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