SOLUTION MANUAL FOR h h
Auditing & Assurance Services A Systematic Approach 12e Messier C
h h h h h h h h h
hapter 1-21 h
CHAPTER 1 h
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATE
h h h h h h
MENT AUDITING h
Answers to Review Questions
h h h
1-1 Thehstudyhofhauditinghishmorehconceptualhinhnaturehashcomparedhtohotherhaccountinghcourses.
hRatherhthanhfocusinghonhlearninghthehrules,htechniques,handhcomputationshrequiredhtohprepar
ehfinancialhstatements,hauditinghemphasizeshlearninghahframeworkhofhanalyticalhandhlogicalhs
kills.hThishframeworkhenableshauditorshtohevaluatehthehrelevanceh andhreliabilityhofhthehsyste
mshandhprocesseshresponsiblehforhfinancialhinformationhashwellhashthehinformationhitself.hToh
behsuccessful,hstudentshmusthlearnhthehframeworkhandhthenhlearnhtohusehlogichandhcommonhse
nsehinhapplyinghauditinghconceptshtohvarioushcircumstanceshandhsituations.hUnderstandingha
uditinghcanhimprovehthehdecision-
makinghabilityhofhconsultants,hbusinesshmanagers,handhaccountantshbyhprovidinghahframewor
khforhevaluatinghthehusefulnesshandhreliabilityhofhinformation—
anhimportanthtaskhinhmanyhdifferenthbusinesshcontexts.
1-2 Therehishahdemandhforhauditinghinhahfree-
marketheconomyhbecausehthehagencyhrelationshiphbetweenhanhabsenteehownerhandhahmanage
rhproduceshahnaturalhconflicthofhinteresthduehtoh thehinformationhasymmetryhthathexistshbetwee
nhthesehtwohparties.hAshahresult,hthehagenthagreeshtohbehmonitoredhashparthofhhis/herhemploym
enthcontract.hAuditinghappearshtohbehahcost-
effectivehformhofhmonitoring.hThehempiricalhevidencehsuggestshthathauditinghwashdemandedh
priorhtohgovernmenthregulation.hInh1926,hbeforehithwashrequiredhbyhlaw,hindependenthauditor
shauditedh82hpercenthofhthehcompanieshonhthehNewhYorkhStockhExchange.hAdditionally,hman
yhprivatehcompanieshandhmunicipalitieshnothsubjecthtohgovernmenthregulations,hsuchhashthehS
ecuritieshActhofh1933handhSecuritieshExchangehActh ofh1934,halsohpurchasehvarioushformshofh
auditinghandhassurancehservices.hManyhprivatehcompanieshseekhouthfinancialhstatementhaudit
shinhorderhtohsecurehfinancinghforhtheirhoperations.hCompanieshpreparinghtohgohpublichalsohbe
nefithfromhhavinghanhaudit.
1-3 Thehagencyhrelationshiphbetweenhanhownerhandhmanagerhproduceshahnaturalhconflicthofhinter
esthbecausehofhdifferenceshinhthehtwohparties’hgoalshandhbecausehofhthehinformationhasymmetr
yhthathexistshbetweenhthem.hThathis,hthehmanagerhlikelyhhashdifferenthgoalshthanhthehowner,han
dhgenerallyhhashmorehinformationhabouththeh"true"hfinancialhpositionhandhresultshofhoperation
shofhthehentityhthanhthehabsenteehownerhdoes.hIfhbothhpartieshseekhtohmaximizehtheirhownhself-
interest,hthehmanagerhmayhnothacthinhthehbesthinteresthofhthehownerhandhmayhmanipulatehthehin
formationhprovidedhtohthehownerhaccordingly.
quizmasters
, 1-4 Independencehishahbedrockhprinciplehforhauditors.hIfhanhauditorhishnothindependenthofhthehclie
nt,husershmayhlosehconfidencehinhthehauditor’shabilityhtohreporthobjectivelyh andhtruthfullyhonht
hehfinancialhstatements,handhthehauditor’shworkhloseshitshvalue.hFromhanhagencyhperspective,h
ifhthehprincipalh(owner)hknowshthaththehauditorhishnothindependent,hthehownerhwillhnothtrusthth
ehauditor’shwork.hThus,hthehagenthwillhnothhirehthehauditorhbecausehthehauditor’shreporthwillhn
othbeheffectivehinhreducinghinformationhriskhfromhthehperspectivehofhthehowner.hAuditorhinde
pendencehishalsohahregulatoryhrequirement.
