SOLUTION MANUAL for Auditing & Assurance Services A
Systematic Approach
12th Edition by William Messier Jr, Steven Glover,
Chapters 1 - 21 / Complete
1
,• Table of Contents
f f
Chapterf1:fAnfIntroductionftofAssurancefandfFinancialfStatementfAuditing
Chapterf2:fThefFinancialfStatementfAuditingfEnvironment
Chapterf3:fAuditfPlanning,fTypesfoffAuditfTests,fandfMateriality
Chapterf4:fRiskfAssessment
Chapterf5:fEvidencefandfDocumentation
Chapterf6:fInternalfControlfinfafFinancialfStatementfAudit
Chapterf7:fAuditingfInternalfControlfoverfFinancialfReporting
Chapterf8:fAuditfSampling:fAnfOverviewfandfApplicationftofTestsfoffControls
Chapterf9:fAuditfSampling:fAnfApplicationftofSubstantivefTestsfoffAccountfBalances
Chapterf10:fAuditingfthefRevenuefProcess
Chapterf11:fAuditingfthefPurchasingfProcess
Chapterf12:fAuditingfthefHumanfResourcefManagementfProcess
Chapterf13:fAuditingfthefInventoryfManagementfProcess
Chapterf14:fAuditingfthefFinancing/InvestingfProcess:PrepaidfExpenses,fIntangiblefAssets,fandfProperty,fPlant,fandfEquip
ment
Chapterf15:fAuditingfthefFinancing/InvestingfProcess:Long-
TermfLiabilities,fStockholders’fEquity,fandfIncomefStatementfAccounts
Chapterf16:fAuditingfthefFinancing/InvestingfProcess:fCashandfInvestments
Chapterf17:fCompletingfthefAuditfEngagement
Chapterf18:fReportsfonfAuditedfFinancialfStatements
Chapterf19:fProfessionalfConduct,fIndependence,fandfQualityfManagement
Chapterf20:fLegalfLiability
Chapterf21:fAssurance,fAttestation,fandfInternalfAuditingfServices
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,CHAPTERf1
ANf INTRODUCTIONf TOf ASSURANCEf ANDf FINANCIALf STATEMENTf AUDITING
AnswersftofReviewfQuestions
1-1 Thefstudyfoffauditingfisfmorefconceptualfinfnaturefcomparedftofotherfaccountingfcourses.f
Ratherfthanffocusingfonflearningfthefrules,ftechniques,fandfcomputationsfrequiredftofprepareffinan
cialfstatements,fauditingfemphasizesflearningfafframeworkfoffanalyticalfandflogicalfskillsftofevaluatef
thefrelevancefandfreliabilityfoffthefsystemsfandfprocessesfresponsiblefforffinancialfinformation,fasf
wellfasfthefinformationfitself.fTofbefsuccessful,fstudentsfmustflearnfthefframeworkfandfthenflearnftof
useflogicfandfcommonfsensefinfapplyingfauditingfconceptsftofvariousfcircumstancesf andfsituations
.
Understandingfauditingfcanfimprovefthefdecisionfmakingfabilityfoffconsultants,fbusinessfma
nagers,fandfaccountantsfbyfprovidingfafframeworkfforfevaluatingfthefusefulnessfandfreliabi
lityfoffinformation.
1-2 Therefisfafdemandfforfauditingfinfaffree-
marketfeconomyfbecausefthefagencyfrelationshipfbetweenfanfabsenteefownerfandfafmanagerfpr
oducesfafnaturalfconflictfoffinterestfdueftofthefinformationfasymmetryfthatfexistsfbetweenfthefown
erfandfmanager.fAsfafresult,fthefagentfagreesftofbefmonitoredfasfpartfoffhis/herfemploymentfcontr
act.fAuditingfappearsftofbefafcost-effectivefformfoffmonitoring.
Thefempiricalfevidencefsuggestsfauditingfwasfdemandedfpriorftofgovernmentfregulationfsu
chfasfstatutoryfauditfrequirements.fAdditionally,fmanyfprivatefcompaniesfandfotherfentitiesfnotfsub
jectftofgovernmentfauditingfregulationsfalsofdemandfauditing.
1-3 Thefagencyfrelationshipfbetweenfanfownerfandfmanagerfproducesfafnaturalfconflictfoffint
erestfbecausefoffdifferencesfinftheftwofparties’fgoalsfandfbecausefoffinformationfasymmetryfthatfe
xistsfbetweenfthem.fThatfis,fthefmanagerfgenerallyfhasfmorefinformationfaboutfthef‘true’ffinancialf
positionfandfresultsfoffoperationsfoffthefentityfthanfthefabsenteefownerfdoes.fIffbothfpartiesfseekft
ofmaximizeftheirfownfself-
interest,fitfisflikelyfthatfthefmanagerfwillfnotfactfinfthefbestfinterestfoffthefownerfandfmayfmanipulate
fthefinformation fprovidedftofthefownerfaccordingly.
1-4 Independencefisfanfimportantfstandardfforfauditors.fIffanfauditorfisfnotfindependentfoffthef
client,fusersfmayflosefconfidencefinfthefauditor’sfabilityftofreportftruthfullyfonftheffinancialfstatemen
ts,fandfthefauditor’sfworkflosesfitsfvalue.fFromfanfagencyfperspective,fiffthefprincipalf(owner)fknow
sfthatfthefauditorfisfnotfindependent,fthefownerfwillfnotftrustfthefauditor’sfwork.
