SOLUTION MANUAL FOR
pc pc
pc Principles Of Auditing And Other Assurance Services
pc pc pc pc pc pc pc
23rd Edition By Ray Whittington Kurt
pc pc pc pc pc pc
ALL Chapters (1 - 21)
pc pc pc pc
, Table of Contents pc pc
Chapter 1: The Role of the Public Accountant in the AmericanEconomy
pc pc pc pc pc pc pc pc pc pc
Chapter 2: Professional Standards
pc pc pc
Chapter 3: Professional Ethics
pc pc pc
Chapter 4: Legal Liability of CPAs
pc pc pc pc pc
Chapter 5: Audit Evidence and Documentation
pc pc pc pc pc
Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding
pc pc pc pc pc pc pc pc pc
Chapter 7: Internal Control
pc pc pc
Chapter 8: Consideration of Internal Control in an InformationTechnology Environment
pc pc pc pc pc pc pc pc pc
Chapter 9: Audit Sampling
pc pc pc
Chapter 10: Cash and Financial Investments
pc pc pc pc pc
Chapter 11: Accounts Receivable, Notes Receivable, andRevenue
pc pc pc pc pc pc
Chapter 12: Inventories and Cost of Goods Sold
pc pc pc pc pc pc pc
Chapter 13: Property, Plant, and Equipment: Depreciation andDepletion
pc pc pc pc pc pc pc
Chapter 14: Accounts Payable and Other Liabilities
pc pc pc pc pc pc
Chapter 15: Debt and Equity Capital
pc pc pc pc pc
Chapter 16: Auditing Operations and Completing the Audit
pc pc pc pc pc pc pc
Chapter 17: Auditors’ Reports
pc pc pc
Chapter 18: Integrated Audits of Public Companies
pc pc pc pc pc pc
Chapter 19: Additional Assurance Services: Historical FinancialInformation
pc pc pc pc pc pc
Chapter 20: Additional Assurance Services: Other Information
pc pc pc pc pc pc
Chapter 21: Internal, Operational, and Compliance Auditing
pc pc pc pc pc pc
,CHAPTER 1 pc
The Role of the Publ pc pc pc pc
ic Accountant in the
pc pc pc
American Economy pc
Review Questions
pc
1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously is
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
sued financial statements as a result of accounting irregularities and fraud. Especially responsible we
pc pc pc pc pc pc pc pc pc pc pc pc pc
rethe very visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and consti
c
p pc pc pc pc pc pc pc pc pc pc pc pc pc pc
tuted the largest companies in American history to do so. The extent of the accounting irregularities
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
and fraud being investigated and disclosed brought into question the effectiveness of financial statem
pc pc pc pc pc pc pc pc pc pc pc pc pc
ent audits. In addition, the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accou
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
nting firms, on charges of destroying documents related to the Enron case brought into question the
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
ethics standards of the profession.
pc pc pc pc
1-2 Assurance services are professional services that enhance the quality of information, or its context,
pc pc pc pc pc pc pc pc pc pc pc pc pc pc
for decision-pc
making. The two types are: (a) those that increase the reliability of information and (b) those that i
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
nvolve putting information in a form or context that facilitates decision-making.
pc pc pc pc pc pc pc pc pc pc
1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall asser
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
tion,made by management, most frequently is that the financial statements follow generally accepted a
c
p pc pc pc pc pc pc pc pc pc pc pc pc pc
ccounting principles. pc
1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exc
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
hange and by the rules of the Securities and Exchange Commission to provide an audit report with t
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
heannual financial statements furnished to its stockholders. It also is required to engage the auditors t
c
p pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
o provide an opinion on its internal control. Apart from legal requirements, however, a large listed
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
corporation recognizes that it must maintain investor confidence in the reliability of its financial state
pc pc pc pc pc pc pc pc pc pc pc pc pc pc
ments and internal control over financial reporting if it is to continue to be able to secure capital fr
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
om the public. The report by a firm of certified public accountants adds credibility to the financial sta
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
tements prepared by the corporation. When a small family-
pc pc pc pc p c pc pc pc
owned enterprise elects to have an audit, the purpose usually is to use the auditors' report to support
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
an application for a bank loan.
