Solutions for Auditing & Assurance Services: A Systematic Approach, 12th Edition by Messier
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Course
CGAP - Certified Government Auditing Professional
Institution
CGAP - Certified Government Auditing Professional
Complete Solutions Manual for Auditing & Assurance Services: A Systematic Approach, 12th Edition 12e by William Messier Jr, Steven Glover and Douglas Prawitt. ISBN-13: 0675
Full Chapters Solutions included
PART 1: Introduction to Assurance andFinancial Statement Auditing
Chapter 1: An Intr...
Chapter 01 - An Introduction to Assurance and Financial Statement Auditing
CHAPTER 1
AN INTRODUCTION TO ASSURANCE AND FINANCIAL
STATEMENT AUDITING
Answers to Review Questions
1-1 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. Understanding
auditing can improve the decision-making ability of consultants, business managers, and
accountants by providing a framework for evaluating the usefulness and reliability of
information—an important task in many different business contexts.
1-2 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 to the
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.
1-3 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
own self-interest, the manager may not act in the best interest of the owner and may
manipulate the information provided to the owner accordingly.
1-4 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.
1-1
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