Chapter il17 il- ilCompleting ilthe ilAudit
ilEngagement
SOLUTION il MANUAL il FOR
Auditing il& ilAssurance ilServices ilA ilSystematic ilApproach il12e
ilMessier ilChapter il1-21
CHAPTER il1
AN ilINTRODUCTION ilTO ilASSURANCE ilAND ilFINANCIAL
ilSTATEMENT ilAUDITING
Answers ilto ilReview ilQuestions
1-1 The ilstudy ilof ilauditing ilis ilmore ilconceptual ilin ilnature ilas ilcompared ilto ilother
ilaccounting ilcourses. ilRather ilthan ilfocusing ilon illearning ilthe ilrules, iltechniques, iland
ilcomputations ilrequired ilto ilprepare ilfinancial ilstatements, ilauditing ilemphasizes illearning
ila ilframework ilof ilanalytical iland illogical ilskills. ilThis ilframework ilenables ilauditors ilto
ilevaluate ilthe ilrelevance iland i l reliability ilof ilthe ilsystems iland ilprocesses ilresponsible
ilfor ilfinancial ilinformation ilas ilwell ilas ilthe ilinformation ilitself. ilTo ilbe ilsuccessful,
ilstudents ilmust illearn ilthe ilframework iland ilthen illearn ilto iluse illogic iland ilcommon
ilsense ilin ilapplying ilauditing ilconcepts ilto ilvarious ilcircumstances iland ilsituations.
ilUnderstanding ilauditing ilcan ilimprove ilthe ildecision-making ilability ilof ilconsultants,
ilbusiness ilmanagers, iland ilaccountants ilby ilproviding ila ilframework ilfor ilevaluating ilthe
ilusefulness iland ilreliability ilof ilinformation—an ilimportant iltask ilin ilmany ildifferent
ilbusiness ilcontexts.
1-2 There ilis ila ildemand ilfor ilauditing ilin ila ilfree-market ileconomy ilbecause ilthe ilagency
ilrelationship ilbetween ilan ilabsentee ilowner iland ila ilmanager ilproduces ila ilnatural
ilconflict ilof ilinterest ildue ilto i l the ilinformation ilasymmetry ilthat ilexists ilbetween ilthese
iltwo ilparties. ilAs ila ilresult, ilthe ilagent ilagrees ilto ilbe ilmonitored ilas ilpart ilof ilhis/her
ilemployment ilcontract. ilAuditing ilappears ilto ilbe ila ilcost-effective ilform ilof ilmonitoring.
ilThe ilempirical ilevidence ilsuggests ilthat ilauditing ilwas ildemanded ilprior ilto ilgovernment
ilregulation. ilIn il1926, ilbefore ilit ilwas ilrequired ilby illaw, ilindependent ilauditors ilaudited
il82 ilpercent ilof ilthe ilcompanies ilon ilthe ilNew ilYork ilStock ilExchange. ilAdditionally,
ilmany ilprivate ilcompanies iland ilmunicipalities ilnot ilsubject ilto ilgovernment ilregulations,
ilsuch ilas ilthe ilSecurities ilAct ilof il1933 iland ilSecurities ilExchange ilAct i l of il1934, ilalso
ilpurchase ilvarious ilforms ilof ilauditing iland ilassurance ilservices. ilMany ilprivate
ilcompanies ilseek ilout ilfinancial ilstatement ilaudits ilin ilorder ilto ilsecure ilfinancing ilfor
iltheir iloperations. ilCompanies ilpreparing ilto ilgo ilpublic ilalso ilbenefit ilfrom ilhaving ilan
ilaudit.