Thus,fthefagentfwillfnotfhirefthefauditorfbecausefthefauditor’sfreportfwillfnotfbefeffectivefinfreducingfi
nformationfriskffromfthefperspectivefoffthefowner.
1-5 Auditingf(broadlyfdefined)fisfafsystematicfprocessfoffobjectivelyfobtainingfandfevaluatin
gfevidencefregardingfassertionsfaboutfeconomicfactionsfandfeventsftofascertainfthefdegreefoffco
rrespondencefbetweenfthosefassertionsfandfestablishedfcriteriafandfcommunicatingfthefresultsf
tofinterestedfusers.
Assurancefisfengagementfinfwhichfafpractitionerfexpressesfafconclusionfdesignedftofenh
ancefthefdegreefoffconfidencefoffthefintendedfusersfotherfthanfthefresponsiblefpartyfaboutfthefoutco
mefoffthefevaluationforfmeasurementfoffafsubjectfmatterfagainstfcriteria.
Examplesfoffassurancefservicesfarefassurancef(audit)fofffinancialfstatements,fassurancef
offprospectiveffinancialfinformation,fassurancefoffreportingfonfinternalfcontrol,fassurancefoffsustain
abilityfreporting,fandfassurancefoffelectronicfcommerce.
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, 1-6 Thefphrasefsystematicfprocessfimpliesfthatftherefshouldfbefafwell-
planned,flogicalfapproachfforfconductingfanfauditfthatfinvolvesfobjectivelyfobtainingfandfevaluati
ngfevidence.
1-7 Materiality:f"Omissionsforfmisstatementsfoffitemsfarefmaterialfifftheyfcould,findividuallyforf
collectively,finfluencefthefeconomicfdecisionsfoffusersftakenfonfthefbasisfofftheffinancialfstatement
s.fMaterialityfdependsfonfthefsizefandfnaturefoffthefomissionforfmisstatement fjudgedfinfthefsurroun
dingfcircumstances.fThefsizeforfnaturefoffthefitem,forfafcombinationfoffboth,fcouldfbefthefdeterminin
gffactor."f(IASB).
Auditfriskfisfdefinedfasfthefriskfthatfthefauditorfexpressesfanfinappropriatefauditfopinionfwhe
nftheffinancialfstatementsfarefmateriallyf misstatedf(ISAf200).
Thefauditfreportfstatesfthatfthefauditorfobtainsf“reasonablefassurance”fwhetherftheffinanci
alfstatementsfareffreeffromf“material”fmisstatement.fTheftermfreasonablefassurancefinformsfthefr
eaderfthatftherefisfsomeflevelfoffriskfthatfthefauditfdidfnotfdetectfallfmaterialfmisstatements.fInfadditi
on,fthefauditor’sfopinionfcommonlyfusesfthefwordingfthatftheffinancialfstatementsfpresentffairly,f“inf
allfmaterialfrespects.”fThesefphrasesfcommunicateftofthirdfpartiesfthatfthefauditfreportfisflimitedftof
materialfinformation.
1-8 Onfmostfaudits,fitfisfnotffeasibleforfcost-
effectiveftofauditfallftransactions.fForfexample,finfafsmallfbusiness,fthefauditorfmightfbefableftofexa
minefallftransactionsfthatfoccurredfduringfthefperiod.fHowever,fitfisfunlikelyfthatfthefownerfoffthefbu
sinessfcouldfaffordftofpayfforfsuchfanfextensivefaudit.fForfaflargeforganization,fthefsheerfvolumefoff
transactionsfpreventsfthefauditorffromfexaminingfeveryftransaction.fThus,ftherefisfaftrade-
offfbetweenfthefexactnessforfprecisionfoffthefauditfandfitsfcost.
1-9 Thefmajorfphasesfoffthefauditfare:
Clientf acceptance/continuancef andf establishingf engagementf terms
Preplanning
Assessfrisksfandfestablishfmateriality
Planfthefaudit
Considerfinternalfcontrol
Auditfbusinessfprocessesfandfrelatedfaccounts
Completefthefaudit
Evaluatefresultsfandfissuefauditfreport
1-10 Thefauditor’sfunderstandingfoffthefentityfandfitsfenvironmentfincludesfknowledgefabo
ut:f(1)fthefnaturefoffthefentity,f(2)fitsfobjectivesfandfstrategies,f(3)fitsfindustry,fregulatory,fandfoth
erfexternalffactors,f(4)fitsfmanagement,f(5)fitsfgovernance,f(6)fitsfmeasurementfandfperforman
cefprocess,fandf(7)fitsfbusinessf processes.
1-11 Sometimesfauditorsfwillffacefsituationsfwherefnofstandardfauditfprocedurefexists,fsuchfasft
hefexampleffromftheftextfoffverifyingfthefinventoryfoffreindeer.fSuchfcircumstancesfrequirefthatfthe
fauditorfpossessfcreativity fandfinnovationfwhenfplanningfandfadministeringfauditfproceduresfwher
eflittleforfnofprecedentfexists.fEveryfclientfisfdifferent,fandfapplyingfauditingfconceptsfinfdifferentfsit
uationsfrequiresflogicfandfcommonfsense,fandffrequentlyfcreativityfandfinnovation.
SolutionsftofProblems
1-12 Thefmemofshouldfciteftheffollowingffacts:
Therefisfafhistoricalfrelationshipfbetweenfaccountingfandfauditing.
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