SOLUTION MANUAL FOR
n n
n Principles Of Auditing And Other Assurance Services
n n n n n n n
23rd Edition By Ray Whittington Kurt
n n n n n n
ALL Chapters (1 - 21)
n n n n
, • Table of Contents
n n
Chapter n1:nThenRolenofnthenPublicnAccountantninnthenAmericanEconomy
Chapter n2:nProfessionalnStandards
Chapter n3:nProfessionalnEthics
Chapter n4:nLegalnLiabilitynofnCPAs
Chapter n5:nAuditnEvidencenandnDocumentation
Chapter n6:nAuditnPlanning,nUnderstandingnthenClient,nAssessingRisks,nandnResponding
Chapter n7:nInternalnControl
Chapter n8:nConsiderationnofnInternalnControlninnannInformationTechnologynEnvironment
Chapter n9:nAuditnSampling
Chapter n10:nCashnandnFinancialnInvestments
Chapter n11:nAccountsnReceivable,nNotesnReceivable,nandRevenue
Chapter n12:nInventoriesnandnCostnofnGoodsnSold
Chapter n13:nProperty,nPlant,nandnEquipment:nDepreciationnandDepletion
Chapter n14:nAccountsnPayablenandnOthernLiabilities
Chapter n15:nDebtnandnEquitynCapital
Chapter n16:nAuditingnOperationsnandnCompletingnthenAudit
Chapter n17:nAuditors’ nReports
Chapter n18:nIntegratednAuditsnofnPublicnCompanies
Chapter n19:nAdditionalnAssurancenServices:nHistoricalnFinancialInformation
Chapter n20:nAdditionalnAssurancenServices:nOthernInformation
Chapter n21:nInternal,nOperational,nandnCompliancenAuditing
,CHAPTER 1 n
The Role of the Publi
n n n n
c Accountant in the
n n n
American Economy n
ReviewnQuestions
1-1 Then ―crisisn ofn credibility‖n largelyn arosen fromn then numbern ofn companiesn thatn restatedn theirn previouslyn issued
n financialn statementsn asn an resultn of n accountingn irregularitiesn andnfraud.n Especiallyn responsiblen werenthen ver
yn visiblen Enronn andn WorldComn fraudncases. n Bothn companiesn filedn forn bankruptcyn andn constitutedn then larg
estn companiesn inn Americann historyn ton donso. n Then extentn ofn thenaccountingn irregularitiesn andn fraudnbeingn in
vestigatedn andn disclosedn broughtn inton questionn then effectivenessn ofn financialn statementn audits. n Innaddition,n
then criminaln convictionn ofn Arthurn Andersen, n LLP, nonen ofn thenthenn Bign5n accountingn firms, n onn chargesn ofn d
estroyingn documentsn relatedn ton then Enronn casen broughtn inton questionn then ethicsn standardsn ofn thenprofessio
n.
1-2 Assurancen servicesn aren professionaln servicesn thatn enhancen then qualityn ofn information, nornitsn context, n forn
decision-
making. n Then twon typesn are:n (a)nthosen thatn increasen then reliabilitynofn informationn andn (b)n thosen thatninvol
venputtingninformationninnanformnorncontextnthatn facilitatesn decision-making.
1-3 An financialn statementn auditn is, n bynfar,n then mostn commonn typen ofn attestn engagement. n Then overalln assertion, n
maden byn management, n mostn frequentlyn isn thatn then financialn statementsn follown generallyn acceptedn accounti
ngn principles.
1-4 An largen corporationn withn securitiesn listedn onnan stockn exchangen isn requiredn bynthen rulesn ofn then stockn exchang
en andn byn then rulesn ofn then Securitiesn andn Exchangen Commissionn tonproviden annauditn reportn withn thenannualn fi
nancialn statementsn furnishedn ton itsn stockholders. n Itn alson isn requiredn ton engagen then auditorsn tonproviden ann opi
nionn onn itsn internaln control. n Apartn fromn legaln requirements, n however, n an largen listedn corporationn recognize
sn thatn itn mustn maintainn investor n confidencen inn thenreliabilitynofn itsn financialn statementsn andn internaln controln
overn financialn reportingn ifn itn isn toncontinuen ton ben ablen tonsecuren capitaln fromnthenpublic. n Then reportn byn an fir
mn ofn certifiedn publicn accountantsn addsn credibilityn tonthenfinancialn statementsn preparedn byn then corporation. n
Whenn an smalln family-
ownedn enterprisen electsn ton haven ann audit, n then purposen usuallyn isn tonusen thenauditors'n reportnton supportnann app
licationn forn an bankn loan.
