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 ―crisis of credibility‖ largely arose from the number of companies that restated their previously
issued financial statements as a result of accounting irregularities and fraud. Especially responsible were
the very visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted
the largest companies in American history to do so. The extent of the accounting irregularities and fraud
being investigated and disclosed brought into question the effectiveness of financial statement audits. In
addition, the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on
charges of destroying documents related to the Enron case brought into question the ethics standards of
the profession.
1-2 Assurance services are professional services that enhance the quality of information, or its context, for
decision-making. The two types are: (a) those that increase the reliability of information and (b) those
that involve putting information in a form or context that facilitates decision-making.
1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall assertion,
made by management, most frequently is that the financial statements follow generally accepted
accounting principles.
1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock
exchange and by the rules of the Securities and Exchange Commission to provide an audit report with the
annual financial statements furnished to its stockholders. It also is required to engage the auditors to
provide an opinion on its internal control. Apart from legal requirements, however, a large listed
corporation recognizes that it must maintain investor confidence in the reliability of its financial
statements and internal control over financial reporting if it is to continue to be able to secure capital
from the public. The report by a firm of certified public accountants adds credibility to the financial
statements prepared by the corporation. When a small family-owned enterprise elects to have an audit,
the purpose usually is to use the auditors' report to support an application for a bank loan.
, 1-5 A report by an independent public accountant concerning the fairness of a company's financial statements
is commonly required in the following situations:
(1) Application for a bank loan.
(2) Establishing credit for purchase of merchandise, equipment, or other assets.
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholders
or partners).
(4) Issuance of securities by a corporation.
(5) Annual financial statements by a corporation with securities listed on a stock exchange or traded
over the counter.
(6) Sale of an ongoing business.
(7) Termination of a partnership.
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared
following the appropriate criteria, usually generally accepted accounting principles. As such, an increase
in credibility results in financial statements that can be believed and relied upon by third parties.
1-7 Business risk is the risk that the investment will be impaired because a company invested in is unable to
meet its financial obligations due to economic conditions or poor management decisions. Information
risk is the risk that the information used to assess business risk is not accurate. Auditors can directly
reduce information risk, but have only limited effect on business risk.
1-8 At cthe cbeginning cof cthe ccentury, cthe cprincipal cobjective cof cauditing cwas c the cprevention cand
cdetection cof c fraud. c Audit c work ccentered con cthe cbalance csheet, cbecause cthe cincome cstatement
cwas c regarded cas chighly c confidential cand c not c for c public cdisclosure. c c Today, c the cprincipal
cobjective cof c auditing c is c to cform can c opinion con cthe cfairness c of cfinancial cstatements c and ctheir
c conformity cwith cgenerally caccepted caccounting c principles. c But c the cprofessional c standards c also
c require cthat c an c audit c be cdesigned cto cprovide creasonable c assurance cof c detecting c material
cmisstatements, c due cto cerrors c or c fraud. c c Particular c emphasis c is c placed c on c the cincome
cstatement c which cis c of cgreat c importance cto cinvestors. c Auditing ctoday calso chas c the cobjectives c of
c meeting cthe crequirements c of c the cSecurities c and cExchange cCommission c(SEC) c and cthe cPublic
cCompany c Accounting c Oversight c Board c for c public c companies.
1-9 The cstatement c is cincorrect. cThe cincreasing cintegrated cdatabases c of c today, calong cwith
cavailable caudit c procedures c make c audited c entire c populations c a c possibility c in c many
c situations.
1-10 An coperational caudit cattempts c to cmeasure cthe ceffectiveness cand cefficiency cof ca cspecific cunit
c of can c organization. c It c involves c more csubjective cjudgments c than ca ccompliance caudit c or can
caudit c of cfinancial c statements c because cthe ccriteria c of c effectiveness c and cefficiency cof
c departmental cperformance care cnot c as c clearly cestablished cas c are cmany claws cand cregulations
c or cgenerally caccepted caccounting cprinciples.
The creport c prepared cafter ccompletion cof c an coperational caudit c is c usually cdirected cto
cmanagement c of c the c organization c in c which c the c audit c work c was c done.
1-11 A ccompliance caudit cis can caudit cto cdetermine cwhether cfinancial creports cor cother cassertions care
c in c compliance cwith cestablished ccriteria. c The cnecessary cingredients c are cverifiable cdata c and cthe
cexistence cof c standards c established cby can cauthoritative cbody. c An coperational caudit, c on cthe
cother chand, c is c a c review cof c a c department c or cother cunit cof c a cbusiness c or cgovernmental
corganization cto cmeasure cthe ceffectiveness c and c efficiency cof coperations. c Internal cauditors c often
cperform coperational caudits c as c do cauditors c employed cby c the c Government c Accountability
c Office c (GAO) c of c the c federal c government.
1-12 Internal cauditors c must c be cindependent cof cthe cdepartment cheads cand cother cline cexecutives cwhose
cwork cthey c review. cHowever, cinternal cauditors care cnot c independent c in cthe csame csense cas c a
cpublic caccounting cfirm.
