SOLUTION MANUAL FOR
Principles Of Auditing And Other Assurance Services
23rd Edition By Ray Whittington Kurt
ALL Chapters (1 - 21)
, • Table of Contents
Chapter 1: The Role of the Public Accountant in the AmericanEconomy
Chapter 2: Professional Standards
Chapter 3: Professional Ethics
Chapter 4: Legal Liability of CPAs
Chapter 5: Audit Evidence and Documentation
Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding
Chapter 7: Internal Control
Chapter 8: Consideration of Internal Control in an InformationTechnology Environment
Chapter 9: Audit Sampling
Chapter 10: Cash and Financial Investments
Chapter 11: Accounts Receivable, Notes Receivable, andRevenue
Chapter 12: Inventories and Cost of Goods Sold
Chapter 13: Property, Plant, and Equipment: Depreciation andDepletion
Chapter 14: Accounts Payable and Other Liabilities
Chapter 15: Debt and Equity Capital
Chapter 16: Auditing Operations and Completing the Audit
Chapter 17: Auditors’ Reports
Chapter 18: Integrated Audits of Public Companies
Chapter 19: Additional Assurance Services: Historical FinancialInformation
Chapter 20: Additional Assurance Services: Other Information
Chapter 21: Internal, Operational, and Compliance Auditing
,CHAPTER 1
The Role of the
Public Accountant in the
American Economy
Review Questions
1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously
issued financial statements as a result of accounting irregularities and fraud. Especially responsible were
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
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
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,
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
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
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.
, 1-5 Aireporti byianiindependenti publiciaccountanti concerningitheifairnessi ofiai company'si financialistatementsiisico
mmonlyirequirediinitheifollowingisituations:
(1) Applicationifori ai bankiloan.
(2) Establishingicrediti fori purchaseiofi merchandise,iequipment,iori otheri assets.
(3) Reportingioperatingiresults,i financialiposition,iandicashiflowsi toiabsenteeiownersi (stockholdersiori
partners).
(4) Issuanceiofi securitiesi byiai corporation.
(5) Annualifinancialistatementsi byiai corporationiwithisecuritiesi listedioniai stockiexchangeiori tradediove
ritheicounter.
(6) Saleiofianiongoingibusiness.
(7) Terminationiofi ai partnership.
1-6 Toiaddicredibilityitoifinancialistatementsi isitoiincreaseitheilikelihoodithati theyihaveibeenipreparedifollowingit
heiappropriateicriteria,iusuallyigenerallyiacceptediaccountingiprinciples.i Asi such,ianiincreaseiinicredibilityire
sultsi inifinancialistatementsithati canibeibelievediandireliediuponibyithirdiparties.
1-7 Businessi riskiisi theiriskithati theiinvestmenti willibeiimpairedibecauseiai companyiinvestediiniisi unableitoimeeti
itsifinancialiobligationsidueitoieconomiciconditionsioripoorimanagementidecisions.iInformationiriskiisitheiri
skithatitheiinformationiuseditoiassessibusinessiriskiisinotiaccurate.iAuditorsicanidirectlyireduceiinformatio
nirisk,ibutihaveionlyilimitedieffectionibusinessirisk.
1-8 Atitheibeginningiofitheicentury,itheiprincipaliobjectiveiofiauditingiwasi theipreventioniandidetectioniofifraud.iA
uditiworkicenteredionitheibalanceisheet,ibecauseitheiincomeistatementi wasi regardediasihighlyiconfidentialian
dinoti fori publicidisclosure.i Today,i theiprincipaliobjectiveiofi auditingiisi toiformianiopinionionitheifairnessi ofifi
nancialistatementsi anditheiriconformityiwithigenerallyiacceptediaccountingiprinciples.i Buti theiprofessionalist
andardsi alsoirequireithati aniauditi beidesigneditoiprovideireasonableiassuranceiofi detectingimaterialimisstatem
ents,i dueitoierrorsi ori fraud.i Particulari emphasisi isi placedionitheiincomeistatementiwhichiisi ofigreati importanc
eitoiinvestors.i Auditingitodayialsoihasi theiobjectivesi ofimeetingitheirequirementsi ofitheiSecuritiesi andiExchan
geiCommissioni(SEC)i anditheiPubliciCompanyiAccountingiOversightiBoardiforipublicicompanies.
