SOLUTION MANUAL FOR
m m
m Principles Of Auditing And Other Assurance Services
m m m m m m m
23rd Edition By Ray Whittington Kurt
m m m m m m
ALL Chapters (1 - 21)
m m m m
, • Table of Contents
m m
Chapterm1:mThemRolemofmthemPublicmAccountantminmthemAmericanEconomy
Chapterm2:mProfessionalmStandards
Chapterm3:mProfessionalmEthics
Chapterm4:mLegalmLiabilitymofmCPAs
Chapterm5:mAuditmEvidencemandmDocumentation
Chapterm6:mAuditmPlanning,mUnderstandingmthemClient,mAssessingRisks,mandmResponding
Chapterm7:mInternalmControl
Chapterm8:mConsiderationmofmInternalmControlminmanmInformationTechnologymEnvironment
Chapterm9:mAuditmSampling
Chapterm10:mCashmandmFinancialmInvestments
Chapterm11:mAccountsmReceivable,mNotesmReceivable,mandRevenue
Chapterm12:mInventoriesmandmCostmofmGoodsmSold
Chapterm13:mProperty,mPlant,mandmEquipment:mDepreciationmandDepletion
Chapterm14:mAccountsmPayablemandmOthermLiabilities
Chapterm15:mDebtmandmEquitymCapital
Chapterm16:mAuditingmOperationsmandmCompletingmthemAudit
Chapterm17:mAuditors’mReports
Chapterm18:mIntegratedmAuditsmofmPublicmCompanies
Chapterm19:mAdditionalmAssurancemServices:mHistoricalmFinancialInformation
Chapterm20:mAdditionalmAssurancemServices:mOthermInformation
Chapterm21:mInternal,mOperational,mandmCompliancemAuditing
,CHAPTER 1 m
The Role of the Publ
m m m m
ic Accountant in the
m m m
American Economy m
ReviewmQuestions
1-1 Them―crisismofmcredibility‖mlargelymarosemfrommthemnumbermofmcompaniesmthatmrestatedmtheirmpreviouslymi
ssuedmfinancialmstatementsm asm am resultm ofm accountingmirregularitiesm andmfraud.m Especiallymresponsiblemw
eremthemverymvisiblemEnronmandmWorldCommfraudmcases.mBothmcompaniesm filedmform bankruptcymandmcons
titutedmthemlargestm companiesm inmAmericanmhistorymtomdomso.m Themextentm ofmthemaccountingmirregularities
m andm fraudmbeingm investigatedm andm disclosedm broughtm intom questionm themeffectivenessm ofm financialm state
mentm audits.m Inmaddition,mthemcriminalmconvictionmofmArthurmAndersen,mLLP,monemofmthemthenmBigm5macc
ountingmfirms,monmchargesmofm destroyingmdocumentsm relatedmtomthemEnronmcasembroughtm intomquestionmth
emethicsm standardsm ofmthemprofession.
1-2 Assurancemservicesmaremprofessionalmservicesmthatmenhancemthemqualitymofminformation,mormitsmcontext,m
formdecision-
making.mThemtwomtypesmare:m(a)mthosemthatmincreasemthemreliabilitymofminformationmandm(b)mthosemthatmi
nvolvemputtingminformationminmamformmormcontextmthatmfacilitatesmdecision-making.
1-3 Amfinancialmstatementm auditmis,mbymfar,mthemmostm commonmtypemofm attestm engagement.m Themoverallmassert
ion,mmadembymmanagement,mmostmfrequentlymismthatmthemfinancialmstatementsmfollowmgenerallymacceptedma
ccountingmprinciples.
