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 is a bedrock principle for auditors. If an auditor is not independent of the client,
users may lose confidence in the auditor’s ability to report objectively and truthfully on the financial
statements, and the auditor’s work loses its value. From an agency perspective, if the principal
(owner) knows that the auditor is not independent, the owner will not trust the auditor’s work.
Thus, the agent will not hire the auditor because the auditor’s report will not be effective in
reducing information risk from the perspective of the owner. Auditor independence is also a
regulatory requirement.
1-5 Auditing (broadly defined) is a systematic process of (1) objectively obtaining and evaluating
evidence regarding assertions about economic actions and events to ascertain the degree of
correspondence between those assertions and established criteria and (2) communicating the
results to interested users.
Attest services occur when a practitioner issues a report on subject matter, or an assertion
about subject matter, that is the responsibility of another party.
Assurance services are independent professional services that improve the quality of information,
or its context, for decision makers.
1-6 Auditing is a specific form of ―attest service,‖ which in turn is a specific category of
―assurance service.‖ In other words, the phrase ―assurance services‖ constitutes the
broadest category of professional services provided by CPAs that serve to improve the quality or
context of information for decision making for other parties. Attest services constitute a more
specific category of assurance that CPAs can provide. These services are intended to reduce
information risk to parties relying on information provided by a party that is creating, or making
assertions about, subject matter of interest. CPAs can provide attest services relating to a
wide variety of subject matter (or assertions about that subject matter) to reduce the information
risk to third parties. One such subject matter is a set of financial statements. When a CPA provides
a very in-depth, detailed attest service that follows relevant standards to constitute a complete
examination of a set of financial statements and related assertions, this is called a financial
statement ―audit.‖
1-7 Audit risk is defined as the risk that the auditor may unknowingly fail to appropriately modify
his or her opinion on financial statements that are materially misstated (AS 1101). Materiality is
defined as "the magnitude of an omission or misstatement of accounting information that, in
the light of surrounding circumstances, makes it probable that the judgment of a reasonable
person relying on the information would have been changed or influenced by the omission or
misstatement" (FASB Statement of Financial Accounting Concepts No. 8, Chapter 3: Qualitative
Characteristics of Useful Accounting Information, which is pending revision at the time of the
writing of this book per the Board’s November 2017 decision to revert to a definition of materiality
similar to the one found in superseded Concept No. 2).
The concept of materiality is reflected in the wording of the auditor's standard audit report
through the phrase "the financial statements present fairly in all material respects." This is the
manner in which the auditor communicates the notion of materiality to the users of the auditor's
report. The auditor's standard report states that the audit provides only reasonable assurance that
the financial statements
, do not contain material misstatements. The term "reasonable assurance" implies that there is some
risk that a material misstatement could be present in the financial statements and the auditor
will fail
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 is a bedrock principle for auditors. If an auditor is not independent of the client,
users may lose confidence in the auditor’s ability to report objectively and truthfully on the financial
statements, and the auditor’s work loses its value. From an agency perspective, if the principal
(owner) knows that the auditor is not independent, the owner will not trust the auditor’s work.
Thus, the agent will not hire the auditor because the auditor’s report will not be effective in
reducing information risk from the perspective of the owner. Auditor independence is also a
regulatory requirement.
1-5 Auditing (broadly defined) is a systematic process of (1) objectively obtaining and evaluating
evidence regarding assertions about economic actions and events to ascertain the degree of
correspondence between those assertions and established criteria and (2) communicating the
results to interested users.
Attest services occur when a practitioner issues a report on subject matter, or an assertion
about subject matter, that is the responsibility of another party.
Assurance services are independent professional services that improve the quality of information,
or its context, for decision makers.
1-6 Auditing is a specific form of ―attest service,‖ which in turn is a specific category of
―assurance service.‖ In other words, the phrase ―assurance services‖ constitutes the
broadest category of professional services provided by CPAs that serve to improve the quality or
context of information for decision making for other parties. Attest services constitute a more
specific category of assurance that CPAs can provide. These services are intended to reduce
information risk to parties relying on information provided by a party that is creating, or making
assertions about, subject matter of interest. CPAs can provide attest services relating to a
wide variety of subject matter (or assertions about that subject matter) to reduce the information
risk to third parties. One such subject matter is a set of financial statements. When a CPA provides
a very in-depth, detailed attest service that follows relevant standards to constitute a complete
examination of a set of financial statements and related assertions, this is called a financial
statement ―audit.‖
1-7 Audit risk is defined as the risk that the auditor may unknowingly fail to appropriately modify
his or her opinion on financial statements that are materially misstated (AS 1101). Materiality is
defined as "the magnitude of an omission or misstatement of accounting information that, in
the light of surrounding circumstances, makes it probable that the judgment of a reasonable
person relying on the information would have been changed or influenced by the omission or
misstatement" (FASB Statement of Financial Accounting Concepts No. 8, Chapter 3: Qualitative
Characteristics of Useful Accounting Information, which is pending revision at the time of the
writing of this book per the Board’s November 2017 decision to revert to a definition of materiality
similar to the one found in superseded Concept No. 2).
The concept of materiality is reflected in the wording of the auditor's standard audit report
through the phrase "the financial statements present fairly in all material respects." This is the
manner in which the auditor communicates the notion of materiality to the users of the auditor's
report. The auditor's standard report states that the audit provides only reasonable assurance that
the financial statements
, do not contain material misstatements. The term "reasonable assurance" implies that there is some
risk that a material misstatement could be present in the financial statements and the auditor
will fail
