TEST BANK For Auditing & Assurance Services: A Systematic Approach, 12th Edition By William Messier Jr, Steven Glover, Verified Chapters 1 - 21, Complete Newest Version 2024 UPDATE
TEST BANK FOR Auditing & Assurance Services: A sustematic Approach, 12th Edition By William Messier Jr, Stephen Glover, Complete Chapter 1-21 | Newest Version.
TEST BANK FOR Auditing & Assurance Services: A sustematic Approach, 12th Edition By William Messier Jr, Stephen Glover, Complete Chapter 1-21, Newest Version.
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SOLUTION MANUALFOR
Auditing & Assurance Services A Systematic Approach 12edition
Messier Chapter 1-21
CHAPTER1
AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT
AUDITING
Answers to Review Questions
The study of auditing is more conceptual in nature as compared to other accounting
courses. Rather than focusing on learning the rules, techniques, and computations
required to prepare financial statements, auditing emphasizes learning a framework of
analytical and logical skills. This framework enables auditors to evaluate the
relevance and reliability of the systems and processes responsible for financial
information as well as the information itself. To be successful, students must learn the
framework and then learn to use logic and common sense in applying auditing
concepts to various circumstances and situations.
Understandingauditingcanimprovethedecision-makingabilityofconsultants, business
managers, and accountants by providing a framework for evaluating the usefulness
and reliability of information—an important task in many different business contexts.
There is a demand for auditing in a free-market economy because the agency relationship
between an absentee owner and a manager produces a natural conflict of interest due
tothe information asymmetry that exists between these two parties. As a result, the
agent agrees to be monitored as part of his/her employment contract. Auditing
appears to be a cost-effective form of monitoring. The empirical evidence suggests
that auditing was demanded prior to government regulation. In 1926, before it was
required by law, independent auditors audited 82 percent of the companies on the
New York Stock Exchange. Additionally, many private companies and municipalities
not subject to government regulations, such as the Securities Act of 1933 and
Securities Exchange Act of 1934, also purchase various forms of auditing and
assurance services. Many private companies seek out financial statement audits in
order to secure financing for their operations. Companies preparing to go public also
benefit from having an audit.
The agency relationship between an owner and manager produces a natural conflict of
interest because of differences in the two parties’ goals and because of the
information asymmetry that exists between them. That is, the manager likely has
different goals than the owner, and generally has more information about the "true"
financial position and results of operations of the entity than the absentee owner does.
If both parties seek to maximize their ownself-interest, them an ager maynot act in the
,best interest of the owner and may manipulate the information provided to the owner
accordingly.
,Independence is a bedrock principle for auditors. If an auditor is not independent of the
client, users may lose confidence in the auditor’s ability to report objectively and
truthfully on the financial statements, and the auditor’s work loses its value. From an
agency perspective, if the principal (owner) knows that the auditor is not independent,
the owner will not trust the auditor’s work. Thus, the agent will not hire the auditor
because the auditor’s report will not be effective in reducing information risk from
the perspective of the owner. Auditor independence is also a regulatory requirement.
Auditing (broadly defined) is a systematic process of (1) objectively obtaining and
evaluating evidence regarding assertions about economic actions and events to
ascertain the degree of correspondence between those assertions and established
criteria and (2) communicating the results to interested users.
Attest services occur when a practitioner issues a report on subject matter, or an assertion
about subject matter, that is the responsibility of another party.
Assurance services are independent professional services that improve the quality of
information, or its context, for decision makers.
Auditingisaspecificformof―attestservice,‖whichinturnisaspecificcategoryof
―assurance service.‖ In other words, the phrase ―assurance services‖ constitutes the
broadest category of professional services provided by CPAs that serve to improve the
quality or context of information for decision making for other parties. Attest services
constitute a more specific category of assurance that CPA scan provide.These services are
intended to reduce information risk to parties relying on information provided by a party
that is creating, or making assertions about, subject matter of interest. CPAs can provide
attest services relating to a wide variety of subject matter (or assertions about that subject
matter) to reduce the information risk to third parties. One such subject matter is a set of
financial statements. When a CPA provides a very in-depth, detailed attest service that
follows relevant standards to constitute a complete examination of a set of financial
statements and related assertions, this is called a financial statement ―audit.‖
Audit risk is defined as the risk that the auditor may unknowingly fail to appropriately
modify his or her opinion on financial statements that are materially misstated (AS
1101). Materiality is defined as "the magnitude of an omission or misstatement of
accounting information that, in the light of surrounding circumstances, makes it
probable that the judgment of a reasonable person relying on the information would
have been changed or influenced by the omission or misstatement" (FASB Statement
of Financial Accounting Concepts No. 8, Chapter 3: Qualitative Characteristics of
Useful Accounting Information, which is pending revision at the time of the writing
of this book per the Board’sNovember 2017 decision to revert to a definition of
materiality similar to the one found in superseded Concept No. 2).
The concept of materiality is reflected in the wording of the auditor's standard audit
report through the phrase "the financial statements present fairly in all material respects."
This is the manner in which the auditor communicates the notion of materiality to the
users of the auditor's report. The auditor's standard report states that the audit provides
only reasonable assurance that the financial statements do not contain material
misstatements. The term "reasonable assurance" implies that there is some risk that a
materialmisstatementcouldbepresentinthefinancialstatementsandtheauditorwillfail
, todetectit.
Th emajor phases of the audit are:
Client acceptance/continuance
Preliminary engagement activities
Plan the audit
Consider and audit internal control
Audit business processes and related accounts
Complete the audit
Evaluate results and issue audit report
Plan the audit: During this phase of the audit, the auditor uses knowledge about the client
and any controls in place to plan the audit and perform preliminary analytical
procedures. The outcome of the planning process is a written audit plan that sets forth
the nature, extent, and timing of the audit procedures to be performed. The purpose of
this phase is to plan an effective and efficient audit.
The auditor's standard unqualified report for a public company client includes the
following sections: (1) opinion on the financial statements, (2) basis for opinion, and
(3) critical audit matters, as illustrated in this chapter.
Theemergence ofadvanced audit technologies will help removemanyofthetedious tasks
that are usually performed by junior auditors. Thus, auditors of all positions and
experience will be required to spend additional time reasoning through fundamental
business, accounting, and auditing concepts. An auditors’ knowledge in these areas
will enable them to provide greater benefit to clients by asking the right questions and
identifying new, more effective ways to collect, analyze, and interpret results. In
using audit data analytics, for example, auditors must understand the client and its
industry, as well as the fundamentals of accounting and auditing, in order to ask the
right questions in querying the data and in interpreting the results obtained.
Auditors frequently face situations where no standard audit procedure exists, such as the
examplefromthetextofverifyingtheinventoryofcattle.Suchcircumstancesrequirethat
the auditor exercise creativity and innovation when planning and administering audit
procedures where little or no guidance or precedent exists. Every client is different,
and applying auditing concepts in different situations requires logic and common
sense, and frequently creativity and innovation.
AnswerstoMultiple-ChoiceQuestions
1-13 b 1-19 a
1-14 b 1-20 d
1-15 c 1-21 d
1-16 c 1-22 d
1-17 c 1-23 b
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