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
R eview Questions
1-1 The ―Crisis Of Credibility‖ Largely Arose From The Number Of Companies That Restated
Their Previously Issued Financial Statements As A Result Of Accounting Irregularities
And Fraud. Especially Responsible Were The Very Visible Enron And Worldcom Fraud
Cases. Both Companies Filed For Bankruptcy And Constituted The Largest Companies In
American History To Do So. The Extent Of The Accounting Irregularities And Fraud Being
Investigated And Disclosed Brought Into Question The Effectiveness Of Financial
Statement Audits. In Addition, The Criminal Conviction Of Arthur Andersen, Llp, One Of
The Then Big 5 Accounting Firms, On Charges Of Destroying Documents Related To The
Enron Case Brought Into Question The Ethics Standards Of The Profession.
1-2 Assurance Services Are Professional Services That Enhance The Quality Of Information,
Or Its Context, For Decision-Making. The Two Types Are: (A) Those That Increase The
Reliability Of Information And (B) Those That Involve Putting Information In A Form
Or Context That Facilitates Decision-Making.
1-3 A Financial Statement Audit Is, By Far, The Most Common Type Of Attest Engagement.
The Overall Assertion, Made By Management, Most Frequently Is That The Financial
Statements Follow Generally Accepted Accounting Principles.
1-4 A Large Corporation With Securities Listed On A Stock Exchange Is Required By The Rules
Of The Stock Exchange And By The Rules Of The Securities And Exchange Commission To
Provide An Audit Report With The Annual Financial Statements Furnished To Its
Stockholders. It Also Is Required To Engage The Auditors To Provide An Opinion On Its
Internal Control. Apart From Legal Requirements, However, A Large Listed Corporation
Recognizes That It Must Maintain Investor Confidence In The Reliability Of Its Financial
Statements And Internal Control Over Financial Reporting If It Is To Continue To Be Able
To Secure Capital From The Public. The Report By A Firm Of Certified Public Accountants
, Adds Credibility To The Financial Statements Prepared By The Corporation. When A
Small Family-Owned Enterprise Elects To Have An Audit, The Purpose Usually Is To Use
The Auditors' Report To Support An Application For A Bank Loan.
1-5 A Report By An Independent Public Accountant Concerning The Fairness Of A Company's
Financial Statements Is Commonly Required In The Following Situations:
(1) Application For A Bank Loan.
(2) Establishing Credit For Purchase Of Merchandise, Equipment, Or Other Assets.
(3) Reporting Operating Results, Financial Position, And Cash Flows To Absentee
Owners (Stockholders Or Partners).
(4) Issuance Of Securities By A Corporation.
(5) Annual Financial Statements By A Corporation With Securities Listed On A Stock
Exchange Or Traded Over The Counter.
(6) Sale Of An Ongoing Business.
(7) Termination Of A Partnership.
1-6 To Add Credibility To Financial Statements Is To Increase The Likelihood That They Have
Been Prepared Following The Appropriate Criteria, Usually Generally Accepted
Accounting Principles. As Such, An Increase In Credibility Results In Financial Statements
That Can Be Believed And Relied Upon By Third Parties.
1-7 Business Risk Is The Risk That The Investment Will Be Impaired Because A Company
Invested In Is Unable To Meet Its Financial Obligations Due To Economic Conditions Or
Poor Management Decisions. Information Risk Is The Risk That The Information Used
To Assess Business Risk Is Not Accurate. Auditors Can Directly Reduce Information
Risk, But Have Only Limited Effect On Business Risk.
1-8 At The Beginning Of The Century, The Principal Objective Of Auditing Was The
Prevention And Detection Of Fraud. Audit Work Centered On The Balance Sheet, Because
The Income Statement Was Regarded As Highly Confidential And Not For Public
Disclosure. Today, The Principal Objective Of Auditing Is To Form An Opinion On The
Fairness Of Financial Statements And Their Conformity With Generally Accepted
Accounting Principles. But The Professional Standards Also Require That An Audit Be
Designed To Provide Reasonable Assurance Of Detecting Material Misstatements, Due To
Errors Or Fraud. Particular Emphasis Is Placed On The Income Statement Which Is Of
Great Importance To Investors. Auditing Today Also Has The Objectives Of Meeting The
Requirements Of The Securities And Exchange Commission (Sec) And The Public Company
Accounting Oversight Board For Public Companies.
1-9 The Statement Is Incorrect. The Increasing Integrated Databases Of Today, Along
With Available Audit Procedures Make Audited Entire Populations A Possibility In
Many Situations.
1-10 An Operational Audit Attempts To Measure The Effectiveness And Efficiency Of A
Specific Unit Of An Organization. It Involves More Subjective Judgments Than A
Compliance Audit Or An Audit Of Financial Statements Because The Criteria Of
Effectiveness And Efficiency Of Departmental Performance Are Not As Clearly
Established As Are Many Laws And Regulations Or Generally Accepted Accounting
Principles.
