SOLUTION MANUAL FOR
Principles Of Auditing And Other Assurance Services
23rd Edition By Ray Whittington Kurt
ALL Chapters (1 - 21)
, Table of Contents
V V
ChapterV1:VTheVRoleVofVtheVPublicVAccountantVinVtheVAmericanEconomy
ChapterV2:VProfessionalVStandards
ChapterV3:VProfessionalVEthics
ChapterV4:VLegalVLiabilityVofVCPAs
ChapterV5:VAuditVEvidenceVandVDocumentation
ChapterV6:VAuditVPlanning,VUnderstandingVtheVClient,VAssessingRisks,VandVResponding
ChapterV7:VInternalVControl
ChapterV8:VConsiderationVofVInternalVControlVinVanVInformationTechnologyVEnvironment
ChapterV9:VAuditVSampling
ChapterV10:VCashVandVFinancialVInvestments
ChapterV11:VAccountsVReceivable,VNotesVReceivable,VandRevenue
ChapterV12:VInventoriesVandVCostVofVGoodsVSold
ChapterV13:VProperty,VPlant,VandVEquipment:VDepreciationVandDepletion
ChapterV14:VAccountsVPayableVandVOtherVLiabilities
ChapterV15:VDebtVandVEquityVCapital
ChapterV16:VAuditingVOperationsVandVCompletingVtheVAudit
ChapterV17:VAuditors’VReports
ChapterV18:VIntegratedVAuditsVofVPublicVCompanies
ChapterV19:VAdditionalVAssuranceVServices:VHistoricalVFinancialInformation
ChapterV20:VAdditionalVAssuranceVServices:VOtherVInformation
ChapterV21:VInternal,VOperational,VandVComplianceVAuditing
,CHAPTER 1 V
The Role of the Publ
V V V V
ic Accountant in the
V V V
American Economy V
ReviewVQuestions
1-1 TheV―crisisVofVcredibility‖VlargelyVaroseVfromVtheVnumberVofVcompaniesVthatVrestatedVtheirVpreviouslyVis
suedVfinancialVstatementsV asV aV resultV ofV accountingVirregularitiesV andVfraud.V EspeciallyVresponsibleVwer
eVtheVveryVvisibleVEnronVandVWorldComVfraudVcases.VBothVcompaniesV filedVforV bankruptcyVandVconstitu
tedVtheVlargestV companiesV inVAmericanVhistoryVtoVdoVso.V TheVextentV ofVtheVaccountingVirregularitiesV an
dVfraudVbeingVinvestigatedVandVdisclosedVbroughtV intoVquestionVtheVeffectivenessV ofV financialVstatementV
audits.V InVaddition,VtheVcriminalVconvictionVofVArthurVAndersen,VLLP,VoneVofVtheVthenVBigV5Vaccountin
gVfirms,VonVchargesV ofV destroyingVdocumentsV relatedVtoVtheVEnronVcaseVbroughtV intoVquestionVtheVethics
V standardsV ofVtheVprofession.
1-2 AssuranceVservicesVareVprofessionalVservicesVthatVenhanceVtheVqualityVofVinformation,VorVitsVcontext,Vf
orVdecision-
making.VTheVtwoVtypesVare:V(a)VthoseVthatVincreaseVtheVreliabilityVofVinformationVandV(b)VthoseVthatVi
nvolveVputtingVinformationVinVaVformVorVcontextVthatVfacilitatesVdecision-making.
1-3 AVfinancialVstatementV auditV is,VbyVfar,VtheVmostV commonVtypeVofV attestV engagement.V TheVoverallVasserti
on,VmadeVbyVmanagement,VmostVfrequentlyVisVthatVtheVfinancialVstatementsVfollowVgenerallyVacceptedVac
countingVprinciples.
