SOLUTION MANUAL FOR
Principles Of Auditing And Other Assurance Services
23rd Edition By Ray Whittington Kurt
ALL Chapters (1 - 21)
, Table of Contents
I I
ChapterI1:ITheIRoleIofItheIPublicIAccountantIinItheIAmericanEconomy
ChapterI2:IProfessionalIStandards
ChapterI3:IProfessionalIEthics
ChapterI4:ILegalILiabilityIofICPAs
ChapterI5:IAuditIEvidenceIandIDocumentation
ChapterI6:IAuditIPlanning,IUnderstandingItheIClient,IAssessingRisks,IandIResponding
ChapterI7:IInternalIControl
ChapterI8:IConsiderationIofIInternalIControlIinIanIInformationTechnologyIEnvironment
ChapterI9:IAuditISampling
ChapterI10:ICashIandIFinancialIInvestments
ChapterI11:IAccountsIReceivable,INotesIReceivable,IandRevenue
ChapterI12:IInventoriesIandICostIofIGoodsISold
ChapterI13:IProperty,IPlant,IandIEquipment:IDepreciationIandDepletion
ChapterI14:IAccountsIPayableIandIOtherILiabilities
ChapterI15:IDebtIandIEquityICapital
ChapterI16:IAuditingIOperationsIandICompletingItheIAudit
ChapterI17:IAuditors’IReports
ChapterI18:IIntegratedIAuditsIofIPublicICompanies
ChapterI19:IAdditionalIAssuranceIServices:IHistoricalIFinancialInformation
ChapterI20:IAdditionalIAssuranceIServices:IOtherIInformation
ChapterI21:IInternal,IOperational,IandIComplianceIAuditing
,CHAPTER 1 I
The Role of the Publi
I I I I
c Accountant in the
I I I
American Economy I
ReviewIQuestions
1-1 TheI―crisisIofIcredibility‖IlargelyIaroseIfromItheInumberIofIcompaniesIthatIrestatedItheirIpreviouslyIissuedIfina
ncialIstatementsI asI aI resultI ofI accountingIirregularitiesI andIfraud.I EspeciallyIresponsibleIwereItheIveryIvisibleI
EnronIandIWorldComIfraudIcases.IBothIcompaniesI filedIforI bankruptcyIandIconstitutedItheIlargestI companie
sI inIAmericanIhistoryItoIdoIso.I TheIextentI ofItheIaccountingIirregularitiesI andIfraudIbeingIinvestigatedIandIdisc
losedIbroughtI intoIquestionItheIeffectivenessI ofI financialIstatementI audits.I InIaddition,ItheIcriminalIconviction
IofIArthurIAndersen,ILLP,IoneIofItheIthenIBigI5IaccountingIfirms,IonIchargesI ofI destroyingIdocumentsI relatedIt
oItheIEnronIcaseIbroughtI intoIquestionItheIethicsI standardsIofItheIprofession.
1-2 AssuranceIservicesIareIprofessionalIservicesIthatIenhanceItheIqualityIofIinformation,IorIitsIcontext,IforIdecis
ion-
making.ITheItwoItypesIare:I(a)IthoseIthatIincreaseItheIreliabilityIofIinformationIandI(b)IthoseIthatIinvolveIpu
ttingIinformationIinIaIformIorIcontextIthatIfacilitatesIdecision-making.
1-3 AIfinancialIstatementI auditI is,IbyIfar,ItheImostI commonItypeIofI attestI engagement.I TheIoverallIassertion,ImadeI
byImanagement,ImostIfrequentlyIisIthatItheIfinancialIstatementsIfollowIgenerallyIacceptedIaccountingIprincip
les.
