SOLUTION MANUAL FOR
Principles Of Auditing And Other Assurance Services
23rd Edition By Ray Whittington Kurt
ALL Chapters (1 - 21)
, • Table of Contents
gt gt
Chaptergt1:gtThegtRolegtofgtthegtPublicgtAccountantgtingtthegtAmericanEconomy
Chaptergt2:gtProfessionalgtStandards
Chaptergt3:gtProfessionalgtEthics
Chaptergt4:gtLegalgtLiabilitygtofgtCPAs
Chaptergt5:gtAuditgtEvidencegtandgtDocumentation
Chaptergt6:gtAuditgtPlanning,gtUnderstandinggtthegtClient,gtAssessingRisks,gtandgtResponding
Chaptergt7:gtInternalgtControl
Chaptergt8:gtConsiderationgtofgtInternalgtControlgtingtangtInformationTechnologygtEnvironment
Chaptergt9:gtAuditgtSampling
Chaptergt10:gtCashgtandgtFinancialgtInvestments
Chaptergt11:gtAccountsgtReceivable,gtNotesgtReceivable,gtandRevenue
Chaptergt12:gtInventoriesgtandgtCostgtofgtGoodsgtSold
Chaptergt13:gtProperty,gtPlant,gtandgtEquipment:gtDepreciationgtandDepletion
Chaptergt14:gtAccountsgtPayablegtandgtOthergtLiabilities
Chaptergt15:gtDebtgtandgtEquitygtCapital
Chaptergt16:gtAuditinggtOperationsgtandgtCompletinggtthegtAudit
Chaptergt17:gtAuditors’gtReports
Chaptergt18:gtIntegratedgtAuditsgtofgtPublicgtCompanies
Chaptergt19:gtAdditionalgtAssurancegtServices:gtHistoricalgtFinancialInformation
Chaptergt20:gtAdditionalgtAssurancegtServices:gtOthergtInformation
Chaptergt21:gtInternal,gtOperational,gtandgtCompliancegtAuditing
,CHAPTER 1 gt
The Role of the Pubgt gt gt gt
lic Accountant in the
gt gt gt
American Economy gt
ReviewgtQuestions
1-1 Thegt―crisisgtofgtcredibility‖gtlargelygtarosegtfromgtthegtnumbergtofgtcompaniesgtthatgtrestatedgttheirgtpreviously
gtissuedgt financialgt statementsgt asgt agt resultgt ofgt accountinggt irregularitiesgt andgt fraud.gt Especiallygtresponsib
legtweregtt hegtverygtvisiblegtEnrongt andgtWorldComgtfraudgtcases.gtBothgtcompaniesgt filedgt forgt bankruptcygtan
dgt constitutedgtthegtlargestgt companiesgt ingtAmericangthistorygttogtdogtso.gt Thegtextentgt ofgt thegtaccountinggtirr
egularitiesgt andgtfraudgtbeinggtinvestigatedgtandgtdisclosedgtbroughtgt intogtquestiongtthegteffectivenessgt ofgt fi
nancialgtstatementgt audits.gt Ingtaddition,gtthegtcriminalgtconvictiongtofgtArthurgtAndersen,gtLLP,gtonegtofgttheg
tthengtBiggt5gt accountinggtfirms,gt ongtchargesgt ofgt destroyinggt documentsgt relatedgt togt thegtEnrongt casegtbroug
htgt intogtquestiongtthegtethicsgt standardsgt ofgtthegtprofession.
1-2 Assurancegtservicesgtaregtprofessionalgtservicesgtthatgtenhancegtthegtqualitygtofgtinformation,gtorgtitsgtconte
xt,gtforgtdecision-
making.gtThegttwogttypesgtare:gt(a)gtthosegtthatgtincreasegtthegtreliabilitygtofgtinformationgtandgt(b)gtthosegtth
atgtinvolvegtputtinggtinformationgtingtagtformgtorgtcontextgtthatgtfacilitatesgtdecision-making.
