SOLUTION MANUAL FOR
Principles Of Auditing And Other Assurance Services
23rd Edition By Ray Whittington Kurt
ALL Chapters (1 - 21)
, Table of Contents RV RV
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 R V
The Role of the Publi RV RV R V RV
c Accountant in the
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American Economy R V
Review Questions
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1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously issue
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d financial statements as a result of accounting irregularities and fraud. Especially responsible werethe
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very visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the
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largest companies in American history to do so. The extent of the accounting irregularities and fraud bei
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ng investigated and disclosed brought into question the effectiveness of financial statement audits. In ad
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dition, the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on char
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ges of destroying documents related to the Enron case brought into question the ethics standards of the
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profession.
1-2 Assurance services are professional services that enhance the quality of information, or its context, for
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decision-
making. The two types are: (a) those that increase the reliability of information and (b) those that invo
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lve 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 assertion
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,made by management, most frequently is that the financial statements follow generally accepted account
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ing principles. RV
1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchan
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ge and by the rules of the Securities and Exchange Commission to provide an audit report with thea nnua
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l financial statements furnished to its stockholders. It also is required to engage the auditors to provide a
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n opinion on its internal control. Apart from legal requirements, however, a large listed corporation reco
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gnizes that it must maintain investor confidence in the reliability of its financial statements and internal c
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ontrol over financial reporting if it is to continue to be able to secure capital from the public. The report
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by a firm of certified public accountants adds credibility to the financial statements prepared by the corp
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oration. When a small family- R V RV RV RV
owned enterprise elects to have an audit, the purpose usually is to use the auditors' report to support an a
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pplication for a bank loan. RV RV RV RV
, 1-5 A report by an independent public accountant concerning the fairness of a company's financial statement
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sis commonly required in the following situations:
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(1) Application for a bank loan. RV RV RV RV
(2) Establishing credit for purchase of merchandise, equipment, or other assets. RV RV RV RV RV RV RV RV RV
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholder
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sor partners).
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(4) Issuance of securities by a corporation. RV RV RV RV RV
(5) Annual financial statements by a corporation with securities listed on a stock exchange or trade
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dover the counter.
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(6) Sale of an ongoing business.
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(7) Termination of a partnership. RV RV RV
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared follo
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wing the appropriate criteria, usually generally accepted accounting principles. As such, an increasein cr
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edibility 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 unable t
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omeet its financial obligations due to economic conditions or poor management decisions. Information
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risk is the risk that the information used to assess business risk is not accurate. Auditors can directly r
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educe 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 of fr
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aud. Audit work centered on the balance sheet, because the income statement was regarded as highly con
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fidential and not for public disclosure. Today, the principal objective of auditing is to form an opinion
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on the fairness of financial statements and their conformity with generally accepted accounting principles
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. But the professional standards also require that an audit be designed to provide reasonable assurance o
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f detecting material misstatements, due to errors or fraud. Particular emphasis is placed on the income
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statement which is of great importance to investors. Auditing today also has the objectives ofmeeting th
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e requirements of the Securities and Exchange Commission (SEC) and the Public Company Accounting
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Oversight Board for public companies. RV RV RV RV
1-9 The statement is incorrect. The increasing integrated databases of today, along with available aud
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itprocedures 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 an org
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anization. It involves more subjective judgments than a compliance audit or an audit of financial stat
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ements because the criteria of effectiveness and efficiency of departmental performance are not ascl
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early established as are many laws and regulations or generally accepted accounting principles.
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The report prepared after completion of an operational audit is usually directed to management
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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 complia
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nce with established criteria. The necessary ingredients are verifiable data and the existence of standard
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s established by an authoritative body. An operational audit, on the other hand, is a review of adepart
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ment or other unit of a business or governmental organization to measure the effectiveness and efficien
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cy of operations. Internal auditors often perform operational audits as do auditors employed by the Go
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vernment Accountability Office (GAO) of the federal government.
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1-12 Internal auditors must be independent of the department heads and other line executives whose work the
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yreview. However, internal auditors are not independent in the same sense as a public accounting firm.
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