1-4 AIlargeIcorporationIwithIsecuritiesIlistedIonIaIstockIexchangeIisIrequiredIbyItheIrulesIofItheIstockIexchangeIandI
byItheIrulesI ofI theISecuritiesI andIExchangeICommissionItoIprovideIanIauditI reportI withItheIannualIfinancialIstat
ementsI furnishedItoIitsI stockholders.I ItI alsoIisI requiredItoIengageItheIauditorsI toIprovideIanIopinionIonIitsIinter
nalIcontrol.IApartIfromIlegalIrequirements,Ihowever,IaIlargeIlistedIcorporationIrecognizesIthatIitImustI mainta
inIinvestorIconfidenceIinItheIreliabilityIofIitsIfinancialIstatementsI andI internalI controlIoverI financialI reportingI i
fI itI isI toI continueItoI beIableItoIsecureIcapitalIfromItheIpublic.I TheIreportI byIaIfirmIofIcertifiedIpublicIaccountants
I addsI credibilityItoItheIfinancialIstatementsI preparedIbyItheIcorporation.I WhenIaI smallIfamily-
ownedIenterpriseIelectsI toIhaveIanIaudit,ItheIpurposeIusuallyIisItoIuseItheIauditors'IreportItoIsupportIanIapplicati
onI forIaIbankIloan.
, 1-5 AIreportI byIanIindependentI publicIaccountantI concerningItheIfairnessI ofIaI company'sI financialIstatementsIisIco
mmonlyIrequiredIinItheIfollowingIsituations:
(1) ApplicationIforIaI bankIloan.
(2) EstablishingIcreditI forI purchaseIofI merchandise,Iequipment,IorI otherI assets.
(3) ReportingIoperatingIresults,I financialIposition,I andIcashIflowsI toIabsenteeIownersI (stockholdersIorIp
artners).
(4) IssuanceIofI securitiesI byIaI corporation.
(5) AnnualIfinancialIstatementsI byIaI corporationIwithIsecuritiesI listedIonIaI stockIexchangeIorI tradedIover
ItheIcounter.
(6) SaleIofI anIongoingIbusiness.
(7) TerminationIofI aI partnership.
1-6 ToIaddIcredibilityItoIfinancialIstatementsI isItoIincreaseItheIlikelihoodIthatI theyIhaveIbeenIpreparedIfollowingIth
eIappropriateIcriteria,IusuallyIgenerallyIacceptedIaccountingIprinciples.I AsI such,IanIincreaseIinIcredibilityIres
ultsI inIfinancialIstatementsIthatI canIbeIbelievedIandIreliedIuponIbyIthirdIparties.
1-7 BusinessI riskIisI theIriskIthatI theIinvestmentI willIbeIimpairedIbecauseIaI companyIinvestedIinIisI unableItoImeetIi
tsIfinancialIobligationsIdueItoIeconomicIconditionsIorIpoorImanagementIdecisions.IInformationIriskIisItheIris
kIthatItheIinformationIusedItoIassessIbusinessIriskIisInotIaccurate.IAuditorsIcanIdirectlyIreduceIinformationIr
isk,IbutIhaveIonlyIlimitedIeffectIonIbusinessIrisk.
1-8 AtItheIbeginningIofItheIcentury,ItheIprincipalIobjectiveIofIauditingIwasI theIpreventionIandIdetectionIofIfraud.I A
uditI workIcenteredIonItheIbalanceIsheet,IbecauseItheIincomeIstatementI wasI regardedIasIhighlyIconfidentialIand
I notI forI publicIdisclosure.I Today,I theIprincipalI objectiveIofI auditingI isI toI formIanIopinionIonItheIfairnessI ofI fin
ancialIstatementsI andItheirIconformityIwithIgenerallyIacceptedIaccountingIprinciples.I ButI theIprofessionalIsta
ndardsI alsoIrequireIthatI anIauditI beIdesignedItoIprovideIreasonableIassuranceIofI detectingImaterialImisstateme
nts,I dueItoIerrorsI orI fraud.I ParticularI emphasisI isI placedIonItheIincomeIstatementI whichIisI ofIgreatI importanceI
toIinvestors.I AuditingItodayIalsoIhasI theIobjectivesI ofImeetingItheIrequirementsI ofItheISecuritiesI andIExchange
ICommissionI(SEC)I andItheIPublicICompanyIAccountingIOversightIBoardIforIpublic Icompanies.
