Smieliauskas & Bewley, Auditing: An International Approach, 7th Edition Page 1-1
Solutions Manual
CHAPTER 1
Introduction to Auditing
SOLUTIONS FOR REVIEW CHECKPOINTS
ESSENTIALS
1-1. In this example of a three-party accountability structure, the owner is the 'third party', the hired manager is the
'first party' and the auditor is the 'second party'. The owner is looking out for his/her own longer-term economic
interests, but has to rely on the actions and information provided by the hired manager, who may have shorter
term concerns (like his/her own compensation and job prospects) and thus act self-interestedly.
The owner is accountable for financing the business and treating the manager fairly, particularly in terms of
compensating his/her efforts and successes appropriately. The manager is accountable for giving reliable and fair
reports of the business profit performance to the owner. Give the potential conflicts between the interests of the
first and third parties, there is information risk - the risk that the financial statement information will not be a full
and fair representation of the transactions and events that really occurred, and will not be reliable for economic
decisions that the owner may base upon it. The auditor is accountable for objectively verifying the fairness and
reliability of the information and providing an independent opinion on how well the information reflects the
underlying realities of the entity's operations. The auditor's opinion can benefit both the first and third parties -
the owner directly by lowering information risk, and the manager indirectly because if the owner has more basis to
trust the manager not to act against the owner's interests the owner will be more willing to share the profits with
the manager (this is referred to as lowering "agency costs," which are charged by the owner/principal and incurred
by the manager/agent if the owner does not trust the manager). For the auditor's opinion to have value in giving
the owner some comfort (i.e., "assurance") that the manager's information can be relied on, the auditor must have
no personal interest in either side and be able remain objective.
1-2. The concept of reasonable assurance describes a mental attitude that the auditor gains from the conclusions
drawn from audit examination findings. Based on the examination, if the auditor comes to believe the financial
statements are reliable and fair to the interests of third party users, this belief forms the basis of the opinion the
auditor will communicate to financial statement users in the Auditor's Report. An 'audit opinion' provides a high
level of assurance to the user that the auditor believes that the information risk is low, and has evidence to
support that belief.
TEXT
1-3 Auditors add credibility to financial information provided by the accountable party such as management (i.e.
auditors make the financial or other information more likely to be true or representationally faithful). Other
common ways of characterizing this property of audited numbers is that the numbers are more accurate, have
higher assurance, or are more reliable. These relate to different dimension of truthfulness, as we discuss later in
the text.
1-4 By obtaining more accurate or reliable information about the company, Aunt Zhang can obtain a more accurate
valuation of the company. This more accurate valuation gives Aunt Zhang more confidence that she will get her
money’s worth in the investment. The preceding assumes Aunt Zhang is risk averse—a common assumption about
economic behavior.

Smieliauskas & Bewley, Auditing: An International Approach, 7th Edition Page 1-1
Solutions Manual
CHAPTER 1
Introduction to Auditing
SOLUTIONS FOR REVIEW CHECKPOINTS
ESSENTIALS
1-1. In this example of a three-party accountability structure, the owner is the 'third party', the hired manager is the
'first party' and the auditor is the 'second party'. The owner is looking out for his/her own longer-term economic
interests, but has to rely on the actions and information provided by the hired manager, who may have shorter
term concerns (like his/her own compensation and job prospects) and thus act self-interestedly.
The owner is accountable for financing the business and treating the manager fairly, particularly in terms of
compensating his/her efforts and successes appropriately. The manager is accountable for giving reliable and fair
reports of the business profit performance to the owner. Give the potential conflicts between the interests of the
first and third parties, there is information risk - the risk that the financial statement information will not be a full
and fair representation of the transactions and events that really occurred, and will not be reliable for economic
decisions that the owner may base upon it. The auditor is accountable for objectively verifying the fairness and
reliability of the information and providing an independent opinion on how well the information reflects the
underlying realities of the entity's operations. The auditor's opinion can benefit both the first and third parties -
the owner directly by lowering information risk, and the manager indirectly because if the owner has more basis to
trust the manager not to act against the owner's interests the owner will be more willing to share the profits with
the manager (this is referred to as lowering "agency costs," which are charged by the owner/principal and incurred
by the manager/agent if the owner does not trust the manager). For the auditor's opinion to have value in giving
the owner some comfort (i.e., "assurance") that the manager's information can be relied on, the auditor must have
no personal interest in either side and be able remain objective.
1-2. The concept of reasonable assurance describes a mental attitude that the auditor gains from the conclusions
drawn from audit examination findings. Based on the examination, if the auditor comes to believe the financial
statements are reliable and fair to the interests of third party users, this belief forms the basis of the opinion the
auditor will communicate to financial statement users in the Auditor's Report. An 'audit opinion' provides a high
level of assurance to the user that the auditor believes that the information risk is low, and has evidence to
support that belief.
TEXT
1-3 Auditors add credibility to financial information provided by the accountable party such as management (i.e.
auditors make the financial or other information more likely to be true or representationally faithful). Other
common ways of characterizing this property of audited numbers is that the numbers are more accurate, have
higher assurance, or are more reliable. These relate to different dimension of truthfulness, as we discuss later in
the text.
1-4 By obtaining more accurate or reliable information about the company, Aunt Zhang can obtain a more accurate
valuation of the company. This more accurate valuation gives Aunt Zhang more confidence that she will get her
money’s worth in the investment. The preceding assumes Aunt Zhang is risk averse—a common assumption about
economic behavior.
1-5 Auditing is the verification of numbers provided by others. To attest means to lend credibility or to vouch for the
truth or accuracy of the statements that one party makes to another. The attest function is a term often applied to