1-5 Auditingh(broadlyhdefined)hishahsystematichprocesshofh(1)hobjectivelyhobtaininghandhevaluati
nghevidencehregardinghassertionshaboutheconomichactionshandheventshtohascertainhthehdegreeh
ofhcorrespondencehbetweenhthosehassertionshandhestablishedhcriteriahandh(2)hcommunicatingh
thehresultshtohinterestedhusers.
Attesthserviceshoccurhwhenhahpractitionerhissueshahreporthonhsubjecthmatter,horhanhassertionha
bouthsubjecthmatter,hthathishthehresponsibilityhofhanotherhparty.
Assurancehservicesharehindependenthprofessionalhserviceshthathimprovehthehqualityhofhinfor
mation,horhitshcontext,hforhdecisionhmakers.
1-6 Auditingh ish ah specifich formh ofh ―attesth service,‖h whichh inh turnh ish ah specifich categoryh of
―assurancehservice.‖hInhotherhwords,hthehphraseh―assurancehservices‖hconstituteshthehbroad
esthcategoryhofhprofessionalhserviceshprovidedhbyhCPAshthathservehtohimprovehthehqualityhorh
contexthofhinformationhforhdecisionhmakinghforhotherhparties.hAttesthserviceshconstitutehahmor
ehspecifichcategoryhofhassurancehthathCPAshcanhprovide.hThesehservicesharehintendedhtohreduc
ehinformationhriskhtohpartieshrelyinghonhinformationhprovidedhbyhahpartyhthathishcreating,horhm
akinghassertionshabout,hsubjecthmatterhofhinterest.hCPAshcanhprovidehattesthserviceshrelatinght
ohahwidehvarietyhofhsubjecthmatterh(orhassertionshabouththathsubjecthmatter)htohreducehthehinfor
mationhriskhtohthirdhparties.hOnehsuchhsubjecthmatterhishahsethofhfinancialhstatements.hWhenhah
CPAhprovideshahveryhin-
depth,hdetailedhattesthservicehthathfollowshrelevanthstandardshtohconstitutehahcompletehexamin
ationhofhahsethofhfinancialhstatementshandhrelatedhassertions,hthishishcalledhahfinancialhstatemen
th―audit.‖
1-7 Audithriskhishdefinedhashthehriskhthaththehauditorhmayhunknowinglyhfailhtohappropriatelyhmod
ifyhhishorhherhopinionhonhfinancialhstatementshthatharehmateriallyhmisstatedh(ASh1101).hMate
rialityhishdefinedhash"thehmagnitudehofhanhomissionhorhmisstatementhofhaccountinghinformati
onhthat,hinhthehlighthofhsurroundinghcircumstances,hmakeshithprobablehthaththehjudgmenthofhahr
easonablehpersonhrelyinghonhthehinformationhwouldhhavehbeenhchangedhorhinfluencedhbyhtheh
omissionhorhmisstatement"h(FASBhStatementhofhFinancialhAccountinghConceptshNo.h8,hCha
pterh3:hQualitativehCharacteristicshofhUsefulhAccountinghInformation,hwhichhishpendinghrevi
sionhaththehtimehofhthehwritinghofhthishbookhperhtheh Board’sh Novemberh2017hdecisionhtohreve
rthtohahdefinitionhofhmaterialityhsimilarhtohthehonehfoundhinhsupersededhConcepthNo.h2).
