Question 1

Explain the relationship between audit,attest and assurance services.

Accepted Answer

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Question 2

An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by an auditor's unqualified report.From this,the investor may conclude that

Accepted Answer

An auditor's unqualified report means that the auditor has reviewed the financial statements and has no significant issues or disagreements with the company's accounting practices. This does not guarantee future profitability or the accuracy of every account balance, but it does suggest that any significant disputes over accounting issues have been resolved to the satisfaction of the auditor.

Question 3

On a high level,the accounting processes of a business consist of internal controls,individual transactions,and account balances.
Required:
A. A company implements internal controls as a safeguard to ensure appropriate capturing and recording of individual transactions, which are then collected into ending account balances. Ending account balances are then used to prepare the financial statements. The auditor expresses an opinion on the financial statements, which are made up of ending account balances and disclosures.
A. Describe the relationship between internal controls, individual transactions, and account balances.
B. Discuss how evidence regarding each of these three areas can help an auditor determine if the financial statements are fairly stated.
B. The auditor can obtain evidence from all three steps of the accounting process. For instance, an auditor can directly test the account balance (e.g., by examining a bank statement reconciliation). This evidence is usually the highest-quality but costliest evidence. Alternatively, the auditor can obtain indirect information by testing the individual transactions that make up an account balance. If transactions are handled properly, this provides indirect evidence that the ending balances are more likely to be fairly stated. The least direct method of obtaining evidence is to evaluate and test the company's internal controls, which are implemented to ensure that transactions are handled properly. If a client's system of internal control is effective, transactions are more likely to be handled properly, and thus the ending balances making up a set of financial statements are more likely to be fairly stated. Auditors usually collect evidence relating to all three areas: internal control, transactions, and ending balances.

Accepted Answer

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Question 4

Which of the following would best be described as an assurance service?

Accepted Answer

Offering an opinion concerning the accuracy of statements made on a client's website relating to the client's online privacy policies is an example of an assurance service, as it provides an independent assessment of the information provided.

Question 5

Sally Thompson's company,Sally's Shoes,is a successful shoe retail business with one store.Sally would like to expand to two locations,but the bank has asked for an independent audit before it will provide financing.Sally hires her brother-in-law,George Thompson,to perform the audit.George has experience in auditing non-profit organizations and he decides to perform the audit the same way as his other audits.After completing all the steps of the audit process,George issues an unqualified opinion indicating that he is certain that the company's financial statements contain no misstatements.Comment on any potential problems with George's audit of Sally's Shoes.

Accepted Answer

The answer of Sally Thompson's company,Sally's Shoes,is a successful shoe...

Question 6

An auditor would issue an adverse opinion if

Accepted Answer

An adverse opinion is issued when the auditor has determined that the financial statements, taken as a whole, do not fairly present the financial condition and results of operations of the company. This is a more serious level of qualification than a qualified opinion, which is given when the auditor believes that the financial statements are fairly presented except for a specific area or issue. Therefore, option D is the best choice for an adverse opinion.

Question 7

The textbook presented the concept of auditing through an analogy that involved buying a house and hiring a house inspector.Name three desirable qualities of a house inspector or an auditor and discuss how those qualities apply to an auditor and why those qualities are important for an auditor to possess.

Accepted Answer

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Question 8

Discuss an overview of the financial statement audit process using the terms "assertion," "evidence," and "report."

Accepted Answer

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Question 9

Which of the following is not a concept that is included in the scope paragraph of the auditor's report?

Accepted Answer

The conformance of the financial statements with generally accepted accounting principles is not included in the scope paragraph of the auditor's report. Rather, it is included in the opinion paragraph where the auditor expresses their opinion on whether the financial statements are fairly presented in accordance with generally accepted accounting principles. The scope paragraph typically describes the nature and extent of the audit procedures performed and any limitations on the scope of the audit. Choices B, C, and D are concepts that are typically included in the scope paragraph of the auditor's report.

Question 10

The definition of auditing refers to auditing as a "systematic process of objectively obtaining and evaluating evidence regarding assertions....." What is meant by "systematic process"?