1-3 The ilagency ilrelationship ilbetween ilan ilowner iland ilmanager ilproduces ila ilnatural
ilconflict ilof ilinterest ilbecause ilof ildifferences ilin ilthe iltwo ilparties’ ilgoals iland ilbecause
ilof ilthe ilinformation ilasymmetry ilthat ilexists ilbetween ilthem. ilThat ilis, ilthe ilmanager
illikely ilhas ildifferent ilgoals ilthan ilthe ilowner, iland ilgenerally ilhas ilmore ilinformation
ilabout ilthe il"true" ilfinancial ilposition iland ilresults ilof iloperations ilof ilthe ilentity ilthan ilthe
ilabsentee ilowner ildoes. ilIf ilboth ilparties ilseek ilto ilmaximize iltheir ilown ilself-interest, ilthe
17-1
Copyright il©2022 ilMcGraw ilHill ilEducation. ilAll ilrights ilreserved. ilNo ilreproduction ilor ildistribution ilwithout ilthe ilprior
ilwritten ilconsent ilof i l McGraw ilHill ilEducation.
,Chapter il17 il- ilCompleting ilthe ilAudit
ilEngagement
ilmanager ilmay ilnot ilact ilin ilthe ilbest ilinterest ilof ilthe ilowner iland ilmay ilmanipulate ilthe
ilinformation ilprovided ilto ilthe ilowner ilaccordingly.
17-2
Copyright il©2022 ilMcGraw ilHill ilEducation. ilAll ilrights ilreserved. ilNo ilreproduction ilor ildistribution ilwithout ilthe ilprior
ilwritten ilconsent ilof i l McGraw ilHill ilEducation.
,Chapter il17 il- ilCompleting ilthe ilAudit
ilEngagement
1-4 Independence ilis ila ilbedrock ilprinciple ilfor ilauditors. ilIf ilan ilauditor ilis ilnot ilindependent
ilof ilthe ilclient, ilusers ilmay illose ilconfidence ilin ilthe ilauditor’s ilability ilto ilreport
ilobjectively iland i l truthfully ilon ilthe ilfinancial ilstatements, iland ilthe ilauditor’s ilwork
illoses ilits ilvalue. ilFrom ilan ilagency ilperspective, ilif ilthe ilprincipal il(owner) ilknows ilthat
ilthe ilauditor ilis ilnot ilindependent, ilthe ilowner ilwill ilnot iltrust ilthe ilauditor’s ilwork. ilThus,
ilthe ilagent ilwill ilnot ilhire ilthe ilauditor ilbecause ilthe ilauditor’s ilreport ilwill ilnot ilbe
ileffective ilin ilreducing ilinformation ilrisk ilfrom ilthe ilperspective ilof ilthe ilowner. ilAuditor
ilindependence ilis ilalso ila ilregulatory ilrequirement.
1-5 Auditing il(broadly ildefined) ilis ila ilsystematic ilprocess ilof il(1) ilobjectively ilobtaining
iland ilevaluating ilevidence ilregarding ilassertions ilabout ileconomic ilactions iland ilevents
ilto ilascertain ilthe ildegree ilof ilcorrespondence ilbetween ilthose ilassertions iland ilestablished
ilcriteria iland il(2) ilcommunicating ilthe ilresults ilto ilinterested ilusers.
Attest ilservices iloccur ilwhen ila ilpractitioner ilissues ila ilreport ilon ilsubject ilmatter, ilor ilan
ilassertion ilabout ilsubject ilmatter, ilthat ilis ilthe ilresponsibility ilof ilanother ilparty.
Assurance ilservices ilare ilindependent ilprofessional ilservices ilthat ilimprove ilthe ilquality
ilof ilinformation, ilor ilits ilcontext, ilfor ildecision ilmakers.
