, Solution manual for Auditing A Risk Based-
Approach 12th Edition by Karla M. Zehms
Notes
1- All Chapters are step by step.
2- We have shown you 10 pages.
3- The file contains all Appendix and Excel
sheet if it exists.
4- We have all what you need, we make
update at every time. There are many
new editions waiting you.
5- If you think you purchased the wrong file
You can contact us at every time, we can
replace it with true one.
Our email:
Our website:
testbanks-store.com
, AUDITING: A RISK-BASED APPROACH
12e ||ZEHMS, GRAMLING, RITTENBERG||
Solutions for Chapter 1
Solutions Manual Reconciliation from 11e to 12e
Question # for 11e Deleted/replaced/updated/new? Question # for 12e
1 1
2 Deleted & replaced with 2
question about regulatory
enforcement
3 3
4 4
5 5
6 6
7 7
8 Updated from a generic 8
question to one specifically
focused on the Theranos
fraud.
9 9
10 10
11 11
12 12
13 13
14 14
15 15
16 16
17 17
18 18
19 19
20 20
21 21
22 Updated to reflect 2021 22
IESB Code of Ethics.
23 23
24 24
25 25
26 26
27 27
28 28
29 29
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1-1
, 30 30
40 Changed order of learning 31
objectives; same question
41 Changed order of learning 32
objectives; same question
42 Changed order of learning 33
objectives; same question
31 34
32 Updated – added additional 35
content on poor judgments
as documented in a
PCAOB enforcement
release
33 36
34 37
35 38
36 39
37 40
38 41
39 42
New fraud case about 43
Elizabeth Holmes &
Theranos
43 44
44 45
45 46
46 47
47 48
48 49
49 50
50 Updated to a 2021 PCAOB 51
enforcement case
illustrating the same points.
New case investigating the 52
outcome of the
Holmes/Theranos trial.
New case simulation on 53
data analytics and CPA
exam written
communication.
51 Deleted Academic
Research case; eliminating
© 2023 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1-2
, this feature.
52 Deleted Academic
Research case; eliminating
this feature.
Answers to Check Your Basic Knowledge Questions
1-1 T
1-2 F
1-3 d
1-4 b
1-5 T
1-6 F
1-7 a
1-8 b
1-9 T
1-10 F
1-11 d
1-12 c
1-13 T
1-14 T
1-15 b
1-16 d
1-17 T
1-18 F
1-19 d
1-20 c
1-21 T
1-22 T
1-23 b
1-24 a
Review Questions and Short Cases
1-1
The objective of external auditing is to provide opinions on the reliability of the financial
statements and, as part of an integrated audit, provide opinions on internal control effectiveness.
The value of the external auditing profession is affirmed when the public has confidence in its
objectivity and the accuracy of its opinions. The capital markets depend on accurate, reliable,
and objective (neutral) data that portray the economic nature of an entity’s business and in turn
provide a base to judge current progress toward long-term objectives. If the market does not
receive reliable data, investors lose confidence in the system, make poor decisions, and may lose
© 2023 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1-3
,a great deal of money; ultimately, the system may fail. By providing an independent audit
opinion, the capital markets have assurance that the financial data that they are basing their
decisions on are accurate.
1-2
The economy benefits from regulatory enforcement because people know that the government is
devoting resources to protecting them, which makes people more likely to invest with
confidence. By investing with confidence, investors make capital available to companies who
can use that capital in profitable ways that benefit the entire society through products/services,
jobs, and taxes. The economy benefits from the auditing profession because the assurance that
audits provide also makes people more likely to invest with confidence.
1-3
Audit services are demanded because there is:
● Potential bias in providing information
● Remoteness between a user and the organization or trading partner
● Such complexity in the transaction, information, or processing systems that it is difficult to
determine their proper presentation without a review by an independent expert
● Need to limit negative consequences that arise from relying on inaccurate information
1-4
The audit enhances the quality of financial statements because the user has assurance that an
independent, qualified professional has examined the financial statements and has rendered an
opinion on their fairness. The independence and expertise of the auditor serve as a quality control
function to overcome the potential bias of management in presenting the financial statements in a
manner that most flatters an assessment of their performance. The audit is designed to add
credibility to the financial statements.
An audit does not necessarily guarantee a fair presentation of a company's financial
statements, although it does increase the likelihood that there are no material misstatements in
the company's financial statements. The audit provides reasonable, but not absolute, assurance
about the accuracy of the financial statements. The caveats about fairness exist for two reasons:
● Fairness is judged within the applicable financial reporting framework. Some question
whether GAAP or IFRS results in the fairest possible presentations in all situations.
