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Contemporary Auditing – 11th Edition by Michael C. Knapp | Complete Solutions Manual

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This document provides the complete Solutions Manual for Contemporary Auditing (11th Edition) by Michael C. Knapp, covering all chapters of the textbook. It includes detailed, step-by-step solutions and explanations for end-of-chapter questions, case studies, and professional judgment scenarios. Topics include audit planning, internal control evaluation, audit evidence, ethical responsibilities, legal liability, fraud examination, and real-world auditing cases. This comprehensive solutions manual is ideal for coursework support and instructor use in auditing and assurance courses.

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Case #z1.3 # z # z Just #zfor #zFeet,
#z Inc. # z # z 1




CASE 1.1 #z




ENRON CORPORATION
#z




Synopsis



Arthur Edward Andersen built his firm, Arthur Andersen & Company, into one of the largest and
most respected accounting firms in the world through his reputation for honesty and integrity. “Think
straight, talk straight” was his motto and he insisted that his clients adopt that same attitude when
preparing and issuing their periodic financial statements. Arthur Andersen’s auditing philosophy was not
rule-based, that is, he did not stress the importance of clients complying with specific accounting rules
because in the early days of the U.S. accounting profession there were few formal rules and guidelines for
accountants and auditors to follow. Instead, Andersen invoked a substance-over-form approach to
auditing and accounting issues. He passionately believed that the primary role of the auditor was to
ensure that clients reported fully and honestly to the public, regardless of the consequences for those
clients.

Ironically, Arthur Andersen & Co.’s dramatic fall from prominence resulted from its association
with a client known for aggressive and innovative uses of “accounting gimmicks” to window dress its
financial statements. Enron Corporation, Andersen’s second largest client, was involved in large,
complex transactions with hundreds of special purpose entities (SPEs) that it used to obscure its true
financial condition and operating results. Among other uses, these SPEs allowed Enron to download
underperforming assets from its balance sheet and to conceal large operating losses. During 2001, a
series of circumstances, including a sharp decline in the price of Enron’s stock, forced the company to
assume control and ownership of many of its troubled SPEs. As a result, Enron was forced to report a

, Case #z1.3 # z # z Just #zfor #zFeet,
#z Inc. # z # z 2



large # z loss # z in # z October # z 2001, # z restate # z its # z earnings # z for # z the # z previous # z five #z years, # z and,
# z ultimately, # z file # z for #zbankruptcy #zin #zDecember #z2001.



During #zthe #zearly #zmonths #zof #z2002, #zAndersen #zbecame #zthe #zfocal #zpoint #zof #zattention #zamong
#zlaw #zenforcement #zauthorities #zsearching #zfor #zthe #zparties #zresponsible #zfor #zEnron’s #zsudden #zcollapse.
#zThe #zaccusations #zdirected #zat #zAndersen #zcentered #zon #zthree #zkey #zissues. # z The #zfirst #zissue #zhad #zto #zdo

#zwith #zthe #zscope #zof #zprofessional #zservices #zthat #zAndersen #zprovided #zto #zEnron. # z Critics #zcharged #zthat

#zthe #zenormous #zconsulting #zfees #zEnron #zpaid #zAndersen #zimpaired #zthe #zaudit #zfirm’s #zindependence.

# z The #zsecond #zissue #zstemmed #zfrom #zAndersen’s #zalleged #zrole #zin #zEnron’s #zaggressive #zaccounting #zand

#zfinancial #zreporting #ztreatments #zfor #zits #zSPE-related #ztransactions. #zFinally, #zthe #zmost #zembarrassing

#zissue #zwas #zthe #zmassive #zeffort #zof #zAndersen’s #zHouston #zoffice #zto #zshred #zEnron #zaudit #zdocuments,

#zwhich #zeventually #zled #zto #zthe #zdemise #zof #zthe #zfirm.



Enron #zCorporation--Key #zFacts



1. Throughout #zArthur #zE. #zAndersen’s #zlife, #z“Think #zStraight, #ztalk #zstraight” #zserved #zas #za #zguiding
#zprinciple # z for #zhimself #zand #zArthur #zAndersen #z& #zCo., #zthe #zaccounting #zfirm #zthat #zhe #zfounded.




2. Arthur #zAndersen’s #zreputation #zfor #zhonesty #zand #zintegrity #zresulted #zin #zArthur #zAndersen #z& #zCo.
#zgaining #zstature #zin #zthe #zbusiness #zcommunity #zand #zgrowing #zinto #zone #zof #zthe #znation’s #zleading

#zaccounting #zfirms #zby #zthe #ztime #zof #zhis #zdeath #zin #z1947.




