Test Bank for Principles of Auditing and Other
Assurance Services 22nd Edition by Whittington
(Ch 1 – 21) > Complete Newest Version
Solutions Manual, Chapter 6, Page 1 of 595
Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw Hill.
,CHAPTERl 1
ThelRoleloflthelPubliclAccountantlinlthe
Americanl Economy
Reviewl Questions
1-1 Thel―crisisloflcredibility‖llargelylaroselfromlthelnumberloflcompanieslthatlrestatedltheirlpreviousl
ylissuedlfinanciallstatementslaslalresultloflaccountinglirregularitieslandlfraud.l Especiallylresponsibl
elwerelthelverylvisiblelEnronlandlWorldComlfraudlcases.lBothlcompanieslfiledlforlbankruptcylandl
constitutedlthellargestlcompanieslinlAmericanlhistoryltoldolso.l Thelextentloflthelaccountinglirregular
itieslandlfraudlbeinglinvestigatedlandldisclosedlbroughtlintolquestionltheleffectivenessloflfinanciall
statementlaudits.l Inladdition,lthelcriminallconvictionloflArthurlAndersen,lLLP,loneloflthelthenlBigl5lac
countinglfirms,lonlchargeslofldestroyingldocumentslrelatedltolthelEnronlcaselbroughtlintolquestionlth
elethicslstandardsloflthelprofession.
1-2 Assurancelserviceslarelprofessionallserviceslthatlenhancelthelqualityloflinformation,lorlitslcontext
,lforldecision-
making.l Theltwoltypeslare:l(a)lthoselthatlincreaselthelreliabilityloflinformationlandl(b)lthoselthatli
nvolvelputtinglinformationlinlalformlorlcontextlthatlfacilitatesldecision-making.
1-3 Alfinanciallstatementlauditlis,lbylfar,lthelmostlcommonltypeloflattestlengagement.l Theloveralllasser
tion,lmadelbylmanagement,lmostlfrequentlylislthatlthelfinanciallstatementslfollowlgenerallylaccept
edlaccountinglprinciples.
1-4 Allargelcorporationlwithlsecuritiesllistedlonlalstocklexchangelislrequiredlbylthelrulesloflthelstocklexch
angelandlbylthelrulesloflthelSecuritieslandlExchangelCommissionltolprovidelanlauditlreportlwithlthel
annuallfinanciallstatementslfurnishedltolitslstockholders.l Itlalsolislrequiredltolengagelthelauditorsltol
providelanlopinionlonlitslinternallcontrol.l Apartlfromllegallrequirements,lhowever,lallargellistedlcor
porationlrecognizeslthatlitlmustlmaintainlinvestorlconfidencelinlthelreliabilityloflitslfinanciall stateme
ntsl andl internall controll overl financiall reportingl ifl itl isl tol continueltol belableltol securelcapitallfromlth
elpublic.l Thelreportlbylalfirmloflcertifiedlpubliclaccountantsladdslcredibilityltolthelfinanciallstateme
ntsl preparedlbylthelcorporation.l Whenlalsmalllfamily-
ownedlenterpriselelectsl tolhavelanlaudit,lthelpurposelusuallylisltoluselthelauditors'lreportltolsupportl
anlapplicationl forlalbanklloan.
Solutions Manual, Chapter 6, Page 2 of 595
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of McGraw Hill.
,1-5 Alreportlbylanlindependentlpubliclaccountantlconcerninglthelfairnessloflalcompany'slfinanciallstate
mentslislcommonlylrequiredlinlthelfollowinglsituations:
(1) Applicationlforlalbanklloan.
(2) Establishinglcreditlforlpurchaseloflmerchandise,lequipment,lorlotherlassets.
(3) Reportingloperatinglresults,lfinanciallposition,landlcashlflowsltolabsenteelownersl(stockhol
derslorlpartners).
(4) Issuanceloflsecuritieslbylalcorporation.
(5) Annuallfinanciallstatementslbylalcorporationlwithlsecuritiesllistedlonlalstocklexchangelorltra
dedloverlthelcounter.
(6) Saleloflanlongoinglbusiness.
(7) Terminationloflalpartnership.
