framework for evaluating the usefulness and
v v v v v v v v v v v v
reliability of information.
v v v
1-2 There is a demand for auditing in a free-market economy because the agency relationship v v v v v v v v v v v v v
between an absentee owner and a manager produces a natural conflict of interest due to the
v v v v v v v v v v v v v v v v
information asymmetry that exists between the owner and manager. As a result, theagent agrees
v v v v v v v v v v v v v v v
to be monitored as part of his/her employment contract. Auditing appears to be acost-effective
v v v v v v v v v v v v v v v
form of monitoring.
v v v
The empirical evidence suggests auditing was demanded prior to government regulation
v v v v v v v v v v
such as statutory audit requirements. Additionally, many private companies and other entities not
v v v v v v v v v v v v v
subject to government auditing regulations also demand auditing.
v v v v v v v v
1-3 The agency relationship between an owner and manager produces a natural conflict of
v v v v v v v v v v v v
interest because of differences in the two parties’ goals and because of information asymmetry
v v v v v v v v v v v v v v
that exists between them. That is, the manager generally has more information about the ‘true’
v v v v v v v v v v v v v v v
financial position and results of operations of the entity than the absentee owner does. If both
v v v v v v v v v v v v v v v v
parties seek to maximize their own self-interest, it is likely that the manager will not act in the best
v v v v v v v v v v v v v v v v v v v
interest of the owner and may manipulate the information provided to the owner accordingly.
v v v v v v v v v v v v v v
1-4 Independence is an important standard for auditors. If an auditor is not independent ofthe v v v v v v v v v v v v v v
client, users may lose confidence in the auditor’s ability to report truthfully on the financial
v v v v v v v v v v v v v v v
statements, and the auditor’s work loses its value. From an agency perspective, if the principal
v v v v v v v v v v v v v v v
(owner) knows that the auditor is not independent, the owner will not trust the auditor’s work.
v v v v v v v v v v v v v v v v
Thus, the agent will not hire the auditor because the auditor’s report will not be effective inreducing
v v v v v v v v v v v v v v v v v
information risk from the perspective of the owner.
v v v v v v v v
1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and v v v v v v v v v v
evaluating evidence regarding assertions about economic actions and events to ascertain the
v v v v v v v v v v v v
degree of correspondence between those assertions and established criteria and
v v v v v v v v v v
communicating the results to interested users.
v v v v v v
Assurance is engagement in which a practitioner expresses a conclusion designed to v v v v v v v v v v v
enhance the degree of confidence of the intended users other than the responsible party aboutthe
v v v v v v v v v v v v v v v v
outcome of the evaluation or measurement of a subject matter against criteria.
v v v v v v v v v v v v
Examples of assurance services are assurance (audit) of financial statements, assurance v v v v v v v v v v
of prospective financial information, assurance of reporting on internal control,assurance of
v v v v v v v v v v v v
sustainability reporting, and assurance of electronic commerce.
v v v v v v v
3
, 1-6 The phrase systematic process implies that there should be a well-planned, logical
v v v v v v v v v v v
approach for conducting an audit that involves objectively obtaining and evaluating evidence.
v v v v v v v v v v v v
1-7 Materiality: "Omissions or misstatements of items are material if they could, individuallyor v v v v v v v v v v v v
collectively, influence the economic decisions of users taken on the basis of the financial
v v v v v v v v v v v v v v
statements. Materiality depends on the size and nature of the omission or misstatement judged in
v v v v v v v v v v v v v v v
the surrounding circumstances. The size or nature of the item, or a combination of both, couldbe the
v v v v v v v v v v v v v v v v v v
determining factor." (IASB).
v v v
Audit risk is defined as the risk that the auditor expresses an inappropriate audit opinion
v v v v v v v v v v v v v v
when the financial statements are materially misstated (ISA 200).
v v v v v v v v v
The audit report states that the auditor obtains “reasonable assurance” whether the
v v v v v v v v v v v
financial statements are free from “material” misstatement. The term reasonable assurance
v v v v v v v v v v v
informs the reader that there is some level of risk that the audit did not detect all material
v v v v v v v v v v v v v v v v v v
misstatements. In addition, the auditor’s opinion commonly uses the wording that the financial
v v v v v v v v v v v v v
statements present fairly, “in all material respects.” These phrases communicate to third partiesthat
v v v v v v v v v v v v v v
the audit report is limited to material information.
v v v v v v v v
1-8 On most audits, it is not feasible or cost-effective to audit all transactions. For example, in a
v v v v v v v v v v v v v v v v
small business, the auditor might be able to examine all transactions that occurred during the
v v v v v v v v v v v v v v v
period. However, it is unlikely that the owner of the business could afford to pay for such an
v v v v v v v v v v v v v v v v v v
extensive audit. For a large organization, the sheer volume of transactions prevents the auditor
v v v v v v v v v v v v v v
from examining every transaction. Thus, there is a trade-off between the exactness or precisionof
v v v v v v v v v v v v v v v
the audit and its cost.
v v v v v
1-9 The major phases of the audit are: v v v v v v
• Client acceptance/continuance and establishing engagement terms v v v v v
• Preplanning
• Assess risks and establish materiality v v v v
• Plan the audit v v
• Consider internal control v v
• Audit business processes and related accounts v v v v v
• Complete the audit v v
• Evaluate results and issue audit report v v v v v
1-10 The auditor’s understanding of the entity and its environment includes knowledge
v v v v v v v v v v
about: (1) the nature of the entity, (2) its objectives and strategies, (3) its industry, regulatory,and
v v v v v v v v v v v v v v v v v
other external factors, (4) its management, (5) its governance, (6) its measurement and
v v v v v v v v v v v v v
performance process, and (7) its business processes.
v v v v v v v
1-11 Sometimes auditors will face situations where no standard audit procedure exists, suchas v v v v v v v v v v v v
the example from the text of verifying the inventory of reindeer. Such circumstances require that
v v v v v v v v v v v v v v v
the auditor possess creativity and innovation when planning and administering audit procedures
v v v v v v v v v v v v
where little or no precedent exists. Every client is different, and applying auditing concepts in
v v v v v v v v v v v v v v v
different situations requires logic and common sense, and frequently creativity and innovation.
v v v v v v v v v v v v
Solutions to Problems v v
1-12 The memo should cite the following facts:
v v v v v v
• There is a historical relationship between accounting and auditing. v v v v v v v v
4
