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 a risk ais a the arisk athat a the ainvestment a will abe aimpaired abecause aa a company ainvested ain
ais a unable atoameet a its a financial aobligations a due ato aeconomic aconditions a or apoor amanagement
a decisions. a Information arisk ais athe arisk athat athe ainformation aused ato aassess abusiness arisk ais anot
aaccurate. aAuditors acan adirectly areduce ainformation arisk, abut ahave aonly alimited aeffect aon
abusiness arisk.
1-8 At athe abeginning aof athe acentury, athe aprincipal aobjective aof aauditing awas a the aprevention aand
adetection aof afraud. a Audit a work acentered aon athe abalance asheet, abecause athe aincome astatement
a was a regarded aas a highly aconfidential a and a not a for a public adisclosure. a Today, a the aprincipal
a objective aof a auditing a is a to a form aan aopinion aon athe afairness a of a financial astatements a and atheir
a conformity awith agenerally aaccepted aaccounting aprinciples. a But a the aprofessional a standards a also
a require athat a an a audit a be adesigned a to aprovide areasonable aassurance aof a detecting a material
a misstatements, a due ato a errors a or a fraud. a Particular a emphasis a is a placed a on athe aincome astatement
a which ais a of a great a importance ato ainvestors. a Auditing atoday aalso ahas a the aobjectives a ofameeting
athe arequirements a of a the aSecurities a and aExchange aCommission a(SEC) a and athe aPublic aCompany
aAccounting aOversight aBoard afor apublic acompanies.
1-9 The astatement a is a incorrect. aThe aincreasing aintegrated adatabases a of a today, aalong awith
aavailable aauditaprocedures amake aaudited aentire apopulations aa apossibility ain amany
asituations.
1-10 An aoperational aaudit a attempts a to ameasure athe aeffectiveness a and aefficiency aof aa aspecific aunit
a of aan aorganization. a It a involves a more asubjective ajudgments a than aa acompliance aaudit a or aan
aaudit a of afinancial astatements a because athe acriteria a of a effectiveness a and aefficiency aof
a departmental aperformance aare anot a asaclearly aestablished aas a are amany alaws a and aregulations a or
a generally aaccepted aaccounting aprinciples.
The areport a prepared aafter acompletion aof aan aoperational aaudit a is a usually adirected ato
amanagementaof athe aorganization ain awhich athe aaudit awork awas adone.
1-11 A acompliance aaudit ais aan aaudit ato adetermine awhether afinancial areports aor aother aassertions aare
a in acompliance awith aestablished acriteria. a The anecessary aingredients a are averifiable adata a and athe
aexistence aof astandards a established aby aan aauthoritative abody. a An aoperational aaudit, a on athe aother
a hand, a is a a a review aof a aadepartment a or a other a unit a of a a a business a or a governmental aorganization
ato ameasure athe aeffectiveness a and aefficiency aof a operations. a Internal aauditors a often aperform
aoperational aaudits a as a do aauditors a employed aby athe aGovernment aAccountability aOffice a(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 ―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 a risk ais a the arisk athat a the ainvestment a will abe aimpaired abecause aa a company ainvested ain
ais a unable atoameet a its a financial aobligations a due ato aeconomic aconditions a or apoor amanagement
a decisions. a Information arisk ais athe arisk athat athe ainformation aused ato aassess abusiness arisk ais anot
aaccurate. aAuditors acan adirectly areduce ainformation arisk, abut ahave aonly alimited aeffect aon
abusiness arisk.
1-8 At athe abeginning aof athe acentury, athe aprincipal aobjective aof aauditing awas a the aprevention aand
adetection aof afraud. a Audit a work acentered aon athe abalance asheet, abecause athe aincome astatement
a was a regarded aas a highly aconfidential a and a not a for a public adisclosure. a Today, a the aprincipal
a objective aof a auditing a is a to a form aan aopinion aon athe afairness a of a financial astatements a and atheir
a conformity awith agenerally aaccepted aaccounting aprinciples. a But a the aprofessional a standards a also
a require athat a an a audit a be adesigned a to aprovide areasonable aassurance aof a detecting a material
a misstatements, a due ato a errors a or a fraud. a Particular a emphasis a is a placed a on athe aincome astatement
a which ais a of a great a importance ato ainvestors. a Auditing atoday aalso ahas a the aobjectives a ofameeting
athe arequirements a of a the aSecurities a and aExchange aCommission a(SEC) a and athe aPublic aCompany
aAccounting aOversight aBoard afor apublic acompanies.
1-9 The astatement a is a incorrect. aThe aincreasing aintegrated adatabases a of a today, aalong awith
aavailable aauditaprocedures amake aaudited aentire apopulations aa apossibility ain amany
asituations.
1-10 An aoperational aaudit a attempts a to ameasure athe aeffectiveness a and aefficiency aof aa aspecific aunit
a of aan aorganization. a It a involves a more asubjective ajudgments a than aa acompliance aaudit a or aan
aaudit a of afinancial astatements a because athe acriteria a of a effectiveness a and aefficiency aof
a departmental aperformance aare anot a asaclearly aestablished aas a are amany alaws a and aregulations a or
a generally aaccepted aaccounting aprinciples.
The areport a prepared aafter acompletion aof aan aoperational aaudit a is a usually adirected ato
amanagementaof athe aorganization ain awhich athe aaudit awork awas adone.
1-11 A acompliance aaudit ais aan aaudit ato adetermine awhether afinancial areports aor aother aassertions aare
a in acompliance awith aestablished acriteria. a The anecessary aingredients a are averifiable adata a and athe
aexistence aof astandards a established aby aan aauthoritative abody. a An aoperational aaudit, a on athe aother
a hand, a is a a a review aof a aadepartment a or a other a unit a of a a a business a or a governmental aorganization
ato ameasure athe aeffectiveness a and aefficiency aof a operations. a Internal aauditors a often aperform
aoperational aaudits a as a do aauditors a employed aby athe aGovernment aAccountability aOffice a(GAO)