1-6 Toladdlcredibilityltolfinanciallstatementslisltolincreaselthellikelihoodlthatltheylhavelbeenlpreparedl
followinglthelappropriatelcriteria,lusuallylgenerallylacceptedlaccountinglprinciples.l Aslsuch,lanlin
creaselinlcredibilitylresultslinlfinanciallstatementslthatlcanlbelbelievedlandlreliedluponlbylthirdlpart
ies.
1-7 Businesslrisklislthelrisklthatlthelinvestmentlwilllbelimpairedlbecauselalcompanylinvestedlinlislunablelt
olmeetlitslfinanciallobligationsldueltoleconomiclconditionslorlpoorlmanagementldecisions.l Informa
tionlrisklislthelrisklthatlthelinformationlusedltolassesslbusinesslrisklislnotlaccurate.l Auditorslcanldirectl
ylreducelinformationlrisk,lbutlhavelonlyllimitedleffectlonlbusinesslrisk.
1-8 Atlthelbeginningloflthelcentury,lthelprincipallobjectiveloflauditinglwaslthelpreventionlandldetectionl
oflfraud.l Auditlworklcenteredlonlthelbalancelsheet,lbecauselthelincomelstatementlwaslregardedlasl
highlylconfidentiallandlnotl forl publicldisclosure.l Today,lthelprincipallobjectivelofl auditinglisl tolfor
mlanlopinionlonlthelfairnessloflfinanciallstatementslandltheirlconformitylwithlgenerallylacceptedlacc
ountinglprinciples.l Butlthelprofessionallstandardslalsolrequirelthatlanlauditlbeldesignedltolprovidel
reasonablelassurancelofl detectinglmateriallmisstatements,ldueltolerrorsl orl fraud.l Particularl emph
asisl isl placedlonlthelincomelstatementlwhichlisloflgreatlimportanceltolinvestors.l Auditingltodaylalsol
haslthelobjectivesloflmeetinglthelrequirementsloflthelSecuritieslandlExchangelCommissionl(SEC)landl
thelPubliclCompanylAccountinglOversightlBoardlforlpubliclcompanies.
1-9 Thelstatementlislincorrect.lThelincreasinglintegratedldatabaseslofltoday,lalonglwithlavailabl
elauditlprocedureslmakelauditedlentirelpopulationslalpossibilitylinlmanylsituations.
1-10 Anloperationallauditlattemptsltolmeasureltheleffectivenesslandlefficiencyloflalspecificlunitloflanl
organization.l Itlinvolveslmorelsubjectiveljudgmentslthanlalcompliancelauditlorlanlauditloflfinanc
iallstatementslbecauselthelcriterialofleffectivenesslandlefficiencylofldepartmentallperformanc
elarelnotlaslclearlylestablishedlaslarelmanyllawslandlregulationslorlgenerallylacceptedlaccoun
tinglprinciples.
Thelreportlpreparedlafterlcompletionloflanloperationallauditlislusuallyldirectedltolmanag
ementloflthelorganizationlinlwhichlthelauditlworklwasldone.
1-11 Alcompliancelauditlislanlauditltoldeterminelwhetherlfinanciallreportslorlotherlassertionslarelinlcom
pliancelwithlestablishedlcriteria.l Thelnecessarylingredientslarelverifiableldatalandlthelexistencel
oflstandardslestablishedlbylanlauthoritativelbody.l Anloperationallaudit,lonlthelotherlhand,lislalre
viewloflaldepartmentlorlotherlunitloflalbusinesslorlgovernmentallorganizationltolmeasureltheleffec
Solutions Manual, Chapter 6, Page 3 of 595
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of McGraw Hill.
, tivenesslandlefficiencylofloperations.l Internallauditorsloftenlperformloperationallauditslasldolau
ditorslemployedlbylthelGovernmentlAccountabilitylOfficel(GAO)loflthelfederallgovernment.
1-12 Internallauditorslmustlbelindependentlofltheldepartmentlheadslandlotherllinelexecutiveslwhoselwor
kltheylreview.l However,linternallauditorslarelnotlindependentlinlthelsamelsenselaslalpubliclaccounti
nglfirm.
Solutions Manual, Chapter 6, Page 4 of 595
Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw Hill.
