SOLUTION MANUAL FOR
l l
l Principles Of Auditing And Other Assurance Services
l l l l l l l
23rd Edition By Ray Whittington Kurt
l l l l l l
ALL Chapters (1 - 21)
l l l l
, • Table of Contents
l l
Chapterl1:lThelRoleloflthelPubliclAccountantlinlthelAmericanEconomy
Chapterl2:lProfessionallStandards
Chapterl3:lProfessionallEthics
Chapterl4:lLegallLiabilityloflCPAs
Chapterl5:lAuditlEvidencelandlDocumentation
Chapterl6:lAuditlPlanning,lUnderstandinglthelClient,lAssessingRisks,landlResponding
Chapterl7:lInternallControl
Chapterl8:lConsiderationloflInternallControllinlanlInformationTechnologylEnvironment
Chapterl9:lAuditlSampling
Chapterl10:lCashlandlFinanciallInvestments
Chapterl11:lAccountslReceivable,lNoteslReceivable,landRevenue
Chapterl12:lInventorieslandlCostloflGoodslSold
Chapterl13:lProperty,lPlant,landlEquipment:lDepreciationlandDepletion
Chapterl14:lAccountslPayablelandlOtherlLiabilities
Chapterl15:lDebtlandlEquitylCapital
Chapterl16:lAuditinglOperationslandlCompletinglthelAudit
Chapterl17:lAuditors’lReports
Chapterl18:lIntegratedlAuditsloflPubliclCompanies
Chapterl19:lAdditionallAssurancelServices:lHistoricallFinancialInformation
Chapterl20:lAdditionallAssurancelServices:lOtherlInformation
Chapterl21:lInternal,lOperational,landlCompliancelAuditing
,CHAPTER 1 l
The Role of the Publi
l l l l
c Accountant in the
l l l
American Economy l
ReviewlQuestions
1-1 Thel―crisisloflcredibility‖llargelylaroselfromlthelnumberloflcompanieslthatlrestatedltheirlpreviouslylissuedl
financiallstatementsl asl al resultl ofl accountinglirregularitiesl andlfraud.l Especiallylresponsiblelwerelthelveryl
visiblelEnronlandlWorldComlfraudlcases.lBothlcompaniesl filedlforlbankruptcylandlconstitutedlthellargestl
companiesl inlAmericanlhistoryltoldolso.l Thelextentloflthelaccountinglirregularitiesl andlfraudlbeinglinvesti
gatedlandldisclosedlbroughtl intolquestionltheleffectivenessl ofl financiallstatementl audits.l Inladdition,lthelcr
iminallconvictionloflArthurlAndersen,lLLP,loneloflthelthenlBigl5laccountinglfirms,lonlchargesl ofl destroyi
ngldocumentsl relatedltolthelEnronlcaselbroughtl intolquestionlthelethicsl standardsl oflthelprofession.
1-2 Assurancelserviceslarelprofessionallserviceslthatlenhancelthelqualityloflinformation,lorlitslcontext,lforld
ecision-
making.lTheltwoltypeslare:l(a)lthoselthatlincreaselthelreliabilityloflinformationlandl(b)lthoselthatlinvolv
elputtinglinformationlinlalformlorlcontextlthatlfacilitatesldecision-making.
1-3 Alfinanciallstatementl auditl is,lbylfar,lthelmostl commonltypelofl attestl engagement.l Theloveralllassertion,lm
adelbylmanagement,lmostlfrequentlylislthatlthelfinanciallstatementslfollowlgenerallylacceptedlaccountingl
principles.
1-4 Allargelcorporationlwithlsecuritiesllistedlonlalstocklexchangelislrequiredlbylthelrulesloflthelstocklexchangel
andlbylthelrulesl ofl thelSecuritiesl andlExchangelCommissionltolprovidelanlauditl reportl withlthelannuallfina
nciallstatementsl furnishedltolitsl stockholders.l Itl alsolisl requiredltolengagelthelauditorsl tolprovidelanlopinio
nlonlitslinternallcontrol.lApartlfromllegallrequirements,lhowever,lallargellistedlcorporationlrecognizesltha
tlitlmustlmaintainlinvestorlconfidencelinlthelreliabilityloflitslfinanciallstatementsl andl internall controll overl f
inanciall reportingl ifl itl isl tol continueltol belableltol securelcapitallfromlthelpublic.l Thelreportl bylalfirmloflcer
tifiedlpubliclaccountantsladdsl credibilityltolthelfinanciallstatementsl preparedlbylthelcorporation.l Whenlal s
malllfamily-
ownedlenterpriselelectsl tolhavelanlaudit,lthelpurposelusuallylisltoluselthelauditors'lreportltolsupportlanlappli
cationl forlalbanklloan.
