Messier - Auditing and Assurance Services - 7e

Chapter01AnIntroductiontoAssuranceandFinancial
StatementAuditing
1.Independencestandardsarerequiredforauditsofpubliccompanies,butnotforauditsofprivatecompanies.
FALSE

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Difficulty:Easy
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MessierChapter01#1

2.Decisionmakersdemandreliableinformationthatisprovidedbyaccountants.
TRUE

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AICPAFN:DecisionMaking
Blooms:Comprehension
Difficulty:Easy
LearningObjective:2
MessierChapter01#2

3.Informationasymmetryseldomoccurs.
FALSE

AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Application
Difficulty:Easy
LearningObjective:2
MessierChapter01#3

Messier - Auditing and Assurance Services - 7e

4.Conflictsofinterestoftenoccurbetweenabsenteeownersandmanagers.
TRUE

AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Application
Difficulty:Easy
LearningObjective:2
MessierChapter01#4

5.Auditingservicesandattestationservicesarethesame.
FALSE

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AICPABB:Industry
AICPAFN:Reporting
Blooms:Comprehension
Difficulty:Easy
LearningObjective:4
MessierChapter01#5

6.Auditingisatypeofattestservice.
TRUE

AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Comprehension
Difficulty:Easy
LearningObjective:4
MessierChapter01#6

7.Testingalltransactionsthatoccurredduringtheperiodiscostprohibitive.
TRUE

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AICPABB:CriticalThinking
AICPAFN:DecisionMaking
Blooms:Application
Difficulty:Easy
LearningObjective:6
MessierChapter01#7

Messier - Auditing and Assurance Services - 7e

8.Whydoauditorsgenerallyuseasamplingapproachtoevidencegathering?
A.Auditorsareexpertsanddonotneedtolookatmuchtoknowwhetherthefinancialstatementsarecorrector
not.
B.Auditorsmustbalancethecostoftheauditwiththeneedforprecision.
C.Auditorsmustlimittheirexposuretotheirclienttomaintainindependence.
D.Theauditor'srelationshipwiththeclientisgenerallyadversarial,sotheauditorwillnothaveaccesstoallof
thefinancialinformationofthecompany.

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Blooms:Comprehension
Difficulty:Easy
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MessierChapter01#8

9.Whichofthefollowingstatementsbestdescribesarelationshipbetweensamplesizeandotherelementsof
auditing?
A.Ifmaterialityincreases,sowillthesamplesize.
B.Ifthedesiredlevelofassuranceincreases,samplesizescanbesmaller.
C.Ifmaterialitydecreases,samplesizewillneedtoincrease.
D.Thereisnorelationshipbetweensamplesizeandmaterialityorthedesiredlevelofassurance.

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AICPAFN:RiskAnalysis
Blooms:Application
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LearningObjective:6
MessierChapter01#9

Messier - Auditing and Assurance Services - 7e

10.WhichofthefollowingstatementsaboutthestudyofauditingisNOTtrue?
A.Thestudyofauditingcanbevaluabletofutureaccountantsandbusinessdecisionmakerswhetherornot
theyplantobecomeauditors.
B.Thestudyofauditingfocusesonlearningtheanalyticalandlogicalskillsnecessarytoevaluatetherelevance
andreliabilityofinformation.
C.Thestudyofauditingfocusesonlearningtherules,techniques,andcomputationsrequiredtoanalyze
financialstatements.
D.Thestudyofauditingbeginswiththeunderstandingofacoherentlogicalframeworkandtechniquesuseful
forgatheringandanalyzingevidenceaboutothers'assertions.

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AICPAFN:DecisionMaking
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Difficulty:Easy
LearningObjective:1
MessierChapter01#10

11.Thebasicpurposeofafinancialstatementauditisto
A.Detectfraud.
B.Examineindividualtransactionssothattheauditormaycertifyastotheirvalidity.
C.Provideassuranceregardingwhethertheclient'sfinancialstatementsarefairlystated.
D.Assuretheconsistentapplicationofcorrectaccountingprocedures.

AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Easy
LearningObjective:4
MessierChapter01#11

Messier - Auditing and Assurance Services - 7e

12.Assuranceservicesmayimproveallofthefollowingexcept:
A.Relevance.
B.Timeliness.
C.Periodicity.
D.Reliability.

