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Summary == Full Solutions: Auditing and Assurance Services by Messier 11e
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SOLUTIONS MANUAL 1TestBank4Textbooks
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CH. 2
Review QS
1-1 The’ study of auditing is more conceptual in nature as compared to’ othe’r accounting courses.
Rathe’r than focusing on learning the’ rules, techniques, an’d computations required to’ prepare financial
statements, auditing emphasizes learning a framework of analytical an’d logical skills. This framework
enables audito’rs to’ evaluate the’ relevance an’d reliability of the’ systems an’d processes responsible for
financial information as well as the’ information itself. To’ be successful, students must learn the’
framework an’d the’n learn to’ use logic an’d common sense in applying auditing concepts to’ various
circumstances an’d situations. Understan’ding auditing can improve the’ decision-making ability of
consultants, business managers, an’d accountants by providing a framework for evaluating the’
usefulness an’d reliability of information—an important task in many different business contexts.
1-2 The’re is a deman’d for auditing in a free-market economy because the’ agency relationship between
an absentee owner an’d a manager produces a natural conflict of interest due to’ the’ information
asymmetry that exists between the’se two parties. As a result, the’ agent agrees to’ be monito’red as part
of his/her employment contract. Auditing appears to’ be a cost-effective form of monito’ring. The’
empirical evidence suggests that auditing was deman’ded prior to’ government regulation. In 1926,
before it was required by law, independent audito’rs audited 82 percent of the’ companies on the’ New
York Sto’ck Exchange. Additionally, many private companies an’d municipalities not subject to’
government regulations, such as the’ Securities Act of 1933 an’d Securities Exchange Act of 1934, also
purchase various forms of auditing an’d assurance services. Many private companies seek out financial
statement audits in order to’ secure financing for the’ir operations. Companies preparing to’ go public
also benefit fro’m having an audit.
1-3 The’ agency relationship between an owner an’d manager produces a natural conflict of interest
because of differences in the’ two parties’ goals an’d because of the’ information asymmetry that exists
between the’m. That is, the’ manager likely has different goals than the’ owner, an’d generally has more
information about the’ "true" financial position an’d results of operations of the’ entity than the’ absentee
owner does. If both parties seek to’ maximize the’ir own self-interest, the’ manager may not act in the’
best interest of the’ owner an’d may manipulate the’ information provided to’ the’ owner accordingly.
1-4 Independence is a bedrock principle for audito’rs. If an audito’r is not independent of the’ client,
users may lose confidence in the’ audito’r’s ability to’ report objectively an’d truthfully on the’ financial
statements, an’d the’ audito’r’s work loses its value. Fro’m an agency perspective, if the’ principal
(owner) knows that the’ audito’r is not independent, the’ owner will not trust the’ audito’r’s work. Thus,
the’ agent will not hire the’ audito’r because the’ audito’r’s report will not be effective in reducing
information risk fro’m the’ perspective of the’ owner. Audito’r independence is also a regulato’ry
requirement.
1-5 Auditing (broadly defined) is a systematic process of (1) objectively obtaining an’d evaluating
evidence regarding assertions about economic actions an’d events to’ ascertain the’ degree of
correspondence between those assertions an’d established criteria an’d (2) communicating the’ results
to’ interested users.
,SOLUTIONS MANUAL 2
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Attest services occur when a practitioner issues a report on subject matter, or an assertion about subject
matter, that is the’ responsibility of anothe’r party.
Assurance services are independent professional services that improve the’ quality of information, or its
context, for decision makers.
1-6 The’ phrase systematic process implies that the’re should be a well-planned, logical approach for
conducting an audit that involves objectively obtaining an’d evaluating evidence. It requires organizing a
plan for gathe’ring evidence an’d documenting steps taken during the’ audit to’ evaluate the’ relevance
an’d validity of the’ evidence.
1-7 Audit risk is defined as the’ risk that the’ audito’r 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, Ch. 3: Qualitative Characteristics of Useful Accounting
Information, which is pending revision at the’ time of the’ writing of this book per the’ Board’s November
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’ audito’r's stan’dard audit report through
the’ phrase "the’ financial statements present fairly in all material respects." This is the’ manner in which
the’ audito’r communicates the’ notion of materiality to’ the’ users of the’ audito’r's report. The’ audito’r's
stan’dard report states that the’ audit provides only reasonable assurance that the’ financial statements
do not contain material misstatements. The’ term "reasonable assurance" implies that the’re is some risk
that a material misstatement could be present in the’ financial statements an’d the’ audito’r will fail to’
detect it.
1-8 The’ major phases of the’ audit are:
• Client acceptance/continuance
• Preliminary engagement activities
• Plan the’ audit
• Consider an’d audit internal control
• Audit business processes an’d related accounts
• Complete the’ audit
• Evaluate results an’d issue audit report
1-9 Plan the’ audit: During this phase of the’ audit, the’ audito’r uses knowledge about the’ client an’d any
controls in place to’ plan the’ audit an’d perform preliminary analytical procedures. The’ outcome of the’
planning process is a written audit plan that sets forth the’ nature, extent, an’d timing of the’ audit
procedures to’ be performed. The’ purpose of this phase is to’ plan an effective an’d efficient audit.
