SOLUTION MANUAL FOR
c c
c Principles Of Auditing And Other Assurance Services
c c c c c c c
23rd Edition By Ray Whittington Kurt
c c c c c c
ALL Chapters (1 - 21)
c c c c
, Table of Contents c c
Chapter 1: The Role of the Public Accountant in the AmericanEconomy
c c c c c c c c c c
Chapter 2: Professional Standards
c c c
Chapter 3: Professional Ethics
c c c
Chapter 4: Legal Liability of CPAs
c c c c c
Chapter 5: Audit Evidence and Documentation
c c c c c
Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding
c c c c c c c c c
Chapter 7: Internal Control
c c c
Chapter 8: Consideration of Internal Control in an InformationTechnology Environment
c c c c c c c c c
Chapter 9: Audit Sampling
c c c
Chapter 10: Cash and Financial Investments
c c c c c
Chapter 11: Accounts Receivable, Notes Receivable, andRevenue
c c c c c c
Chapter 12: Inventories and Cost of Goods Sold
c c c c c c c
Chapter 13: Property, Plant, and Equipment: Depreciation andDepletion
c c c c c c c
Chapter 14: Accounts Payable and Other Liabilities
c c c c c c
Chapter 15: Debt and Equity Capital
c c c c c
Chapter 16: Auditing Operations and Completing the Audit
c c c c c c c
Chapter 17: Auditors’ Reports
c c c
Chapter 18: Integrated Audits of Public Companies
c c c c c c
Chapter 19: Additional Assurance Services: Historical FinancialInformation
c c c c c c
Chapter 20: Additional Assurance Services: Other Information
c c c c c c
Chapter 21: Internal, Operational, and Compliance Auditing
c c c c c c
,CHAPTER 1 c
The Role of the c c c
c Public Accountant in the c c c
American Economy c
Review Questions
c
1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously issued
c c c c c c c c c c c c c c c
financial statements as a result of accounting irregularities and fraud. Especially responsible werethe very
c c c c c c c c c c c c c c c
visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the largest
c c c c c c c c c c c c c c c
companies in American history to do so. The extent of the accounting irregularities and fraud being
c c c c c c c c c c c c c c c c
investigated and disclosed brought into question the effectiveness of financial statement audits. In addition,
c c c c c c c c c c c c c c
the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on charges of
c c c c c c c c c c c c c c c c c c
destroying documents related to the Enron case brought into question the ethics standards of the profession.
c c c c c c c c c c c c c c c c
1-2 Assurance services are professional services that enhance the quality of information, or its context, for
c c c c c c c c c c c c c c
decision-making. The two types are: (a) those that increase the reliability of information and (b) those that
c c c c c c c c c c c c c c c c c
involve putting information in a form or context that facilitates decision-making.
c c c c c c c c c c c
1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall
c c c c c c c c c c c c c c c
assertion,made by management, most frequently is that the financial statements follow generally accepted
c c c c c c c c c c c c c c
accounting principles.
c c
1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchange and
c c c c c c c c c c c c c c c c c c c
by the rules of the Securities and Exchange Commission to provide an audit report with theannual financial
c c c c c c c c c c c c c c c c c c
statements furnished to its stockholders. It also is required to engage the auditors to provide an opinion on its
c c c c c c c c c c c c c c c c c c c
internal control. Apart from legal requirements, however, a large listed corporation recognizes that it must
c c c c c c c c c c c c c c c
maintain investor confidence in the reliability of its financial statements and internal control over financial
c c c c c c c c c c c c c c c
reporting if it is to continue to be able to secure capital from the public. The report by a firm of certified
c c c c c c c c c c c c c c c c c c c c c c
public accountants adds credibility to the financial statements prepared by the corporation. When a small
c c c c c c c c c c c c c c c
family-owned enterprise elects to have an audit, the purpose usually is to use the auditors' report to support an
c c c c c c c c c c c c c c c c c c c
application for a bank loan.
c c c c c
, 1-5 A report by an independent public accountant concerning the fairness of a company's financial statementsis
c c c c c c c c c c c c c c c
commonly required in the following situations:
c c c c c c
(1) Application for a bank loan. c c c c
(2) Establishing credit for purchase of merchandise, equipment, or other assets. c c c c c c c c c
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholdersor c c c c c c c c c c c c
partners).
c
(4) Issuance of securities by a corporation. c c c c c
(5) Annual financial statements by a corporation with securities listed on a stock exchange or
c c c c c c c c c c c c c
tradedover the counter.
c c c c
(6) Sale of an ongoing business. c c c c
(7) Termination of a partnership. c c c
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared following
c c c c c c c c c c c c c c c c
the appropriate criteria, usually generally accepted accounting principles. As such, an increasein credibility
c c c c c c c c c c c c c c
results in financial statements that can be believed and relied upon by third parties.
c c c c c c c c c c c c c c
1-7 Business risk is the risk that the investment will be impaired because a company invested in is unable tomeet
c c c c c c c c c c c c c c c c c c c
its financial obligations due to economic conditions or poor management decisions. Information risk is the
c c c c c c c c c c c c c c c
risk that the information used to assess business risk is not accurate. Auditors can directly reduce
c c c c c c c c c c c c c c c c
information risk, but have only limited effect on business risk.
