Solution Manual for Principles of Auditing and Other Assurance Services, 23rd Edition by Ray Whittington & Kurt Pany (McGraw-Hill, 2024) | ISBN: 9781266857669 | Chapters 1-21

SOLUTION MANUAL FOR
tm tm




Principles Of Auditing And Other Assurance Services
tm tm tm tm tm tm tm tm




23rd Edition By Ray Whittington Kurt
tm tm tm tm tm tm




ALL Chapters (1 - 21)
tm tm tm tm

, • Table of Contents tm tm




Chapter 1: The Role of the Public Accountant in the AmericanEconomy
tm tm tm tm tm tm tm tm tm tm




Chapter 2: Professional Standards
tm tm tm




Chapter 3: Professional Ethics
tm tm tm




Chapter 4: Legal Liability of CPAs
tm tm tm tm tm




Chapter 5: Audit Evidence and Documentation
tm tm tm tm tm




Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding
tm tm tm tm tm tm tm tm tm




Chapter 7: Internal Control
tm tm tm




Chapter 8: Consideration of Internal Control in an InformationTechnology Environment
tm tm tm tm tm tm tm tm tm




Chapter 9: Audit Sampling
tm tm tm




Chapter 10: Cash and Financial Investments
tm tm tm tm tm




Chapter 11: Accounts Receivable, Notes Receivable, andRevenue
tm tm tm tm tm tm




Chapter 12: Inventories and Cost of Goods Sold
tm tm tm tm tm tm tm




Chapter 13: Property, Plant, and Equipment: Depreciation andDepletion
tm tm tm tm tm tm tm




Chapter 14: Accounts Payable and Other Liabilities
tm tm tm tm tm tm




Chapter 15: Debt and Equity Capital
tm tm tm tm tm




Chapter 16: Auditing Operations and Completing the Audit
tm tm tm tm tm tm tm




Chapter 17: Auditors’ Reports
tm tm tm




Chapter 18: Integrated Audits of Public Companies
tm tm tm tm tm tm




Chapter 19: Additional Assurance Services: Historical FinancialInformation
tm tm tm tm tm tm




Chapter 20: Additional Assurance Services: Other Information
tm tm tm tm tm tm




Chapter 21: Internal, Operational, and Compliance Auditing
tm tm tm tm tm tm

,CHAPTER 1 t m




The Role of the tm tm tm




Public Accountant in
tm t m t m




the
t m




American Economy t m




Review Questions
tm




1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously issued
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




financial statements as a result of accounting irregularities and fraud. Especially responsible werethe
tm tm tm tm tm tm tm tm tm tm tm tm tm tm




very visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




largest companies in American history to do so. The extent of the accounting irregularities and fraud
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




being investigated and disclosed brought into question the effectiveness of financial statement audits.
tm tm tm tm tm tm tm tm tm tm tm tm tm




In addition, the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




charges of destroying documents related to the Enron case brought into question the ethics standards of
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




the profession.
tm tm




1-2 Assurance services are professional services that enhance the quality of information, or its context, for
tm tm tm tm tm tm tm tm tm tm tm tm tm tm




decision-making. The two types are: (a) those that increase the reliability of information and (b) those
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




that involve putting information in a form or context that facilitates decision-making.
tm tm tm tm tm tm tm tm tm tm tm tm




1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




assertion,made by management, most frequently is that the financial statements follow generally accepted
tm tm tm tm tm tm tm tm tm tm tm tm tm tm




accounting principles.
tm tm




1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




exchange and by the rules of the Securities and Exchange Commission to provide an audit report with
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




theannual financial statements furnished to its stockholders. It also is required to engage the auditors to
tm tm tm tm tm tm tm tm t m tm tm tm tm tm tm tm tm




provide an opinion on its internal control. Apart from legal requirements, however, a large listed
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




corporation recognizes that it must maintain investor confidence in the reliability of its financial
tm tm tm tm tm tm tm tm tm tm tm tm tm tm




statements and internal control over financial reporting if it is to continue to be able to secure capital
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




from the public. The report by a firm of certified public accountants adds credibility to the financial
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




statements prepared by the corporation. When a small family-owned enterprise elects to have an audit,
tm tm tm tm tm t m tm tm tm tm tm tm tm tm tm




the purpose usually is to use the auditors' report to support an application for a bank loan.
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm

