SOLUTION MANUAL
Principles Of Auditing and Other Assurance Services
23rd Edition by Whittington Kurt
ALL Chapters 1 – 21 covered
, • Table of Contents
v v
Chapterv1:vThevRolevofvthevPublicvAccountantvinvthevAmericanEconomy
Chapterv2:vProfessionalvStandards
Chapterv3:vProfessionalvEthics
Chapterv4:vLegalvLiabilityvofvCPAs
Chapterv5:vAuditvEvidencevandvDocumentation
Chapterv6:vAuditvPlanning,vUnderstandingvthevClient,vAssessingRisks,vandvResponding
Chapterv7:vInternalvControl
Chapterv8:vConsiderationvofvInternalvControlvinvanvInformationTechnologyvEnvironment
Chapterv9:vAuditvSampling
Chapterv10:vCashvandvFinancialvInvestments
Chapterv11:vAccountsvReceivable,vNotesvReceivable,vandRevenue
Chapterv12:vInventoriesvandvCostvofvGoodsvSold
Chapterv13:vProperty,vPlant,vandvEquipment:vDepreciationvandDepletion
Chapterv14:vAccountsvPayablevandvOthervLiabilities
Chapterv15:vDebtvandvEquityvCapital
Chapterv16:vAuditingvOperationsvandvCompletingvthevAudit
Chapterv17:vAuditors’vReports
Chapterv18:vIntegratedvAuditsvofvPublicvCompanies
Chapterv19:vAdditionalvAssurancevServices:vHistoricalvFinancialInformation
Chapterv20:vAdditionalvAssurancevServices:vOthervInformation
Chapterv21:vInternal,vOperational,vandvCompliancevAuditing
,CHAPTER 1 v
The Role of the Publi
v v v v
c Accountant in the
v v v
American Economy v
Review vQuestions
1-1 Thev―crisisv ofvcredibility‖vlargelyvarosevfromvthevnumbervofvcompaniesv thatvrestatedvtheirvpreviouslyvissued
vfinancialv statementsv asv av resultv ofv accountingv irregularitiesv andvfraud.v Especiallyvresponsiblevwerevthevver
yvvisiblevEnronvandvWorldComvfraudv cases.v Bothvcompaniesv filedv forv bankruptcyvandvconstitutedvthevlarg
estv companiesv invAmericanv historyvtovdovso.v Thevextentv ofv thevaccountingvirregularitiesv andvfraudvbeingvin
vestigatedvandv disclosedvbroughtv intovquestionvtheveffectivenessvofvfinancialvstatementv audits.v Invaddition,v
thevcriminalvconvictionvofv Arthurv Andersen,vLLP,vonevofv thevthenvBigv5v accountingvfirms,vonvchargesv ofvd
estroyingvdocumentsv relatedvtov thevEnronvcasevbroughtv intovquestionvthevethicsv standardsv ofvthevprofessio
n.
1-2 Assurancevservicesvarevprofessionalvservicesvthatvenhancevthevqualityvofvinformation,vorvitsvcontext,vforv
decision-
making.vThevtwovtypesvare:v(a)vthosevthatvincreasevthevreliabilityvofvinformationvandv(b)vthosevthatvinvol
ve vputtingvinformationvinvavformvorvcontextvthatvfacilitatesvdecision-making.
1-3 Avfinancialv statementv auditv is,v byvfar,v thevmostv commonv typevofvattestv engagement.v Thevoverallv assertion,v
madevbyvmanagement,vmostvfrequentlyvisvthatvthevfinancialvstatementsvfollowvgenerallyvacceptedvaccounti
ngvprinciples.
