SOLUTION MANUAL for Auditing & Assurance Services A
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b Systematic Approach b b
12th Edition by William Messier Jr, Steven Glover,
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Chapters 1 - 21 / Complete
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,• Table of Contents b b
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
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Statement 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 b
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
b b b b b b b
Answers to Review Questions b b b
1-1 The study of auditing is more conceptual in nature compared to other accounting
b b b b b b b b b b b b
courses. Rather than focusing on learning the rules, techniques, and computations required to
b b b b b b b b b b b b b
prepare financial statements, auditing emphasizes learning a framework of analytical and
b b b b b b b b b b b
logicalskills to evaluate the relevance and reliability of the systems and processes responsible
b b b b b b b b b b b b b b
for financial information, as well as the information itself. To be successful, students must
b b b b b b b b b b b b b b
learn the framework and then learn to use logic and common sense in applying auditing
b b b b b b b b b b b b b b b
concepts to various circumstances and situations.
b b b b b b
Understanding auditing can improve the decision making ability of consultants, b b b b b b b b b
business managers, and accountants by providing a framework for evaluating the
b b b b b b b b b b b
usefulness andreliability of information.
b b b b b
1-2 There is a demand for auditing in a free-market economy because the agency
b b b b b b b b b b b b
relationship between an absentee owner and a manager produces a natural conflict of
b b b b b b b b b b b b b
interest due to the information asymmetry that exists between the owner and manager. As a
b b b b b b b b b b b b b b b
result, theagent agrees to be monitored as part of his/her employment contract. Auditing
b b b b b b b b b b b b b b
appears to be acost-effective form of monitoring.
b b b b b b b b
The empirical evidence suggests auditing was demanded prior to government
b b b b b b b b b
regulationsuch as statutory audit requirements. Additionally, many private companies and
b b b b b b b b b b b
other entities not subject to government auditing regulations also demand auditing.
b b b b b b b b b b b
1-3 The agency relationship between an owner and manager produces a natural conflict
b b b b b b b b b b b
of interest because of differences in the two parties‘ goals and because of information
b b b b b b b b b b b b b b
asymmetrythat exists between them. That is, the manager generally has more information
b b b b b b b b b b b b b
about the ‗true‘financial position and results of operations of the entity than the absentee
b b b b b b b b b b b b b b b
owner does. If both parties seek to maximize their own self-interest, it is likely that the
b b b b b b b b b b b b b b b b
manager will not act in the best interest of the owner and may manipulate the information
b b b b b b b b b b b b b b b b
provided to the owner accordingly.
b b b b b
1-4 Independence is an important standard for auditors. If an auditor is not independent b b b b b b b b b b b b
ofthe client, users may lose confidence in the auditor‘s ability to report truthfully on the
b b b b b b b b b b b b b b b b
financial statements, and the auditor‘s work loses its value. From an agency perspective, if
b b b b b b b b b b b b b b
the principal (owner) knows that the auditor is not independent, the owner will not trust the
b b b b b b b b b b b b b b b b
auditor‘s work.
b b
Thus, the agent will not hire the auditor because the auditor‘s report will not be effective
b b b b b b b b b b b b b b b
inreducing information risk from the perspective of the owner.
b b b b b b b b b b
1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and b b b b b b b b b b
evaluating evidence regarding assertions about economic actions and events to ascertain
b b b b b b b b b b b
thedegree of correspondence between those assertions and established criteria and
b b b b b b b b b b b
communicating the results to interested users.
b b b b b b
Assurance is engagement in which a practitioner expresses a conclusion designed to b b b b b b b b b b b
enhance the degree of confidence of the intended users other than the responsible party
b b b b b b b b b b b b b b
aboutthe outcome of the evaluation or measurement of a subject matter against criteria.
b b b b b b b b b b b b b b
Examples of assurance services are assurance (audit) of financial statements, b b b b b b b b b
assurance of prospective financial information, assurance of reporting on internal
b b b b b b b b b b
, control,assurance of sustainability reporting, and assurance of electronic commerce.