1-4 Amlargemcorporationmwithmsecuritiesmlistedmonmamstockmexchangemismrequiredmbymthemrulesmofmthemstockmex
changemandmbymthemrulesm ofmthemSecuritiesm andmExchangemCommissionmtomprovidemanmauditm reportm withmt
hemannualmfinancialmstatementsm furnishedmtomitsm stockholders.m Itm alsomism requiredmtomengagemthemauditorsm t
omprovidemanmopinionmonmitsminternalmcontrol.mApartmfrommlegalmrequirements,mhowever,mamlargemlistedm
corporationmrecognizesmthatmitmmustmmaintainminvestormconfidenceminmthemreliabilitymofmitsmfinancialmstate
mentsm andm internalm controlmoverm financialm reportingm ifm itm ism tom continuemtom bemablemtom securemcapitalmfro
mmthempublic.mThemreportm bymamfirmmofmcertifiedmpublicmaccountantsmaddsm credibilitymtomthemfinancialmstat
ementsm preparedmbymthemcorporation.m Whenmam smallmfamily-
ownedmenterprisemelectsm tomhavemanmaudit,mthempurposemusuallymismtomusemthemauditors'mreportmtomsupportm
anmapplicationm formambankmloan.
, 1-5 Amreportm bymanmindependentm publicmaccountantmconcerningmthemfairnessm ofmam company'sm financialmstatem
entsmismcommonlymrequiredminmthemfollowingmsituations:
(1) Applicationmform am bankmloan.
(2) Establishingmcreditm form purchasemofm merchandise,mequipment,mormotherm assets.
(3) Reportingmoperatingmresults,m financialmposition,m andmcashmflowsm tomabsenteemownersm (stockhold
ersmormpartners).
(4) Issuancemofm securitiesm bymamcorporation.
(5) Annualmfinancialmstatementsm bymam corporationmwithmsecuritiesm listedmonmam stockmexchangemorm tr
adedmovermthemcounter.
(6) Salemofm anmongoingmbusiness.
(7) Terminationmofm am partnership.
1-6 Tomaddmcredibilitymtomfinancialmstatementsm ismtomincreasemthemlikelihoodmthatm theymhavembeenmpreparedmfo
llowingmthemappropriatemcriteria,musuallymgenerallymacceptedmaccountingmprinciples.m Asm such,manmincreas
eminmcredibilitymresultsm inmfinancialmstatementsmthatm canmbembelievedmandmreliedmuponmbymthirdmparties.
1-7 Businessm riskmism themriskmthatm theminvestmentm willmbemimpairedmbecausemam companyminvestedminmism una
blemtommeetmitsmfinancialmobligationsmduemtomeconomicmconditionsmormpoormmanagementmdecisions.mInfor
mationmriskmismthemriskmthatmtheminformationmusedmtomassessmbusinessmriskmismnotmaccurate.mAuditorsmc
anmdirectlymreduceminformationmrisk,mbutmhavemonlymlimitedmeffectmonmbusinessmrisk.
1-8 Atmthembeginningmofmthemcentury,mthemprincipalmobjectivemofmauditingmwasm thempreventionmandmdetectionm
ofmfraud.mAuditmworkmcenteredmonmthembalancemsheet,mbecausemthemincomemstatementmwasm regardedmasmhi
ghlymconfidentialmandmnotm form publicmdisclosure.m Today,m themprincipalmobjectivemofm auditingmism tomformm
anmopinionmonmthemfairnessmofmfinancialmstatementsm andmtheirmconformitymwithmgenerallymacceptedmaccou
ntingmprinciples.m Butm themprofessionalmstandardsm alsomrequiremthatm anmauditm bemdesignedmtomprovidemreas
onablemassurancemofm detectingmmaterialmmisstatements,mduemtomerrorsm orm fraud.m Particularm emphasism ism p
lacedmonmthemincomemstatementm whichmism ofmgreatm importancemtominvestors.m Auditingmtodaymalsomhasm the
mobjectivesm ofmmeetingm themrequirementsm ofm themSecuritiesm andm ExchangemCommissionm (SEC)m andm themP
ublicmCompanymAccountingmOversightmBoardmformpublicmcompanies.
