TEST BANK FOR
dr dr
dr Principles Of Auditing And Other Assurance Services
dr dr dr dr dr dr dr
23rd Edition By Ray Whittington Kurt
dr dr dr dr dr dr
ALL Chapters (1 - 21)
dr dr dr dr
, • Table of Contents
dr dr
Chapterdr1:drThedrRoledrofdrthedrPublicdrAccountantdrindrthedrAmericanEconomy
Chapterdr2:drProfessionaldrStandards
Chapterdr3:drProfessionaldrEthics
Chapterdr4:drLegaldrLiabilitydrofdrCPAs
Chapterdr5:drAuditdrEvidencedranddrDocumentation
Chapterdr6:drAuditdrPlanning,drUnderstandingdrthedrClient,drAssessingRisks,dranddrResponding
Chapterdr7:drInternaldrControl
Chapterdr8:drConsiderationdrofdrInternaldrControldrindrandrInformationTechnologydrEnvironment
Chapterdr9:drAuditdrSampling
Chapterdr10:drCashdranddrFinancialdrInvestments
Chapterdr11:drAccountsdrReceivable,drNotesdrReceivable,drandRevenue
Chapterdr12:drInventoriesdranddrCostdrofdrGoodsdrSold
Chapterdr13:drProperty,drPlant,dranddrEquipment:drDepreciationdrandDepletion
Chapterdr14:drAccountsdrPayabledranddrOtherdrLiabilities
Chapterdr15:drDebtdranddrEquitydrCapital
Chapterdr16:drAuditingdrOperationsdranddrCompletingdrthedrAudit
Chapterdr17:drAuditors’drReports
Chapterdr18:drIntegrateddrAuditsdrofdrPublicdrCompanies
Chapterdr19:drAdditionaldrAssurancedrServices:drHistoricaldrFinancialInformation
Chapterdr20:drAdditionaldrAssurancedrServices:drOtherdrInformation
Chapterdr21:drInternal,drOperational,dranddrCompliancedrAuditing
,CHAPTER 1 dr
The Role of the Pubdr dr dr dr
lic Accountant in the
dr dr dr
American Economy dr
ReviewdrQuestions
1-1 Thedr―crisisdrofdrcredibility‖drlargelydrarosedrfromdrthedrnumberdrofdrcompaniesdrthatdrrestateddrtheirdrpreviouslydri
ssueddrfinancialdrstatementsdr asdr adr resultdr ofdr accountingdrirregularitiesdr anddrfraud.d r Especiallydrresponsibledr
weredrthedrverydrvisibledrEnrondranddrWorldComdrfrauddrcases.drBothdrcompaniesdr fileddrfordrbankruptcydranddrc
onstituteddrthedrlargestdr companiesdr indrAmericandrhistorydrtodrdodrso.dr Thedrextentdr ofdrthedraccountingdrirregula
ritiesdr anddrfrauddrbeingdrinvestigateddranddrdiscloseddrbroughtdr intodrquestiondrthedreffectivenessdr ofdr financiald
rstatementdr audits.d r Indraddition,drthedrcriminaldrconvictiondrofdrArthurdrAndersen,drLLP,dronedrofdrthedrthendrBigd
r5dr accountingdrfirms,drondrchargesdr ofdr destroyingdrdocumentsdr relateddrtodr thedrEnrondrcasedrbroughtdr intodrque
stiondrthedrethicsdr standardsdrofdrthedrprofession.
1-2 Assurancedrservicesdraredrprofessionaldrservicesdrthatdrenhancedrthedrqualitydrofdrinformation,drordritsdrcontext,
drfordrdecision-
making.drThedrtwodrtypesdrare:dr(a)drthosedrthatdrincreasedrthedrreliabilitydrofdrinformationdranddr(b)drthosedrthatd
rinvolvedrputtingdrinformation drindradrformdrordrcontext drthatdrfacilitates drdecision-making.
