SOLUTION MANUAL FOR
f f
f Principles Of Auditing And Other Assurance Services
f f f f f f f
23rd Edition By Ray Whittington Kurt
f f f f f f
ALL Chapters (1 - 21)
f f f f
, • Table of Contents
f f
Chapterf1:fThefRolefoffthefPublicfAccountantfinfthefAmericanEconomy
Chapterf2:fProfessionalfStandards
Chapterf3:fProfessionalfEthics
Chapterf4:fLegalfLiabilityfoffCPAs
Chapterf5:fAuditfEvidencefandfDocumentation
Chapterf6:fAuditfPlanning,fUnderstandingfthefClient,fAssessingRisks,fandfResponding
Chapterf7:fInternalfControl
Chapterf8:fConsiderationfoffInternalfControlfinfanfInformationTechnologyfEnvironment
Chapterf9:fAuditfSampling
Chapterf10:fCashfandfFinancialfInvestments
Chapterf11:fAccountsfReceivable,fNotesfReceivable,fandRevenue
Chapterf12:fInventoriesfandfCostfoffGoodsfSold
Chapterf13:fProperty,fPlant,fandfEquipment:fDepreciationfandDepletion
Chapterf14:fAccountsfPayablefandfOtherfLiabilities
Chapterf15:fDebtfandfEquityfCapital
Chapterf16:fAuditingfOperationsfandfCompletingfthefAudit
Chapterf17:fAuditors’fReports
Chapterf18:fIntegratedfAuditsfoffPublicfCompanies
Chapterf19:fAdditionalfAssurancefServices:fHistoricalfFinancialInformation
Chapterf20:fAdditionalfAssurancefServices:fOtherfInformation
Chapterf21:fInternal,fOperational,fandfCompliancefAuditing
,CHAPTER 1 f
The Role of the Publi
f f f f
c Accountant in the
f f f
American Economy f
ReviewfQuestions
1-1 Thef―crisisfoffcredibility‖flargelyfaroseffromfthefnumberfoffcompaniesfthatfrestatedftheirfpreviouslyfissuedffin
ancialfstatementsfasfafresultfoff accountingfirregularitiesfandffraud.f Especiallyfresponsiblefwerefthefveryfvisib
lefEnronfandfWorldComffraudfcases.fBothfcompaniesf filedfforfbankruptcyfandfconstitutedftheflargestfcompa
niesfinfAmericanfhistoryftofdofso.f Thefextentfoffthefaccountingfirregularitiesfandffraudfbeingfinvestigatedfan
dfdisclosedfbroughtfintofquestionfthefeffectivenessfofffinancialfstatementfaudits.f Infaddition,fthefcriminalfcon
victionfoffArthurfAndersen,fLLP,fonefoffthefthenfBigf5faccountingffirms,fonfchargesfoffdestroyingfdocument
sfrelatedftofthefEnronfcasefbroughtfintofquestionfthefethicsfstandardsfoffthefprofession.
1-2 Assurancefservicesfarefprofessionalfservicesfthatfenhancefthefqualityfoffinformation,forfitsfcontext,fforfdec
ision-
making.fTheftwoftypesfare:f(a)fthosefthatfincreasefthefreliabilityfoffinformationfandf(b)fthosefthatfinvolvefp
uttingfinformationfinfafformforfcontextfthatffacilitatesfdecision-making.
1-3 Affinancialfstatementfauditfis,fbyffar,fthefmostfcommonftypefoffattestfengagement.f Thefoverallfassertion,fmad
efbyfmanagement,fmostffrequentlyfisfthatftheffinancialfstatementsffollowfgenerallyfacceptedfaccountingfprin
ciples.