Smieliauskas & Bewley, Auditing: An International Approach, 7th Edition Page 1-2
Solutions Manual
the activities of independent PAs when acting as auditors of financial statements.
Since financial statements are prepared by managers of an entity who have authority and responsibility for
financial success or failure, an outsider may be skeptical that the statements are objective, free from bias, fully
informative, and free from material error--intentional or inadvertent. The audit opinion of an independent-PA
auditor helps resolve those doubts because the auditor's success depends upon his independent, objective, and
competent assessment of the conformity of the financial statements with GAAP. The auditor's role is to lend
credibility to the statements, hence the outsider will likely seek his independent audit opinion.
1-6 Client: the company, board of directors, agency, or some other person or group who retains (hires) the
auditor. Usually the party who pays the fee.
Auditee: the entity (e.g., business firm, hospital, city government) whose financial information is under
audit.
Auditors: report to the client on the auditee's financial or control information.
Three party accountability consists of the auditor, the accountable party of the auditee such as management of the
auditee, and the users. Users include the client as defined above. Traditionally management hired the auditor so
that there was some confusion as to who was the true client. New corporate governance concepts in part attempt
to clarify this three party accountability.

Smieliauskas & Bewley, Auditing: An International Approach, 7th Edition Page 1-3
Solutions Manual
misappropriation of assets and fraudulent financial reporting (misreporting).
1-13 Operational auditing is the study of business operations for the purpose of making recommendations about the
economic and efficient use of resources, effective achievement of business objectives, and compliance with
company policies.
CPA Canada views operational auditing as a type of management advisory service offered by public accounting
firms.
1-14 The elements of comprehensive auditing include: (1) financial and compliance audits, (2) economy and efficiency
audits, and (3) program results or effectiveness audits. Public sector is the part of the economy represented by all
levels of government. Public companies are companies whose shares are traded on the stock markets.
1-15 A compliance audit involves a study of an organization's policies, procedures, and performance in following laws,
rules, and regulations. An example is a company’s compliance with environmental laws.
1-16 Other kinds of auditors: Revenue Canada agents/auditors, provincial and federal bank examiners, provincial
insurance commissioner auditors.
1-17 Yes, to a reasonable degree. Financial statement audits are intended to provide assurance there are no significant
intentional or unintentional misstatements.

Smieliauskas & Bewley, Auditing: An International Approach, 7th Edition Page 1-4
Solutions Manual
b. they are too far away from company headquarters to perform accounting and auditing themselves.
c. the consequences of making a bad loan are very undesirable.
d. they generally see a potential conflict of interest between company managers who want to get loans and their
needs for reliable financial statements.
MC 1-5 LO4 Operational audits of a company’s efficiency and economy of managing projects and of the results of
programs are conducted by whom?
a. Financial statement auditors
b. The company’s internal auditors
c. Tax auditors employed by the federal government
d. Fraud auditors
MC 1-6 LO3 Independent auditors of financial statements perform audits that reduce and control
a. the business risks faced by investors.
b. the information risk faced by investors.

Smieliauskas & Bewley, Auditing: An International Approach, 7th Edition Page 1-5
Solutions Manual
tied to factors over which management has little control may motivate management to “manage
earnings”).
e. private vs. public company (publicly held company owners are more reliant on financial statements for
information about their investment).
EP1-4 Financial statements are prepared on basis of GAAP. Knowledge of GAAP is thus indispensable for determining if
the financial statements are in conformity with GAAP. For example lease accounting used to consist of some very
specific rules (bright line rules) that the auditor effectively tested compliance with. Unfortunately such detailed
rule based accounting leads to what some refer to as a checklist mentality where the form is more important than
the substance. Enron’s special purpose entity accounting also comes to mind.
EP1-5 Operational Auditing
Bigdeal cannot hire the OAG. This government agency does not perform operational audits for private industry.
One possibility is the management advisory services department of a large PA firm. The major advantage may be
total objectivity. The PA firm has no stake in making a report reflect favorably or unfavorably on Smalltek (provided
there are no prior relations of the PA firm with Bigdeal managers that may suggest a bias or with Smalltek). The
possible disadvantage is that the PA firm may not possess the required expertise in Smalltek' type of business.
Another possibility is the Bigdeal internal audit department. The major advantage may be a thorough appreciation
of Bigdeal's managerial effectiveness and efficiency standards and a longstanding familiarity with Bigdeal's
business. The possible disadvantage could be that the internal auditors may not be independent enough from

Loading page 6...

