Principles of Auditing and Other
ST
Assurance Services – 22nd Edition
SOLUTION
UV
MANUAL
IA
_A
Ray Whittington
PP
Kurt Pany
RO
Comprehensive Solutions Manual for Instructors
VE
and Students
D?
© Ray Whittington & Kurt Pany
All rights reserved. Reproduction or distribution without permission is prohibited.
??
©STUDYSTREAM
, Table of Contents
Chapter 1: The Role of the Public Accountant in the American Economy
ST
Chapter 2: Professional Standards
Chapter 3: Professional Ethics
SSUTT
Chapter 4: Legal Liability of CPAs
Chapter 5: Audit Evidence and Documentation
UV UVIV
Chapter 6: Audit Planning, Understanding the Client, Assessing Risks, and Responding
Chapter 7: Internal Control
AIIA_A
Chapter 8: Consideration of Internal Control in an Information Technology Environment
Chapter 9: Audit Sampling
_A_A
Chapter 10: Cash and Financial Investments
APPPP
Chapter 11: Accounts Receivable, Notes Receivable, and Revenue
Chapter 12: Inventories and Cost of Goods Sold
PPR
Chapter 13: Property, Plant, and Equipment: Depreciation and Depletion
Chapter 14: Accounts Payable and Other Liabilities
ROO
Chapter 15: Debt and Equity Capital
Chapter 16: Auditing Operations and Completing the Audit
VVEE
Chapter 17: Auditors’ Reports
Chapter 18: Integrated Audits of Public Companies
DD?
Chapter 19: Additional Assurance Services: Historical Financial Information
Chapter 20: Additional Assurance Services: Other Information
???
Chapter 21: Internal, Operational, and Compliance Auditing
?
, The Role of the
Public Accountant in the
American Economy
ST
CHAPTER 1
SSUTT
Review Questions
1-1 The ―crisis of credibilityǁ largely arose from the number of companies that restated their previously
UV
issued financial statements as a result of accounting irregularities and fraud. Especially responsible were
UVIV
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
AIIA_A
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
_A_A
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,
APPPP
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
PPR
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
ROO
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.
VVEE
DD?
???
?
, 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.
ST
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholders
or partners).
(4) Issuance of securities by a corporation.
SSUTT
(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.
UV
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared
UVIV
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.
AIIA_A
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.
_A_A
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
APPPP
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
PPR
meeting the requirements of the Securities and Exchange Commission (SEC) and the Public Company
Accounting Oversight Board for public companies.
ROO
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
VVEE
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.
DD?
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.
ST
Assurance Services – 22nd Edition
SOLUTION
UV
MANUAL
IA
_A
Ray Whittington
PP
Kurt Pany
RO
Comprehensive Solutions Manual for Instructors
VE
and Students
D?
© Ray Whittington & Kurt Pany
All rights reserved. Reproduction or distribution without permission is prohibited.
??
©STUDYSTREAM
, Table of Contents
Chapter 1: The Role of the Public Accountant in the American Economy
ST
Chapter 2: Professional Standards
Chapter 3: Professional Ethics
SSUTT
Chapter 4: Legal Liability of CPAs
Chapter 5: Audit Evidence and Documentation
UV UVIV
Chapter 6: Audit Planning, Understanding the Client, Assessing Risks, and Responding
Chapter 7: Internal Control
AIIA_A
Chapter 8: Consideration of Internal Control in an Information Technology Environment
Chapter 9: Audit Sampling
_A_A
Chapter 10: Cash and Financial Investments
APPPP
Chapter 11: Accounts Receivable, Notes Receivable, and Revenue
Chapter 12: Inventories and Cost of Goods Sold
PPR
Chapter 13: Property, Plant, and Equipment: Depreciation and Depletion
Chapter 14: Accounts Payable and Other Liabilities
ROO
Chapter 15: Debt and Equity Capital
Chapter 16: Auditing Operations and Completing the Audit
VVEE
Chapter 17: Auditors’ Reports
Chapter 18: Integrated Audits of Public Companies
DD?
Chapter 19: Additional Assurance Services: Historical Financial Information
Chapter 20: Additional Assurance Services: Other Information
???
Chapter 21: Internal, Operational, and Compliance Auditing
?
, The Role of the
Public Accountant in the
American Economy
ST
CHAPTER 1
SSUTT
Review Questions
1-1 The ―crisis of credibilityǁ largely arose from the number of companies that restated their previously
UV
issued financial statements as a result of accounting irregularities and fraud. Especially responsible were
UVIV
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
AIIA_A
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
_A_A
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,
APPPP
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
PPR
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
ROO
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.
VVEE
DD?
???
?
, 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.
ST
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholders
or partners).
(4) Issuance of securities by a corporation.
SSUTT
(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.
UV
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared
UVIV
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.
AIIA_A
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.
_A_A
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
APPPP
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
PPR
meeting the requirements of the Securities and Exchange Commission (SEC) and the Public Company
Accounting Oversight Board for public companies.
ROO
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
VVEE
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.
DD?
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.