, 1-5 Alreportl bylanlindependentl publiclaccountantl concerninglthelfairnessl oflal company'sl financiallstatementslis
lcommonlylrequiredlinlthelfollowinglsituations:
(1) Applicationlforl al banklloan.
(2) Establishinglcreditl forl purchaselofl merchandise,lequipment,lorl otherl assets.
(3) Reportingloperatinglresults,l financiallposition,l andlcashlflowsl tolabsenteelownersl (stockholderslo
rlpartners).
(4) Issuancelofl securitiesl bylal corporation.
(5) Annuallfinanciallstatementsl bylal corporationlwithlsecuritiesl listedlonlal stocklexchangelorl tradedlo
verlthelcounter.
(6) Saleloflanlongoinglbusiness.
(7) Terminationlofl al partnership.
1-6 Toladdlcredibilityltolfinanciallstatementsl isltolincreaselthellikelihoodlthatl theylhavelbeenlpreparedlfollowin
glthelappropriatelcriteria,lusuallylgenerallylacceptedlaccountinglprinciples.l Asl such,lanlincreaselinlcredibil
itylresultsl inlfinanciallstatementslthatl canlbelbelievedlandlreliedluponlbylthirdlparties.
1-7 Businessl risklisl thelrisklthatl thelinvestmentl willlbelimpairedlbecauselal companylinvestedlinlisl unableltolm
eetlitslfinanciallobligationsldueltoleconomiclconditionslorlpoorlmanagementldecisions.lInformationlriskli
slthelrisklthatlthelinformationlusedltolassesslbusinesslrisklislnotlaccurate.lAuditorslcanldirectlylreduceli
nformationlrisk,lbutlhavelonlyllimitedleffectlonlbusinesslrisk.
1-8 Atlthelbeginningloflthelcentury,lthelprincipallobjectiveloflauditinglwasl thelpreventionlandldetectionloflfrau
d.l Auditlworklcenteredlonlthelbalancelsheet,lbecauselthelincomelstatementlwasl regardedlasl highlylconfide
ntiallandlnotl forl publicldisclosure.l Today,l thelprincipallobjectivelofl auditinglisl tolformlanlopinionlonlthelf
airnessl oflfinanciallstatementsl andltheirlconformitylwithlgenerallylacceptedlaccountinglprinciples.l Butl thel
professionallstandardsl alsolrequirelthatl anlauditl beldesignedltolprovidelreasonablelassurancelofldetectingl
materiallmisstatements,l dueltolerrorsl orl fraud.l Particularl emphasisl isl placedlonlthelincomelstatementl whic
hlisl oflgreatl importanceltolinvestors.l Auditingltodaylalsolhasl thelobjectivesl oflmeetinglthelrequirementsl ofl
thelSecuritiesl andlExchangelCommissionl(SEC)l andlthelPubliclCompanylAccountinglOversightlBoardlfo
rlpubliclcompanies.
1-9 Thelstatementl isl incorrect.lThelincreasinglintegratedldatabasesl ofl today,lalonglwithlavailablelauditlp
rocedureslmakelauditedlentirelpopulationslalpossibilitylinlmanylsituations.
1-10 Anloperationallauditlattemptsl tolmeasureltheleffectivenessl andlefficiencyloflalspecificlunitl oflanlorgani
zation.l Itlinvolvesl morelsubjectiveljudgmentslthanlalcompliancelauditl orlanlauditl oflfinanciallstatemen
tsl becauselthelcriterial ofleffectivenessl andlefficiencylofldepartmentallperformancelarelnotl aslclearlylest
ablishedlasl arelmanyllawsl andlregulationslorlgenerallylacceptedlaccountinglprinciples.
Thelreportl preparedlafterl completionlofl anloperationallauditl isl usuallyldirectedltolmanagementlofl
thelorganizationlinlwhichlthelauditlworklwasldone.
1-11 Alcompliancelauditlislanlauditltoldeterminelwhetherlfinanciallreportslorlotherlassertionslarel inlcomplianc
elwithlestablishedlcriteria.l Thelnecessarylingredientsl arelverifiableldatalandlthelexistenceloflstandardsl est
ablishedlbylanlauthoritativelbody.l Anloperationallaudit,lonlthelotherl hand,lisl al reviewlofl aldepartmentl orl
otherlunitloflalbusinessl orlgovernmentallorganizationltolmeasureltheleffectivenessl andlefficiencyloflopera
tions.l Internallauditorsl oftenlperformloperationallauditsl asl dolauditorsl employedlbylthelGovernmentlAc
countabilitylOfficel(GAO)loflthelfederallgovernment.
