SOLUTION MANUAL FOR PRINCIPLES OF
AUDITING AND OTHER ASSURANCE
SERVICES, 23RD EDITION BY O. RAY
WHITTINGTON & KURT PANY | PRACTICE
QUESTIONS WITH VERIFIED ANSWERS &
DETAILED RATIONALES | ALL CHAPTERS 1-
21 | LATEST 2026 UPDATE
PART I: THE AUDITING PROFESSION (Chapters 1–4)
CHAPTER 1: The Role of the Public Accountant in the American Economy
1. What event largely contributed to the "crisis of credibility" in the accounting profession?
A) The Great Depression
B) The Enron and WorldCom fraud cases
C) The Savings and Loan crisis
D) The 2008 financial crisis
Answer: B
Rationale: 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 the very
visible Enron and WorldCom cases.
2. What are assurance services?
A) Services that only involve financial statement audits
B) Professional services that enhance the quality of information, or its context, for decision-making
C) Services provided exclusively to public companies
D) Consulting services for management
Answer: B
,Rationale: Assurance services are professional services that enhance the quality of information, or its
context, for decision-making.
3. A financial statement audit is the most common type of:
A) Consulting engagement
B) Attest engagement
C) Tax engagement
D) Review engagement
Answer: B
Rationale: A financial statement audit is, by far, the most common type of attest engagement.
4. What is the purpose of adding credibility to financial statements?
A) To increase the likelihood they have been prepared following appropriate criteria
B) To guarantee the company's financial success
C) To eliminate all business risk
D) To ensure the company never goes bankrupt
Answer: A
Rationale: To add credibility to financial statements is to increase the likelihood that they have been
prepared following the appropriate criteria, usually GAAP.
5. What is business risk?
A) The risk that auditors will fail to detect fraud
B) The risk that information used to assess business risk is not accurate
C) The risk that the investment will be impaired because a company is unable to meet its financial
obligations
D) The risk of litigation against the auditor
Answer: C
Rationale: 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.
6. What is information risk?
A) The risk that the information used to assess business risk is not accurate
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,B) The risk that auditors will fail to detect fraud
C) The risk that the company will go bankrupt
D) The risk of litigation against the auditor
Answer: A
Rationale: Information risk is the risk that the information used to assess business risk is not accurate.
7. Which of the following best describes the primary role of the public accountant in the American
economy?
A) To guarantee the accuracy of financial statements
B) To provide credibility to financial information
C) To manage the financial operations of companies
D) To replace management in decision-making
Answer: B
Rationale: The public accountant's primary role is to provide credibility to financial information through
independent audits and assurance services.
8. Which organization can revoke the right of an individual to practice as a CPA?
A) The AICPA
B) The PCAOB
C) The State Board of Accountancy
D) The SEC
Answer: C
Rationale: The State Board of Accountancy has the authority to revoke CPA licenses.
9. Which of the following is not a type of attest engagement?
A) Financial statement audit
B) Examination of internal control over financial reporting
C) Review of financial statements
D) Tax return preparation
Answer: D
Rationale: Tax return preparation is not an attest engagement; it is a tax service.
3
, 10. The Sarbanes-Oxley Act of 2002 was enacted primarily to:
A) Reduce corporate taxes
B) Improve corporate governance and financial reporting
C) Increase government spending
D) Deregulate the accounting profession
Answer: B
Rationale: The Sarbanes-Oxley Act was enacted to improve corporate governance and financial reporting
following major accounting scandals.
11. Which of the following is an example of an assurance service?
A) Bookkeeping
B) Tax planning
C) Review of financial statements
D) Management consulting
Answer: C
Rationale: Review of financial statements is an assurance service that enhances the credibility of financial
information.
12. The AICPA stands for:
A) American Institute of Certified Public Accountants
B) Association of International Certified Professional Accountants
C) American Institute of Chartered Public Accountants
D) Association of Independent Certified Public Accountants
Answer: A
Rationale: AICPA stands for American Institute of Certified Public Accountants.
13. The PCAOB stands for:
A) Public Company Accounting Oversight Board
B) Private Company Accounting Oversight Board
C) Public Certified Accounting Oversight Board
D) Professional Company Accounting Oversight Board
Answer: A
Rationale: PCAOB stands for Public Company Accounting Oversight Board.