1-9 TheIstatementI isI incorrect.ITheIincreasingIintegratedIdatabasesI ofI today,IalongIwithIavailableIauditIpro
ceduresImakeIauditedIentireIpopulationsIaIpossibilityIinImanyIsituations.
1-10 AnIoperationalIauditIattemptsI toImeasureItheIeffectivenessI andIefficiencyIofIaIspecificIunitI ofIanIorganizati
on.I ItIinvolvesI moreIsubjectiveIjudgmentsIthanIaIcomplianceIauditI orIanIauditI ofIfinancialIstatementsI beca
useItheIcriteriaI ofI effectivenessI andIefficiencyIofI departmentalIperformanceIareInotI asIclearlyIestablishedIa
sI areImanyIlawsI andIregulationsIorIgenerallyIacceptedIaccountingIprinciples.
TheIreportI preparedIafterI completionIofI anIoperationalIauditI isI usuallyIdirectedItoImanagementIofItheI
organizationIinIwhichItheIauditIworkIwasIdone.
1-11 AIcomplianceIauditIisIanIauditItoIdetermineIwhetherIfinancialIreportsIorIotherIassertionsIareI inIcomplianceIwi
thIestablishedIcriteria.I TheInecessaryIingredientsI areIverifiableIdataI andItheIexistenceIofIstandardsI establishe
dIbyIanIauthoritativeIbody.I AnIoperationalIaudit,IonItheIotherI hand,IisI aI reviewIofI aIdepartmentI orIotherIunitI of
I aI businessI orI governmentalIorganizationItoImeasureItheIeffectivenessI andIefficiencyIofI operations.I InternalIa
uditorsI oftenIperformIoperationalIauditsI asI doIauditorsI employedIbyItheIGovernmentIAccountabilityIOffic
eI(GAO)IofItheIfederalIgovernment.
1-12 InternalIauditorsI mustI beIindependentI ofItheIdepartmentI headsI andIotherIlineIexecutivesI whoseIworkItheyIrevie
w.I However,IinternalIauditorsIareInotIindependentIinItheIsameIsenseIasIaIpublicIaccountingIfirm.
Principles Of Auditing And Other Assurance Services
23rd Edition By Ray Whittington Kurt
ALL Chapters (1 - 21)
, Table of Contents
I I
ChapterI1:ITheIRoleIofItheIPublicIAccountantIinItheIAmericanEconomy
ChapterI2:IProfessionalIStandards
ChapterI3:IProfessionalIEthics
ChapterI4:ILegalILiabilityIofICPAs
ChapterI5:IAuditIEvidenceIandIDocumentation
ChapterI6:IAuditIPlanning,IUnderstandingItheIClient,IAssessingRisks,IandIResponding
ChapterI7:IInternalIControl
ChapterI8:IConsiderationIofIInternalIControlIinIanIInformationTechnologyIEnvironment
ChapterI9:IAuditISampling
ChapterI10:ICashIandIFinancialIInvestments
ChapterI11:IAccountsIReceivable,INotesIReceivable,IandRevenue
ChapterI12:IInventoriesIandICostIofIGoodsISold
ChapterI13:IProperty,IPlant,IandIEquipment:IDepreciationIandDepletion
ChapterI14:IAccountsIPayableIandIOtherILiabilities
ChapterI15:IDebtIandIEquityICapital
ChapterI16:IAuditingIOperationsIandICompletingItheIAudit
ChapterI17:IAuditors’IReports
ChapterI18:IIntegratedIAuditsIofIPublicICompanies
ChapterI19:IAdditionalIAssuranceIServices:IHistoricalIFinancialInformation
ChapterI20:IAdditionalIAssuranceIServices:IOtherIInformation
ChapterI21:IInternal,IOperational,IandIComplianceIAuditing
,CHAPTER 1 I
The Role of the Publi
I I I I
c Accountant in the
I I I
American Economy I
ReviewIQuestions
1-1 TheI―crisisIofIcredibility‖IlargelyIaroseIfromItheInumberIofIcompaniesIthatIrestatedItheirIpreviouslyIissuedIfina
ncialIstatementsI asI aI resultI ofI accountingIirregularitiesI andIfraud.I EspeciallyIresponsibleIwereItheIveryIvisibleI
EnronIandIWorldComIfraudIcases.IBothIcompaniesI filedIforI bankruptcyIandIconstitutedItheIlargestI companie
sI inIAmericanIhistoryItoIdoIso.I TheIextentI ofItheIaccountingIirregularitiesI andIfraudIbeingIinvestigatedIandIdisc
losedIbroughtI intoIquestionItheIeffectivenessI ofI financialIstatementI audits.I InIaddition,ItheIcriminalIconviction
IofIArthurIAndersen,ILLP,IoneIofItheIthenIBigI5IaccountingIfirms,IonIchargesI ofI destroyingIdocumentsI relatedIt
oItheIEnronIcaseIbroughtI intoIquestionItheIethicsI standardsIofItheIprofession.