1-12 Internallauditorsl mustl belindependentl ofltheldepartmentl headslandlotherllinelexecutiveslwhoselworkltheylre
view.lHowever,linternallauditorslarelnotlindependentlinlthelsamelsenselaslalpubliclaccountinglfirm.
l l
l Principles Of Auditing And Other Assurance Services
l l l l l l l
23rd Edition By Ray Whittington Kurt
l l l l l l
ALL Chapters (1 - 21)
l l l l
, • Table of Contents
l l
Chapterl1:lThelRoleloflthelPubliclAccountantlinlthelAmericanEconomy
Chapterl2:lProfessionallStandards
Chapterl3:lProfessionallEthics
Chapterl4:lLegallLiabilityloflCPAs
Chapterl5:lAuditlEvidencelandlDocumentation
Chapterl6:lAuditlPlanning,lUnderstandinglthelClient,lAssessingRisks,landlResponding
Chapterl7:lInternallControl
Chapterl8:lConsiderationloflInternallControllinlanlInformationTechnologylEnvironment
Chapterl9:lAuditlSampling
Chapterl10:lCashlandlFinanciallInvestments
Chapterl11:lAccountslReceivable,lNoteslReceivable,landRevenue
Chapterl12:lInventorieslandlCostloflGoodslSold
Chapterl13:lProperty,lPlant,landlEquipment:lDepreciationlandDepletion
Chapterl14:lAccountslPayablelandlOtherlLiabilities
Chapterl15:lDebtlandlEquitylCapital
Chapterl16:lAuditinglOperationslandlCompletinglthelAudit
Chapterl17:lAuditors’lReports
Chapterl18:lIntegratedlAuditsloflPubliclCompanies
Chapterl19:lAdditionallAssurancelServices:lHistoricallFinancialInformation
Chapterl20:lAdditionallAssurancelServices:lOtherlInformation
Chapterl21:lInternal,lOperational,landlCompliancelAuditing
,CHAPTER 1 l
The Role of the Publi
l l l l
c Accountant in the
l l l
American Economy l
ReviewlQuestions
1-1 Thel―crisisloflcredibility‖llargelylaroselfromlthelnumberloflcompanieslthatlrestatedltheirlpreviouslylissuedl
financiallstatementsl asl al resultl ofl accountinglirregularitiesl andlfraud.l Especiallylresponsiblelwerelthelveryl
visiblelEnronlandlWorldComlfraudlcases.lBothlcompaniesl filedlforlbankruptcylandlconstitutedlthellargestl
companiesl inlAmericanlhistoryltoldolso.l Thelextentloflthelaccountinglirregularitiesl andlfraudlbeinglinvesti
gatedlandldisclosedlbroughtl intolquestionltheleffectivenessl ofl financiallstatementl audits.l Inladdition,lthelcr
iminallconvictionloflArthurlAndersen,lLLP,loneloflthelthenlBigl5laccountinglfirms,lonlchargesl ofl destroyi
ngldocumentsl relatedltolthelEnronlcaselbroughtl intolquestionlthelethicsl standardsl oflthelprofession.
1-2 Assurancelserviceslarelprofessionallserviceslthatlenhancelthelqualityloflinformation,lorlitslcontext,lforld
ecision-
making.lTheltwoltypeslare:l(a)lthoselthatlincreaselthelreliabilityloflinformationlandl(b)lthoselthatlinvolv
elputtinglinformationlinlalformlorlcontextlthatlfacilitatesldecision-making.
1-3 Alfinanciallstatementl auditl is,lbylfar,lthelmostl commonltypelofl attestl engagement.l Theloveralllassertion,lm
adelbylmanagement,lmostlfrequentlylislthatlthelfinanciallstatementslfollowlgenerallylacceptedlaccountingl
principles.
1-4 Allargelcorporationlwithlsecuritiesllistedlonlalstocklexchangelislrequiredlbylthelrulesloflthelstocklexchangel
andlbylthelrulesl ofl thelSecuritiesl andlExchangelCommissionltolprovidelanlauditl reportl withlthelannuallfina
nciallstatementsl furnishedltolitsl stockholders.l Itl alsolisl requiredltolengagelthelauditorsl tolprovidelanlopinio
nlonlitslinternallcontrol.lApartlfromllegallrequirements,lhowever,lallargellistedlcorporationlrecognizesltha
tlitlmustlmaintainlinvestorlconfidencelinlthelreliabilityloflitslfinanciallstatementsl andl internall controll overl f
inanciall reportingl ifl itl isl tol continueltol belableltol securelcapitallfromlthelpublic.l Thelreportl bylalfirmloflcer
tifiedlpubliclaccountantsladdsl credibilityltolthelfinanciallstatementsl preparedlbylthelcorporation.l Whenlal s
malllfamily-
ownedlenterpriselelectsl tolhavelanlaudit,lthelpurposelusuallylisltoluselthelauditors'lreportltolsupportlanlappli
cationl forlalbanklloan.
