SOLUTION MANUAL
Principles Of Auditing And Other Assuranc 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 theannual 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 A report by an independent public accountant concerning the fairness of a company's financial
statementsis commonly required in the following situations:
(1) Application for a bank loan.
(2) Establishing credit for purchase of merchandise, equipment, or other assets.
(3) Reporting operating results, financial position, and cash flows to absentee owners
(stockholdersor partners).
(4) Issuance of securities by a corporation.
(5) Annual financial statements by a corporation with securities listed on a stock exchange
or tradedover the counter.
(6) Sale of an ongoing business.
(7) Termination of a partnership.
1-6 To add credibility to financial statements is to increase the likelihood that they have been
prepared following the appropriate criteria, usually generally accepted accounting principles.
As such, an increasein credibility results in financial statements that can be believed and relied
upon by third parties.
1-7 Business risk is the risk that the investment will be impaired because a company invested in is
unable tomeet its financial obligations due to economic conditions or poor management
decisions. Information risk is the risk that the information used to assess business risk is not
accurate. Auditors can directly reduce information risk, but have only limited effect on
business risk.
1-8 At the beginning of the century, the principal objective of auditing was the prevention and
detection of fraud. Audit work centered on the balance sheet, because the income statement was
regarded as highly confidential and not for public disclosure. Today, the principal objective of
auditing is to form an opinion on the fairness of financial statements and their conformity with
generally accepted accounting principles. But the professional standards also require that an
audit be designed to provide reasonable assurance of detecting material misstatements, due to
errors or fraud. Particular emphasis is placed on the income statement which is of great
importance to investors. Auditing today also has the objectives ofmeeting the requirements of
the Securities and Exchange Commission (SEC) and the Public Company Accounting
Oversight Board for public companies.
1-9 The statement is incorrect. The increasing integrated databases of today, along with
available auditprocedures make audited entire populations a possibility in many
situations.
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit
of an organization. It involves more subjective judgments than a compliance audit or an
audit of financial statements because the criteria of effectiveness and efficiency of
departmental performance are not asclearly established as are many laws and regulations or
generally accepted accounting principles.
The report prepared after completion of an operational audit is usually directed to
managementof the organization in which the audit work was done.
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are
, in compliance with established criteria. The necessary ingredients are verifiable data and the
existence of standards established by an authoritative body. An operational audit, on the other
hand, is a review of adepartment or other unit of a business or governmental organization to
measure the effectiveness and efficiency of operations. Internal auditors often perform
operational audits as do auditors employed by the Government Accountability Office (GAO)
of the federal government.
1-12 Internal auditors must be independent of the department heads and other line executives
whose work theyreview. However, internal auditors are not independent in the same sense as a
public accounting firm.
, The public accounting firm serves many clients and the revenue obtained from any one client is
only a small part of the revenue of the firm. Internal auditors, on the other hand, are employees
of one company,and are subject to the restraints inherent in the employer-employee
relationship. Internal auditors can achieve a great deal of independence by reporting to the
audit committee of the board of directors, but they cannot achieve the same degree of
independence as is possessed by the external public accounting firm.
1-13 The internal auditors are employees of Spacecraft, Inc., and may be influenced by corporate
management.
The public accounting firm is independent of the company and is in a better position to take
positions opposed to those of company management. The work of the internal audit staff
emphasizes measurementof the efficiency and effectiveness of various operating units of the
company and compliance with all types of controls, whereas the public accounting firm is
primarily concerned with determining the fairnessof Spacecraft's financial statements.
1-14 The Government Accountability Office (GAO) is a staff of professional auditors which reports
to Congress. Its function is to determine that programs carried out by federal agencies conform
to the financial authorization of the Congress. It is also concerned with the cost-effectiveness of
government programs. The audit activities include investigation of the costs and performance
of corporations holdinggovernment contracts.
1-15 Among the many important contributions to auditing literature by the AICPA are the series of
Statements on Auditing Standards (SASs), Statements on Standards for Attestation
Engagements (SSAEs), Industry Audit and Accounting Guides, Audit Guides, Audit Risk
Alerts, Statements on Standards for Accounting and Review Services (SSARSs), , and the Code
of Professional Conduct (only two required).
1-16 A peer review is a critical review of a public accounting firm's practices by another public
accounting firm (or other CPAs functioning as a peer review team). The purpose of a peer
review is to encourageadherence to quality control standards established by the accounting
firm and the profession.