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AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Easy
LearningObjective:4
MessierChapter01#12

13.Evidenceisreliableifit
A.Signalsthetruestateofamanagementassertion.
B.Appliestotheperiodbeingaudited.
C.Relatestotheauditassertionbeingtested.
D.Isconsistentwithmanagement'sassertions.

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Comprehension
Difficulty:Easy
LearningObjective:5
MessierChapter01#13

14.Whichofthefollowingbestdescribestheconceptofauditrisk?
A.Theriskoftheauditorbeingsuedbecauseofassociationwithanauditclient.
B.Theriskthattheauditorwillprovideanunqualifiedopiniononfinancialstatementsthatare,infact,
materiallymisstated.
C.Theoverallriskthatamaterialmisstatementexistsinthefinancialstatements.
D.Theriskthatauditorsuseauditproceduresthatareinappropriate.

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:RiskAnalysis
Blooms:Comprehension
Difficulty:Moderate
LearningObjective:5
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Messier - Auditing and Assurance Services - 7e

15.Anauditorwhoacceptsanauditengagementanddoesnotpossessexpertisewithrespecttothebusiness
entity'sindustry,should
A.Engagefinancialexpertsfamiliarwiththenatureofthebusinessentity.
B.Obtainaknowledgeofmattersthatrelatetothenatureoftheentity'sbusiness.
C.ReferasubstantialportionoftheaudittoanotherCPA,whowillactastheprincipalauditor.
D.Firstinformmanagementthatanunqualifiedopinioncannotbeissued.

AACSB:Ethics
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AICPAFN:DecisionMaking
Blooms:Application
Difficulty:Easy
LearningObjective:7
LearningObjective:9
MessierChapter01#15

16.Forpubliclyheldcompanies,theexternalauditorisrequiredtoauditwhichofthefollowing:
A.Budgetaryinformation.
B.Thecompany'sinternalcontrols.
C.Managementforecasts.
D.Interimfinancialstatements.

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MessierChapter01#16

17.Duringthefirstphaseofanaudit,aCPAmostlikelywould
A.Identifyspecificinternalcontrolactivitiesthatarelikelytopreventfraud.
B.Evaluatethereasonablenessoftheclient'saccountingestimates.
C.Discussthetimingoftheauditprocedureswiththeclient'smanagement.
D.Inquireoftheclient'sattorneyastowhetheranyunrecordedclaimsareprobableorasserted.

AACSB:Communications
AICPABB:ResourceManagement
AICPAFN:DecisionMaking
Blooms:Application
Difficulty:Moderate
LearningObjective:7
MessierChapter01#17

Messier - Auditing and Assurance Services - 7e

18.Inthecontextofagencytheory,informationasymmetryreferstotheideathat
A.Informationcanvaryinitsreliability.
B.Informationcanvaryinitsrelevance.
C.Managementhasmoreinformationabouttheentity'struefinancialpositionthandotheabsenteeowners(i.e.
stockholders).
D.Managementlikelywillnotactinthebestinterestsoftheabsenteeowners.

AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:RiskAnalysis
Blooms:Comprehension
Difficulty:Moderate
LearningObjective:2
LearningObjective:3
MessierChapter01#18

19.Whichofthefollowingbestdescribeswhyanindependentauditorisaskedtoexpressanopiniononthefair
presentationoffinancialstatements?
A.Itisdifficulttopreparefinancialstatementsthatfairlypresentacompany'sfinancialpositionandchangesin
cashflowswithouttheexpertiseofanindependentauditor.
B.Itismanagement'sresponsibilitytoseekavailableindependentaidintheappraisalofthefinancial
informationshowninitsfinancialstatements.
C.Theopinionofanindependentpartyisneededbecauseacompanyisnotlikelytobeconsideredobjective
withrespecttoitsownfinancialstatements.
D.Itisacustomarycourtesythatallstockholdersofacompanyreceiveanindependentreportonmanagement's
stewardshipinmanagingtheaffairsofthebusiness.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Application
Difficulty:Moderate
LearningObjective:2
LearningObjective:3
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Messier - Auditing and Assurance Services - 7e