, 1-5 An reportn byn ann independentn publicnaccountantn concerningn thenfairnessn ofn an company'sn financialn statementsni
sn commonlynrequiredn inn thenfollowingn situations:
(1) Applicationn forn an bankn loan.
(2) Establishingn creditn forn purchasen ofn merchandise, n equipment, n orn othern assets.
(3) Reportingn operatingn results, n financialn position, n andn cashn flowsn ton absenteen ownersn (stockholdersn
orn partners).
(4) Issuancen ofn securitiesn byn an corporation.
(5) Annualn financialn statementsn byn an corporationn withn securitiesn listedn onn an stockn exchangen orn tradedn
overn thencounter.
(6) Salen ofn ann ongoingn business.
(7) Terminationn ofn an partnership.
1-6 Ton addn credibilityn ton financialn statementsn isn ton increasen thenlikelihoodn thatn theynhaven beenn preparednfollowi
ngn then appropriaten criteria, n usuallyn generallynacceptedn accountingn principles. n Asn such, n ann increaseninn credi
bilityn resultsn inn financialn statementsn thatn cann ben believedn andn reliedn uponn byn thirdn parties.
1-7 Businessn riskn isn then riskn thatn then investmentn willn benimpairednbecausen an companyn investedn inn isn unablen ton
meetn itsn financialn obligationsn duen ton economicn conditionsn ornpoornmanagementn decisions. n Informationnris
kn isn then riskn thatn then informationn usedn ton assessn businessn riskn isn notn accurate. n Auditorsn cann directlyn redu
cen informationn risk, n butn haven onlyn limitedn effectn onn businessn risk.
1-8 Atn then beginningn ofn then century,n thenprincipalnobjectiven ofnauditingnwasn then preventionnandn detectionn ofn fra
ud. n Auditn workn centeredn onn then balancen sheet, n becausen then incomen statementn wasn regardedn asn highlyn confi
dentialn andn notn forn publicndisclosure. n Today, n then principaln objectiven ofn auditingnisn ton formn ann opinionn onnt
hen fairnessn ofn financialn statementsn andn theirn conformityn withn generallynacceptedn accountingn principles. n But
n then professional n standardsn alson requiren thatn ann auditn ben designedn tonproviden reasonablen assurancen of n detect
ingn materialn misstatements, n duen ton errorsn orn fraud. n Particular n emphasisn isn placedn onnthen incomenstatementn
whichn isn ofn greatn importancen ton investors. n Auditingntodayn alson hasn thenobjectivesn ofnmeetingn then requireme
ntsn ofn then Securitiesn andn Exchangen Commissionn (SEC) n andn then Publicn Companyn AccountingnOversightn B
oardn forn publicncompanies.
1-9 Then statementn isn incorrect. n Then increasingn integratedn databasesn ofn today, n alongnwithn availablen auditn
proceduresn makenauditedn entirenpopulationsn an possibilityninnmanynsituations.
1-10 Ann operationaln auditn attemptsn ton measuren then effectivenessn andn efficiencyn ofn an specificnunitn ofnann organ
ization. n Itn involvesn moren subjectiven judgmentsn thann an compliancen auditn orn annauditn ofnfinancialn stateme
ntsn becausen then criterian ofn effectivenessn andn efficiencyn ofn departmentalnperformancen aren notn asnclearlyn
establishedn asn aren manyn lawsn andn regulationsn orn generallyn acceptedn accountingn principles.
Then reportn preparedn aftern completionn ofnann operationaln auditn isn usuallyn directedn ton managementnof
n thenorganizationninn whichnthenauditn workn wasn done.
1-11 An compliancen auditn isn ann auditn ton determinenwhethern financialn reportsn orn othern assertionsn aren inn complian
cen withn establishedn criteria. n Then necessaryn ingredientsn aren verifiablendatan andn then existencen ofnstandardsn e
stablishedn byn ann authoritativen body. n Ann operationaln audit,n onnthen othernhand, n isn an reviewn ofn andepartmentn
orn othern unitn ofn an businessn orn governmentaln organizationn tonmeasuren then effectivenessn andn efficiencyn ofn o
perations. n Internaln auditorsn oftenn performn operationalnauditsn asn don auditorsn employedn byn thenGovernmen
tn AccountabilitynOfficen(GAO) n ofn thenfederalngovernment.