1-17 The Securities and Exchange Commission (SEC) is an agency of the federal government and is
responsible for administering a number of acts, including the Securities Act of 1933 and the
Securities Exchange Act of 1934. In meeting this responsibility, the SEC reviews financial
statements of companies offering securities for sale to the public. It is particularly concerned
with requiring full disclosure of financial information and with preventing misrepresentation.
Through the Public Company Accounting Oversight Board, the SEC now oversees public
accounting firms that audit public companies.Included in this oversight process includes
development of auditing, independence, and quality control standards; inspection of
performance; and enforcement of the standards.
The AICPA is the national organization of certified public accountants. It has long been
a leaderin accounting and auditing research, in publication of authoritative accounting and
auditing pronouncements and studies, and in promoting high professional standards of
practice.
1-18 Services offered by public accounting firms in addition to auditing include other forms of
attestation, taxwork, consulting services, litigation support services, fraud investigation
,services, personal financial planning and accounting services. This last category includes
preparation of financial statements for smaller companies that have limited accounting
personnel and various types of write-up work. Public accounting firms also perform a variety
of other services. Consulting services include aiding clients in the design of accounting
systems, conversion to Information Technology (IT) systems, preparation of budgets, planning
business combinations with other companies, executive search, and numerous other projects.
Public accounting firms are restricted as to the consulting services that they may provide to
audit clients that are public companies.
,1-19 The partnership form of organization for a public accounting firm offers several advantages
over a soleproprietorship. A partnership offers the opportunity for specialization by the
partners in areas such as taxation, auditing, and consulting services. Partners can discuss
difficult technical problems among themselves, and benefit from different perspectives. Also,
the partnership may be better able to attract and retain high quality professional staff, because
they may be rewarded by acceptance into the partnership.
1-20 The following characteristics of a professional corporation distinguish it from the traditional
corporation:
(1) All shareholders must be engaged in the practice of public accounting.
(2) To the extent possible, directors and officers should be certified public accountants.
(3) Shares of a professional corporation may be transferred only to those engaged
in publicaccounting or to the corporation itself.
(4) The corporation's shareholders and employees have liability equivalent to other forms
of organizations (i.e., the corporate form of organization does not reduce liability).
Note, however,that CPAs may choose to purchase liability insurance to limit potential
liability.
1-21 Local firms usually have only one or two offices, are headed by a single CPA or have a few
CPAs as partners, and serve clients in a single city or area. The services provided are mostly
income tax work,consulting services, and accounting services. Auditing is often only a small
part of the practice.
Regional firms often arise from the merger and expansion of local firms. They typically
maintain several offices in neighboring cities and states. Auditing is a more important function
for regional firms than for the local firms, because larger businesses are included among the
clients.
National firms have offices in most major cities in the United States and some operate in
other countries as well. These firms offer a full range of services, with auditing often
representing the largestsingle portion of the practice.
International firms have offices in most of the world’s major cities. These firms offer a
full rangeof services, with auditing often representing the largest single portion of the
practice.
1-22 The various levels of accounting personnel in a large public accounting firm are staff
auditors, seniorauditors, managers or supervisors, and partners (and principals).
The staff auditor performs audit procedures such as the observation of physical
inventories and confirmation of receivables under the supervision of a senior. The senior
auditor plans and coordinates the audit and drafts the audit report. The senior also reviews
working papers, controls the allocation of audit time, and trains assistants on the job. The
manager or supervisor usually is responsible for supervising and reviewing several audit
engagements concurrently, and resolving significant problems with the client. The partners
maintain contacts with clients, develop new business, establish policies of the firm, review the
adequacy of audit work, and sign audit reports. The engagement partner is responsible for
performance of the audit in accordance with professional standards. A partner also devotes
time to the recruitment and development of staff, to AICPA and other professional group
activities, to educational and other civic activities, and generally to promoting an environment
, in which the firm can prosper. The position of principal, which is often held by top-ranking
consulting personnelwho do not hold the CPA certificate, has responsibilities similar to
those of a partner.
1-23 The most significant responsibilities of a partner in a public accounting firm include (only three
required:
Assume ultimate responsibility for the audits assigned to him or her
Sign audit reports
Review the audit work for compliance with firm and professional standards
Maintain relations with audit clients
Principles Of Auditing And Other Assuranc 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 theannual 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 A report by an independent public accountant concerning the fairness of a company's financial
statementsis commonly required in the following situations:
(1) Application for a bank loan.