,SOLUTIONS MANUAL 3
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1-10 The’ audito’r's stan’dard unqualified report for a public company client includes the’ following
sections: (1) opinion on the’ financial statements, (2) basis for opinion, an’d (3) critical audit matters, as
illustrated in this Ch. .
1-11 The’ emergence of advanced audit technologies will help remove many of the’ tedious tasks that are
usually performed by junior audito’rs. Thus, audito’rs of all positions an’d experience will be required to’
spend additional time reasoning through fundamental business, accounting, an’d auditing concepts. An
audito’rs’ knowledge in the’se areas will enable the’m to’ provide greater benefit to’ clients by asking the’
right questions an’d identifying new, more effective ways to’ collect, analyze, an’d interpret results. In
using audit data analytics, for example, audito’rs must understan’d the’ client an’d its industry, as well as
the’ fundamentals of accounting an’d auditing, in order to’ ask the’ right questions in querying the’ data
an’d in interpreting the’ results obtained.
1-12 Audito’rs frequently face situations where no stan’dard audit procedure exists, such as the’ example
fro’m the’ text of verifying the’ invento’ry of cattle. Such circumstances require that the’ audito’r exercise
creativity an’d innovation when planning an’d administering audit procedures where little or no guidance
or precedent exists. Every client is different, an’d applying auditing concepts in different situations
requires logic an’d common sense, an’d frequently creativity an’d innovation.
MCQs answers
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
1-18 c
Problems Ans:
1-24 The’re are two major facto’rs that may make an audit necessary for Greenbloom Garden Centers.
First, the’ company may require long-term financing for its expansion into’ othe’r cities in Florida.
Entities such as banks or insurance companies are likely to’ be the’ sources of the’ company's debt
financing. The’se entities normally require audited financial statements before lending significant funds
an’d generally require audited financial statements during the’ time period the’ debt is outstan’ding.
The’re is information asymmetry between the’ lender of funds an’d the’ owner of the’ business, an’d this
asymmetry results in information risk to’ the’ lender. Even if the’ business could get funding wit’hout an
audit, a clean audit report by a reputable audito’r might very well reduce the’ lender’s information risk
an’d make the’ terms of the’ loan more favorable to’ the’ owner. Second, as the’ company grows, the’
family will lose control over the’ day-to’-day operations of the’ sto’res. An audit can provide an additional
monito’ring activity for the’ family in controlling the’ expan’ded operations of the’ company.
, SOLUTIONS MANUAL 4
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1-25 a. Evidence that assists the’ audito’r in evaluating financial statement assertions consists of the’
underlying accounting data an’d any additional information available to’ the’ audito’r, whethe’r
originating fro’m the’ client or externally.
b. Management makes assertions about components of the’ financial statements. For example, an
entity's financial statements may contain a line item that accounts receivable amount to’
1,750,000. In this instance, management is asserting, among othe’r things, that the’ receivables
exist, the’ entity owns the’ receivables, an’d the’ receivables are properly valued. Audit evidence
helps the’ audito’r determine whethe’r management’s assertions are being met. If the’ audito’r is
comfortable that he or she can provide reasonable assurance that all assertions are met for all
accounts, he or she can issue a clean audit report. In short, the’ assertions are a conceptual to’ol to’
help the’ audito’r ensure that she or he has “covered all the’ bases.”
c. In searching for an’d evaluating evidence, the’ audito’r should be concerned wit’h the’ relevance
an’d reliability of evidence. If the’ audito’r mistakenly relies on evidence that does not relate to’
the’ assertion being tested, an incorrect conclusion may be reached about the’ management
assertion. Reliability refers to’ the’ ability of evidence to’ signal the’ true state of the’ assertion, i.e.,
whethe’r it is actually being met or not.
1-26 a. The’ major phases of the’ audit an’d the’ir descriptions are:
1. Client acceptance/continuance. The’ audito’r decides to’ accept a new client or to’ retain an
existing client.
2. Preliminary engagement activities. This phase involves (1) determining the’ audit engagement
team requirements, (2) ensuring the’ independence of the’ audit team an’d audit firm, an’d (3)
establishing an understan’ding wit’h the’ client regarding the’ services to’ be performed an’d the’
othe’r terms of the’ engagement.
3. Plan the’ audit. During this phase of the’ audit, the’ audito’r uses the’ knowledge of the’ client to’
plan the’ audit an’d perform preliminary analytical procedures.
The’ purpose of this phase is to’ plan an effective an’d efficient audit.
4. Consider an’d audit internal control. The’ audito’r understan’ds an’d evaluates the’ client’s
internal controls in order to’ assess the’ risk that the’y will not prevent or detect a material
misstatement. In the’ case of a public company, the’ audito’r will conduct an audit of internal
control over financial reporting.
5. Audit business processes an’d related accounts. The’ audito’r conducts substantive tests,
including analytical procedures an’d the’ details of the’ account balances, searching for material
misstatements.
6. Complete the’ audit. The’ audito’r searches for contingent liabilities an’d subsequent events, an’d
performs a final review of the’ evidence gathe’red.
7. Evaluate results an’d issue the’ audit report. Based on the’ collection an’d evaluation of
evidence, the’ audito’r issues a report on whethe’r the’ financial statements are fairly presented.
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