Solution Manual – Principles of Auditing & Other Assurance Services | Whittington & Pany | 22nd Edition

SOLUTION MANUAL FOR
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Principles Of Auditing And Other Assurance Services
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23rd EditionByRay Whittington Kurt
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ALL Chapters (1 - 21)
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, • Table of Contents b b




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
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Chapter 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
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Chapter 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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,CHAPTER 1 b




The Role of the b b b




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American Economy b




ReviewQuestions
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1-1 The ―crisis of credibility‖ largelyarose fromthenumber 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
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investigated and disclosed brought into question the effectiveness of financial statement audits. In addition, the
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criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on charges of destroying
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documents related to the Enron case brought into question the ethics standards of theprofession.
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1-2 Assurance services are professional services that enhance the quality of information, or its context, for
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decision-making. The two types are: (a) those that increase the reliability of information and (b) those that
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involveputtinginformationinaformorcontextthat facilitatesdecision-making.
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1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall assertion,made
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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 bythe rules of the stock exchange and by
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the rules of the Securities and Exchange Commission to provide an audit report with theannual financial
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statements furnished to its stockholders. It also is required to engage the auditors to provide an opinion on its
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internal control. Apart from legal requirements, however, a large listed corporation recognizes that it must
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maintain investor confidence in the reliabilityof its financial statements and internal control over financial
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reporting if it is to continue to be able to secure capital from the public. The report by a firm of certified public
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accountants adds credibilityto the financial statements prepared by the corporation. When a small family-
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owned enterprise elects to have an audit, the purpose usuallyis to use the auditors' report to support an application
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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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commonlyrequiredinthefollowingsituations:
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(1) Application for a bank loan. b b b b




(2) Establishing credit for purchase of merchandise, equipment, or other assets. b b b b b b b b b




(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholdersor b b b b b b b b b b b b




partners).
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(4) Issuance of securities by a corporation. b b b b b




(5) Annual financial statements by a corporation with securities listed on a stock exchange or tradedover
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thecounter.
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(6) Sale of an ongoing business. b b b b




(7) Termination of a partnership. b b b




1-6 To add credibility to financial statements is to increase the likelihood that theyhave been prepared following the
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appropriate criteria, usually generally accepted accounting principles. As such, an increasein credibilityresults
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in financial statements that can be believed and relied upon bythird 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 tomeet its
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financial obligations due to economic conditions or poor management decisions. Information risk is the risk
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that the information used to assess business risk is not accurate. Auditors can directly reduceinformation risk,
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but haveonlylimited 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 fraud.
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Audit work centered on the balance sheet, because the income statement was regarded as highly confidential and
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not for public disclosure. Today, the principal objective of auditing is to form an opinion on the fairness of
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financial statements and their conformity with generallyaccepted accounting principles. But the professional
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standards also require that an audit be designed to provide reasonable assurance of detecting material
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misstatements, due to errors or fraud. Particular emphasis is placed on the income statement which is of great
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importance to investors. Auditing today also has the objectives ofmeeting the requirements of the Securities
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and Exchange Commission (SEC) and the Public Company AccountingOversight Board for public
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companies.
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1-9 The statement is incorrect. The increasing integrated databases of today, along with available audit
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procedures makeauditedentirepopulations a possibilityinmanysituations.
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1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an
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organization. It involves more subjective judgments than a compliance audit or an audit of financial
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statements because the criteria of effectiveness and efficiency of departmental performance are not as
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clearlyestablished as are manylaws and regulations or generallyaccepted accounting principles.
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The report prepared after completion of an operational audit is usually directed to managementof the b b b b b b b b b b b b b b b




organizationinwhichtheaudit workwas done.
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1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in compliance with
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established criteria. The necessary ingredients are verifiable data and the existence of standards established by
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an authoritative body. An operational audit, on the other hand, is a review of adepartment or other unit of a
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business or governmental organization to measure the effectiveness and efficiency of operations. Internal
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auditors often perform operational audits as do auditors employed by theGovernment AccountabilityOffice
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(GAO) ofthefederalgovernment.
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1-12 Internal auditors must be independent of the department heads and other line executives whose work they
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review. However, internal auditors are not independent in the same sense as a public accounting firm.
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