(2) Establishing credit for purchase of merchandise, equipment, or other assets.
(3) Reporting operating results, financial position, and cash flows to absentee owners
(stockholdersor partners).
(4) Issuance of securities by a corporation.
(5) Annual financial statements by a corporation with securities listed on a stock exchange
or tradedover the counter.
(6) Sale of an ongoing business.
(7) Termination of a partnership.
1-6 To add credibility to financial statements is to increase the likelihood that they have been
prepared following the appropriate criteria, usually generally accepted accounting principles.
As such, an increasein credibility results in financial statements that can be believed and relied
upon by third parties.
1-7 Business risk is the risk that the investment will be impaired because a company invested in is
unable tomeet its financial obligations due to economic conditions or poor management
decisions. Information risk is the risk that the information used to assess business risk is not
accurate. Auditors can directly reduce information risk, but have only limited effect on
business risk.
1-8 At the beginning of the century, the principal objective of auditing was the prevention and
detection of fraud. Audit work centered on the balance sheet, because the income statement was
regarded as highly confidential and not for public disclosure. Today, the principal objective of
auditing is to form an opinion on the fairness of financial statements and their conformity with
generally accepted accounting principles. But the professional standards also require that an
audit be designed to provide reasonable assurance of detecting material misstatements, due to
errors or fraud. Particular emphasis is placed on the income statement which is of great
importance to investors. Auditing today also has the objectives ofmeeting the requirements of
the Securities and Exchange Commission (SEC) and the Public Company Accounting
Oversight Board for public companies.
1-9 The statement is incorrect. The increasing integrated databases of today, along with
available auditprocedures make audited entire populations a possibility in many
situations.
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit
of an organization. It involves more subjective judgments than a compliance audit or an
audit of financial statements because the criteria of effectiveness and efficiency of
departmental performance are not asclearly established as are many laws and regulations or
generally accepted accounting principles.
The report prepared after completion of an operational audit is usually directed to
managementof the organization in which the audit work was done.
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are
, in compliance with established criteria. The necessary ingredients are verifiable data and the
existence of standards established by an authoritative body. An operational audit, on the other
hand, is a review of adepartment or other unit of a business or governmental organization to
measure the effectiveness and efficiency of operations. Internal auditors often perform
operational audits as do auditors employed by the Government Accountability Office (GAO)
of the federal government.
1-12 Internal auditors must be independent of the department heads and other line executives
whose work theyreview. However, internal auditors are not independent in the same sense as a
public accounting firm.
, The public accounting firm serves many clients and the revenue obtained from any one client is
only a small part of the revenue of the firm. Internal auditors, on the other hand, are employees
of one company,and are subject to the restraints inherent in the employer-employee
relationship. Internal auditors can achieve a great deal of independence by reporting to the
audit committee of the board of directors, but they cannot achieve the same degree of
independence as is possessed by the external public accounting firm.
1-13 The internal auditors are employees of Spacecraft, Inc., and may be influenced by corporate
management.
The public accounting firm is independent of the company and is in a better position to take
positions opposed to those of company management. The work of the internal audit staff
emphasizes measurementof the efficiency and effectiveness of various operating units of the
company and compliance with all types of controls, whereas the public accounting firm is
primarily concerned with determining the fairnessof Spacecraft's financial statements.
1-14 The Government Accountability Office (GAO) is a staff of professional auditors which reports
to Congress. Its function is to determine that programs carried out by federal agencies conform
to the financial authorization of the Congress. It is also concerned with the cost-effectiveness of
government programs. The audit activities include investigation of the costs and performance
of corporations holdinggovernment contracts.
1-15 Among the many important contributions to auditing literature by the AICPA are the series of
Statements on Auditing Standards (SASs), Statements on Standards for Attestation
Engagements (SSAEs), Industry Audit and Accounting Guides, Audit Guides, Audit Risk
Alerts, Statements on Standards for Accounting and Review Services (SSARSs), , and the Code
of Professional Conduct (only two required).
1-16 A peer review is a critical review of a public accounting firm's practices by another public
accounting firm (or other CPAs functioning as a peer review team). The purpose of a peer
review is to encourageadherence to quality control standards established by the accounting
firm and the profession.
