SOLUTION MANUAL FOR
p p
Principles Of Auditing And Other Assurance Services
p p p p p p p p
23rd Edition By Ray Whittington Kurt
p p p p p p
ALL Chapters (1 - 21)
p p p p
, Table of Contents
p p
Chapter p1: pThe pRole pof pthe pPublic pAccountant pin pthe pAmericanEconomy
Chapter p2: pProfessional pStandards
Chapter p3: pProfessional pEthics
Chapter p4: pLegal pLiability pof pCPAs
Chapter p5: pAudit pEvidence pand pDocumentation
Chapter p6: pAudit pPlanning, pUnderstanding pthe pClient, pAssessingRisks, pand pResponding
Chapter p7: pInternal pControl
Chapter p8: pConsideration pof pInternal pControl pin pan pInformationTechnology pEnvironment
Chapter p9: pAudit pSampling
Chapter p10: pCash pand pFinancial pInvestments
Chapter p11: pAccounts pReceivable, pNotes pReceivable, pandRevenue
Chapter p12: pInventories pand pCost pof pGoods pSold
Chapter p13: pProperty, pPlant, pand pEquipment: pDepreciation pandDepletion
Chapter p14: pAccounts pPayable pand pOther pLiabilities
Chapter p15: pDebt pand pEquity pCapital
Chapter p16: pAuditing pOperations pand pCompleting pthe pAudit
Chapter p17: pAuditors’ pReports
Chapter p18: pIntegrated pAudits pof pPublic pCompanies
Chapter p19: pAdditional pAssurance pServices: pHistorical pFinancialInformation
Chapter p20: pAdditional pAssurance pServices: pOther pInformation
Chapter p21: pInternal, pOperational, pand pCompliance pAuditing
,CHAPTER 1 p
The Role of the p p p
Public Accountant in
p p p
the
p
American Economy p
Review pQuestions
1-1 The p―crisis pof pcredibility‖ plargely parose pfrom pthe pnumber pof pcompanies pthat prestated ptheir ppreviously
pissued pfinancial pstatements p as p a p result p of p accounting pirregularities p and pfraud. p Especially presponsible
pwerep the pvery pvisible pEnron pand pWorldCom pfraud pcases. pBoth pcompanies p filed pfor pbankruptcy pand
p constituted pthe plargest p companies p in pAmerican phistory pto pdo pso. p The pextent p of p the paccounting
pirregularities p and pfraud pbeing pinvestigated pand pdisclosed pbrought p into pquestion pthe peffectiveness p of
p financial pstatement p audits. p In paddition, pthe pcriminal pconviction pof pArthur pAndersen, pLLP, pone pof pthe
pthen pBig p5 paccounting pfirms, pon pcharges p of p destroying pdocuments p related pto p the pEnron pcase pbrought
p into pquestion pthe pethics p standards p of pthe pprofession.
1-2 Assurance pservices pare pprofessional pservices pthat penhance pthe pquality pof pinformation, por pits pcontext,
pfor pdecision-making. pThe ptwo ptypes pare: p(a) pthose pthat pincrease pthe preliability pof pinformation pand
p(b) pthose pthat pinvolve pputting pinformation pin pa pform por pcontext pthat pfacilitates pdecision-making.
1-3 A pfinancial pstatement p audit p is, pby pfar, pthe pmost p common ptype pof pattest p engagement. p The poverall
passertion,p
made pby pmanagement, pmost pfrequently pis pthat pthe pfinancial pstatements pfollow pgenerally
paccepted paccounting pprinciples.
1-4 A plarge pcorporation pwith psecurities plisted pon pa pstock pexchange pis prequired pby pthe prules pof pthe pstock
pexchange pand pby pthe prules p of p the pSecurities p and pExchange pCommission pto pprovide pan paudit p report
p with pthepannual pfinancial pstatements p furnished pto pits p stockholders. p It p also pis p required pto pengage pthe
pauditors p to pprovide pan popinion pon pits pinternal pcontrol. pApart pfrom plegal prequirements, phowever, pa
plarge plisted pcorporation precognizes p that p it p must p maintain pinvestor pconfidence pin p the preliability pof p its
p financial pstatements p and p internal p control p over p financial p reporting p if p it p is p to p continue p to p be pable p to
p secure p capital pfrom pthe ppublic. p The preport p by pa p firm pof p certified ppublic paccountants p adds p credibility pto
pthe pfinancial pstatements p prepared pby pthe pcorporation. p When pa p small pfamily-owned penterprise pelects
p to phave pan paudit, pthe ppurpose pusually pis p to puse pthe pauditors' preport p to psupport p an papplication p for p a
pbank ploan.
