SOLUTION MANUAL FOR
c c
c Principles Of Auditing And Other Assurance Services
c c c c c c c
23rd Edition By Ray Whittington Kurt
c c c c c c
ALL Chapters (1 - 21)
c c c c
, • Table of Contents
c c
Chapterc1:cThecRolecofcthecPubliccAccountantcincthecAmericanEconomy
Chapterc2:cProfessionalcStandards
Chapterc3:cProfessionalcEthics
Chapterc4:cLegalcLiabilitycofcCPAs
Chapterc5:cAuditcEvidencecandcDocumentation
Chapterc6:cAuditcPlanning,cUnderstandingcthecClient,cAssessingRisks,candcResponding
Chapterc7:cInternalcControl
Chapterc8:cConsiderationcofcInternalcControlcincancInformationTechnologycEnvironment
Chapterc9:cAuditcSampling
Chapterc10:cCashcandcFinancialcInvestments
Chapterc11:cAccountscReceivable,cNotescReceivable,candRevenue
Chapterc12:cInventoriescandcCostcofcGoodscSold
Chapterc13:cProperty,cPlant,candcEquipment:cDepreciationcandDepletion
Chapterc14:cAccountscPayablecandcOthercLiabilities
Chapterc15:cDebtcandcEquitycCapital
Chapterc16:cAuditingcOperationscandcCompletingcthecAudit
Chapterc17:cAuditors’cReports
Chapterc18:cIntegratedcAuditscofcPubliccCompanies
Chapterc19:cAdditionalcAssurancecServices:cHistoricalcFinancialInformation
Chapterc20:cAdditionalcAssurancecServices:cOthercInformation
Chapterc21:cInternal,cOperational,candcCompliancecAuditing
,CHAPTER 1 c
The Role of the Publi
c c c c
c Accountant in the
c c c
American Economy c
ReviewcQuestions
1-1 Thec―crisiscofccredibility‖clargelycarosecfromcthecnumbercofccompaniescthatcrestatedctheircpreviouslycissuedc
financialcstatementsc asc ac resultc ofc accountingcirregularitiesc andcfraud.c Especiallycresponsiblecwerecthecveryc
visiblecEnroncandcWorldComcfraudccases.cBothccompaniesc filedcforcbankruptcycandcconstitutedctheclargestc
companiesc incAmericanchistoryctocdocso.c Thecextentc ofcthecaccountingcirregularitiesc andcfraudcbeingcinvesti
gatedcandcdisclosedcbroughtc intocquestionctheceffectivenessc ofc financialcstatementc audits.c Incaddition,ctheccr
iminalcconvictioncofcArthurcAndersen,cLLP,conecofcthecthencBigc5caccountingcfirms,concchargesc ofc destroyi
ngcdocumentsc relatedctocthecEnronccasecbroughtc intocquestioncthecethicsc standardscofcthecprofession.
1-2 Assurancecservicescarecprofessionalcservicescthatcenhancecthecqualitycofcinformation,corcitsccontext,cforcd
ecision-
making.cThectwoctypescare:c(a)cthosecthatcincreasecthecreliabilitycofcinformationcandc(b)cthosecthatcinvolv
ecputtingcinformationcincacformcorccontextcthatcfacilitatescdecision-making.
1-3 Acfinancialcstatementc auditc is,cbycfar,cthecmostc commonctypecofc attestc engagement.c Thecoverallcassertion,cm
adecbycmanagement,cmostcfrequentlyciscthatcthecfinancialcstatementscfollowcgenerallycacceptedcaccountingc
principles.
1-4 Aclargeccorporationcwithcsecuritiesclistedconcacstockcexchangeciscrequiredcbycthecrulescofcthecstockcexchangec
andcbycthecrulesc ofc thecSecuritiesc andcExchangecCommissionctocprovidecancauditc reportc withcthecannualcfina
ncialcstatementsc furnishedctocitsc stockholders.c Itc alsocisc requiredctocengagecthecauditorsc tocprovidecancopinio
nconcitscinternalccontrol.cApartcfromclegalcrequirements,chowever,caclargeclistedccorporationcrecognizesctha
tcitcmustcmaintaincinvestorcconfidencecincthecreliabilitycofcitscfinancialcstatementsc andc internalc controlc overc f
inancialc reportingc ifc itc isc toc continuectoc becablectoc secureccapitalcfromcthecpublic.c Thecreportc bycacfirmcofccer
tifiedcpubliccaccountantsc addsc credibilityctocthecfinancialcstatementsc preparedcbyctheccorporation.c Whencac s
mallcfamily-
ownedcenterprisecelectsc tochavecancaudit,cthecpurposecusuallycisctocusecthecauditors'creportctocsupportcancappli
cationc forcacbankcloan.
