Principles of Auditing and Other Assurance Services (23rd Edition) – Ray Whittington, Kurt Pany – Complete Solution Manual for Chapters 1–21

SOLUTION MANUAL FOR
Principles Of Auditing And Other Assurance Services

23rd Edition By Ray Whittington Kurt
ALL Chapters (1 - 21)

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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 w y




The Role of the Publi wy wy wy wy




c Accountant in the
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American Economy w y




Review Questions
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1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously issued
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financial statements as a result of accounting irregularities and fraud. Especially responsible werethe ver
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y visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the larg
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est companies in American history to do so. The extent of the accounting irregularities and fraud being in
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vestigated and disclosed brought into question the effectiveness of financial statement audits. In addition,
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the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on charges of d
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estroying documents related to the Enron case brought into question the ethics standards of the professio
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n.

1-2 Assurance services are professional services that enhance the quality of information, or its context, for d
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ecision-
making. The two types are: (a) those that increase the reliability of information and (b) those that involv
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e putting information in a form or context that facilitates decision-making.
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1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall assertion,
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made by management, most frequently is that the financial statements follow generally accepted accountin
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g principles.
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1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchang
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e and by the rules of the Securities and Exchange Commission to provide an audit report with theannual fi
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nancial statements furnished to its stockholders. It also is required to engage the auditors to provide an op
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inion on its internal control. Apart from legal requirements, however, a large listed corporation recognize
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s that it must maintain investor confidence in the reliability of its financial statements and internal control
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over financial reporting if it is to continue to be able to secure capital from the public. The report by a fir
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m of certified public accountants adds credibility to the financial statements prepared by the corporation.
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When a small family- wy wy wy




owned enterprise elects to have an audit, the purpose usually is to use the auditors' report to support an app
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lication for a bank loan. wy wy wy wy

, 1-5 A report by an independent public accountant concerning the fairness of a company's financial statements
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is commonly required in the following situations:
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(1) Application for a bank loan. wy wy wy wy




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




(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholders
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or partners).
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(4) Issuance of securities by a corporation. wy wy wy wy wy




(5) Annual financial statements by a corporation with securities listed on a stock exchange or traded
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over the counter. wy wy




(6) Sale of an ongoing business.
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(7) Termination of a partnership. wy wy wy




1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared followi
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ng the appropriate criteria, usually generally accepted accounting principles. As such, an increasein credi
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bility results in financial statements that can be believed and relied upon by third 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 to
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meet its financial obligations due to economic conditions or poor management decisions. Information ris
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k is the risk that the information used to assess business risk is not accurate. Auditors can directly reduc
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e information risk, but have only limited 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 fra
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ud. Audit work centered on the balance sheet, because the income statement was regarded as highly confi
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dential and not for public disclosure. Today, the principal objective of auditing is to form an opinion on
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the fairness of financial statements and their conformity with generally accepted accounting principles. B
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ut the professional standards also require that an audit be designed to provide reasonable assurance of det
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ecting material misstatements, due to errors or fraud. Particular emphasis is placed on the income state
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ment which is of great importance to investors. Auditing today also has the objectives ofmeeting the requ
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irements of the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversi
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ght Board for public 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 make audited entire populations a possibility in many situations.
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1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an orga
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nization. It involves more subjective judgments than a compliance audit or an audit of financial state
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ments because the criteria of effectiveness and efficiency of departmental performance are not asclear
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ly established as are many laws and regulations or generally accepted accounting principles.
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The report prepared after completion of an operational audit is usually directed to managemento
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f the organization in which the audit work was done.
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1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in complian
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ce with established criteria. The necessary ingredients are verifiable data and the existence of standards
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established by an authoritative body. An operational audit, on the other hand, is a review of adepartmen
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t or other unit of a business or governmental organization to measure the effectiveness and efficiency of
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operations. Internal auditors often perform operational audits as do auditors employed by the Governm
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ent Accountability Office (GAO) of the federal government.
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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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