Solution Manual for Principles of Auditing and Other Assurance Services (23rd Edition) by Whittington & Pany

SOLUTION MANUAL FOR n n




Principles Of Auditing And Other Assurance Services
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23rd Edition By Ray Whittington Kurt
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ALL Chapters (1 - 21)
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, • Table of Contents n n




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 n




The Role of the n n n




n Public Accountant in the n n n




American Economy n




Review Questions
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1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously issued
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financial statements as a result of accounting irregularities and fraud. Especially responsible werethe very
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visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the largest
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companies in American history to do so. The extent of the accounting irregularities and fraud being
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investigated and disclosed brought into question the effectiveness of financial statement audits. In addition,
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the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on charges of
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destroying 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
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decision-making. The two types are: (a) those that increase the reliability of information and (b) those that
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involve 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,
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made by management, most frequently is that the financial statements follow generally accepted accounting
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principles.
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1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchange
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and by the rules of the Securities and Exchange Commission to provide an audit report with theannual
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financial statements furnished to its stockholders. It also is required to engage the auditors to provide an
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opinion on its internal control. Apart from legal requirements, however, a large listed corporation
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recognizes that it must maintain investor confidence in the reliability of its financial statements and internal
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control over financial reporting if it is to continue to be able to secure capital from the public. The report by a
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firm of certified public accountants adds credibility to the financial statements prepared by the corporation.
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nWhen a small family-owned enterprise elects to have an audit, the purpose usually is to use the auditors'
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report to support an application for a bank loan.
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, 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. n n n n




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




(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholdersor n n n n n n n n n n n n




partners).
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(4) Issuance of securities by a corporation. n n n n n




(5) Annual financial statements by a corporation with securities listed on a stock exchange or traded
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over the counter.
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(6) Sale of an ongoing business. n n n n




(7) Termination of a partnership. n n n




1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared following
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the appropriate criteria, usually generally accepted accounting principles. As such, an increasein credibility
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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 to
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meet 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
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information 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 confidential
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and not for public disclosure. Today, the principal objective of auditing is to form an opinion on the
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fairness of financial statements and their conformity with generally accepted accounting principles. But the
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professional standards also require that an audit be designed to provide reasonable assurance of detecting
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material misstatements, due to errors or fraud. Particular emphasis is placed on the income statement
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which is of great importance to investors. Auditing today also has the objectives ofmeeting the requirements
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of the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board
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for public companies.
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1-9 The statement is incorrect. The increasing integrated databases of today, along with available audit
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procedures make audited entire populations a possibility in many situations.
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1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an
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organization. It involves more subjective judgments than a compliance audit or an audit of financial
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statements because the criteria of effectiveness and efficiency of departmental performance are not as
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clearly established 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
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established by an authoritative body. An operational audit, on the other hand, is a review of adepartment or
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other unit of a business or governmental organization to measure the effectiveness and efficiency of
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operations. Internal auditors often perform operational audits as do auditors employed by the Government
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Accountability Office (GAO) of the federal government.
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1-12 Internal auditors must be independent of the department heads and other line executives whose work they
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review. However, internal auditors are not independent in the same sense as a public accounting firm.
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