1-4 Aflargefcorporationfwithfsecuritiesflistedfonfafstockfexchangefisfrequiredfbyfthefrulesfoffthefstockfexchangefan
dfbyfthefrulesfoff thefSecuritiesf andfExchangefCommissionftofprovidefanfauditfreportf withfthefannualffinancialf
statementsffurnishedftofitsfstockholders.f Itfalsofisfrequiredftofengagefthefauditorsftofprovidefanfopinionfonfitsf
internalfcontrol.fApartffromflegalfrequirements,fhowever,faflargeflistedfcorporationfrecognizesfthatfitfmustf
maintainfinvestorfconfidencefinfthefreliabilityfoffitsffinancialfstatementsf andfinternalfcontrolfoverf financialfre
portingf iff itf isf tofcontinueftofbefableftofsecurefcapitalffromfthefpublic.fThefreportf byfaffirmfoffcertifiedfpublicfa
ccountantsfaddsfcredibilityftoftheffinancialfstatementsfpreparedfbyfthefcorporation.f Whenfafsmallffamily-
ownedfenterprisefelectsf tofhavefanfaudit,fthefpurposefusuallyfisftofusefthefauditors'freportftofsupportfanfapplica
tionf forfafbankfloan.
, 1-5 Afreportfbyfanfindependentfpublicfaccountantfconcerningftheffairnessfoffafcompany'sffinancialfstatementsfisfc
ommonlyfrequiredfinftheffollowingfsituations:
(1) Applicationfforfafbankfloan.
(2) Establishingfcreditf forfpurchasefoff merchandise,fequipment,forfotherfassets.
(3) Reportingfoperatingfresults,ffinancialfposition,fandfcashfflowsf tofabsenteefownersf (stockholdersforf
partners).
(4) Issuancefoffsecuritiesfbyfafcorporation.
(5) Annualffinancialfstatementsf byfafcorporationfwithfsecuritiesf listedfonfaf stockfexchangeforftradedfov
erfthefcounter.
(6) Salefoffanfongoingfbusiness.
(7) Terminationfoff af partnership.
1-6 Tofaddfcredibilityftoffinancialfstatementsfisftofincreaseftheflikelihoodfthatftheyfhavefbeenfpreparedffollowingf
thefappropriatefcriteria,fusuallyfgenerallyfacceptedfaccountingfprinciples.f Asfsuch,fanfincreasefinfcredibilityfr
esultsfinffinancialfstatementsfthatfcanfbefbelievedfandfreliedfuponfbyfthirdfparties.
1-7 Businessfriskfisf thefriskfthatf thefinvestmentfwillfbefimpairedfbecausefafcompanyfinvestedfinfisf unableftofmee
tfitsffinancialfobligationsfdueftofeconomicfconditionsforfpoorfmanagementfdecisions.fInformationfriskfisfthef
riskfthatfthefinformationfusedftofassessfbusinessfriskfisfnotfaccurate.fAuditorsfcanfdirectlyfreducefinformat
ionfrisk,fbutfhavefonlyflimitedfeffectfonfbusinessfrisk.
1-8 Atfthefbeginningfoffthefcentury,fthefprincipalfobjectivefoffauditingfwasf thefpreventionfandfdetectionfofffraud.f
Auditfworkfcenteredfonfthefbalancefsheet,fbecausefthefincomefstatementfwasfregardedfasfhighlyfconfidentialf
andfnotf forfpublicfdisclosure.f Today,fthefprincipalfobjectivefoffauditingfisf tofformfanfopinionfonftheffairnessf
offfinancialfstatementsfandftheirfconformityfwithfgenerallyfacceptedfaccountingfprinciples.f Butfthefprofessio
nalfstandardsfalsofrequirefthatfanfauditf befdesignedftofprovidefreasonablefassurancefoffdetectingfmaterialfmis
statements,fdueftoferrorsf orffraud.f Particularfemphasisf isf placedfonfthefincomefstatementfwhichfisfoffgreatfi
mportanceftofinvestors.f AuditingftodayfalsofhasfthefobjectivesfoffmeetingfthefrequirementsfoffthefSecuritiesfa
ndfExchangefCommissionf(SEC)f andfthefPublicfCompanyfAccountingfOversightfBoardfforfpublicfcompan
ies.