Thehconcepthofhmaterialityhishreflectedhinhthehwordinghofhthehauditor'shstandardhaudithrepor
ththroughhthehphraseh"thehfinancialhstatementshpresenthfairlyhinhallhmaterialhrespects."hThishish
thehmannerhinhwhichhthehauditorhcommunicateshthehnotionhofhmaterialityhtohtheh usershofhtheha
uditor'shreport.hThehauditor'shstandardhreporthstateshthaththehaudithprovidesh onlyhreasonableha
ssurancehthaththehfinancialhstatementshdohnothcontainhmaterialhmisstatements.hThehtermh"reas
onablehassurance"himplieshthaththerehishsomehriskhthathahmaterialh misstatementh couldh behpres
enth inhthehfinancialh statementsh andhthehauditorhwillh fail
quizmasters
, tohdetecthit.
1-8 Thehmajorhphaseshofhthehaudithare:
Clienthacceptance/continuance
Preliminaryhengagementhactivities
Planhthehaudit
Considerhandhaudithinternalhcontrol
Audithbusinesshprocesseshandhrelatedhaccounts
Completehthehaudit
Evaluatehresultshandhissuehaudithreport
1-9 Planhthehaudit:hDuringhthishphasehofhthehaudit,hthehauditorhuseshknowledgehabouththehclienthan
dhanyhcontrolshinhplacehtohplanhthehaudithandhperformhpreliminaryhanalyticalhprocedures.hTheh
outcomehofhthehplanninghprocesshishahwrittenhaudithplanhthathsetshforthhthehnature,hextent,handh
timinghofhthehaudithprocedureshtohbehperformed.hThehpurposehofhthishphasehishtohplanhanheffec
tivehandhefficienthaudit.
1-10 Thehauditor'shstandardhunqualifiedhreporthforhahpublichcompanyhclienthincludeshthehfollowing
hsections:h(1)hopinionhonhthehfinancialhstatements,h(2)hbasishforhopinion,handh(3)hcriticalhaudith
matters,hashillustratedhinhthishchapter.
1-11 Thehemergencehofhadvancedhaudithtechnologieshwillhhelphremovehmanyhofhthehtedioushtasksht
hatharehusuallyhperformedhbyhjuniorhauditors.hThus,hauditorshofhallhpositionsh andhexperienceh
willhbehrequiredhtohspendhadditionalhtimehreasoninghthroughhfundamentalhbusiness,haccounti
ng,handhauditinghconcepts.hAnhauditors’hknowledgehinhthesehareashwillhenablehthemhtohprovid
ehgreaterhbenefithtohclientshbyhaskinghthehrighthquestionshandhidentifyinghnew,hmoreheffectiveh
wayshtohcollect,hanalyze,handhinterprethresults.hInhusinghaudithdatahanalytics,hforhexample,haud
itorshmusthunderstandhthehclienthandhitshindustry,hashwellhashthehfundamentalshofhaccountingha
ndhauditing,hinhorderhtohaskhthehrighthquestionshinhqueryinghthehdatahandhinhinterpretinghthehre
sultshobtained.
1-12 Auditorshfrequentlyhfacehsituationshwherehnohstandardhaudithprocedurehexists,hsuchhashthehex
amplehfromhthehtexthofhverifyinghthehinventoryhofhcattle.hSuchhcircumstanceshrequirehthaththeh
auditorhexercisehcreativityhandhinnovationhwhenhplanninghandhadministeringhaudithprocedur
eshwherehlittlehorhnohguidancehorhprecedenthexists.hEveryhclienthishdifferent,handhapplyinghau
ditinghconceptshinhdifferenthsituationshrequireshlogichandhcommonhsense,handhfrequentlyhcre
ativityhandhinnovation.