1-3 Adrfinancialdrstatementdr auditdr is,drbydrfar,drthedrmostdr commondrtypedrofdr attestdr engagement.d r Thedroveralldrass
ertion,drmadedrbydrmanagement,drmostdrfrequentlydrisdrthatdrthedrfinancialdrstatementsdrfollowdrgenerallydraccepte
ddraccountingdrprinciples.
1-4 Adrlargedrcorporationdrwithdrsecuritiesdrlisteddrondradrstockdrexchangedrisdrrequireddrbydrthedrrulesdrofdrthedrstockdre
xchangedranddrbydrthedrrulesdr ofdr thedrSecuritiesdr anddrExchangedrCommissiondrtodrprovidedrandrauditdr reportdr wit
hdrthedrannualdrfinancialdrstatementsdr furnisheddrtodritsdr stockholders.d r Itdralsodrisdr requireddrtodrengagedrthedraudit
orsdr todrprovidedrandropiniondrondritsdrinternaldrcontrol.drApartdrfromdrlegaldrrequirements,drhowever,dradrlargedrl
isteddrcorporationdrrecognizesdrthatdritdrmustdrmaintaindrinvestordrconfidencedrindrthedrreliabilitydrofdritsdrfinancia
ldrstatementsd r anddr internaldr controldroverdr financialdr reportingdr ifdr itd r isd r todr continuedrtodrbedrabledrtodr securedrc
apitaldrfromdrthedrpublic.dr Thedrreportdr bydradrfirmdrofdrcertifieddrpublicdraccountantsdr addsdrcredibilitydrtodrthedrfin
ancialdrstatementsdr prepareddrbydrthedrcorporation.d r Whendradr smalldrfamily-
owneddrenterprisedrelectsdr todrhavedrandraudit,drthedrpurposedrusuallydrisdrtodrusedrthedrauditors'drreportdrtodrsupport
dr andrapplicationdr fordr adrbankdrloan.
, 1-5 Adrreportdr bydrandrindependentdr publicdraccountantdr concerningdrthedrfairnessdr ofdradr company'sdr financialdrstate
mentsdrisdrcommonlydrrequireddrindrthedrfollowingdrsituations:
(1) Applicationdrfordr adr bankdrloan.
(2) Establishingdrcreditdr fordr purchasedrofdr merchandise,drequipment,drordr otherdrassets.
(3) Reportingdroperatingdrresults,dr financialdrposition,dr anddrcashdrflowsdr todrabsenteedrownersd r (stockho
ldersdrordrpartners).
(4) Issuancedrofdr securitiesdr bydradrcorporation.
(5) Annualdrfinancialdrstatementsdr bydradr corporationdrwithdrsecuritiesdr listeddrondradr stockdrexchangedrordr t
radeddroverdrthedrcounter.
(6) Saledrofdr androngoingdrbusiness.
(7) Terminationdrofdr adr partnership.
1-6 Todradddrcredibilitydrtodrfinancialdrstatementsdr isdrtodrincreasedrthedrlikelihooddrthatdr theydrhavedrbeendrprepareddrf
ollowingdrthedrappropriatedrcriteria,drusuallydrgenerallydraccepteddraccountingdrprinciples.d r Asdr such,drandrincre
asedrindrcredibilitydrresultsdr indrfinancialdrstatementsdrthatdr candrbedrbelieveddranddrrelieddrupondrbydrthirddrparties.
1-7 Businessdr riskdrisdr thedrriskdrthatdr thedrinvestmentdr willdrbedrimpaireddrbecausedradr companydrinvesteddrindrisdr un
abledrtodrmeetdritsdrfinancialdrobligationsdrduedrtodreconomicdrconditionsdrordrpoordrmanagementdrdecisions.drInf
ormationdrriskdrisdrthedrriskdrthatdrthedrinformationdruseddrtodrassessdrbusinessdrriskdrisdrnotdraccurate.drAuditor
sdrcandrdirectlydrreducedrinformationdrrisk,drbutdrhavedronlydrlimiteddreffectdrondrbusinessdrrisk.
