SOLUTION MANUAL FOR
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Principles Of Auditing And Other Assurance Services
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23rd Edition By Ray Whittington Kurt
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z ALL Chapters (1 - 21)
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, • TableofContents z z
Chapter 1: The Role of the Public Accountant in the AmericanEconomy
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Chapter 2: Professional Standards
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Chapter 3: Professional Ethics
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Chapter 4: Legal Liability of CPAs
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Chapter 5: Audit Evidence and Documentation
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Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding Chapter
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7: Internal Control
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Chapter 8: Consideration of Internal Control in an InformationTechnology Environment
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Chapter 9: Audit Sampling
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Chapter 10: Cash and Financial Investments
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Chapter 11: Accounts Receivable, Notes Receivable, andRevenue Chapter
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12: Inventories and Cost of Goods Sold
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Chapter 13: Property, Plant, and Equipment: Depreciation andDepletion
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Chapter 14: Accounts Payable and Other Liabilities
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Chapter 15: Debt and Equity Capital
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Chapter 16: Auditing Operations and Completing the Audit
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Chapter 17: Auditors’ Reports
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Chapter 18: Integrated Audits of Public Companies
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Chapter 19: Additional Assurance Services: Historical FinancialInformation
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Chapter 20: Additional Assurance Services: Other Information
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Chapter 21: Internal, Operational, and Compliance Auditing
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,CHAPTER1 z
TheRoleofthePubli c z z z z
z Accountant in the z z
American Economy z
Review Questions
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1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously issued
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financial statements as a result of accounting irregularities and fraud. Especially responsible werethe very
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visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the largest
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companies in American history to do so. The extent of the accounting irregularities and fraud being investi
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gated and disclosed brought into question the effectiveness of financial statement audits. In addition, the cr
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iminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on charges of destroyi
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ng documents related to the Enron case brought into question the ethics standards of the profession.
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1-2 Assurance services are professional services that enhance the quality of information, or its context, for d
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ecision-
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making. The two types are: (a) those that increase the reliability of information and (b) those that involv e
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putting information in a form or context that facilitates decision-making.
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1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall assertion,m
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ade by management, most frequently is that the financial statements follow generally accepted accounting
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principles.
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1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchange
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and by the rules of the Securities and Exchange Commission to provide an audit report with theannual fina
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ncial statements furnished to its stockholders. It also is required to engage the auditors to provide an opinio
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n on its internal control. Apart from legal requirements, however, a large listed corporation recognizes tha
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zt it must maintain investor confidence in the reliability of its financial statements and internal control over f
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inancial reporting if it is to continue to be able to secure capital from the public. The report by a firm of cer
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tified public accountants adds credibility to the financial statements prepared by the corporation. When a s
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mall family-
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owned enterprise elects to have an audit, the purpose usually is to use the auditors' report to support an appli
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cation for a bank loan.
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, 1-5 A report by an independent public accountant concerning the fairness of a company's financial statementsis
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commonly required in the following situations:
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(1) Application for a bank loan. z z F F
(2) Establishing credit for purchase of merchandise, equipment, or other assets. z F z z z z z z z
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholderso
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zr partners).
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(4) Issuance of securities by a corporation. z z z z z
(5) Annual financial statements by a corporation with securities listed on a stock exchange or tradedo
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zver the counter. z z
(6) Sale of an ongoing business.
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(7) Termination of a partnership. z z F
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared followin
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g the appropriate criteria, usually generally accepted accounting principles. As such, an increasein credibil
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ity results in financial statements that can be believed and relied upon by third parties.
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1-7 Business risk is the risk that the investment will be impaired because a company invested in is unable tom
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eet its financial obligations due to economic conditions or poor management decisions. Information risk i
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s the risk that the information used to assess business risk is not accurate. Auditors can directly reduce i
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nformation risk, but have only limited effect on business risk.
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1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection of frau
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d. Audit work centered on the balance sheet, because the income statement was regarded as highly confide
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ntial and not for public disclosure. Today, the principal objective of auditing is to form an opinion on
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the f airness of financial statements and their conformity with generally accepted accounting principles.
