SOLUTION MANUAL FOR
x x
Principles Of Auditing And Other Assurance Services
x x x x x x x x
23rd Edition By Ray Whittington Kurt
x x x x x x
ALL Chapters (1 - 21)
x x x x
, Table of Contents x x
Chapter 1: The Role of the Public Accountant in the AmericanEconomy
x x x x x x x x x x
Chapter 2: Professional Standards
x x x
Chapter 3: Professional Ethics
x x x
Chapter 4: Legal Liability of CPAs
x x x x x
Chapter 5: Audit Evidence and Documentation
x x x x x
Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding
x x x x x x x x x
Chapter 7: Internal Control
x x x
Chapter 8: Consideration of Internal Control in an InformationTechnology Environment
x x x x x x x x x
Chapter 9: Audit Sampling
x x x
Chapter 10: Cash and Financial Investments
x x x x x
Chapter 11: Accounts Receivable, Notes Receivable, andRevenue
x x x x x x
Chapter 12: Inventories and Cost of Goods Sold
x x x x x x x
Chapter 13: Property, Plant, and Equipment: Depreciation andDepletion
x x x x x x x
Chapter 14: Accounts Payable and Other Liabilities
x x x x x x
Chapter 15: Debt and Equity Capital
x x x x x
Chapter 16: Auditing Operations and Completing the Audit
x x x x x x x
Chapter 17: Auditors’ Reports
x x x
Chapter 18: Integrated Audits of Public Companies
x x x x x x
Chapter 19: Additional Assurance Services: Historical FinancialInformation
x x x x x x
Chapter 20: Additional Assurance Services: Other Information
x x x x x x
Chapter 21: Internal, Operational, and Compliance Auditing
x x x x x x
,CHAPTER 1 x
The Role of the Publi x x x x
c Accountant in the
x x x
American Economy x
Review Questions
x
1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously issued fi
x x x x x x x x x x x x x x x x
nancial statements as a result of accounting irregularities and fraud. Especially responsible werethe very vi
x x x x x x x x x x x x x x x
sible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the largest co
x x x x x x x x x x x x x x x
mpanies in American history to do so. The extent of the accounting irregularities and fraud being investigat
x x x x x x x x x x x x x x x x
ed and disclosed brought into question the effectiveness of financial statement audits. In addition, the crimi
x x x x x x x x x x x x x x x
nal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on charges of destroying d
x x x x x x x x x x x x x x x x x x
ocuments related to the Enron case brought into question the ethics standards of the profession.
x x x x x x x x x x x x x x
1-2 Assurance services are professional services that enhance the quality of information, or its context, for de
x x x x x x x x x x x x x x x
cision-
making. The two types are: (a) those that increase the reliability of information and (b) those that involve
x x x x x x x x x x x x x x x x x x
putting information in a form or context that facilitates decision-making.
x x x x x x x x x
1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall assertion,ma
x x x x x x x x x x x x x x x x x
de by management, most frequently is that the financial statements follow generally accepted accounting pr
x x x x x x x x x x x x x x
inciples.
1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchange a
x x x x x x x x x x x x x x x x x x x
nd by the rules of the Securities and Exchange Commission to provide an audit report with theannual financ
x x x x x x x x x x x x x x x x x x
ial statements furnished to its stockholders. It also is required to engage the auditors to provide an opinion o
x x x x x x x x x x x x x x x x x x
n its internal control. Apart from legal requirements, however, a large listed corporation recognizes that it
x x x x x x x x x x x x x x x x
must maintain investor confidence in the reliability of its financial statements and internal control over finan
x x x x x x x x x x x x x x x
cial reporting if it is to continue to be able to secure capital from the public. The report by a firm of certified
x x x x x x x x x x x x x x x x x x x x x x x
public accountants adds credibility to the financial statements prepared by the corporation. When a small fa
x x x x x x x x x x x x x x x
mily-
owned enterprise elects to have an audit, the purpose usually is to use the auditors' report to support an appli
x x x x x x x x x x x x x x x x x x x
cation for a bank loan. x x x x
, 1-5 A report by an independent public accountant concerning the fairness of a company's financial statementsis
x x x x x x x x x x x x x x x x
commonly required in the following situations: x x x x x
(1) Application for a bank loan. x x x x
(2) Establishing credit for purchase of merchandise, equipment, or other assets.x x x x x x x x x
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholderso
x x x x x x x x x x x x
r partners).