● Although designed to detect material fraud, it might be possible that a well-executed
audit may still fail to detect fraud.
© 2023 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1-4
,1-5
Independence means objectivity and freedom from bias. The auditor can favor neither the client
nor the third party in evaluating the fairness of the financial statements. The auditor must be
independent in fact and in appearance. Independence in fact means the auditor is unbiased and
objective. An auditor could be independent in fact if they owned a few shares of common stock
in an audit client but might not appear independent to a third party. Independence in appearance
means that a third party with knowledge of the auditor’s relationship with the client would
consider the auditor to be independent. If users don’t perceive auditors to be independent, then
the value of the audit is lacking.
1-6
a. An organization’s financial statements should reflect a true and fair view of the
organization’s financial results. The statements should not favor one user over another.
However, the interests of the various users can conflict. By having rules that encourage
auditor independence (e.g., not owning stock in the client company, not performing
consulting services for a publicly traded audit client), the profession encourages auditor
independence.
b. Refer to Exhibit 1.1.
1-7
a. Susan Birkert had a friend purchase $5,000 worth of stock in the company that she was
auditing. She lied to KPMG when responding to the firm’s yearly written requirements to
comply with the firm’s independence policies.
b. Independence in fact means that while Susan might have actually not behaved in a biased
manner on the engagement because of the stock she owned, external users may perceive
an independence conflict, thus causing the auditor to not be independent in appearance.
c. The answer to this question will vary by student.
1-8
a. Management may want an independent audit because:
● An independent assessment of the fairness of presentation enhances the perceived
reliability of the financial report and assists the company in obtaining loans or new
capital because the investing and lending public will have confidence in the financial
figures.
© 2023 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1-5
, ● The auditor's expertise in related areas may help the client in:
(a) Tax planning
(b) Preparing tax returns
(c) Selecting and implementing accounting information systems
(d) Identifying sources of capital or loans
(e) Preparing financial forecasts or analyses that may assist the company in obtaining
loans or new capital
(f) Determining the efficiency of existing accounting operations
(g) Observing areas in which efficiency and effectiveness of operations might be
improved
● The auditor's testing and evaluations of controls may provide insights into areas in which
improvements could be made.
● The threat, as well as the performance, of an audit may act to deter potential fraud on the
part of employees.
● The auditor's expertise may lead to improved financial presentations because of the
application of accounting principles or improved financial statement disclosure.
b. Some of the points that management might consider in deciding the type of audit firm to
hire include the following:
● The audit fees for conducting the audit.
● The reputation of the auditor in the community and potential impact of auditor reputation
in securing loans or capital.
● The ability of the auditor to assist the firm in expanding the scope of its operations
beyond the immediate geographic area.
● The industry-specific knowledge of the potential auditors.
● The individual personnel servicing the company; that is, the involvement of a partner
versus other personnel on the engagement.
● Perceived audit expertise in ancillary areas such as tax, financial projections and analysis,
mergers and acquisitions, and systems.
● The outcome of any recent peer review performed on the audit firm.
● The satisfaction of other clients with the level of service obtained from the audit firm.
● The ability of the audit firm to use state-of-the-art technology on the engagement and to
introduce that technology to the client.
(Note: The above list is not inclusive. Students are generally quite good in identifying other
factors that may or may not be important, thus providing for excellent classroom discussion.)
© 2023 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1-6
,c. Several users might be interested in Theranos’ financial results, including management
itself, existing or potential creditors, potential takeover or merger partners, employees,
and the government.
1-9
Refer to Exhibit 1.4.
1-10
There exist various types of audit service providers, and they are each suited to auditing different
types of clients:
● Large, multinational audit firms are best suited to auditing large, multinational
companies, both publicly traded and privately held.
● Regional audit firms are best suited to auditing relatively small, publicly traded
companies or medium-sized, privately held companies.
● Small audit firms are best suited to auditing small, privately held companies.
1-11
The requirements of those entering the auditing profession are demanding. Audits are performed
in teams where each auditor is expected to complete tasks requiring considerable technical
knowledge and expertise. Auditors also need well-developed skills in leadership, teamwork,
communication, decision making, and other professional areas. In terms of technical knowledge
and expertise, auditors must understand accounting and auditing authoritative literature, develop
industry- and client-specific knowledge, develop and apply computer skills, evaluate internal
controls, and assess and respond to fraud risk. Furthermore, a strong ethical foundation is critical
for each auditor.
