SOLUTION MANUAL for Auditing & Assurance Services A
Systematic Approach
12th Edition by William Messier Jr, Steven Glover,
Chapters 1 - 21 / Complete
1
,• Table of Contents
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
Chapter 2: The Financial Statement Auditing Environment
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
Chapter 4: Risk Assessment
Chapter 5: Evidence and Documentation
Chapter 6: Internal Control in a Financial Statement Audit
Chapter 7: Auditing Internal Control over Financial Reporting
Chapter 8: Audit Sampling: An Overview and Application to Tests of Controls
Chapter 9: Audit Sampling: An Application to Substantive Tests of Account Balances
Chapter 10: Auditing the Revenue Process
Chapter 11: Auditing the Purchasing Process
Chapter 12: Auditing the Human Resource Management Process
Chapter 13: Auditing the Inventory Management Process
Chapter 14: Auditing the Financing/Investing Process:Prepaid Expenses, Intangible Assets, and Property, Plant, and
Equipment
Chapter 15: Auditing the Financing/Investing Process:Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
Chapter 16: Auditing the Financing/Investing Process: Cashand Investments
Chapter 17: Completing the Audit Engagement
Chapter 18: Reports on Audited Financial Statements
Chapter 19: Professional Conduct, Independence, and Quality Management
Chapter 20: Legal Liability
Chapter 21: Assurance, Attestation, and Internal Auditing Services
2
,CHAPTER 1
AN / i INTRODUCTION / i TO / i ASSURANCE / i AND / i FINANCIAL / i STATEMENT / i AUDITING
Answers /ito /iReview /iQuestions
1-1 The /i study /iof /i auditing /iis /i more /i conceptual /iin /inature /i compared /i to /iother /i accounting
/icourses. /i Rather /i than /i focusing /i on /i learning /i the /irules, /itechniques, /iand /i computations /irequired
/ito /iprepare /ifinancial /istatements, /iauditing /iemphasizes /ilearning /ia /iframework /iof /ianalytical /iand
/ilogical/is kills /i to /i evaluate /i the /irelevance /iand /ireliability /iof /i the /i systems /iand /i processes
/iresponsible /i for /i financial /iinformation, /ias /i well /i as /ithe /iinformation /i itself. /i To /i be /i successful,
/istudents /i must /ilearn /i the /iframework /i and /ithen /ilearn /i to /i use /ilogic /iand /i common /isense /iin
/iapplying /i auditing /i concepts /i to /i various /i circumstances / i and /isituations.
Understanding /iauditing /ican /iimprove /ithe /idecision /imaking /iability /iof /iconsultants,
/ibusiness /im anagers, /iand /iaccountants /i by /iproviding /i a /iframework /ifor /ievaluating /ithe
/iusefulness /iand/r i eliability /i of /i information.
1-2 There /iis /i a /idemand /ifor /i auditing /iin /ia /ifree-market /i economy /ibecause /i the /iagency
/irelationship /i between /ian /i absentee /i owner /i and /ia /i manager /i produces /i a /inatural /i conflict /i of
/iinterest /i due /i to /i the /iinformation /i asymmetry /ithat /i exists /ibetween /ithe /i owner /iand /i manager. /i As
/ia /iresult, /ithe /ia gent /i agrees /i to /i be /i monitored /ias /ipart /i of /i his/her /i employment /icontract. /i Auditing
/iappears /i to /i be /i a/icost-effective /i form /i of /i monitoring.
The /iempirical /ievidence /isuggests /iauditing /iwas /idemanded /iprior /ito /igovernment
/iregulation /isuch /ias /i statutory /i audit /irequirements. /i Additionally, /i many /i private /i companies /iand
/iother /ientities /inot /i subject /i to /i government /iauditing /iregulations /i also /idemand /iauditing.
1-3 The /i agency /i relationship /i between /ian /iowner /i and /i manager /i produces /i a /inatural /i conflict
/iof /iinterest /ibecause /i of /idifferences /iin /i the /itwo /i parties’ /i goals /iand /ibecause /i of /i information
/iasymmetry/it hat /i exists /ibetween /i them. /i That /iis, /i the /imanager /i generally /ihas /i more /iinformation
/iabout /i the /i‘true’/ifinancial /iposition /i and /iresults /i of /i operations /iof /i the /i entity /i than /i the /i absentee
/iowner /i does. /iIf /iboth /iparties /i seek /i to /i maximize /i their /i own /i self-interest, /iit /iis /ilikely /ithat /i the
/imanager /i will /i not /iact /iin /i the /i best /iinterest /iof /i the /iowner /iand /i may /i manipulate /ithe /iinformation
/iprovided /i to /ithe /i owner /i accordingly.