Answers to Multiple-Choice Questions
h h h
1-13 b 1-19 a
1-14 b 1-20 d
1-15 c 1-21 d
1-16 c 1-22 d
1-17 c 1-23 b
quizmasters
, 1-18 c
Solutions to Problems
h h
1-24 ThereharehtwohmajorhfactorshthathmayhmakehanhaudithnecessaryhforhGreenbloomhGardenhCent
ers.hFirst,hthehcompanyhmayhrequirehlong-
termhfinancinghforhitshexpansionhintohotherhcitieshinhFlorida.hEntitieshsuchhashbankshorhinsuran
cehcompaniesharehlikelyhtohbehthehsourceshofhthehcompany'shdebthfinancing.hThesehentitieshnor
mallyhrequirehauditedhfinancialhstatementshbeforehlendinghsignificanthfundshandhgenerallyhre
quirehauditedhfinancialhstatementshduringhthehtimehperiodhthehdebthishoutstanding.hTherehishin
formationhasymmetryhbetweenhthehlenderhofhfundshandhthehownerhofhthehbusiness,handhthishas
ymmetryhresultshinhinformationhriskhtohthehlender.hEvenhifhthehbusinesshcouldhgethfundinghwit
houthanhaudit,hahcleanhaudithreporthbyhahreputablehauditorhmighthveryhwellhreducehthehlender’sh
informationhriskhandhmakehthehtermshofhthehloanhmorehfavorablehtohthehowner.hSecond,hashthe
hcompanyhgrows,hthehfamilyhwillhlosehcontrolhoverhthehday-to-
dayhoperationshofhthehstores.hAnhaudithcanhprovidehanhadditionalhmonitoringhactivityhforhthehf
amilyhinhcontrollinghthehexpandedhoperationshofhthehcompany.
1-25 a.h Evidencehthathassistshthehauditorhinhevaluatinghfinancialhstatementhassertionshconsistshofh
thehunderlyinghaccountinghdatahandhanyhadditionalhinformationhavailablehtohthehauditor,h
whetherhoriginatinghfromhthehclienthorhexternally.
b. Managementhmakeshassertionshabouthcomponentshofhthehfinancialhstatements.hForhexam
ple,hanhentity'shfinancialhstatementshmayhcontainhahlinehitemhthathaccountshreceivableham
ounthtoh$1,750,000.hInhthishinstance,hmanagementhishasserting,hamonghotherhthings,hthath
thehreceivableshexist,hthehentityhownshthehreceivables,handhthehreceivablesharehproperlyhv
alued.hAudithevidencehhelpshthehauditorhdeterminehwhetherhmanagement’shassertionshar
ehbeinghmet.hIfhthehauditorhish comfortablehthathhehorhshehcanhprovidehreasonablehassuran
cehthathallhassertionsharehmethforhallhaccounts,hhehorhshehcanhissuehahcleanhaudithreport.hInh
short,hthehassertionsharehahconceptualhtoolhtohhelphthehauditorhensurehthathshehorhhehhash
―coveredhallhthehbases.‖
c. Inhsearchinghforhandhevaluatinghevidence,hthehauditorhshouldhbehconcernedhwithhthehrele
vancehandhreliabilityhofhevidence.hIfhthehauditorhmistakenlyhrelieshonhevidencehthathdoesh
nothrelatehtohthehassertionhbeinghtested,hanhincorrecthconclusionhmayhbehreachedhabouthth
ehmanagementhassertion.hReliabilityhrefershtohthehabilityhofhevidencehtohsignalhthehtruehst
atehofhthehassertion,hi.e.,hwhetherhithishactuallyhbeinghmethorhnot.
1-26 a.h Ashthehchapterhexplains,hahfinancialhstatementhaudithreduceshtheh informationhriskh bo
rn
byhinvestorshandhcreditors,hbecausehanhaudithreduceshthehriskhthaththehcompany’sh finan
cialhstatementsharehmateriallyhmisstated.hInh thish example,h CommunityhBankh canhrelyhonhin
formationhinhYoung’shfinancialhstatementshtohmakehdecisionshonhwhetherhtohprovidehahloan,h
withhassurancehthaththehinformationh(whichhishproducedhbyhYounghCompany)hishfairlyhprese
nted.hThehriskhthehbankhfaceshinh providingh ahloanh ish thushreducedh byh ah cleanh audith opinio
nh onh Young’sh financials,h leadingh toh ah lowerh interest
rate.
