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
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Principles Of Auditing And Other Assurance Services
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23rd Edition By Ray Whittington Kurt
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ALL Chapters (1 - 21)
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,  Table of Contents ty ty




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 ty




The Role of the ty ty ty




ty Public Accountant in ty ty




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American Economy ty




Review Questions
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1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously
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issued financial statements as a result of accounting irregularities and fraud. Especially
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responsible werethe very visible Enron and WorldCom fraud cases. Both companies filed for
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bankruptcy and constituted the largest companies in American history to do so. The extent of the
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accounting irregularities and fraud being investigated and disclosed brought into question the
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effectiveness of financial statement audits. In addition, the criminal conviction of Arthur Andersen,
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LLP, one of the then Big 5 accounting firms, on charges of destroying documents related to the
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Enron case brought into question the ethics standards of the profession.
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1-2 Assurance services are professional services that enhance the quality of information, or its context,
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for decision-making. The two types are: (a) those that increase the reliability of information and
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(b) those that involve 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
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assertion,made by management, most frequently is that the financial statements follow generally
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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
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exchange and by the rules of the Securities and Exchange Commission to provide an audit report
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with theannual financial statements furnished to its stockholders. It also is required to engage the
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auditors to provide an opinion on its internal control. Apart from legal requirements, however, a
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large listed corporation recognizes that it must maintain investor confidence in the reliability of its
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financial statements and internal control over financial reporting if it is to continue to be able to
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secure capital from the public. The report by a firm of certified public accountants adds credibility
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to the financial statements prepared by the corporation. When a small family-owned enterprise
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elects to have an audit, the purpose usually is to use the auditors' report to support an application
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for a bank loan.
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, 1-5 A report by an independent public accountant concerning the fairness of a company's financial
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statementsis commonly required in the following situations:
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(1) Application for a bank loan. ty ty ty ty


(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
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(stockholdersor partners).
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(4) Issuance of securities by a corporation. ty ty ty ty ty


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




1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared
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following the appropriate criteria, usually generally accepted accounting principles. As such, an
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increasein credibility results in financial statements that can be believed and relied upon by third
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parties.
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1-7 Business risk is the risk that the investment will be impaired because a company invested in is
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unable tomeet its financial obligations due to economic conditions or poor management decisions.
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Information risk is the risk that the information used to assess business risk is not accurate.
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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
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of fraud. Audit work centered on the balance sheet, because the income statement was regarded as
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highly confidential and not for public disclosure. Today, the principal objective of auditing is to
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form an opinion on the fairness of financial statements and their conformity with generally
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accepted accounting principles. But the professional standards also require that an audit be
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designed to provide reasonable assurance of detecting material misstatements, due to errors or
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fraud. Particular emphasis is placed on the income statement which is of great importance to
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investors. Auditing today also has the objectives ofmeeting the requirements of the Securities and
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Exchange Commission (SEC) and the Public Company Accounting Oversight Board for public
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companies.
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1-9 The statement is incorrect. The increasing integrated databases of today, along with available
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auditprocedures 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
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an organization. It involves more subjective judgments than a compliance audit or an audit of
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financial statements because the criteria of effectiveness and efficiency of departmental
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performance are not asclearly established as are many laws and regulations or generally
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accepted accounting principles.
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The report prepared after completion of an operational audit is usually directed to
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managemento f 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
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compliance with established criteria. The necessary ingredients are verifiable data and the
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existence of standards established by an authoritative body. An operational audit, on the other
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hand, is a review of adepartment or other unit of a business or governmental organization to
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measure the effectiveness and efficiency of operations. Internal auditors often perform operational
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audits as do auditors employed by the Government Accountability Office (GAO) of the federal
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government.
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