20.Whichofthefollowingbestdescribesthefundamental,underlyingreasonforwhythereisdemandforan
independentauditortoreportonfinancialstatements?
A.Amanagementfraudmayexistanditismorelikelytobedetectedbyauditorsiftheyareindependent.
B.Differentinterestsmayexistbetweenthecompanypreparingthestatementsandthepartiesusingthe
statements.
C.Amisstatementofaccountbalancesmayexistanditistheindependentauditor'sresponsibilitytoensurethat
financialstatementsarenotmisstated.
D.Apoorlydesignedinternalcontrolsystemmaybeinplace.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Analysis
Difficulty:Moderate
LearningObjective:2
MessierChapter01#20

21.Whichofthefollowingbestdescribeswhypubliclytradedcorporationsfollowthepracticeofhavingthe
externalauditorappointedbytheboardofdirectorsorelectedbythestockholders?
A.Topromoteanadversarialrelationshipbetweentheauditorandthecorporation'smanagement.
B.Toenhanceauditorindependencefromthemanagementofthecorporation.
C.Toencourageapolicyofrotationoftheindependentauditors.
D.Togivemanagementmoreleverageovertheauditor'sdecisions.

AACSB:Ethics
AICPABB:Legal
AICPAFN:RiskAnalysis
Blooms:Analysis
Difficulty:Moderate
LearningObjective:2
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Messier - Auditing and Assurance Services - 7e

22.Thedefinitionofauditingreferstoauditingasa"systematicprocessofobjectivelyobtainingandevaluating
evidenceregardingassertions"Whatismeantby"systematicprocess?"
A.Allauditsinvolveobtainingthesameevidence.
B.Allauditsinvolveevaluatingevidenceinthesamemanner.
C.Thereshouldbeawellplannedapproachforobtainingandevaluatingevidence.
D.Allassertionsareequallyimportantforallaudits.

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:DecisionMaking
Blooms:Comprehension
Difficulty:Moderate
LearningObjective:4
MessierChapter01#22

23.Whichofthefollowingwouldbestbedescribedasanassuranceservice?
A.Preparingareportrepresentingaclient'spositionduringanIRSaudit.
B.Workingwithaclienttodevelopamoreefficientmethodofprocessingfinancialtransactions.
C.Offeringanopinionconcerningtheaccuracyofstatementsmadeonaclient'swebsiterelatingtotheclient's
onlineprivacypolicies.
D.Assistingaclientinidentifyingpotentialsourcesofcapitalforpotentialacquisitions.

AACSB:Communications
AICPABB:Industry
AICPAFN:DecisionMaking
Blooms:Comprehension
Difficulty:Hard
LearningObjective:4
MessierChapter01#23

24.Whichofthefollowingstatementsisnottruewithrespecttoassurance,attest,andauditservices?
A.Theseservicesareappliedonlytofinancialstatementsandfinancialstatementaccounts.
B.Theseservicesallinvolveobtainingandevaluatingevidence.
C.Theseservicesallinvolvedeterminingthecorrespondenceofsomeinformationtoasetofcriteria.
D.Theseservicesallinvolveissuingareport.

AACSB:Communications
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AICPAFN:DecisionMaking
Blooms:Application
Difficulty:Easy
LearningObjective:4
MessierChapter01#24

Messier - Auditing and Assurance Services - 7e

25.Auditorsaremostlikelytousethemostrigorousauditprocedurestoexamine
A.Routinetransactions.
B.Managementassertionsthataredeemedtobeoflowrisk.
C.Onlytherightsandobligationsassertion.
D.Managementassertionsthataredeemedtobeofhighrisk.

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AICPAFN:RiskAnalysis
Blooms:Application
Difficulty:Moderate
LearningObjective:5
MessierChapter01#25

26.Whenobtaininganunderstandingoftheentityanditsenvironment,theauditorshouldobtainan
understandingofinternalcontrolsprimarilyto
A.Identifyareasofrelativelyhighriskofmisstatementandplantheauditaccordingly.
B.Providesuggestionsforimprovementtotheclient.
C.Serveasabasisforsettingauditriskandmateriality.
D.Decidewhethertoperformanauditfortheclient.

