SOLUTION MANUAL FOR
Principles Of Auditing And Other Assurance Services
23rd Edition By Ray Whittington Kurt
ALL Chapters (1 - 21)
, Table of Contents
11 11
Chapter111:11The11Role11of11the11Public11Accountant11in11the11America
nEconomy11Chapter112:11Professional11Standards
Chapter113:11Professional11Ethics
11Chapter114:11Legal11Liability11of
11CPAs
Chapter115:11Audit11Evidence11and11Documentation
Chapter116:11Audit11Planning,11Understanding11the11Client,11AssessingRisks,11and11Respond
ing11Chapter117:11Internal11Control
Chapter118:11Consideration11of11Internal11Control11in11an11InformationTechnology11Environ
ment11Chapter119:11Audit11Sampling
Chapter1110:11Cash11and11Financial11Investments
Chapter1111:11Accounts11Receivable,11Notes11Receivable,11andRevenue
11Chapter1112:11Inventories11and11Cost11of11Goods11Sold
Chapter1113:11Property,11Plant,11and11Equipment:11Depreciation11andDepletio
n11Chapter1114:11Accounts11Payable11and11Other11Liabilities
Chapter1115:11Debt11and11Equity11Capital
Chapter1116:11Auditing11Operations11and11Completing11the11Aud
it11Chapter1117:11Auditors’11Reports
Chapter1118:11Integrated11Audits11of11Public11Companies
Chapter1119:11Additional11Assurance11Services:11Historical11FinancialInformat
ion11Chapter1120:11Additional11Assurance11Services:11Other11Information
Chapter1121:11Internal,11Operational,11and11Compliance11Auditing
,CHAPTER 1 11
The Role of the Pu
11 11 11 11
blic Accountant in the
11 11 11
American Economy 11
Review11 Questions
1-1 The11―crisis11of11credibility‖11largely11arose11from11the11number11of11companies11that11restated11t
heir11previously11issued11financial11statements1 1 as1 1 a1 1 result11of1 1 accounting11irregularities11and
11fraud.1 1 Especially11responsible11werethe11very11visible11Enron11and11WorldCom11fraud11cases.1
1Both11companies1 1 filed11for1 1 bankruptcy11and11constituted11the11largest1 1 companies1 1 in11Ame
rican11history11to11do11so.1 1 The11extent1 1 of11the11accounting11irregularities1 1 and11fraud11being11
investigated11and11disclosed11brought11into11question11the11effectiveness11of11financial11statement1
1 audits.1 1 In11addition,11the11criminal11conviction11of11Arthur11Andersen,11LLP,11one11of11the11the
n11Big11511accounting11firms,11on11charges1 1 of11destroying11documents1 1 related11to11the11Enron11
case11brought11into11question11the11ethics1 1 standards1 1 of11the11profession.
1-2 Assurance11services11are11professional11services11that11enhance11the11quality11of11information,11or11
its11context,11for11decision-
making.1 1 The1 1 two1 1 types1 1 are:1 1 (a)1 1 those1 1 that1 1 increase1 1 the1 1 reliability1 1 of1 1 informati
on1 1 and1 1 (b)11those1 1 that11involveputting11information11in11a11form11or11context11that1 1 facilitate
s1 1 decision-making.
1-3 A11financial11statement1 1 audit1 1 is,11by11far,1 1 the11most1 1 common11type11of1 1 attest1 1 engage
ment.1 1 The11overall11assertion,made11by11management,11most11frequently11is11that11the11finan
cial11statements11follow11generally11accepted11accounting11principles.