Assurance Services 22nd Edition by Whittington
(Ch 1 – 21) > Complete Newest Version
Solutions Manual, Chapter 6, Page 1 of 595
Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw Hill.
,CHAPTERl 1
ThelRoleloflthelPubliclAccountantlinlthe
Americanl Economy
Reviewl Questions
1-1 Thel―crisisloflcredibility‖llargelylaroselfromlthelnumberloflcompanieslthatlrestatedltheirlpreviousl
ylissuedlfinanciallstatementslaslalresultloflaccountinglirregularitieslandlfraud.l Especiallylresponsibl
elwerelthelverylvisiblelEnronlandlWorldComlfraudlcases.lBothlcompanieslfiledlforlbankruptcylandl
constitutedlthellargestlcompanieslinlAmericanlhistoryltoldolso.l Thelextentloflthelaccountinglirregular
itieslandlfraudlbeinglinvestigatedlandldisclosedlbroughtlintolquestionltheleffectivenessloflfinanciall
statementlaudits.l Inladdition,lthelcriminallconvictionloflArthurlAndersen,lLLP,loneloflthelthenlBigl5lac
countinglfirms,lonlchargeslofldestroyingldocumentslrelatedltolthelEnronlcaselbroughtlintolquestionlth
elethicslstandardsloflthelprofession.
1-2 Assurancelserviceslarelprofessionallserviceslthatlenhancelthelqualityloflinformation,lorlitslcontext
,lforldecision-
making.l Theltwoltypeslare:l(a)lthoselthatlincreaselthelreliabilityloflinformationlandl(b)lthoselthatli
nvolvelputtinglinformationlinlalformlorlcontextlthatlfacilitatesldecision-making.
1-3 Alfinanciallstatementlauditlis,lbylfar,lthelmostlcommonltypeloflattestlengagement.l Theloveralllasser
tion,lmadelbylmanagement,lmostlfrequentlylislthatlthelfinanciallstatementslfollowlgenerallylaccept
edlaccountinglprinciples.
1-4 Allargelcorporationlwithlsecuritiesllistedlonlalstocklexchangelislrequiredlbylthelrulesloflthelstocklexch
angelandlbylthelrulesloflthelSecuritieslandlExchangelCommissionltolprovidelanlauditlreportlwithlthel
annuallfinanciallstatementslfurnishedltolitslstockholders.l Itlalsolislrequiredltolengagelthelauditorsltol
providelanlopinionlonlitslinternallcontrol.l Apartlfromllegallrequirements,lhowever,lallargellistedlcor
porationlrecognizeslthatlitlmustlmaintainlinvestorlconfidencelinlthelreliabilityloflitslfinanciall stateme
ntsl andl internall controll overl financiall reportingl ifl itl isl tol continueltol belableltol securelcapitallfromlth
elpublic.l Thelreportlbylalfirmloflcertifiedlpubliclaccountantsladdslcredibilityltolthelfinanciallstateme
ntsl preparedlbylthelcorporation.l Whenlalsmalllfamily-
ownedlenterpriselelectsl tolhavelanlaudit,lthelpurposelusuallylisltoluselthelauditors'lreportltolsupportl
anlapplicationl forlalbanklloan.
Solutions Manual, Chapter 6, Page 2 of 595
Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw Hill.
,1-5 Alreportlbylanlindependentlpubliclaccountantlconcerninglthelfairnessloflalcompany'slfinanciallstate
mentslislcommonlylrequiredlinlthelfollowinglsituations:
(1) Applicationlforlalbanklloan.
(2) Establishinglcreditlforlpurchaseloflmerchandise,lequipment,lorlotherlassets.
(3) Reportingloperatinglresults,lfinanciallposition,landlcashlflowsltolabsenteelownersl(stockhol
derslorlpartners).
(4) Issuanceloflsecuritieslbylalcorporation.
(5) Annuallfinanciallstatementslbylalcorporationlwithlsecuritiesllistedlonlalstocklexchangelorltra
dedloverlthelcounter.
(6) Saleloflanlongoinglbusiness.
(7) Terminationloflalpartnership.