4
AUDITING AND OTHER ASSURANCE
SERVICES, 23RD EDITION BY O. RAY
WHITTINGTON & KURT PANY | PRACTICE
QUESTIONS WITH VERIFIED ANSWERS &
DETAILED RATIONALES | ALL CHAPTERS 1-
21 | LATEST 2026 UPDATE
PART I: THE AUDITING PROFESSION (Chapters 1–4)
CHAPTER 1: The Role of the Public Accountant in the American Economy
1. What event largely contributed to the "crisis of credibility" in the accounting profession?
A) The Great Depression
B) The Enron and WorldCom fraud cases
C) The Savings and Loan crisis
D) The 2008 financial crisis
Answer: B
Rationale: 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 the very
visible Enron and WorldCom cases.
2. What are assurance services?
A) Services that only involve financial statement audits
B) Professional services that enhance the quality of information, or its context, for decision-making
C) Services provided exclusively to public companies
D) Consulting services for management
Answer: B
,Rationale: Assurance services are professional services that enhance the quality of information, or its
context, for decision-making.
3. A financial statement audit is the most common type of:
A) Consulting engagement
B) Attest engagement
C) Tax engagement
D) Review engagement
Answer: B
Rationale: A financial statement audit is, by far, the most common type of attest engagement.
4. What is the purpose of adding credibility to financial statements?
A) To increase the likelihood they have been prepared following appropriate criteria
B) To guarantee the company's financial success
C) To eliminate all business risk
D) To ensure the company never goes bankrupt
Answer: A
Rationale: To add credibility to financial statements is to increase the likelihood that they have been
prepared following the appropriate criteria, usually GAAP.
5. What is business risk?
A) The risk that auditors will fail to detect fraud
B) The risk that information used to assess business risk is not accurate
C) The risk that the investment will be impaired because a company is unable to meet its financial
obligations
D) The risk of litigation against the auditor
Answer: C
Rationale: 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.
6. What is information risk?
A) The risk that the information used to assess business risk is not accurate
2
,B) The risk that auditors will fail to detect fraud
C) The risk that the company will go bankrupt
D) The risk of litigation against the auditor
Answer: A
Rationale: Information risk is the risk that the information used to assess business risk is not accurate.
7. Which of the following best describes the primary role of the public accountant in the American
economy?
A) To guarantee the accuracy of financial statements
B) To provide credibility to financial information
C) To manage the financial operations of companies
D) To replace management in decision-making
Answer: B
Rationale: The public accountant's primary role is to provide credibility to financial information through
independent audits and assurance services.
8. Which organization can revoke the right of an individual to practice as a CPA?
A) The AICPA
B) The PCAOB
C) The State Board of Accountancy
D) The SEC
Answer: C
Rationale: The State Board of Accountancy has the authority to revoke CPA licenses.
9. Which of the following is not a type of attest engagement?
A) Financial statement audit
B) Examination of internal control over financial reporting
C) Review of financial statements
D) Tax return preparation
Answer: D
Rationale: Tax return preparation is not an attest engagement; it is a tax service.
3
, 10. The Sarbanes-Oxley Act of 2002 was enacted primarily to:
A) Reduce corporate taxes
B) Improve corporate governance and financial reporting
C) Increase government spending
D) Deregulate the accounting profession
Answer: B
Rationale: The Sarbanes-Oxley Act was enacted to improve corporate governance and financial reporting
following major accounting scandals.
11. Which of the following is an example of an assurance service?
A) Bookkeeping
B) Tax planning
C) Review of financial statements
D) Management consulting
Answer: C
Rationale: Review of financial statements is an assurance service that enhances the credibility of financial
information.
12. The AICPA stands for:
A) American Institute of Certified Public Accountants
B) Association of International Certified Professional Accountants
C) American Institute of Chartered Public Accountants
D) Association of Independent Certified Public Accountants
Answer: A
Rationale: AICPA stands for American Institute of Certified Public Accountants.
13. The PCAOB stands for:
A) Public Company Accounting Oversight Board
B) Private Company Accounting Oversight Board
C) Public Certified Accounting Oversight Board
D) Professional Company Accounting Oversight Board
Answer: A
Rationale: PCAOB stands for Public Company Accounting Oversight Board.
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