, 1-5 Acreportc bycancindependentc publiccaccountantc concerningcthecfairnessc ofcac company'sc financialcstatementscis
ccommonly crequiredcincthecfollowingcsituations:
(1) Applicationcforc ac bankcloan.
(2) Establishingccreditc forcpurchasecofc merchandise,cequipment,corc otherc assets.
(3) Reportingcoperatingcresults,c financialcposition,c andccashcflowsc tocabsenteecownersc (stockholdersco
rcpartners).
(4) Issuancecofc securitiesc bycac corporation.
(5) Annualcfinancialcstatementsc bycac corporationcwithcsecuritiesc listedconcac stockcexchangecorc tradedco
verctheccounter.
(6) Salecofc ancongoingcbusiness.
(7) Terminationcofc ac partnership.
1-6 Tocaddccredibilityctocfinancialcstatementsc isctocincreasectheclikelihoodcthatc theychavecbeencpreparedcfollowin
gcthecappropriateccriteria,cusuallycgenerallycacceptedcaccountingcprinciples.c Asc such,cancincreasecinccredibil
itycresultsc incfinancialcstatementscthatc cancbecbelievedcandcreliedcuponcbycthirdcparties.
1-7 Businessc riskcisc thecriskcthatc thecinvestmentc willcbecimpairedcbecausecaccompanycinvestedcincisc unablectocm
eetcitscfinancialcobligationscduectoceconomiccconditionscorcpoorcmanagementcdecisions.cInformationcriskci
scthecriskcthatcthecinformationcusedctocassesscbusinesscriskciscnotcaccurate.cAuditorsccancdirectlycreduceci
nformationcrisk,cbutchaveconlyclimitedceffectconcbusinesscrisk.
1-8 Atcthecbeginningcofctheccentury,cthecprincipalcobjectivecofcauditingcwasc thecpreventioncandcdetectioncofcfrau
d.c Auditcworkccenteredconcthecbalancecsheet,cbecausecthecincomecstatementcwasc regardedcasc highlycconfide
ntialcandcnotc forc publiccdisclosure.c Today,c thecprincipalcobjectivecofc auditingcisc tocformcancopinionconcthecf
airnessc ofcfinancialcstatementsc andctheircconformitycwithcgenerallycacceptedcaccountingcprinciples.c Butc thec
professionalcstandardsc alsocrequirecthatc ancauditc becdesignedctocprovidecreasonablecassurancecofc detectingc
materialcmisstatements,c duectocerrorsc orc fraud.c Particularcemphasisc isc placedconcthecincomecstatementc whic
hcisc ofcgreatc importancectocinvestors.c Auditingctodaycalsochasc thecobjectivesc ofcmeetingcthecrequirementsc ofc
thecSecuritiesc andcExchangecCommissionc(SEC)c andcthecPubliccCompanycAccountingcOversightcBoardcfo
rcpublicccompanies.
1-9 Thecstatementc isc incorrect.cThecincreasingcintegratedcdatabasesc ofc today,calongcwithcavailablecauditcp
rocedurescmakecauditedcentirecpopulationscacpossibilitycincmanycsituations.
1-10 Ancoperationalcauditcattemptsc tocmeasurectheceffectivenessc andcefficiencycofcacspecificcunitc ofcancorgani
zation.c Itcinvolvesc morecsubjectivecjudgmentscthancaccompliancecauditc orcancauditc ofcfinancialcstatemen
tsc becausectheccriteriac ofc effectivenessc andcefficiencycofc departmentalcperformancecarecnotc ascclearlycest
ablishedcasc arecmanyclawsc andcregulationscorcgenerallycacceptedcaccountingcprinciples.
Thecreportc preparedcafterc completioncofc ancoperationalcauditc isc usuallycdirectedctocmanagementcofc
thecorganizationcincwhichcthecauditcworkcwascdone.
1-11 Accompliancecauditciscancauditctocdeterminecwhethercfinancialcreportscorcothercassertionscarec inccomplianc
ecwithcestablishedccriteria.c Thecnecessarycingredientsc arecverifiablecdatac andcthecexistencecofcstandardsc est
ablishedcbycancauthoritativecbody.c Ancoperationalcaudit,concthecotherc hand,cisc ac reviewcofc acdepartmentc orc
othercunitcofcacbusinessc orcgovernmentalcorganizationctocmeasurectheceffectivenessc andcefficiencycofcopera
tions.c Internalcauditorsc oftencperformcoperationalcauditsc asc docauditorsc employedcbycthecGovernmentcAc
countabilitycOfficec(GAO)cofcthecfederalcgovernment.