1-9 Theistatementi isi incorrect.iTheiincreasingiintegratedidatabasesi ofi today,ialongiwithiavailableiauditipro
ceduresimakeiauditedientireipopulationsiaipossibilityiinimanyisituations.
1-10 Anioperationaliauditi attemptsitoimeasureitheieffectivenessi andiefficiencyiofiaispecificiuniti ofianiorganizat
ion.i Itiinvolvesi moreisubjectiveijudgmentsithaniaicomplianceiauditi orianiauditi ofifinancialistatementsi bec
auseitheicriteriai ofi effectivenessi andiefficiencyiofi departmentaliperformanceiareinoti asiclearlyiestablishedi
asi areimanyilawsi andiregulationsiorigenerallyiacceptediaccountingiprinciples.
Theireporti preparediaftericompletioniofi anioperationaliauditi isi usuallyidirecteditoimanagementiofithe
iorganizationiiniwhichitheiauditiworkiwasidone.
1-11 Aicomplianceiauditiisianiaudititoidetermineiwhetherifinancialireportsioriotheriassertionsiarei inicomplianceiwi
thiestablishedicriteria.i Theinecessaryiingredientsi areiverifiableidatai anditheiexistenceiofistandardsi establishe
dibyianiauthoritativeibody.i Anioperationaliaudit,ionitheiotheri hand,iisi ai reviewiofiaidepartmenti oriotheriuniti o
fiaibusinessi origovernmentaliorganizationitoimeasureitheieffectivenessi andiefficiencyiofioperations.i Internali
auditorsi ofteniperformioperationaliauditsi asi doiauditorsi employedibyitheiGovernmentiAccountabilityiOffi
cei(GAO)iofitheifederaligovernment.
1-12 Internaliauditorsi musti beiindependenti ofitheidepartmenti headsi andiotherilineiexecutivesiwhoseiworkitheyirevi
ew.iHowever,iinternaliauditorsiareinotiindependentiinitheisameisenseiasiaipubliciaccountingifirm.
Principles Of Auditing And Other Assurance Services
23rd Edition By Ray Whittington Kurt
ALL Chapters (1 - 21)
, • Table of Contents
Chapter 1: The Role of the Public Accountant in the AmericanEconomy
Chapter 2: Professional Standards
Chapter 3: Professional Ethics
Chapter 4: Legal Liability of CPAs
Chapter 5: Audit Evidence and Documentation
Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding
Chapter 7: Internal Control
Chapter 8: Consideration of Internal Control in an InformationTechnology Environment
Chapter 9: Audit Sampling
Chapter 10: Cash and Financial Investments
Chapter 11: Accounts Receivable, Notes Receivable, andRevenue
Chapter 12: Inventories and Cost of Goods Sold
Chapter 13: Property, Plant, and Equipment: Depreciation andDepletion
Chapter 14: Accounts Payable and Other Liabilities
Chapter 15: Debt and Equity Capital
Chapter 16: Auditing Operations and Completing the Audit
Chapter 17: Auditors’ Reports
Chapter 18: Integrated Audits of Public Companies
Chapter 19: Additional Assurance Services: Historical FinancialInformation
Chapter 20: Additional Assurance Services: Other Information
Chapter 21: Internal, Operational, and Compliance Auditing
,CHAPTER 1
The Role of the
Public Accountant in the
American Economy
Review Questions
1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously
issued financial statements as a result of accounting irregularities and fraud. Especially responsible were
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
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
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,
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
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
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.
, 1-5 Aireporti byianiindependenti publiciaccountanti concerningitheifairnessi ofiai company'si financialistatementsiisico
mmonlyirequirediinitheifollowingisituations:
(1) Applicationifori ai bankiloan.
(2) Establishingicrediti fori purchaseiofi merchandise,iequipment,iori otheri assets.
(3) Reportingioperatingiresults,i financialiposition,iandicashiflowsi toiabsenteeiownersi (stockholdersiori
partners).
(4) Issuanceiofi securitiesi byiai corporation.
(5) Annualifinancialistatementsi byiai corporationiwithisecuritiesi listedioniai stockiexchangeiori tradediove
ritheicounter.