1-8 Atdrthedrbeginningdrofdrthedrcentury,drthedrprincipaldrobjectivedrofdrauditingdrwasdr thedrpreventiondranddrdetectiond
rofdrfraud.dr Auditdr workdrcentereddrondrthedrbalancedrsheet,drbecausedrthedrincomedrstatementdr wasdr regardeddrasdr
highlydrconfidentialdranddrnotdr fordr publicdrdisclosure.d r Today,dr thedrprincipaldrobjectivedrofdr auditingdrisd r todrf
ormdrandropiniondrondrthedrfairnessdr ofdrfinancialdrstatementsdr anddrtheirdrconformitydrwithdrgenerallydraccepteddr
accountingdrprinciples.d r Butdr thedrprofessionaldrstandardsdr alsodrrequiredrthatdr andrauditdr bedrdesigneddrtodrprovi
dedrreasonabledrassurancedrofdr detectingdrmaterialdrmisstatements,drduedrtodrerrorsdr ordr fraud.d r Particulardr emp
hasisdr isdr placeddrondrthedrincomedrstatementdr whichdrisdr ofdrgreatdr importancedrtodrinvestors.d r Auditingdrtodaydra
lsodrhasdr thedrobjectivesdr ofdrmeetingdrthedrrequirementsdr ofdrthedrSecuritiesdr anddrExchangedrCommissiondr(SEC
)d r anddrthedrPublicdrCompanydrAccountingdrOversightdrBoarddrfordrpublicdrcompanies.
1-9 Thedrstatementdr isdr incorrect.drThedrincreasingdrintegrateddrdatabasesdr ofd r today,dralongdrwithdravailabled
rauditdrprocedures drmake drauditeddrentiredrpopulations dradrpossibility drindrmanydrsituations.
1-10 Androperationaldrauditdr attemptsdr todrmeasuredrthedreffectivenessdr anddrefficiencydrofdradrspecificdrunitdr ofdran
drorganization.dr Itdr involvesdr moredrsubjectivedrjudgmentsdrthandradrcompliancedrauditdr ordrandrauditdr ofdrfina
ncialdrstatementsdr becausedrthedrcriteriadr ofdr effectivenessdr anddrefficiencydrofdr departmentaldrperformanced
raredrnotdr asd
rclearlydrestablisheddrasdr aredrmanydrlawsdr anddrregulationsdr ordrgenerallydraccepteddraccountingdr
principles.
Thedrreportdr prepareddrafterdr completiondrofdr androperationaldrauditdr isdr usuallydrdirecteddrtodrmanage
mentdrofdrthedrorganizationdrindrwhichdrthedrauditdrworkdrwasdrdone.
1-11 Adrcompliancedrauditdrisdrandrauditdrtodrdeterminedrwhetherdrfinancialdrreportsdrordrotherdrassertionsdraredr indrco
mpliancedrwithdrestablisheddrcriteria.d r Thedrnecessarydringredientsdr aredrverifiabledrdatadr anddrthedrexistencedro
fdrstandardsdr establisheddrbydrandrauthoritativedrbody.d r Androperationaldraudit,drondrthedrotherdrhand,drisdr adr revi
ewdrofdradrdepartmentdrordrotherdrunitdrofdradrbusinessdr ordrgovernmentaldrorganizationdrtodrmeasuredrthedreffecti
venessdr anddrefficiencydrofdr operations.d r Internaldrauditorsdr oftendrperformdroperationaldrauditsdr asdr dodraudito
rsdr employeddrbydrthedrGovernmentdrAccountabilitydrOfficedr(GAO)drofdrthedrfederaldrgovernment.