1-4 Avlargevcorporationvwithvsecuritiesv listedvonvav stockvexchangevisvrequiredvbyvthevrulesv ofv thevstockvexchang
evandv byvthevrulesv ofv thevSecuritiesv andvExchangevCommissionv tov providevanv auditv reportv withv thevannualvfi
nancialvstatementsv furnishedvtovitsv stockholders.v Itv alsovisvrequiredvtovengagevthevauditorsv tovprovidevanvopi
nionvonvitsvinternalvcontrol.v Apartvfromvlegalvrequirements,vhowever,vavlargev listedvcorporationvrecognize
sv thatv itv mustv maintainvinvestorvconfidencevinv thevreliabilityvofv itsvfinancialvstatementsv andv internalvcontrolv
overv financialvreportingv ifv itv isv tovcontinuev tovbevablev tov securevcapitalvfromvthevpublic.v Thevreportv byvavfir
mvofvcertifiedvpublicvaccountantsvaddsvcredibilityvtovthevfinancialvstatementsv preparedv byvthevcorporation.v
Whenv av smallvfamily-
ownedventerprisevelectsv tov havevanv audit,vthevpurposevusuallyvisv tovusevthevauditors'vreportv tovsupportvanvapp
licationv forvav bankvloan.
, 1-5 Avreportv byvanv independentv publicvaccountantv concerningvthevfairnessv ofvavcompany'sv financialvstatementsvi
svcommonlyvrequiredvinvthevfollowingvsituations:
(1) Applicationvforv avbankv loan.
(2) Establishingv creditv forv purchasevofv merchandise,vequipment,v orv otherv assets.
(3) Reportingv operatingvresults,vfinancialv position,vandv cashv flowsv tov absenteev ownersv (stockholdersv
or vpartners).
(4) Issuancevofv securitiesv byvav corporation.
(5) Annualvfinancialv statementsv byvavcorporationvwithv securitiesv listedvonv av stockvexchangevorv tradedv
overvthevcounter.
(6) Salevofvanvongoingvbusiness.
(7) Terminationv ofv av partnership.
1-6 Tovaddvcredibilityvtovfinancialvstatementsv isv tovincreasevthevlikelihoodvthatv theyvhavevbeenvpreparedvfollowi
ngvthevappropriatevcriteria,v usuallyvgenerallyvacceptedvaccountingv principles.v Asv such,v anv increasevinvcredi
bilityvresultsv invfinancialvstatementsv thatvcanvbevbelievedvandvreliedvuponvbyvthirdvparties.
1-7 Businessv riskv isv thevriskv thatv thevinvestmentv willv bevimpairedvbecausevav companyvinvestedvinv isv unablevtov
meetv itsv financialvobligationsv duevtoveconomicvconditionsvorv poorv managementv decisions.v Informationvris
kvisvthevriskvthatvthevinformationvusedvtovassessvbusinessvriskvisvnotvaccurate.vAuditorsvcanv directlyvredu
cevinformationvrisk,vbutvhavevonlyvlimitedveffectvonvbusinessv risk.
1-8 Atv thevbeginningvofv thevcentury,vthevprincipalvobjectivevofvauditingvwasv thevpreventionvandvdetectionvofvfra
ud.v Auditv workvcenteredvonvthevbalancevsheet,vbecausevthevincomevstatementv wasvregardedvasv highlyvconfi
dentialv andv notv forv publicv disclosure.v Today,v thev principalv objectivev ofv auditingv isv tovformvanvopinionvonvt
hevfairnessv ofvfinancialvstatementsvandvtheirvconformityvwithvgenerallyvacceptedvaccountingvprinciples.v But
v thevprofessionalv standardsv alsov requirevthatv anvauditv bevdesignedv tovprovidevreasonablevassurance vofv detect
ingv materialv misstatements,v duev toverrorsv orv fraud.v Particularv emphasisv isv placedv onvthevincomevstatementv
whichvisv ofv greatv importancevtovinvestors.v Auditingvtodayvalsovhasv thevobjectivesv ofvmeetingvthevrequireme
ntsv ofv thevSecuritiesv andvExchangevCommissionv(SEC)v andvthevPublicvCompanyvAccountingvOversightv B
oardvforvpublicvcompanies.