1-4 AVlargeVcorporationVwithVsecuritiesVlistedVonVaVstockVexchangeVisVrequiredVbyVtheVrulesVofVtheVstockVexc
hangeVandVbyVtheVrulesV ofV theVSecuritiesV andVExchangeVCommissionVtoVprovideVanVauditV reportV withVth
eVannualVfinancialVstatementsV furnishedVtoVitsV stockholders.V ItV alsoVisV requiredVtoVengageVtheVauditorsV toV
provideVanVopinionVonVitsVinternalVcontrol.VApartVfromVlegalVrequirements,Vhowever,VaVlargeVlistedVcor
porationVrecognizesVthatVitVmustV maintainVinvestorVconfidenceVinVtheVreliabilityVofVitsVfinancialVstatement
sV andV internalV controlV overV financialV reportingV ifV itV isV toV continueVtoV beVableVtoV secureVcapitalVfromVthe
Vpublic.V TheVreportV byVaV firmVofV certifiedVpublicVaccountantsV addsV credibilityVtoVtheVfinancialVstatements
V preparedVbyVtheVcorporation.V WhenVaV smallV family-
ownedVenterpriseVelectsV toVhaveVanVaudit,VtheVpurposeVusuallyVisVtoVuseVtheVauditors'VreportVtoVsupportVa
nVapplicationV forVaVbankVloan.
, 1-5 AVreportV byVanVindependentV publicVaccountantV concerningVtheVfairnessV ofVaV company'sV financialVstateme
ntsVisVcommonlyVrequiredVinVtheVfollowingVsituations:
(1) ApplicationVforV aV bankVloan.
(2) EstablishingVcreditV forV purchaseVofV merchandise,Vequipment,VorV otherV assets.
(3) ReportingVoperatingVresults,V financialVposition,V andVcashVflowsV toVabsenteeVownersV (stockhold
ersVorVpartners).
(4) IssuanceVofV securitiesV byVaV corporation.
(5) AnnualVfinancialVstatementsV byVaV corporationVwithVsecuritiesV listedVonVaV stockVexchangeVorV tra
dedVoverVtheVcounter.
(6) SaleVofV anVongoingVbusiness.
(7) TerminationVofV aV partnership.
1-6 ToVaddVcredibilityVtoVfinancialVstatementsV isVtoVincreaseVtheVlikelihoodVthatV theyVhaveVbeenVpreparedVfol
lowingVtheVappropriateVcriteria,VusuallyVgenerallyVacceptedVaccountingVprinciples.V AsV such,VanVincreaseVi
nVcredibilityVresultsV inVfinancialVstatementsVthatV canVbeVbelievedVandVreliedVuponVbyVthirdVparties.
1-7 BusinessV riskVisV theVriskVthatV theVinvestmentV willVbeVimpairedVbecauseVaV companyVinvestedVinVisV unabl
eVtoVmeetVitsVfinancialVobligationsVdueVtoVeconomicVconditionsVorVpoorVmanagementVdecisions.VInforma
tionVriskVisVtheVriskVthatVtheVinformationVusedVtoVassessVbusinessVriskVisVnotVaccurate.VAuditorsVcanVd
irectlyVreduceVinformationVrisk,VbutVhaveVonlyVlimitedVeffectVonVbusinessVrisk.
1-8 AtVtheVbeginningVofVtheVcentury,VtheVprincipalVobjectiveVofVauditingVwasV theVpreventionVandVdetectionVof
Vfraud.V AuditV workVcenteredVonVtheVbalanceVsheet,VbecauseVtheVincomeVstatementV wasV regardedVasV highl
yVconfidentialVandVnotV forV publicVdisclosure.V Today,V theVprincipalVobjectiveVofV auditingVisV toVformVanV
opinionVonVtheVfairnessV ofVfinancialVstatementsV andVtheirVconformityVwithVgenerallyVacceptedVaccounting
Vprinciples.V ButV theVprofessionalV standardsV alsoV requireVthatV anV auditV beVdesignedV toVprovideVreasonable
VassuranceVofV detectingV materialV misstatements,V dueVtoV errorsV orV fraud.V ParticularV emphasisV isV placedV o
nVtheVincomeVstatementV whichVisV ofVgreatV importanceVtoVinvestors.V AuditingVtodayValsoVhasV theVobjectiv
esV ofVmeetingVtheVrequirementsV ofVtheVSecuritiesV andVExchangeVCommissionV(SEC)V andVtheVPublicVCom
panyVAccountingVOversightVBoardVforVpublicVcompanies.