1-4 A11large11corporation11with11securities1 1 listed11on11a11stock11exchange11is1 1 required11by11the11rules1
1 of11the11stock11exchange11and11by11the11rules1 1 of1 1 the11Securities1 1 and11Exchange11Commission11t
o11provide11an11audit1 1 report1 1 with11theannual11financial11statements1 1 furnished11to11its1 1 stockholde
rs.1 1 It1 1 also11is1 1 required11to11engage11the11auditors1 1 to11provide11an11opinion11on11its11internal11co
ntrol.11Apart11from11legal11requirements,11however,11a11large11listed1 1 corporation11recognizes11that11
it11must11maintain11investor11confidence11in11the11reliability11of11its11financial11statements1 1 and1 1 inte
rnal1 1 control1 1 over1 1 financial1 1 reporting1 1 if1 1 it1 1 is1 1 to1 1 continue1 1 to1 1 be11 able1 1 to1 1 secure11 ca
pital11from11the11public.1 1 The11report1 1 by11a11firm11of11certified11public11accountants1 1 adds1 1 credi
bility11to11the11financial11statements1 1 prepared11by11the11corporation. When1 1 a1 1 small1 1 family-
owned1 1 enterprise11elects1 1 to1 1 have11an11audit,11the11purpose11usually11is1 1 to11use11the11auditors'11r
eport1 1 to1 1 support1 1 an11application1 1 for1 1 a1 1 bank11loan.
, 1-5 A11report1 1 by11an11independent1 1 public11accountant1 1 concerning11the11fairness1 1 of11a1 1 com
pany's1 1 financial11statementsis11commonly11required11in11the11following11situations:
(1) Application11 for1 1 a1 1 bank11 loan.
(2) Establishing11 credit1 1 for1 1 purchase11of1 1 merchandise,1 1 equipment,1 1 or1 1 other1 1 assets.
(3) Reporting11operating11results,11financial11position,11and11cash11flows1 1 to11absent
ee11owners11(stockholders or11partners).
q
(4) Issuance11of1 1 securities1 1 by11a1 1 corporation.
(5) Annual11financial11statements1 1 by11a1 1 corporation11with11securities1 1 listed11on11a1 1 stoc
k11exchange11or11traded over11the11counter.
q
(6) Sale11of1 1 an11 ongoing11 business.
(7) Termination1 1 of1 1 a1 1 partnership.
1-6 To11add11credibility11to11financial11statements1 1 is11to11increase11the11likelihood11that1 1 they11have11b
een11prepared11following11the11appropriate11criteria,11usually11generally11accepted11accounting11princi
ples.1 1 As1 1 such,11an11increasein11credibility11results1 1 in11financial11statements1 1 that1 1 can11be11belie
ved11and11relied11upon11by11third11parties.
1-7 Business1 1 risk11is1 1 the11risk11that1 1 the11investment1 1 will11be11impaired11because11a1 1 company11inv
ested11in11is1 1 unable11to meet11its11financial11obligations11due11to11economic11conditions11or11poor11
q
management11decisions.
Information1 1 risk11is11the11risk11that11the11information11used11to11assess11business11risk11is11not11a
ccurate.11Auditors11can11directly11reduce11information11risk,11but11have11only11limited11effect11on11
business11risk.
1-8 At11the11beginning11of11the11century,11the11principal11objective11of11auditing11was1 1 the11prevention1
1and11detection11of11fraud.1 1 Audit1 1 work11centered11on11the11balance11sheet,11because11the11income
11statement1 1 was11regarded11as1 1 highly11confidential11and11not1 1 for11public11disclosure.
Today,1 1 the11principal11objective11of1 1 auditing11is1 1 to
11form11an11opinion11on11the11fairness11of11financial11statements1 1 and11their11conformity11with11gen
erally11accepted11accounting11principles.1 1 But1 1 the11professional11standards1 1 also11require11that1 1 an
11audit1 1 be11designed11to11provide11reasonable11assurance11of11detecting11material11misstatements,11
due11to11errors1 1 or1 1 fraud.
Particular11emphasis1 1 is1 1 placed11on11the11income11stat
ement1 1 which11is1 1 of11great1 1 importance11to11investors.1 1 Auditing11today11also11has1 1 the11objecti
ves1 1 ofmeeting11the11requirements1 1 of11the11Securities1 1 and11Exchange11Commission11(SEC)1 1 an
d11the11Public1 1 Company1 1 Accounting11Oversight1 1 Board11for11public11companies.