pc pc pc pc pc
, 1-5 A report by an independent public accountant concerning the fairness of a company's financial statem
pc pc pc pc pc pc pc pc pc pc pc pc pc pc
entsis commonly required in the following situations:
c
p pc pc pc pc pc pc
(1) Application for a bank loan. pc pc pc pc
(2) Establishing credit for purchase of merchandise, equipment, or other assets.
pc pc pc pc pc pc pc pc pc
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockhol
pc pc pc pc pc pc pc pc pc pc pc
dersor partners). pc pc
(4) Issuance of securities by a corporation. pc pc pc pc pc
(5) Annual financial statements by a corporation with securities listed on a stock exchange or tr
pc pc pc pc pc pc pc pc pc pc pc pc pc pc
adedover the counter. pc pc pc
(6) Sale of an ongoing business.
pc pc pc pc
(7) Termination of a partnership. pc pc pc
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared fo
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
llowing the appropriate criteria, usually generally accepted accounting principles. As such, an increas
pc pc pc pc pc pc pc pc pc pc pc pc
ein credibility results in financial statements that can be believed and relied upon by third parties.
c
p pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
1-7 Business risk is the risk that the investment will be impaired because a company invested in is una
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
ble tomeet its financial obligations due to economic conditions or poor management decisions. Infor
pc pc pc pc pc pc pc pc pc pc pc pc pc pc
mation risk is the risk that the information used to assess business risk is not accurate. Auditors ca
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
n directly reduce information risk, but have only limited effect on business risk.
pc pc pc pc pc pc pc pc pc pc pc pc
1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection o
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
f fraud. Audit work centered on the balance sheet, because the income statement was regarded as hig
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
hly confidential and not for public disclosure. Today, the principal objective of auditing is to form
pc pc pc pc pc pc p c pc pc pc pc pc pc pc pc pc
an opinion on the fairness of financial statements and their conformity with generally accepted accoun
pc pc pc pc pc pc pc pc pc pc pc pc pc pc
ting principles. But the professional standards also require that an audit be designed to provide reaso
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
nable assurance of detecting material misstatements, due to errors or fraud. Particular emphasis is
pc pc pc pc pc pc pc pc pc pc p c pc pc pc
placed on the income statement which is of great importance to investors. Auditing today also has th
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
e objectives ofmeeting the requirements of the Securities and Exchange Commission (SEC) and the
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
Public Company Accounting Oversight Board for public companies.
pc pc pc pc pc pc pc
1-9 The statement is incorrect. The increasing integrated databases of today, along with available a
pc pc pc pc pc pc pc pc pc pc pc pc pc
uditprocedures make audited entire populations a possibility in many situations.
c
p pc pc pc pc pc pc pc pc pc
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
organization. It involves more subjective judgments than a compliance audit or an audit of financ
pc pc pc pc pc pc pc pc pc pc pc pc pc pc
ial statements because the criteria of effectiveness and efficiency of departmental performance are
pc pc pc pc pc pc pc pc pc pc pc pc
not asclearly established as are many laws and regulations or generally accepted accounting princ
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
iples.
The report prepared after completion of an operational audit is usually directed to managem
pc pc pc pc pc pc pc pc pc pc pc pc pc
entof the organization in which the audit work was done.
c
p pc pc pc pc pc pc pc pc pc
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in com
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
pliance with established criteria. The necessary ingredients are verifiable data and the existence of st
pc pc pc pc pc pc pc pc pc pc pc pc pc pc
andards established by an authoritative body. An operational audit, on the other hand, is a review o
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
f adepartment or other unit of a business or governmental organization to measure the effectiveness
pc c
p pc pc pc pc pc pc pc pc pc pc pc pc pc p
cand efficiency of operations. Internal auditors often perform operational audits as do auditors empl
pc pc pc pc pc pc pc pc pc pc pc pc pc
oyed by the Government Accountability Office (GAO) of the federal government.
