SOLUTION MANUAL for Auditing & Assurance Services A
Systematic Approach
12th Edition by William Messier Jr, Steven Glover,
Chapters 1 - 21 / Complete
,• Table of Contents
j j
Chapterj1:jAnjIntroductionjtojAssurancejandjFinancialjStatementjAuditing
Chapterj2:jThejFinancialjStatementjAuditingjEnvironment
Chapterj3:jAuditjPlanning,jTypesjofjAuditjTests,jandjMateriality
Chapterj4:jRiskjAssessment
Chapterj5:jEvidencejandjDocumentation
Chapterj6:jInternaljControljinjajFinancialjStatementjAudit
Chapterj7:jAuditingjInternaljControljoverjFinancialjReporting
Chapterj8:jAuditjSampling:jAnjOverviewjandjApplicationjtojTestsjofjControls
Chapterj9:jAuditjSampling:jAnjApplicationjtojSubstantivejTestsjofjAccountjBalances
Chapterj10:jAuditingjthejRevenuejProcess
Chapterj11:jAuditingjthejPurchasingjProcess
Chapterj12:jAuditingjthejHumanjResourcejManagementjProcess
Chapterj13:jAuditingjthejInventoryjManagementjProcess
Chapterj14:jAuditingjthejFinancing/InvestingjProcess:PrepaidjExpenses,jIntangiblejAssets,jandjProperty,jPlant,jandjEquip
ment
Chapterj15:jAuditingjthejFinancing/InvestingjProcess:Long-
TermjLiabilities,jStockholders’jEquity,jandjIncomejStatementjAccounts
Chapterj16:jAuditingjthejFinancing/InvestingjProcess:jCashandjInvestments
Chapterj17:jCompletingjthejAuditjEngagement
Chapterj18:jReportsjonjAuditedjFinancialjStatements
Chapterj19:jProfessionaljConduct,jIndependence,jandjQualityjManagement
Chapterj20:jLegaljLiability
Chapterj21:jAssurance,jAttestation,jandjInternaljAuditingjServices
,CHAPTERj1
ANj INTRODUCTIONj TOj ASSURANCEj ANDj FINANCIALj STATEMENTj AUDITING
AnswersjtojReviewjQuestions
1-1 Thejstudyjofjauditingjisjmorejconceptualjinjnaturejcomparedjtojotherjaccountingjcourses.jR
atherjthanjfocusingjonjlearningjthejrules,jtechniques,jandjcomputationsjrequiredjtojpreparejfinancialj
statements,jauditingjemphasizesjlearningjajframeworkjofjanalyticaljandjlogicaljskillsjtojevaluatejthejr
elevancejandjreliabilityjofjthejsystemsjandjprocessesjresponsiblejforjfinancialjinformation,jasjwelljasj
thejinformationjitself.jTojbejsuccessful,jstudentsjmustjlearnjthejframeworkjandjthenjlearnjtojusejlogicj
andjcommonjsensejinjapplyingjauditingjconceptsjtojvariousj circumstancesj andjsituations.
Understandingjauditingjcanjimprovejthejdecisionjmakingjabilityjofjconsultants,jbusinessjman
agers,jandjaccountantsjbyjprovidingjajframeworkjforjevaluatingjthejusefulnessjandjreliability
j ofj information.
1-2 Therejisjajdemandjforjauditingjinjajfree-
marketjeconomyjbecausejthejagencyjrelationshipjbetweenjanjabsenteejownerjandjajmanagerjprod
ucesjajnaturaljconflictjofjinterestjduejtojthejinformationjasymmetryjthatjexistsjbetweenjthejownerjan
djmanager.jAsjajresult,jthejagentjagreesjtojbejmonitoredjasjpartjofjhis/herjemploymentjcontract.jAu
ditingjappearsjtojbejajcost-effectivejformj ofj monitoring.
Thejempiricaljevidencejsuggestsjauditingjwasjdemandedjpriorjtojgovernmentjregulationjsuc
hjasjstatutoryjauditjrequirements.jAdditionally,jmanyjprivatejcompaniesjandjotherjentitiesjnotjsubjec
tjtojgovernmentj auditingjregulationsj alsojdemandjauditing.
1-3 Thejagencyjrelationshipjbetweenjanjownerjandjmanagerjproducesjajnaturaljconflictjofjinter
estjbecausejofjdifferencesjinjthejtwojparties‘jgoalsjandjbecausejofjinformationjasymmetryjthatjexist
sjbetweenjthem.jThatjis,jthejmanagerjgenerallyjhasjmorejinformationjaboutjthej‗true‘jfinancialjpositi
onjandjresultsjofjoperationsjofjthejentityjthanjthejabsenteejownerjdoes.jIfjbothjpartiesjseekjtojmaxim
izejtheirjownjself-
interest,jitjisjlikelyjthatjthejmanagerjwilljnotjactjinjthejbestjinterestjofjthejownerjandjmayjmanipulatejth
ejinformationjprovidedjtojthejownerjaccordingly.
1-4 Independencejisjanjimportantjstandardjforjauditors.jIfjanjauditorjisjnotjindependentjofjthejcl
ient,jusersjmayjlosejconfidencejinjthejauditor‘sjabilityjtojreportjtruthfullyjonjthejfinancialjstatements,j
andjthejauditor‘sjworkjlosesjitsjvalue.jFromjanjagencyjperspective,jifjthejprincipalj(owner)jknowsjtha
tjthejauditorjisjnotjindependent,jthejownerjwilljnotjtrustjthejauditor‘sjwork.