1-9 The11statement1 1 is1 1 incorrect.11The11increasing11integrated11databases11of1 1 today,11along11
with11available11auditprocedures1 1 make11audited11entire11populations1 1 a1 1 possibilityin11ma
nysituations.
1-10 An11operational11audit1 1 attempts1 1 to11measure11the11effectiveness1 1 and11efficiency11of11a11specif
ic11unit1 1 of11an11organization.1 1 It11involves1 1 more11subjective11judgments11than11a11compliance1
1audit1 1 or11an11audit1 1 of11financial11statements1 1 because11the11criteria1 1 of11effectiveness11and11e
fficiency11of11departmental11performance11are11not11asclearly11established11as1 1 are11many11laws1
1 and11regulations11or11generally11accepted11accounting11principles.
The11report1 1 prepared11after11completion11of11an11operational11audit1 1 is1 1 usually
11directed11to11management of11the11organization11in11which11the11audit11work11was11done.
q
1-11 A11compliance11audit11is11an11audit11to11determine11whether11financial11reports11or11other11assertion
s11are11in11compliance11with11established11criteria.1 1 The11necessary11ingredients1 1 are11verifiable11da
ta1 1 and11the11existence11of11standards1 1 established1 1 by11an1 1 authoritative1 1 body.1 1 An1 1 operationa
l1 1 audit,1 1 on1 1 the11 other1 1 hand,1 1 is1 1 a1 1 review11of11a department11or11other11unit11of11a11busine
q
ss1 1 or11governmental11organization11to11measure11the11effectiveness11and11efficiency11of1 1 operation
s.1 1 Internal1 1 auditors1 1 often1 1 perform11operational1 1 audits1 1 as1 1 do1 1 auditors11employed1 1 by1 1 t
Principles Of Auditing And Other Assurance Services
23rd Edition By Ray Whittington Kurt
ALL Chapters (1 - 21)
, Table of Contents
11 11
Chapter111:11The11Role11of11the11Public11Accountant11in11the11America
nEconomy11Chapter112:11Professional11Standards
Chapter113:11Professional11Ethics
11Chapter114:11Legal11Liability11of
11CPAs
Chapter115:11Audit11Evidence11and11Documentation
Chapter116:11Audit11Planning,11Understanding11the11Client,11AssessingRisks,11and11Respond
ing11Chapter117:11Internal11Control
Chapter118:11Consideration11of11Internal11Control11in11an11InformationTechnology11Environ
ment11Chapter119:11Audit11Sampling
Chapter1110:11Cash11and11Financial11Investments
Chapter1111:11Accounts11Receivable,11Notes11Receivable,11andRevenue
11Chapter1112:11Inventories11and11Cost11of11Goods11Sold
Chapter1113:11Property,11Plant,11and11Equipment:11Depreciation11andDepletio
n11Chapter1114:11Accounts11Payable11and11Other11Liabilities
Chapter1115:11Debt11and11Equity11Capital
Chapter1116:11Auditing11Operations11and11Completing11the11Aud
it11Chapter1117:11Auditors’11Reports
Chapter1118:11Integrated11Audits11of11Public11Companies
Chapter1119:11Additional11Assurance11Services:11Historical11FinancialInformat
ion11Chapter1120:11Additional11Assurance11Services:11Other11Information
Chapter1121:11Internal,11Operational,11and11Compliance11Auditing
,CHAPTER 1 11
The Role of the Pu
11 11 11 11
blic Accountant in the
11 11 11
American Economy 11
Review11 Questions
1-1 The11―crisis11of11credibility‖11largely11arose11from11the11number11of11companies11that11restated11t
heir11previously11issued11financial11statements1 1 as1 1 a1 1 result11of1 1 accounting11irregularities11and
11fraud.1 1 Especially11responsible11werethe11very11visible11Enron11and11WorldCom11fraud11cases.1
1Both11companies1 1 filed11for1 1 bankruptcy11and11constituted11the11largest1 1 companies1 1 in11Ame
rican11history11to11do11so.1 1 The11extent1 1 of11the11accounting11irregularities1 1 and11fraud11being11
investigated11and11disclosed11brought11into11question11the11effectiveness11of11financial11statement1
1 audits.1 1 In11addition,11the11criminal11conviction11of11Arthur11Andersen,11LLP,11one11of11the11the
n11Big11511accounting11firms,11on11charges1 1 of11destroying11documents1 1 related11to11the11Enron11
case11brought11into11question11the11ethics1 1 standards1 1 of11the11profession.