pc pc pc pc pc pc pc pc pc pc
1-12 Internal auditors must be independent of the department heads and other line executives whose work
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
theyreview. However, internal auditors are not independent in the same sense as a public accounting f
c
p pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
pc pc
pc Principles Of Auditing And Other Assurance Services
pc pc pc pc pc pc pc
23rd Edition By Ray Whittington Kurt
pc pc pc pc pc pc
ALL Chapters (1 - 21)
pc pc pc pc
, Table of Contents pc pc
Chapter 1: The Role of the Public Accountant in the AmericanEconomy
pc pc pc pc pc pc pc pc pc pc
Chapter 2: Professional Standards
pc pc pc
Chapter 3: Professional Ethics
pc pc pc
Chapter 4: Legal Liability of CPAs
pc pc pc pc pc
Chapter 5: Audit Evidence and Documentation
pc pc pc pc pc
Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding
pc pc pc pc pc pc pc pc pc
Chapter 7: Internal Control
pc pc pc
Chapter 8: Consideration of Internal Control in an InformationTechnology Environment
pc pc pc pc pc pc pc pc pc
Chapter 9: Audit Sampling
pc pc pc
Chapter 10: Cash and Financial Investments
pc pc pc pc pc
Chapter 11: Accounts Receivable, Notes Receivable, andRevenue
pc pc pc pc pc pc
Chapter 12: Inventories and Cost of Goods Sold
pc pc pc pc pc pc pc
Chapter 13: Property, Plant, and Equipment: Depreciation andDepletion
pc pc pc pc pc pc pc
Chapter 14: Accounts Payable and Other Liabilities
pc pc pc pc pc pc
Chapter 15: Debt and Equity Capital
pc pc pc pc pc
Chapter 16: Auditing Operations and Completing the Audit
pc pc pc pc pc pc pc
Chapter 17: Auditors’ Reports
pc pc pc
Chapter 18: Integrated Audits of Public Companies
pc pc pc pc pc pc
Chapter 19: Additional Assurance Services: Historical FinancialInformation
pc pc pc pc pc pc
Chapter 20: Additional Assurance Services: Other Information
pc pc pc pc pc pc
Chapter 21: Internal, Operational, and Compliance Auditing
pc pc pc pc pc pc
,CHAPTER 1 pc
The Role of the Publ pc pc pc pc
ic Accountant in the
pc pc pc
American Economy pc
Review Questions
pc
1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously is
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
sued financial statements as a result of accounting irregularities and fraud. Especially responsible we
pc pc pc pc pc pc pc pc pc pc pc pc pc
rethe very visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and consti
c
p pc pc pc pc pc pc pc pc pc pc pc pc pc pc
tuted the largest companies in American history to do so. The extent of the accounting irregularities
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
and fraud being investigated and disclosed brought into question the effectiveness of financial statem
pc pc pc pc pc pc pc pc pc pc pc pc pc
ent audits. In addition, the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accou
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
nting firms, on charges of destroying documents related to the Enron case brought into question the
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
ethics standards of the profession.
pc pc pc pc
1-2 Assurance services are professional services that enhance the quality of information, or its context,
pc pc pc pc pc pc pc pc pc pc pc pc pc pc
for decision-pc
making. The two types are: (a) those that increase the reliability of information and (b) those that i
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
nvolve putting information in a form or context that facilitates decision-making.
pc pc pc pc pc pc pc pc pc pc
1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall asser
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
tion,made by management, most frequently is that the financial statements follow generally accepted a
c
p pc pc pc pc pc pc pc pc pc pc pc pc pc
ccounting principles. pc
1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exc
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
hange and by the rules of the Securities and Exchange Commission to provide an audit report with t
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
heannual financial statements furnished to its stockholders. It also is required to engage the auditors t
c
p pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
o provide an opinion on its internal control. Apart from legal requirements, however, a large listed
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
corporation recognizes that it must maintain investor confidence in the reliability of its financial state
pc pc pc pc pc pc pc pc pc pc pc pc pc pc
ments and internal control over financial reporting if it is to continue to be able to secure capital fr
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
om the public. The report by a firm of certified public accountants adds credibility to the financial sta
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
tements prepared by the corporation. When a small family-
pc pc pc pc p c pc pc pc
owned enterprise elects to have an audit, the purpose usually is to use the auditors' report to support
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
an application for a bank loan.
