Auditing & Assurance Services: A Systematic Approach 12th Edition – Solution Manual for Accounting and Auditing Course Material

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,• Table of Contents
f f




Chapterf1:fAnfIntroductionftofAssurancefandfFinancialfStatementfAuditing

Chapterf2:fThefFinancialfStatementfAuditingfEnvironment

Chapterf3:fAuditfPlanning,fTypesfoffAuditfTests,fandfMateriality

Chapterf4:fRiskfAssessment

Chapterf5:fEvidencefandfDocumentation

Chapterf6:fInternalfControlfinfafFinancialfStatementfAudit

Chapterf7:fAuditingfInternalfControlfoverfFinancialfReporting

Chapterf8:fAuditfSampling:fAnfOverviewfandfApplicationftofTestsfoffControls

Chapterf9:fAuditfSampling:fAnfApplicationftofSubstantivefTestsfoffAccountfBalances

Chapterf10:fAuditingfthefRevenuefProcess

Chapterf11:fAuditingfthefPurchasingfProcess

Chapterf12:fAuditingfthefHumanfResourcefManagementfProcess

Chapterf13:fAuditingfthefInventoryfManagementfProcess

Chapterf14:fAuditingfthefFinancing/InvestingfProcess:PrepaidfExpenses,fIntangiblefAssets,fandfProperty,fPlant,fandfEquip
ment

Chapterf15:fAuditingfthefFinancing/InvestingfProcess:Long-
TermfLiabilities,fStockholders’fEquity,fandfIncomefStatementfAccounts

Chapterf16:fAuditingfthefFinancing/InvestingfProcess:fCashandfInvestments

Chapterf17:fCompletingfthefAuditfEngagement

Chapterf18:fReportsfonfAuditedfFinancialfStatements

Chapterf19:fProfessionalfConduct,fIndependence,fandfQualityfManagement

Chapterf20:fLegalfLiability

Chapterf21:fAssurance,fAttestation,fandfInternalfAuditingfServices
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,CHAPTERf1

ANf INTRODUCTIONf TOf ASSURANCEf ANDf FINANCIALf STATEMENTf AUDITING

AnswersftofReviewfQuestions

1-1 Thefstudyfoffauditingfisfmorefconceptualfinfnaturefcomparedftofotherfaccountingfcourses.fR
atherfthanffocusingfonflearningfthefrules,ftechniques,fandfcomputationsfrequiredftofprepareffinancia
lfstatements,fauditingfemphasizesflearningfafframeworkfoffanalyticalfandflogicalfskillsftofevaluatefthef
relevancefandfreliabilityfoffthefsystemsfandfprocessesfresponsiblefforffinancialfinformation,fasfwellf
asfthefinformationfitself.fTofbefsuccessful,fstudentsfmustflearnfthefframeworkfandfthenflearnftofusefl
ogicfandfcommonfsensefinfapplyingfauditingfconceptsftofvariousfcircumstancesf andfsituations.
Understandingfauditingfcanfimprovefthefdecisionfmakingfabilityfoffconsultants,fbusinessfma
nagers,fandfaccountantsfbyfprovidingfafframeworkfforfevaluatingfthefusefulnessfandfreliabil
ityfoffinformation.

1-2 Therefisfafdemandfforfauditingfinfaffree-
marketfeconomyfbecausefthefagencyfrelationshipfbetweenfanfabsenteefownerfandfafmanagerfpro
ducesfafnaturalfconflictfoffinterestfdueftofthefinformationfasymmetryfthatfexistsfbetweenfthefownerf
andfmanager.fAsfafresult,fthefagentfagreesftofbefmonitoredfasfpartfoffhis/herfemploymentfcontract.f
Auditingfappearsftofbefafcost-effectivefformfoffmonitoring.
Thefempiricalfevidencefsuggestsfauditingfwasfdemandedfpriorftofgovernmentfregulationfsuc
hfasfstatutoryfauditfrequirements.fAdditionally,fmanyfprivatefcompaniesfandfotherfentitiesfnotfsubje
ctftofgovernmentfauditingfregulationsfalsofdemandfauditing.

1-3 Thefagencyfrelationshipfbetweenfanfownerfandfmanagerfproducesfafnaturalfconflictfoffinte
restfbecausefoffdifferencesfinftheftwofparties’fgoalsfandfbecausefoffinformationfasymmetryfthatfexi
stsfbetweenfthem.fThatfis,fthefmanagerfgenerallyfhasfmorefinformationfaboutfthef‘true’ffinancialfpo
sitionfandfresultsfoffoperationsfoffthefentityfthanfthefabsenteefownerfdoes.fIffbothfpartiesfseekftofm
aximizeftheirfownfself-
interest,fitfisflikelyfthatfthefmanagerfwillfnotfactfinfthefbestfinterestfoffthefownerfandfmayfmanipulateft
hefinformationfprovidedftofthefownerfaccordingly.

1-4 Independencefisfanfimportantfstandardfforfauditors.fIffanfauditorfisfnotfindependentfoffthefc
lient,fusersfmayflosefconfidencefinfthefauditor’sfabilityftofreportftruthfullyfonftheffinancialfstatements
,fandfthefauditor’sfworkflosesfitsfvalue.fFromfanfagencyfperspective,fiffthefprincipalf(owner)fknowsft
hatfthefauditorfisfnotfindependent,fthefownerfwillfnotftrustfthefauditor’sfwork.
Thus,fthefagentfwillfnotfhirefthefauditorfbecausefthefauditor’sfreportfwillfnotfbefeffectivefinfreducingfinf
ormationfriskffromfthefperspectivefoffthefowner.

