Question 1

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

Accepted Answer

The answer of Define "information asymmetry" and discuss it in...

Question 2

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 promotes auditor independence from the management of the corporation. This ensures that the auditor provides an unbiased and accurate assessment of the company's financial statements, which enhances the reliability of financial reporting. It is essential to prevent conflicts of interest from arising between the auditor and company management, which could compromise the auditor's impartiality.

Question 3

On a high level, the accounting processes of a business consist of internal controls, individual transactions, and account balances.
Required:
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.

Accepted Answer

The answer of On a high level, the accounting processes...

Question 4

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. Performing background checks on top management may be a part of preliminary engagement activities to evaluate the credibility and credibility of the management team.

Question 5

Explain the relationship between audit, attest and assurance services.

Accepted Answer

The answer of Explain the relationship between audit, attest and...

Question 6

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

Accepted Answer

Materiality is largely a matter of professional judgment as it involves determining the relevance or importance of an item to users of the financial statements. While quantitative guidelines may be used as a reference, materiality is not solely based on the dollar amount of an item but also takes into consideration the nature and context of the item.

Question 7

The auditor's report is generally addressed to the:

Accepted Answer

The auditor's report is typically addressed to the stockholders of the company and presented alongside the company's financial statements. This report communicates the auditor's findings and opinion regarding the completeness and accuracy of the financial statements. While the auditor may communicate with the chief operating officer or chief financial officer during the audit process, the final report is meant for the intended audience of the stockholders. The securities and exchange commission may also review the auditor's report as part of their regulatory oversight, but they are not the primary audience.

Question 8

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 indicates that the auditor is satisfied with the financial statements and has not found any major issues or disputes with the accounting practices of the company. It does not make any statement about future profitability, precise accuracy of account balances, or the qualification of management.

Question 9

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

Accepted Answer

Offering an opinion on the accuracy of statements made on an entity's website relating to its online privacy policies is an example of an assurance service. This service provides an independent and objective evaluation of information to increase the confidence of stakeholders in the accuracy and reliability of that information.

Question 10

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

Accepted Answer

Before accepting a new engagement, an auditor is required to make inquiries of the predecessor auditor to assess the reasons for the change in auditors, any issues encountered during the previous audit, and to determine if there are any factors that may affect the current audit. Choices B, C, and D are not mandatory requirements before accepting a new audit engagement.

Question 11

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...

Question 12

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

Accepted Answer

Assurance, attest, and audit services are not limited to financial statements and financial statement accounts. These services can be applied to various types of information and processes, such as internal controls, compliance with laws and regulations, and sustainability reporting.

Question 13

Information Risk is defined as:

Accepted Answer

Information risk refers to the possibility that the information provided by a company's management is false or misleading.

Question 14

An auditor would issue an adverse opinion if:

Accepted Answer

An adverse opinion is issued when the financial statements taken as a whole do not fairly present the financial condition and results of operations of the company. This means that there are material misstatements present in the financial statements that are significant enough to affect the decisions of users of the statements.

Question 15

Which of the following is not a benefit of emerging audit technologies?

Accepted Answer

The other options mention benefits of emerging audit technologies such as automation, improved effectiveness, and allowing auditors more time for understanding the business and risks. Option D suggests that emerging audit technologies remove the challenge of junior auditor work and make it less interesting, which is not necessarily a benefit. It could also be seen as a drawback, as junior auditors need challenging work to develop their skills and grow in their careers.

Question 16

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

Accepted Answer

The auditor's report indicates that the company's financial statements were audited in accordance with applicable auditing standards, such as Generally Accepted Auditing Standards (GAAS) in the United States or International Standards on Auditing (ISA) internationally. The auditor may also refer to other relevant standards or regulations depending on the circumstances. The report does not mention accounting standards or the auditor's best judgment.

Question 17

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

Accepted Answer

Auditors are likely to use the most rigorous audit procedures for management assertions that are deemed to be of high risk. This is because high-risk assertions have a higher probability of material misstatement, which could result in a material misstatement in the financial statements. Therefore, auditors will use more rigorous procedures to ensure that these assertions are accurate and reliable.

Question 18

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 typically included in the opinion paragraph of the auditor's report, rather than the scope paragraph. The scope paragraph usually focuses on the nature and extent of the audit procedures that were performed. Choices B, C, and D are concepts that are typically included in the scope paragraph.

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

The primary purpose of obtaining an understanding of internal controls is to identify areas of higher risk of misstatement in the financial statements so that the auditor can plan the audit accordingly. This helps the auditor to assess the risks of material misstatement and design appropriate audit procedures to address those risks. While internal controls may also provide suggestions for improvement to the company, this is not the primary objective of the auditor's evaluation. Similarly, understanding internal controls serves as a basis for setting audit risk and materiality, but again, this is not the primary objective of the evaluation. Finally, the auditor's decision of whether to perform an audit for the company is based on a number of factors, including whether the company meets the auditor's independence requirements, whether there are conflicts of interest, etc.

Question 20

Auditing is defined as a "systematic process of objectively obtaining and evaluating evidence regarding assertions..." What is meant by "systematic process"?

Accepted Answer

A systematic process refers to having a structured and planned approach for obtaining and evaluating evidence. This involves following a set of procedures and methods that ensure a consistent and thorough examination of the relevant assertions. This helps to ensure that the audit is conducted in a reliable and effective manner, and that the findings are accurate and objective.

Quiz 1: An Introduction to Assurance and Financial Statement Auditing