Loading page 7...

Smieliauskas & Bewley, Auditing: An International Approach, 7th Edition Page 1-7
Solutions Manual
If you are asked to estimate the probabilities of the conjunctive and disjunctive events of rolling the die, a natural
starting place (anchor) would be to know that the probability of getting one three in one roll is 1/6, or 0.167. Then
to estimate the harder conjunctive event (three 3's in a row), a downward adjustment would be required.
Conversely, for the disjunctive event (one 3 in three rolls), an upward adjustment would be needed. However,
since adjustments from an anchor are usually insufficient, the estimated probability of the conjunctive event will
likely be too large, and that of the disjunctive event too small.
Form A of the problem (the one in the textbook chapter) is a conjunctive statement of the problem, and it asks for
an estimate of the probability of successful product introduction. With the five sub-events considered independent
of each other, the best answer is 0.554 (.80 x .90 x .95 x .90 x .90). Students may anchor on the probabilities of the
elementary sub-events and fail to adjust sufficiently downward, and their probability estimates will be higher than
0.554.
Form B of the problem (reproduced below, not in the textbook) is a disjunctive statement of the same problem,
and the best answer is still 0. 554. Form B, however, is stated in terms of failure in the chain of events. (Student
responses must be subtracted from 1.000 to make them comparable to Form A.) If students anchor on the
probabilities of the elementary disjunctive sub-events in Form B, their probability estimates (subtracted from
1.000) will probably be too low.

Loading page 8...

Smieliauskas & Bewley, Auditing: An International Approach, 7th Edition Page 1-8
Solutions Manual
.00 .10 .20 .30 .40 .50 .60 .70 .80 .90 1.00
EP1-9 Information Risk Questions.
Examples of misstatements that create audit risk: the balance sheet does not balance, cash is understated,
inventory is overstated, and unrecorded payables. Examples of misstatements that create accounting risk: a
company that will fail in the next 3 months records all assets and liabilities assuming that the going concern
assumption is true, impaired goodwill is not written down, the allowance for doubtful accounts has not been
adjusted for changed economic circumstances, and the fair value assets have not been updated for changes in
future cash flows. Accounting misstatements relate to future events whereas audit misstatements relate to facts
about the present or past events.
EP1-10

Loading page 9...

Smieliauskas & Bewley, Auditing: An International Approach, 7th Edition Page 2-1
Solutions Manual © 2016, McGraw-Hill Education. All Rights Reserved.
CHAPTER 2
Auditors’ Professional Roles and Responsibilities
SOLUTIONS FOR REVIEW CHECKPOINTS
ESSENTIALS
2-1. Since auditing is a critical function in the economy, it is extensively regulated to ensure it remains effective. In
Canada, the regulation of professional accountants and auditors is a provincial responsibility, and varies somewhat
depending on the legislation in different provinces. The profession also has a national umbrella organization that
all provincial organizations are associated with. At the time of writing, the profession is being streamlined at both
the national and provincial levels by uniting three formerly separate accounting designations (CA, CGA, CMA) into a
single designation for Canadian professional accountants, the “CPA” (Chartered Professional Accountant). The
national umbrella organization is CPA-Canada, and there are counterpart CPA associations in each province (e.g.,
CPA-Saskatchewan) and territory.
2-2. When an accountant provides auditing and assurance services for use by the general public, this is referred to as
‘public accounting’. Public accounting is distinct from many other types of accounting-related work that do not
produce information that the general public will use and possibly rely on, such as bookkeeping and financial
statement and tax preparation for individuals or private companies. Since a person from the general public may
not be able to assess whether an accountant is properly qualified and regulated to act in their best interest, to

Loading page 10...

Loading page 11...

Loading page 12...

Loading page 13...

Loading page 14...

Loading page 15...

Loading page 16...

Loading page 17...

Loading page 18...

Loading page 19...

Loading page 20...

Loading page 21...

Loading page 22...

Loading page 23...

Loading page 24...

Loading page 25...

Loading page 26...

Loading page 27...

Loading page 28...

Loading page 29...

Loading page 30...

Loading page 31...

Auditing: An International Approach Seventh Canadian Edition Solution Manual

Study Now!

Document Details

Related Documents

Auditing: An International Approach Seventh Canadian Edition Test Bank

The Audit Report and Internal Control Evaluation

Auditing Inventories; Cost of Goods Sold; And Property, Plant, and Equipment

Audit Procedures and Internal Control Evaluation for Smackey Dog Foods, Inc.

Test Bank For Auditing And Assurance Services, 5th Edition

Test Bank for Auditing and Assurance Services, 17th Edition

Auditing and Assurance Services 6th Edition Solution Manual

Principles of Fraud Examination 4th Edition Solution Manual

Solution Manual for Assurance Practice Set for Comprehensive Assurance & Systems Tool (CAST), 4th Edition

Auditing : A Practical Approach, Canadian Edition Solution Manual

Company

Explore

Study Tools