Principles of Auditing and Other Assurance Services, 23rd Edition by Ray Whittington & Kurt | Complete Solution Manual Chapters 1–21

SOLUTION MANUAL FOR

Principles Of Auditing And Other Assurance Services



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

, • Table of Contents cy cy




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 cy




The Role of the Publi cy cy cy cy




c Accountant in the
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American Economy c y




Review Questions
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1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously issue
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d financial statements as a result of accounting irregularities and fraud. Especially responsible werethe
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very visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the
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ylargest companies in American history to do so. The extent of the accounting irregularities and fraud be
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ing investigated and disclosed brought into question the effectiveness of financial statement audits. In a
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ddition, the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on cha
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rges of destroying documents related to the Enron case brought into question the ethics standards of the
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profession.

1-2 Assurance services are professional services that enhance the quality of information, or its context, for
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ydecision-
making. The two types are: (a) those that increase the reliability of information and (b) those that invo
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lve 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 account
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ing principles. cy




1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchan
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ge and by the rules of the Securities and Exchange Commission to provide an audit report with theannua
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l financial statements furnished to its stockholders. It also is required to engage the auditors to provide a
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n opinion on its internal control. Apart from legal requirements, however, a large listed corporation rec
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ognizes that it must maintain investor confidence in the reliability of its financial statements and internal
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ycontrol over financial reporting if it is to continue to be able to secure capital from the public. The rep
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ort by a firm of certified public accountants adds credibility to the financial statements prepared by the c
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orporation. When a small family- c y cy cy cy



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

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



(2) Establishing credit for purchase of merchandise, equipment, or other assets.
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(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholder
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sor partners).
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(4) Issuance of securities by a corporation. cy cy cy cy cy



(5) Annual financial statements by a corporation with securities listed on a stock exchange or trade
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dover the counter.
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(6) Sale of an ongoing business.
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(7) Termination of a partnership. cy cy cy




1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared follo
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wing the appropriate criteria, usually generally accepted accounting principles. As such, an increasein cr
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edibility 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 t
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omeet its financial obligations due to economic conditions or poor management decisions. Information
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risk is the risk that the information used to assess business risk is not accurate. Auditors can directly r
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educe 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 fr
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aud. Audit work centered on the balance sheet, because the income statement was regarded as highly co
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nfidential and not for public disclosure. Today, the principal objective of auditing is to form an opinio
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n on the fairness of financial statements and their conformity with generally accepted accounting principl
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es. But the professional standards also require that an audit be designed to provide reasonable assurance
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of detecting material misstatements, due to errors or fraud. Particular emphasis is placed on the incom
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e statement which is of great importance to investors. Auditing today also has the objectives ofmeeting t
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he requirements of the Securities and Exchange Commission (SEC) and the Public Company Accountin
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g Oversight Board for public companies.
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1-9 The statement is incorrect. The increasing integrated databases of today, along with available aud
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itprocedures 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 org
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anization. It involves more subjective judgments than a compliance audit or an audit of financial stat
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ements because the criteria of effectiveness and efficiency of departmental performance are not ascl
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early 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 management
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of 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 complia
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nce with established criteria. The necessary ingredients are verifiable data and the existence of standard
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s established by an authoritative body. An operational audit, on the other hand, is a review of adepart
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ment or other unit of a business or governmental organization to measure the effectiveness and efficien
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cy of operations. Internal auditors often perform operational audits as do auditors employed by the Go
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vernment 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 the
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yreview. However, internal auditors are not independent in the same sense as a public accounting firm.
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