quizmasters
Auditing & Assurance Services A Systematic Approach 12e Messier C
h h h h h h h h h
hapter 1-21 h
CHAPTER 1 h
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATE
h h h h h h
MENT AUDITING h
Answers to Review Questions
h h h
1-1 Thehstudyhofhauditinghishmorehconceptualhinhnaturehashcomparedhtohotherhaccountinghcourses.
hRatherhthanhfocusinghonhlearninghthehrules,htechniques,handhcomputationshrequiredhtohprepar
ehfinancialhstatements,hauditinghemphasizeshlearninghahframeworkhofhanalyticalhandhlogicalhs
kills.hThishframeworkhenableshauditorshtohevaluatehthehrelevanceh andhreliabilityhofhthehsyste
mshandhprocesseshresponsiblehforhfinancialhinformationhashwellhashthehinformationhitself.hToh
behsuccessful,hstudentshmusthlearnhthehframeworkhandhthenhlearnhtohusehlogichandhcommonhse
nsehinhapplyinghauditinghconceptshtohvarioushcircumstanceshandhsituations.hUnderstandingha
uditinghcanhimprovehthehdecision-
makinghabilityhofhconsultants,hbusinesshmanagers,handhaccountantshbyhprovidinghahframewor
khforhevaluatinghthehusefulnesshandhreliabilityhofhinformation—
anhimportanthtaskhinhmanyhdifferenthbusinesshcontexts.
1-2 Therehishahdemandhforhauditinghinhahfree-
marketheconomyhbecausehthehagencyhrelationshiphbetweenhanhabsenteehownerhandhahmanage
rhproduceshahnaturalhconflicthofhinteresthduehtoh thehinformationhasymmetryhthathexistshbetwee
nhthesehtwohparties.hAshahresult,hthehagenthagreeshtohbehmonitoredhashparthofhhis/herhemploym
enthcontract.hAuditinghappearshtohbehahcost-
effectivehformhofhmonitoring.hThehempiricalhevidencehsuggestshthathauditinghwashdemandedh
priorhtohgovernmenthregulation.hInh1926,hbeforehithwashrequiredhbyhlaw,hindependenthauditor
shauditedh82hpercenthofhthehcompanieshonhthehNewhYorkhStockhExchange.hAdditionally,hman
yhprivatehcompanieshandhmunicipalitieshnothsubjecthtohgovernmenthregulations,hsuchhashthehS
ecuritieshActhofh1933handhSecuritieshExchangehActh ofh1934,halsohpurchasehvarioushformshofh
auditinghandhassurancehservices.hManyhprivatehcompanieshseekhouthfinancialhstatementhaudit
shinhorderhtohsecurehfinancinghforhtheirhoperations.hCompanieshpreparinghtohgohpublichalsohbe
nefithfromhhavinghanhaudit.
1-3 Thehagencyhrelationshiphbetweenhanhownerhandhmanagerhproduceshahnaturalhconflicthofhinter
esthbecausehofhdifferenceshinhthehtwohparties’hgoalshandhbecausehofhthehinformationhasymmetr
yhthathexistshbetweenhthem.hThathis,hthehmanagerhlikelyhhashdifferenthgoalshthanhthehowner,han
dhgenerallyhhashmorehinformationhabouththeh"true"hfinancialhpositionhandhresultshofhoperation
shofhthehentityhthanhthehabsenteehownerhdoes.hIfhbothhpartieshseekhtohmaximizehtheirhownhself-
interest,hthehmanagerhmayhnothacthinhthehbesthinteresthofhthehownerhandhmayhmanipulatehthehin
formationhprovidedhtohthehownerhaccordingly.
quizmasters
, 1-4 Independencehishahbedrockhprinciplehforhauditors.hIfhanhauditorhishnothindependenthofhthehclie
nt,husershmayhlosehconfidencehinhthehauditor’shabilityhtohreporthobjectivelyh andhtruthfullyhonht
hehfinancialhstatements,handhthehauditor’shworkhloseshitshvalue.hFromhanhagencyhperspective,h
ifhthehprincipalh(owner)hknowshthaththehauditorhishnothindependent,hthehownerhwillhnothtrusthth
ehauditor’shwork.hThus,hthehagenthwillhnothhirehthehauditorhbecausehthehauditor’shreporthwillhn
othbeheffectivehinhreducinghinformationhriskhfromhthehperspectivehofhthehowner.hAuditorhinde
pendencehishalsohahregulatoryhrequirement.