1-9 Thefstatementf isfincorrect.fThefincreasingfintegratedfdatabasesfoff today,falongfwithfavailablefauditfpr
oceduresfmakefauditedfentirefpopulationsfafpossibilityfinfmanyfsituations.
1-10 Anfoperationalfauditfattemptsftofmeasurefthefeffectivenessf andfefficiencyfoffafspecificfunitfoffanforganiza
tion.f Itfinvolvesf morefsubjectivefjudgmentsfthanfafcompliancefauditforfanfauditfofffinancialfstatementsfbe
causefthefcriteriafoffeffectivenessfandfefficiencyfoffdepartmentalfperformancefarefnotf asfclearlyfestablish
edfasfarefmanyflawsfandfregulationsforfgenerallyfacceptedfaccountingfprinciples.
Thefreportf preparedfafterfcompletionfoffanfoperationalfauditf isf usuallyfdirectedftofmanagementfoffth
eforganizationfinfwhichfthefauditfworkfwasfdone.
1-11 Afcompliancefauditfisfanfauditftofdeterminefwhetherffinancialfreportsforfotherfassertionsfarefinfcompliancef
withfestablishedfcriteria.f Thefnecessaryfingredientsfarefverifiablefdatafandfthefexistencefoffstandardsfestabli
shedfbyfanfauthoritativefbody.f Anfoperationalfaudit,fonfthefotherfhand,fisf afreviewfoffafdepartmentforfotherfu
nitfoffafbusinessf orfgovernmentalforganizationftofmeasurefthefeffectivenessfandfefficiencyfoffoperations.f Int
ernalfauditorsfoftenfperformfoperationalfauditsfasfdofauditorsfemployedfbyfthefGovernmentfAccountabilit
yfOfficef(GAO)fofftheffederalfgovernment.
1-12 Internalfauditorsf mustfbefindependentfoffthefdepartmentfheadsfandfotherflinefexecutivesf whosefworkftheyfrevi
ew.fHowever,finternalfauditorsfarefnotfindependentfinfthefsamefsensefasfafpublicfaccountingffirm.
f f
f Principles Of Auditing And Other Assurance Services
f f f f f f f
23rd Edition By Ray Whittington Kurt
f f f f f f
ALL Chapters (1 - 21)
f f f f
, • Table of Contents
f f
Chapterf1:fThefRolefoffthefPublicfAccountantfinfthefAmericanEconomy
Chapterf2:fProfessionalfStandards
Chapterf3:fProfessionalfEthics
Chapterf4:fLegalfLiabilityfoffCPAs
Chapterf5:fAuditfEvidencefandfDocumentation
Chapterf6:fAuditfPlanning,fUnderstandingfthefClient,fAssessingRisks,fandfResponding
Chapterf7:fInternalfControl
Chapterf8:fConsiderationfoffInternalfControlfinfanfInformationTechnologyfEnvironment
Chapterf9:fAuditfSampling
Chapterf10:fCashfandfFinancialfInvestments
Chapterf11:fAccountsfReceivable,fNotesfReceivable,fandRevenue
Chapterf12:fInventoriesfandfCostfoffGoodsfSold
Chapterf13:fProperty,fPlant,fandfEquipment:fDepreciationfandDepletion
Chapterf14:fAccountsfPayablefandfOtherfLiabilities
Chapterf15:fDebtfandfEquityfCapital
Chapterf16:fAuditingfOperationsfandfCompletingfthefAudit
Chapterf17:fAuditors’fReports
Chapterf18:fIntegratedfAuditsfoffPublicfCompanies
Chapterf19:fAdditionalfAssurancefServices:fHistoricalfFinancialInformation
Chapterf20:fAdditionalfAssurancefServices:fOtherfInformation
Chapterf21:fInternal,fOperational,fandfCompliancefAuditing
,CHAPTER 1 f
The Role of the Publi
f f f f
c Accountant in the
f f f
American Economy f
ReviewfQuestions
1-1 Thef―crisisfoffcredibility‖flargelyfaroseffromfthefnumberfoffcompaniesfthatfrestatedftheirfpreviouslyfissuedffin
ancialfstatementsfasfafresultfoff accountingfirregularitiesfandffraud.f Especiallyfresponsiblefwerefthefveryfvisib
lefEnronfandfWorldComffraudfcases.fBothfcompaniesf filedfforfbankruptcyfandfconstitutedftheflargestfcompa
niesfinfAmericanfhistoryftofdofso.f Thefextentfoffthefaccountingfirregularitiesfandffraudfbeingfinvestigatedfan
dfdisclosedfbroughtfintofquestionfthefeffectivenessfofffinancialfstatementfaudits.f Infaddition,fthefcriminalfcon
victionfoffArthurfAndersen,fLLP,fonefoffthefthenfBigf5faccountingffirms,fonfchargesfoffdestroyingfdocument
sfrelatedftofthefEnronfcasefbroughtfintofquestionfthefethicsfstandardsfoffthefprofession.