c c c c c c c c c c
1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection of fraud.
c c c c c c c c c c c c c c c c c
Audit work centered on the balance sheet, because the income statement was regarded as highly confidential
c c c c c c c c c c c c c c c c
and not for public disclosure. Today, the principal objective of auditing is to form an opinion on the fairness
c c c c c c c c c c c c c c c c c c c
of financial statements and their conformity with generally accepted accounting principles. But the
c c c c c c c c c c c c c
professional standards also require that an audit be designed to provide reasonable assurance of detecting
c c c c c c c c c c c c c c c
material misstatements, due to errors or fraud. Particular emphasis is placed on the income statement
c c c c c c c c c c c c c c c
which is of great importance to investors. Auditing today also has the objectives ofmeeting the requirements
c c c c c c c c c c c c c c c c c
of the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board
c c c c c c c c c c c c c c
for public companies.
c c c
1-9 The statement is incorrect. The increasing integrated databases of today, along with available
c c c c c c c c c c c c
auditprocedures make audited entire populations a possibility in many situations.
c c c c c c c c c c c
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an
c c c c c c c c c c c c c c c
organization. It involves more subjective judgments than a compliance audit or an audit of financial
c c c c c c c c c c c c c c c
statements because the criteria of effectiveness and efficiency of departmental performance are not
c c c c c c c c c c c c c
asclearly established as are many laws and regulations or generally accepted accounting principles.
c c c c c c c c c c c c c c
The report prepared after completion of an operational audit is usually directed to managementof
c c c c c c c c c c c c c c
the organization in which the audit work was done.
c c c c c c c c c
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in compliance
c c c c c c c c c c c c c c c c
with established criteria. The necessary ingredients are verifiable data and the existence of standards
c c c c c c c c c c c c c c
established by an authoritative body. An operational audit, on the other hand, is a review of adepartment or
c c c c c c c c c c c c c c c c c c c
other unit of a business or governmental organization to measure the effectiveness and efficiency of
c c c c c c c c c c c c c c c
operations. Internal auditors often perform operational audits as do auditors employed by the Government
c c c c c c c c c c c c c c
Accountability Office (GAO) of the federal government.
c c c c c c c
1-12 Internal auditors must be independent of the department heads and other line executives whose work
c c c c c c c c c c c c c c
theyreview. However, internal auditors are not independent in the same sense as a public accounting firm.
c c c c c c c c c c c c c c c c c
c c
c Principles Of Auditing And Other Assurance Services
c c c c c c c
23rd Edition By Ray Whittington Kurt
c c c c c c
ALL Chapters (1 - 21)
c c c c
, Table of Contents c c
Chapter 1: The Role of the Public Accountant in the AmericanEconomy
c c c c c c c c c c
Chapter 2: Professional Standards
c c c
Chapter 3: Professional Ethics
c c c
Chapter 4: Legal Liability of CPAs
c c c c c
Chapter 5: Audit Evidence and Documentation
c c c c c
Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding
c c c c c c c c c
Chapter 7: Internal Control
c c c
Chapter 8: Consideration of Internal Control in an InformationTechnology Environment
c c c c c c c c c
Chapter 9: Audit Sampling
c c c
Chapter 10: Cash and Financial Investments
c c c c c
Chapter 11: Accounts Receivable, Notes Receivable, andRevenue
c c c c c c
Chapter 12: Inventories and Cost of Goods Sold
c c c c c c c
Chapter 13: Property, Plant, and Equipment: Depreciation andDepletion
c c c c c c c
Chapter 14: Accounts Payable and Other Liabilities
c c c c c c
Chapter 15: Debt and Equity Capital
c c c c c
Chapter 16: Auditing Operations and Completing the Audit
c c c c c c c
Chapter 17: Auditors’ Reports
c c c
Chapter 18: Integrated Audits of Public Companies
c c c c c c
Chapter 19: Additional Assurance Services: Historical FinancialInformation
c c c c c c
Chapter 20: Additional Assurance Services: Other Information
c c c c c c
Chapter 21: Internal, Operational, and Compliance Auditing
c c c c c c
,CHAPTER 1 c
The Role of the c c c
c Public Accountant in the c c c
American Economy c
Review Questions
c
1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously issued
c c c c c c c c c c c c c c c
financial statements as a result of accounting irregularities and fraud. Especially responsible werethe very
c c c c c c c c c c c c c c c
visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the largest
c c c c c c c c c c c c c c c
companies in American history to do so. The extent of the accounting irregularities and fraud being
c c c c c c c c c c c c c c c c
investigated and disclosed brought into question the effectiveness of financial statement audits. In addition,
c c c c c c c c c c c c c c
the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on charges of
c c c c c c c c c c c c c c c c c c
destroying documents related to the Enron case brought into question the ethics standards of the profession.