1-3 Agtfinancialgtstatementgt auditgt is,gt bygtfar,gt thegtmostgt commongttypegtofgt attestgt engagement.g t Thegtoverallgta
ssertion,gtmadegtbygtmanagement,gtmostgtfrequentlygtisgtthatgtthegtfinancialgtstatementsgtfollowgtgenerallygtacce
ptedgtaccountinggtprinciples.
1-4 Agtlargegtcorporationgtwithgtsecuritiesgt listedgtongtagtstockgtexchangegtisgt requiredgtbygtthegtrulesgt ofgtthegtstockg
texchangegtandgt bygtthegtrulesgt ofgt thegtSecuritiesgt andgtExchangegtCommissiongt togt providegtangt auditgt reportg
t withgt thega
t nnualgtfinancialgtstatementsgt furnishedgttogtitsgt stockholders.g t Itgt alsogtisgt requiredgttogtengagegtthegt
auditorsgt togtprovidegtangtopiniongtongtitsgtinternalgtcontrol.gtApartgtfromgtlegalgtrequirements,gthowever,gtagt
largegtlistedgtcorporationgtrecognizesgt thatgt itgt mustgt maintaingtinvestorgtconfidencegtingt thegtreliabilitygtofgt itsg
t financialgtstatementsgt andgt internalgt controlgt overgt financialgt reportinggt ifgt itgt isgt togt continuegt togt begt ablegt to
gt securegt capitalgtfromgtthegtpublic.gt Thegtreportgt bygtagt firmgtofgt certifiedgtpublicgtaccountantsgt addsgt credibilit
ygttogtthegtfinancialgtstatementsgt preparedgtbygtthegtcorporation.g t Whengtagt smallgtfamily-
ownedgtenterprisegtelectsgt togthavegtangtaudit,gtthegtpurposegtusuallygtisgt togtusegtthegtauditors'gtreportgt togtsupp
ortgt angtapplicationgt forgt agtbankgtloan.
, 1-5 Agtreportgt bygtangtindependentgt publicgtaccountantgt concerninggtthegtfairnessgt ofgtagt company'sgt financialgtstat
ementsgtisgtcommonlygtrequiredgtingtthegtfollowinggtsituations:
(1) Applicationgtforgt agt bankgtloan.
(2) Establishinggtcreditgt forgt purchasegtofgt merchandise,gt equipment,gt orgt othergt assets.
(3) Reportinggtoperatinggt results,gt financialgt position,gt andgt cashgt flowsgt togtabsenteegtownersgt (stockh
oldersgtorgtpartners).
(4) Issuancegtofgt securitiesgt bygtagt corporation.
(5) Annualgtfinancialgtstatementsgt bygtagt corporationgtwithgt securitiesgt listedgtongtagt stockgtexchangegtor
gt tradedgtovergtthegtcounter.
(6) Salegtofgt angtongoinggtbusiness.
(7) Terminationgt ofgt agt partnership.
1-6 Togtaddgtcredibilitygttogtfinancialgtstatementsgt isgt togtincreasegtthegtlikelihoodgtthatgt theygthavegtbeengtprepared
gtfollowinggt thegtappropriategtcriteria,gt usuallygtgenerallygtacceptedgtaccountinggt principles.g t Asgt such,gt angt i
ncreasegit ngtcredibilitygtresultsgt ingtfinancialgtstatementsgt thatgt cangtbegtbelievedgtandgtreliedgtupongtbygtthirdgtp
arties.
1-7 Businessgt riskgtisgt thegtriskgtthatgt thegtinvestmentgt willgtbegtimpairedgtbecausegtagt companygtinvestedgtingtisgt
unablegttogtmeetgt itsgt financialgtobligationsgt duegttogteconomicgtconditionsgt orgtpoorgtmanagementgt decisions.
gt Informationgtriskgtisgtthegtriskgtthatgtthegtinformationgtusedgttogtassessgtbusinessgtriskgtisgtnotgtaccurate.gtA
uditorsgtcangtdirectlygtreducegtinformationgtrisk,gtbutgthavegtonlygtlimitedgteffectgtongtbusinessgtrisk.