Accepted Answer

"Systematic process" means that there is a well-planned approach for obtaining and evaluating evidence. This approach should be consistently followed to ensure that the audit is conducted in a structured and organized manner.

Question 11

Which of the following is true with respect to the auditor's report?

Accepted Answer

The auditor's report indicates that the client's financial statements were audited in accordance with applicable auditing standards. This includes generally accepted accounting principles (GAAP) as well as other necessary standards such as the Generally Accepted Auditing Standards (GAAS) and International Standards on Auditing (ISA). The auditor's report does not indicate that the financial statements were audited in accordance with the auditor's best judgment, as this would not provide sufficient guidance or clarity to users of the report. Similarly, the report does not indicate that the financial statements were audited in accordance with statements issued by the FASB alone, as there are other important standards that must also be followed.

Question 12

The auditor's report is generally addressed to the

Accepted Answer

The auditor's report is generally addressed to the stockholders of the company. This is because the auditor's main duty is to express an opinion on the financial statements and provide assurance to the stockholders that the financial statements are presented fairly and in accordance with the applicable accounting standards. The auditor's report is included in the annual report that is distributed to the stockholders, making them the intended recipients of the report.

Question 13

Which one of the following statements best describes the concept of materiality?

Accepted Answer

Materiality is largely a matter of professional judgment, which means that there is no specific quantitative guideline or dollar amount that can be universally applied to every situation. Rather, auditors use their professional judgment and knowledge to evaluate whether an item is material or not based on factors such as its nature, size, and potential impact on the financial statements. Therefore, option D is the best choice.

Question 14

Preliminary engagement activities include

Accepted Answer

Preliminary engagement activities do not involve evaluating internal controls, assessing audit risk at the account balance level, or setting materiality. The only option that makes sense for preliminary engagement activities is performing background checks on top management to ensure that there are no potential conflicts of interest or other issues that could impact the integrity of the audit.

Question 15

Which of the following statements is not true with respect to assurance,attest,and audit services?

Accepted Answer

While these services are commonly applied to financial statements and financial statement accounts, they can also be applied to non-financial information such as performance metrics and compliance with laws and regulations.

Question 16

Define "information asymmetry" and discuss it in the context of the financial markets.Include in your discussion how information asymmetry is reduced.

Accepted Answer

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Question 17

Auditors are most likely to use the most rigorous audit procedures to examine

Accepted Answer

Auditors are more likely to use the most rigorous audit procedures to examine management assertions that are deemed to be of high risk. This is because high-risk assertions are more likely to contain material misstatements that could adversely affect the financial statements. Therefore, to obtain sufficient and appropriate audit evidence, auditors need to perform more extensive procedures to address the higher risk of material misstatement.

Question 18

Before accepting an engagement to audit a new client,an auditor is required to

Accepted Answer

Making inquiries of the predecessor auditor is a necessary step before accepting a new client engagement as it helps the auditor understand any potential issues or concerns with the client's financial statements and business operations. The other options are not required or appropriate steps in the client acceptance process.

Question 19

When obtaining an understanding of the entity and its environment,the auditor should obtain an understanding of internal controls primarily to

Accepted Answer

Obtaining an understanding of internal controls is primarily done to identify areas of relatively high risk of misstatement and plan the audit accordingly. This helps the auditor to design suitable audit procedures for those high-risk areas and ensure that the financial statements are not materially misstated. While internal controls can also provide suggestions for improvement and serve as a basis for setting audit risk and materiality, identifying areas of high risk is the primary purpose. Deciding whether to perform an audit is based on other factors such as auditor independence, client acceptance, and assessing engagement risks.

Question 20

Which of the following best describes why publicly-traded corporations follow the practice of having the external auditor appointed by the board of directors or elected by the stockholders?

Accepted Answer

Having an external auditor appointed by the board of directors or elected by the stockholders enhances the auditor's independence from the management of the corporation. This reduces the possibility of conflicts of interest and ensures that the audit is free from any bias. The auditor is expected to report any irregularities or errors found during the audit, which may not be in line with the management's decisions. Therefore, having an independent auditor promotes transparency and accountability in the corporation's financial reporting.

Quiz 1: An Introduction to Assurance and Financial Statement Auditing