SOLUTION MANUAL FOR
Principles Of Auditing And Other Assurance Services
23rd Edition By Ray Whittington Kurt
ALL Chapters (1 - 21)
, • Table of Contents
Chapter 1: The Role of the Public Accountant in the AmericanEconomy
Chapter 2: Professional Standards
Chapter 3: Professional Ethics
Chapter 4: Legal Liability of CPAs
Chapter 5: Audit Evidence and Documentation
Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding
Chapter 7: Internal Control
Chapter 8: Consideration of Internal Control in an InformationTechnology Environment
Chapter 9: Audit Sampling
Chapter 10: Cash and Financial Investments
Chapter 11: Accounts Receivable, Notes Receivable, andRevenue
Chapter 12: Inventories and Cost of Goods Sold
Chapter 13: Property, Plant, and Equipment: Depreciation andDepletion
Chapter 14: Accounts Payable and Other Liabilities
Chapter 15: Debt and Equity Capital
Chapter 16: Auditing Operations and Completing the Audit
Chapter 17: Auditors’ Reports
Chapter 18: Integrated Audits of Public Companies
Chapter 19: Additional Assurance Services: Historical FinancialInformation
Chapter 20: Additional Assurance Services: Other Information
Chapter 21: Internal, Operational, and Compliance Auditing
,CHAPTER 1
The Role of the
Public Accountant in the
American Economy
Review Questions
1-1 The kl―crisis klof klcredibility‖ kllargely klarose klfrom klthe klnumber klof klcompanies klthat klrestated kltheir
klpreviously klissued kl financial kl statements kl as kl a kl result kl of k l accounting kl irregularities kl and kl fraud.
k l Especially klresponsible klwerek lthe klvery klvisible klEnron kl and kl WorldCom kl fraud kl cases. kl Both kl companies
kl filed kl for kl bankruptcy kland kl constituted klthe kllargest kl companies kl in klAmerican kl history klto kl do kl so. k l The
klextent kl of kl the klaccounting klirregularities kl and kl fraud klbeing kl investigated kl and kl disclosed kl brought kl into
kl question kl the kleffectiveness kl of kl financial kl statement kl audits. k l In kladdition, klthe klcriminal klconviction klof
kl Arthur kl Andersen, klLLP, klone klof kl the klthen klBig kl5 kl accounting klfirms, kl on klcharges kl of kl destroying
kl documents kl related kl to kl the klEnron kl case klbrought kl into kl question kl the klethics kl standards kl of klthe
klprofession.
1-2 Assurance klservices klare klprofessional klservices klthat klenhance klthe klquality klof klinformation, klor klits
klcontext, klfor kldecision-making. klThe kltwo kltypes klare: kl(a) klthose klthat klincrease klthe klreliability klof
klinformation kland kl(b) klthose klthat klinvolve klputting klinformation klin kla klform klor klcontext klthat klfacilitates
kldecision-making.
1-3 A klfinancial klstatement kl audit kl is, klby klfar, klthe klmost kl common kltype klof kl attest kl engagement. kl The kloverall
kl assertion,k
lmade klby klmanagement, klmost klfrequently klis klthat klthe klfinancial klstatements klfollow klgenerally
klaccepted klaccounting klprinciples.
1-4 A kllarge klcorporation klwith klsecurities kllisted klon kla klstock klexchange klis klrequired klby klthe klrules klof klthe
klstock klexchange kland klby klthe klrules kl of kl the klSecurities kl and klExchange klCommission klto kl provide klan
kl audit kl report kl with kl thek lannual klfinancial klstatements kl furnished klto klits kl stockholders. k l It kl also klis kl required
klto klengage klthe klauditors kl to klprovide klan klopinion klon klits klinternal klcontrol. klApart klfrom kllegal
klrequirements, klhowever, kla kllarge kllisted klcorporation klrecognizes kl that kl it kl must kl maintain klinvestor
kl confidence klin kl the klreliability klof kl its kl financial klstatements k l and kl internal kl control kl over kl financial
kl reporting kl if kl it k l is kl to kl continue kl to kl be kl able kl to kl secure kl capital klfrom klthe klpublic. kl The klreport kl by kla
kl firm klof kl certified klpublic klaccountants kl adds kl credibility klto klthe klfinancial klstatements kl prepared klby klthe
klcorporation. k l When kl a kl small kl family-owned klenterprise klelects kl to kl have klan kl audit, klthe klpurpose
klusually klis kl to kluse klthe klauditors' kl report kl to klsupport kl an klapplication kl for kl a klbank klloan.
, 1-5 A klreport kl by klan klindependent kl public klaccountant kl concerning klthe klfairness klof kla kl company's kl financial
kl statementsk lis klcommonly klrequired klin klthe klfollowing klsituations:
(1) Application klfor kl a klbank klloan.