1-9 Thevstatementv isv incorrect.vThevincreasingv integratedv databasesv ofv today,valongv withv availablevauditv
proceduresvmakevauditedventire vpopulationsvavpossibility vinvmanyvsituations.
1-10 Anvoperationalvauditv attemptsv tovmeasurevtheveffectivenessv andvefficiencyvofv av specificvunitv ofv anvorgan
ization.v Itv involvesv morevsubjectivevjudgmentsv thanvav compliancevauditv orvanvauditv ofv financialvstateme
ntsv becausevthevcriteriav ofveffectivenessv andv efficiencyvofvdepartmentalv performancevarevnotv asvclearlyv
establishedvasvarevmanyvlawsvandvregulationsv orv generallyvacceptedvaccountingvprinciples.
Thevreportv preparedv afterv completionv ofv anv operationalv auditv isv usuallyvdirectedv tov managementvof
vthevorganizationvinvwhichvthe vaudit vworkvwasvdone.
1-11 Avcompliancevauditv isv anvauditv tovdeterminevwhethervfinancialvreportsv orvothervassertionsvarev invcomplian
cevwithvestablishedvcriteria.v Thevnecessaryvingredientsv arevverifiablevdatavandvthevexistencevofvstandardsv e
stablishedv byvanv authoritativevbody.v Anv operationalvaudit,vonv thevotherv hand,v isv av reviewvofvavdepartmentv
orv otherv unitv ofvav businessv orv governmentalvorganizationvtovmeasurevtheveffectivenessv andvefficiencyvofv o
perations.v Internalvauditorsv oftenv performvoperationalvauditsv asv dovauditorsv employedvbyvthe vGovernmen
tvAccountabilityvOffice v(GAO)vofvthevfederalvgovernment.
1-12 Internalvauditorsv mustv bevindependentv ofv thevdepartmentv headsv andvotherv linevexecutivesv whosevworkvtheyvr
eview.v However,vinternalvauditorsv arevnotv independentv invthevsamevsensevasvav publicvaccountingvfirm.
Principles Of Auditing and Other Assurance Services
23rd Edition by Whittington Kurt
ALL Chapters 1 – 21 covered
, • Table of Contents
v v
Chapterv1:vThevRolevofvthevPublicvAccountantvinvthevAmericanEconomy
Chapterv2:vProfessionalvStandards
Chapterv3:vProfessionalvEthics
Chapterv4:vLegalvLiabilityvofvCPAs
Chapterv5:vAuditvEvidencevandvDocumentation
Chapterv6:vAuditvPlanning,vUnderstandingvthevClient,vAssessingRisks,vandvResponding
Chapterv7:vInternalvControl
Chapterv8:vConsiderationvofvInternalvControlvinvanvInformationTechnologyvEnvironment
Chapterv9:vAuditvSampling
Chapterv10:vCashvandvFinancialvInvestments
Chapterv11:vAccountsvReceivable,vNotesvReceivable,vandRevenue
Chapterv12:vInventoriesvandvCostvofvGoodsvSold
Chapterv13:vProperty,vPlant,vandvEquipment:vDepreciationvandDepletion
Chapterv14:vAccountsvPayablevandvOthervLiabilities
Chapterv15:vDebtvandvEquityvCapital
Chapterv16:vAuditingvOperationsvandvCompletingvthevAudit
Chapterv17:vAuditors’vReports
Chapterv18:vIntegratedvAuditsvofvPublicvCompanies
Chapterv19:vAdditionalvAssurancevServices:vHistoricalvFinancialInformation
Chapterv20:vAdditionalvAssurancevServices:vOthervInformation
Chapterv21:vInternal,vOperational,vandvCompliancevAuditing
,CHAPTER 1 v
The Role of the Publi
v v v v
c Accountant in the
v v v
American Economy v
Review vQuestions
1-1 Thev―crisisv ofvcredibility‖vlargelyvarosevfromvthevnumbervofvcompaniesv thatvrestatedvtheirvpreviouslyvissued
vfinancialv statementsv asv av resultv ofv accountingv irregularitiesv andvfraud.v Especiallyvresponsiblevwerevthevver
yvvisiblevEnronvandvWorldComvfraudv cases.v Bothvcompaniesv filedv forv bankruptcyvandvconstitutedvthevlarg
estv companiesv invAmericanv historyvtovdovso.v Thevextentv ofv thevaccountingvirregularitiesv andvfraudvbeingvin
vestigatedvandv disclosedvbroughtv intovquestionvtheveffectivenessvofvfinancialvstatementv audits.v Invaddition,v
thevcriminalvconvictionvofv Arthurv Andersen,vLLP,vonevofv thevthenvBigv5v accountingvfirms,vonvchargesv ofvd
estroyingvdocumentsv relatedvtov thevEnronvcasevbroughtv intovquestionvthevethicsv standardsv ofvthevprofessio
n.