, 1-5 A preport p by pan pindependent p public paccountant p concerning pthe pfairness p of pa p company's p financial
pstatementspis pcommonly prequired pin pthe pfollowing psituations:
(1) Application pfor p a p bank ploan.
(2) Establishing pcredit p for p purchase pof p merchandise, pequipment, por p other p assets.
(3) Reporting poperating presults, p financial pposition, p and pcash pflows p to pabsentee powners
p (stockholdersp or ppartners).
(4) Issuance pof p securities p by pa pcorporation.
(5) Annual pfinancial pstatements p by pa p corporation pwith psecurities p listed pon pa p stock pexchange por
p tradedpover pthe pcounter.
(6) Sale pof p an pongoing pbusiness.
(7) Termination pof p a p partnership.
1-6 To padd pcredibility pto pfinancial pstatements p is pto pincrease pthe plikelihood pthat p they phave pbeen pprepared
pfollowing pthe pappropriate pcriteria, p usually pgenerally paccepted paccounting pprinciples. p As p such, p an
pincreasepin pcredibility presults p in pfinancial pstatements pthat p can pbe pbelieved pand prelied pupon pby pthird
pparties.
1-7 Business p risk pis p the prisk pthat p the pinvestment p will pbe pimpaired pbecause pa pcompany pinvested pin pis
p unable ptopmeet p its p financial pobligations p due pto peconomic pconditions p or ppoor pmanagement p decisions.
p Information prisk pis pthe prisk pthat pthe pinformation pused pto passess pbusiness prisk pis pnot paccurate.
pAuditors pcan pdirectly preduce pinformation prisk, pbut phave ponly plimited peffect pon pbusiness prisk.
1-8 At pthe pbeginning pof pthe pcentury, pthe pprincipal pobjective pof pauditing pwas p the pprevention pand pdetection
pof pfraud. p Audit p work pcentered pon pthe pbalance psheet, pbecause pthe pincome pstatement p was p regarded pas
p highly pconfidential p and p not p for p public pdisclosure. p Today, p the pprincipal p objective pof p auditing p is p to
p form pan popinion pon pthe pfairness p of p financial pstatements p and ptheir p conformity pwith pgenerally paccepted
paccounting pprinciples. p But p the pprofessional p standards p also p require pthat p an p audit p be pdesigned p to
pprovide preasonable passurance pof p detecting p material p misstatements, p due pto p errors p or p fraud. p Particular
p emphasis p is p placed p on pthe pincome pstatement p which pis p of p great p importance pto pinvestors. p Auditing
ptoday palso phas p the pobjectives p ofp meeting pthe prequirements p of pthe pSecurities p and pExchange
pCommission p(SEC) p and pthe pPublic pCompany pAccounting pOversight pBoard pfor ppublic pcompanies.
1-9 The pstatement p is p incorrect. pThe pincreasing pintegrated pdatabases p of p today, palong pwith pavailable
pauditpprocedures pmake paudited pentire ppopulations pa ppossibility pin pmany psituations.
1-10 An poperational paudit p attempts p to pmeasure pthe peffectiveness p and pefficiency pof pa pspecific punit pof pan
porganization. p It p involves p more psubjective pjudgments p than pa pcompliance paudit p or pan paudit p of
pfinancial pstatements p because pthe pcriteria p of p effectiveness p and pefficiency pof p departmental
pperformance pare pnot p asp clearly pestablished pas p are pmany plaws pand pregulations por pgenerally paccepted
paccounting pprinciples.
The preport p prepared pafter p completion pof p an poperational paudit p is p usually pdirected pto
pmanagementpof pthe porganization pin pwhich pthe paudit pwork pwas pdone.
1-11 A pcompliance paudit pis pan paudit pto pdetermine pwhether pfinancial preports por pother passertions pare p in
pcompliance pwith pestablished pcriteria. p The pnecessary pingredients p are pverifiable pdata p and pthe pexistence
pof pstandards p established pby pan pauthoritative pbody. p An poperational paudit, pon pthe pother p hand, p is p a
p review pof p ap
department p or pother punit p of pa pbusiness p or pgovernmental porganization pto pmeasure pthe
peffectiveness p and pefficiency pof p operations. p Internal pauditors p often pperform poperational paudits p as p do
pauditors p employed pby pthe pGovernment pAccountability pOffice p(GAO) pof pthe pfederal pgovernment.