In terms of professional skills, auditors make presentations to management and audit
committee members, exercise logical reasoning, communicate decisions to users, manage and
supervise others by providing meaningful feedback, act with integrity and ethics, interact in a
team environment, collaborate with others, and maintain a professional presence.
1-12
Audit quality involves performing an audit in accordance with GAAS to provide reasonable
assurance that the audited financial statements and related disclosures are presented in
accordance with GAAP and demonstrate assurance that those financial statements are not
materially misstated whether due to errors or fraud.
The five elements of the FRC’s Audit Quality Framework include (1) audit firm culture, (2)
skills and qualities of the audit partner and the engagement team, (3) effectiveness of the audit
© 2023 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1-7
, process, (4) factors outside the control of auditors, and (5) reliability and usefulness of audit
reporting, including auditor communication of key issues.
1-13
a. Audit firm culture affects audit quality because when it is positive it:
• Creates an environment where achieving quality is valued, invested in, and rewarded.
• Emphasizes the importance of “doing the right thing” in the public interest and the
effect of doing so on the reputation of both the firm and individual auditors.
• Ensures partners and staff have sufficient time and resources to deal with difficult
issues as they arise.
• Ensures financial considerations do not drive actions and decisions having a negative
effect on audit quality.
• Promotes the merits of consultation on difficult issues and supports partners in the
exercise of their personal judgment.
• Ensures robust systems for client acceptance and continuation.
• Fosters appraisal and reward systems for partners and staff that promote the personal
characteristics essential to quality auditing.
• Ensures audit quality is monitored within firms and across international networks and
appropriate consequential action is taken.
Expert skills and qualities of the audit partner and engagement team affect audit quality
because they:
• Affect whether partners and staff understand their clients’ business and adhere to the
principles underlying auditing and ethical standards.
• Affect the ability of partners and staff to exercise professional skepticism in their work
and to ensure that they are robust in dealing with issues identified during the audit.
• Affect whether staff members performing audit work have sufficient experience and are
appropriately supervised by partners and managers.
• Affect whether partners and managers provide junior staff with appropriate “mentoring”
and “on-the-job” training.
• Affect whether sufficient training is given to audit personnel in audit, accounting, and
industry specialist issues.
In turn, these factors affect the effectiveness of the audit process itself, which then has
further effects on audit quality.
© 2023 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1-8
Approach 12th Edition by Karla M. Zehms
Notes
1- All Chapters are step by step.
2- We have shown you 10 pages.
3- The file contains all Appendix and Excel
sheet if it exists.
4- We have all what you need, we make
update at every time. There are many
new editions waiting you.
5- If you think you purchased the wrong file
You can contact us at every time, we can
replace it with true one.
Our email:
Our website:
testbanks-store.com
, AUDITING: A RISK-BASED APPROACH
12e ||ZEHMS, GRAMLING, RITTENBERG||
Solutions for Chapter 1
Solutions Manual Reconciliation from 11e to 12e
Question # for 11e Deleted/replaced/updated/new? Question # for 12e
1 1
2 Deleted & replaced with 2
question about regulatory
enforcement
3 3
4 4
5 5
6 6
7 7
8 Updated from a generic 8
question to one specifically
focused on the Theranos
fraud.
9 9
10 10
11 11
12 12
13 13
14 14
15 15
16 16
17 17
18 18
19 19
20 20
21 21
22 Updated to reflect 2021 22
IESB Code of Ethics.
23 23
24 24
25 25
26 26
27 27
28 28
29 29
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1-1
, 30 30
40 Changed order of learning 31
objectives; same question
41 Changed order of learning 32
objectives; same question
42 Changed order of learning 33
objectives; same question
31 34
32 Updated – added additional 35
content on poor judgments
as documented in a
PCAOB enforcement
release
33 36
34 37
35 38
36 39
37 40
38 41
39 42
New fraud case about 43
Elizabeth Holmes &
Theranos
43 44
44 45
45 46
46 47
47 48
48 49
49 50
50 Updated to a 2021 PCAOB 51
enforcement case
illustrating the same points.
New case investigating the 52
outcome of the
Holmes/Theranos trial.
New case simulation on 53
data analytics and CPA
exam written
communication.
51 Deleted Academic
Research case; eliminating
© 2023 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1-2
, this feature.
52 Deleted Academic
Research case; eliminating
this feature.