(2) Establishing klcredit kl for kl purchase klof kl merchandise, klequipment, klor kl other kl assets.
(3) Reporting kloperating klresults, kl financial klposition, kland klcash klflows kl to klabsentee klowners
k l (stockholdersk lor klpartners).
(4) Issuance klof kl securities kl by kla kl corporation.
(5) Annual klfinancial klstatements kl by kla klcorporation klwith klsecurities kl listed klon kla kl stock klexchange
kl or kl tradedk
lover klthe klcounter.
(6) Sale klof kl an klongoing klbusiness.
(7) Termination klof kl a kl partnership.
1-6 To kladd klcredibility klto klfinancial klstatements kl is klto klincrease klthe kllikelihood klthat kl they klhave klbeen
klprepared klfollowing kl the klappropriate klcriteria, kl usually klgenerally klaccepted kl accounting kl principles. k l As
kl such, kl an kl increasek
lin klcredibility klresults kl in klfinancial klstatements kl that kl can klbe klbelieved kland klrelied
klupon klby klthird klparties.
1-7 Business kl risk klis kl the klrisk klthat kl the klinvestment kl will klbe klimpaired klbecause kla klcompany klinvested klin
kl is kl unable kltok
lmeet kl its kl financial klobligations kl due klto kleconomic klconditions kl or klpoor klmanagement
kl decisions. kl Information klrisk klis klthe klrisk klthat klthe klinformation klused klto klassess klbusiness klrisk klis klnot
klaccurate. klAuditors klcan kldirectly klreduce klinformation klrisk, klbut klhave klonly kllimited kleffect kl on klbusiness
kl risk.
1-8 At klthe klbeginning klof klthe klcentury, klthe klprincipal klobjective klof klauditing klwas kl the klprevention kland
kldetection klof klfraud. kl Audit kl work klcentered klon klthe klbalance klsheet, klbecause klthe klincome klstatement kl was
kl regarded klas kl highly klconfidential kl and kl not kl for kl public kldisclosure. k l Today, kl the kl principal kl objective
kl of kl auditing kl is kl to kl form kl an klopinion klon klthe klfairness kl of kl financial klstatements kl and kltheir kl conformity
klwith klgenerally klaccepted klaccounting klprinciples. k l But kl the klprofessional kl standards kl also kl require klthat
kl an kl audit kl be kldesigned kl to klprovide klreasonable klassurance kl of kl detecting kl material kl misstatements, kl due
kl to kl errors kl or kl fraud. k l Particular kl emphasis kl is kl placed kl on klthe klincome klstatement kl which kl is kl of kl great
kl importance klto kl investors. kl Auditing kl today klalso klhas kl the klobjectives kl ofklmeeting kl the klrequirements kl of
kl the klSecurities kl and klExchange klCommission kl (SEC) k l and kl the klPublic klCompany klAccounting klOversight
klBoard klfor klpublic klcompanies.
1-9 The klstatement kl is kl incorrect. klThe klincreasing klintegrated kldatabases kl of k l today, klalong klwith
kl available klauditk
lprocedures klmake klaudited klentire klpopulations kla klpossibility klin klmany klsituations.
1-10 An kloperational klaudit klattempts kl to klmeasure klthe kleffectiveness kl and klefficiency klof kla klspecific klunit
kl of kl an klorganization. kl It kl involves kl more klsubjective kljudgments kl than kla kl compliance klaudit kl or kl an
klaudit kl of kl financial klstatements kl because klthe klcriteria kl of kl effectiveness kl and kl efficiency klof
kl departmental kl performance klare klnot kl asklclearly klestablished klas kl are klmany kllaws kl and klregulations kl or
kl generally klaccepted klaccounting klprinciples.
The klreport kl prepared klafter klcompletion klof kl an kloperational klaudit kl is kl usually kldirected klto
kl managementk lof klthe klorganization klin klwhich klthe klaudit klwork klwas kldone.