1-6 Auditing i l is i l a i l specific i l form i l of i l ―attest i l service,‖ i l which i l in i l turn i l is i l a i l specif
i l category i l of
―assurance ilservice.‖ ilIn ilother ilwords, ilthe ilphrase il―assurance ilservices‖ ilconstitutes
ilthe ilbroadest ilcategory ilof ilprofessional ilservices ilprovided ilby ilCPAs ilthat ilserve ilto
ilimprove ilthe ilquality ilor ilcontext ilof ilinformation ilfor ildecision ilmaking ilfor ilother
ilparties. ilAttest ilservices ilconstitute ila ilmore ilspecific ilcategory ilof ilassurance ilthat ilCPAs
ilcan ilprovide. ilThese ilservices ilare ilintended ilto ilreduce ilinformation ilrisk ilto ilparties
ilrelying ilon ilinformation ilprovided ilby ila ilparty ilthat ilis ilcreating, ilor ilmaking ilassertions
ilabout, ilsubject ilmatter ilof ilinterest. ilCPAs ilcan ilprovide ilattest ilservices ilrelating ilto ila
ilwide ilvariety ilof ilsubject ilmatter il(or ilassertions ilabout ilthat ilsubject ilmatter) ilto ilreduce
ilthe ilinformation ilrisk ilto ilthird ilparties. ilOne ilsuch ilsubject ilmatter ilis ila ilset ilof ilfinancial
ilstatements. ilWhen ila ilCPA ilprovides ila ilvery ilin-depth, ildetailed ilattest ilservice ilthat
ilfollows ilrelevant ilstandards ilto ilconstitute ila ilcomplete ilexamination ilof ila ilset ilof
ilfinancial ilstatements iland ilrelated ilassertions, ilthis ilis ilcalled ila ilfinancial ilstatement
il―audit.‖
1-7 Audit ilrisk ilis ildefined ilas ilthe ilrisk ilthat ilthe ilauditor ilmay ilunknowingly ilfail ilto
ilappropriately ilmodify ilhis ilor ilher ilopinion ilon ilfinancial ilstatements ilthat ilare ilmaterially
ilmisstated il(AS il1101). ilMateriality ilis ildefined ilas il"the ilmagnitude ilof ilan ilomission ilor
ilmisstatement ilof ilaccounting ilinformation ilthat, ilin ilthe illight ilof ilsurrounding
ilcircumstances, ilmakes ilit ilprobable ilthat ilthe iljudgment ilof ila ilreasonable ilperson ilrelying
ilon ilthe ilinformation ilwould ilhave ilbeen ilchanged ilor ilinfluenced ilby ilthe ilomission ilor
ilmisstatement" il(FASB ilStatement ilof ilFinancial ilAccounting ilConcepts ilNo. il8, ilChapter
il3: ilQualitative ilCharacteristics ilof ilUseful ilAccounting ilInformation, ilwhich ilis ilpending
ilrevision ilat ilthe iltime ilof ilthe ilwriting ilof ilthis ilbook ilper ilthe ilBoard’s i l November
il2017 ildecision ilto ilrevert ilto ila ildefinition ilof ilmateriality ilsimilar ilto ilthe ilone ilfound ilin
ilsuperseded ilConcept ilNo. il2).
The ilconcept ilof ilmateriality ilis ilreflected ilin ilthe ilwording ilof ilthe ilauditor's ilstandard
ilaudit ilreport ilthrough ilthe ilphrase il"the ilfinancial ilstatements ilpresent ilfairly ilin ilall
ilmaterial ilrespects." ilThis ilis ilthe ilmanner ilin ilwhich ilthe ilauditor ilcommunicates ilthe
ilnotion ilof ilmateriality ilto ilthe i l users ilof ilthe ilauditor's ilreport. ilThe ilauditor's ilstandard
17-3
Copyright il©2022 ilMcGraw ilHill ilEducation. ilAll ilrights ilreserved. ilNo ilreproduction ilor ildistribution ilwithout ilthe ilprior
ilwritten ilconsent ilof i l McGraw ilHill ilEducation.
, Chapter il17 il- ilCompleting ilthe ilAudit
ilEngagement
ilreport ilstates ilthat ilthe ilaudit ilprovides ilonly ilreasonable ilassurance ilthat ilthe ilfinancial
ilstatements ildo ilnot ilcontain ilmaterial ilmisstatements. ilThe ilterm il"reasonable ilassurance"
ilimplies ilthat ilthere ilis ilsome ilrisk ilthat ila ilmaterial il misstatement il could ilbe ilpresent il in
il the il financial ilstatements il and ilthe il auditor ilwill il fail
17-4
Copyright il©2022 ilMcGraw ilHill ilEducation. ilAll ilrights ilreserved. ilNo ilreproduction ilor ildistribution ilwithout ilthe ilprior
ilwritten ilconsent ilof i l McGraw ilHill ilEducation.