1-2 AssuranceIservicesIareIprofessionalIservicesIthatIenhanceItheIqualityIofIinformation,IorIitsIcontext,IforIdecis
ion-
making.ITheItwoItypesIare:I(a)IthoseIthatIincreaseItheIreliabilityIofIinformationIandI(b)IthoseIthatIinvolveIpu
ttingIinformationIinIaIformIorIcontextIthatIfacilitatesIdecision-making.
1-3 AIfinancialIstatementI auditI is,IbyIfar,ItheImostI commonItypeIofI attestI engagement.I TheIoverallIassertion,ImadeI
byImanagement,ImostIfrequentlyIisIthatItheIfinancialIstatementsIfollowIgenerallyIacceptedIaccountingIprincip
les.
1-4 AIlargeIcorporationIwithIsecuritiesIlistedIonIaIstockIexchangeIisIrequiredIbyItheIrulesIofItheIstockIexchangeIandI
byItheIrulesI ofI theISecuritiesI andIExchangeICommissionItoIprovideIanIauditI reportI withItheIannualIfinancialIstat
ementsI furnishedItoIitsI stockholders.I ItI alsoIisI requiredItoIengageItheIauditorsI toIprovideIanIopinionIonIitsIinter
nalIcontrol.IApartIfromIlegalIrequirements,Ihowever,IaIlargeIlistedIcorporationIrecognizesIthatIitImustI mainta
inIinvestorIconfidenceIinItheIreliabilityIofIitsIfinancialIstatementsI andI internalI controlIoverI financialI reportingI i
fI itI isI toI continueItoI beIableItoIsecureIcapitalIfromItheIpublic.I TheIreportI byIaIfirmIofIcertifiedIpublicIaccountants
I addsI credibilityItoItheIfinancialIstatementsI preparedIbyItheIcorporation.I WhenIaI smallIfamily-
ownedIenterpriseIelectsI toIhaveIanIaudit,ItheIpurposeIusuallyIisItoIuseItheIauditors'IreportItoIsupportIanIapplicati
onI forIaIbankIloan.
, 1-5 AIreportI byIanIindependentI publicIaccountantI concerningItheIfairnessI ofIaI company'sI financialIstatementsIisIco
mmonlyIrequiredIinItheIfollowingIsituations:
(1) ApplicationIforIaI bankIloan.
(2) EstablishingIcreditI forI purchaseIofI merchandise,Iequipment,IorI otherI assets.
(3) ReportingIoperatingIresults,I financialIposition,I andIcashIflowsI toIabsenteeIownersI (stockholdersIorIp
artners).
(4) IssuanceIofI securitiesI byIaI corporation.
(5) AnnualIfinancialIstatementsI byIaI corporationIwithIsecuritiesI listedIonIaI stockIexchangeIorI tradedIover
ItheIcounter.
(6) SaleIofI anIongoingIbusiness.
(7) TerminationIofI aI partnership.
1-6 ToIaddIcredibilityItoIfinancialIstatementsI isItoIincreaseItheIlikelihoodIthatI theyIhaveIbeenIpreparedIfollowingIth
eIappropriateIcriteria,IusuallyIgenerallyIacceptedIaccountingIprinciples.I AsI such,IanIincreaseIinIcredibilityIres
ultsI inIfinancialIstatementsIthatI canIbeIbelievedIandIreliedIuponIbyIthirdIparties.