1-12 Internaldrauditorsdr mustdr bedrindependentdr ofdrthedrdepartmentdr headsdranddrotherdrlinedrexecutivesdrwhosedrwor
kdrtheydrreview.drHowever,drinternaldrauditorsdraredrnotdrindependentdrindrthedrsamedrsensedrasdradrpublicdraccounti
dr dr
dr Principles Of Auditing And Other Assurance Services
dr dr dr dr dr dr dr
23rd Edition By Ray Whittington Kurt
dr dr dr dr dr dr
ALL Chapters (1 - 21)
dr dr dr dr
, • Table of Contents
dr dr
Chapterdr1:drThedrRoledrofdrthedrPublicdrAccountantdrindrthedrAmericanEconomy
Chapterdr2:drProfessionaldrStandards
Chapterdr3:drProfessionaldrEthics
Chapterdr4:drLegaldrLiabilitydrofdrCPAs
Chapterdr5:drAuditdrEvidencedranddrDocumentation
Chapterdr6:drAuditdrPlanning,drUnderstandingdrthedrClient,drAssessingRisks,dranddrResponding
Chapterdr7:drInternaldrControl
Chapterdr8:drConsiderationdrofdrInternaldrControldrindrandrInformationTechnologydrEnvironment
Chapterdr9:drAuditdrSampling
Chapterdr10:drCashdranddrFinancialdrInvestments
Chapterdr11:drAccountsdrReceivable,drNotesdrReceivable,drandRevenue
Chapterdr12:drInventoriesdranddrCostdrofdrGoodsdrSold
Chapterdr13:drProperty,drPlant,dranddrEquipment:drDepreciationdrandDepletion
Chapterdr14:drAccountsdrPayabledranddrOtherdrLiabilities
Chapterdr15:drDebtdranddrEquitydrCapital
Chapterdr16:drAuditingdrOperationsdranddrCompletingdrthedrAudit
Chapterdr17:drAuditors’drReports
Chapterdr18:drIntegrateddrAuditsdrofdrPublicdrCompanies
Chapterdr19:drAdditionaldrAssurancedrServices:drHistoricaldrFinancialInformation
Chapterdr20:drAdditionaldrAssurancedrServices:drOtherdrInformation
Chapterdr21:drInternal,drOperational,dranddrCompliancedrAuditing
,CHAPTER 1 dr
The Role of the Pubdr dr dr dr
lic Accountant in the
dr dr dr
American Economy dr
ReviewdrQuestions
1-1 Thedr―crisisdrofdrcredibility‖drlargelydrarosedrfromdrthedrnumberdrofdrcompaniesdrthatdrrestateddrtheirdrpreviouslydri
ssueddrfinancialdrstatementsdr asdr adr resultdr ofdr accountingdrirregularitiesdr anddrfraud.d r Especiallydrresponsibledr
weredrthedrverydrvisibledrEnrondranddrWorldComdrfrauddrcases.drBothdrcompaniesdr fileddrfordrbankruptcydranddrc
onstituteddrthedrlargestdr companiesdr indrAmericandrhistorydrtodrdodrso.dr Thedrextentdr ofdrthedraccountingdrirregula
ritiesdr anddrfrauddrbeingdrinvestigateddranddrdiscloseddrbroughtdr intodrquestiondrthedreffectivenessdr ofdr financiald
rstatementdr audits.d r Indraddition,drthedrcriminaldrconvictiondrofdrArthurdrAndersen,drLLP,dronedrofdrthedrthendrBigd
r5dr accountingdrfirms,drondrchargesdr ofdr destroyingdrdocumentsdr relateddrtodr thedrEnrondrcasedrbroughtdr intodrque
stiondrthedrethicsdr standardsdrofdrthedrprofession.
1-2 Assurancedrservicesdraredrprofessionaldrservicesdrthatdrenhancedrthedrqualitydrofdrinformation,drordritsdrcontext,
drfordrdecision-
making.drThedrtwodrtypesdrare:dr(a)drthosedrthatdrincreasedrthedrreliabilitydrofdrinformationdranddr(b)drthosedrthatd
rinvolvedrputtingdrinformation drindradrformdrordrcontext drthatdrfacilitates drdecision-making.