Answers to Check Your Basic Knowledge Questions
1-1 T
1-2 F
1-3 d
1-4 b
1-5 T
1-6 F
1-7 a
1-8 b
1-9 T
1-10 F
1-11 d
1-12 c
1-13 T
1-14 T
1-15 b
1-16 d
1-17 T
1-18 F
1-19 d
1-20 c
1-21 T
1-22 T
1-23 b
1-24 a
Review Questions and Short Cases
1-1
The objective of external auditing is to provide opinions on the reliability of the financial
statements and, as part of an integrated audit, provide opinions on internal control effectiveness.
The value of the external auditing profession is affirmed when the public has confidence in its
objectivity and the accuracy of its opinions. The capital markets depend on accurate, reliable,
and objective (neutral) data that portray the economic nature of an entity’s business and in turn
provide a base to judge current progress toward long-term objectives. If the market does not
receive reliable data, investors lose confidence in the system, make poor decisions, and may lose
© 2023 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1-3
,a great deal of money; ultimately, the system may fail. By providing an independent audit
opinion, the capital markets have assurance that the financial data that they are basing their
decisions on are accurate.
1-2
The economy benefits from regulatory enforcement because people know that the government is
devoting resources to protecting them, which makes people more likely to invest with
confidence. By investing with confidence, investors make capital available to companies who
can use that capital in profitable ways that benefit the entire society through products/services,
jobs, and taxes. The economy benefits from the auditing profession because the assurance that
audits provide also makes people more likely to invest with confidence.
1-3
Audit services are demanded because there is:
● Potential bias in providing information
● Remoteness between a user and the organization or trading partner
● Such complexity in the transaction, information, or processing systems that it is difficult to
determine their proper presentation without a review by an independent expert
● Need to limit negative consequences that arise from relying on inaccurate information
1-4
The audit enhances the quality of financial statements because the user has assurance that an
independent, qualified professional has examined the financial statements and has rendered an
opinion on their fairness. The independence and expertise of the auditor serve as a quality control
function to overcome the potential bias of management in presenting the financial statements in a
manner that most flatters an assessment of their performance. The audit is designed to add
credibility to the financial statements.
An audit does not necessarily guarantee a fair presentation of a company's financial
statements, although it does increase the likelihood that there are no material misstatements in
the company's financial statements. The audit provides reasonable, but not absolute, assurance
about the accuracy of the financial statements. The caveats about fairness exist for two reasons:
● Fairness is judged within the applicable financial reporting framework. Some question
whether GAAP or IFRS results in the fairest possible presentations in all situations.
● Although designed to detect material fraud, it might be possible that a well-executed
audit may still fail to detect fraud.
© 2023 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1-4
,1-5
Independence means objectivity and freedom from bias. The auditor can favor neither the client
nor the third party in evaluating the fairness of the financial statements. The auditor must be
independent in fact and in appearance. Independence in fact means the auditor is unbiased and
objective. An auditor could be independent in fact if they owned a few shares of common stock
in an audit client but might not appear independent to a third party. Independence in appearance
means that a third party with knowledge of the auditor’s relationship with the client would
consider the auditor to be independent. If users don’t perceive auditors to be independent, then
the value of the audit is lacking.
1-6
a. An organization’s financial statements should reflect a true and fair view of the
organization’s financial results. The statements should not favor one user over another.
However, the interests of the various users can conflict. By having rules that encourage
auditor independence (e.g., not owning stock in the client company, not performing
consulting services for a publicly traded audit client), the profession encourages auditor
independence.
b. Refer to Exhibit 1.1.
1-7
a. Susan Birkert had a friend purchase $5,000 worth of stock in the company that she was
auditing. She lied to KPMG when responding to the firm’s yearly written requirements to
comply with the firm’s independence policies.
b. Independence in fact means that while Susan might have actually not behaved in a biased
manner on the engagement because of the stock she owned, external users may perceive
an independence conflict, thus causing the auditor to not be independent in appearance.
c. The answer to this question will vary by student.
1-8
a. Management may want an independent audit because:
● An independent assessment of the fairness of presentation enhances the perceived
reliability of the financial report and assists the company in obtaining loans or new
capital because the investing and lending public will have confidence in the financial
figures.
© 2023 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1-5
, ● The auditor's expertise in related areas may help the client in:
(a) Tax planning
(b) Preparing tax returns
(c) Selecting and implementing accounting information systems
(d) Identifying sources of capital or loans
(e) Preparing financial forecasts or analyses that may assist the company in obtaining
loans or new capital
(f) Determining the efficiency of existing accounting operations
(g) Observing areas in which efficiency and effectiveness of operations might be
improved
● The auditor's testing and evaluations of controls may provide insights into areas in which
improvements could be made.