1-2 Assurancefservicesfarefprofessionalfservicesfthatfenhancefthefqualityfoffinformation,forfitsfcontext,fforfdec
ision-
making.fTheftwoftypesfare:f(a)fthosefthatfincreasefthefreliabilityfoffinformationfandf(b)fthosefthatfinvolvefp
uttingfinformationfinfafformforfcontextfthatffacilitatesfdecision-making.
1-3 Affinancialfstatementfauditfis,fbyffar,fthefmostfcommonftypefoffattestfengagement.f Thefoverallfassertion,fmad
efbyfmanagement,fmostffrequentlyfisfthatftheffinancialfstatementsffollowfgenerallyfacceptedfaccountingfprin
ciples.
1-4 Aflargefcorporationfwithfsecuritiesflistedfonfafstockfexchangefisfrequiredfbyfthefrulesfoffthefstockfexchangefan
dfbyfthefrulesfoff thefSecuritiesf andfExchangefCommissionftofprovidefanfauditfreportf withfthefannualffinancialf
statementsffurnishedftofitsfstockholders.f Itfalsofisfrequiredftofengagefthefauditorsftofprovidefanfopinionfonfitsf
internalfcontrol.fApartffromflegalfrequirements,fhowever,faflargeflistedfcorporationfrecognizesfthatfitfmustf
maintainfinvestorfconfidencefinfthefreliabilityfoffitsffinancialfstatementsf andfinternalfcontrolfoverf financialfre
portingf iff itf isf tofcontinueftofbefableftofsecurefcapitalffromfthefpublic.fThefreportf byfaffirmfoffcertifiedfpublicfa
ccountantsfaddsfcredibilityftoftheffinancialfstatementsfpreparedfbyfthefcorporation.f Whenfafsmallffamily-
ownedfenterprisefelectsf tofhavefanfaudit,fthefpurposefusuallyfisftofusefthefauditors'freportftofsupportfanfapplica
tionf forfafbankfloan.
, 1-5 Afreportfbyfanfindependentfpublicfaccountantfconcerningftheffairnessfoffafcompany'sffinancialfstatementsfisfc
ommonlyfrequiredfinftheffollowingfsituations:
(1) Applicationfforfafbankfloan.
(2) Establishingfcreditf forfpurchasefoff merchandise,fequipment,forfotherfassets.
(3) Reportingfoperatingfresults,ffinancialfposition,fandfcashfflowsf tofabsenteefownersf (stockholdersforf
partners).
(4) Issuancefoffsecuritiesfbyfafcorporation.
(5) Annualffinancialfstatementsf byfafcorporationfwithfsecuritiesf listedfonfaf stockfexchangeforftradedfov
erfthefcounter.
(6) Salefoffanfongoingfbusiness.
(7) Terminationfoff af partnership.
1-6 Tofaddfcredibilityftoffinancialfstatementsfisftofincreaseftheflikelihoodfthatftheyfhavefbeenfpreparedffollowingf
thefappropriatefcriteria,fusuallyfgenerallyfacceptedfaccountingfprinciples.f Asfsuch,fanfincreasefinfcredibilityfr
esultsfinffinancialfstatementsfthatfcanfbefbelievedfandfreliedfuponfbyfthirdfparties.