1-17 The Securities and Exchange Commission (SEC) is an agency of the federal government and is
responsible for administering a number of acts, including the Securities Act of 1933 and the
Securities Exchange Act of 1934. In meeting this responsibility, the SEC reviews financial
statements of companies offering securities for sale to the public. It is particularly concerned
with requiring full disclosure of financial information and with preventing misrepresentation.
Through the Public Company Accounting Oversight Board, the SEC now oversees public
accounting firms that audit public companies.Included in this oversight process includes
development of auditing, independence, and quality control standards; inspection of
performance; and enforcement of the standards.
The AICPA is the national organization of certified public accountants. It has long been
a leaderin accounting and auditing research, in publication of authoritative accounting and
auditing pronouncements and studies, and in promoting high professional standards of
practice.
1-18 Services offered by public accounting firms in addition to auditing include other forms of
attestation, taxwork, consulting services, litigation support services, fraud investigation
,services, personal financial planning and accounting services. This last category includes
preparation of financial statements for smaller companies that have limited accounting
personnel and various types of write-up work. Public accounting firms also perform a variety
of other services. Consulting services include aiding clients in the design of accounting
systems, conversion to Information Technology (IT) systems, preparation of budgets, planning
business combinations with other companies, executive search, and numerous other projects.
Public accounting firms are restricted as to the consulting services that they may provide to
audit clients that are public companies.
,1-19 The partnership form of organization for a public accounting firm offers several advantages
over a soleproprietorship. A partnership offers the opportunity for specialization by the
partners in areas such as taxation, auditing, and consulting services. Partners can discuss
difficult technical problems among themselves, and benefit from different perspectives. Also,
the partnership may be better able to attract and retain high quality professional staff, because
they may be rewarded by acceptance into the partnership.
1-20 The following characteristics of a professional corporation distinguish it from the traditional
corporation:
(1) All shareholders must be engaged in the practice of public accounting.
(2) To the extent possible, directors and officers should be certified public accountants.
(3) Shares of a professional corporation may be transferred only to those engaged
in publicaccounting or to the corporation itself.
(4) The corporation's shareholders and employees have liability equivalent to other forms
of organizations (i.e., the corporate form of organization does not reduce liability).
Note, however,that CPAs may choose to purchase liability insurance to limit potential
liability.
1-21 Local firms usually have only one or two offices, are headed by a single CPA or have a few
CPAs as partners, and serve clients in a single city or area. The services provided are mostly
income tax work,consulting services, and accounting services. Auditing is often only a small
part of the practice.
Regional firms often arise from the merger and expansion of local firms. They typically
maintain several offices in neighboring cities and states. Auditing is a more important function
for regional firms than for the local firms, because larger businesses are included among the
clients.
National firms have offices in most major cities in the United States and some operate in
other countries as well. These firms offer a full range of services, with auditing often
representing the largestsingle portion of the practice.
International firms have offices in most of the world’s major cities. These firms offer a
full rangeof services, with auditing often representing the largest single portion of the
practice.
1-22 The various levels of accounting personnel in a large public accounting firm are staff
auditors, seniorauditors, managers or supervisors, and partners (and principals).
The staff auditor performs audit procedures such as the observation of physical
inventories and confirmation of receivables under the supervision of a senior. The senior
auditor plans and coordinates the audit and drafts the audit report. The senior also reviews
working papers, controls the allocation of audit time, and trains assistants on the job. The
manager or supervisor usually is responsible for supervising and reviewing several audit
engagements concurrently, and resolving significant problems with the client. The partners
maintain contacts with clients, develop new business, establish policies of the firm, review the
adequacy of audit work, and sign audit reports. The engagement partner is responsible for
performance of the audit in accordance with professional standards. A partner also devotes
time to the recruitment and development of staff, to AICPA and other professional group
activities, to educational and other civic activities, and generally to promoting an environment
, in which the firm can prosper. The position of principal, which is often held by top-ranking
consulting personnelwho do not hold the CPA certificate, has responsibilities similar to
those of a partner.
1-23 The most significant responsibilities of a partner in a public accounting firm include (only three
required:
Assume ultimate responsibility for the audits assigned to him or her
Sign audit reports
Review the audit work for compliance with firm and professional standards
Maintain relations with audit clients