● The threat, as well as the performance, of an audit may act to deter potential fraud on the
part of employees.
● The auditor's expertise may lead to improved financial presentations because of the
application of accounting principles or improved financial statement disclosure.
b. Some of the points that management might consider in deciding the type of audit firm to
hire include the following:
● The audit fees for conducting the audit.
● The reputation of the auditor in the community and potential impact of auditor reputation
in securing loans or capital.
● The ability of the auditor to assist the firm in expanding the scope of its operations
beyond the immediate geographic area.
● The industry-specific knowledge of the potential auditors.
● The individual personnel servicing the company; that is, the involvement of a partner
versus other personnel on the engagement.
● Perceived audit expertise in ancillary areas such as tax, financial projections and analysis,
mergers and acquisitions, and systems.
● The outcome of any recent peer review performed on the audit firm.
● The satisfaction of other clients with the level of service obtained from the audit firm.
● The ability of the audit firm to use state-of-the-art technology on the engagement and to
introduce that technology to the client.
(Note: The above list is not inclusive. Students are generally quite good in identifying other
factors that may or may not be important, thus providing for excellent classroom discussion.)
© 2023 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1-6
,c. Several users might be interested in Theranos’ financial results, including management
itself, existing or potential creditors, potential takeover or merger partners, employees,
and the government.
1-9
Refer to Exhibit 1.4.
1-10
There exist various types of audit service providers, and they are each suited to auditing different
types of clients:
● Large, multinational audit firms are best suited to auditing large, multinational
companies, both publicly traded and privately held.
● Regional audit firms are best suited to auditing relatively small, publicly traded
companies or medium-sized, privately held companies.
● Small audit firms are best suited to auditing small, privately held companies.
1-11
The requirements of those entering the auditing profession are demanding. Audits are performed
in teams where each auditor is expected to complete tasks requiring considerable technical
knowledge and expertise. Auditors also need well-developed skills in leadership, teamwork,
communication, decision making, and other professional areas. In terms of technical knowledge
and expertise, auditors must understand accounting and auditing authoritative literature, develop
industry- and client-specific knowledge, develop and apply computer skills, evaluate internal
controls, and assess and respond to fraud risk. Furthermore, a strong ethical foundation is critical
for each auditor.
In terms of professional skills, auditors make presentations to management and audit
committee members, exercise logical reasoning, communicate decisions to users, manage and
supervise others by providing meaningful feedback, act with integrity and ethics, interact in a
team environment, collaborate with others, and maintain a professional presence.
1-12
Audit quality involves performing an audit in accordance with GAAS to provide reasonable
assurance that the audited financial statements and related disclosures are presented in
accordance with GAAP and demonstrate assurance that those financial statements are not
materially misstated whether due to errors or fraud.
The five elements of the FRC’s Audit Quality Framework include (1) audit firm culture, (2)
skills and qualities of the audit partner and the engagement team, (3) effectiveness of the audit
© 2023 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1-7
, process, (4) factors outside the control of auditors, and (5) reliability and usefulness of audit
reporting, including auditor communication of key issues.
1-13
a. Audit firm culture affects audit quality because when it is positive it:
• Creates an environment where achieving quality is valued, invested in, and rewarded.
• Emphasizes the importance of “doing the right thing” in the public interest and the
effect of doing so on the reputation of both the firm and individual auditors.
• Ensures partners and staff have sufficient time and resources to deal with difficult
issues as they arise.
• Ensures financial considerations do not drive actions and decisions having a negative
effect on audit quality.
• Promotes the merits of consultation on difficult issues and supports partners in the
exercise of their personal judgment.
• Ensures robust systems for client acceptance and continuation.
• Fosters appraisal and reward systems for partners and staff that promote the personal
characteristics essential to quality auditing.
• Ensures audit quality is monitored within firms and across international networks and
appropriate consequential action is taken.
Expert skills and qualities of the audit partner and engagement team affect audit quality
because they:
• Affect whether partners and staff understand their clients’ business and adhere to the
principles underlying auditing and ethical standards.
• Affect the ability of partners and staff to exercise professional skepticism in their work
and to ensure that they are robust in dealing with issues identified during the audit.
• Affect whether staff members performing audit work have sufficient experience and are
appropriately supervised by partners and managers.
• Affect whether partners and managers provide junior staff with appropriate “mentoring”
and “on-the-job” training.
• Affect whether sufficient training is given to audit personnel in audit, accounting, and
industry specialist issues.
In turn, these factors affect the effectiveness of the audit process itself, which then has
further effects on audit quality.
© 2023 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1-8
