SOLUTION MANUAL for Auditing & Assurance Services A
Systematic Approach
12th Edition by William Messier Jr, Steven Glover,
Chapters 1 - 21 / Complete
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,• Table of Contents vr vr
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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Chapter 2: The Financial Statement Auditing Environment
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Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
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Chapter 4: Risk Assessment
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Chapter 5: Evidence and Documentation
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Chapter 6: Internal Control in a Financial Statement Audit
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Chapter 7: Auditing Internal Controlover Financial Reporting
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Chapter 8: Audit Sampling: An Overview and Application to Tests ofControls
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Chapter 9: Audit Sampling: An Application to Substantive Tests of Account Balances
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Chapter 10: Auditing the Revenue Process
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Chapter 11: Auditing the Purchasing Process
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Chapter 12: Auditing the Human Resource Management Process
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Chapter 13: Auditing the Inventory Management Process
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Chapter 14: Auditing the Financing/Investing Process:Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipme
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nt
Chapter 15: Auditing the Financing/Investing Process:Long-
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Term Liabilities, Stockholders’ Equity, and Income Statement Accounts
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Chapter 16: Auditing the Financing/Investing Process: Cashand Investments
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Chapter 17: Completing the Audit Engagement
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Chapter 18: Reports on Audited Financial Statements
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Chapter 19: Professional Conduct, Independence, and Quality Management
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Chapter 20: Legal Liability
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Chapter 21: Assurance, Attestation, and Internal Auditing Services
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,CHAPTER 1 vr
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING
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Answers to Review Questions vr vr rv
1-1 The study of auditing is more conceptual in nature compared to other accounting courses. Rat vr vr vr vr vr vr vr vr vr vr vr vr vr vr
her than focusing on learning the rules, techniques, and computations required to preparefinancial sta
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tements, auditing emphasizes learning aframework of analytical and logical skills to evaluate the relev
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ance and reliability of the systems and processes responsible for financial information, as well as the in
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formation itself. To be successful, students must learn the framework and then learn to use logic and c vr vr vr vr vr vr vr vr vr vr vr vr vr vr vr vr vr
ommon sense in applying auditing concepts to various circumstances and situations.
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Understanding auditing canimprovethe decision m aking ability of consultants, businessm an vr vr vr vr vr vr r
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agers, and accountants by providing a framework for evaluating the usefulness and reliability
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of information.
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1-2 There is a demand for auditing in a free- vr vr vr vr vr vr vr vr
market economy because the agency relationship between an absentee owner and a manager prod
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uces a natural conflict of interest due to the information asymmetry that exists between the owner and
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manager. As a result, the agent agrees to be monitored as part of his/her employment contract. Auditi vr vr vr vr vr vr vr vr vr vr vr vr vr vr vr vr
ng appears to be a cost-effective form of monitoring.
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The empirical evidence suggests auditing w as demanded prior to government r egulation such vr vr vr vr r
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as statutory audit requirements. Additionally, many private companies and other entities not subject t
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o government auditing regulations also demand auditing.
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1-3 The agency relationship between an owner and manager produces a natural conflict of intere vr vr vr vr vr vr vr vr vr vr vr vr vr
st because of differences in the two parties’ goals and because of information asymmetry that exists b
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etween them. That is, the manager generally has more information about the ‘true’ financial position a
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nd results of operations of the entity than the absentee owner does. If both parties seek to maximize th
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eir own self- vr vr
interest, it is likely that the manager will not act in the best interest of the owner and may manipulate the
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information provided to the owner accordingly.
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1-4 Independence is an important standard for auditors. If an auditor is not independent of the cli vr vr vr vr vr vr vr vr vr vr vr vr vr r
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ent, users may lose confidence in the auditor’s ability to report truthfully on the financial statements, a
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nd the auditor’s work loses its value. From an agency perspective, if the principal (owner) knows that t
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he auditor is not independent, the owner will not trust the auditor’s work.
