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 Adreportd bydandindependentd publicdaccountantd concerningdthedfairnessd ofdad company'sd financialdstatementsdi
sdcommonlydrequireddindthedfollowingdsituations:
(1) Applicationdfordad bankdloan.
(2) Establishingdcreditd ford purchasedofd merchandise,dequipment,dord otherd assets.
(3) Reportingdoperatingdresults,dfinancialdposition,d anddcashdflowsd todabsenteedownersd (stockholdersd
ordpartners).
(4) Issuancedofd securitiesd bydadcorporation.
(5) Annualdfinancialdstatementsd bydadcorporationdwithdsecuritiesd listeddondad stockdexchangedord tradedd
overdthedcounter.
(6) Saledofd andongoingdbusiness.
(7) Terminationdofd ad partnership.
1-6 Todadddcredibilitydtodfinancialdstatementsd isdtodincreasedthedlikelihooddthatd theydhavedbeendprepareddfollowi
ngdthedappropriatedcriteria,dusuallydgenerallydaccepteddaccountingdprinciples.d Asd such,dandincreasedindcredi
bilitydresultsd indfinancialdstatementsdthatd candbedbelieveddanddrelieddupondbydthirddparties.
1-7 Businessd riskdisd thedriskdthatd thedinvestmentd willdbedimpaireddbecausedad companydinvesteddindisd unabledtod
meetditsdfinancialdobligationsdduedtodeconomicdconditionsdordpoordmanagementddecisions.dInformationdris
kdisdthedriskdthatdthedinformationduseddtodassessdbusinessdriskdisdnotdaccurate.dAuditorsdcanddirectlydredu
cedinformationdrisk,dbutdhavedonlydlimiteddeffectdondbusinessdrisk.
1-8 Atdthedbeginningdofdthedcentury,dthedprincipaldobjectivedofdauditingdwasd thedpreventiondandddetectiondofdfra
ud.d Auditdworkdcentereddondthedbalancedsheet,dbecausedthedincomedstatementdwasd regardeddasd highlydconfi
dentialdanddnotd ford publicddisclosure.d Today,d thedprincipaldobjectivedofd auditingdisd todformdandopiniondondt
hedfairnessd ofdfinancialdstatementsd anddtheirdconformitydwithdgenerallydaccepteddaccountingdprinciples.d But
d thedprofessionald standardsd alsod requiredthatd and auditd beddesignedd todprovidedreasonabledassurancedofd detect
ingdmaterialdmisstatements,d duedtoderrorsd ord fraud.d Particulard emphasisd isd placeddondthedincomedstatementd
whichdisd ofdgreatd importancedtodinvestors.d Auditingdtodaydalsodhasd thedobjectivesd ofdmeetingdthedrequireme
ntsd ofdthedSecuritiesd anddExchangedCommissiond(SEC)d anddthedPublicdCompanydAccountingdOversightdB
oarddfordpublicdcompanies.
1-9 Thedstatementd isd incorrect.dThedincreasingdintegratedddatabasesd ofd today,dalongdwithdavailabledauditd
proceduresdmakedauditeddentiredpopulationsdadpossibilitydindmanydsituations.
1-10 Andoperationaldauditdattemptsd todmeasuredthedeffectivenessd anddefficiencydofdadspecificdunitd ofdandorgan
ization.d Itdinvolvesd moredsubjectivedjudgmentsdthandadcompliancedauditd ordandauditdofdfinancialdstateme
ntsd becausedthedcriteriad ofd effectivenessd anddefficiencydofddepartmentaldperformancedarednotd asdclearlyd
establisheddasd aredmanydlawsd anddregulationsdordgenerallydaccepteddaccountingdprinciples.
Thedreportd prepareddafterd completiondofd andoperationaldauditd isd usuallyddirecteddtodmanagementdof
dthedorganization dindwhichdthedauditdworkdwasddone.
1-11 Adcompliancedauditdisdandauditdtoddeterminedwhetherdfinancialdreportsdordotherdassertionsdared indcomplian
cedwithdestablisheddcriteria.d Thednecessarydingredientsd aredverifiableddatad anddthedexistencedofdstandardsd e
stablisheddbydandauthoritativedbody.d Andoperationaldaudit,dondthedotherdhand,disd ad reviewdofd addepartmentd
ordotherdunitdofdadbusinessd ordgovernmentaldorganizationdtodmeasuredthedeffectivenessdanddefficiencydofd o
perations.d Internaldauditorsd oftendperformdoperationaldauditsd asd dodauditorsd employeddbydthedGovernmen
tdAccountabilitydOfficed(GAO)dofdthedfederaldgovernment.
1-12 Internaldauditorsd mustd bedindependentd ofdtheddepartmentd headsd anddotherdlinedexecutivesd whosedworkdtheydr
eview.dHowever,dinternaldauditorsdarednotdindependentdindthedsamedsensedasdadpublicdaccountingdfirm.