1-2 Assurance11services11are11professional11services11that11enhance11the11quality11of11information,11or11
its11context,11for11decision-
making.1 1 The1 1 two1 1 types1 1 are:1 1 (a)1 1 those1 1 that1 1 increase1 1 the1 1 reliability1 1 of1 1 informati
on1 1 and1 1 (b)11those1 1 that11involveputting11information11in11a11form11or11context11that1 1 facilitate
s1 1 decision-making.
1-3 A11financial11statement1 1 audit1 1 is,11by11far,1 1 the11most1 1 common11type11of1 1 attest1 1 engage
ment.1 1 The11overall11assertion,made11by11management,11most11frequently11is11that11the11finan
cial11statements11follow11generally11accepted11accounting11principles.
1-4 A11large11corporation11with11securities1 1 listed11on11a11stock11exchange11is1 1 required11by11the11rules1
1 of11the11stock11exchange11and11by11the11rules1 1 of1 1 the11Securities1 1 and11Exchange11Commission11t
o11provide11an11audit1 1 report1 1 with11theannual11financial11statements1 1 furnished11to11its1 1 stockholde
rs.1 1 It1 1 also11is1 1 required11to11engage11the11auditors1 1 to11provide11an11opinion11on11its11internal11co
ntrol.11Apart11from11legal11requirements,11however,11a11large11listed1 1 corporation11recognizes11that11
it11must11maintain11investor11confidence11in11the11reliability11of11its11financial11statements1 1 and1 1 inte
rnal1 1 control1 1 over1 1 financial1 1 reporting1 1 if1 1 it1 1 is1 1 to1 1 continue1 1 to1 1 be11 able1 1 to1 1 secure11 ca
pital11from11the11public.1 1 The11report1 1 by11a11firm11of11certified11public11accountants1 1 adds1 1 credi
bility11to11the11financial11statements1 1 prepared11by11the11corporation. When1 1 a1 1 small1 1 family-
owned1 1 enterprise11elects1 1 to1 1 have11an11audit,11the11purpose11usually11is1 1 to11use11the11auditors'11r
eport1 1 to1 1 support1 1 an11application1 1 for1 1 a1 1 bank11loan.
, 1-5 A11report1 1 by11an11independent1 1 public11accountant1 1 concerning11the11fairness1 1 of11a1 1 com
pany's1 1 financial11statementsis11commonly11required11in11the11following11situations:
(1) Application11 for1 1 a1 1 bank11 loan.
(2) Establishing11 credit1 1 for1 1 purchase11of1 1 merchandise,1 1 equipment,1 1 or1 1 other1 1 assets.
(3) Reporting11operating11results,11financial11position,11and11cash11flows1 1 to11absent
ee11owners11(stockholders or11partners).
q
(4) Issuance11of1 1 securities1 1 by11a1 1 corporation.
(5) Annual11financial11statements1 1 by11a1 1 corporation11with11securities1 1 listed11on11a1 1 stoc
k11exchange11or11traded over11the11counter.
q
(6) Sale11of1 1 an11 ongoing11 business.
