Principles of Auditing & Other Assurance
Services Whittington Solutions Manual
chapter 1: The Role of the Public Accountant in the
American Economy
Question 1
Topic: Crisis of Credibility
Question: What was the "crisis of credibility" in the accounting profession, and what
major events contributed to it?
Answer:
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 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 ethical standards of the profession .
Question 2
Topic: Assurance Services
Question: What are assurance services, and what are the two main types?
Answer:
Assurance services are professional services that enhance the quality of information,
or its context, for decision-making . The two types are:
,1. Those that increase the reliability of information – Services that provide
assurance about the accuracy and credibility of information
2. Those that involve putting information in a form or context that facilitates
decision-making – Services that help users better understand and utilize
information
Question 3
Topic: Financial Statement Audit
Question: What is the most common type of attest engagement, and what is the
overall assertion made by management?
Answer:
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 .
Question 4
Topic: Reasons for Audits
Question: Why are large corporations with securities listed on stock exchanges
required to have audits?
Answer:
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 .
, Question 5
Topic: Audit Report Requirements
Question: In which situations is a report by an independent public accountant
concerning the fairness of a company's financial statements commonly required?
Answer:
A report by an independent public accountant is commonly required in the following
situations:
1. Application for a bank loan
2. Issuance of securities to the public
3. Sale of a business or merger with another company
4. Compliance with regulatory requirements (SEC, stock exchanges)
Question 6
Topic: Audit Credibility
Question: How does an audit add credibility to financial statements?
Answer:
An audit adds credibility to financial statements by increasing 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 .
Question 7
Topic: Business Risk vs. Information Risk
Question: Distinguish between business risk and information risk.
Answer:
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
Key point: Auditors can directly reduce information risk, but have only limited
effect on business risk .
Question 8
Topic: Evolution of Auditing Objectives
Question: How has the principal objective of auditing changed from the beginning
of the 20th century to today?
Answer:
Early 20th Century: The principal objective 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 is to form an opinion on the fairness of financial
statements and their conformity with generally accepted accounting principles. 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 .
Question 9
Topic: Auditing Entire Populations
Question: Is the statement "Auditing entire populations is impossible" true or false?
Answer:
The statement is incorrect. The increasing integrated databases of today, along with
available audit procedures, make audited entire populations a possibility in many
situations .
Services Whittington Solutions Manual
chapter 1: The Role of the Public Accountant in the
American Economy
Question 1
Topic: Crisis of Credibility
Question: What was the "crisis of credibility" in the accounting profession, and what
major events contributed to it?
Answer:
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 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 ethical standards of the profession .
Question 2
Topic: Assurance Services
Question: What are assurance services, and what are the two main types?
Answer:
Assurance services are professional services that enhance the quality of information,
or its context, for decision-making . The two types are:
,1. Those that increase the reliability of information – Services that provide
assurance about the accuracy and credibility of information
2. Those that involve putting information in a form or context that facilitates
decision-making – Services that help users better understand and utilize
information
Question 3
Topic: Financial Statement Audit
Question: What is the most common type of attest engagement, and what is the
overall assertion made by management?
Answer:
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 .
Question 4
Topic: Reasons for Audits
Question: Why are large corporations with securities listed on stock exchanges
required to have audits?
Answer:
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 .
, Question 5
Topic: Audit Report Requirements
Question: In which situations is a report by an independent public accountant
concerning the fairness of a company's financial statements commonly required?
Answer:
A report by an independent public accountant is commonly required in the following
situations:
1. Application for a bank loan
2. Issuance of securities to the public
3. Sale of a business or merger with another company
4. Compliance with regulatory requirements (SEC, stock exchanges)
Question 6
Topic: Audit Credibility
Question: How does an audit add credibility to financial statements?
Answer:
An audit adds credibility to financial statements by increasing 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 .
Question 7
Topic: Business Risk vs. Information Risk
Question: Distinguish between business risk and information risk.
Answer:
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
Key point: Auditors can directly reduce information risk, but have only limited
effect on business risk .
Question 8
Topic: Evolution of Auditing Objectives
Question: How has the principal objective of auditing changed from the beginning
of the 20th century to today?
Answer:
Early 20th Century: The principal objective 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 is to form an opinion on the fairness of financial
statements and their conformity with generally accepted accounting principles. 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 .
Question 9
Topic: Auditing Entire Populations
Question: Is the statement "Auditing entire populations is impossible" true or false?
Answer:
The statement is incorrect. The increasing integrated databases of today, along with
available audit procedures, make audited entire populations a possibility in many
situations .