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 Adreportd bydandindependentd publicdaccountantd concerningdthedfairnessd ofdad company'sd financialdstatementsdi
sdcommonlydrequireddindthedfollowingdsituations:
(1) Applicationdfordad bankdloan.
(2) Establishingdcreditd ford purchasedofd merchandise,dequipment,dord otherd assets.
(3) Reportingdoperatingdresults,dfinancialdposition,d anddcashdflowsd todabsenteedownersd (stockholdersd
ordpartners).
(4) Issuancedofd securitiesd bydadcorporation.
(5) Annualdfinancialdstatementsd bydadcorporationdwithdsecuritiesd listeddondad stockdexchangedord tradedd
overdthedcounter.
(6) Saledofd andongoingdbusiness.
(7) Terminationdofd ad partnership.
1-6 Todadddcredibilitydtodfinancialdstatementsd isdtodincreasedthedlikelihooddthatd theydhavedbeendprepareddfollowi
ngdthedappropriatedcriteria,dusuallydgenerallydaccepteddaccountingdprinciples.d Asd such,dandincreasedindcredi
bilitydresultsd indfinancialdstatementsdthatd candbedbelieveddanddrelieddupondbydthirddparties.
1-7 Businessd riskdisd thedriskdthatd thedinvestmentd willdbedimpaireddbecausedad companydinvesteddindisd unabledtod
meetditsdfinancialdobligationsdduedtodeconomicdconditionsdordpoordmanagementddecisions.dInformationdris
kdisdthedriskdthatdthedinformationduseddtodassessdbusinessdriskdisdnotdaccurate.dAuditorsdcanddirectlydredu
cedinformationdrisk,dbutdhavedonlydlimiteddeffectdondbusinessdrisk.
1-8 Atdthedbeginningdofdthedcentury,dthedprincipaldobjectivedofdauditingdwasd thedpreventiondandddetectiondofdfra
ud.d Auditdworkdcentereddondthedbalancedsheet,dbecausedthedincomedstatementdwasd regardeddasd highlydconfi
dentialdanddnotd ford publicddisclosure.d Today,d thedprincipaldobjectivedofd auditingdisd todformdandopiniondondt
hedfairnessd ofdfinancialdstatementsd anddtheirdconformitydwithdgenerallydaccepteddaccountingdprinciples.d But
d thedprofessionald standardsd alsod requiredthatd and auditd beddesignedd todprovidedreasonabledassurancedofd detect
ingdmaterialdmisstatements,d duedtoderrorsd ord fraud.d Particulard emphasisd isd placeddondthedincomedstatementd
whichdisd ofdgreatd importancedtodinvestors.d Auditingdtodaydalsodhasd thedobjectivesd ofdmeetingdthedrequireme
ntsd ofdthedSecuritiesd anddExchangedCommissiond(SEC)d anddthedPublicdCompanydAccountingdOversightdB
oarddfordpublicdcompanies.
1-9 Thedstatementd isd incorrect.dThedincreasingdintegratedddatabasesd ofd today,dalongdwithdavailabledauditd
proceduresdmakedauditeddentiredpopulationsdadpossibilitydindmanydsituations.
1-10 Andoperationaldauditdattemptsd todmeasuredthedeffectivenessd anddefficiencydofdadspecificdunitd ofdandorgan
ization.d Itdinvolvesd moredsubjectivedjudgmentsdthandadcompliancedauditd ordandauditdofdfinancialdstateme
ntsd becausedthedcriteriad ofd effectivenessd anddefficiencydofddepartmentaldperformancedarednotd asdclearlyd
establisheddasd aredmanydlawsd anddregulationsdordgenerallydaccepteddaccountingdprinciples.
Thedreportd prepareddafterd completiondofd andoperationaldauditd isd usuallyddirecteddtodmanagementdof
dthedorganization dindwhichdthedauditdworkdwasddone.
1-11 Adcompliancedauditdisdandauditdtoddeterminedwhetherdfinancialdreportsdordotherdassertionsdared indcomplian
cedwithdestablisheddcriteria.d Thednecessarydingredientsd aredverifiableddatad anddthedexistencedofdstandardsd e
stablisheddbydandauthoritativedbody.d Andoperationaldaudit,dondthedotherdhand,disd ad reviewdofd addepartmentd
ordotherdunitdofdadbusinessd ordgovernmentaldorganizationdtodmeasuredthedeffectivenessdanddefficiencydofd o
perations.d Internaldauditorsd oftendperformdoperationaldauditsd asd dodauditorsd employeddbydthedGovernmen
tdAccountabilitydOfficed(GAO)dofdthedfederaldgovernment.
1-12 Internaldauditorsd mustd bedindependentd ofdtheddepartmentd headsd anddotherdlinedexecutivesd whosedworkdtheydr
eview.dHowever,dinternaldauditorsdarednotdindependentdindthedsamedsensedasdadpublicdaccountingdfirm.