1-5 Auditingh(broadlyhdefined)hishahsystematichprocesshofh(1)hobjectivelyhobtaininghandhevaluati
nghevidencehregardinghassertionshaboutheconomichactionshandheventshtohascertainhthehdegreeh
ofhcorrespondencehbetweenhthosehassertionshandhestablishedhcriteriahandh(2)hcommunicatingh
thehresultshtohinterestedhusers.
Attesthserviceshoccurhwhenhahpractitionerhissueshahreporthonhsubjecthmatter,horhanhassertionha
bouthsubjecthmatter,hthathishthehresponsibilityhofhanotherhparty.
Assurancehservicesharehindependenthprofessionalhserviceshthathimprovehthehqualityhofhinfor
mation,horhitshcontext,hforhdecisionhmakers.
1-6 Auditingh ish ah specifich formh ofh ―attesth service,‖h whichh inh turnh ish ah specifich categoryh of
―assurancehservice.‖hInhotherhwords,hthehphraseh―assurancehservices‖hconstituteshthehbroad
esthcategoryhofhprofessionalhserviceshprovidedhbyhCPAshthathservehtohimprovehthehqualityhorh
contexthofhinformationhforhdecisionhmakinghforhotherhparties.hAttesthserviceshconstitutehahmor
ehspecifichcategoryhofhassurancehthathCPAshcanhprovide.hThesehservicesharehintendedhtohreduc
ehinformationhriskhtohpartieshrelyinghonhinformationhprovidedhbyhahpartyhthathishcreating,horhm
akinghassertionshabout,hsubjecthmatterhofhinterest.hCPAshcanhprovidehattesthserviceshrelatinght
ohahwidehvarietyhofhsubjecthmatterh(orhassertionshabouththathsubjecthmatter)htohreducehthehinfor
mationhriskhtohthirdhparties.hOnehsuchhsubjecthmatterhishahsethofhfinancialhstatements.hWhenhah
CPAhprovideshahveryhin-
depth,hdetailedhattesthservicehthathfollowshrelevanthstandardshtohconstitutehahcompletehexamin
ationhofhahsethofhfinancialhstatementshandhrelatedhassertions,hthishishcalledhahfinancialhstatemen
th―audit.‖
1-7 Audithriskhishdefinedhashthehriskhthaththehauditorhmayhunknowinglyhfailhtohappropriatelyhmod
ifyhhishorhherhopinionhonhfinancialhstatementshthatharehmateriallyhmisstatedh(ASh1101).hMate
rialityhishdefinedhash"thehmagnitudehofhanhomissionhorhmisstatementhofhaccountinghinformati
onhthat,hinhthehlighthofhsurroundinghcircumstances,hmakeshithprobablehthaththehjudgmenthofhahr
easonablehpersonhrelyinghonhthehinformationhwouldhhavehbeenhchangedhorhinfluencedhbyhtheh
omissionhorhmisstatement"h(FASBhStatementhofhFinancialhAccountinghConceptshNo.h8,hCha
pterh3:hQualitativehCharacteristicshofhUsefulhAccountinghInformation,hwhichhishpendinghrevi
sionhaththehtimehofhthehwritinghofhthishbookhperhtheh Board’sh Novemberh2017hdecisionhtohreve
rthtohahdefinitionhofhmaterialityhsimilarhtohthehonehfoundhinhsupersededhConcepthNo.h2).