1-4 Independence /iis /i an /iimportant /i standard /ifor /i auditors. /iIf /i an /i auditor /iis /inot /iindependent
/iof/it he /i client, /i users /i may /ilose /iconfidence /iin /i the /i auditor’s /i ability /ito /ireport /i truthfully /i on /ithe
/ifinancial /i statements, /iand /i the /iauditor’s /i work /iloses /iits /i value. /i From /ian /iagency /iperspective, /iif
/ithe /iprincipal /i (owner) /iknows /ithat /ithe /iauditor /iis /inot /iindependent, /ithe /iowner /iwill /i not /itrust /ithe
/iauditor’s /i work.
Thus, /ithe /iagent /iwill /inot /ihire /ithe /iauditor /ibecause /ithe /iauditor’s /ireport /iwill /inot /ibe /ieffective /iin
/r
i educing /iinformation /irisk /i from /ithe /iperspective /iof /i the /iowner.
1-5 Auditing /i(broadly /idefined) /iis /ia /i systematic /i process /iof /i objectively /iobtaining /i and
/ievaluating /ievidence /iregarding /iassertions /iabout /ieconomic /iactions /iand /ievents /ito /iascertain
/ithe /id egree /iof /i correspondence /i between /i those /i assertions /iand /iestablished /i criteria /iand
/icommunicating /ithe /iresults /i to /iinterested /i users.
Assurance /iis /iengagement /iin /i which /ia /ipractitioner /iexpresses /ia /i conclusion /i designed
/ito /ienhance /ithe /idegree /iof /iconfidence /iof /ithe /iintended /iusers /iother /ithan /ithe /iresponsible /iparty
/iabout/ithe /ioutcome /iof /i the /ievaluation /i or /i measurement /i of /ia /isubject /i matter /iagainst /i criteria.
Examples /iof /i assurance /i services /i are /iassurance /i(audit) /iof /i financial /i statements,
/iassurance /iof /iprospective /ifinancial /iinformation, /iassurance /iof /ireporting /ion /iinternal /icontrol,
3
, /i ssurance /iof /i sustainability /ireporting, /iand /iassurance /iof /ielectronic /i commerce.
a
4
Systematic Approach
12th Edition by William Messier Jr, Steven Glover,
Chapters 1 - 21 / Complete
1
,• Table of Contents
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
Chapter 2: The Financial Statement Auditing Environment
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
Chapter 4: Risk Assessment
Chapter 5: Evidence and Documentation
Chapter 6: Internal Control in a Financial Statement Audit
Chapter 7: Auditing Internal Control over Financial Reporting
Chapter 8: Audit Sampling: An Overview and Application to Tests of Controls
Chapter 9: Audit Sampling: An Application to Substantive Tests of Account Balances
Chapter 10: Auditing the Revenue Process
Chapter 11: Auditing the Purchasing Process
Chapter 12: Auditing the Human Resource Management Process
Chapter 13: Auditing the Inventory Management Process
Chapter 14: Auditing the Financing/Investing Process:Prepaid Expenses, Intangible Assets, and Property, Plant, and
Equipment
Chapter 15: Auditing the Financing/Investing Process:Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
Chapter 16: Auditing the Financing/Investing Process: Cashand Investments
Chapter 17: Completing the Audit Engagement
Chapter 18: Reports on Audited Financial Statements
Chapter 19: Professional Conduct, Independence, and Quality Management
Chapter 20: Legal Liability
Chapter 21: Assurance, Attestation, and Internal Auditing Services
2
,CHAPTER 1
AN / i INTRODUCTION / i TO / i ASSURANCE / i AND / i FINANCIAL / i STATEMENT / i AUDITING
Answers /ito /iReview /iQuestions
1-1 The /i study /iof /i auditing /iis /i more /i conceptual /iin /inature /i compared /i to /iother /i accounting
/icourses. /i Rather /i than /i focusing /i on /i learning /i the /irules, /itechniques, /iand /i computations /irequired
/ito /iprepare /ifinancial /istatements, /iauditing /iemphasizes /ilearning /ia /iframework /iof /ianalytical /iand
/ilogical/is kills /i to /i evaluate /i the /irelevance /iand /ireliability /iof /i the /i systems /iand /i processes
/iresponsible /i for /i financial /iinformation, /ias /i well /i as /ithe /iinformation /i itself. /i To /i be /i successful,
/istudents /i must /ilearn /i the /iframework /i and /ithen /ilearn /i to /i use /ilogic /iand /i common /isense /iin
/iapplying /i auditing /i concepts /i to /i various /i circumstances / i and /isituations.
