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