1-11 A klcompliance klaudit klis klan klaudit klto kldetermine klwhether klfinancial klreports klor klother klassertions klare kl in
klcompliance klwith kl established kl criteria. kl The klnecessary klingredients kl are klverifiable kldata kl and kl the
klexistence klof klstandards kl established kl by klan kl authoritative klbody. k l An kl operational klaudit, kl on kl the klother
kl hand, kl is kl a kl review klof kl ak
ldepartment kl or kl other kl unit kl of kl a kl business kl or kl governmental klorganization klto
klmeasure klthe kleffectiveness kl and klefficiency klof kl operations. k l Internal kl auditors kl often klperform
kloperational kl audits kl as kl do klauditors kl employed kl by klthe klGovernment klAccountability klOffice kl(GAO)
Principles Of Auditing And Other Assurance Services
23rd Edition By Ray Whittington Kurt
ALL Chapters (1 - 21)
, • Table of Contents
Chapter 1: The Role of the Public Accountant in the AmericanEconomy
Chapter 2: Professional Standards
Chapter 3: Professional Ethics
Chapter 4: Legal Liability of CPAs
Chapter 5: Audit Evidence and Documentation
Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding
Chapter 7: Internal Control
Chapter 8: Consideration of Internal Control in an InformationTechnology Environment
Chapter 9: Audit Sampling
Chapter 10: Cash and Financial Investments
Chapter 11: Accounts Receivable, Notes Receivable, andRevenue
Chapter 12: Inventories and Cost of Goods Sold
Chapter 13: Property, Plant, and Equipment: Depreciation andDepletion
Chapter 14: Accounts Payable and Other Liabilities
Chapter 15: Debt and Equity Capital
Chapter 16: Auditing Operations and Completing the Audit
Chapter 17: Auditors’ Reports
Chapter 18: Integrated Audits of Public Companies
Chapter 19: Additional Assurance Services: Historical FinancialInformation
Chapter 20: Additional Assurance Services: Other Information
Chapter 21: Internal, Operational, and Compliance Auditing
,CHAPTER 1
The Role of the
Public Accountant in the
American Economy
Review Questions
1-1 The kl―crisis klof klcredibility‖ kllargely klarose klfrom klthe klnumber klof klcompanies klthat klrestated kltheir
klpreviously klissued kl financial kl statements kl as kl a kl result kl of k l accounting kl irregularities kl and kl fraud.
k l Especially klresponsible klwerek lthe klvery klvisible klEnron kl and kl WorldCom kl fraud kl cases. kl Both kl companies
kl filed kl for kl bankruptcy kland kl constituted klthe kllargest kl companies kl in klAmerican kl history klto kl do kl so. k l The
klextent kl of kl the klaccounting klirregularities kl and kl fraud klbeing kl investigated kl and kl disclosed kl brought kl into
kl question kl the kleffectiveness kl of kl financial kl statement kl audits. k l In kladdition, klthe klcriminal klconviction klof
kl Arthur kl Andersen, klLLP, klone klof kl the klthen klBig kl5 kl accounting klfirms, kl on klcharges kl of kl destroying
kl documents kl related kl to kl the klEnron kl case klbrought kl into kl question kl the klethics kl standards kl of klthe
klprofession.
1-2 Assurance klservices klare klprofessional klservices klthat klenhance klthe klquality klof klinformation, klor klits
klcontext, klfor kldecision-making. klThe kltwo kltypes klare: kl(a) klthose klthat klincrease klthe klreliability klof
klinformation kland kl(b) klthose klthat klinvolve klputting klinformation klin kla klform klor klcontext klthat klfacilitates
kldecision-making.
1-3 A klfinancial klstatement kl audit kl is, klby klfar, klthe klmost kl common kltype klof kl attest kl engagement. kl The kloverall
kl assertion,k
lmade klby klmanagement, klmost klfrequently klis klthat klthe klfinancial klstatements klfollow klgenerally
klaccepted klaccounting klprinciples.
1-4 A kllarge klcorporation klwith klsecurities kllisted klon kla klstock klexchange klis klrequired klby klthe klrules klof klthe
klstock klexchange kland klby klthe klrules kl of kl the klSecurities kl and klExchange klCommission klto kl provide klan
kl audit kl report kl with kl thek lannual klfinancial klstatements kl furnished klto klits kl stockholders. k l It kl also klis kl required
klto klengage klthe klauditors kl to klprovide klan klopinion klon klits klinternal klcontrol. klApart klfrom kllegal
klrequirements, klhowever, kla kllarge kllisted klcorporation klrecognizes kl that kl it kl must kl maintain klinvestor
kl confidence klin kl the klreliability klof kl its kl financial klstatements k l and kl internal kl control kl over kl financial
kl reporting kl if kl it k l is kl to kl continue kl to kl be kl able kl to kl secure kl capital klfrom klthe klpublic. kl The klreport kl by kla
kl firm klof kl certified klpublic klaccountants kl adds kl credibility klto klthe klfinancial klstatements kl prepared klby klthe
klcorporation. k l When kl a kl small kl family-owned klenterprise klelects kl to kl have klan kl audit, klthe klpurpose
klusually klis kl to kluse klthe klauditors' kl report kl to klsupport kl an klapplication kl for kl a klbank klloan.
, 1-5 A klreport kl by klan klindependent kl public klaccountant kl concerning klthe klfairness klof kla kl company's kl financial
kl statementsk lis klcommonly klrequired klin klthe klfollowing klsituations:
(1) Application klfor kl a klbank klloan.
