Test Bank for NR 599: Nursing Informatics and the Foundation of Knowledge, 4th Edition by McGonigle & Mastrian

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

Chapter 2: Professional Standards

Chapter 3: Professional Ethics

Chapter 4: Legal Liability of CPAs

Chapter 5: Audit Evidence and Documentation

Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding

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

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
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
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issued financial statements as a result of accounting irregularities and fraud. Especially responsible
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werethe very visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and
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constituted the largest companies in American history to do so. The extent of the accounting
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irregularities and fraud being investigated and disclosed brought into question the effectiveness of
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financial statement audits. In addition, the criminal conviction of Arthur Andersen, LLP, one of the
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then Big 5 accounting firms, on charges of destroying documents related to the Enron case brought
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into question the ethics standards of the profession.
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1-2 Assurance services are professional services that enhance the quality of information, or its context, for
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qdecision-making. The two types are: (a) those that increase the reliability of information and (b)
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those that involve putting information in a form or context that facilitates decision-making.
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1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall
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assertion,made by management, most frequently is that the financial statements follow generally
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accepted accounting principles. q q




1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock
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exchange and by the rules of the Securities and Exchange Commission to provide an audit report with
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theannual financial statements furnished to its stockholders. It also is required to engage the auditors to
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provide an opinion on its internal control. Apart from legal requirements, however, a large listed
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corporation recognizes that it must maintain investor confidence in the reliability of its financial
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statements and internal control over financial reporting if it is to continue to be able to secure capital
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qfrom the public. The report by a firm of certified public accountants adds credibility to the financial
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statements prepared by the corporation. When a small family-owned enterprise elects to have an
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audit, the purpose usually is to use the auditors' report to support an application for a bank loan.
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, 1-5 A report by an independent public accountant concerning the fairness of a company's financial
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statementsis commonly required in the following situations: q q q q q q q




(1) Application for a bank loan. q q q q



(2) Establishing credit for purchase of merchandise, equipment, or other assets. q q q q q q q q q



(3) Reporting operating results, financial position, and cash flows to absentee owners
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(stockholdersor partners). q q



(4) Issuance of securities by a corporation. q q q q q



(5) Annual financial statements by a corporation with securities listed on a stock exchange or
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tradedover the counter. q q q



(6) Sale of an ongoing business.q q q q



(7) Termination of a partnership. q q q




1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared
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following the appropriate criteria, usually generally accepted accounting principles. As such, an
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increasein credibility results in financial statements that can be believed and relied upon by third parties.
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1-7 Business risk is the risk that the investment will be impaired because a company invested in is unable
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qtomeet its financial obligations due to economic conditions or poor management decisions.
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Information risk is the risk that the information used to assess business risk is not accurate. Auditors
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can directly reduce information risk, but have only limited effect on business risk.
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1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection of
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fraud. Audit work centered on the balance sheet, because the income statement was regarded as highly
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confidential and not for public disclosure. Today, the principal objective of auditing is to form an
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opinion on the fairness of financial statements and their conformity with generally accepted accounting
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principles. But the professional standards also require that an audit be designed to provide reasonable
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assurance of detecting material misstatements, due to errors or fraud. Particular emphasis is placed
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on the income statement which is of great importance to investors. Auditing today also has the
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objectives ofmeeting the requirements of the Securities and Exchange Commission (SEC) and the
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Public Company Accounting Oversight Board for public companies.
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1-9 The statement is incorrect. The increasing integrated databases of today, along with available
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auditprocedures make audited entire populations a possibility in many situations.
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1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an
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organization. It involves more subjective judgments than a compliance audit or an audit of financial
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statements because the criteria of effectiveness and efficiency of departmental performance are not
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qasclearly established as are many laws and regulations or generally accepted accounting principles.
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The report prepared after completion of an operational audit is usually directed to
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managementof the organization in which the audit work was done. q q q q q q q q q q




1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in
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compliance with established criteria. The necessary ingredients are verifiable data and the existence of
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standards established by an authoritative body. An operational audit, on the other hand, is a review
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of adepartment or other unit of a business or governmental organization to measure the effectiveness
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and efficiency of operations. Internal auditors often perform operational audits as do auditors
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employed by the Government Accountability Office (GAO) of the federal government.
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1-12 Internal auditors must be independent of the department heads and other line executives whose work
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theyreview. However, internal auditors are not independent in the same sense as a public accounting
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firm.