AACSB:Analytic
AICPABB:Industry
AICPAFN:RiskAnalysis
Blooms:Comprehension
Difficulty:Moderate
LearningObjective:5
LearningObjective:7
MessierChapter01#26

27.Whichoneofthefollowingstatementsbestdescribestheconceptofmateriality?
A.MaterialityisdeterminedbyreferencetospecificquantitativeguidelinesestablishedbytheAICPA.
B.Materialitydependsonlyonthedollaramountofanitemrelativetootheritemsinthefinancialstatements.
C.Materialitydependsonthenatureofanitembutnotonthedollaramountoftheitem.
D.Materialityislargelyamatterofprofessionaljudgment.

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AICPAFN:Measurement
Blooms:Comprehension
Difficulty:Moderate
LearningObjective:5
MessierChapter01#27

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Messier - Auditing and Assurance Services - 7e

28.Beforeacceptinganengagementtoauditanewclient,anauditorisrequiredto
A.Makeinquiriesofthepredecessorauditor.
B.Telltheclientwhetherornottheauditoriswillingtoissuea"clean"opinion.
C.Prepareamemorandumsettingforththestaffingrequirementsanddocumentingthepreliminaryauditplan.
D.Becomeamemberoftheclient'sboardofdirectors.

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Blooms:Knowledge
Difficulty:Moderate
LearningObjective:7
MessierChapter01#28

29.AninvestorisreadingthefinancialstatementsoftheStankeyCorporationandobservesthatthestatements
areaccompaniedbyanauditor'sunqualifiedreport.Fromthis,theinvestormayconcludethat:
A.Anydisputesoversignificantaccountingissueshavebeensettledtotheauditor'ssatisfaction.
B.TheauditorissatisfiedthatStankeywillbehighlyprofitableinthefuture.
C.TheauditoriscertainthatStankey'sfinancialstatementshavebeenpreparedaccuratelyandthatallaccount
balancesarepreciselycorrect.
D.TheauditorhasdeterminedthatStankey'smanagementisnotqualifiedtoleadthecompany.

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Difficulty:Moderate
LearningObjective:7
MessierChapter01#29

30.Preliminaryengagementactivitiesinclude:
A.Evaluatinginternalcontrols.
B.Assessingauditriskattheaccountbalancelevel.
C.Settingmateriality.
D.Determiningengagementteamrequirements.

AACSB:Analytic
AICPABB:ResourceManagement
AICPAFN:DecisionMaking
Blooms:Knowledge
Difficulty:Hard
LearningObjective:7
MessierChapter01#30

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31.Theauditor'sreportisgenerallyaddressedtothe:
A.Chiefoperatingofficer.
B.SecuritiesandExchangeCommission.
C.Stockholdersofthecompany.
D.Chieffinancialofficer.

AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Easy
LearningObjective:8
MessierChapter01#31

32.Anauditorwouldissueanadverseopinionif
A.Theauditorencountersadverseattitudestowardtheauditoronthepartofclientmanagement.
B.Aqualifiedopinioncannotbegivenbecausetheauditorisnotqualifiedtodoso.
C.Animmaterialmisstatementispresent.
D.Thestatementstakenasawholedonotfairlypresentthefinancialconditionandresultsofoperationsofthe
company.

AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Application
Difficulty:Moderate
LearningObjective:8
MessierChapter01#32

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33.Whichofthefollowingistruewithrespecttotheauditor'sreport?
A.Thereportindicatesthattheclient'sfinancialstatementswereauditedinaccordancewithgenerallyaccepted
accountingstandards.
B.Thereportindicatesthattheclient'sfinancialstatementswereauditedinaccordancewithapplicableauditing
standards.
C.Thereportindicatesthattheclient'sfinancialstatementswereauditedinaccordancewiththeauditor'sbest
judgment.
D.Thereportindicatesthattheclient'sfinancialstatementswereauditedinaccordancewithstatementsissued
bytheFASB.

AACSB:Communications
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AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Easy
LearningObjective:8
MessierChapter01#33

34.Whichofthefollowingisnotaconceptthatisincludedinthescopeparagraphoftheauditor'sreport?
A.Theconformanceofthefinancialstatementswithgenerallyacceptedaccountingprinciples.
B.Theauditwasconductedinaccordancewithapplicableauditingstandards.
C.Theauditwasplannedandperformedtoobtainreasonable,ratherthanabsolute,assurance.
D.Anauditinvolvesexaminingitemsonatest(i.e.sampling)basis.

AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:8
MessierChapter01#34

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Messier - Auditing and Assurance Services - 7e

35.Onahighlevel,theaccountingprocessesofabusinessconsistofinternalcontrols,individualtransactions,
andaccountbalances.
Required:
A.Describetherelationshipbetweeninternalcontrols,individualtransactions,andaccountbalances.
B.Discusshowevidenceregardingeachofthesethreeareascanhelpanauditordetermineifthefinancial
statementsarefairlystated.
A.Acompanyimplementsinternalcontrolsasasafeguardtoensureappropriatecapturingandrecordingof
individualtransactions,whicharethencollectedintoendingaccountbalances.Endingaccountbalancesare
thenusedtopreparethefinancialstatements.Theauditorexpressesanopiniononthefinancialstatements,
whicharemadeupofendingaccountbalancesanddisclosures.
B.Theauditorcanobtainevidencefromallthreestepsoftheaccountingprocess.Forinstance,anauditorcan
directlytesttheaccountbalance(e.g.,byexaminingabankstatementreconciliation).Thisevidenceisusually
thehighestqualitybutcostliestevidence.Alternatively,theauditorcanobtainindirectinformationbytesting
theindividualtransactionsthatmakeupanaccountbalance.Iftransactionsarehandledproperly,thisprovides
indirectevidencethattheendingbalancesaremorelikelytobefairlystated.Theleastdirectmethodof
obtainingevidenceistoevaluateandtestthecompany'sinternalcontrols,whichareimplementedtoensurethat
transactionsarehandledproperly.Ifaclient'ssystemofinternalcontroliseffective,transactionsaremorelikely
tobehandledproperly,andthustheendingbalancesmakingupasetoffinancialstatementsaremorelikelyto
befairlystated.Auditorsusuallycollectevidencerelatingtoallthreeareas:internalcontrol,transactions,and
endingbalances.

AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:DecisionMaking
Blooms:Application
Difficulty:Moderate
LearningObjective:5
LearningObjective:7
MessierChapter01#35

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36.SallyThompson'scompany,Sally'sShoes,isasuccessfulshoeretailstorewithonestore.Sallywouldlike
toexpandtotwolocations,butthebankhasaskedforanindependentauditbeforeitwillprovidefinancing.
Sallyhiresherbrotherinlaw,GeorgeThompson,toperformtheaudit.Georgehasexperienceinauditingnon
profitorganizationsandhedecidestoperformtheauditthesamewayashisotheraudits.Aftercompletingall
thestepsoftheauditprocess,Georgeissuesanunqualifiedopinionindicatingthatheiscertainthatthe
company'sfinancialstatementscontainnomisstatements.CommentonanypotentialproblemswithGeorge's
auditofSally'sShoes.
Independence:BecauseGeorgeisSally'sbrotherinlaw,heisnotconsideredindependent.Thispresentsa
problem,bothintheperceivedvalueoftheauditandintheactualobjectivityoftheaudit.Thatis,Georgemay
beintentionallyorunintentionallybiasedtowardsSally'sShoesratherthanitscreditors.Thiswouldalsoviolate
professionalstandards.
Competence:George'scompetenceinthisauditisalsoquestionable.WhileGeorgehasexperienceinauditing,
hehasnoexperienceorknowledgeofretailstoresorevenforprofitorganizations.Tosuccessfullyperforman
audit,Georgewouldneedtoobtainanunderstandingoftheindustry.Oneauditshouldnotbeperformedexactly
thesameasanotherrather,auditsshouldbetailoredtothespecificcircumstancesandrisks.
Other:Anunqualifiedauditopinionprovidesonlyreasonableassurance,notcertaintyor"absolute"assurance.
Italsoprovidesassuranceonlywithrespecttothefairnessofthefinancialstatements"inallmaterialrespects";
itdoesnotprovideassurancewithrespecttoallmisstatements,onlymaterialones.