1-3 Adrfinancialdrstatementdr auditdr is,drbydrfar,drthedrmostdr commondrtypedrofdr attestdr engagement.d r Thedroveralldrass
ertion,drmadedrbydrmanagement,drmostdrfrequentlydrisdrthatdrthedrfinancialdrstatementsdrfollowdrgenerallydraccepte
ddraccountingdrprinciples.
1-4 Adrlargedrcorporationdrwithdrsecuritiesdrlisteddrondradrstockdrexchangedrisdrrequireddrbydrthedrrulesdrofdrthedrstockdre
xchangedranddrbydrthedrrulesdr ofdr thedrSecuritiesdr anddrExchangedrCommissiondrtodrprovidedrandrauditdr reportdr wit
hdrthedrannualdrfinancialdrstatementsdr furnisheddrtodritsdr stockholders.d r Itdralsodrisdr requireddrtodrengagedrthedraudit
orsdr todrprovidedrandropiniondrondritsdrinternaldrcontrol.drApartdrfromdrlegaldrrequirements,drhowever,dradrlargedrl
isteddrcorporationdrrecognizesdrthatdritdrmustdrmaintaindrinvestordrconfidencedrindrthedrreliabilitydrofdritsdrfinancia
ldrstatementsd r anddr internaldr controldroverdr financialdr reportingdr ifdr itd r isd r todr continuedrtodrbedrabledrtodr securedrc
apitaldrfromdrthedrpublic.dr Thedrreportdr bydradrfirmdrofdrcertifieddrpublicdraccountantsdr addsdrcredibilitydrtodrthedrfin
ancialdrstatementsdr prepareddrbydrthedrcorporation.d r Whendradr smalldrfamily-
owneddrenterprisedrelectsdr todrhavedrandraudit,drthedrpurposedrusuallydrisdrtodrusedrthedrauditors'drreportdrtodrsupport
dr andrapplicationdr fordr adrbankdrloan.
, 1-5 Adrreportdr bydrandrindependentdr publicdraccountantdr concerningdrthedrfairnessdr ofdradr company'sdr financialdrstate
mentsdrisdrcommonlydrrequireddrindrthedrfollowingdrsituations:
(1) Applicationdrfordr adr bankdrloan.
(2) Establishingdrcreditdr fordr purchasedrofdr merchandise,drequipment,drordr otherdrassets.
(3) Reportingdroperatingdrresults,dr financialdrposition,dr anddrcashdrflowsdr todrabsenteedrownersd r (stockho
ldersdrordrpartners).
(4) Issuancedrofdr securitiesdr bydradrcorporation.
(5) Annualdrfinancialdrstatementsdr bydradr corporationdrwithdrsecuritiesdr listeddrondradr stockdrexchangedrordr t
radeddroverdrthedrcounter.
(6) Saledrofdr androngoingdrbusiness.
(7) Terminationdrofdr adr partnership.
1-6 Todradddrcredibilitydrtodrfinancialdrstatementsdr isdrtodrincreasedrthedrlikelihooddrthatdr theydrhavedrbeendrprepareddrf
ollowingdrthedrappropriatedrcriteria,drusuallydrgenerallydraccepteddraccountingdrprinciples.d r Asdr such,drandrincre
asedrindrcredibilitydrresultsdr indrfinancialdrstatementsdrthatdr candrbedrbelieveddranddrrelieddrupondrbydrthirddrparties.
1-7 Businessdr riskdrisdr thedrriskdrthatdr thedrinvestmentdr willdrbedrimpaireddrbecausedradr companydrinvesteddrindrisdr un
abledrtodrmeetdritsdrfinancialdrobligationsdrduedrtodreconomicdrconditionsdrordrpoordrmanagementdrdecisions.drInf
ormationdrriskdrisdrthedrriskdrthatdrthedrinformationdruseddrtodrassessdrbusinessdrriskdrisdrnotdraccurate.drAuditor
sdrcandrdirectlydrreducedrinformationdrrisk,drbutdrhavedronlydrlimiteddreffectdrondrbusinessdrrisk.
