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
rr
Chapter 2: Professional Standards
Chapter 3: Professional Ethics
Chapter 4: Legal Liability of CPAs
Chapter 5: Audit Evidence and Documentation
rr
Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding
rr
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
rr
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 Publ
ic Accountant in the
American Economy
Review Questions
1-1 The —crisis of credibility‖ largely arose from the number of companies that restated their previously issue
rr rr rr
d financial statements as a result of accounting irregularities and fraud. Especially responsible werethe v
rr
ery visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the l
argest companies in American history to do so. The extent of the accounting irregularities and fraud bei
rr
ng investigated and disclosed brought into question the effectiveness of financial statement audits. In ad
dition, the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on char
rr
ges of destroying documents related to the Enron case brought into question the ethics standards of the p
rr
rofession.
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 invol
rr
ve 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 accounti
ng principles.
1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchang
e and by the rules of the Securities and Exchange Commission to provide an audit report with theannual
rr
financial statements furnished to its stockholders. It also is required to engage the auditors to provide an rr
opinion on its internal control. Apart from legal requirements, however, a large listed corporation recog
nizes that it must maintain investor confidence in the reliability of its financial statements and internal co
rr
ntrol over financial reporting if it is to continue to be able to secure capital from the public. The report
rr rr
by a firm of certified public accountants adds credibility to the financial statements prepared by the corpo
ration. When a small family-
owned enterprise elects to have an audit, the purpose usually is to use the auditors' report to support an ap
rr
plication for a bank loan.
rr
, 1-5 A report by an independent public accountant concerning the fairness of a company's financial statement
rr rr
sis commonly required in the following situations:
rr
(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 (stockholder
sor partners).
(4) Issuance of securities by a corporation.
(5) Annual financial statements by a corporation with securities listed on a stock exchange or trade rr
dover 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 follow rr rr
ing the appropriate criteria, usually generally accepted accounting principles. As such, an increase in cred rr rr
ibility 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 t rr
omeet its financial obligations due to economic conditions or poor management decisions. Information r
isk is the risk that the information used to assess business risk is not accurate. Auditors can directly re
rr rr rr
duce information risk, but have only limited effect on business risk.
rr rr
1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection of fra
ud. Audit work centered on the balance sheet, because the income statement was regarded as highly confi rr
dential and not for public disclosure. Today, the principal objective of auditing is to form an opinion o
n the fairness of financial statements and their conformity with generally accepted accounting principles.
rr
But the professional standards also require that an audit be designed to provide reasonable assurance of
rr
detecting material misstatements, due to errors or fraud. Particular emphasis is placed on the income st
atement which is of great importance to investors. Auditing today also has the objectives ofmeeting the r
equirements of the Securities and Exchange Commission (SEC) and the Public Company Accounting O
r
versight Board for public companies.
1-9 The statement is incorrect. The increasing integrated databases of today, along with available audi
rr
t procedures make audited entire populations a possibility in many situations.
rr rr rr rr
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an orga rr
nization. It involves more subjective judgments than a compliance audit or an audit of financial state
rr
ments because the criteria of effectiveness and efficiency of departmental performance are not asclea
rly established as are many laws and regulations or generally accepted accounting principles. rr
The report prepared after completion of an operational audit is usually directed to management
rr rr rr rr
of the organization in which the audit work was done.
rr rr
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in complian
rr
ce with established criteria. The necessary ingredients are verifiable data and the existence of standards
rr
established by an authoritative body. An operational audit, on the other hand, is a review of adepartme
nt or other unit of a business or governmental organization to measure the effectiveness and efficiency rr
of operations. Internal auditors often perform operational audits as do auditors employed by the Gover
rr
nment Accountability Office (GAO) of the federal government.
rr
1-12 Internal auditors must be independent of the department heads and other line executives whose work the
rr
yreview. However, internal auditors are not independent in the same sense as a public accounting firm.
