SOLUTION MANUAL FOR
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&t Principles Of Auditing And Other Assurance Services
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23rd Edition By Ray Whittington Kurt
&t &t &t &t &t &t
ALL Chapters (1 - 21)
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, Table of Contents &t &t
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
&t &t &t &t &t
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 &t
The Role of the Pub &t &t &t &t
lic Accountant in the
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American Economy &t
Review Questions
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1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
issued financial statements as a result of accounting irregularities and fraud. Especially responsible
&t &t &t &t &t &t &t &t &t &t &t &t &t
were the very visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and c
&
t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
onstituted the largest companies in American history to do so. The extent of the accounting irregul
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
arities and fraud being investigated and disclosed brought into question the effectiveness of financia
&t &t &t &t &t &t &t &t &t &t &t &t &t
l statement audits. In addition, the criminal conviction of Arthur Andersen, LLP, one of the then Bi
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
g 5 accounting firms, on charges of destroying documents related to the Enron case brought into q
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
uestion 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-
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making. The two types are: (a) those that increase the reliability of information and (b) those that
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
involve putting information in a form or context that facilitates decision-making.
&t &t &t &t &t &t &t &t &t &t &t
1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall ass
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
ertion, made by management, most frequently is that the financial statements follow generally accepte
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d 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 e
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
xchange and by the rules of the Securities and Exchange Commission to provide an audit report wi
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
th the annual financial statements furnished to its stockholders. It also is required to engage the audi
&t &
t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
tors to provide an opinion on its internal control. Apart from legal requirements, however, a large
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
listed corporation recognizes that it must maintain investor confidence in the reliability of its financi
&t &t &t &t &t &t &t &t &t &t &t &t &t &t
al statements and internal control over financial reporting if it is to continue to be able to secure
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
capital from the public. The report by a firm of certified public accountants adds credibility to the fi
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
nancial statements prepared by the corporation. When a small family-
&t &t &t &t &t & t &t &t &t
owned enterprise elects to have an audit, the purpose usually is to use the auditors' report to support
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
&tan application for a bank loan.
&t &t &t &t &t
, 1-5 A report by an independent public accountant concerning the fairness of a company's financial state
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ments is commonly required in the following situations:
&
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(1) Application for a bank loan. &t &t &t &t
(2) Establishing credit for purchase of merchandise, equipment, or other assets.
&t &t &t &t &t &t &t &t &t
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockho
&t &t &t &t &t &t &t &t &t &t &t
lders or partners). &
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(4) Issuance of securities by a corporation.
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(5) Annual financial statements by a corporation with securities listed on a stock exchange or
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traded over the counter. &
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(6) Sale of an ongoing business.
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(7) Termination of a partnership. &t &t &t
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
following the appropriate criteria, usually generally accepted accounting principles. As such, an incr
&t &t &t &t &t &t &t &t &t &t &t &t
ease in credibility 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 un
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
able to meet its financial obligations due to economic conditions or poor management decisions. Inf
&t &
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ormation risk is the risk that the information used to assess business risk is not accurate. Auditor
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
s can directly reduce information risk, but have only limited effect on business risk.
&t &t &t &t &t &t &t &t &t &t &t &t &t
1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
of fraud. Audit work centered on the balance sheet, because the income statement was regarded as
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &
highly confidential and not for public disclosure. Today, the principal objective of auditing is to
t &t &t &t &t &t &t & t &t &t &t &t &t &t &t &t
form an opinion on the fairness of financial statements and their conformity with generally accepted
&t &t &t &t &t &t &t &t &t &t &t &t &t &t
accounting principles. But the professional standards also require that an audit be designed to prov
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
ide reasonable assurance of detecting material misstatements, due to errors or fraud. Particular em
&t &t &t &t &t &t &t &t &t &t &t & t &t
phasis is placed on the income statement which is of great importance to investors. Auditing today
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &
also has the objectives of meeting the requirements of the Securities and Exchange Commission (SE
t &t &t &t &t &
t &t &t &t &t &t &t &t &t &t
C) and the Public Company Accounting Oversight Board for public companies.
&t &t &t &t &t &t &t &t &t &t
1-9 The statement is incorrect. The increasing integrated databases of today, along with available
&t &t &t &t &t &t &t &t &t &t &t &t &
audit procedures make audited entire populations a possibility in many situations.
t &
t &t &t &t &t &t &t &t &t &t
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of a
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
n organization. It involves more subjective judgments than a compliance audit or an audit of fin
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
ancial statements because the criteria of effectiveness and efficiency of departmental performanc
&t &t &t &t &t &t &t &t &t &t &t
e are not as clearly established as are many laws and regulations or generally accepted accountin
&t &t &t &
t &t &t &t &t &t &t &t &t &t &t &t
g principles.