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Thus, the agent will not hire the auditor because the auditor’s r eport w ill not b e effectiveinr educing infor
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mation risk from the perspective of the owner. vr vr vr vr vr vr vr
1-5 Auditing (broadly defined) is a systematic process of objectively obtaining and evaluating vr vr vr vr vr vr vr vr vr vr vr r
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evidence regarding assertions about economic actions and events to ascertain the degree of corres r
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pondence between those assertions and established criteria and communicating the results to inte vr vr vr vr vr vr vr vr vr vr vr vr
rested users. vr
Assurance is engagement in which a practitioner expresses a conclusion designed to enhan vr vr vr vr vr vr vr vr vr vr vr vr
ce the degree of confidence of the intended users other than the r esponsible p arty aboutthe outcome of t
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he evaluation or measurement of a subject matter against criteria.
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Examples of assurance services are assurance (audit) of financial statements, assurance of vr vr vr vr vr vr vr vr vr vr vr vr
prospectivefinancial information, assurance of r eporting on internal control,assurance of sustainabilit vr vr vr vr vr r
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y reporting, and assurance of electronic commerce.
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, 1-6 The phrase systematic process implies that there should be a well- vr vr vr vr vr vr vr vr vr vr
planned, logical approachf or conducting an audit that involves objectively obtaining and evaluating
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evidence.
1-7 Materiality: "Omissions or misstatements of items are material if they could, individually or col vr vr vr vr vr vr vr vr vr vr vr r
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lectively, influence the economic decisions of users taken on the basis of the financial statements. Mat
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eriality depends on the size and nature of the omission or misstatement judged in the surrounding circu
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mstances. The size or nature of the item, or a combination of b oth, couldbe the determining factor." (IAS
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B).
Audit risk is defined as the risk that the auditor expresses an inappropriate audit opinionw hen th vr vr vr vr vr vr vr vr vr vr vr vr vr vr r
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e financial statements are materially misstated (ISA 200).
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The audit report states that the auditor obtains “reasonable assurance” whether the financial s
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tatements are free from “material” misstatement. The term reasonable assurance informs the reader t
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hat there is some level of risk that the audit did not detect all material misstatements. In addition, the au
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ditor’s opinion commonly uses the wording that the financial statements p resent f airly, “in all material r
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espects.” These p hrases communicate to third p artiesthat the audit report is limited to material informa
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tion.
1-8 On most audits, it is not feasible or cost- vr vr vr vr vr vr vr vr
effective to audit all transactions. For example, in a small business, the auditor might be able to examin
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e all transactions that occurred during the period. However, it is unlikely that the owner of the business
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could afford to pay for such an extensive audit. For a large organization, the sheer volume of transactio
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ns prevents the auditor from examining every transaction. Thus, there is a trade-
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off between the exactness or precision of the audit and its cost.
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1-9 The m ajor phases of the audit are: vr vr vr vr vr vr
Client acceptance/continuance and establishing engagement terms v r v r v r v r v r
Preplanning
Assess risks and establish materiality vr vr vr vr
Plan the audit vr vr
Consider internal control vr vr
Auditb usiness processes and r elated accounts vr vr vr vr vr
Complete the audit vr vr
Evaluate results and issue audit r eport vr vr vr vr vr
1-10 The auditor’s understanding of the entity and its environment includes knowledge about vr vr vr vr vr vr vr vr vr vr vr
: ( 1) the nature of the entity, ( 2) its objectives and strategies, ( 3) its industry, r egulatory, and other exte
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rnal factors, (4) its management, (5) its governance, (6) its measurement and performance proces
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s, and (7) its business processes.
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1-11 Sometimes auditors willf ace situations where no standard auditprocedure exists,such as the vr vr vr vr vr r
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example from the text of verifying the inventory of reindeer. Such circumstances require that the audit
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or possess creativity and innovation when planning and administering audit procedures where little o
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r no precedent exists. Every client is different, and applying auditing concepts in different situations re
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quires logic and common sense, and frequently creativity and innovation.
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Solutions toProblems rv rv
1-12 The memo should cite the f ollowing f acts:
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Thereis a historical relationship between accounting and auditing. vr vr vr vr vr vr r
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