1-8 Atdrthedrbeginningdrofdrthedrcentury,drthedrprincipaldrobjectivedrofdrauditingdrwasdr thedrpreventiondranddrdetectiond
rofdrfraud.dr Auditdr workdrcentereddrondrthedrbalancedrsheet,drbecausedrthedrincomedrstatementdr wasdr regardeddrasdr
highlydrconfidentialdranddrnotdr fordr publicdrdisclosure.d r Today,dr thedrprincipaldrobjectivedrofdr auditingdrisd r todrf
ormdrandropiniondrondrthedrfairnessdr ofdrfinancialdrstatementsdr anddrtheirdrconformitydrwithdrgenerallydraccepteddr
accountingdrprinciples.d r Butdr thedrprofessionaldrstandardsdr alsodrrequiredrthatdr andrauditdr bedrdesigneddrtodrprovi
dedrreasonabledrassurancedrofdr detectingdrmaterialdrmisstatements,drduedrtodrerrorsdr ordr fraud.d r Particulardr emp
hasisdr isdr placeddrondrthedrincomedrstatementdr whichdrisdr ofdrgreatdr importancedrtodrinvestors.d r Auditingdrtodaydra
lsodrhasdr thedrobjectivesdr ofdrmeetingdrthedrrequirementsdr ofdrthedrSecuritiesdr anddrExchangedrCommissiondr(SEC
)d r anddrthedrPublicdrCompanydrAccountingdrOversightdrBoarddrfordrpublicdrcompanies.
1-9 Thedrstatementdr isdr incorrect.drThedrincreasingdrintegrateddrdatabasesdr ofd r today,dralongdrwithdravailabled
rauditdrprocedures drmake drauditeddrentiredrpopulations dradrpossibility drindrmanydrsituations.
1-10 Androperationaldrauditdr attemptsdr todrmeasuredrthedreffectivenessdr anddrefficiencydrofdradrspecificdrunitdr ofdran
drorganization.dr Itdr involvesdr moredrsubjectivedrjudgmentsdrthandradrcompliancedrauditdr ordrandrauditdr ofdrfina
ncialdrstatementsdr becausedrthedrcriteriadr ofdr effectivenessdr anddrefficiencydrofdr departmentaldrperformanced
raredrnotdr asd
rclearlydrestablisheddrasdr aredrmanydrlawsdr anddrregulationsdr ordrgenerallydraccepteddraccountingdr
principles.
Thedrreportdr prepareddrafterdr completiondrofdr androperationaldrauditdr isdr usuallydrdirecteddrtodrmanage
mentdrofdrthedrorganizationdrindrwhichdrthedrauditdrworkdrwasdrdone.
1-11 Adrcompliancedrauditdrisdrandrauditdrtodrdeterminedrwhetherdrfinancialdrreportsdrordrotherdrassertionsdraredr indrco
mpliancedrwithdrestablisheddrcriteria.d r Thedrnecessarydringredientsdr aredrverifiabledrdatadr anddrthedrexistencedro
fdrstandardsdr establisheddrbydrandrauthoritativedrbody.d r Androperationaldraudit,drondrthedrotherdrhand,drisdr adr revi
ewdrofdradrdepartmentdrordrotherdrunitdrofdradrbusinessdr ordrgovernmentaldrorganizationdrtodrmeasuredrthedreffecti
venessdr anddrefficiencydrofdr operations.d r Internaldrauditorsdr oftendrperformdroperationaldrauditsdr asdr dodraudito
rsdr employeddrbydrthedrGovernmentdrAccountabilitydrOfficedr(GAO)drofdrthedrfederaldrgovernment.
1-12 Internaldrauditorsdr mustdr bedrindependentdr ofdrthedrdepartmentdr headsdranddrotherdrlinedrexecutivesdrwhosedrwor
kdrtheydrreview.drHowever,drinternaldrauditorsdraredrnotdrindependentdrindrthedrsamedrsensedrasdradrpublicdraccounti