x
(4) Issuance of securities by a corporation. x x x x x
(5) Annual financial statements by a corporation with securities listed on a stock exchange or tradedo
x x x x x x x x x x x x x x x
ver the counter. x x
(6) Sale of an ongoing business.
x x x x
(7) Termination of a partnership. x x x
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared followin
x x x x x x x x x x x x x x x x
g the appropriate criteria, usually generally accepted accounting principles. As such, an increasein credibili
x x x x x x x x x x x x x x
ty results in financial statements that can be believed and relied upon by third parties.
x x x x x x x x x x x x x x
1-7 Business risk is the risk that the investment will be impaired because a company invested in is unable tome
x x x x x x x x x x x x x x x x x x x
et its financial obligations due to economic conditions or poor management decisions. Information risk is t
x x x x x x x x x x x x x x x
he risk that the information used to assess business risk is not accurate. Auditors can directly reduce infor
x x x x x x x x x x x x x x x x x
mation risk, but have only limited effect on business risk.
x x x x x x x x x
1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection of fraud
x x x x x x x x x x x x x x x x x
. Audit work centered on the balance sheet, because the income statement was regarded as highly confidenti
x x x x x x x x x x x x x x x x
al and not for public disclosure. Today, the principal objective of auditing is to form an opinion on the fairn
x x x x x x x x x x x x x x x x x x x
ess of financial statements and their conformity with generally accepted accounting principles. But the prof
x x x x x x x x x x x x x x
essional standards also require that an audit be designed to provide reasonable assurance of detecting materi
x x x x x x x x x x x x x x x
al misstatements, due to errors or fraud. Particular emphasis is placed on the income statement which is of
x x x x x x x x x x x x x x x x x x
great importance to investors. Auditing today also has the objectives ofmeeting the requirements of the Sec
x x x x x x x x x x x x x x x x
urities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board for public
x x x x x x x x x x x x x
xcompanies.
1-9 The statement is incorrect. The increasing integrated databases of today, along with available auditpr
x x x x x x x x x x x x x x
ocedures make audited entire populations a possibility in many situations.
x x x x x x x x x
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an organiz
x x x x x x x x x x x x x x x x
ation. It involves more subjective judgments than a compliance audit or an audit of financial statements
x x x x x x x x x x x x x x x x
because the criteria of effectiveness and efficiency of departmental performance are not asclearly establ
x x x x x x x x x x x x x x
ished as are many laws and regulations or generally accepted accounting principles.
x x x x x x x x x x x
The report prepared after completion of an operational audit is usually directed to managementof t
x x x x x x x x x x x x x x x
he organization in which the audit work was done.
x x x x x x x x
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in compliance
x x x x x x x x x x x x x x x x x
with established criteria. The necessary ingredients are verifiable data and the existence of standards estab
x x x x x x x x x x x x x x
lished by an authoritative body. An operational audit, on the other hand, is a review of adepartment or othe
x x x x x x x x x x x x x x x x x x x
r unit of a business or governmental organization to measure the effectiveness and efficiency of operations
x x x x x x x x x x x x x x x
. Internal auditors often perform operational audits as do auditors employed by the Government Account
x x x x x x x x x x x x x x
ability Office (GAO) of the federal government.
x x x x x x
1-12 Internal auditors must be independent of the department heads and other line executives whose work theyre
x x x x x x x x x x x x x x x x
view. However, internal auditors are not independent in the same sense as a public accounting firm.
