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