Understanding /iauditing /ican /iimprove /ithe /idecision /imaking /iability /iof /iconsultants,
/ibusiness /im anagers, /iand /iaccountants /i by /iproviding /i a /iframework /ifor /ievaluating /ithe
/iusefulness /iand/r i eliability /i of /i information.
1-2 There /iis /i a /idemand /ifor /i auditing /iin /ia /ifree-market /i economy /ibecause /i the /iagency
/irelationship /i between /ian /i absentee /i owner /i and /ia /i manager /i produces /i a /inatural /i conflict /i of
/iinterest /i due /i to /i the /iinformation /i asymmetry /ithat /i exists /ibetween /ithe /i owner /iand /i manager. /i As
/ia /iresult, /ithe /ia gent /i agrees /i to /i be /i monitored /ias /ipart /i of /i his/her /i employment /icontract. /i Auditing
/iappears /i to /i be /i a/icost-effective /i form /i of /i monitoring.
The /iempirical /ievidence /isuggests /iauditing /iwas /idemanded /iprior /ito /igovernment
/iregulation /isuch /ias /i statutory /i audit /irequirements. /i Additionally, /i many /i private /i companies /iand
/iother /ientities /inot /i subject /i to /i government /iauditing /iregulations /i also /idemand /iauditing.
1-3 The /i agency /i relationship /i between /ian /iowner /i and /i manager /i produces /i a /inatural /i conflict
/iof /iinterest /ibecause /i of /idifferences /iin /i the /itwo /i parties’ /i goals /iand /ibecause /i of /i information
/iasymmetry/it hat /i exists /ibetween /i them. /i That /iis, /i the /imanager /i generally /ihas /i more /iinformation
/iabout /i the /i‘true’/ifinancial /iposition /i and /iresults /i of /i operations /iof /i the /i entity /i than /i the /i absentee
/iowner /i does. /iIf /iboth /iparties /i seek /i to /i maximize /i their /i own /i self-interest, /iit /iis /ilikely /ithat /i the
/imanager /i will /i not /iact /iin /i the /i best /iinterest /iof /i the /iowner /iand /i may /i manipulate /ithe /iinformation
/iprovided /i to /ithe /i owner /i accordingly.
1-4 Independence /iis /i an /iimportant /i standard /ifor /i auditors. /iIf /i an /i auditor /iis /inot /iindependent
/iof/it he /i client, /i users /i may /ilose /iconfidence /iin /i the /i auditor’s /i ability /ito /ireport /i truthfully /i on /ithe
/ifinancial /i statements, /iand /i the /iauditor’s /i work /iloses /iits /i value. /i From /ian /iagency /iperspective, /iif
/ithe /iprincipal /i (owner) /iknows /ithat /ithe /iauditor /iis /inot /iindependent, /ithe /iowner /iwill /i not /itrust /ithe
/iauditor’s /i work.
Thus, /ithe /iagent /iwill /inot /ihire /ithe /iauditor /ibecause /ithe /iauditor’s /ireport /iwill /inot /ibe /ieffective /iin
/r
i educing /iinformation /irisk /i from /ithe /iperspective /iof /i the /iowner.
1-5 Auditing /i(broadly /idefined) /iis /ia /i systematic /i process /iof /i objectively /iobtaining /i and
/ievaluating /ievidence /iregarding /iassertions /iabout /ieconomic /iactions /iand /ievents /ito /iascertain
/ithe /id egree /iof /i correspondence /i between /i those /i assertions /iand /iestablished /i criteria /iand
/icommunicating /ithe /iresults /i to /iinterested /i users.
Assurance /iis /iengagement /iin /i which /ia /ipractitioner /iexpresses /ia /i conclusion /i designed
/ito /ienhance /ithe /idegree /iof /iconfidence /iof /ithe /iintended /iusers /iother /ithan /ithe /iresponsible /iparty
/iabout/ithe /ioutcome /iof /i the /ievaluation /i or /i measurement /i of /ia /isubject /i matter /iagainst /i criteria.
Examples /iof /i assurance /i services /i are /iassurance /i(audit) /iof /i financial /i statements,
/iassurance /iof /iprospective /ifinancial /iinformation, /iassurance /iof /ireporting /ion /iinternal /icontrol,
3
, /i ssurance /iof /i sustainability /ireporting, /iand /iassurance /iof /ielectronic /i commerce.
a
4