(2) Establishing klcredit kl for kl purchase klof kl merchandise, klequipment, klor kl other kl assets.
(3) Reporting kloperating klresults, kl financial klposition, kland klcash klflows kl to klabsentee klowners
k l (stockholdersk lor klpartners).
(4) Issuance klof kl securities kl by kla kl corporation.
(5) Annual klfinancial klstatements kl by kla klcorporation klwith klsecurities kl listed klon kla kl stock klexchange
kl or kl tradedk
lover klthe klcounter.
(6) Sale klof kl an klongoing klbusiness.
(7) Termination klof kl a kl partnership.
1-6 To kladd klcredibility klto klfinancial klstatements kl is klto klincrease klthe kllikelihood klthat kl they klhave klbeen
klprepared klfollowing kl the klappropriate klcriteria, kl usually klgenerally klaccepted kl accounting kl principles. k l As
kl such, kl an kl increasek
lin klcredibility klresults kl in klfinancial klstatements kl that kl can klbe klbelieved kland klrelied
klupon klby klthird klparties.
1-7 Business kl risk klis kl the klrisk klthat kl the klinvestment kl will klbe klimpaired klbecause kla klcompany klinvested klin
kl is kl unable kltok
lmeet kl its kl financial klobligations kl due klto kleconomic klconditions kl or klpoor klmanagement
kl decisions. kl Information klrisk klis klthe klrisk klthat klthe klinformation klused klto klassess klbusiness klrisk klis klnot
klaccurate. klAuditors klcan kldirectly klreduce klinformation klrisk, klbut klhave klonly kllimited kleffect kl on klbusiness
kl risk.
1-8 At klthe klbeginning klof klthe klcentury, klthe klprincipal klobjective klof klauditing klwas kl the klprevention kland
kldetection klof klfraud. kl Audit kl work klcentered klon klthe klbalance klsheet, klbecause klthe klincome klstatement kl was
kl regarded klas kl highly klconfidential kl and kl not kl for kl public kldisclosure. k l Today, kl the kl principal kl objective
kl of kl auditing kl is kl to kl form kl an klopinion klon klthe klfairness kl of kl financial klstatements kl and kltheir kl conformity
klwith klgenerally klaccepted klaccounting klprinciples. k l But kl the klprofessional kl standards kl also kl require klthat
kl an kl audit kl be kldesigned kl to klprovide klreasonable klassurance kl of kl detecting kl material kl misstatements, kl due
kl to kl errors kl or kl fraud. k l Particular kl emphasis kl is kl placed kl on klthe klincome klstatement kl which kl is kl of kl great
kl importance klto kl investors. kl Auditing kl today klalso klhas kl the klobjectives kl ofklmeeting kl the klrequirements kl of
kl the klSecurities kl and klExchange klCommission kl (SEC) k l and kl the klPublic klCompany klAccounting klOversight
klBoard klfor klpublic klcompanies.
1-9 The klstatement kl is kl incorrect. klThe klincreasing klintegrated kldatabases kl of k l today, klalong klwith
kl available klauditk
lprocedures klmake klaudited klentire klpopulations kla klpossibility klin klmany klsituations.
1-10 An kloperational klaudit klattempts kl to klmeasure klthe kleffectiveness kl and klefficiency klof kla klspecific klunit
kl of kl an klorganization. kl It kl involves kl more klsubjective kljudgments kl than kla kl compliance klaudit kl or kl an
klaudit kl of kl financial klstatements kl because klthe klcriteria kl of kl effectiveness kl and kl efficiency klof
kl departmental kl performance klare klnot kl asklclearly klestablished klas kl are klmany kllaws kl and klregulations kl or
kl generally klaccepted klaccounting klprinciples.
The klreport kl prepared klafter klcompletion klof kl an kloperational klaudit kl is kl usually kldirected klto
kl managementk lof klthe klorganization klin klwhich klthe klaudit klwork klwas kldone.
1-11 A klcompliance klaudit klis klan klaudit klto kldetermine klwhether klfinancial klreports klor klother klassertions klare kl in
klcompliance klwith kl established kl criteria. kl The klnecessary klingredients kl are klverifiable kldata kl and kl the
klexistence klof klstandards kl established kl by klan kl authoritative klbody. k l An kl operational klaudit, kl on kl the klother
kl hand, kl is kl a kl review klof kl ak
ldepartment kl or kl other kl unit kl of kl a kl business kl or kl governmental klorganization klto
klmeasure klthe kleffectiveness kl and klefficiency klof kl operations. k l Internal kl auditors kl often klperform
kloperational kl audits kl as kl do klauditors kl employed kl by klthe klGovernment klAccountability klOffice kl(GAO)
