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
Review 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 f risk fis f the frisk fthat f the finvestment f will fbe fimpaired fbecause fa fcompany finvested fin fis
f unable ftofmeet fits ffinancial fobligations fdue fto feconomic fconditions for fpoor fmanagement
fdecisions. fInformation frisk fis fthe frisk fthat fthe finformation fused fto fassess fbusiness frisk fis fnot
faccurate. fAuditors fcan fdirectly freduce finformation frisk, fbut fhave fonly flimited feffect fon fbusiness
frisk.
1-8 At fthe fbeginning fof fthe fcentury, fthe fprincipal fobjective fof fauditing fwas f the fprevention fand
fdetection fof ffraud. f Audit fwork fcentered fon fthe fbalance fsheet, fbecause fthe fincome fstatement f was
f regarded fas f highly fconfidential fand fnot f for f public fdisclosure. f Today, f the fprincipal fobjective fof
f auditing fis f to fform fan fopinion fon fthe ffairness fof ffinancial fstatements f and ftheir fconformity fwith
fgenerally faccepted faccounting fprinciples. f But f the fprofessional fstandards f also frequire fthat f an faudit
f be fdesigned fto fprovide freasonable fassurance fof f detecting fmaterial fmisstatements, f due fto ferrors f or
f fraud. f Particular f emphasis f is f placed fon fthe fincome fstatement f which fis f of fgreat f importance fto
finvestors. f Auditing ftoday falso fhas f the fobjectives f offmeeting fthe frequirements f of fthe fSecurities f and
fExchange fCommission f(SEC) f and fthe fPublic fCompany fAccounting fOversight fBoard ffor fpublic
fcompanies.
1-9 The fstatement f is f incorrect. fThe fincreasing fintegrated fdatabases f of f today, falong fwith
favailable fauditfprocedures fmake faudited fentire fpopulations fa fpossibility fin fmany fsituations.
1-10 An foperational faudit f attempts f to fmeasure fthe feffectiveness f and fefficiency fof fa fspecific funit f of
fan forganization. f It finvolves f more fsubjective fjudgments fthan fa fcompliance faudit for fan faudit fof
ffinancial fstatements f because fthe fcriteria f of f effectiveness f and fefficiency fof f departmental
fperformance fare fnot f asfclearly festablished fas f are fmany flaws f and fregulations for fgenerally
faccepted faccounting fprinciples.
The freport f prepared fafter f completion fof f an foperational faudit f is f usually fdirected fto
fmanagementfof fthe forganization fin fwhich fthe faudit fwork fwas fdone.
1-11 A fcompliance faudit fis fan faudit fto fdetermine fwhether ffinancial freports for fother fassertions fare f in
fcompliance fwith festablished fcriteria. f The fnecessary fingredients f are fverifiable fdata f and fthe
fexistence fof fstandards f established fby fan fauthoritative fbody. f An foperational faudit, fon fthe fother
f hand, fis f a f review fof f afdepartment f or fother funit f of fa fbusiness f or fgovernmental forganization fto
fmeasure fthe feffectiveness f and fefficiency fof f operations. f Internal fauditors f often fperform foperational
faudits f as f do fauditors f employed fby fthe fGovernment fAccountability fOffice f(GAO) fof fthe ffederal
fgovernment.
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
Review 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 f risk fis f the frisk fthat f the finvestment f will fbe fimpaired fbecause fa fcompany finvested fin fis
f unable ftofmeet fits ffinancial fobligations fdue fto feconomic fconditions for fpoor fmanagement
fdecisions. fInformation frisk fis fthe frisk fthat fthe finformation fused fto fassess fbusiness frisk fis fnot
faccurate. fAuditors fcan fdirectly freduce finformation frisk, fbut fhave fonly flimited feffect fon fbusiness
frisk.
1-8 At fthe fbeginning fof fthe fcentury, fthe fprincipal fobjective fof fauditing fwas f the fprevention fand
fdetection fof ffraud. f Audit fwork fcentered fon fthe fbalance fsheet, fbecause fthe fincome fstatement f was
f regarded fas f highly fconfidential fand fnot f for f public fdisclosure. f Today, f the fprincipal fobjective fof
f auditing fis f to fform fan fopinion fon fthe ffairness fof ffinancial fstatements f and ftheir fconformity fwith
fgenerally faccepted faccounting fprinciples. f But f the fprofessional fstandards f also frequire fthat f an faudit
f be fdesigned fto fprovide freasonable fassurance fof f detecting fmaterial fmisstatements, f due fto ferrors f or
f fraud. f Particular f emphasis f is f placed fon fthe fincome fstatement f which fis f of fgreat f importance fto
finvestors. f Auditing ftoday falso fhas f the fobjectives f offmeeting fthe frequirements f of fthe fSecurities f and
fExchange fCommission f(SEC) f and fthe fPublic fCompany fAccounting fOversight fBoard ffor fpublic
fcompanies.
1-9 The fstatement f is f incorrect. fThe fincreasing fintegrated fdatabases f of f today, falong fwith
favailable fauditfprocedures fmake faudited fentire fpopulations fa fpossibility fin fmany fsituations.
1-10 An foperational faudit f attempts f to fmeasure fthe feffectiveness f and fefficiency fof fa fspecific funit f of
fan forganization. f It finvolves f more fsubjective fjudgments fthan fa fcompliance faudit for fan faudit fof
ffinancial fstatements f because fthe fcriteria f of f effectiveness f and fefficiency fof f departmental
fperformance fare fnot f asfclearly festablished fas f are fmany flaws f and fregulations for fgenerally
faccepted faccounting fprinciples.
The freport f prepared fafter f completion fof f an foperational faudit f is f usually fdirected fto
fmanagementfof fthe forganization fin fwhich fthe faudit fwork fwas fdone.
1-11 A fcompliance faudit fis fan faudit fto fdetermine fwhether ffinancial freports for fother fassertions fare f in
fcompliance fwith festablished fcriteria. f The fnecessary fingredients f are fverifiable fdata f and fthe
fexistence fof fstandards f established fby fan fauthoritative fbody. f An foperational faudit, fon fthe fother
f hand, fis f a f review fof f afdepartment f or fother funit f of fa fbusiness f or fgovernmental forganization fto
fmeasure fthe feffectiveness f and fefficiency fof f operations. f Internal fauditors f often fperform foperational
faudits f as f do fauditors f employed fby fthe fGovernment fAccountability fOffice f(GAO) fof fthe ffederal
fgovernment.