1-8 Atgt thegtbeginninggtofgtthegtcentury,gtthegtprincipalgtobjectivegtofgtauditinggtwasgt thegtpreventiongtandgtdetectio
ngtofgtfraud.gt Auditgt workgtcenteredgtongtthegtbalancegtsheet,gtbecausegtthegtincomegtstatementgt wasgt regardedgt
asgt highlygtconfidentialgt andgtnotgt forgt publicgtdisclosure.g t Today,gt thegtprincipalgt objectivegtofgt auditinggt is
gt togt formgt angtopiniongtongtthegtfairnessgt ofgt financialgtstatementsgt andgttheirgt conformitygtwithgtgenerallygtacc
eptedgtaccountinggtprinciples.gt Butgt thegtprofessionalgtstandardsgt alsogt requiregtthatgt angtauditgt begtdesignedgt t
ogtprovidegtreasonablegtassurancegtofgt detectinggt materialgtmisstatements,gt duegttogterrorsgt orgt fraud.g t Partic
ulargt emphasisgt isgt placedgtongtthegtincomegtstatementgt whichgtisgt ofgt greatgt importancegttogtinvestors.gt Auditi
nggttodaygtalsogthasgt thegtobjectivesgt ofgtmeetinggtthegtrequirementsgt ofgt thegtSecuritiesgt andgtExchangegtCom
missiongt(SEC)gt andgtthegtPublicgtCompanygtAccountinggtOversightgtBoardgtforgtpublicgtcompanies.
1-9 Thegtstatementgt isgt incorrect.gtThegtincreasinggtintegratedgtdatabasesgt ofg t today,gt alonggtwithgtavailabl
egtauditgtproceduresgtmakegtauditedgtentiregtpopulationsgtagtpossibilitygtingtmanygtsituations.
1-10 Angtoperationalgtauditgt attemptsgt togtmeasuregtthegteffectivenessgt andgtefficiencygtofgtagtspecificgtunitgt ofgt
angtorganization.gt Itgt involvesgt moregtsubjectivegtjudgmentsgt thangtagtcompliancegtauditgt orgtangtauditgt ofgt
financialgtstatementsgt becausegtthegtcriteriagt ofgt effectivenessgt andgtefficiencygtofgt departmentalgtperform
ancegtaregtnotgt asgct learlygtestablishedgtasgt aregtmanygtlawsgt andgtregulationsgt orgtgenerallygtacceptedgtacco
untinggtprinciples.
Thegtreportgt preparedgtaftergt completiongtofgt angtoperationalgtauditgt isgt usuallygtdirectedgttogtmanag
ementgtofgtthegtorganizationgtingtwhichgtthegtauditgtworkgtwasgtdone.
1-11 Agtcompliancegtauditgt isgt angtauditgt togtdeterminegtwhethergtfinancialgtreportsgt orgtothergtassertionsgt aregt ingtc
ompliancegtwithgtestablishedgtcriteria.gt Thegtnecessarygtingredientsgt aregtverifiablegtdatagt andgtthegtexistence
gtofgtstandardsgt establishedgt bygtangt authoritativegtbody.g t Angt operationalgt audit,gt ongt thegtothergt hand,gt isgt agt
reviewgtofgt agdt epartmentgt orgtothergt unitgt ofgt agt businessgt orgt governmentalgtorganizationgttogtmeasuregtthegte
ffectivenessgt andgtefficiencygtofgt operations.gt Internalgtauditorsgt oftengtperformgtoperationalgtauditsgt asgt dog
t auditorsgt employedgt bygtthegtGovernmentgtAccountabilitygtOfficegt(GAO)gtofgtthegtfederalgtgovernment.