Thehconcepthofhmaterialityhishreflectedhinhthehwordinghofhthehauditor'shstandardhaudithrepor
ththroughhthehphraseh"thehfinancialhstatementshpresenthfairlyhinhallhmaterialhrespects."hThishish
thehmannerhinhwhichhthehauditorhcommunicateshthehnotionhofhmaterialityhtohtheh usershofhtheha
uditor'shreport.hThehauditor'shstandardhreporthstateshthaththehaudithprovidesh onlyhreasonableha
ssurancehthaththehfinancialhstatementshdohnothcontainhmaterialhmisstatements.hThehtermh"reas
onablehassurance"himplieshthaththerehishsomehriskhthathahmaterialh misstatementh couldh behpres
enth inhthehfinancialh statementsh andhthehauditorhwillh fail
quizmasters
, tohdetecthit.
1-8 Thehmajorhphaseshofhthehaudithare:
Clienthacceptance/continuance
Preliminaryhengagementhactivities
Planhthehaudit
Considerhandhaudithinternalhcontrol
Audithbusinesshprocesseshandhrelatedhaccounts
Completehthehaudit
Evaluatehresultshandhissuehaudithreport
1-9 Planhthehaudit:hDuringhthishphasehofhthehaudit,hthehauditorhuseshknowledgehabouththehclienthan
dhanyhcontrolshinhplacehtohplanhthehaudithandhperformhpreliminaryhanalyticalhprocedures.hTheh
outcomehofhthehplanninghprocesshishahwrittenhaudithplanhthathsetshforthhthehnature,hextent,handh
timinghofhthehaudithprocedureshtohbehperformed.hThehpurposehofhthishphasehishtohplanhanheffec
tivehandhefficienthaudit.
1-10 Thehauditor'shstandardhunqualifiedhreporthforhahpublichcompanyhclienthincludeshthehfollowing
hsections:h(1)hopinionhonhthehfinancialhstatements,h(2)hbasishforhopinion,handh(3)hcriticalhaudith
matters,hashillustratedhinhthishchapter.
1-11 Thehemergencehofhadvancedhaudithtechnologieshwillhhelphremovehmanyhofhthehtedioushtasksht
hatharehusuallyhperformedhbyhjuniorhauditors.hThus,hauditorshofhallhpositionsh andhexperienceh
willhbehrequiredhtohspendhadditionalhtimehreasoninghthroughhfundamentalhbusiness,haccounti
ng,handhauditinghconcepts.hAnhauditors’hknowledgehinhthesehareashwillhenablehthemhtohprovid
ehgreaterhbenefithtohclientshbyhaskinghthehrighthquestionshandhidentifyinghnew,hmoreheffectiveh
wayshtohcollect,hanalyze,handhinterprethresults.hInhusinghaudithdatahanalytics,hforhexample,haud
itorshmusthunderstandhthehclienthandhitshindustry,hashwellhashthehfundamentalshofhaccountingha
ndhauditing,hinhorderhtohaskhthehrighthquestionshinhqueryinghthehdatahandhinhinterpretinghthehre
sultshobtained.
1-12 Auditorshfrequentlyhfacehsituationshwherehnohstandardhaudithprocedurehexists,hsuchhashthehex
amplehfromhthehtexthofhverifyinghthehinventoryhofhcattle.hSuchhcircumstanceshrequirehthaththeh
auditorhexercisehcreativityhandhinnovationhwhenhplanninghandhadministeringhaudithprocedur
eshwherehlittlehorhnohguidancehorhprecedenthexists.hEveryhclienthishdifferent,handhapplyinghau
ditinghconceptshinhdifferenthsituationshrequireshlogichandhcommonhsense,handhfrequentlyhcre
ativityhandhinnovation.
