Question 1

Compare the auditor's focus in an audit with the public's general expectation.

Accepted Answer

The public generally expects that an auditor will ferret out all errors and fraud in a client. The reality of auditing is a bit different, however. As a practical matter, an auditor focuses on errors and fraudulent financial reporting because they directly affect the financial statements and are often highly significant. Auditors are less concerned with misappropriation of assets because the amounts involved tend to be small and often have little direct impact on the financial statements unless the culprit tries to hide the theft by manipulating the accounting records. Professional standards require that the audit be planned so as to provide reasonable assurance that significant errors or fraudulent misstatements will be detected, regardless of their cause. Professional standards also acknowledge that a well-planned audit may not detect all fraudulent misstatements, especially those involving collusion among multiple persons or forgery of documents.

Question 2

Describe the auditor's responsibility to plan an audit. .

Accepted Answer

The auditor's responsibility is to plan the audit to provide reasonable assurance that material errors and fraudulent misstatements will be detected including: Exercising adequate professional skepticism, investigating whether risk factors are present that indicate a higher than average risk of material misstatement, discussing with the audit team explicitly how fraud or other material misstatement might occur in a specific client, how earnings management attempts might lead to fraud, and how the audit team would uncover indications of fraud or other material misstatement.

Question 3

Describe the auditor's responsibilities relating to internal control.

Accepted Answer

The auditor has four primary responsibilities related to the conduct of the audit: (1) to plan the audit so as to have reasonable assurance that errors and fraudulent misstatements will be detected and corrected, (2) to evaluate the effectiveness of internal control over financial reporting, (3) to evaluate the potential for illegal acts on the part of the client, and (4) to evaluate the likelihood that the company will continue as a going concern.

Question 4

Why don't auditors provide a guarantee that all misstatements in the financial statements will be discovered?

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Question 5

Define 'reasonable assurance' as it relates to an audit engagement.

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Question 6

How will the auditor's work differ if the goal of the audit is the detection of all fraud?

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Question 7

What is the auditor's responsibility with respect to management's assertions about the financial statements?

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Question 8

Explain the difference between errors and fraudulent misstatements.

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Question 9

Describe the auditor's responsibility if an error or fraudulent misstatement is detected during the course of the audit.

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Question 10

How are the three concepts of risk, evidence and materiality interrelated?

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Question 11

Describe management's responsibility for internal control.

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Question 12

Describe the three reports an auditor issues when reporting on the financial statements of any public company registered with the SEC in the United States,

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Question 13

Describe the auditor's responsibility to plan an audit when sufficient risk factors are present to indicate a higher than average risk of material misstatement due to errors and fraudulent misstatements.

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Question 14

Describe the auditor's responsibility with regard to the going concern concept.

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Question 15

Describe three different types of fraud.

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Question 16

The notion of reasonable assurance comprises three concepts that are pervasive to the conduct of an audit: risk, materiality, and evidence. Define them as concisely as possible.

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Question 17

What are the auditors' responsibilities for detecting illegal acts that have been committed by client personnel?

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Question 18

Describe the responsibilities of management and auditors related to the production and release of audited financial statements.

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Question 19

Identify and explain the three broad types of risk of paramount interest to the auditor.

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Question 20

Describe four different types of tests applicable to accounting information.

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Quiz 3: The Building Blocks of Auditing