(6) Saleiofianiongoingibusiness.
(7) Terminationiofi ai partnership.
1-6 Toiaddicredibilityitoifinancialistatementsi isitoiincreaseitheilikelihoodithati theyihaveibeenipreparedifollowingit
heiappropriateicriteria,iusuallyigenerallyiacceptediaccountingiprinciples.i Asi such,ianiincreaseiinicredibilityire
sultsi inifinancialistatementsithati canibeibelievediandireliediuponibyithirdiparties.
1-7 Businessi riskiisi theiriskithati theiinvestmenti willibeiimpairedibecauseiai companyiinvestediiniisi unableitoimeeti
itsifinancialiobligationsidueitoieconomiciconditionsioripoorimanagementidecisions.iInformationiriskiisitheiri
skithatitheiinformationiuseditoiassessibusinessiriskiisinotiaccurate.iAuditorsicanidirectlyireduceiinformatio
nirisk,ibutihaveionlyilimitedieffectionibusinessirisk.
1-8 Atitheibeginningiofitheicentury,itheiprincipaliobjectiveiofiauditingiwasi theipreventioniandidetectioniofifraud.iA
uditiworkicenteredionitheibalanceisheet,ibecauseitheiincomeistatementi wasi regardediasihighlyiconfidentialian
dinoti fori publicidisclosure.i Today,i theiprincipaliobjectiveiofi auditingiisi toiformianiopinionionitheifairnessi ofifi
nancialistatementsi anditheiriconformityiwithigenerallyiacceptediaccountingiprinciples.i Buti theiprofessionalist
andardsi alsoirequireithati aniauditi beidesigneditoiprovideireasonableiassuranceiofi detectingimaterialimisstatem
ents,i dueitoierrorsi ori fraud.i Particulari emphasisi isi placedionitheiincomeistatementiwhichiisi ofigreati importanc
eitoiinvestors.i Auditingitodayialsoihasi theiobjectivesi ofimeetingitheirequirementsi ofitheiSecuritiesi andiExchan
geiCommissioni(SEC)i anditheiPubliciCompanyiAccountingiOversightiBoardiforipublicicompanies.
1-9 Theistatementi isi incorrect.iTheiincreasingiintegratedidatabasesi ofi today,ialongiwithiavailableiauditipro
ceduresimakeiauditedientireipopulationsiaipossibilityiinimanyisituations.
1-10 Anioperationaliauditi attemptsitoimeasureitheieffectivenessi andiefficiencyiofiaispecificiuniti ofianiorganizat
ion.i Itiinvolvesi moreisubjectiveijudgmentsithaniaicomplianceiauditi orianiauditi ofifinancialistatementsi bec
auseitheicriteriai ofi effectivenessi andiefficiencyiofi departmentaliperformanceiareinoti asiclearlyiestablishedi
asi areimanyilawsi andiregulationsiorigenerallyiacceptediaccountingiprinciples.
Theireporti preparediaftericompletioniofi anioperationaliauditi isi usuallyidirecteditoimanagementiofithe
iorganizationiiniwhichitheiauditiworkiwasidone.
1-11 Aicomplianceiauditiisianiaudititoidetermineiwhetherifinancialireportsioriotheriassertionsiarei inicomplianceiwi
thiestablishedicriteria.i Theinecessaryiingredientsi areiverifiableidatai anditheiexistenceiofistandardsi establishe
dibyianiauthoritativeibody.i Anioperationaliaudit,ionitheiotheri hand,iisi ai reviewiofiaidepartmenti oriotheriuniti o
fiaibusinessi origovernmentaliorganizationitoimeasureitheieffectivenessi andiefficiencyiofioperations.i Internali
auditorsi ofteniperformioperationaliauditsi asi doiauditorsi employedibyitheiGovernmentiAccountabilityiOffi
cei(GAO)iofitheifederaligovernment.
1-12 Internaliauditorsi musti beiindependenti ofitheidepartmenti headsi andiotherilineiexecutivesiwhoseiworkitheyirevi
ew.iHowever,iinternaliauditorsiareinotiindependentiinitheisameisenseiasiaipubliciaccountingifirm.