, 1-5 Alreportl bylanlindependentl publiclaccountantl concerninglthelfairnessl oflal company'sl financiallstatementslis
lcommonlylrequiredlinlthelfollowinglsituations:
(1) Applicationlforl al banklloan.
(2) Establishinglcreditl forl purchaselofl merchandise,lequipment,lorl otherl assets.
(3) Reportingloperatinglresults,l financiallposition,l andlcashlflowsl tolabsenteelownersl (stockholderslo
rlpartners).
(4) Issuancelofl securitiesl bylal corporation.
(5) Annuallfinanciallstatementsl bylal corporationlwithlsecuritiesl listedlonlal stocklexchangelorl tradedlo
verlthelcounter.
(6) Saleloflanlongoinglbusiness.
(7) Terminationlofl al partnership.
1-6 Toladdlcredibilityltolfinanciallstatementsl isltolincreaselthellikelihoodlthatl theylhavelbeenlpreparedlfollowin
glthelappropriatelcriteria,lusuallylgenerallylacceptedlaccountinglprinciples.l Asl such,lanlincreaselinlcredibil
itylresultsl inlfinanciallstatementslthatl canlbelbelievedlandlreliedluponlbylthirdlparties.
1-7 Businessl risklisl thelrisklthatl thelinvestmentl willlbelimpairedlbecauselal companylinvestedlinlisl unableltolm
eetlitslfinanciallobligationsldueltoleconomiclconditionslorlpoorlmanagementldecisions.lInformationlriskli
slthelrisklthatlthelinformationlusedltolassesslbusinesslrisklislnotlaccurate.lAuditorslcanldirectlylreduceli
nformationlrisk,lbutlhavelonlyllimitedleffectlonlbusinesslrisk.
1-8 Atlthelbeginningloflthelcentury,lthelprincipallobjectiveloflauditinglwasl thelpreventionlandldetectionloflfrau
d.l Auditlworklcenteredlonlthelbalancelsheet,lbecauselthelincomelstatementlwasl regardedlasl highlylconfide
ntiallandlnotl forl publicldisclosure.l Today,l thelprincipallobjectivelofl auditinglisl tolformlanlopinionlonlthelf
airnessl oflfinanciallstatementsl andltheirlconformitylwithlgenerallylacceptedlaccountinglprinciples.l Butl thel
professionallstandardsl alsolrequirelthatl anlauditl beldesignedltolprovidelreasonablelassurancelofldetectingl
materiallmisstatements,l dueltolerrorsl orl fraud.l Particularl emphasisl isl placedlonlthelincomelstatementl whic
hlisl oflgreatl importanceltolinvestors.l Auditingltodaylalsolhasl thelobjectivesl oflmeetinglthelrequirementsl ofl
thelSecuritiesl andlExchangelCommissionl(SEC)l andlthelPubliclCompanylAccountinglOversightlBoardlfo
rlpubliclcompanies.
1-9 Thelstatementl isl incorrect.lThelincreasinglintegratedldatabasesl ofl today,lalonglwithlavailablelauditlp
rocedureslmakelauditedlentirelpopulationslalpossibilitylinlmanylsituations.
1-10 Anloperationallauditlattemptsl tolmeasureltheleffectivenessl andlefficiencyloflalspecificlunitl oflanlorgani
zation.l Itlinvolvesl morelsubjectiveljudgmentslthanlalcompliancelauditl orlanlauditl oflfinanciallstatemen
tsl becauselthelcriterial ofleffectivenessl andlefficiencylofldepartmentallperformancelarelnotl aslclearlylest
ablishedlasl arelmanyllawsl andlregulationslorlgenerallylacceptedlaccountinglprinciples.
Thelreportl preparedlafterl completionlofl anloperationallauditl isl usuallyldirectedltolmanagementlofl
thelorganizationlinlwhichlthelauditlworklwasldone.
1-11 Alcompliancelauditlislanlauditltoldeterminelwhetherlfinanciallreportslorlotherlassertionslarel inlcomplianc
elwithlestablishedlcriteria.l Thelnecessarylingredientsl arelverifiableldatalandlthelexistenceloflstandardsl est
ablishedlbylanlauthoritativelbody.l Anloperationallaudit,lonlthelotherl hand,lisl al reviewlofl aldepartmentl orl
otherlunitloflalbusinessl orlgovernmentallorganizationltolmeasureltheleffectivenessl andlefficiencyloflopera
tions.l Internallauditorsl oftenlperformloperationallauditsl asl dolauditorsl employedlbylthelGovernmentlAc
countabilitylOfficel(GAO)loflthelfederallgovernment.
1-12 Internallauditorsl mustl belindependentl ofltheldepartmentl headslandlotherllinelexecutiveslwhoselworkltheylre
view.lHowever,linternallauditorslarelnotlindependentlinlthelsamelsenselaslalpubliclaccountinglfirm.