1-6 Toladdlcredibilityltolfinanciallstatementslisltolincreaselthellikelihoodlthatltheylhavelbeenlpreparedl
followinglthelappropriatelcriteria,lusuallylgenerallylacceptedlaccountinglprinciples.l Aslsuch,lanlin
creaselinlcredibilitylresultslinlfinanciallstatementslthatlcanlbelbelievedlandlreliedluponlbylthirdlpart
ies.
1-7 Businesslrisklislthelrisklthatlthelinvestmentlwilllbelimpairedlbecauselalcompanylinvestedlinlislunablelt
olmeetlitslfinanciallobligationsldueltoleconomiclconditionslorlpoorlmanagementldecisions.l Informa
tionlrisklislthelrisklthatlthelinformationlusedltolassesslbusinesslrisklislnotlaccurate.l Auditorslcanldirectl
ylreducelinformationlrisk,lbutlhavelonlyllimitedleffectlonlbusinesslrisk.
1-8 Atlthelbeginningloflthelcentury,lthelprincipallobjectiveloflauditinglwaslthelpreventionlandldetectionl
oflfraud.l Auditlworklcenteredlonlthelbalancelsheet,lbecauselthelincomelstatementlwaslregardedlasl
highlylconfidentiallandlnotl forl publicldisclosure.l Today,lthelprincipallobjectivelofl auditinglisl tolfor
mlanlopinionlonlthelfairnessloflfinanciallstatementslandltheirlconformitylwithlgenerallylacceptedlacc
ountinglprinciples.l Butlthelprofessionallstandardslalsolrequirelthatlanlauditlbeldesignedltolprovidel
reasonablelassurancelofl detectinglmateriallmisstatements,ldueltolerrorsl orl fraud.l Particularl emph
asisl isl placedlonlthelincomelstatementlwhichlisloflgreatlimportanceltolinvestors.l Auditingltodaylalsol
haslthelobjectivesloflmeetinglthelrequirementsloflthelSecuritieslandlExchangelCommissionl(SEC)landl
thelPubliclCompanylAccountinglOversightlBoardlforlpubliclcompanies.
1-9 Thelstatementlislincorrect.lThelincreasinglintegratedldatabaseslofltoday,lalonglwithlavailabl
elauditlprocedureslmakelauditedlentirelpopulationslalpossibilitylinlmanylsituations.
1-10 Anloperationallauditlattemptsltolmeasureltheleffectivenesslandlefficiencyloflalspecificlunitloflanl
organization.l Itlinvolveslmorelsubjectiveljudgmentslthanlalcompliancelauditlorlanlauditloflfinanc
iallstatementslbecauselthelcriterialofleffectivenesslandlefficiencylofldepartmentallperformanc
elarelnotlaslclearlylestablishedlaslarelmanyllawslandlregulationslorlgenerallylacceptedlaccoun
tinglprinciples.
Thelreportlpreparedlafterlcompletionloflanloperationallauditlislusuallyldirectedltolmanag
ementloflthelorganizationlinlwhichlthelauditlworklwasldone.
1-11 Alcompliancelauditlislanlauditltoldeterminelwhetherlfinanciallreportslorlotherlassertionslarelinlcom
pliancelwithlestablishedlcriteria.l Thelnecessarylingredientslarelverifiableldatalandlthelexistencel
oflstandardslestablishedlbylanlauthoritativelbody.l Anloperationallaudit,lonlthelotherlhand,lislalre
viewloflaldepartmentlorlotherlunitloflalbusinesslorlgovernmentallorganizationltolmeasureltheleffec
Solutions Manual, Chapter 6, Page 3 of 595
Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw Hill.
, tivenesslandlefficiencylofloperations.l Internallauditorsloftenlperformloperationallauditslasldolau
ditorslemployedlbylthelGovernmentlAccountabilitylOfficel(GAO)loflthelfederallgovernment.
1-12 Internallauditorslmustlbelindependentlofltheldepartmentlheadslandlotherllinelexecutiveslwhoselwor
kltheylreview.l However,linternallauditorslarelnotlindependentlinlthelsamelsenselaslalpubliclaccounti
nglfirm.
Solutions Manual, Chapter 6, Page 4 of 595
Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw Hill.