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 ―crisis of credibility‖ largely arose from the number of companies that restated their previously
issued financial statements as a result of accounting irregularities and fraud. Especially responsible were
the very visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted
the largest companies in American history to do so. The extent of the accounting irregularities and fraud
being investigated and disclosed brought into question the effectiveness of financial statement audits. In
addition, the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on
charges of destroying documents related to the Enron case brought into question the ethics standards of
the profession.
1-2 Assurance services are professional services that enhance the quality of information, or its context, for
decision-making. The two types are: (a) those that increase the reliability of information and (b) those
that involve putting information in a form or context that facilitates decision-making.
1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall assertion,
made by management, most frequently is that the financial statements follow generally accepted
accounting principles.
1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock
exchange and by the rules of the Securities and Exchange Commission to provide an audit report with the
annual financial statements furnished to its stockholders. It also is required to engage the auditors to
provide an opinion on its internal control. Apart from legal requirements, however, a large listed
corporation recognizes that it must maintain investor confidence in the reliability of its financial
statements and internal control over financial reporting if it is to continue to be able to secure capital
from the public. The report by a firm of certified public accountants adds credibility to the financial
statements prepared by the corporation. When a small family-owned enterprise elects to have an audit,
the purpose usually is to use the auditors' report to support an application for a bank loan.
, 1-5 A report by an independent public accountant concerning the fairness of a company's financial statements
is commonly required in the following situations:
(1) Application for a bank loan.
(2) Establishing credit for purchase of merchandise, equipment, or other assets.
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholders
or partners).
(4) Issuance of securities by a corporation.
(5) Annual financial statements by a corporation with securities listed on a stock exchange or traded
over the counter.
(6) Sale of an ongoing business.
(7) Termination of a partnership.
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared
following the appropriate criteria, usually generally accepted accounting principles. As such, an increase
in credibility results in financial statements that can be believed and relied upon by third parties.
1-7 Business risk is the risk that the investment will be impaired because a company invested in is unable to
meet its financial obligations due to economic conditions or poor management decisions. Information
risk is the risk that the information used to assess business risk is not accurate. Auditors can directly
reduce information risk, but have only limited effect on business risk.
1-8 At cthe cbeginning cof cthe ccentury, cthe cprincipal cobjective cof cauditing cwas c the cprevention cand
cdetection cof c fraud. c Audit c work ccentered con cthe cbalance csheet, cbecause cthe cincome cstatement
cwas c regarded cas chighly c confidential cand c not c for c public cdisclosure. c c Today, c the cprincipal
cobjective cof c auditing c is c to cform can c opinion con cthe cfairness c of cfinancial cstatements c and ctheir
c conformity cwith cgenerally caccepted caccounting c principles. c But c the cprofessional c standards c also
c require cthat c an c audit c be cdesigned cto cprovide creasonable c assurance cof c detecting c material
cmisstatements, c due cto cerrors c or c fraud. c c Particular c emphasis c is c placed c on c the cincome
cstatement c which cis c of cgreat c importance cto cinvestors. c Auditing ctoday calso chas c the cobjectives c of
c meeting cthe crequirements c of c the cSecurities c and cExchange cCommission c(SEC) c and cthe cPublic
cCompany c Accounting c Oversight c Board c for c public c companies.
1-9 The cstatement c is cincorrect. cThe cincreasing cintegrated cdatabases c of c today, calong cwith
cavailable caudit c procedures c make c audited c entire c populations c a c possibility c in c many
c situations.
1-10 An coperational caudit cattempts c to cmeasure cthe ceffectiveness cand cefficiency cof ca cspecific cunit
c of can c organization. c It c involves c more csubjective cjudgments c than ca ccompliance caudit c or can
caudit c of cfinancial c statements c because cthe ccriteria c of c effectiveness c and cefficiency cof
c departmental cperformance care cnot c as c clearly cestablished cas c are cmany claws cand cregulations
c or cgenerally caccepted caccounting cprinciples.
The creport c prepared cafter ccompletion cof c an coperational caudit c is c usually cdirected cto
cmanagement c of c the c organization c in c which c the c audit c work c was c done.
1-11 A ccompliance caudit cis can caudit cto cdetermine cwhether cfinancial creports cor cother cassertions care
c in c compliance cwith cestablished ccriteria. c The cnecessary cingredients c are cverifiable cdata c and cthe
cexistence cof c standards c established cby can cauthoritative cbody. c An coperational caudit, c on cthe
cother chand, c is c a c review cof c a c department c or cother cunit cof c a cbusiness c or cgovernmental
corganization cto cmeasure cthe ceffectiveness c and c efficiency cof coperations. c Internal cauditors c often
cperform coperational caudits c as c do cauditors c employed cby c the c Government c Accountability
c Office c (GAO) c of c the c federal c government.
1-12 Internal cauditors c must c be cindependent cof cthe cdepartment cheads cand cother cline cexecutives cwhose
cwork cthey c review. cHowever, cinternal cauditors care cnot c independent c in cthe csame csense cas c a
cpublic caccounting cfirm.