1-7 BusinessI riskIisI theIriskIthatI theIinvestmentI willIbeIimpairedIbecauseIaI companyIinvestedIinIisI unableItoImeetIi
tsIfinancialIobligationsIdueItoIeconomicIconditionsIorIpoorImanagementIdecisions.IInformationIriskIisItheIris
kIthatItheIinformationIusedItoIassessIbusinessIriskIisInotIaccurate.IAuditorsIcanIdirectlyIreduceIinformationIr
isk,IbutIhaveIonlyIlimitedIeffectIonIbusinessIrisk.
1-8 AtItheIbeginningIofItheIcentury,ItheIprincipalIobjectiveIofIauditingIwasI theIpreventionIandIdetectionIofIfraud.I A
uditI workIcenteredIonItheIbalanceIsheet,IbecauseItheIincomeIstatementI wasI regardedIasIhighlyIconfidentialIand
I notI forI publicIdisclosure.I Today,I theIprincipalI objectiveIofI auditingI isI toI formIanIopinionIonItheIfairnessI ofI fin
ancialIstatementsI andItheirIconformityIwithIgenerallyIacceptedIaccountingIprinciples.I ButI theIprofessionalIsta
ndardsI alsoIrequireIthatI anIauditI beIdesignedItoIprovideIreasonableIassuranceIofI detectingImaterialImisstateme
nts,I dueItoIerrorsI orI fraud.I ParticularI emphasisI isI placedIonItheIincomeIstatementI whichIisI ofIgreatI importanceI
toIinvestors.I AuditingItodayIalsoIhasI theIobjectivesI ofImeetingItheIrequirementsI ofItheISecuritiesI andIExchange
ICommissionI(SEC)I andItheIPublicICompanyIAccountingIOversightIBoardIforIpublic Icompanies.
1-9 TheIstatementI isI incorrect.ITheIincreasingIintegratedIdatabasesI ofI today,IalongIwithIavailableIauditIpro
ceduresImakeIauditedIentireIpopulationsIaIpossibilityIinImanyIsituations.
1-10 AnIoperationalIauditIattemptsI toImeasureItheIeffectivenessI andIefficiencyIofIaIspecificIunitI ofIanIorganizati
on.I ItIinvolvesI moreIsubjectiveIjudgmentsIthanIaIcomplianceIauditI orIanIauditI ofIfinancialIstatementsI beca
useItheIcriteriaI ofI effectivenessI andIefficiencyIofI departmentalIperformanceIareInotI asIclearlyIestablishedIa
sI areImanyIlawsI andIregulationsIorIgenerallyIacceptedIaccountingIprinciples.
TheIreportI preparedIafterI completionIofI anIoperationalIauditI isI usuallyIdirectedItoImanagementIofItheI
organizationIinIwhichItheIauditIworkIwasIdone.
1-11 AIcomplianceIauditIisIanIauditItoIdetermineIwhetherIfinancialIreportsIorIotherIassertionsIareI inIcomplianceIwi
thIestablishedIcriteria.I TheInecessaryIingredientsI areIverifiableIdataI andItheIexistenceIofIstandardsI establishe
dIbyIanIauthoritativeIbody.I AnIoperationalIaudit,IonItheIotherI hand,IisI aI reviewIofI aIdepartmentI orIotherIunitI of
I aI businessI orI governmentalIorganizationItoImeasureItheIeffectivenessI andIefficiencyIofI operations.I InternalIa
uditorsI oftenIperformIoperationalIauditsI asI doIauditorsI employedIbyItheIGovernmentIAccountabilityIOffic
eI(GAO)IofItheIfederalIgovernment.
1-12 InternalIauditorsI mustI beIindependentI ofItheIdepartmentI headsI andIotherIlineIexecutivesI whoseIworkItheyIrevie
w.I However,IinternalIauditorsIareInotIindependentIinItheIsameIsenseIasIaIpublicIaccountingIfirm.