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
rr
Chapter 2: Professional Standards
Chapter 3: Professional Ethics
Chapter 4: Legal Liability of CPAs
Chapter 5: Audit Evidence and Documentation
rr
Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding
rr
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
rr
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 Publ
ic Accountant in the
American Economy
Review Questions
1-1 The —crisis of credibility‖ largely arose from the number of companies that restated their previously issue
rr rr rr
d financial statements as a result of accounting irregularities and fraud. Especially responsible werethe v
rr
ery visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the l
argest companies in American history to do so. The extent of the accounting irregularities and fraud bei
rr
ng investigated and disclosed brought into question the effectiveness of financial statement audits. In ad
dition, the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on char
rr
ges of destroying documents related to the Enron case brought into question the ethics standards of the p
rr
rofession.
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 invol
rr
ve 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 accounti
ng principles.
1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchang
e and by the rules of the Securities and Exchange Commission to provide an audit report with theannual
rr
financial statements furnished to its stockholders. It also is required to engage the auditors to provide an rr
opinion on its internal control. Apart from legal requirements, however, a large listed corporation recog
nizes that it must maintain investor confidence in the reliability of its financial statements and internal co
rr
ntrol over financial reporting if it is to continue to be able to secure capital from the public. The report
rr rr
by a firm of certified public accountants adds credibility to the financial statements prepared by the corpo
ration. When a small family-
owned enterprise elects to have an audit, the purpose usually is to use the auditors' report to support an ap
rr
plication for a bank loan.
rr
, 1-5 A report by an independent public accountant concerning the fairness of a company's financial statement
rr rr
sis commonly required in the following situations:
rr
(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 (stockholder
sor partners).
(4) Issuance of securities by a corporation.
(5) Annual financial statements by a corporation with securities listed on a stock exchange or trade rr
dover 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 follow rr rr
ing the appropriate criteria, usually generally accepted accounting principles. As such, an increase in cred rr rr
ibility 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 t rr
omeet its financial obligations due to economic conditions or poor management decisions. Information r
isk is the risk that the information used to assess business risk is not accurate. Auditors can directly re
rr rr rr
duce information risk, but have only limited effect on business risk.
rr rr
1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection of fra
ud. Audit work centered on the balance sheet, because the income statement was regarded as highly confi rr
dential and not for public disclosure. Today, the principal objective of auditing is to form an opinion o
n the fairness of financial statements and their conformity with generally accepted accounting principles.
rr
But the professional standards also require that an audit be designed to provide reasonable assurance of
rr
detecting material misstatements, due to errors or fraud. Particular emphasis is placed on the income st
atement which is of great importance to investors. Auditing today also has the objectives ofmeeting the r
equirements of the Securities and Exchange Commission (SEC) and the Public Company Accounting O
r
versight Board for public companies.
1-9 The statement is incorrect. The increasing integrated databases of today, along with available audi
rr
t procedures make audited entire populations a possibility in many situations.
rr rr rr rr
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an orga rr
nization. It involves more subjective judgments than a compliance audit or an audit of financial state
rr
ments because the criteria of effectiveness and efficiency of departmental performance are not asclea
rly established as are many laws and regulations or generally accepted accounting principles. rr
The report prepared after completion of an operational audit is usually directed to management
rr rr rr rr
of the organization in which the audit work was done.
rr rr
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in complian
rr
ce with established criteria. The necessary ingredients are verifiable data and the existence of standards
rr
established by an authoritative body. An operational audit, on the other hand, is a review of adepartme
nt or other unit of a business or governmental organization to measure the effectiveness and efficiency rr
of operations. Internal auditors often perform operational audits as do auditors employed by the Gover
rr
nment Accountability Office (GAO) of the federal government.
rr
1-12 Internal auditors must be independent of the department heads and other line executives whose work the
rr
yreview. However, internal auditors are not independent in the same sense as a public accounting firm.