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The report prepared after completion of an operational audit is usually directed to manage
&t &t &t &t &t &t &t &t &t &t &t &t &t
ment of the organization in which the audit work was done.
&
t &t &t &t &t &t &t &t &t &t
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in co
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
mpliance with established criteria. The necessary ingredients are verifiable data and the existence o
&t &t &t &t &t &t &t &t &t &t &t &t &t
f standards established by an authoritative body. An operational audit, on the other hand, is a revi
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
ew of a department or other unit of a business or governmental organization to measure the effecti
&t &t &
t &t &t &t &t &t &t &t &t &t &t &t &t &t
veness and efficiency of operations. Internal auditors often perform operational audits as do audito
&t &t &t &t &t &t &t &t &t &t &t &t &t
rs employed by the Government Accountability Office (GAO) of the federal government.
&t &t &t &t &t &t &t &t &t &t &t
1-12 Internal auditors must be independent of the department heads and other line executives whose wor
&t &t &t &t &t &t &t &t &t &t &t &t &t &t
&t &t
&t Principles Of Auditing And Other Assurance Services
&t &t &t &t &t &t &t
23rd Edition By Ray Whittington Kurt
&t &t &t &t &t &t
ALL Chapters (1 - 21)
&t &t &t &t
, Table of Contents &t &t
Chapter 1: The Role of the Public Accountant in the AmericanEconomy
&t &t &t &t &t &t &t &t &t &t
Chapter 2: Professional Standards
&t &t &t
Chapter 3: Professional Ethics
&t &t &t
Chapter 4: Legal Liability of CPAs
&t &t &t &t &t
Chapter 5: Audit Evidence and Documentation
&t &t &t &t &t
Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding
&t &t &t &t &t &t &t &t &t
Chapter 7: Internal Control
&t &t &t
Chapter 8: Consideration of Internal Control in an InformationTechnology Environment
&t &t &t &t &t &t &t &t &t
Chapter 9: Audit Sampling
&t &t &t
Chapter 10: Cash and Financial Investments
&t &t &t &t &t
Chapter 11: Accounts Receivable, Notes Receivable, andRevenue
&t &t &t &t &t &t
Chapter 12: Inventories and Cost of Goods Sold
&t &t &t &t &t &t &t
Chapter 13: Property, Plant, and Equipment: Depreciation andDepletion
&t &t &t &t &t &t &t
Chapter 14: Accounts Payable and Other Liabilities
&t &t &t &t &t &t
Chapter 15: Debt and Equity Capital
&t &t &t &t &t
Chapter 16: Auditing Operations and Completing the Audit
&t &t &t &t &t &t &t
Chapter 17: Auditors’ Reports
&t &t &t
Chapter 18: Integrated Audits of Public Companies
&t &t &t &t &t &t
Chapter 19: Additional Assurance Services: Historical FinancialInformation
&t &t &t &t &t &t
Chapter 20: Additional Assurance Services: Other Information
&t &t &t &t &t &t
Chapter 21: Internal, Operational, and Compliance Auditing
&t &t &t &t &t &t
,CHAPTER 1 &t
The Role of the Pub &t &t &t &t
lic Accountant in the
&t &t &t
American Economy &t
Review Questions
&t
1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
issued financial statements as a result of accounting irregularities and fraud. Especially responsible
&t &t &t &t &t &t &t &t &t &t &t &t &t
were the very visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and c
&
t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
onstituted the largest companies in American history to do so. The extent of the accounting irregul
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
arities and fraud being investigated and disclosed brought into question the effectiveness of financia
&t &t &t &t &t &t &t &t &t &t &t &t &t
l statement audits. In addition, the criminal conviction of Arthur Andersen, LLP, one of the then Bi
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
g 5 accounting firms, on charges of destroying documents related to the Enron case brought into q
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
uestion the ethics standards of the profession.
&t &t &t &t &t &t
1-2 Assurance services are professional services that enhance the quality of information, or its context
&t &t &t &t &t &t &t &t &t &t &t &t &t
, for decision-
&t &t
making. The two types are: (a) those that increase the reliability of information and (b) those that
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
involve putting information in a form or context that facilitates decision-making.
&t &t &t &t &t &t &t &t &t &t &t
1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall ass
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
ertion, made by management, most frequently is that the financial statements follow generally accepte
&
t &t &t &t &t &t &t &t &t &t &t &t &t
d accounting principles.