AACSB:Ethics
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AICPAFN:RiskAnalysis
Blooms:Analysis
Difficulty:Easy
LearningObjective:2
LearningObjective:3
LearningObjective:7
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37.Explaintherelationshipbetweenaudit,attestandassuranceservices.
Allthreeservicesentailtheevaluationofevidencetodeterminethecorrespondenceofsomeinformationtoa
setofcriteriaandtheissuanceofareporttoindicatethedegreeofcorrespondence.
Assuranceservicesareindependentprofessionalservicesthatimprovethequalityofinformationoritscontext,
fordecisionmakers.Notethatassuranceservicescoverbothnonfinancialandfinancialinformation.Assurance
servicescancaptureinformation,improveitsquality,andenhanceitsusefulnessfordecisionmakers.The
extendedreachofthisdefinitionallowsprofessionalstoreportnotonlyonthereliabilityandcredibilityof
informationbutalsoontherelevanceandtimelinessofthatinformation.
Attestationisatypeofassurance.Attestservicesoccurwhenapractitionerisengagedtoissueordoesissuea
reportonsubjectmatteroranassertionaboutsubjectmatterthatistheresponsibilityofanotherparty.The
practitionerisabletoaddreliabilityandcredibilitytoinformationbeyondtraditionalfinancialinformation.
Examplesofattestservicesincludefinancialforecastsandreportsoninternalcontrol.
Auditingisaspecializedformofanattestservice.Auditingisasystematicprocessof(1)objectively
maintainingandevaluatingevidenceregardingassertionsabouteconomicactionsandeventstoascertainthe
degreeofcorrespondencebetweenthoseassertionsandestablishedcriteriaand(2)communicatingresultsto
interestedusers.Examplesofauditservicesincludecomplianceauditingandauditsoffinancialstatements.

AACSB:Analytic
AICPABB:Industry
AICPAFN:DecisionMaking
Blooms:Comprehension
Difficulty:Moderate
LearningObjective:4
MessierChapter01#37

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38.Define"informationasymmetry"anddiscussitinthecontextofthefinancialmarkets.Includeinyour
discussionhowinformationasymmetryisreduced.
Inthecontextoffinancialmarkets,informationasymmetryistheconceptthatthecompany'smanagement
generallyhasmoreinformationaboutthetruefinancialpositionandresultsofoperationsoftheentitythanthe
absenteeownerdoes.Whilemanagementofapubliccompanyworksasanagentforthestockholders,aconflict
ofinterestisapparentbecausebothsidesseektomaximizetheirselfinterest.Thisleadstoariskthatthe
managerwillnotalwaysactinthebestinterestoftheowner.Therefore,theownersattempttoprotect
themselvesthroughmonitoring.Auditsprovidereasonableassurancethattheinformationpresentedby
managementisfairlystated.Theownersareattemptingtoreduceinformationasymmetrybyseekingout
reliablecompanyinformation.

AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:RiskAnalysis
Blooms:Application
Difficulty:Moderate
LearningObjective:2
MessierChapter01#38

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39.Thetextbookpresentedtheconceptofauditingthroughananalogythatinvolvedbuyingahouseandhiring
ahouseinspector.Namethreedesirablequalitiesofahouseinspectororanauditoranddiscusshowthose
qualitiesapplytoanauditorandwhythosequalitiesareimportantforanauditortopossess.
Possiblesolutions:
Ahouseinspectorshouldbecompetent,whichmeansheshouldpossesstherequiredtraining,expertiseand
experiencetoevaluatethepropertyforsale.Anauditorshouldalsobecompetent.Anauditormustknowthe
acceptablemethodstoperformanauditandreportanopinion.Furthermore,theauditorshouldhaveorobtain
knowledgeofthespecificindustryinvolvedintheauditsoshecanappropriatelyadjustthetiming,natureand
extentofauditingprocedures.
Ahouseinspectorshouldbeobjective.Heshouldhavenoreasontosidewiththeseller;heisindependentofthe
seller'sinfluence.Inthesameway,anauditorshouldbeindependentofmanagement'sinfluence.Financial
statementauditsdifferfromhouseinspectionsinauditingfeesarepaidforbythesellerinsteadofthebuyer.
Becauseofthis,anauditorneedstomaintainindependenceinfactandappearancetodecreasebiastowardsthe
company'smanagementandgarnerpublicconfidenceforthefindings.
Ahouseinspectorshouldbehonest;heshouldconducthimselfwithintegrityandshareallfindingswiththe
buyer.Ifanauditordiscoversamaterialmisstatement,sheisrequiredtoreportthefindingstomanagement.If
nothingisdonetorectifythesituationandtheauditorfeelsthefinancialstatementsarenotfairlypresented,she
cannotissueanunqualifiedreport.
Ahouseinspectorshouldbeskeptical.Hewillnotsimplytaketheseller'sassertionsatfacevalue.Hewill
conducthisownanalysisandtesting.Anauditor,incomparison,shouldalwaysexerciseprofessional
skepticism.Anauditorgathersherownevidencetodeterminethevalidityofmanagement'sassertions.
Ahouseinspectorshouldberesponsibleand/orliable.Heshouldstandbehindhisassessmentwithaguarantee
and/orbesubjecttolitigationifhefailstoactwithduecare.Anauditorshouldalwaysactwithduecare.When
afirmissuesareport,thereportissignedwiththefirm'snametosignifythefirm'sresponsibilityforperforming
theaudit.