3. Leonard #zSpacek #zsucceeded #zArthur #zAndersen #zas #zmanaging #zpartner #zof #zArthur #zAndersen #z& #zCo.
#zin #z1947 #zand #zcontinued #zAndersen’s #zlegacy #zof #zlobbying #zfor #zmore #zrigorous #zaccounting,

#zauditing, #zand #zethical #zstandards #zfor #zthe #zpublic #zaccounting #zprofession.




4. When #zSpacek #zretired #zin #z1973, #zArthur #zAndersen #z& #zCo. #zwas #zone #zof #zthe #zlargest #zand,
#zarguably, #zthe #zmost #zprominent #zaccounting #zfirm #zworldwide




5. The #zpredecessor #zof #zEnron #zCorporation #zwas #zan #zOmaha-based #znatural #zgas #zcompany #zcreated #zin
#z1930; #zsteady #zgrowth #zin #zprofits #zand #zsales #zand #znumerous #zacquisitions #zallowed #zEnron #zto

#zbecome #zthe #zlargest #znatural #zgas #zcompany #zin #zthe #zUnited #zStates #zby #zthe #zmid-1980s.




6. During #zthe #z1990s, #zKenneth #zLay, #zEnron’s #zCEO, #zand #zhis #ztop #zsubordinate, #zJeffrey #zSkilling,
# z transformed #zthe #zcompany #zfrom #za #zconventional #znatural #zgas #zsupplier #zinto #zan #zenergy #ztrading

#zcompany.

, Case #z1.3 # z # z Just #zfor #zFeet,
#z Inc. # z # z 3



7. Lay #zand #zSkilling #zplaced #za #zheavy #zemphasis #zon #z“strong #zearnings #zperformance” #zand #zon
#zincreasing #zEnron’s #zstature #zin #zthe #zbusiness #zworld.




8. Enron #zexecutives #zused #zhundreds #zof #zSPEs #z(special #zpurpose #zentities) #zto #zarrange #zlarge #zand #zcomplex related
#zparty #ztra




9. During #z2001, #zEnron’s #zfinancial #zcondition #zdeteriorated #zrapidly #zafter #zmany #zof #zthe #zcompany’s
#zSPE #ztransactions #zunraveled; #zin #zDecember #z2001, #zEnron #zfiled #zfor #zbankruptcy.




10. Following #zEnron’s #zcollapse, #zthe #zbusiness #zpress #zand #zother #zcritics #zbegan #zsearching #zfor #zparties
#zto #zhold #zresponsible #zfor #zwhat, #zat #zthe #ztime, #zwas #zthe #znation’s #zlargest #zcorporate #zbankruptcy.




11. Criticism #zof #zAndersen’s #zrole #zin #zthe #zEnron #zdebacle #zfocused #zon #zthree #zkey #zissues: # z the #zlarge
#zamount #zof #zconsulting #zrevenue #zthe #zfirm #zearned #zfrom #zEnron, #zthe #zfirm’s #zrole #zin #zmany #zof

#zEnron’s #zSPE #ztransactions, #zand #zthe #zefforts #zof #zAndersen #zpersonnel #zto #zdestroy #zEnron #zaudit

#zdocuments.




12. Andersen’s #zfelony #zconviction #zin #zJune #z2002 #zeffectively #zended #zthe #zfirm’s #zlong #zand #zproud
#zhistory #zin #zthe #zpublic #zaccounting #zprofession.




Instructional #zObjectives



1. To #zprovide #zstudents #zwith #za #zbrief #zoverview #zof #zthe #zhistory #zand #zdevelopment #zof #zthe #zpublic
#zaccounting #zprofession #zin #zthe #zUnited #zStates.




2. To #zexamine #zthe #z“scope #zof #zservices” #zissue, #zthat #zis, #zthe #zthreats #zto #zauditor #zindependence #zposed
#zby #zaudit #zfirms #zproviding #zconsulting #zservices #zto #ztheir #zaudit #zclients.




3. To #zexamine #zthe #zextent #zto #zwhich #zindependent #zauditors #zshould #zbe #zinvolved #zin #ztheir #zclients’
#zdecisions #zregarding #zimportant #zaccounting #zand #zfinancial #zreporting #zissues.




4. To #zreview #zrecent #zrecommendations #zmade #zto #zstrengthen #zthe #zindependent #zaudit #zfunction.

, Case #z1.3 # z # z Just #zfor #zFeet,
#z Inc. # z # z 4




5. To #zreview #zauditors’ #zresponsibilities #zregarding #zthe #zpreparation #zand #zretention #zof #zaudit #zworkpapers.