1-9 TheVstatementV isV incorrect.V TheVincreasingVintegratedVdatabasesV ofV today,ValongVwithVavailableVau
ditVproceduresVmakeVauditedVentireVpopulationsVaVpossibilityVinVmanyVsituations.
1-10 AnVoperationalVauditV attemptsV toVmeasureVtheVeffectivenessV andVefficiencyVofVaVspecificVunitV ofVanVo
rganization.V ItVinvolvesV moreVsubjectiveVjudgmentsVthanVaVcomplianceVauditV orVanVauditV ofVfinancial
VstatementsV becauseVtheVcriteriaV ofV effectivenessV andVefficiencyVofV departmentalVperformanceVareVno
tV asVclearlyVestablishedVasV areVmanyVlawsV andVregulationsVorVgenerallyVacceptedVaccountingVprinciple
s.
TheVreportV preparedVafterV completionVofV anVoperationalVauditV isV usuallyVdirectedVtoVmanageme
ntVofVtheVorganizationVinVwhichVtheVauditVworkVwasVdone.
1-11 AVcomplianceVauditVisVanVauditVtoVdetermineVwhetherVfinancialVreportsVorVotherVassertionsVareV inVcomp
lianceVwithVestablishedVcriteria.V TheVnecessaryVingredientsV areVverifiableVdataV andVtheVexistenceVofVsta
ndardsV establishedVbyVanVauthoritativeVbody.V AnVoperationalVaudit,VonVtheVotherV hand,VisV aV reviewVofV
aVdepartmentV orVotherVunitV ofVaVbusinessV orVgovernmentalVorganizationVtoVmeasureVtheVeffectivenessV an
dVefficiencyVofV operations.V InternalVauditorsV oftenVperformVoperationalVauditsV asV doVauditorsV employed
VbyVtheVGovernment VAccountability VOfficeV(GAO) VofVtheVfederal Vgovernment.
1-12 InternalVauditorsV mustV beVindependentV ofVtheVdepartmentV headsV andVotherVlineVexecutivesV whoseVworkVt
heyVreview.V However,VinternalVauditorsVareVnotVindependentVinVtheVsameVsenseVasVaVpublicVaccountingVfi
Principles Of Auditing And Other Assurance Services
23rd Edition By Ray Whittington Kurt
ALL Chapters (1 - 21)
, Table of Contents
V V
ChapterV1:VTheVRoleVofVtheVPublicVAccountantVinVtheVAmericanEconomy
ChapterV2:VProfessionalVStandards
ChapterV3:VProfessionalVEthics
ChapterV4:VLegalVLiabilityVofVCPAs
ChapterV5:VAuditVEvidenceVandVDocumentation
ChapterV6:VAuditVPlanning,VUnderstandingVtheVClient,VAssessingRisks,VandVResponding
ChapterV7:VInternalVControl
ChapterV8:VConsiderationVofVInternalVControlVinVanVInformationTechnologyVEnvironment
ChapterV9:VAuditVSampling
ChapterV10:VCashVandVFinancialVInvestments
ChapterV11:VAccountsVReceivable,VNotesVReceivable,VandRevenue
ChapterV12:VInventoriesVandVCostVofVGoodsVSold
ChapterV13:VProperty,VPlant,VandVEquipment:VDepreciationVandDepletion
ChapterV14:VAccountsVPayableVandVOtherVLiabilities
ChapterV15:VDebtVandVEquityVCapital
ChapterV16:VAuditingVOperationsVandVCompletingVtheVAudit
ChapterV17:VAuditors’VReports
ChapterV18:VIntegratedVAuditsVofVPublicVCompanies
ChapterV19:VAdditionalVAssuranceVServices:VHistoricalVFinancialInformation
ChapterV20:VAdditionalVAssuranceVServices:VOtherVInformation
ChapterV21:VInternal,VOperational,VandVComplianceVAuditing
,CHAPTER 1 V
The Role of the Publ
V V V V
ic Accountant in the
V V V
American Economy V
ReviewVQuestions
1-1 TheV―crisisVofVcredibility‖VlargelyVaroseVfromVtheVnumberVofVcompaniesVthatVrestatedVtheirVpreviouslyVis
suedVfinancialVstatementsV asV aV resultV ofV accountingVirregularitiesV andVfraud.V EspeciallyVresponsibleVwer
eVtheVveryVvisibleVEnronVandVWorldComVfraudVcases.VBothVcompaniesV filedVforV bankruptcyVandVconstitu
tedVtheVlargestV companiesV inVAmericanVhistoryVtoVdoVso.V TheVextentV ofVtheVaccountingVirregularitiesV an
dVfraudVbeingVinvestigatedVandVdisclosedVbroughtV intoVquestionVtheVeffectivenessV ofV financialVstatementV
audits.V InVaddition,VtheVcriminalVconvictionVofVArthurVAndersen,VLLP,VoneVofVtheVthenVBigV5Vaccountin
gVfirms,VonVchargesV ofV destroyingVdocumentsV relatedVtoVtheVEnronVcaseVbroughtV intoVquestionVtheVethics
V standardsV ofVtheVprofession.