AACSB:Communications
AICPABB:Marketing
AICPAFN:DecisionMaking
Blooms:Application
Difficulty:Easy
LearningObjective:3
MessierChapter01#39

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40.Discussanoverviewofthefinancialstatementauditprocessusingtheterms"assertion,""evidence,"and
"report."
Theauditorgathersevidenceaboutthebusinesstransactionsthathaveoccurred(economicactivityandevents)
andaboutmanagement(thepreparerofthestatements).Theauditorusesthisevidencetocomparethe
assertionscontainedinthefinancialstatementstothecriteriachosenbytheuser.Theauditor'sreport
communicatestotheuserthedegreeofcorrespondencebetweentheassertionsandthecriteria.

AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Comprehension
Difficulty:Moderate
LearningObjective:7
MessierChapter01#40

41.YouareanewemployeeattheaccountingfirmMurray&Murray,CPAs.Beforeyouareassignedtoyour
firstaudit,yoursupervisortestsyourknowledgeandasksyoutoexplaintheterm"scope"inthecontextofa
financialstatementaudit.
Required:
A.Provideadefinitionofscope.
B.Describewhatinfluencesanauditor'sdeterminationofscope.
A.Thescopeofanauditisthetypeandamountofauditworktobeperformed.
B.Theauditor'sassessmentsofriskandmaterialityinfluencetheaudit'sscope.Forinstance,ifanauditorsetsa
lowermaterialityamountorwouldliketosubstantiallyreduceauditrisk,thescopeoftheauditwouldbe
increased.Inestablishingthescopeofanaudit,theauditormustmakedecisionsaboutthenature,extentand
timingofevidencetobegatheredinordertoevaluatemanagement'sassertions.

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Knowledge
Difficulty:Easy
LearningObjective:7
MessierChapter01#41

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Messier - Auditing and Assurance Services - 7e

42.Whymustanauditorassessmateriality?
Anauditormustassessmaterialitybecauseanaudittofindallmisstatementswouldnotbecostefficientoreven
feasible.Tosearchforallmisstatements,theauditorwouldneedtoexamineeverytransaction.Inaddition,
relativelyminormisstatementsmaynotmattertousers.Forthisreason,whenplanningandperforminganaudit
theauditorfocusesonmisstatementsthatwouldaffecttheusers'decisions(i.e.materialmisstatements).

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:RiskAnalysis
Blooms:Application
Difficulty:Moderate
LearningObjective:5
LearningObjective:6
MessierChapter01#42

43.Youareanewstaffauditorandyouareauditingaclient'sinventoryaccount.Brieflydescribeonewayyou
mightobtaindirectevidenceandonewayyoumightobtainindirectevidencethattheinventoryaccountbalance
isfairlystated.
Studentanswerswillvary.Thefollowinganswerprovidesanexample:
Toobtaindirectevidence,anauditorcanphysicallyexamineandcounttheitemsincludedintheendingbalance
oftheinventoryaccount.Toobtainindirectevidence,anauditorcanexamineinvoicesfromsuppliersrelatingto
purchasesofinventoryorcouldtestwhethertheinternalcontrolsovertheinventoryprocesswereworking
properly.