1-12 Internal pauditors p must p be pindependent p of pthe pdepartment p heads p and pother pline pexecutives p whose pwork
p p
Principles Of Auditing And Other Assurance Services
p p p p p p p p
23rd Edition By Ray Whittington Kurt
p p p p p p
ALL Chapters (1 - 21)
p p p p
, Table of Contents
p p
Chapter p1: pThe pRole pof pthe pPublic pAccountant pin pthe pAmericanEconomy
Chapter p2: pProfessional pStandards
Chapter p3: pProfessional pEthics
Chapter p4: pLegal pLiability pof pCPAs
Chapter p5: pAudit pEvidence pand pDocumentation
Chapter p6: pAudit pPlanning, pUnderstanding pthe pClient, pAssessingRisks, pand pResponding
Chapter p7: pInternal pControl
Chapter p8: pConsideration pof pInternal pControl pin pan pInformationTechnology pEnvironment
Chapter p9: pAudit pSampling
Chapter p10: pCash pand pFinancial pInvestments
Chapter p11: pAccounts pReceivable, pNotes pReceivable, pandRevenue
Chapter p12: pInventories pand pCost pof pGoods pSold
Chapter p13: pProperty, pPlant, pand pEquipment: pDepreciation pandDepletion
Chapter p14: pAccounts pPayable pand pOther pLiabilities
Chapter p15: pDebt pand pEquity pCapital
Chapter p16: pAuditing pOperations pand pCompleting pthe pAudit
Chapter p17: pAuditors’ pReports
Chapter p18: pIntegrated pAudits pof pPublic pCompanies
Chapter p19: pAdditional pAssurance pServices: pHistorical pFinancialInformation
Chapter p20: pAdditional pAssurance pServices: pOther pInformation
Chapter p21: pInternal, pOperational, pand pCompliance pAuditing
,CHAPTER 1 p
The Role of the p p p
Public Accountant in
p p p
the
p
American Economy p
Review pQuestions
1-1 The p―crisis pof pcredibility‖ plargely parose pfrom pthe pnumber pof pcompanies pthat prestated ptheir ppreviously
pissued pfinancial pstatements p as p a p result p of p accounting pirregularities p and pfraud. p Especially presponsible
pwerep the pvery pvisible pEnron pand pWorldCom pfraud pcases. pBoth pcompanies p filed pfor pbankruptcy pand
p constituted pthe plargest p companies p in pAmerican phistory pto pdo pso. p The pextent p of p the paccounting
pirregularities p and pfraud pbeing pinvestigated pand pdisclosed pbrought p into pquestion pthe peffectiveness p of
p financial pstatement p audits. p In paddition, pthe pcriminal pconviction pof pArthur pAndersen, pLLP, pone pof pthe
pthen pBig p5 paccounting pfirms, pon pcharges p of p destroying pdocuments p related pto p the pEnron pcase pbrought
p into pquestion pthe pethics p standards p of pthe pprofession.
1-2 Assurance pservices pare pprofessional pservices pthat penhance pthe pquality pof pinformation, por pits pcontext,
pfor pdecision-making. pThe ptwo ptypes pare: p(a) pthose pthat pincrease pthe preliability pof pinformation pand
p(b) pthose pthat pinvolve pputting pinformation pin pa pform por pcontext pthat pfacilitates pdecision-making.
1-3 A pfinancial pstatement p audit p is, pby pfar, pthe pmost p common ptype pof pattest p engagement. p The poverall
passertion,p
made pby pmanagement, pmost pfrequently pis pthat pthe pfinancial pstatements pfollow pgenerally
paccepted paccounting pprinciples.
1-4 A plarge pcorporation pwith psecurities plisted pon pa pstock pexchange pis prequired pby pthe prules pof pthe pstock
pexchange pand pby pthe prules p of p the pSecurities p and pExchange pCommission pto pprovide pan paudit p report
p with pthepannual pfinancial pstatements p furnished pto pits p stockholders. p It p also pis p required pto pengage pthe
pauditors p to pprovide pan popinion pon pits pinternal pcontrol. pApart pfrom plegal prequirements, phowever, pa
plarge plisted pcorporation precognizes p that p it p must p maintain pinvestor pconfidence pin p the preliability pof p its
p financial pstatements p and p internal p control p over p financial p reporting p if p it p is p to p continue p to p be pable p to
p secure p capital pfrom pthe ppublic. p The preport p by pa p firm pof p certified ppublic paccountants p adds p credibility pto
pthe pfinancial pstatements p prepared pby pthe pcorporation. p When pa p small pfamily-owned penterprise pelects
p to phave pan paudit, pthe ppurpose pusually pis p to puse pthe pauditors' preport p to psupport p an papplication p for p a
pbank ploan.