1-2 Assurancevservicesvarevprofessionalvservicesvthatvenhancevthevqualityvofvinformation,vorvitsvcontext,vforv
decision-
making.vThevtwovtypesvare:v(a)vthosevthatvincreasevthevreliabilityvofvinformationvandv(b)vthosevthatvinvol
ve vputtingvinformationvinvavformvorvcontextvthatvfacilitatesvdecision-making.
1-3 Avfinancialv statementv auditv is,v byvfar,v thevmostv commonv typevofvattestv engagement.v Thevoverallv assertion,v
madevbyvmanagement,vmostvfrequentlyvisvthatvthevfinancialvstatementsvfollowvgenerallyvacceptedvaccounti
ngvprinciples.
1-4 Avlargevcorporationvwithvsecuritiesv listedvonvav stockvexchangevisvrequiredvbyvthevrulesv ofv thevstockvexchang
evandv byvthevrulesv ofv thevSecuritiesv andvExchangevCommissionv tov providevanv auditv reportv withv thevannualvfi
nancialvstatementsv furnishedvtovitsv stockholders.v Itv alsovisvrequiredvtovengagevthevauditorsv tovprovidevanvopi
nionvonvitsvinternalvcontrol.v Apartvfromvlegalvrequirements,vhowever,vavlargev listedvcorporationvrecognize
sv thatv itv mustv maintainvinvestorvconfidencevinv thevreliabilityvofv itsvfinancialvstatementsv andv internalvcontrolv
overv financialvreportingv ifv itv isv tovcontinuev tovbevablev tov securevcapitalvfromvthevpublic.v Thevreportv byvavfir
mvofvcertifiedvpublicvaccountantsvaddsvcredibilityvtovthevfinancialvstatementsv preparedv byvthevcorporation.v
Whenv av smallvfamily-
ownedventerprisevelectsv tov havevanv audit,vthevpurposevusuallyvisv tovusevthevauditors'vreportv tovsupportvanvapp
licationv forvav bankvloan.
, 1-5 Avreportv byvanv independentv publicvaccountantv concerningvthevfairnessv ofvavcompany'sv financialvstatementsvi
svcommonlyvrequiredvinvthevfollowingvsituations:
(1) Applicationvforv avbankv loan.
(2) Establishingv creditv forv purchasevofv merchandise,vequipment,v orv otherv assets.
(3) Reportingv operatingvresults,vfinancialv position,vandv cashv flowsv tov absenteev ownersv (stockholdersv
or vpartners).
(4) Issuancevofv securitiesv byvav corporation.
(5) Annualvfinancialv statementsv byvavcorporationvwithv securitiesv listedvonv av stockvexchangevorv tradedv
overvthevcounter.
(6) Salevofvanvongoingvbusiness.
(7) Terminationv ofv av partnership.
1-6 Tovaddvcredibilityvtovfinancialvstatementsv isv tovincreasevthevlikelihoodvthatv theyvhavevbeenvpreparedvfollowi
ngvthevappropriatevcriteria,v usuallyvgenerallyvacceptedvaccountingv principles.v Asv such,v anv increasevinvcredi
bilityvresultsv invfinancialvstatementsv thatvcanvbevbelievedvandvreliedvuponvbyvthirdvparties.