, 1-5 A report by an independent public accountant concerning the fairness of a company's financial
tm tm tm tm tm tm tm tm tm tm tm tm tm




statementsis commonly required in the following situations:
tm tm tm tm tm tm tm tm




(1) Application for a bank loan. tm tm tm tm




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




(3) Reporting operating results, financial position, and cash flows to absentee owners
tm tm tm tm tm tm tm tm tm tm




(stockholdersor partners).
tm tm tm




(4) Issuance of securities by a corporation. tm tm tm tm tm




(5) Annual financial statements by a corporation with securities listed on a stock exchange or
tm tm tm tm tm tm tm tm tm tm tm tm tm




tradedover the counter.
tm tm tm tm




(6) Sale of an ongoing business. tm tm tm tm




(7) Termination of a partnership. tm tm tm




1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




following the appropriate criteria, usually generally accepted accounting principles. As such, an
tm tm tm tm tm tm tm tm tm tm tm tm




increasein credibility results in financial statements that can be believed and relied upon by third parties.
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




1-7 Business risk is the risk that the investment will be impaired because a company invested in is unable
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




tomeet its financial obligations due to economic conditions or poor management decisions. Information
tm tm tm tm tm tm tm tm tm tm tm tm tm tm




risk is the risk that the information used to assess business risk is not accurate. Auditors can directly
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




reduce information risk, but have only limited effect on business risk.
tm tm tm tm tm tm tm tm tm tm tm




1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection of
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




fraud. Audit work centered on the balance sheet, because the income statement was regarded as highly
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




confidential and not for public disclosure. Today, the principal objective of auditing is to form an
tm tm tm tm tm tm t m tm tm tm tm tm tm tm tm tm




opinion on the fairness of financial statements and their conformity with generally accepted accounting
tm tm tm tm tm tm tm tm tm tm tm tm tm tm




principles. But the professional standards also require that an audit be designed to provide reasonable
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




assurance of detecting material misstatements, due to errors or fraud. Particular emphasis is placed
tm tm tm tm tm tm tm tm tm tm t m tm tm tm




on the income statement which is of great importance to investors. Auditing today also has the
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




objectives ofmeeting the requirements of the Securities and Exchange Commission (SEC) and the
tm tm tm tm tm tm tm tm tm tm tm tm tm tm




Public Company Accounting Oversight Board for public companies.
tm tm tm tm tm tm tm tm




1-9 The statement is incorrect. The increasing integrated databases of today, along with available
tm tm tm tm tm tm tm tm tm tm tm tm




auditprocedures make audited entire populations a possibility in many situations.
tm tm tm tm tm tm tm tm tm tm tm




1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




organization. It involves more subjective judgments than a compliance audit or an audit of financial
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




statements because the criteria of effectiveness and efficiency of departmental performance are not
tm tm tm tm tm tm tm tm tm tm tm tm tm




asclearly established as are many laws and regulations or generally accepted accounting principles.
tm tm tm tm tm tm tm tm tm tm tm tm tm tm




The report prepared after completion of an operational audit is usually directed to management
tm tm tm tm tm tm tm tm tm tm tm tm tm




of the organization in which the audit work was done.
tm tm tm tm tm tm tm tm tm tm




1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




compliance with established criteria. The necessary ingredients are verifiable data and the existence of
tm tm tm tm tm tm tm tm tm tm tm tm tm tm




standards established by an authoritative body. An operational audit, on the other hand, is a review of
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




adepartment or other unit of a business or governmental organization to measure the effectiveness and
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




efficiency of operations. Internal auditors often perform operational audits as do auditors employed by
tm tm tm tm tm tm tm tm tm tm tm tm tm tm




the Government Accountability Office (GAO) of the federal government.
tm tm tm tm tm tm tm tm tm




1-12 Internal auditors must be independent of the department heads and other line executives whose work
tm tm tm tm tm tm tm tm tm tm tm tm tm tm




theyreview. However, internal auditors are not independent in the same sense as a public accounting
tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm tm




firm.
tm