1-12 Internaln auditorsn mustn ben independentn ofn then departmentn headsn andn othern linen executivesn whosen workn theynr
eview. n However, n internaln auditorsn aren notn independentn inn then samen sensen asn an publicn accountingn firm.
n n
n Principles Of Auditing And Other Assurance Services
n n n n n n n
23rd Edition By Ray Whittington Kurt
n n n n n n
ALL Chapters (1 - 21)
n n n n
, • Table of Contents
n n
Chapter n1:nThenRolenofnthenPublicnAccountantninnthenAmericanEconomy
Chapter n2:nProfessionalnStandards
Chapter n3:nProfessionalnEthics
Chapter n4:nLegalnLiabilitynofnCPAs
Chapter n5:nAuditnEvidencenandnDocumentation
Chapter n6:nAuditnPlanning,nUnderstandingnthenClient,nAssessingRisks,nandnResponding
Chapter n7:nInternalnControl
Chapter n8:nConsiderationnofnInternalnControlninnannInformationTechnologynEnvironment
Chapter n9:nAuditnSampling
Chapter n10:nCashnandnFinancialnInvestments
Chapter n11:nAccountsnReceivable,nNotesnReceivable,nandRevenue
Chapter n12:nInventoriesnandnCostnofnGoodsnSold
Chapter n13:nProperty,nPlant,nandnEquipment:nDepreciationnandDepletion
Chapter n14:nAccountsnPayablenandnOthernLiabilities
Chapter n15:nDebtnandnEquitynCapital
Chapter n16:nAuditingnOperationsnandnCompletingnthenAudit
Chapter n17:nAuditors’ nReports
Chapter n18:nIntegratednAuditsnofnPublicnCompanies
Chapter n19:nAdditionalnAssurancenServices:nHistoricalnFinancialInformation
Chapter n20:nAdditionalnAssurancenServices:nOthernInformation
Chapter n21:nInternal,nOperational,nandnCompliancenAuditing
,CHAPTER 1 n
The Role of the Publi
n n n n
c Accountant in the
n n n
American Economy n
ReviewnQuestions
1-1 Then ―crisisn ofn credibility‖n largelyn arosen fromn then numbern ofn companiesn thatn restatedn theirn previouslyn issued
n financialn statementsn asn an resultn of n accountingn irregularitiesn andnfraud.n Especiallyn responsiblen werenthen ver
yn visiblen Enronn andn WorldComn fraudncases. n Bothn companiesn filedn forn bankruptcyn andn constitutedn then larg
estn companiesn inn Americann historyn ton donso. n Then extentn ofn thenaccountingn irregularitiesn andn fraudnbeingn in
vestigatedn andn disclosedn broughtn inton questionn then effectivenessn ofn financialn statementn audits. n Innaddition,n
then criminaln convictionn ofn Arthurn Andersen, n LLP, nonen ofn thenthenn Bign5n accountingn firms, n onn chargesn ofn d
estroyingn documentsn relatedn ton then Enronn casen broughtn inton questionn then ethicsn standardsn ofn thenprofessio
n.
1-2 Assurancen servicesn aren professionaln servicesn thatn enhancen then qualityn ofn information, nornitsn context, n forn
decision-
making. n Then twon typesn are:n (a)nthosen thatn increasen then reliabilitynofn informationn andn (b)n thosen thatninvol
venputtingninformationninnanformnorncontextnthatn facilitatesn decision-making.
1-3 An financialn statementn auditn is, n bynfar,n then mostn commonn typen ofn attestn engagement. n Then overalln assertion, n
maden byn management, n mostn frequentlyn isn thatn then financialn statementsn follown generallyn acceptedn accounti
ngn principles.
1-4 An largen corporationn withn securitiesn listedn onnan stockn exchangen isn requiredn bynthen rulesn ofn then stockn exchang
en andn byn then rulesn ofn then Securitiesn andn Exchangen Commissionn tonproviden annauditn reportn withn thenannualn fi
nancialn statementsn furnishedn ton itsn stockholders. n Itn alson isn requiredn ton engagen then auditorsn tonproviden ann opi
nionn onn itsn internaln control. n Apartn fromn legaln requirements, n however, n an largen listedn corporationn recognize
sn thatn itn mustn maintainn investor n confidencen inn thenreliabilitynofn itsn financialn statementsn andn internaln controln
overn financialn reportingn ifn itn isn toncontinuen ton ben ablen tonsecuren capitaln fromnthenpublic. n Then reportn byn an fir
mn ofn certifiedn publicn accountantsn addsn credibilityn tonthenfinancialn statementsn preparedn byn then corporation. n
Whenn an smalln family-
ownedn enterprisen electsn ton haven ann audit, n then purposen usuallyn isn tonusen thenauditors'n reportnton supportnann app
licationn forn an bankn loan.