1-12 Internalgtauditorsgt mustgt begtindependentgt ofgt thegtdepartmentgt headsgt andgtothergt linegtexecutivesgt whosegtwo
Principles Of Auditing And Other Assurance Services
23rd Edition By Ray Whittington Kurt
ALL Chapters (1 - 21)
, • Table of Contents
gt gt
Chaptergt1:gtThegtRolegtofgtthegtPublicgtAccountantgtingtthegtAmericanEconomy
Chaptergt2:gtProfessionalgtStandards
Chaptergt3:gtProfessionalgtEthics
Chaptergt4:gtLegalgtLiabilitygtofgtCPAs
Chaptergt5:gtAuditgtEvidencegtandgtDocumentation
Chaptergt6:gtAuditgtPlanning,gtUnderstandinggtthegtClient,gtAssessingRisks,gtandgtResponding
Chaptergt7:gtInternalgtControl
Chaptergt8:gtConsiderationgtofgtInternalgtControlgtingtangtInformationTechnologygtEnvironment
Chaptergt9:gtAuditgtSampling
Chaptergt10:gtCashgtandgtFinancialgtInvestments
Chaptergt11:gtAccountsgtReceivable,gtNotesgtReceivable,gtandRevenue
Chaptergt12:gtInventoriesgtandgtCostgtofgtGoodsgtSold
Chaptergt13:gtProperty,gtPlant,gtandgtEquipment:gtDepreciationgtandDepletion
Chaptergt14:gtAccountsgtPayablegtandgtOthergtLiabilities
Chaptergt15:gtDebtgtandgtEquitygtCapital
Chaptergt16:gtAuditinggtOperationsgtandgtCompletinggtthegtAudit
Chaptergt17:gtAuditors’gtReports
Chaptergt18:gtIntegratedgtAuditsgtofgtPublicgtCompanies
Chaptergt19:gtAdditionalgtAssurancegtServices:gtHistoricalgtFinancialInformation
Chaptergt20:gtAdditionalgtAssurancegtServices:gtOthergtInformation
Chaptergt21:gtInternal,gtOperational,gtandgtCompliancegtAuditing
,CHAPTER 1 gt
The Role of the Pubgt gt gt gt
lic Accountant in the
gt gt gt
American Economy gt
ReviewgtQuestions
1-1 Thegt―crisisgtofgtcredibility‖gtlargelygtarosegtfromgtthegtnumbergtofgtcompaniesgtthatgtrestatedgttheirgtpreviously
gtissuedgt financialgt statementsgt asgt agt resultgt ofgt accountinggt irregularitiesgt andgt fraud.gt Especiallygtresponsib
legtweregtt hegtverygtvisiblegtEnrongt andgtWorldComgtfraudgtcases.gtBothgtcompaniesgt filedgt forgt bankruptcygtan
dgt constitutedgtthegtlargestgt companiesgt ingtAmericangthistorygttogtdogtso.gt Thegtextentgt ofgt thegtaccountinggtirr
egularitiesgt andgtfraudgtbeinggtinvestigatedgtandgtdisclosedgtbroughtgt intogtquestiongtthegteffectivenessgt ofgt fi
nancialgtstatementgt audits.gt Ingtaddition,gtthegtcriminalgtconvictiongtofgtArthurgtAndersen,gtLLP,gtonegtofgttheg
tthengtBiggt5gt accountinggtfirms,gt ongtchargesgt ofgt destroyinggt documentsgt relatedgt togt thegtEnrongt casegtbroug
htgt intogtquestiongtthegtethicsgt standardsgt ofgtthegtprofession.
1-2 Assurancegtservicesgtaregtprofessionalgtservicesgtthatgtenhancegtthegtqualitygtofgtinformation,gtorgtitsgtconte
xt,gtforgtdecision-
making.gtThegttwogttypesgtare:gt(a)gtthosegtthatgtincreasegtthegtreliabilitygtofgtinformationgtandgt(b)gtthosegtth
atgtinvolvegtputtinggtinformationgtingtagtformgtorgtcontextgtthatgtfacilitatesgtdecision-making.