1-9 Themstatementm ism incorrect.mThemincreasingmintegratedmdatabasesm ofm today,malongmwithmavailablema
uditmproceduresmmakemauditedmentirempopulationsmampossibilityminmmanymsituations.
1-10 Anmoperationalmauditm attemptsm tommeasuremthemeffectivenessm andmefficiencymofmamspecificmunitm ofmanm
organization.m Itminvolvesm moremsubjectivemjudgmentsmthanmamcompliancemauditmormanmauditm ofmfinanc
ialmstatementsm becausemthemcriteriam ofm effectivenessm andmefficiencymofmdepartmentalmperformancemare
mnotm asmclearlymestablishedmasm aremmanymlawsm andmregulationsm orm generallymacceptedmaccountingmprin
ciples.
Themreportm preparedmafterm completionmofm anmoperationalmauditm ism usuallymdirectedmtommanagem
entmofmthemorganizationminmwhichmthemauditmworkmwasmdone.
1-11 Amcompliancemauditmismanmauditmtomdeterminemwhethermfinancialmreportsmormothermassertionsmarem inmcom
pliancemwithmestablishedmcriteria.m Themnecessarymingredientsm aremverifiablemdatam andmthemexistencemofmst
andardsm establishedmbymanmauthoritativembody.m Anmoperationalmaudit,monmthemotherm hand,mism am reviewmo
fm amdepartmentm ormothermunitm ofmambusinessm ormgovernmentalmorganizationmtommeasuremthemeffectiveness
m andmefficiencymofm operations.m Internalm auditorsm oftenm performmoperationalmauditsm asm dom auditorsm empl
oyedmbymthemGovernmentmAccountabilitymOfficem(GAO)mofmthemfederalmgovernment.
1-12 Internalmauditorsm mustm bemindependentmofmthemdepartmentm headsm andmothermlinemexecutivesmwhosemworkm
theymreview.mHowever,minternalmauditorsmaremnotmindependentminmthemsamemsensemasmampublicmaccountingm
m m
m Principles Of Auditing And Other Assurance Services
m m m m m m m
23rd Edition By Ray Whittington Kurt
m m m m m m
ALL Chapters (1 - 21)
m m m m
, • Table of Contents
m m
Chapterm1:mThemRolemofmthemPublicmAccountantminmthemAmericanEconomy
Chapterm2:mProfessionalmStandards
Chapterm3:mProfessionalmEthics
Chapterm4:mLegalmLiabilitymofmCPAs
Chapterm5:mAuditmEvidencemandmDocumentation
Chapterm6:mAuditmPlanning,mUnderstandingmthemClient,mAssessingRisks,mandmResponding
Chapterm7:mInternalmControl
Chapterm8:mConsiderationmofmInternalmControlminmanmInformationTechnologymEnvironment
Chapterm9:mAuditmSampling
Chapterm10:mCashmandmFinancialmInvestments
Chapterm11:mAccountsmReceivable,mNotesmReceivable,mandRevenue
Chapterm12:mInventoriesmandmCostmofmGoodsmSold
Chapterm13:mProperty,mPlant,mandmEquipment:mDepreciationmandDepletion
Chapterm14:mAccountsmPayablemandmOthermLiabilities
Chapterm15:mDebtmandmEquitymCapital
Chapterm16:mAuditingmOperationsmandmCompletingmthemAudit
Chapterm17:mAuditors’mReports
Chapterm18:mIntegratedmAuditsmofmPublicmCompanies
Chapterm19:mAdditionalmAssurancemServices:mHistoricalmFinancialInformation
Chapterm20:mAdditionalmAssurancemServices:mOthermInformation
Chapterm21:mInternal,mOperational,mandmCompliancemAuditing
,CHAPTER 1 m
The Role of the Publ
m m m m
ic Accountant in the
m m m
American Economy m
ReviewmQuestions
1-1 Them―crisismofmcredibility‖mlargelymarosemfrommthemnumbermofmcompaniesmthatmrestatedmtheirmpreviouslymi
ssuedmfinancialmstatementsm asm am resultm ofm accountingmirregularitiesm andmfraud.m Especiallymresponsiblemw
eremthemverymvisiblemEnronmandmWorldCommfraudmcases.mBothmcompaniesm filedmform bankruptcymandmcons
titutedmthemlargestm companiesm inmAmericanmhistorymtomdomso.m Themextentm ofmthemaccountingmirregularities
m andm fraudmbeingm investigatedm andm disclosedm broughtm intom questionm themeffectivenessm ofm financialm state
mentm audits.m Inmaddition,mthemcriminalmconvictionmofmArthurmAndersen,mLLP,monemofmthemthenmBigm5macc
ountingmfirms,monmchargesmofm destroyingmdocumentsm relatedmtomthemEnronmcasembroughtm intomquestionmth
emethicsm standardsm ofmthemprofession.