AACSB:Analytic
AICPABB:Industry
AICPAFN:DecisionMaking
Blooms:Application
Difficulty:Hard
LearningObjective:5
MessierChapter01#43

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Messier - Auditing and Assurance Services - 7e

44.Nameanddiscussthesevenphasesoftheauditprocess.
1.Clientacceptance/continuanceandestablishanunderstandingwiththeclient:Tominimizethelikelihoodthat
anauditorwillbeassociatedwithclientswholackintegrity,prospectiveauditorsarerequiredtoconferwiththe
predecessorauditorandfrequentlyconductbackgroundchecksontopmanagement.Onceafirmacceptsa
client,theauditorshouldestablishanunderstandingwiththeclientregardingtheservicestobeperformedand
thetermsofengagement.
2.Preliminaryengagementactivities:Preliminaryengagementactivitiesinclude(1)determiningtheaudit
engagementteamrequirementsand(2)ensuringtheindependenceoftheauditteamandauditfirm.
3.Plantheaudit:Theauditteammustmakeapreliminaryassessmentofmaterialityandrelevantrisks.With
thosedeterminations,theauditteamcanassessriskrelatingtothelikelihoodofmaterialmisstatementsinthe
financialstatements.Basedontheseassessments,theauditorthenpreparesawrittenauditplanthatsetsforth,in
reasonabledetail,thenature,extent,andtimingoftheauditwork.
4.Considerandauditinternalcontrol:Theauditorgainsanunderstandingofinternalcontroltodetermineits
effectivenessatachievingreliabilityoffinancialreporting.
5.Auditbusinessprocessesandrelatedaccounts:Theauditordeterminesandperformsindividualaudit
proceduresdirectedtowardspecificassertionsintheaccountbalancethatarelikelytobemisstated.
6.Completetheaudit:Theauditorevaluatesthesufficiencyoftheevidencegathered,assessesthepossibilityof
contingentliabilities,andsearchesforanyeventssubsequenttothebalancesheetdatethatmayimpactthe
financialstatements.
7.Evaluateresultsandissuethereport:Theauditorreachesaconclusionastowhetherornotthefinancial
statementsarefairlystated.Iftheuncorrectedmisstatementsincorporatedintothefinancialstatementsdonot
causethestatementstobemateriallymisstated,theauditorissuesanunqualifiedreport.

AACSB:Communications
AICPABB:ResourceManagement
AICPAFN:DecisionMaking
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:7
MessierChapter01#44

21

Messier - Auditing and Assurance Services - 7e

45.Astandard,unqualifiedauditor'sreportcontainsthreeparagraphs,plusafourthexplanatoryparagraphin
somecircumstances.Provideabrief(onesentence)descriptionforeachparagraph.
Theintroductoryparagraphindicateswhichfinancialstatementsarecoveredbythereport,thatthestatements
aretheresponsibilityofmanagement,andthattheauditorhasaresponsibilitytoexpressanopinion.Thescope
paragraphcommunicatestotheusers,inverygeneralterms,whatanauditentailsandhowtheauditwas
conducted(inaccordancewiththeapplicableauditingstandardsusuallyeitherthestandardsofthePCAOBor
GAAS).Theopinionparagraphindicatestheauditor'sopinionastowhetherthefinancialstatementsarefairly
presentedinaccordancewiththecriteriaagainstwhichtheywereaudited,GAAP.Anexplanatoryparagraphis
usedtobringmattersofimportancetothereader'sattention.Forexample,inanauditofapubliccompany,the
auditor'sreportonaclient'sfinancialstatementswillcontainanexplanatoryparagraphreferringthereaderto
theauditor'sreportontheauditofinternalcontroloverfinancialreporting.

AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Easy
LearningObjective:8
MessierChapter01#45

46.Explaintherelationshipbetweensamplesize,materialityanddesiredlevelofassurance.
Thesizeofasampleisinfluencedbythematerialityandthedesiredlevelofassurancefortheaccountor
assertionbeingexamined.Thereisaninverserelationshipbetweensamplesizeandmateriality(i.e.,if
materialityincreasesthensamplesizedecreases)andadirectrelationshipbetweensamplesizeandthedesired
levelofassurance(i.e.,ifthedesiredlevelofassuranceincreasesthensamplesizeincreases).

AACSB:Analytic
AICPABB:Industry
AICPAFN:DecisionMaking
Blooms:Comprehension
Difficulty:Moderate
LearningObjective:6
MessierChapter01#46

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