Suggestions #zfor #zUse



I #ztypically #zbegin #zan #zauditing #zcourse #zby #zdiscussing #za #zmajor #zand #zwidely #zpublicized #zaudit
#zcase. #zClearly, #zthe #zEnron #zcase #zsatisfies #zthose #zcriteria. # z The #zpurpose #zof #zpresenting #zsuch #za #zcase
#zearly #zin #zthe #zsemester #zis #znot #zonly #zto #zacquaint #zstudents #zwith #zthe #znature #zof #zauditing #zbut #zalso #zto

#zmake #zthem #zaware #zof #zwhy #zthe #zindependent #zaudit #zfunction #zis #zso #zimportant. # z Many #zaccounting

#zstudents #zare #znot #zwell #zacquainted #zwith #zthe #znature #zof #zthe #zindependent #zauditor's #zwork #zenvironment,

#znor #zare #zthey #zgenerally #zfamiliar #zwith #zthe #zcritical #zrole #zthe #zindependent #zaudit #zfunction #zplays #zin

#zour #znational #zeconomy. # z Hopefully, #zcases #zsuch #zas #zthis #zone #zprovide #zstudents #zwith #za #z"reality #zjolt"

#zthat #zwill #zstimulate #ztheir #zinterest #zin #zauditing #zand, #zpossibly, #zmake #zthem #zmore #zinclined #zto #zpursue

#za #zcareer #zin #zthe #zauditing #zfield.



The #zEnron #zcase #zalso #zserves #zas #za #zgood #zstarting #zpoint #zfor #zan #zauditing #zcourse #zsince #zit
#zprovides #zstudents #zwith #zan #zoverview #zof #zhow #zthe #zauditing #zprofession #zdeveloped #zand #zevolved #zin
#zthe #zUnited #zStates #zover #zthe #zpast #zcentury. # z The #zvehicle #zused #zto #zpresent #zthis #zoverview #zis #zthe

#zhistory #zof #zArthur #zAndersen #z& #zCo. # z You #zwill #zfind #zthat #zthe #zcase #zattempts #zto #zcontrast #zthe

#z“Think #zstraight, #ztalk #zstraight” #zphilosophy #zof #zArthur #zE. #zAndersen, #zthe #zfounder #zof #zthe #zAndersen

#zfirm, #zwith #zthe #zmore #zbusiness-oriented #zapproach #zto #zauditing #zthat #zhis #zpredecessors #zadopted #zin #zthe

#zlatter #zdecades #zof #zthe #ztwentieth #zcentury.



Consider #zasking #zone #zor #zmore #zof #zyour #zstudents #zto #zinterview #zformer #zAndersen #zpersonnel #zwho
#zare #zgraduates #zof #zyour #zschool. # z I #zhave #zfound #zthat #zmany #zformer #zAndersen #zpartners #zand
#zemployees #zare #zmore #zthan #zwilling #zto #zdiscuss #ztheir #zformer #zemployer #zand #zthe #zseries #zof #zevents #zthat

#zled #zto #zthe #zfirm’s #zsudden #zcollapse. #zThese #zindividuals #ztypically #zsuggest #zthat #zfederal #zprosecutors’

#zefforts #zto #z“bring #zdown” #zthe #zentire #zAndersen #zfirm #zas #za #zresult #zof #zthe #zdocument-shredding

#zincident #zwas #znot #zonly #zunnecessary #zbut #zalso #zinequitable, #zan #zargument #zthat #zmany #zmembers #zof #zthe

#zaccounting #zprofession—including #zacademics—find #zdifficult #zto # z refute.




Suggested #zSolutions #zto #zCase #zQuestions



1. A #zlarge #znumber #zof #zparties #zbore #zsome #zdegree #zof #zresponsibility #zfor #zthe #zproblems #zthat #zthe
#zEnron #zfiasco #zultimately #zposed #zfor #zthe #zpublic #zaccounting #zprofession #zand #zthe #zindependent #zaudit

#zfunction. # z The #zfollowing #zbullet #zitems #zidentify #zseveral #zof #zthese #zparties #z[see #zbold-facing] #zand #zthe

#zrole #zthey #zplayed #zin #zthe #zEnron #zdrama.




 The #zleadership #zof #zthe #zAndersen #zfirm #zthat #zallegedly #zfocused #ztoo #zmuch #zattention #zon #zpractice development
act
#z



 Impertinent #zcorporate #zexecutives #zwho #zinsisted #zon #zaggressive, #zif #znot #zillegal, #zaccounting #zand financial #zreporti

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Michael C. Knapp Contemporary Auditing
Publisher: 2016 ISBN: 9781305970816 Edition: Unknown

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