Thus,jthejagentjwilljnotjhirejthejauditorjbecausejthejauditor‘sjreportjwilljnotjbejeffectivejinjreducingjinfo
rmationjriskjfromjthejperspectivejofj thejowner.
1-5 Auditingj(broadlyjdefined)jisjajsystematicjprocessjofjobjectivelyjobtainingjandjevaluatingj
evidencejregardingjassertionsjaboutjeconomicjactionsjandjeventsjtojascertainjthejdegreejofjcorre
spondencejbetweenjthosejassertionsjandjestablishedjcriteriajandjcommunicatingjthejresultsj tojin
terestedj users.
Assurancejisjengagementjinjwhichjajpractitionerjexpressesjajconclusionjdesignedjtojenha
ncejthejdegreejofjconfidencejofjthejintendedjusersjotherjthanjthejresponsiblejpartyjaboutjthejoutcom
ejofjthejevaluationj orj measurementjofjajsubjectjmatterjagainstjcriteria.
Examplesjofjassurancejservicesjarejassurancej(audit)jofjfinancialjstatements,jassurancejofj
prospectivejfinancialjinformation,jassurancejofjreportingjonjinternaljcontrol,jassurancejofjsustainabil
ityjreporting,jandjassurancejofjelectronicjcommerce.
, 1-6 Thejphrasejsystematicjprocessjimpliesjthatjtherejshouldjbejajwell-
planned,jlogicaljapproachjforjconductingjanjauditjthatjinvolvesjobjectivelyjobtainingjandjevaluatin
gjevidence.
1-7 Materiality:j"Omissionsjorjmisstatementsjofjitemsjarejmaterialjifjtheyjcould,jindividuallyjorjco
llectively,jinfluencejthejeconomicjdecisionsjofjusersjtakenjonjthejbasisjofjthejfinancialjstatements.jM
aterialityjdependsjonjthejsizejandjnaturejofjthejomissionjorjmisstatementjjudgedjinjthejsurroundingjci
rcumstances.jThejsizejorjnaturejofjthejitem,jorjajcombinationjofjboth,jcouldjbejthej determiningjfactor."j
(IASB).
Auditjriskjisjdefinedjasjthejriskjthatjthejauditorjexpressesjanjinappropriatejauditjopinionjwhenj
thejfinancialjstatementsjarej materiallyj misstatedj(ISAj200).
Thejauditjreportjstatesjthatjthejauditorjobtainsj―reasonablejassurance‖jwhetherjthejfinancialj
statementsjarejfreejfromj“material”jmisstatement.jThejtermjreasonablejassurancejinformsjthejread
erjthatjtherejisjsomejleveljofjriskjthatjthejauditjdidjnotjdetectjalljmaterialjmisstatements.jInjaddition,jth
ejauditor‘sjopinionjcommonlyjusesjthejwordingjthatjthejfinancialjstatementsjpresentjfairly,j―injalljmat
erialjrespects.‖jThesejphrasesjcommunicatejtojthirdjpartiesjthatjthejauditjreportjisjlimitedjtoj materialji
nformation.
1-8 Onjmostjaudits,jitjisjnotjfeasiblejorjcost-
effectivejtojauditjalljtransactions.jForjexample,jinjajsmalljbusiness,jthejauditorjmightjbejablejtojexami
nejalljtransactionsjthatjoccurredjduringjthejperiod.jHowever,jitjisjunlikelyjthatjthejownerjofjthejbusine
ssjcouldjaffordjtojpayjforjsuchjanjextensivejaudit.jForjajlargejorganization,jthejsheerjvolumejofjtransa
ctionsjpreventsjthejauditorjfromjexaminingjeveryjtransaction.jThus,jtherejisjajtrade-
offjbetweenjthejexactnessjorjprecisionjofj thejauditj andjitsj cost.
1-9 Thejmajorjphasesjofjthejauditjare:
Clientj acceptance/continuancej andj establishingj engagementj terms
Preplanning
Assessjrisksjandjestablishjmateriality
Planjthejaudit
Considerjinternaljcontrol
Auditjbusinessjprocessesjandjrelatedjaccounts
Completejthejaudit
Evaluatejresultsjandjissuejauditjreport
1-10 Thejauditor‘sjunderstandingjofjthejentityjandjitsjenvironmentjincludesjknowledgejabou
t:j(1)jthejnaturejofjthejentity,j(2)jitsjobjectivesjandjstrategies,j(3)jitsjindustry,jregulatory,jandjotherje
xternaljfactors,j(4)jitsjmanagement,j(5)jitsjgovernance,j(6)jitsjmeasurementjandjperformancejpro
cess,j andj(7)jitsj businessj processes.
1-11 Sometimesjauditorsjwilljfacejsituationsjwherejnojstandardjauditjprocedurejexists,jsuchjasjth
ejexamplejfromjthejtextjofjverifyingjthejinventoryjofjreindeer.jSuchjcircumstancesjrequirejthatjthejau
ditorjpossessjcreativityjandjinnovationjwhenjplanningjandjadministeringjauditjproceduresjwherejlittl
ejorjnojprecedentjexists.jEveryjclientjisjdifferent,jandjapplyingjauditingjconceptsjinjdifferentjsituation
sjrequiresjlogicjandjcommonjsense,jandjfrequentlyjcreativityjandjinnovation.
SolutionsjtojProblems
1-12 Thejmemojshouldjcitejthejfollowingjfacts:
Therejisjajhistoricaljrelationshipjbetweenjaccountingjandjauditing.