1-3 Agtfinancialgtstatementgt auditgt is,gt bygtfar,gt thegtmostgt commongttypegtofgt attestgt engagement.g t Thegtoverallgta
ssertion,gtmadegtbygtmanagement,gtmostgtfrequentlygtisgtthatgtthegtfinancialgtstatementsgtfollowgtgenerallygtacce
ptedgtaccountinggtprinciples.
1-4 Agtlargegtcorporationgtwithgtsecuritiesgt listedgtongtagtstockgtexchangegtisgt requiredgtbygtthegtrulesgt ofgtthegtstockg
texchangegtandgt bygtthegtrulesgt ofgt thegtSecuritiesgt andgtExchangegtCommissiongt togt providegtangt auditgt reportg
t withgt thega
t nnualgtfinancialgtstatementsgt furnishedgttogtitsgt stockholders.g t Itgt alsogtisgt requiredgttogtengagegtthegt
auditorsgt togtprovidegtangtopiniongtongtitsgtinternalgtcontrol.gtApartgtfromgtlegalgtrequirements,gthowever,gtagt
largegtlistedgtcorporationgtrecognizesgt thatgt itgt mustgt maintaingtinvestorgtconfidencegtingt thegtreliabilitygtofgt itsg
t financialgtstatementsgt andgt internalgt controlgt overgt financialgt reportinggt ifgt itgt isgt togt continuegt togt begt ablegt to
gt securegt capitalgtfromgtthegtpublic.gt Thegtreportgt bygtagt firmgtofgt certifiedgtpublicgtaccountantsgt addsgt credibilit
ygttogtthegtfinancialgtstatementsgt preparedgtbygtthegtcorporation.g t Whengtagt smallgtfamily-
ownedgtenterprisegtelectsgt togthavegtangtaudit,gtthegtpurposegtusuallygtisgt togtusegtthegtauditors'gtreportgt togtsupp
ortgt angtapplicationgt forgt agtbankgtloan.
, 1-5 Agtreportgt bygtangtindependentgt publicgtaccountantgt concerninggtthegtfairnessgt ofgtagt company'sgt financialgtstat
ementsgtisgtcommonlygtrequiredgtingtthegtfollowinggtsituations:
(1) Applicationgtforgt agt bankgtloan.
(2) Establishinggtcreditgt forgt purchasegtofgt merchandise,gt equipment,gt orgt othergt assets.
(3) Reportinggtoperatinggt results,gt financialgt position,gt andgt cashgt flowsgt togtabsenteegtownersgt (stockh
oldersgtorgtpartners).
(4) Issuancegtofgt securitiesgt bygtagt corporation.
(5) Annualgtfinancialgtstatementsgt bygtagt corporationgtwithgt securitiesgt listedgtongtagt stockgtexchangegtor
gt tradedgtovergtthegtcounter.
(6) Salegtofgt angtongoinggtbusiness.
(7) Terminationgt ofgt agt partnership.
1-6 Togtaddgtcredibilitygttogtfinancialgtstatementsgt isgt togtincreasegtthegtlikelihoodgtthatgt theygthavegtbeengtprepared
gtfollowinggt thegtappropriategtcriteria,gt usuallygtgenerallygtacceptedgtaccountinggt principles.g t Asgt such,gt angt i
ncreasegit ngtcredibilitygtresultsgt ingtfinancialgtstatementsgt thatgt cangtbegtbelievedgtandgtreliedgtupongtbygtthirdgtp
arties.
1-7 Businessgt riskgtisgt thegtriskgtthatgt thegtinvestmentgt willgtbegtimpairedgtbecausegtagt companygtinvestedgtingtisgt
unablegttogtmeetgt itsgt financialgtobligationsgt duegttogteconomicgtconditionsgt orgtpoorgtmanagementgt decisions.
gt Informationgtriskgtisgtthegtriskgtthatgtthegtinformationgtusedgttogtassessgtbusinessgtriskgtisgtnotgtaccurate.gtA
uditorsgtcangtdirectlygtreducegtinformationgtrisk,gtbutgthavegtonlygtlimitedgteffectgtongtbusinessgtrisk.