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But the professional standards also require that an audit be designed to provide reasonable assurance of
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detecting material misstatements, due to errors or fraud. Particular emphasis is placed on the income
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statement whic h is of great importance to investors. Auditing today also has the objectives ofmeeting the
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requirements of the Securities and Exchange Commission (SEC) and the Public Company Accounting
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Oversight Board fo r public companies.
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1-9 The statement is incorrect. The increasing integrated databases of today, along with available auditp
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rocedures make audited entire populations a possibility in many situations.
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1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an organi
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zation. It involves more subjective judgments than a compliance audit or an audit of financial statemen
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ts because the criteria of effectiveness and efficiency of departmental performance are not asclearly est
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ablished as are many laws and regulations or generally accepted accounting principles.
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The report prepared after completion of an operational audit is usually directed to management of
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the organization in which the audit work was done.
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1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in complianc
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e with established criteria. The necessary ingredients are verifiable data and the existence of standards est
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ablished by an authoritative body. An operational audit, on the other hand, is a review of adepartment or
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other unit of a business or governmental organization to measure the effectiveness and efficiency of opera
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tions. Internal auditors often perform operational audits as do auditors employed by the Government Ac
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countability Office (GAO) of the federal government.
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1-12 Internal auditors must be independent of the department heads and other line executives whose work theyre
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zview. However, internal auditors are not independent in the same sense as a public accounting firm.
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z z
Principles Of Auditing And Other Assurance Services
z z z z z z z
23rd Edition By Ray Whittington Kurt
z z z z z
z ALL Chapters (1 - 21)
z z z z
, • TableofContents z z
Chapter 1: The Role of the Public Accountant in the AmericanEconomy
z z z z z z z z z z
Chapter 2: Professional Standards
z z z z
Chapter 3: Professional Ethics
z z z
Chapter 4: Legal Liability of CPAs
z z z z z z
Chapter 5: Audit Evidence and Documentation
z z z z z
Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding Chapter
z z z z z z z z z z
7: Internal Control
z z z
Chapter 8: Consideration of Internal Control in an InformationTechnology Environment
z z z z z z z z z
Chapter 9: Audit Sampling
z z z z
Chapter 10: Cash and Financial Investments
z z z z z
Chapter 11: Accounts Receivable, Notes Receivable, andRevenue Chapter
z z z z z z z
12: Inventories and Cost of Goods Sold
z z z z z z z
Chapter 13: Property, Plant, and Equipment: Depreciation andDepletion
z z z z z z z
Chapter 14: Accounts Payable and Other Liabilities
z z z z z z z
Chapter 15: Debt and Equity Capital
z z z z z
Chapter 16: Auditing Operations and Completing the Audit
z z z z z z z
Chapter 17: Auditors’ Reports
z z z z
Chapter 18: Integrated Audits of Public Companies
z z z z z z
Chapter 19: Additional Assurance Services: Historical FinancialInformation
z z z z z z
Chapter 20: Additional Assurance Services: Other Information
z z z z z z z
Chapter 21: Internal, Operational, and Compliance Auditing
z z z z z z
,CHAPTER1 z
TheRoleofthePubli c z z z z
z Accountant in the z z
American Economy z
Review Questions
z
1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously issued
z z z z z z z z z z F z z z z
financial statements as a result of accounting irregularities and fraud. Especially responsible werethe very
z z z z z z z z z z z z z z
visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the largest
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companies in American history to do so. The extent of the accounting irregularities and fraud being investi
z z z F z z z z z F z z z F z z z
gated and disclosed brought into question the effectiveness of financial statement audits. In addition, the cr
z z F z z z z z z z z z z z z z
iminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on charges of destroyi
z z z z z z z z z z F z z z z z z z
ng documents related to the Enron case brought into question the ethics standards of the profession.
z z z F z z z z F z z z z z z z
1-2 Assurance services are professional services that enhance the quality of information, or its context, for d
z z z z z F z z z z z z z z z
ecision-
z
making. The two types are: (a) those that increase the reliability of information and (b) those that involv e
z z z z z z F F z z z z z z z z z z
putting information in a form or context that facilitates decision-making.