&t &t
1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock e
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
xchange and by the rules of the Securities and Exchange Commission to provide an audit report wi
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
th the annual financial statements furnished to its stockholders. It also is required to engage the audi
&t &
t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
tors to provide an opinion on its internal control. Apart from legal requirements, however, a large
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
listed corporation recognizes that it must maintain investor confidence in the reliability of its financi
&t &t &t &t &t &t &t &t &t &t &t &t &t &t
al statements and internal control over financial reporting if it is to continue to be able to secure
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
capital from the public. The report by a firm of certified public accountants adds credibility to the fi
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
nancial statements prepared by the corporation. When a small family-
&t &t &t &t &t & t &t &t &t
owned enterprise elects to have an audit, the purpose usually is to use the auditors' report to support
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
&tan application for a bank loan.
&t &t &t &t &t
, 1-5 A report by an independent public accountant concerning the fairness of a company's financial state
&t &t &t &t &t &t &t &t &t &t &t &t &t &t
ments is commonly required in the following situations:
&
t &t &t &t &t &t &t
(1) Application for a bank loan. &t &t &t &t
(2) Establishing credit for purchase of merchandise, equipment, or other assets.
&t &t &t &t &t &t &t &t &t
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockho
&t &t &t &t &t &t &t &t &t &t &t
lders or partners). &
t &t
(4) Issuance of securities by a corporation.
&t &t &t &t &t
(5) Annual financial statements by a corporation with securities listed on a stock exchange or
&t &t &t &t &t &t &t &t &t &t &t &t &t &t
traded over the counter. &
t &t &t
(6) Sale of an ongoing business.
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(7) Termination of a partnership. &t &t &t
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
following the appropriate criteria, usually generally accepted accounting principles. As such, an incr
&t &t &t &t &t &t &t &t &t &t &t &t
ease in credibility results in financial statements that can be believed and relied upon by third parties
&
t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
.
1-7 Business risk is the risk that the investment will be impaired because a company invested in is un
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
able to meet its financial obligations due to economic conditions or poor management decisions. Inf
&t &
t &t &t &t &t &t &t &t &t &t &t &t &t
ormation risk is the risk that the information used to assess business risk is not accurate. Auditor
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
s can directly reduce information risk, but have only limited effect on business risk.
&t &t &t &t &t &t &t &t &t &t &t &t &t
1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
of fraud. Audit work centered on the balance sheet, because the income statement was regarded as
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &
highly confidential and not for public disclosure. Today, the principal objective of auditing is to
t &t &t &t &t &t &t & t &t &t &t &t &t &t &t &t
form an opinion on the fairness of financial statements and their conformity with generally accepted
&t &t &t &t &t &t &t &t &t &t &t &t &t &t
accounting principles. But the professional standards also require that an audit be designed to prov
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
ide reasonable assurance of detecting material misstatements, due to errors or fraud. Particular em
&t &t &t &t &t &t &t &t &t &t &t & t &t
phasis is placed on the income statement which is of great importance to investors. Auditing today
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &
also has the objectives of meeting the requirements of the Securities and Exchange Commission (SE
t &t &t &t &t &
t &t &t &t &t &t &t &t &t &t
C) and the Public Company Accounting Oversight Board for public companies.
&t &t &t &t &t &t &t &t &t &t
1-9 The statement is incorrect. The increasing integrated databases of today, along with available
&t &t &t &t &t &t &t &t &t &t &t &t &
audit procedures make audited entire populations a possibility in many situations.
t &
t &t &t &t &t &t &t &t &t &t
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of a
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
n organization. It involves more subjective judgments than a compliance audit or an audit of fin
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
ancial statements because the criteria of effectiveness and efficiency of departmental performanc
&t &t &t &t &t &t &t &t &t &t &t
e are not as clearly established as are many laws and regulations or generally accepted accountin
&t &t &t &
t &t &t &t &t &t &t &t &t &t &t &t
g principles.
&t
The report prepared after completion of an operational audit is usually directed to manage
&t &t &t &t &t &t &t &t &t &t &t &t &t
ment 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 co
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
mpliance with established criteria. The necessary ingredients are verifiable data and the existence o
&t &t &t &t &t &t &t &t &t &t &t &t &t
f standards established by an authoritative body. An operational audit, on the other hand, is a revi
&t &t &t &t &t &t &t &t &t &t &t &t &t &t &t &t
ew of a department or other unit of a business or governmental organization to measure the effecti
&t &t &
t &t &t &t &t &t &t &t &t &t &t &t &t &t
veness and efficiency of operations. Internal auditors often perform operational audits as do audito
&t &t &t &t &t &t &t &t &t &t &t &t &t
rs employed by the Government Accountability Office (GAO) of the federal government.
&t &t &t &t &t &t &t &t &t &t &t
1-12 Internal auditors must be independent of the department heads and other line executives whose wor
&t &t &t &t &t &t &t &t &t &t &t &t &t &t