1-8 Atgt thegtbeginninggtofgtthegtcentury,gtthegtprincipalgtobjectivegtofgtauditinggtwasgt thegtpreventiongtandgtdetectio
ngtofgtfraud.gt Auditgt workgtcenteredgtongtthegtbalancegtsheet,gtbecausegtthegtincomegtstatementgt wasgt regardedgt
asgt highlygtconfidentialgt andgtnotgt forgt publicgtdisclosure.g t Today,gt thegtprincipalgt objectivegtofgt auditinggt is
gt togt formgt angtopiniongtongtthegtfairnessgt ofgt financialgtstatementsgt andgttheirgt conformitygtwithgtgenerallygtacc
eptedgtaccountinggtprinciples.gt Butgt thegtprofessionalgtstandardsgt alsogt requiregtthatgt angtauditgt begtdesignedgt t
ogtprovidegtreasonablegtassurancegtofgt detectinggt materialgtmisstatements,gt duegttogterrorsgt orgt fraud.g t Partic
ulargt emphasisgt isgt placedgtongtthegtincomegtstatementgt whichgtisgt ofgt greatgt importancegttogtinvestors.gt Auditi
nggttodaygtalsogthasgt thegtobjectivesgt ofgtmeetinggtthegtrequirementsgt ofgt thegtSecuritiesgt andgtExchangegtCom
missiongt(SEC)gt andgtthegtPublicgtCompanygtAccountinggtOversightgtBoardgtforgtpublicgtcompanies.
1-9 Thegtstatementgt isgt incorrect.gtThegtincreasinggtintegratedgtdatabasesgt ofg t today,gt alonggtwithgtavailabl
egtauditgtproceduresgtmakegtauditedgtentiregtpopulationsgtagtpossibilitygtingtmanygtsituations.
1-10 Angtoperationalgtauditgt attemptsgt togtmeasuregtthegteffectivenessgt andgtefficiencygtofgtagtspecificgtunitgt ofgt
angtorganization.gt Itgt involvesgt moregtsubjectivegtjudgmentsgt thangtagtcompliancegtauditgt orgtangtauditgt ofgt
financialgtstatementsgt becausegtthegtcriteriagt ofgt effectivenessgt andgtefficiencygtofgt departmentalgtperform
ancegtaregtnotgt asgct learlygtestablishedgtasgt aregtmanygtlawsgt andgtregulationsgt orgtgenerallygtacceptedgtacco
untinggtprinciples.
Thegtreportgt preparedgtaftergt completiongtofgt angtoperationalgtauditgt isgt usuallygtdirectedgttogtmanag
ementgtofgtthegtorganizationgtingtwhichgtthegtauditgtworkgtwasgtdone.
1-11 Agtcompliancegtauditgt isgt angtauditgt togtdeterminegtwhethergtfinancialgtreportsgt orgtothergtassertionsgt aregt ingtc
ompliancegtwithgtestablishedgtcriteria.gt Thegtnecessarygtingredientsgt aregtverifiablegtdatagt andgtthegtexistence
gtofgtstandardsgt establishedgt bygtangt authoritativegtbody.g t Angt operationalgt audit,gt ongt thegtothergt hand,gt isgt agt
reviewgtofgt agdt epartmentgt orgtothergt unitgt ofgt agt businessgt orgt governmentalgtorganizationgttogtmeasuregtthegte
ffectivenessgt andgtefficiencygtofgt operations.gt Internalgtauditorsgt oftengtperformgtoperationalgtauditsgt asgt dog
t auditorsgt employedgt bygtthegtGovernmentgtAccountabilitygtOfficegt(GAO)gtofgtthegtfederalgtgovernment.
1-12 Internalgtauditorsgt mustgt begtindependentgt ofgt thegtdepartmentgt headsgt andgtothergt linegtexecutivesgt whosegtwo