(7) Termination1 1 of1 1 a1 1 partnership.
1-6 To11add11credibility11to11financial11statements1 1 is11to11increase11the11likelihood11that1 1 they11have11b
een11prepared11following11the11appropriate11criteria,11usually11generally11accepted11accounting11princi
ples.1 1 As1 1 such,11an11increasein11credibility11results1 1 in11financial11statements1 1 that1 1 can11be11belie
ved11and11relied11upon11by11third11parties.
1-7 Business1 1 risk11is1 1 the11risk11that1 1 the11investment1 1 will11be11impaired11because11a1 1 company11inv
ested11in11is1 1 unable11to meet11its11financial11obligations11due11to11economic11conditions11or11poor11
q
management11decisions.
Information1 1 risk11is11the11risk11that11the11information11used11to11assess11business11risk11is11not11a
ccurate.11Auditors11can11directly11reduce11information11risk,11but11have11only11limited11effect11on11
business11risk.
1-8 At11the11beginning11of11the11century,11the11principal11objective11of11auditing11was1 1 the11prevention1
1and11detection11of11fraud.1 1 Audit1 1 work11centered11on11the11balance11sheet,11because11the11income
11statement1 1 was11regarded11as1 1 highly11confidential11and11not1 1 for11public11disclosure.
Today,1 1 the11principal11objective11of1 1 auditing11is1 1 to
11form11an11opinion11on11the11fairness11of11financial11statements1 1 and11their11conformity11with11gen
erally11accepted11accounting11principles.1 1 But1 1 the11professional11standards1 1 also11require11that1 1 an
11audit1 1 be11designed11to11provide11reasonable11assurance11of11detecting11material11misstatements,11
due11to11errors1 1 or1 1 fraud.
Particular11emphasis1 1 is1 1 placed11on11the11income11stat
ement1 1 which11is1 1 of11great1 1 importance11to11investors.1 1 Auditing11today11also11has1 1 the11objecti
ves1 1 ofmeeting11the11requirements1 1 of11the11Securities1 1 and11Exchange11Commission11(SEC)1 1 an
d11the11Public1 1 Company1 1 Accounting11Oversight1 1 Board11for11public11companies.
1-9 The11statement1 1 is1 1 incorrect.11The11increasing11integrated11databases11of1 1 today,11along11
with11available11auditprocedures1 1 make11audited11entire11populations1 1 a1 1 possibilityin11ma
nysituations.
1-10 An11operational11audit1 1 attempts1 1 to11measure11the11effectiveness1 1 and11efficiency11of11a11specif
ic11unit1 1 of11an11organization.1 1 It11involves1 1 more11subjective11judgments11than11a11compliance1
1audit1 1 or11an11audit1 1 of11financial11statements1 1 because11the11criteria1 1 of11effectiveness11and11e
fficiency11of11departmental11performance11are11not11asclearly11established11as1 1 are11many11laws1
1 and11regulations11or11generally11accepted11accounting11principles.
The11report1 1 prepared11after11completion11of11an11operational11audit1 1 is1 1 usually
11directed11to11management of11the11organization11in11which11the11audit11work11was11done.
q
1-11 A11compliance11audit11is11an11audit11to11determine11whether11financial11reports11or11other11assertion
s11are11in11compliance11with11established11criteria.1 1 The11necessary11ingredients1 1 are11verifiable11da
ta1 1 and11the11existence11of11standards1 1 established1 1 by11an1 1 authoritative1 1 body.1 1 An1 1 operationa
l1 1 audit,1 1 on1 1 the11 other1 1 hand,1 1 is1 1 a1 1 review11of11a department11or11other11unit11of11a11busine
q
ss1 1 or11governmental11organization11to11measure11the11effectiveness11and11efficiency11of1 1 operation
s.1 1 Internal1 1 auditors1 1 often1 1 perform11operational1 1 audits1 1 as1 1 do1 1 auditors11employed1 1 by1 1 t