1-7 Businessv riskv isv thevriskv thatv thevinvestmentv willv bevimpairedvbecausevav companyvinvestedvinv isv unablevtov
meetv itsv financialvobligationsv duevtoveconomicvconditionsvorv poorv managementv decisions.v Informationvris
kvisvthevriskvthatvthevinformationvusedvtovassessvbusinessvriskvisvnotvaccurate.vAuditorsvcanv directlyvredu
cevinformationvrisk,vbutvhavevonlyvlimitedveffectvonvbusinessv risk.
1-8 Atv thevbeginningvofv thevcentury,vthevprincipalvobjectivevofvauditingvwasv thevpreventionvandvdetectionvofvfra
ud.v Auditv workvcenteredvonvthevbalancevsheet,vbecausevthevincomevstatementv wasvregardedvasv highlyvconfi
dentialv andv notv forv publicv disclosure.v Today,v thev principalv objectivev ofv auditingv isv tovformvanvopinionvonvt
hevfairnessv ofvfinancialvstatementsvandvtheirvconformityvwithvgenerallyvacceptedvaccountingvprinciples.v But
v thevprofessionalv standardsv alsov requirevthatv anvauditv bevdesignedv tovprovidevreasonablevassurance vofv detect
ingv materialv misstatements,v duev toverrorsv orv fraud.v Particularv emphasisv isv placedv onvthevincomevstatementv
whichvisv ofv greatv importancevtovinvestors.v Auditingvtodayvalsovhasv thevobjectivesv ofvmeetingvthevrequireme
ntsv ofv thevSecuritiesv andvExchangevCommissionv(SEC)v andvthevPublicvCompanyvAccountingvOversightv B
oardvforvpublicvcompanies.
1-9 Thevstatementv isv incorrect.vThevincreasingv integratedv databasesv ofv today,valongv withv availablevauditv
proceduresvmakevauditedventire vpopulationsvavpossibility vinvmanyvsituations.
1-10 Anvoperationalvauditv attemptsv tovmeasurevtheveffectivenessv andvefficiencyvofv av specificvunitv ofv anvorgan
ization.v Itv involvesv morevsubjectivevjudgmentsv thanvav compliancevauditv orvanvauditv ofv financialvstateme
ntsv becausevthevcriteriav ofveffectivenessv andv efficiencyvofvdepartmentalv performancevarevnotv asvclearlyv
establishedvasvarevmanyvlawsvandvregulationsv orv generallyvacceptedvaccountingvprinciples.
Thevreportv preparedv afterv completionv ofv anv operationalv auditv isv usuallyvdirectedv tov managementvof
vthevorganizationvinvwhichvthe vaudit vworkvwasvdone.
1-11 Avcompliancevauditv isv anvauditv tovdeterminevwhethervfinancialvreportsv orvothervassertionsvarev invcomplian
cevwithvestablishedvcriteria.v Thevnecessaryvingredientsv arevverifiablevdatavandvthevexistencevofvstandardsv e
stablishedv byvanv authoritativevbody.v Anv operationalvaudit,vonv thevotherv hand,v isv av reviewvofvavdepartmentv
orv otherv unitv ofvav businessv orv governmentalvorganizationvtovmeasurevtheveffectivenessv andvefficiencyvofv o
perations.v Internalvauditorsv oftenv performvoperationalvauditsv asv dovauditorsv employedvbyvthe vGovernmen
tvAccountabilityvOffice v(GAO)vofvthevfederalvgovernment.
1-12 Internalvauditorsv mustv bevindependentv ofv thevdepartmentv headsv andvotherv linevexecutivesv whosevworkvtheyvr
eview.v However,vinternalvauditorsv arevnotv independentv invthevsamevsensevasvav publicvaccountingvfirm.