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
R eview Questions
1-1 The ―Crisis Of Credibility‖ Largely Arose From The Number Of Companies That Restated
Their Previously Issued Financial Statements As A Result Of Accounting Irregularities
And Fraud. Especially Responsible Were The Very Visible Enron And Worldcom Fraud
Cases. Both Companies Filed For Bankruptcy And Constituted The Largest Companies In
American History To Do So. The Extent Of The Accounting Irregularities And Fraud Being
Investigated And Disclosed Brought Into Question The Effectiveness Of Financial
Statement Audits. In Addition, The Criminal Conviction Of Arthur Andersen, Llp, One Of
The Then Big 5 Accounting Firms, On Charges Of Destroying Documents Related To The
Enron Case Brought Into Question The Ethics Standards Of The Profession.
1-2 Assurance Services Are Professional Services That Enhance The Quality Of Information,
Or Its Context, For Decision-Making. The Two Types Are: (A) Those That Increase The
Reliability Of Information And (B) Those That Involve Putting Information In A Form
Or Context That Facilitates Decision-Making.
1-3 A Financial Statement Audit Is, By Far, The Most Common Type Of Attest Engagement.
The Overall Assertion, Made By Management, Most Frequently Is That The Financial
Statements Follow Generally Accepted Accounting Principles.
1-4 A Large Corporation With Securities Listed On A Stock Exchange Is Required By The Rules
Of The Stock Exchange And By The Rules Of The Securities And Exchange Commission To
Provide An Audit Report With The Annual Financial Statements Furnished To Its
Stockholders. It Also Is Required To Engage The Auditors To Provide An Opinion On Its
Internal Control. Apart From Legal Requirements, However, A Large Listed Corporation
Recognizes That It Must Maintain Investor Confidence In The Reliability Of Its Financial
Statements And Internal Control Over Financial Reporting If It Is To Continue To Be Able
To Secure Capital From The Public. The Report By A Firm Of Certified Public Accountants
, Adds Credibility To The Financial Statements Prepared By The Corporation. When A
Small Family-Owned Enterprise Elects To Have An Audit, The Purpose Usually Is To Use
The Auditors' Report To Support An Application For A Bank Loan.
1-5 A Report By An Independent Public Accountant Concerning The Fairness Of A Company's
Financial Statements Is Commonly Required In The Following Situations:
(1) Application For A Bank Loan.
(2) Establishing Credit For Purchase Of Merchandise, Equipment, Or Other Assets.
(3) Reporting Operating Results, Financial Position, And Cash Flows To Absentee
Owners (Stockholders Or Partners).
(4) Issuance Of Securities By A Corporation.
(5) Annual Financial Statements By A Corporation With Securities Listed On A Stock
Exchange Or Traded Over The Counter.
(6) Sale Of An Ongoing Business.
(7) Termination Of A Partnership.
1-6 To Add Credibility To Financial Statements Is To Increase The Likelihood That They Have
Been Prepared Following The Appropriate Criteria, Usually Generally Accepted
Accounting Principles. As Such, An Increase In Credibility Results In Financial Statements
That Can Be Believed And Relied Upon By Third Parties.
1-7 Business Risk Is The Risk That The Investment Will Be Impaired Because A Company
Invested In Is Unable To Meet Its Financial Obligations Due To Economic Conditions Or
Poor Management Decisions. Information Risk Is The Risk That The Information Used
To Assess Business Risk Is Not Accurate. Auditors Can Directly Reduce Information
Risk, But Have Only Limited Effect On Business Risk.
1-8 At The Beginning Of The Century, The Principal Objective Of Auditing Was The
Prevention And Detection Of Fraud. Audit Work Centered On The Balance Sheet, Because
The Income Statement Was Regarded As Highly Confidential And Not For Public
Disclosure. Today, The Principal Objective Of Auditing Is To Form An Opinion On The
Fairness Of Financial Statements And Their Conformity With Generally Accepted
Accounting Principles. But The Professional Standards Also Require That An Audit Be
Designed To Provide Reasonable Assurance Of Detecting Material Misstatements, Due To
Errors Or Fraud. Particular Emphasis Is Placed On The Income Statement Which Is Of
Great Importance To Investors. Auditing Today Also Has The Objectives Of Meeting The
Requirements Of The Securities And Exchange Commission (Sec) And The Public Company
Accounting Oversight Board For Public Companies.
1-9 The Statement Is Incorrect. The Increasing Integrated Databases Of Today, Along
With Available Audit Procedures Make Audited Entire Populations A Possibility In
Many Situations.
1-10 An Operational Audit Attempts To Measure The Effectiveness And Efficiency Of A
Specific Unit Of An Organization. It Involves More Subjective Judgments Than A
Compliance Audit Or An Audit Of Financial Statements Because The Criteria Of
Effectiveness And Efficiency Of Departmental Performance Are Not As Clearly
Established As Are Many Laws And Regulations Or Generally Accepted Accounting
Principles.