1-2 Assurancemservicesmaremprofessionalmservicesmthatmenhancemthemqualitymofminformation,mormitsmcontext,m
formdecision-
making.mThemtwomtypesmare:m(a)mthosemthatmincreasemthemreliabilitymofminformationmandm(b)mthosemthatmi
nvolvemputtingminformationminmamformmormcontextmthatmfacilitatesmdecision-making.
1-3 Amfinancialmstatementm auditmis,mbymfar,mthemmostm commonmtypemofm attestm engagement.m Themoverallmassert
ion,mmadembymmanagement,mmostmfrequentlymismthatmthemfinancialmstatementsmfollowmgenerallymacceptedma
ccountingmprinciples.
1-4 Amlargemcorporationmwithmsecuritiesmlistedmonmamstockmexchangemismrequiredmbymthemrulesmofmthemstockmex
changemandmbymthemrulesm ofmthemSecuritiesm andmExchangemCommissionmtomprovidemanmauditm reportm withmt
hemannualmfinancialmstatementsm furnishedmtomitsm stockholders.m Itm alsomism requiredmtomengagemthemauditorsm t
omprovidemanmopinionmonmitsminternalmcontrol.mApartmfrommlegalmrequirements,mhowever,mamlargemlistedm
corporationmrecognizesmthatmitmmustmmaintainminvestormconfidenceminmthemreliabilitymofmitsmfinancialmstate
mentsm andm internalm controlmoverm financialm reportingm ifm itm ism tom continuemtom bemablemtom securemcapitalmfro
mmthempublic.mThemreportm bymamfirmmofmcertifiedmpublicmaccountantsmaddsm credibilitymtomthemfinancialmstat
ementsm preparedmbymthemcorporation.m Whenmam smallmfamily-
ownedmenterprisemelectsm tomhavemanmaudit,mthempurposemusuallymismtomusemthemauditors'mreportmtomsupportm
anmapplicationm formambankmloan.
, 1-5 Amreportm bymanmindependentm publicmaccountantmconcerningmthemfairnessm ofmam company'sm financialmstatem
entsmismcommonlymrequiredminmthemfollowingmsituations:
(1) Applicationmform am bankmloan.
(2) Establishingmcreditm form purchasemofm merchandise,mequipment,mormotherm assets.
(3) Reportingmoperatingmresults,m financialmposition,m andmcashmflowsm tomabsenteemownersm (stockhold
ersmormpartners).
(4) Issuancemofm securitiesm bymamcorporation.
(5) Annualmfinancialmstatementsm bymam corporationmwithmsecuritiesm listedmonmam stockmexchangemorm tr
adedmovermthemcounter.
(6) Salemofm anmongoingmbusiness.
(7) Terminationmofm am partnership.
1-6 Tomaddmcredibilitymtomfinancialmstatementsm ismtomincreasemthemlikelihoodmthatm theymhavembeenmpreparedmfo
llowingmthemappropriatemcriteria,musuallymgenerallymacceptedmaccountingmprinciples.m Asm such,manmincreas
eminmcredibilitymresultsm inmfinancialmstatementsmthatm canmbembelievedmandmreliedmuponmbymthirdmparties.
