Question 1

Which of the following best describes what an auditor is doing before providing an opinion on a set of financial statements?&#10;A) An auditor is taking the source documents and is recreating the financial statements to prove they are accurate.&#10;B) An auditor is trying to collect sufficient appropriate evidence to prove the financial statements are true and fair.&#10;C) An auditor is assessing the liability they have to shareholders for losses suffered from inaccurate financial statements.&#10;D) An auditor is checking that the accountants preparing the financial statements have followed their advice correctly on material matters.

Accepted Answer

An auditor's primary role is to gather sufficient appropriate evidence to determine whether the financial statements are free from material misstatement and present a true and fair view.

Question 2

Ideally an auditor wants what level of assurance before giving their opinion on a set of financial statements?&#10;A) Reasonable&#10;B) Absolute&#10;C) Limited&#10;D) Material

Accepted Answer

Auditors aim to provide reasonable assurance, which is a high but not absolute level of assurance, due to inherent limitations in auditing.

Question 3

Which of the following people described would be in the best position to audit a set of financial statements?&#10;A) An accountant who prepared the financial statements because they understand the accounts best.&#10;B) A senior manager in the organization whose accounts are being audited because they understand the environment in which the organization operates.&#10;C) An independent professional with accounting knowledge because they can remain unbiased when reviewing the financial statements.&#10;D) An owner of the organization who is not involved in its day to day operations because they are most interested in ensuring the information is accurate.

Accepted Answer

An independent professional with accounting knowledge is best suited to audit financial statements as they can provide an unbiased and objective review, which is essential for a credible audit.

Question 4

Which sort of attitude towards management is generally best for an auditor to adopt?&#10;A) Professional scepticism&#10;B) Suspicion&#10;C) Collegiality&#10;D) Friendship

Accepted Answer

Professional skepticism is an auditor's attitude of questioning the validity of information provided by management. This attitude is necessary for auditors to maintain their independence and objectivity and to ensure that they are not misled by management.

Question 5

Which of the following statements is NOT correct when considering 'true and fair' from an auditing perspective?&#10;A) True and fair financial statements should not mislead the reader.&#10;B) True and fair financial statements should be able to be relied upon to make decisions.&#10;C) The income statement, balance sheet and cash flow statement are not on their own sufficient to provide a true and fair view.&#10;D) To be true and fair financial statements must be completely accurate.

Accepted Answer

Financial statements can be considered true and fair even if they are not completely accurate, as long as they are free from material misstatements and provide a reliable representation of the company's financial position.

Question 6

One justification of audit is that it makes financial statements more reliable and,because it is more reliable, it is more useful to decision makers. This is an example of:&#10;A) The agency theory hypothesis&#10;B) The information hypothesis&#10;C) The true and fair view hypothesis&#10;D) The insurance hypothesis

Accepted Answer

The information hypothesis suggests that audited financial statements provide more reliable information, which is useful for decision-making.

Question 7

Which of the following is NOT an assumption of agency theory?&#10;A) Both owners and managers are trying to maximize their own wealth&#10;B) The financial report provides a mechanism for owners to monitor managers&#10;C) The appointment of auditors is considered a cost-effective monitoring mechanism&#10;D) Managers do not benefit from the financial statements being audited.

Accepted Answer

Agency theory assumes that managers may benefit from audited financial statements as it can enhance their credibility and reduce information asymmetry between them and the owners.

Deck 1: Why Are Auditors Needed