1-2 AssuranceVservicesVareVprofessionalVservicesVthatVenhanceVtheVqualityVofVinformation,VorVitsVcontext,Vf
orVdecision-
making.VTheVtwoVtypesVare:V(a)VthoseVthatVincreaseVtheVreliabilityVofVinformationVandV(b)VthoseVthatVi
nvolveVputtingVinformationVinVaVformVorVcontextVthatVfacilitatesVdecision-making.
1-3 AVfinancialVstatementV auditV is,VbyVfar,VtheVmostV commonVtypeVofV attestV engagement.V TheVoverallVasserti
on,VmadeVbyVmanagement,VmostVfrequentlyVisVthatVtheVfinancialVstatementsVfollowVgenerallyVacceptedVac
countingVprinciples.
1-4 AVlargeVcorporationVwithVsecuritiesVlistedVonVaVstockVexchangeVisVrequiredVbyVtheVrulesVofVtheVstockVexc
hangeVandVbyVtheVrulesV ofV theVSecuritiesV andVExchangeVCommissionVtoVprovideVanVauditV reportV withVth
eVannualVfinancialVstatementsV furnishedVtoVitsV stockholders.V ItV alsoVisV requiredVtoVengageVtheVauditorsV toV
provideVanVopinionVonVitsVinternalVcontrol.VApartVfromVlegalVrequirements,Vhowever,VaVlargeVlistedVcor
porationVrecognizesVthatVitVmustV maintainVinvestorVconfidenceVinVtheVreliabilityVofVitsVfinancialVstatement
sV andV internalV controlV overV financialV reportingV ifV itV isV toV continueVtoV beVableVtoV secureVcapitalVfromVthe
Vpublic.V TheVreportV byVaV firmVofV certifiedVpublicVaccountantsV addsV credibilityVtoVtheVfinancialVstatements
V preparedVbyVtheVcorporation.V WhenVaV smallV family-
ownedVenterpriseVelectsV toVhaveVanVaudit,VtheVpurposeVusuallyVisVtoVuseVtheVauditors'VreportVtoVsupportVa
nVapplicationV forVaVbankVloan.
, 1-5 AVreportV byVanVindependentV publicVaccountantV concerningVtheVfairnessV ofVaV company'sV financialVstateme
ntsVisVcommonlyVrequiredVinVtheVfollowingVsituations:
(1) ApplicationVforV aV bankVloan.
(2) EstablishingVcreditV forV purchaseVofV merchandise,Vequipment,VorV otherV assets.
(3) ReportingVoperatingVresults,V financialVposition,V andVcashVflowsV toVabsenteeVownersV (stockhold
ersVorVpartners).
(4) IssuanceVofV securitiesV byVaV corporation.
(5) AnnualVfinancialVstatementsV byVaV corporationVwithVsecuritiesV listedVonVaV stockVexchangeVorV tra
dedVoverVtheVcounter.
(6) SaleVofV anVongoingVbusiness.
(7) TerminationVofV aV partnership.
1-6 ToVaddVcredibilityVtoVfinancialVstatementsV isVtoVincreaseVtheVlikelihoodVthatV theyVhaveVbeenVpreparedVfol
lowingVtheVappropriateVcriteria,VusuallyVgenerallyVacceptedVaccountingVprinciples.V AsV such,VanVincreaseVi
nVcredibilityVresultsV inVfinancialVstatementsVthatV canVbeVbelievedVandVreliedVuponVbyVthirdVparties.