1-12 Internalcauditorsc mustc becindependentc ofcthecdepartmentc headsc andcotherclinecexecutivescwhosecworkctheycre
view.cHowever,cinternalcauditorscarecnotcindependentcincthecsamecsensecascacpubliccaccountingcfirm.
c c
c Principles Of Auditing And Other Assurance Services
c c c c c c c
23rd Edition By Ray Whittington Kurt
c c c c c c
ALL Chapters (1 - 21)
c c c c
, • Table of Contents
c c
Chapterc1:cThecRolecofcthecPubliccAccountantcincthecAmericanEconomy
Chapterc2:cProfessionalcStandards
Chapterc3:cProfessionalcEthics
Chapterc4:cLegalcLiabilitycofcCPAs
Chapterc5:cAuditcEvidencecandcDocumentation
Chapterc6:cAuditcPlanning,cUnderstandingcthecClient,cAssessingRisks,candcResponding
Chapterc7:cInternalcControl
Chapterc8:cConsiderationcofcInternalcControlcincancInformationTechnologycEnvironment
Chapterc9:cAuditcSampling
Chapterc10:cCashcandcFinancialcInvestments
Chapterc11:cAccountscReceivable,cNotescReceivable,candRevenue
Chapterc12:cInventoriescandcCostcofcGoodscSold
Chapterc13:cProperty,cPlant,candcEquipment:cDepreciationcandDepletion
Chapterc14:cAccountscPayablecandcOthercLiabilities
Chapterc15:cDebtcandcEquitycCapital
Chapterc16:cAuditingcOperationscandcCompletingcthecAudit
Chapterc17:cAuditors’cReports
Chapterc18:cIntegratedcAuditscofcPubliccCompanies
Chapterc19:cAdditionalcAssurancecServices:cHistoricalcFinancialInformation
Chapterc20:cAdditionalcAssurancecServices:cOthercInformation
Chapterc21:cInternal,cOperational,candcCompliancecAuditing
,CHAPTER 1 c
The Role of the Publi
c c c c
c Accountant in the
c c c
American Economy c
ReviewcQuestions
1-1 Thec―crisiscofccredibility‖clargelycarosecfromcthecnumbercofccompaniescthatcrestatedctheircpreviouslycissuedc
financialcstatementsc asc ac resultc ofc accountingcirregularitiesc andcfraud.c Especiallycresponsiblecwerecthecveryc
visiblecEnroncandcWorldComcfraudccases.cBothccompaniesc filedcforcbankruptcycandcconstitutedctheclargestc
companiesc incAmericanchistoryctocdocso.c Thecextentc ofcthecaccountingcirregularitiesc andcfraudcbeingcinvesti
gatedcandcdisclosedcbroughtc intocquestionctheceffectivenessc ofc financialcstatementc audits.c Incaddition,ctheccr
iminalcconvictioncofcArthurcAndersen,cLLP,conecofcthecthencBigc5caccountingcfirms,concchargesc ofc destroyi
ngcdocumentsc relatedctocthecEnronccasecbroughtc intocquestioncthecethicsc standardscofcthecprofession.
1-2 Assurancecservicescarecprofessionalcservicescthatcenhancecthecqualitycofcinformation,corcitsccontext,cforcd
ecision-
making.cThectwoctypescare:c(a)cthosecthatcincreasecthecreliabilitycofcinformationcandc(b)cthosecthatcinvolv
ecputtingcinformationcincacformcorccontextcthatcfacilitatescdecision-making.
1-3 Acfinancialcstatementc auditc is,cbycfar,cthecmostc commonctypecofc attestc engagement.c Thecoverallcassertion,cm
adecbycmanagement,cmostcfrequentlyciscthatcthecfinancialcstatementscfollowcgenerallycacceptedcaccountingc
principles.
1-4 Aclargeccorporationcwithcsecuritiesclistedconcacstockcexchangeciscrequiredcbycthecrulescofcthecstockcexchangec
andcbycthecrulesc ofc thecSecuritiesc andcExchangecCommissionctocprovidecancauditc reportc withcthecannualcfina
ncialcstatementsc furnishedctocitsc stockholders.c Itc alsocisc requiredctocengagecthecauditorsc tocprovidecancopinio
nconcitscinternalccontrol.cApartcfromclegalcrequirements,chowever,caclargeclistedccorporationcrecognizesctha
tcitcmustcmaintaincinvestorcconfidencecincthecreliabilitycofcitscfinancialcstatementsc andc internalc controlc overc f
inancialc reportingc ifc itc isc toc continuectoc becablectoc secureccapitalcfromcthecpublic.c Thecreportc bycacfirmcofccer
tifiedcpubliccaccountantsc addsc credibilityctocthecfinancialcstatementsc preparedcbyctheccorporation.c Whencac s
mallcfamily-
ownedcenterprisecelectsc tochavecancaudit,cthecpurposecusuallycisctocusecthecauditors'creportctocsupportcancappli
cationc forcacbankcloan.