b b b b b b b b b b
b b b b b b b
b Systematic Approach b b
12th Edition by William Messier Jr, Steven Glover,
b b b b b b b b
Chapters 1 - 21 / Complete
b b b b b
,• Table of Contents b b
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
b b b b b b b b b
Chapter 2: The Financial Statement Auditing Environment
b b b b b b
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
b b b b b b b b b
Chapter 4: Risk Assessment
b b b
Chapter 5: Evidence and Documentation
b b b b
Chapter 6: Internal Control in a Financial Statement Audit
b b b b b b b b
Chapter 7: Auditing Internal Control over Financial Reporting
b b b b b b b
Chapter 8: Audit Sampling: An Overview and Application to Tests of Controls
b b b b b b b b b b b
Chapter 9: Audit Sampling: An Application to Substantive Tests of Account Balances
b b b b b b b b b b b
Chapter 10: Auditing the Revenue Process
b b b b b
Chapter 11: Auditing the Purchasing Process
b b b b b
Chapter 12: Auditing the Human Resource Management Process
b b b b b b b
Chapter 13: Auditing the Inventory Management Process
b b b b b b
Chapter 14: Auditing the Financing/Investing Process:Prepaid Expenses, Intangible Assets, and Property, Plant, and
b b b b b b b b b b b b
Equipment
b
Chapter 15: Auditing the Financing/Investing Process:Long-Term Liabilities, Stockholders’ Equity, and Income
b b b b b b b b b b
Statement Accounts
b b
Chapter 16: Auditing the Financing/Investing Process: Cashand Investments
b b b b b b b
Chapter 17: Completing the Audit Engagement
b b b b b
Chapter 18: Reports on Audited Financial Statements
b b b b b b
Chapter 19: Professional Conduct, Independence, and Quality Management
b b b b b b b
Chapter 20: Legal Liability
b b b
Chapter 21: Assurance, Attestation, and Internal Auditing Services
b b b b b b b
,CHAPTER 1 b
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
b b b b b b b
Answers to Review Questions b b b
1-1 The study of auditing is more conceptual in nature compared to other accounting
b b b b b b b b b b b b
courses. Rather than focusing on learning the rules, techniques, and computations required to
b b b b b b b b b b b b b
prepare financial statements, auditing emphasizes learning a framework of analytical and
b b b b b b b b b b b
logicalskills to evaluate the relevance and reliability of the systems and processes responsible
b b b b b b b b b b b b b b
for financial information, as well as the information itself. To be successful, students must
b b b b b b b b b b b b b b
learn the framework and then learn to use logic and common sense in applying auditing
b b b b b b b b b b b b b b b
concepts to various circumstances and situations.
b b b b b b
Understanding auditing can improve the decision making ability of consultants, b b b b b b b b b
business managers, and accountants by providing a framework for evaluating the
b b b b b b b b b b b
usefulness andreliability of information.
b b b b b
1-2 There is a demand for auditing in a free-market economy because the agency
b b b b b b b b b b b b
relationship between an absentee owner and a manager produces a natural conflict of
b b b b b b b b b b b b b
interest due to the information asymmetry that exists between the owner and manager. As a
b b b b b b b b b b b b b b b
result, theagent agrees to be monitored as part of his/her employment contract. Auditing
b b b b b b b b b b b b b b
appears to be acost-effective form of monitoring.
b b b b b b b b
The empirical evidence suggests auditing was demanded prior to government
b b b b b b b b b
regulationsuch as statutory audit requirements. Additionally, many private companies and
b b b b b b b b b b b
other entities not subject to government auditing regulations also demand auditing.
b b b b b b b b b b b
1-3 The agency relationship between an owner and manager produces a natural conflict
b b b b b b b b b b b
of interest because of differences in the two parties‘ goals and because of information
b b b b b b b b b b b b b b
asymmetrythat exists between them. That is, the manager generally has more information
b b b b b b b b b b b b b
about the ‗true‘financial position and results of operations of the entity than the absentee
b b b b b b b b b b b b b b b
owner does. If both parties seek to maximize their own self-interest, it is likely that the
b b b b b b b b b b b b b b b b
manager will not act in the best interest of the owner and may manipulate the information
b b b b b b b b b b b b b b b b
provided to the owner accordingly.
b b b b b
1-4 Independence is an important standard for auditors. If an auditor is not independent b b b b b b b b b b b b
ofthe client, users may lose confidence in the auditor‘s ability to report truthfully on the
b b b b b b b b b b b b b b b b
financial statements, and the auditor‘s work loses its value. From an agency perspective, if
b b b b b b b b b b b b b b
the principal (owner) knows that the auditor is not independent, the owner will not trust the
b b b b b b b b b b b b b b b b
auditor‘s work.
b b
Thus, the agent will not hire the auditor because the auditor‘s report will not be effective
b b b b b b b b b b b b b b b
inreducing information risk from the perspective of the owner.
b b b b b b b b b b
1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and b b b b b b b b b b
evaluating evidence regarding assertions about economic actions and events to ascertain
b b b b b b b b b b b
thedegree of correspondence between those assertions and established criteria and
b b b b b b b b b b b
communicating the results to interested users.
b b b b b b
Assurance is engagement in which a practitioner expresses a conclusion designed to b b b b b b b b b b b
enhance the degree of confidence of the intended users other than the responsible party
b b b b b b b b b b b b b b
aboutthe outcome of the evaluation or measurement of a subject matter against criteria.
b b b b b b b b b b b b b b
Examples of assurance services are assurance (audit) of financial statements, b b b b b b b b b
assurance of prospective financial information, assurance of reporting on internal
b b b b b b b b b b
, control,assurance of sustainability reporting, and assurance of electronic commerce.
b b b b b b b b b b
