Principles of Auditing & Other Assurance
Services 23rd Edition by Ray Whittington
SOLUTION MANUAL
FULLY COVERED CHAPTERS 1-21|
VERIFIED STUDY GUIDE WITH
Q&As
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, TABLE OF CONTENTS
CHAPTER 1: The Role of the Public Accountant in the American Economy
CHAPTER 2: Professional Standards
CHAPTER 3 : Professional Ethics
CHAPTER 4: Legal Liability of CPA
CHAPTER 5 : Audit Evidence and Documentation
CHAPTER 6: Audit Planning, Understanding the Client, Assessing Risks and Responding
CHAPTER 7 : Internal Control
CHAPTER 8: Consideration of Internal Control in an IT Environment
CHAPTER 9 : Audit Sampling
CHAPTER 10: Cash and Financial Investments
CHAPTER 11: Accounts Receivable, Notes Receivable, and Revenue
CHAPTER 12: Inventories and Cost of Goods Sold
CHAPTER 13: Property, Plant, and Equipment: Depreciation and Depletion
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 Issuers (Public Companies)
CHAPTER 19: Additional Assurance Services: Historical Financial Information
CHAPTER 20: Additional Assurance Services: Other Information
CHAPTER 21: Internal, Operational and Compliance Auditing
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, 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.
Ar
(6) Sale of an ongoing business.
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(7) Termination of a partnership.
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, 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 the beginning of the century, the principal objective of auditing was the prevention and detection of
fraud. Audit work centered on the balance sheet, because the income statement was regarded as highly
confidential and not for public disclosure. Today, the principal objective of auditing is to form an opinion on
the fairness of financial statements and their conformity with generally accepted accounting principles. But
the professional standards also require that an audit be designed to provide reasonable assurance of detecting
material misstatements, due to errors or fraud. Particular emphasis is placed on the income statement which is
of great importance to investors. Auditing today also has the objectives of meeting the requirements of the
Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board for public
companies.
1-9 The statement is incorrect. The increasing integrated databases of today, along with available audit
procedures make audited entire populations a possibility in many situations.
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an
organization. It involves more subjective judgments than a compliance audit or an audit of financial
statements because the criteria of effectiveness and efficiency of departmental performance are not as clearly
established as are many laws and regulations or generally accepted accounting principles.
The report prepared after completion of an operational audit is usually directed to management of the
organization in which the audit work was done.
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in
compliance with established criteria. The necessary ingredients are verifiable data and the existence of
standards established by an authoritative body. An operational audit, on the other hand, is a review of a
department or other unit of a business or governmental organization to measure the effectiveness and
efficiency of operations. Internal auditors often perform operational audits as do auditors employed by the
Government Accountability Office (GAO) of the federal government.
1-12 Internal auditors must be independent of the department heads and other line executives whose work they
review. However, internal auditors are not independent in the same sense as a public accounting firm.
Ar
The public accounting firm serves many clients and the revenue obtained from any one client is only a small
part of the revenue of the firm. Internal auditors, on the other hand, are employees of one company, and are
ch
subject to the restraints inherent in the employer-employee relationship. Internal auditors can achieve a great
Do
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c
Services 23rd Edition by Ray Whittington
SOLUTION MANUAL
FULLY COVERED CHAPTERS 1-21|
VERIFIED STUDY GUIDE WITH
Q&As
Ar
ch
Do
Page | 1
c
, TABLE OF CONTENTS
CHAPTER 1: The Role of the Public Accountant in the American Economy
CHAPTER 2: Professional Standards
CHAPTER 3 : Professional Ethics
CHAPTER 4: Legal Liability of CPA
CHAPTER 5 : Audit Evidence and Documentation
CHAPTER 6: Audit Planning, Understanding the Client, Assessing Risks and Responding
CHAPTER 7 : Internal Control
CHAPTER 8: Consideration of Internal Control in an IT Environment
CHAPTER 9 : Audit Sampling
CHAPTER 10: Cash and Financial Investments
CHAPTER 11: Accounts Receivable, Notes Receivable, and Revenue
CHAPTER 12: Inventories and Cost of Goods Sold
CHAPTER 13: Property, Plant, and Equipment: Depreciation and Depletion
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 Issuers (Public Companies)
CHAPTER 19: Additional Assurance Services: Historical Financial Information
CHAPTER 20: Additional Assurance Services: Other Information
CHAPTER 21: Internal, Operational and Compliance Auditing
Ar
ch
Do
Page | 2
c
, 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.
Ar
(6) Sale of an ongoing business.
ch
(7) Termination of a partnership.
Do
Page | 3
c
, 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 the beginning of the century, the principal objective of auditing was the prevention and detection of
fraud. Audit work centered on the balance sheet, because the income statement was regarded as highly
confidential and not for public disclosure. Today, the principal objective of auditing is to form an opinion on
the fairness of financial statements and their conformity with generally accepted accounting principles. But
the professional standards also require that an audit be designed to provide reasonable assurance of detecting
material misstatements, due to errors or fraud. Particular emphasis is placed on the income statement which is
of great importance to investors. Auditing today also has the objectives of meeting the requirements of the
Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board for public
companies.
1-9 The statement is incorrect. The increasing integrated databases of today, along with available audit
procedures make audited entire populations a possibility in many situations.
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an
organization. It involves more subjective judgments than a compliance audit or an audit of financial
statements because the criteria of effectiveness and efficiency of departmental performance are not as clearly
established as are many laws and regulations or generally accepted accounting principles.
The report prepared after completion of an operational audit is usually directed to management of the
organization in which the audit work was done.
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in
compliance with established criteria. The necessary ingredients are verifiable data and the existence of
standards established by an authoritative body. An operational audit, on the other hand, is a review of a
department or other unit of a business or governmental organization to measure the effectiveness and
efficiency of operations. Internal auditors often perform operational audits as do auditors employed by the
Government Accountability Office (GAO) of the federal government.
1-12 Internal auditors must be independent of the department heads and other line executives whose work they
review. However, internal auditors are not independent in the same sense as a public accounting firm.
Ar
The public accounting firm serves many clients and the revenue obtained from any one client is only a small
part of the revenue of the firm. Internal auditors, on the other hand, are employees of one company, and are
ch
subject to the restraints inherent in the employer-employee relationship. Internal auditors can achieve a great
Do
Page | 4
c