, 1-5 An reportn byn ann independentn publicnaccountantn concerningn thenfairnessn ofn an company'sn financialn statementsni
sn commonlynrequiredn inn thenfollowingn situations:
(1) Applicationn forn an bankn loan.
(2) Establishingn creditn forn purchasen ofn merchandise, n equipment, n orn othern assets.
(3) Reportingn operatingn results, n financialn position, n andn cashn flowsn ton absenteen ownersn (stockholdersn
orn partners).
(4) Issuancen ofn securitiesn byn an corporation.
(5) Annualn financialn statementsn byn an corporationn withn securitiesn listedn onn an stockn exchangen orn tradedn
overn thencounter.
(6) Salen ofn ann ongoingn business.
(7) Terminationn ofn an partnership.
1-6 Ton addn credibilityn ton financialn statementsn isn ton increasen thenlikelihoodn thatn theynhaven beenn preparednfollowi
ngn then appropriaten criteria, n usuallyn generallynacceptedn accountingn principles. n Asn such, n ann increaseninn credi
bilityn resultsn inn financialn statementsn thatn cann ben believedn andn reliedn uponn byn thirdn parties.
1-7 Businessn riskn isn then riskn thatn then investmentn willn benimpairednbecausen an companyn investedn inn isn unablen ton
meetn itsn financialn obligationsn duen ton economicn conditionsn ornpoornmanagementn decisions. n Informationnris
kn isn then riskn thatn then informationn usedn ton assessn businessn riskn isn notn accurate. n Auditorsn cann directlyn redu
cen informationn risk, n butn haven onlyn limitedn effectn onn businessn risk.
1-8 Atn then beginningn ofn then century,n thenprincipalnobjectiven ofnauditingnwasn then preventionnandn detectionn ofn fra
ud. n Auditn workn centeredn onn then balancen sheet, n becausen then incomen statementn wasn regardedn asn highlyn confi
dentialn andn notn forn publicndisclosure. n Today, n then principaln objectiven ofn auditingnisn ton formn ann opinionn onnt
hen fairnessn ofn financialn statementsn andn theirn conformityn withn generallynacceptedn accountingn principles. n But
n then professional n standardsn alson requiren thatn ann auditn ben designedn tonproviden reasonablen assurancen of n detect
ingn materialn misstatements, n duen ton errorsn orn fraud. n Particular n emphasisn isn placedn onnthen incomenstatementn
whichn isn ofn greatn importancen ton investors. n Auditingntodayn alson hasn thenobjectivesn ofnmeetingn then requireme
ntsn ofn then Securitiesn andn Exchangen Commissionn (SEC) n andn then Publicn Companyn AccountingnOversightn B
oardn forn publicncompanies.
1-9 Then statementn isn incorrect. n Then increasingn integratedn databasesn ofn today, n alongnwithn availablen auditn
proceduresn makenauditedn entirenpopulationsn an possibilityninnmanynsituations.
1-10 Ann operationaln auditn attemptsn ton measuren then effectivenessn andn efficiencyn ofn an specificnunitn ofnann organ
ization. n Itn involvesn moren subjectiven judgmentsn thann an compliancen auditn orn annauditn ofnfinancialn stateme
ntsn becausen then criterian ofn effectivenessn andn efficiencyn ofn departmentalnperformancen aren notn asnclearlyn
establishedn asn aren manyn lawsn andn regulationsn orn generallyn acceptedn accountingn principles.
Then reportn preparedn aftern completionn ofnann operationaln auditn isn usuallyn directedn ton managementnof
n thenorganizationninn whichnthenauditn workn wasn done.
1-11 An compliancen auditn isn ann auditn ton determinenwhethern financialn reportsn orn othern assertionsn aren inn complian
cen withn establishedn criteria. n Then necessaryn ingredientsn aren verifiablendatan andn then existencen ofnstandardsn e
stablishedn byn ann authoritativen body. n Ann operationaln audit,n onnthen othernhand, n isn an reviewn ofn andepartmentn
orn othern unitn ofn an businessn orn governmentaln organizationn tonmeasuren then effectivenessn andn efficiencyn ofn o
perations. n Internaln auditorsn oftenn performn operationalnauditsn asn don auditorsn employedn byn thenGovernmen
tn AccountabilitynOfficen(GAO) n ofn thenfederalngovernment.
1-12 Internaln auditorsn mustn ben independentn ofn then departmentn headsn andn othern linen executivesn whosen workn theynr
eview. n However, n internaln auditorsn aren notn independentn inn then samen sensen asn an publicn accountingn firm.