x x x x x x x x x x x x x x x
x x
Principles Of Auditing And Other Assurance Services
x x x x x x x x
23rd Edition By Ray Whittington Kurt
x x x x x x
ALL Chapters (1 - 21)
x x x x
, Table of Contents x x
Chapter 1: The Role of the Public Accountant in the AmericanEconomy
x x x x x x x x x x
Chapter 2: Professional Standards
x x x
Chapter 3: Professional Ethics
x x x
Chapter 4: Legal Liability of CPAs
x x x x x
Chapter 5: Audit Evidence and Documentation
x x x x x
Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding
x x x x x x x x x
Chapter 7: Internal Control
x x x
Chapter 8: Consideration of Internal Control in an InformationTechnology Environment
x x x x x x x x x
Chapter 9: Audit Sampling
x x x
Chapter 10: Cash and Financial Investments
x x x x x
Chapter 11: Accounts Receivable, Notes Receivable, andRevenue
x x x x x x
Chapter 12: Inventories and Cost of Goods Sold
x x x x x x x
Chapter 13: Property, Plant, and Equipment: Depreciation andDepletion
x x x x x x x
Chapter 14: Accounts Payable and Other Liabilities
x x x x x x
Chapter 15: Debt and Equity Capital
x x x x x
Chapter 16: Auditing Operations and Completing the Audit
x x x x x x x
Chapter 17: Auditors’ Reports
x x x
Chapter 18: Integrated Audits of Public Companies
x x x x x x
Chapter 19: Additional Assurance Services: Historical FinancialInformation
x x x x x x
Chapter 20: Additional Assurance Services: Other Information
x x x x x x
Chapter 21: Internal, Operational, and Compliance Auditing
x x x x x x
,CHAPTER 1 x
The Role of the Publi x x x x
c Accountant in the
x x x
American Economy x
Review Questions
x
1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously issued fi
x x x x x x x x x x x x x x x x
nancial statements as a result of accounting irregularities and fraud. Especially responsible werethe very vi
x x x x x x x x x x x x x x x
sible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the largest co
x x x x x x x x x x x x x x x
mpanies in American history to do so. The extent of the accounting irregularities and fraud being investigat
x x x x x x x x x x x x x x x x
ed and disclosed brought into question the effectiveness of financial statement audits. In addition, the crimi
x x x x x x x x x x x x x x x
nal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on charges of destroying d
x x x x x x x x x x x x x x x x x x
ocuments related to the Enron case brought into question the ethics standards of the profession.
x x x x x x x x x x x x x x
1-2 Assurance services are professional services that enhance the quality of information, or its context, for de
x x x x x x x x x x x x x x x
cision-
making. The two types are: (a) those that increase the reliability of information and (b) those that involve
x x x x x x x x x x x x x x x x x x
putting information in a form or context that facilitates decision-making.
x x x x x x x x x
1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall assertion,ma
x x x x x x x x x x x x x x x x x
de by management, most frequently is that the financial statements follow generally accepted accounting pr
x x x x x x x x x x x x x x
inciples.
1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchange a
x x x x x x x x x x x x x x x x x x x
nd by the rules of the Securities and Exchange Commission to provide an audit report with theannual financ
x x x x x x x x x x x x x x x x x x
ial statements furnished to its stockholders. It also is required to engage the auditors to provide an opinion o
x x x x x x x x x x x x x x x x x x
n its internal control. Apart from legal requirements, however, a large listed corporation recognizes that it
x x x x x x x x x x x x x x x x
must maintain investor confidence in the reliability of its financial statements and internal control over finan
x x x x x x x x x x x x x x x
cial reporting if it is to continue to be able to secure capital from the public. The report by a firm of certified
x x x x x x x x x x x x x x x x x x x x x x x
public accountants adds credibility to the financial statements prepared by the corporation. When a small fa
x x x x x x x x x x x x x x x
mily-
owned enterprise elects to have an audit, the purpose usually is to use the auditors' report to support an appli
x x x x x x x x x x x x x x x x x x x
cation for a bank loan. x x x x
, 1-5 A report by an independent public accountant concerning the fairness of a company's financial statementsis
x x x x x x x x x x x x x x x x
commonly required in the following situations: x x x x x
(1) Application for a bank loan. x x x x
(2) Establishing credit for purchase of merchandise, equipment, or other assets.x x x x x x x x x
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholderso
x x x x x x x x x x x x
r partners).