1-7 Businessfriskfisf thefriskfthatf thefinvestmentfwillfbefimpairedfbecausefafcompanyfinvestedfinfisf unableftofmee
tfitsffinancialfobligationsfdueftofeconomicfconditionsforfpoorfmanagementfdecisions.fInformationfriskfisfthef
riskfthatfthefinformationfusedftofassessfbusinessfriskfisfnotfaccurate.fAuditorsfcanfdirectlyfreducefinformat
ionfrisk,fbutfhavefonlyflimitedfeffectfonfbusinessfrisk.
1-8 Atfthefbeginningfoffthefcentury,fthefprincipalfobjectivefoffauditingfwasf thefpreventionfandfdetectionfofffraud.f
Auditfworkfcenteredfonfthefbalancefsheet,fbecausefthefincomefstatementfwasfregardedfasfhighlyfconfidentialf
andfnotf forfpublicfdisclosure.f Today,fthefprincipalfobjectivefoffauditingfisf tofformfanfopinionfonftheffairnessf
offfinancialfstatementsfandftheirfconformityfwithfgenerallyfacceptedfaccountingfprinciples.f Butfthefprofessio
nalfstandardsfalsofrequirefthatfanfauditf befdesignedftofprovidefreasonablefassurancefoffdetectingfmaterialfmis
statements,fdueftoferrorsf orffraud.f Particularfemphasisf isf placedfonfthefincomefstatementfwhichfisfoffgreatfi
mportanceftofinvestors.f AuditingftodayfalsofhasfthefobjectivesfoffmeetingfthefrequirementsfoffthefSecuritiesfa
ndfExchangefCommissionf(SEC)f andfthefPublicfCompanyfAccountingfOversightfBoardfforfpublicfcompan
ies.
1-9 Thefstatementf isfincorrect.fThefincreasingfintegratedfdatabasesfoff today,falongfwithfavailablefauditfpr
oceduresfmakefauditedfentirefpopulationsfafpossibilityfinfmanyfsituations.
1-10 Anfoperationalfauditfattemptsftofmeasurefthefeffectivenessf andfefficiencyfoffafspecificfunitfoffanforganiza
tion.f Itfinvolvesf morefsubjectivefjudgmentsfthanfafcompliancefauditforfanfauditfofffinancialfstatementsfbe
causefthefcriteriafoffeffectivenessfandfefficiencyfoffdepartmentalfperformancefarefnotf asfclearlyfestablish
edfasfarefmanyflawsfandfregulationsforfgenerallyfacceptedfaccountingfprinciples.
Thefreportf preparedfafterfcompletionfoffanfoperationalfauditf isf usuallyfdirectedftofmanagementfoffth
eforganizationfinfwhichfthefauditfworkfwasfdone.
1-11 Afcompliancefauditfisfanfauditftofdeterminefwhetherffinancialfreportsforfotherfassertionsfarefinfcompliancef
withfestablishedfcriteria.f Thefnecessaryfingredientsfarefverifiablefdatafandfthefexistencefoffstandardsfestabli
shedfbyfanfauthoritativefbody.f Anfoperationalfaudit,fonfthefotherfhand,fisf afreviewfoffafdepartmentforfotherfu
nitfoffafbusinessf orfgovernmentalforganizationftofmeasurefthefeffectivenessfandfefficiencyfoffoperations.f Int
ernalfauditorsfoftenfperformfoperationalfauditsfasfdofauditorsfemployedfbyfthefGovernmentfAccountabilit
yfOfficef(GAO)fofftheffederalfgovernment.
1-12 Internalfauditorsf mustfbefindependentfoffthefdepartmentfheadsfandfotherflinefexecutivesf whosefworkftheyfrevi
ew.fHowever,finternalfauditorsfarefnotfindependentfinfthefsamefsensefasfafpublicfaccountingffirm.
