Deck 1: Introduction to Auditing

Question 1

Since financial decision makers usually obtain accounting information from companies wanting loans or selling stock, this creates a potential ________.

A) agency problem
B) conflict of interest
C) harmonization problem
D) expectations gap

Answer 1

B

Question 2

In operational auditing, the auditor studies business operations and makes recommendations about all of the following EXCEPT ________.

A) economic and efficient use of resources
B) effective achievement of business objectives
C) the fairness of the financial statements
D) compliance with company policies

Answer 2

C

Question 3

Reducing information risk means the same as ________.

A) serving the public interest
B) monitoring economic activities
C) improving the credibility of information
D) ensuring generally accepted accounting principles are used to measure profit

Answer 3

C

Question 4

In addition to the audit of financial statements, comprehensive governmental auditing may also include audits of efficiency, effectiveness, and ________.

A) fraud
B) accuracy
C) economy
D) adequacy

Question 5

Professional judgment is a widely used concept in accounting and auditing. How is it defined in the audit standards?

A) There is no definition of professional judgment in the auditing standards.
B) Professional judgment includes consideration of key principles and concepts of disciplines underlying the professional standards, such as economics, psychology, law, finance, statistics and philosophy.
C) Professional judgment means reaching a complex decision by incorporating auditing standards, accounting standards, and rules of professional ethics in a coherent manner.
D) Professional judgment involves specialized concepts and language integrating several disciplines in order to provide appropriate justification for audit decisions.

Question 6

The three underlying conditions affecting users' demand for accounting information are complexity, reliability, and completeness.

Question 7

An example of a forensic accounting assignment might be ________.

A) to ensure compliance with specific legislation
B) to provide an opinion about the effectiveness of a government program
C) to provide assurance about the fairness of prospective financial information included in an initial public offering document
D) to estimate the value of inventory lost in a warehouse fire

Question 8

The assurance function involves the lending of credibility to financial information.

Question 9

What is the primary role and responsibility of independent external auditors?

A) to prepare a company's annual financial statements and notes.
B) to perform an audit and provide an opinion on the financial statements of a company.
C) to provide business consulting advice to audit clients.
D) to obtain an understanding of a client's internal control system and prepare a report for management about control weaknesses.

Question 10

Which of the following best describes the main reason that independent auditors report on a company's financial statements?

A) Management fraud may exist within the company and it is likely that the independent auditors will detect it.
B) Users of financial statements need confidence in the numbers they base their decisions on.
C) Misstated account balances may be corrected as the result of the independent audit work.
D) The accounting system from which the financial statements are derived may have a poorly designed system of internal control.

Question 11

The agency problem can be mitigated by ________.

A) greater transparency
B) a higher degree of independence
C) design of contracts
D) internal auditing

Question 12

The risk that financial statements may be materially false and misleading is called ________.

A) business risk
B) information risk
C) client risk
D) risk assessment

Question 13

The role of the auditor is to satisfy users' demand for reliable information.

Question 14

The concept of three-party accountability means that the auditor is expected to act in the interests of the party paying the audit fee.

Question 15

Three-party accountability is a special case of which economic theory problem?

A) independence
B) agency
C) business risk
D) forensics

Question 16

Auditors on staff in the Office of the Auditor General of Canada (OAG) are considered to be external auditors with respect to the government agencies they audit because the OAG is ________.

A) organizationally independent
B) the accounting and auditing agency of the Canadian Senate
C) funded by the federal government
D) guided by standards similar to GAAS

Question 17

The difference between what the public expects of auditors and what auditors can actually deliver is known as ________.

A) forensics
B) an expectations gap
C) a business risk
D) an information risk

Question 18

The auditee is the person or company ________.

A) who will use the audited information
B) who performs an audit
C) who pays the audit fee
D) whose information is being audited

Question 19

The underlying conditions that create demand by users for reliable financial information include the fact that ________.

A) more reliable information will allow investors to calculate the rate of return on their investment
B) users are separated from accounting records by distance and time
C) governments rely on such information to create tax policies
D) there is a need for the expression of an opinion as to the fairness of financial statements

Question 20

International harmonization is also known as ________.

A) convergence
B) harmony
C) independence
D) critical thinking

Question 21

When does an agency problem occur?

Question 22

Discuss the nature of value-for-money (VFM) audits and give three examples of its application.

Question 23

Internal auditing is an independent activity designed to add value and improve an organization's operations.

Question 24

Discuss the conflict between the need for an audit firm to perform quality services and its desire to make a profit in the context of the investor's need for reliable information.

Question 25

A material misstatement is one that would affect a user's decision making.

Question 26

Why is three-party accountability an important distinguishing feature of auditing?

Question 27

Forensic accounting does not include fraud auditing.

Question 28

What is an attest engagement?

Question 29

Discuss the underlying conditions affecting users' demand for accounting information.

Question 30

What is a direct reporting engagement?

Question 31

An attest engagement involves a public accountant affirming the validity of an assertion.

Question 32

What is the difference between the American Accounting Association's (AAA) definition of auditing and the Chartered Professional Accountants of Canada (CPA Canada) objectives of financial statement auditing?

Question 33

Business risk is the risk that the financial statements do not reflect the economic substance of business activities.

Question 34

There are no restrictions on the type of business advisory services a PA firm can provide to a non-audit client.

Question 35

Accounting risk is the part of information risk that is due to incorrectly predicting future events.

Question 36

What is information risk?

Question 37

What is operational auditing and who performs it?

Question 38

Value-for-money (VFM) audits include testing of compliance with laws and regulations.