x
(4) Issuance of securities by a corporation. x x x x x
(5) Annual financial statements by a corporation with securities listed on a stock exchange or tradedo
x x x x x x x x x x x x x x x
ver the counter. x x
(6) Sale of an ongoing business.
x x x x
(7) Termination of a partnership. x x x
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared followin
x x x x x x x x x x x x x x x x
g the appropriate criteria, usually generally accepted accounting principles. As such, an increasein credibili
x x x x x x x x x x x x x x
ty results in financial statements that can be believed and relied upon by third parties.
x x x x x x x x x x x x x x
1-7 Business risk is the risk that the investment will be impaired because a company invested in is unable tome
x x x x x x x x x x x x x x x x x x x
et its financial obligations due to economic conditions or poor management decisions. Information risk is t
x x x x x x x x x x x x x x x
he risk that the information used to assess business risk is not accurate. Auditors can directly reduce infor
x x x x x x x x x x x x x x x x x
mation risk, but have only limited effect on business risk.
x x x x x x x x x
1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection of fraud
x x x x x x x x x x x x x x x x x
. Audit work centered on the balance sheet, because the income statement was regarded as highly confidenti
x x x x x x x x x x x x x x x x
al and not for public disclosure. Today, the principal objective of auditing is to form an opinion on the fairn
x x x x x x x x x x x x x x x x x x x
ess of financial statements and their conformity with generally accepted accounting principles. But the prof
x x x x x x x x x x x x x x
essional standards also require that an audit be designed to provide reasonable assurance of detecting materi
x x x x x x x x x x x x x x x
al misstatements, due to errors or fraud. Particular emphasis is placed on the income statement which is of
x x x x x x x x x x x x x x x x x x
great importance to investors. Auditing today also has the objectives ofmeeting the requirements of the Sec
x x x x x x x x x x x x x x x x
urities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board for public
x x x x x x x x x x x x x
xcompanies.
1-9 The statement is incorrect. The increasing integrated databases of today, along with available auditpr
x x x x x x x x x x x x x x
ocedures make audited entire populations a possibility in many situations.
x x x x x x x x x
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an organiz
x x x x x x x x x x x x x x x x
ation. It involves more subjective judgments than a compliance audit or an audit of financial statements
x x x x x x x x x x x x x x x x
because the criteria of effectiveness and efficiency of departmental performance are not asclearly establ
x x x x x x x x x x x x x x
ished as are many laws and regulations or generally accepted accounting principles.
x x x x x x x x x x x
The report prepared after completion of an operational audit is usually directed to managementof t
x x x x x x x x x x x x x x x
he organization in which the audit work was done.
x x x x x x x x
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in compliance
x x x x x x x x x x x x x x x x x
with established criteria. The necessary ingredients are verifiable data and the existence of standards estab
x x x x x x x x x x x x x x
lished by an authoritative body. An operational audit, on the other hand, is a review of adepartment or othe
x x x x x x x x x x x x x x x x x x x
r unit of a business or governmental organization to measure the effectiveness and efficiency of operations
x x x x x x x x x x x x x x x
. Internal auditors often perform operational audits as do auditors employed by the Government Account
x x x x x x x x x x x x x x
ability Office (GAO) of the federal government.
x x x x x x
1-12 Internal auditors must be independent of the department heads and other line executives whose work theyre
x x x x x x x x x x x x x x x x
view. However, internal auditors are not independent in the same sense as a public accounting firm.
x x x x x x x x x x x x x x x
