SOLUTION MANUAL- Principles of Auditing & Other
Assurance Services 23rd Edition by Ray Whittington
ALL CHAPTERS 1-21 ENTAILING VERIFIED
QUESTIONS & 100% ACCURATE SOLUTIONS
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Page | 1
, TABLE OF CONTENTS
CHAPTER 1: The Role of the Public Accountant in the American Economy
CHAPTER 2: Professional Standards
CHAPTER 3 : Professional Ethics
CHAPTER 4: Legal Liability of CPA
CHAPTER 5 : Audit Evidence and Documentation
CHAPTER 6: Audit Planning, Understanding the Client, Assessing Risks and Responding
CHAPTER 7 : Internal Control
CHAPTER 8: Consideration of Internal Control in an IT Environment
CHAPTER 9 : Audit Sampling
CHAPTER 10: Cash and Financial Investments
CHAPTER 11: Accounts Receivable, Notes Receivable, and Revenue
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CHAPTER 12: Inventories and Cost of Goods Sold
CHAPTER 13: Property, Plant, and Equipment: Depreciation and Depletion
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CHAPTER 14: Accounts Payable and Other Liabilities
CHAPTER 15: Debt and Equity Capital
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CHAPTER 16 : Auditing Operations and Completing the Audit
CHAPTER 17 : Auditors' Reports
CHAPTER 18 : Integrated Audits of Issuers (Public Companies)
CHAPTER 19: Additional Assurance Services: Historical Financial Information
CHAPTER 20: Additional Assurance Services: Other Information
CHAPTER 21: Internal, Operational and Compliance Auditing
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, 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
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generally accepted accounting 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 exchange and by the rules of the Securities and Exchange Commission to provide an audit
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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).
Page | 3
, (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.
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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
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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
er
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.
Page | 4
Assurance Services 23rd Edition by Ray Whittington
ALL CHAPTERS 1-21 ENTAILING VERIFIED
QUESTIONS & 100% ACCURATE SOLUTIONS
TB
Ac
er
Page | 1
, TABLE OF CONTENTS
CHAPTER 1: The Role of the Public Accountant in the American Economy
CHAPTER 2: Professional Standards
CHAPTER 3 : Professional Ethics
CHAPTER 4: Legal Liability of CPA
CHAPTER 5 : Audit Evidence and Documentation
CHAPTER 6: Audit Planning, Understanding the Client, Assessing Risks and Responding
CHAPTER 7 : Internal Control
CHAPTER 8: Consideration of Internal Control in an IT Environment
CHAPTER 9 : Audit Sampling
CHAPTER 10: Cash and Financial Investments
CHAPTER 11: Accounts Receivable, Notes Receivable, and Revenue
TB
CHAPTER 12: Inventories and Cost of Goods Sold
CHAPTER 13: Property, Plant, and Equipment: Depreciation and Depletion
Ac
CHAPTER 14: Accounts Payable and Other Liabilities
CHAPTER 15: Debt and Equity Capital
er
CHAPTER 16 : Auditing Operations and Completing the Audit
CHAPTER 17 : Auditors' Reports
CHAPTER 18 : Integrated Audits of Issuers (Public Companies)
CHAPTER 19: Additional Assurance Services: Historical Financial Information
CHAPTER 20: Additional Assurance Services: Other Information
CHAPTER 21: Internal, Operational and Compliance Auditing
Page | 2
, 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
TB
generally accepted accounting principles.
Ac
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
er
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).
Page | 3
, (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.
TB
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
Ac
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
er
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.
Page | 4