1-5 Auditingf(broadlyfdefined)fisfafsystematicfprocessfoffobjectivelyfobtainingfandfevaluatin
gfevidencefregardingfassertionsfaboutfeconomicfactionsfandfeventsftofascertainfthefdegreefoffcor
respondencefbetweenfthosefassertionsfandfestablishedfcriteriafandfcommunicatingfthefresultsft
ofinterestedf users.
Assurancefisfengagementfinfwhichfafpractitionerfexpressesfafconclusionfdesignedftofenha
ncefthefdegreefoffconfidencefoffthefintendedfusersfotherfthanfthefresponsiblefpartyfaboutfthefoutcom
efoffthefevaluationforfmeasurementfoffafsubjectfmatterfagainstfcriteria.
Examplesfoffassurancefservicesfarefassurancef(audit)fofffinancialfstatements,fassurancefo
ffprospectiveffinancialfinformation,fassurancefoffreportingfonfinternalfcontrol,fassurancefoffsustaina
bilityfreporting,fandfassurancefoffelectronicfcommerce.

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, 1-6 Thefphrasefsystematicfprocessfimpliesfthatftherefshouldfbefafwell-
planned,flogicalfapproachfforfconductingfanfauditfthatfinvolvesfobjectivelyfobtainingfandfevaluati
ngfevidence.

1-7 Materiality:f"Omissionsforfmisstatementsfoffitemsfarefmaterialfifftheyfcould,findividuallyforfc
ollectively,finfluencefthefeconomicfdecisionsfoffusersftakenfonfthefbasisfofftheffinancialfstatements.f
Materialityfdependsfonfthefsizefandfnaturefoffthefomissionforfmisstatementfjudgedfinfthefsurroundin
gfcircumstances.fThefsizeforfnaturefoffthefitem,forfafcombinationfoffboth,fcouldfbefthef determiningffac
tor."f(IASB).
Auditfriskfisfdefinedfasfthefriskfthatfthefauditorfexpressesfanfinappropriatefauditfopinionfwhe
nftheffinancialfstatementsfarefmateriallyf misstatedf(ISAf200).
Thefauditfreportfstatesfthatfthefauditorfobtainsf“reasonablefassurance”fwhetherftheffinancia
lfstatementsfareffreeffromf“material”fmisstatement.fTheftermfreasonablefassurancefinformsfthefrea
derfthatftherefisfsomeflevelfoffriskfthatfthefauditfdidfnotfdetectfallfmaterialfmisstatements.fInfaddition,f
thefauditor’sfopinionfcommonlyfusesfthefwordingfthatftheffinancialfstatementsfpresentffairly,f“infallfm
aterialfrespects.”fThesefphrasesfcommunicateftofthirdfpartiesfthatfthefauditfreportfisflimitedftofmateri
alfinformation.

1-8 Onfmostfaudits,fitfisfnotffeasibleforfcost-
effectiveftofauditfallftransactions.fForfexample,finfafsmallfbusiness,fthefauditorfmightfbefableftofexam
inefallftransactionsfthatfoccurredfduringfthefperiod.fHowever,fitfisfunlikelyfthatfthefownerfoffthefbusin
essfcouldfaffordftofpayfforfsuchfanfextensivefaudit.fForfaflargeforganization,fthefsheerfvolumefofftran
sactionsfpreventsfthefauditorffromfexaminingfeveryftransaction.fThus,ftherefisfaftrade-
offfbetweenfthefexactnessforfprecisionfoffthefauditfandfitsfcost.

1-9 Thefmajorfphasesfoffthefauditfare:
• Clientf acceptance/continuancef andf establishingf engagementf terms
• Preplanning
• Assessfrisksfandfestablishfmateriality
• Planfthefaudit
• Considerfinternalfcontrol
• Auditfbusinessfprocessesfandfrelatedfaccounts
• Completefthefaudit
• Evaluatefresultsfandfissuefauditfreport

1-10 Thefauditor’sfunderstandingfoffthefentityfandfitsfenvironmentfincludesfknowledgefabo
ut:f(1)fthefnaturefoffthefentity,f(2)fitsfobjectivesfandfstrategies,f(3)fitsfindustry,fregulatory,fandfothe
rfexternalffactors,f(4)fitsfmanagement,f(5)fitsfgovernance,f(6)fitsfmeasurementfandfperformancef
process,fandf(7)fitsfbusinessf processes.

1-11 Sometimesfauditorsfwillffacefsituationsfwherefnofstandardfauditfprocedurefexists,fsuchfasft
hefexampleffromftheftextfoffverifyingfthefinventoryfoffreindeer.fSuchfcircumstancesfrequirefthatfthef
auditorfpossessfcreativityfandfinnovationfwhenfplanningfandfadministeringfauditfproceduresfwher
eflittleforfnofprecedentfexists.fEveryfclientfisfdifferent,fandfapplyingfauditingfconceptsfinfdifferentfsit
uationsfrequiresflogicfandfcommonfsense,fandffrequentlyfcreativityfandfinnovation.

SolutionsftofProblems

1-12 Thefmemofshouldfciteftheffollowingffacts:
• Therefisfafhistoricalfrelationshipfbetweenfaccountingfandfauditing.

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