c c c c c c c c c c c c c c c c
1-2 Assurance services are professional services that enhance the quality of information, or its context, for
c c c c c c c c c c c c c c
decision-making. The two types are: (a) those that increase the reliability of information and (b) those that
c c c c c c c c c c c c c c c c c
involve putting information in a form or context that facilitates decision-making.
c c c c c c c c c c c
1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall
c c c c c c c c c c c c c c c
assertion,made by management, most frequently is that the financial statements follow generally accepted
c c c c c c c c c c c c c c
accounting principles.
c c
1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchange and
c c c c c c c c c c c c c c c c c c c
by the rules of the Securities and Exchange Commission to provide an audit report with theannual financial
c c c c c c c c c c c c c c c c c c
statements furnished to its stockholders. It also is required to engage the auditors to provide an opinion on its
c c c c c c c c c c c c c c c c c c c
internal control. Apart from legal requirements, however, a large listed corporation recognizes that it must
c c c c c c c c c c c c c c c
maintain investor confidence in the reliability of its financial statements and internal control over financial
c c c c c c c c c c c c c c c
reporting if it is to continue to be able to secure capital from the public. The report by a firm of certified
c c c c c c c c c c c c c c c c c c c c c c
public accountants adds credibility to the financial statements prepared by the corporation. When a small
c c c c c c c c c c c c c c c
family-owned enterprise elects to have an audit, the purpose usually is to use the auditors' report to support an
c c c c c c c c c c c c c c c c c c c
application for a bank loan.
c c c c c
, 1-5 A report by an independent public accountant concerning the fairness of a company's financial statementsis
c c c c c c c c c c c c c c c
commonly required in the following situations:
c c c c c c
(1) Application for a bank loan. c c c c
(2) Establishing credit for purchase of merchandise, equipment, or other assets. c c c c c c c c c
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholdersor c c c c c c c c c c c c
partners).
c
(4) Issuance of securities by a corporation. c c c c c
(5) Annual financial statements by a corporation with securities listed on a stock exchange or
c c c c c c c c c c c c c
tradedover the counter.
c c c c
(6) Sale of an ongoing business. c c c c
(7) Termination of a partnership. c c c
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared following
c c c c c c c c c c c c c c c c
the appropriate criteria, usually generally accepted accounting principles. As such, an increasein credibility
c c c c c c c c c c c c c c
results in financial statements that can be believed and relied upon by third parties.
c c c c c c c c c c c c c c
1-7 Business risk is the risk that the investment will be impaired because a company invested in is unable tomeet
c c c c c c c c c c c c c c c c c c c
its financial obligations due to economic conditions or poor management decisions. Information risk is the
c c c c c c c c c c c c c c c
risk that the information used to assess business risk is not accurate. Auditors can directly reduce
c c c c c c c c c c c c c c c c
information risk, but have only limited effect on business risk.
c c c c c c c c c c
1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection of fraud.
c c c c c c c c c c c c c c c c c
Audit work centered on the balance sheet, because the income statement was regarded as highly confidential
c c c c c c c c c c c c c c c c
and not for public disclosure. Today, the principal objective of auditing is to form an opinion on the fairness
c c c c c c c c c c c c c c c c c c c
of financial statements and their conformity with generally accepted accounting principles. But the
c c c c c c c c c c c c c
professional standards also require that an audit be designed to provide reasonable assurance of detecting
c c c c c c c c c c c c c c c
material misstatements, due to errors or fraud. Particular emphasis is placed on the income statement
c c c c c c c c c c c c c c c
which is of great importance to investors. Auditing today also has the objectives ofmeeting the requirements
c c c c c c c c c c c c c c c c c
of the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board
c c c c c c c c c c c c c c
for public companies.
c c c
1-9 The statement is incorrect. The increasing integrated databases of today, along with available
c c c c c c c c c c c c
auditprocedures make audited entire populations a possibility in many situations.
c c c c c c c c c c c
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an
c c c c c c c c c c c c c c c
organization. It involves more subjective judgments than a compliance audit or an audit of financial
c c c c c c c c c c c c c c c
statements because the criteria of effectiveness and efficiency of departmental performance are not
c c c c c c c c c c c c c
asclearly established as are many laws and regulations or generally accepted accounting principles.
c c c c c c c c c c c c c c
The report prepared after completion of an operational audit is usually directed to managementof
c c c c c c c c c c c c c c
the organization in which the audit work was done.
c c c c c c c c c
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in compliance
c c c c c c c c c c c c c c c c
with established criteria. The necessary ingredients are verifiable data and the existence of standards
c c c c c c c c c c c c c c
established by an authoritative body. An operational audit, on the other hand, is a review of adepartment or
c c c c c c c c c c c c c c c c c c c
other unit of a business or governmental organization to measure the effectiveness and efficiency of
c c c c c c c c c c c c c c c
operations. Internal auditors often perform operational audits as do auditors employed by the Government
c c c c c c c c c c c c c c
Accountability Office (GAO) of the federal government.
c c c c c c c
1-12 Internal auditors must be independent of the department heads and other line executives whose work
c c c c c c c c c c c c c c
theyreview. However, internal auditors are not independent in the same sense as a public accounting firm.
c c c c c c c c c c c c c c c c c