z z z z z z z z z z
1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall assertion,m
z z z z z z z z z z F z z z z z
ade by management, most frequently is that the financial statements follow generally accepted accounting
z z z z z z z z z z z z z z
principles.
z
1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchange
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and by the rules of the Securities and Exchange Commission to provide an audit report with theannual fina
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ncial statements furnished to its stockholders. It also is required to engage the auditors to provide an opinio
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n on its internal control. Apart from legal requirements, however, a large listed corporation recognizes tha
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zt it must maintain investor confidence in the reliability of its financial statements and internal control over f
z F z z z z z z z z z z z z z z z
inancial reporting if it is to continue to be able to secure capital from the public. The report by a firm of cer
z z z z z z z F z F F z F z F z z F z z z z z
tified public accountants adds credibility to the financial statements prepared by the corporation. When a s
z z z z z z z z z z z z z z z z
mall family-
z z
owned enterprise elects to have an audit, the purpose usually is to use the auditors' report to support an appli
z z z z z z z z z z z z z z z z z z z
cation for a bank loan.
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, 1-5 A report by an independent public accountant concerning the fairness of a company's financial statementsis
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commonly required in the following situations:
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(1) Application for a bank loan. z z F F
(2) Establishing credit for purchase of merchandise, equipment, or other assets. z F z z z z z z z
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholderso
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zr partners).
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(4) Issuance of securities by a corporation. z z z z z
(5) Annual financial statements by a corporation with securities listed on a stock exchange or tradedo
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zver the counter. z z
(6) Sale of an ongoing business.
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(7) Termination of a partnership. z z F
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared followin
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g the appropriate criteria, usually generally accepted accounting principles. As such, an increasein credibil
z z F F z z z z F z F z z z
ity results in financial statements that can be believed and relied upon by third parties.
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1-7 Business risk is the risk that the investment will be impaired because a company invested in is unable tom
F z z F z z z z z z z z z z z z z z
eet its financial obligations due to economic conditions or poor management decisions. Information risk i
z F F z z z z F z z z z z z F
s the risk that the information used to assess business risk is not accurate. Auditors can directly reduce i
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nformation risk, but have only limited effect on business risk.
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1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection of frau
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d. Audit work centered on the balance sheet, because the income statement was regarded as highly confide
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ntial and not for public disclosure. Today, the principal objective of auditing is to form an opinion on
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the f airness of financial statements and their conformity with generally accepted accounting principles.
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But the professional standards also require that an audit be designed to provide reasonable assurance of
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detecting material misstatements, due to errors or fraud. Particular emphasis is placed on the income
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statement whic h is of great importance to investors. Auditing today also has the objectives ofmeeting the
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requirements of the Securities and Exchange Commission (SEC) and the Public Company Accounting
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Oversight Board fo r public companies.
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1-9 The statement is incorrect. The increasing integrated databases of today, along with available auditp
F z F z z F z F z z F z z
rocedures make audited entire populations a possibility in many situations.
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1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an organi
z z z z z z z F z z z z z z z z
zation. It involves more subjective judgments than a compliance audit or an audit of financial statemen
z z F z z z z F F z F z z F z z
ts because the criteria of effectiveness and efficiency of departmental performance are not asclearly est
z z z z z z z F z z z F F Fz z
ablished as are many laws and regulations or generally accepted accounting principles.
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The report prepared after completion of an operational audit is usually directed to management of
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the organization in which the audit work was done.
z z z z z z z z z
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in complianc
z z z z z z z z z z z z z z z z
e with established criteria. The necessary ingredients are verifiable data and the existence of standards est
z z F z z F z z z z z z z z z z
ablished by an authoritative body. An operational audit, on the other hand, is a review of adepartment or
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other unit of a business or governmental organization to measure the effectiveness and efficiency of opera
z z z z z z z z z z z z z z z z
tions. Internal auditors often perform operational audits as do auditors employed by the Government Ac
z z z z z z z z z z z F z z z
countability Office (GAO) of the federal government.
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1-12 Internal auditors must be independent of the department heads and other line executives whose work theyre
z z z z z z z z z z z z z z F
zview. However, internal auditors are not independent in the same sense as a public accounting firm.
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