Principles of Auditing and Other Assurance Services, 23rd Edition | Ray Whittington & Kurt Pany | Complete Solution Manual (Chapters 1–21)

SOLUTION MANUAL FOR
Principles Of Auditing And Other Assurance Services

23rd Edition By Ray Whittington Kurt
ALL Chapters (1 - 21)

, • Table of Contents hd hd




Chapter 1: The Role of the Public Accountant in the AmericanEconomy
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Chapter 2: Professional Standards
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Chapter 3: Professional Ethics
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Chapter 4: Legal Liability of CPAs
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Chapter 5: Audit Evidence and Documentation
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Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding
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Chapter 7: Internal Control
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Chapter 8: Consideration of Internal Control in an InformationTechnology Environment
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Chapter 9: Audit Sampling
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Chapter 10: Cash and Financial Investments
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Chapter 11: Accounts Receivable, Notes Receivable, andRevenue
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Chapter 12: Inventories and Cost of Goods Sold
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Chapter 13: Property, Plant, and Equipment: Depreciation andDepletion
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Chapter 14: Accounts Payable and Other Liabilities
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Chapter 15: Debt and Equity Capital
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Chapter 16: Auditing Operations and Completing the Audit
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Chapter 17: Auditors’ Reports
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Chapter 18: Integrated Audits of Public Companies
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Chapter 19: Additional Assurance Services: Historical FinancialInformation
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Chapter 20: Additional Assurance Services: Other Information
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Chapter 21: Internal, Operational, and Compliance Auditing
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,CHAPTER 1 h d




The Role of the Publi hd hd hd hd




c Accountant in theh d h d h d




American Economy h d




Review Questions
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1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously issued fi
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nancial statements as a result of accounting irregularities and fraud. Especially responsible werethe very vi
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sible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the largest co
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mpanies in American history to do so. The extent of the accounting irregularities and fraud being investiga
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ted and disclosed brought into question the effectiveness of financial statement audits. In addition, the crim
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inal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on charges of destroying
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documents related to the Enron case brought into question the ethics standards of the profession.
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1-2 Assurance services are professional services that enhance the quality of information, or its context, for de
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cision-
making. The two types are: (a) those that increase the reliability of information and (b) those that involve
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putting information in a form or context that facilitates decision-making.
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1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall assertion,m
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ade by management, most frequently is that the financial statements follow generally accepted accounting p
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rinciples.

1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchange a
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nd by the rules of the Securities and Exchange Commission to provide an audit report with theannual finan
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cial statements furnished to its stockholders. It also is required to engage the auditors to provide an opinion
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on its internal control. Apart from legal requirements, however, a large listed corporation recognizes that it
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must maintain investor confidence in the reliability of its financial statements and internal control over fina
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ncial reporting if it is to continue to be able to secure capital from the public. The report by a firm of certifi
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ed public accountants adds credibility to the financial statements prepared by the corporation. When a sma
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ll family-
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owned enterprise elects to have an audit, the purpose usually is to use the auditors' report to support an appli
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cation for a bank loan. hd hd hd hd

, 1-5 A report by an independent public accountant concerning the fairness of a company's financial statementsis
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commonly required in the following situations:
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(1) Application for a bank loan. hd hd hd hd




(2) Establishing credit for purchase of merchandise, equipment, or other assets. hd hd hd hd hd hd hd hd hd




(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholderso
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r partners).
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(4) Issuance of securities by a corporation. hd hd hd hd hd




(5) Annual financial statements by a corporation with securities listed on a stock exchange or tradedo
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ver the counter. hd hd




(6) Sale of an ongoing business. hd hd hd hd




(7) Termination of a partnership. hd hd hd




1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared followin
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g the appropriate criteria, usually generally accepted accounting principles. As such, an increasein credibili
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ty results in financial statements that can be believed and relied upon by third parties.
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1-7 Business risk is the risk that the investment will be impaired because a company invested in is unable tom
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eet its financial obligations due to economic conditions or poor management decisions. Information risk is
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the risk that the information used to assess business risk is not accurate. Auditors can directly reduce info
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rmation risk, but have only limited effect on business risk.
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1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection of fraud
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. Audit work centered on the balance sheet, because the income statement was regarded as highly confidenti
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al and not for public disclosure. Today, the principal objective of auditing is to form an opinion on the fai
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rness of financial statements and their conformity with generally accepted accounting principles. But the pr
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ofessional standards also require that an audit be designed to provide reasonable assurance of detecting ma
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terial misstatements, due to errors or fraud. Particular emphasis is placed on the income statement which
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is of great importance to investors. Auditing today also has the objectives ofmeeting the requirements of th
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e Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board for p
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ublic companies. hd




1-9 The statement is incorrect. The increasing integrated databases of today, along with available auditp
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rocedures make audited entire populations a possibility in many situations. hd hd hd hd hd hd hd hd hd




1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an organi
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zation. It involves more subjective judgments than a compliance audit or an audit of financial statement
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s because the criteria of effectiveness and efficiency of departmental performance are not asclearly esta
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blished as are many laws and regulations or generally accepted accounting principles.
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The report prepared after completion of an operational audit is usually directed to managementof
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the organization in which the audit work was done.
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1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in compliance
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with established criteria. The necessary ingredients are verifiable data and the existence of standards esta
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blished by an authoritative body. An operational audit, on the other hand, is a review of adepartment or ot
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her unit of a business or governmental organization to measure the effectiveness and efficiency of operati
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ons. Internal auditors often perform operational audits as do auditors employed by the Government Acco
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untability Office (GAO) of the federal government. hd hd hd hd hd hd




1-12 Internal auditors must be independent of the department heads and other line executives whose work theyre
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view. However, internal auditors are not independent in the same sense as a public accounting firm.
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