1-7 BusinessV riskVisV theVriskVthatV theVinvestmentV willVbeVimpairedVbecauseVaV companyVinvestedVinVisV unabl
eVtoVmeetVitsVfinancialVobligationsVdueVtoVeconomicVconditionsVorVpoorVmanagementVdecisions.VInforma
tionVriskVisVtheVriskVthatVtheVinformationVusedVtoVassessVbusinessVriskVisVnotVaccurate.VAuditorsVcanVd
irectlyVreduceVinformationVrisk,VbutVhaveVonlyVlimitedVeffectVonVbusinessVrisk.
1-8 AtVtheVbeginningVofVtheVcentury,VtheVprincipalVobjectiveVofVauditingVwasV theVpreventionVandVdetectionVof
Vfraud.V AuditV workVcenteredVonVtheVbalanceVsheet,VbecauseVtheVincomeVstatementV wasV regardedVasV highl
yVconfidentialVandVnotV forV publicVdisclosure.V Today,V theVprincipalVobjectiveVofV auditingVisV toVformVanV
opinionVonVtheVfairnessV ofVfinancialVstatementsV andVtheirVconformityVwithVgenerallyVacceptedVaccounting
Vprinciples.V ButV theVprofessionalV standardsV alsoV requireVthatV anV auditV beVdesignedV toVprovideVreasonable
VassuranceVofV detectingV materialV misstatements,V dueVtoV errorsV orV fraud.V ParticularV emphasisV isV placedV o
nVtheVincomeVstatementV whichVisV ofVgreatV importanceVtoVinvestors.V AuditingVtodayValsoVhasV theVobjectiv
esV ofVmeetingVtheVrequirementsV ofVtheVSecuritiesV andVExchangeVCommissionV(SEC)V andVtheVPublicVCom
panyVAccountingVOversightVBoardVforVpublicVcompanies.
1-9 TheVstatementV isV incorrect.V TheVincreasingVintegratedVdatabasesV ofV today,ValongVwithVavailableVau
ditVproceduresVmakeVauditedVentireVpopulationsVaVpossibilityVinVmanyVsituations.
1-10 AnVoperationalVauditV attemptsV toVmeasureVtheVeffectivenessV andVefficiencyVofVaVspecificVunitV ofVanVo
rganization.V ItVinvolvesV moreVsubjectiveVjudgmentsVthanVaVcomplianceVauditV orVanVauditV ofVfinancial
VstatementsV becauseVtheVcriteriaV ofV effectivenessV andVefficiencyVofV departmentalVperformanceVareVno
tV asVclearlyVestablishedVasV areVmanyVlawsV andVregulationsVorVgenerallyVacceptedVaccountingVprinciple
s.
TheVreportV preparedVafterV completionVofV anVoperationalVauditV isV usuallyVdirectedVtoVmanageme
ntVofVtheVorganizationVinVwhichVtheVauditVworkVwasVdone.
1-11 AVcomplianceVauditVisVanVauditVtoVdetermineVwhetherVfinancialVreportsVorVotherVassertionsVareV inVcomp
lianceVwithVestablishedVcriteria.V TheVnecessaryVingredientsV areVverifiableVdataV andVtheVexistenceVofVsta
ndardsV establishedVbyVanVauthoritativeVbody.V AnVoperationalVaudit,VonVtheVotherV hand,VisV aV reviewVofV
aVdepartmentV orVotherVunitV ofVaVbusinessV orVgovernmentalVorganizationVtoVmeasureVtheVeffectivenessV an
dVefficiencyVofV operations.V InternalVauditorsV oftenVperformVoperationalVauditsV asV doVauditorsV employed
VbyVtheVGovernment VAccountability VOfficeV(GAO) VofVtheVfederal Vgovernment.
1-12 InternalVauditorsV mustV beVindependentV ofVtheVdepartmentV headsV andVotherVlineVexecutivesV whoseVworkVt
heyVreview.V However,VinternalVauditorsVareVnotVindependentVinVtheVsameVsenseVasVaVpublicVaccountingVfi
