SOLUTION MANUAL FOR
| |
Principles Of Auditing And Other Assurance 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 |the|annual
|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 |statements
|is |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 | (stockholders
|or |partners).
(4) Issuance |of |securities |by |a |corporation.
(5) Annual |financial |statements | by |a |corporation |with |securities | listed |on |a |stock |exchange |or |traded
|over |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 |increase
|in |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 |to
|meet | 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 | of
|meeting |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 |audit
|procedures |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 | as
|clearly |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 |management|of
|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 | a
|department | 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 |they
|review. | However, |internal |auditors | are |not | independent | in |the |same |sense |as | a |public |accounting |firm.
| |
Principles Of Auditing And Other Assurance 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 |the|annual
|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 |statements
|is |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 | (stockholders
|or |partners).
(4) Issuance |of |securities |by |a |corporation.
(5) Annual |financial |statements | by |a |corporation |with |securities | listed |on |a |stock |exchange |or |traded
|over |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 |increase
|in |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 |to
|meet | 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 | of
|meeting |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 |audit
|procedures |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 | as
|clearly |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 |management|of
|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 | a
|department | 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 |they
|review. | However, |internal |auditors | are |not | independent | in |the |same |sense |as | a |public |accounting |firm.