pc pc pc pc pc
, 1-5 A report by an independent public accountant concerning the fairness of a company's financial statem
pc pc pc pc pc pc pc pc pc pc pc pc pc pc
entsis commonly required in the following situations:
c
p pc pc pc pc pc pc
(1) Application for a bank loan. pc pc pc pc
(2) Establishing credit for purchase of merchandise, equipment, or other assets.
pc pc pc pc pc pc pc pc pc
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockhol
pc pc pc pc pc pc pc pc pc pc pc
dersor partners). pc pc
(4) Issuance of securities by a corporation. pc pc pc pc pc
(5) Annual financial statements by a corporation with securities listed on a stock exchange or tr
pc pc pc pc pc pc pc pc pc pc pc pc pc pc
adedover the counter. pc pc pc
(6) Sale of an ongoing business.
pc pc pc pc
(7) Termination of a partnership. pc pc pc
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared fo
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
llowing the appropriate criteria, usually generally accepted accounting principles. As such, an increas
pc pc pc pc pc pc pc pc pc pc pc pc
ein credibility results in financial statements that can be believed and relied upon by third parties.
c
p pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
1-7 Business risk is the risk that the investment will be impaired because a company invested in is una
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
ble tomeet its financial obligations due to economic conditions or poor management decisions. Infor
pc pc pc pc pc pc pc pc pc pc pc pc pc pc
mation risk is the risk that the information used to assess business risk is not accurate. Auditors ca
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
n directly reduce information risk, but have only limited effect on business risk.
pc pc pc pc pc pc pc pc pc pc pc pc
1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection o
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
f fraud. Audit work centered on the balance sheet, because the income statement was regarded as hig
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
hly confidential and not for public disclosure. Today, the principal objective of auditing is to form
pc pc pc pc pc pc p c pc pc pc pc pc pc pc pc pc
an opinion on the fairness of financial statements and their conformity with generally accepted accoun
pc pc pc pc pc pc pc pc pc pc pc pc pc pc
ting principles. But the professional standards also require that an audit be designed to provide reaso
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
nable assurance of detecting material misstatements, due to errors or fraud. Particular emphasis is
pc pc pc pc pc pc pc pc pc pc p c pc pc pc
placed on the income statement which is of great importance to investors. Auditing today also has th
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
e objectives ofmeeting the requirements of the Securities and Exchange Commission (SEC) and the
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
Public Company Accounting Oversight Board for public companies.
pc pc pc pc pc pc pc
1-9 The statement is incorrect. The increasing integrated databases of today, along with available a
pc pc pc pc pc pc pc pc pc pc pc pc pc
uditprocedures make audited entire populations a possibility in many situations.
c
p pc pc pc pc pc pc pc pc pc
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
organization. It involves more subjective judgments than a compliance audit or an audit of financ
pc pc pc pc pc pc pc pc pc pc pc pc pc pc
ial statements because the criteria of effectiveness and efficiency of departmental performance are
pc pc pc pc pc pc pc pc pc pc pc pc
not asclearly established as are many laws and regulations or generally accepted accounting princ
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
iples.
The report prepared after completion of an operational audit is usually directed to managem
pc pc pc pc pc pc pc pc pc pc pc pc pc
entof the organization in which the audit work was done.
c
p pc pc pc pc pc pc pc pc pc
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in com
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
pliance with established criteria. The necessary ingredients are verifiable data and the existence of st
pc pc pc pc pc pc pc pc pc pc pc pc pc pc
andards established by an authoritative body. An operational audit, on the other hand, is a review o
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
f adepartment or other unit of a business or governmental organization to measure the effectiveness
pc c
p pc pc pc pc pc pc pc pc pc pc pc pc pc p
cand efficiency of operations. Internal auditors often perform operational audits as do auditors empl
pc pc pc pc pc pc pc pc pc pc pc pc pc
oyed by the Government Accountability Office (GAO) of the federal government.
pc pc pc pc pc pc pc pc pc pc
1-12 Internal auditors must be independent of the department heads and other line executives whose work
pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
theyreview. However, internal auditors are not independent in the same sense as a public accounting f
c
p pc pc pc pc pc pc pc pc pc pc pc pc pc pc pc