, 1-5 Acreportc bycancindependentc publiccaccountantc concerningcthecfairnessc ofcac company'sc financialcstatementscis
ccommonly crequiredcincthecfollowingcsituations:
(1) Applicationcforc ac bankcloan.
(2) Establishingccreditc forcpurchasecofc merchandise,cequipment,corc otherc assets.
(3) Reportingcoperatingcresults,c financialcposition,c andccashcflowsc tocabsenteecownersc (stockholdersco
rcpartners).
(4) Issuancecofc securitiesc bycac corporation.
(5) Annualcfinancialcstatementsc bycac corporationcwithcsecuritiesc listedconcac stockcexchangecorc tradedco
verctheccounter.
(6) Salecofc ancongoingcbusiness.
(7) Terminationcofc ac partnership.
1-6 Tocaddccredibilityctocfinancialcstatementsc isctocincreasectheclikelihoodcthatc theychavecbeencpreparedcfollowin
gcthecappropriateccriteria,cusuallycgenerallycacceptedcaccountingcprinciples.c Asc such,cancincreasecinccredibil
itycresultsc incfinancialcstatementscthatc cancbecbelievedcandcreliedcuponcbycthirdcparties.
1-7 Businessc riskcisc thecriskcthatc thecinvestmentc willcbecimpairedcbecausecaccompanycinvestedcincisc unablectocm
eetcitscfinancialcobligationscduectoceconomiccconditionscorcpoorcmanagementcdecisions.cInformationcriskci
scthecriskcthatcthecinformationcusedctocassesscbusinesscriskciscnotcaccurate.cAuditorsccancdirectlycreduceci
nformationcrisk,cbutchaveconlyclimitedceffectconcbusinesscrisk.
1-8 Atcthecbeginningcofctheccentury,cthecprincipalcobjectivecofcauditingcwasc thecpreventioncandcdetectioncofcfrau
d.c Auditcworkccenteredconcthecbalancecsheet,cbecausecthecincomecstatementcwasc regardedcasc highlycconfide
ntialcandcnotc forc publiccdisclosure.c Today,c thecprincipalcobjectivecofc auditingcisc tocformcancopinionconcthecf
airnessc ofcfinancialcstatementsc andctheircconformitycwithcgenerallycacceptedcaccountingcprinciples.c Butc thec
professionalcstandardsc alsocrequirecthatc ancauditc becdesignedctocprovidecreasonablecassurancecofc detectingc
materialcmisstatements,c duectocerrorsc orc fraud.c Particularcemphasisc isc placedconcthecincomecstatementc whic
hcisc ofcgreatc importancectocinvestors.c Auditingctodaycalsochasc thecobjectivesc ofcmeetingcthecrequirementsc ofc
thecSecuritiesc andcExchangecCommissionc(SEC)c andcthecPubliccCompanycAccountingcOversightcBoardcfo
rcpublicccompanies.
1-9 Thecstatementc isc incorrect.cThecincreasingcintegratedcdatabasesc ofc today,calongcwithcavailablecauditcp
rocedurescmakecauditedcentirecpopulationscacpossibilitycincmanycsituations.
1-10 Ancoperationalcauditcattemptsc tocmeasurectheceffectivenessc andcefficiencycofcacspecificcunitc ofcancorgani
zation.c Itcinvolvesc morecsubjectivecjudgmentscthancaccompliancecauditc orcancauditc ofcfinancialcstatemen
tsc becausectheccriteriac ofc effectivenessc andcefficiencycofc departmentalcperformancecarecnotc ascclearlycest
ablishedcasc arecmanyclawsc andcregulationscorcgenerallycacceptedcaccountingcprinciples.
Thecreportc preparedcafterc completioncofc ancoperationalcauditc isc usuallycdirectedctocmanagementcofc
thecorganizationcincwhichcthecauditcworkcwascdone.
1-11 Accompliancecauditciscancauditctocdeterminecwhethercfinancialcreportscorcothercassertionscarec inccomplianc
ecwithcestablishedccriteria.c Thecnecessarycingredientsc arecverifiablecdatac andcthecexistencecofcstandardsc est
ablishedcbycancauthoritativecbody.c Ancoperationalcaudit,concthecotherc hand,cisc ac reviewcofc acdepartmentc orc
othercunitcofcacbusinessc orcgovernmentalcorganizationctocmeasurectheceffectivenessc andcefficiencycofcopera
tions.c Internalcauditorsc oftencperformcoperationalcauditsc asc docauditorsc employedcbycthecGovernmentcAc
countabilitycOfficec(GAO)cofcthecfederalcgovernment.
1-12 Internalcauditorsc mustc becindependentc ofcthecdepartmentc headsc andcotherclinecexecutivescwhosecworkctheycre
view.cHowever,cinternalcauditorscarecnotcindependentcincthecsamecsensecascacpubliccaccountingcfirm.