Answers to Multiple-Choice Questions
h h h
1-13 b 1-19 a
1-14 b 1-20 d
1-15 c 1-21 d
1-16 c 1-22 d
1-17 c 1-23 b
quizmasters
, 1-18 c
Solutions to Problems
h h
1-24 ThereharehtwohmajorhfactorshthathmayhmakehanhaudithnecessaryhforhGreenbloomhGardenhCent
ers.hFirst,hthehcompanyhmayhrequirehlong-
termhfinancinghforhitshexpansionhintohotherhcitieshinhFlorida.hEntitieshsuchhashbankshorhinsuran
cehcompaniesharehlikelyhtohbehthehsourceshofhthehcompany'shdebthfinancing.hThesehentitieshnor
mallyhrequirehauditedhfinancialhstatementshbeforehlendinghsignificanthfundshandhgenerallyhre
quirehauditedhfinancialhstatementshduringhthehtimehperiodhthehdebthishoutstanding.hTherehishin
formationhasymmetryhbetweenhthehlenderhofhfundshandhthehownerhofhthehbusiness,handhthishas
ymmetryhresultshinhinformationhriskhtohthehlender.hEvenhifhthehbusinesshcouldhgethfundinghwit
houthanhaudit,hahcleanhaudithreporthbyhahreputablehauditorhmighthveryhwellhreducehthehlender’sh
informationhriskhandhmakehthehtermshofhthehloanhmorehfavorablehtohthehowner.hSecond,hashthe
hcompanyhgrows,hthehfamilyhwillhlosehcontrolhoverhthehday-to-
dayhoperationshofhthehstores.hAnhaudithcanhprovidehanhadditionalhmonitoringhactivityhforhthehf
amilyhinhcontrollinghthehexpandedhoperationshofhthehcompany.
1-25 a.h Evidencehthathassistshthehauditorhinhevaluatinghfinancialhstatementhassertionshconsistshofh
thehunderlyinghaccountinghdatahandhanyhadditionalhinformationhavailablehtohthehauditor,h
whetherhoriginatinghfromhthehclienthorhexternally.
b. Managementhmakeshassertionshabouthcomponentshofhthehfinancialhstatements.hForhexam
ple,hanhentity'shfinancialhstatementshmayhcontainhahlinehitemhthathaccountshreceivableham
ounthtoh$1,750,000.hInhthishinstance,hmanagementhishasserting,hamonghotherhthings,hthath
thehreceivableshexist,hthehentityhownshthehreceivables,handhthehreceivablesharehproperlyhv
alued.hAudithevidencehhelpshthehauditorhdeterminehwhetherhmanagement’shassertionshar
ehbeinghmet.hIfhthehauditorhish comfortablehthathhehorhshehcanhprovidehreasonablehassuran
cehthathallhassertionsharehmethforhallhaccounts,hhehorhshehcanhissuehahcleanhaudithreport.hInh
short,hthehassertionsharehahconceptualhtoolhtohhelphthehauditorhensurehthathshehorhhehhash
―coveredhallhthehbases.‖
c. Inhsearchinghforhandhevaluatinghevidence,hthehauditorhshouldhbehconcernedhwithhthehrele
vancehandhreliabilityhofhevidence.hIfhthehauditorhmistakenlyhrelieshonhevidencehthathdoesh
nothrelatehtohthehassertionhbeinghtested,hanhincorrecthconclusionhmayhbehreachedhabouthth
ehmanagementhassertion.hReliabilityhrefershtohthehabilityhofhevidencehtohsignalhthehtruehst
atehofhthehassertion,hi.e.,hwhetherhithishactuallyhbeinghmethorhnot.
1-26 a.h Ashthehchapterhexplains,hahfinancialhstatementhaudithreduceshtheh informationhriskh bo
rn
byhinvestorshandhcreditors,hbecausehanhaudithreduceshthehriskhthaththehcompany’sh finan
cialhstatementsharehmateriallyhmisstated.hInh thish example,h CommunityhBankh canhrelyhonhin
formationhinhYoung’shfinancialhstatementshtohmakehdecisionshonhwhetherhtohprovidehahloan,h
withhassurancehthaththehinformationh(whichhishproducedhbyhYounghCompany)hishfairlyhprese
nted.hThehriskhthehbankhfaceshinh providingh ahloanh ish thushreducedh byh ah cleanh audith opinio
nh onh Young’sh financials,h leadingh toh ah lowerh interest
rate.
quizmasters