1-7 Businessm riskmism themriskmthatm theminvestmentm willmbemimpairedmbecausemam companyminvestedminmism una
blemtommeetmitsmfinancialmobligationsmduemtomeconomicmconditionsmormpoormmanagementmdecisions.mInfor
mationmriskmismthemriskmthatmtheminformationmusedmtomassessmbusinessmriskmismnotmaccurate.mAuditorsmc
anmdirectlymreduceminformationmrisk,mbutmhavemonlymlimitedmeffectmonmbusinessmrisk.
1-8 Atmthembeginningmofmthemcentury,mthemprincipalmobjectivemofmauditingmwasm thempreventionmandmdetectionm
ofmfraud.mAuditmworkmcenteredmonmthembalancemsheet,mbecausemthemincomemstatementmwasm regardedmasmhi
ghlymconfidentialmandmnotm form publicmdisclosure.m Today,m themprincipalmobjectivemofm auditingmism tomformm
anmopinionmonmthemfairnessmofmfinancialmstatementsm andmtheirmconformitymwithmgenerallymacceptedmaccou
ntingmprinciples.m Butm themprofessionalmstandardsm alsomrequiremthatm anmauditm bemdesignedmtomprovidemreas
onablemassurancemofm detectingmmaterialmmisstatements,mduemtomerrorsm orm fraud.m Particularm emphasism ism p
lacedmonmthemincomemstatementm whichmism ofmgreatm importancemtominvestors.m Auditingmtodaymalsomhasm the
mobjectivesm ofmmeetingm themrequirementsm ofm themSecuritiesm andm ExchangemCommissionm (SEC)m andm themP
ublicmCompanymAccountingmOversightmBoardmformpublicmcompanies.
1-9 Themstatementm ism incorrect.mThemincreasingmintegratedmdatabasesm ofm today,malongmwithmavailablema
uditmproceduresmmakemauditedmentirempopulationsmampossibilityminmmanymsituations.
1-10 Anmoperationalmauditm attemptsm tommeasuremthemeffectivenessm andmefficiencymofmamspecificmunitm ofmanm
organization.m Itminvolvesm moremsubjectivemjudgmentsmthanmamcompliancemauditmormanmauditm ofmfinanc
ialmstatementsm becausemthemcriteriam ofm effectivenessm andmefficiencymofmdepartmentalmperformancemare
mnotm asmclearlymestablishedmasm aremmanymlawsm andmregulationsm orm generallymacceptedmaccountingmprin
ciples.
Themreportm preparedmafterm completionmofm anmoperationalmauditm ism usuallymdirectedmtommanagem
entmofmthemorganizationminmwhichmthemauditmworkmwasmdone.
1-11 Amcompliancemauditmismanmauditmtomdeterminemwhethermfinancialmreportsmormothermassertionsmarem inmcom
pliancemwithmestablishedmcriteria.m Themnecessarymingredientsm aremverifiablemdatam andmthemexistencemofmst
andardsm establishedmbymanmauthoritativembody.m Anmoperationalmaudit,monmthemotherm hand,mism am reviewmo
fm amdepartmentm ormothermunitm ofmambusinessm ormgovernmentalmorganizationmtommeasuremthemeffectiveness
m andmefficiencymofm operations.m Internalm auditorsm oftenm performmoperationalmauditsm asm dom auditorsm empl
oyedmbymthemGovernmentmAccountabilitymOfficem(GAO)mofmthemfederalmgovernment.
1-12 Internalmauditorsm mustm bemindependentmofmthemdepartmentm headsm andmothermlinemexecutivesmwhosemworkm
theymreview.mHowever,minternalmauditorsmaremnotmindependentminmthemsamemsensemasmampublicmaccountingm