, 1-5 A preport p by pan pindependent p public paccountant p concerning pthe pfairness p of pa p company's p financial
pstatementspis pcommonly prequired pin pthe pfollowing psituations:
(1) Application pfor p a p bank ploan.
(2) Establishing pcredit p for p purchase pof p merchandise, pequipment, por p other p assets.
(3) Reporting poperating presults, p financial pposition, p and pcash pflows p to pabsentee powners
p (stockholdersp or ppartners).
(4) Issuance pof p securities p by pa pcorporation.
(5) Annual pfinancial pstatements p by pa p corporation pwith psecurities p listed pon pa p stock pexchange por
p tradedpover pthe pcounter.
(6) Sale pof p an pongoing pbusiness.
(7) Termination pof p a p partnership.
1-6 To padd pcredibility pto pfinancial pstatements p is pto pincrease pthe plikelihood pthat p they phave pbeen pprepared
pfollowing pthe pappropriate pcriteria, p usually pgenerally paccepted paccounting pprinciples. p As p such, p an
pincreasepin pcredibility presults p in pfinancial pstatements pthat p can pbe pbelieved pand prelied pupon pby pthird
pparties.
1-7 Business p risk pis p the prisk pthat p the pinvestment p will pbe pimpaired pbecause pa pcompany pinvested pin pis
p unable ptopmeet p its p financial pobligations p due pto peconomic pconditions p or ppoor pmanagement p decisions.
p Information prisk pis pthe prisk pthat pthe pinformation pused pto passess pbusiness prisk pis pnot paccurate.
pAuditors pcan pdirectly preduce pinformation prisk, pbut phave ponly plimited peffect pon pbusiness prisk.
1-8 At pthe pbeginning pof pthe pcentury, pthe pprincipal pobjective pof pauditing pwas p the pprevention pand pdetection
pof pfraud. p Audit p work pcentered pon pthe pbalance psheet, pbecause pthe pincome pstatement p was p regarded pas
p highly pconfidential p and p not p for p public pdisclosure. p Today, p the pprincipal p objective pof p auditing p is p to
p form pan popinion pon pthe pfairness p of p financial pstatements p and ptheir p conformity pwith pgenerally paccepted
paccounting pprinciples. p But p the pprofessional p standards p also p require pthat p an p audit p be pdesigned p to
pprovide preasonable passurance pof p detecting p material p misstatements, p due pto p errors p or p fraud. p Particular
p emphasis p is p placed p on pthe pincome pstatement p which pis p of p great p importance pto pinvestors. p Auditing
ptoday palso phas p the pobjectives p ofp meeting pthe prequirements p of pthe pSecurities p and pExchange
pCommission p(SEC) p and pthe pPublic pCompany pAccounting pOversight pBoard pfor ppublic pcompanies.
1-9 The pstatement p is p incorrect. pThe pincreasing pintegrated pdatabases p of p today, palong pwith pavailable
pauditpprocedures pmake paudited pentire ppopulations pa ppossibility pin pmany psituations.
1-10 An poperational paudit p attempts p to pmeasure pthe peffectiveness p and pefficiency pof pa pspecific punit pof pan
porganization. p It p involves p more psubjective pjudgments p than pa pcompliance paudit p or pan paudit p of
pfinancial pstatements p because pthe pcriteria p of p effectiveness p and pefficiency pof p departmental
pperformance pare pnot p asp clearly pestablished pas p are pmany plaws pand pregulations por pgenerally paccepted
paccounting pprinciples.
The preport p prepared pafter p completion pof p an poperational paudit p is p usually pdirected pto
pmanagementpof pthe porganization pin pwhich pthe paudit pwork pwas pdone.
1-11 A pcompliance paudit pis pan paudit pto pdetermine pwhether pfinancial preports por pother passertions pare p in
pcompliance pwith pestablished pcriteria. p The pnecessary pingredients p are pverifiable pdata p and pthe pexistence
pof pstandards p established pby pan pauthoritative pbody. p An poperational paudit, pon pthe pother p hand, p is p a
p review pof p ap
department p or pother punit p of pa pbusiness p or pgovernmental porganization pto pmeasure pthe
peffectiveness p and pefficiency pof p operations. p Internal pauditors p often pperform poperational paudits p as p do
pauditors p employed pby pthe pGovernment pAccountability pOffice p(GAO) pof pthe pfederal pgovernment.
1-12 Internal pauditors p must p be pindependent p of pthe pdepartment p heads p and pother pline pexecutives p whose pwork
