Question 1

Insurance hypothesis is a means whereby the investor can guarantee the success of their investment.

Accepted Answer

Insurance is a means of mitigating risk but it does not guarantee the success of an investment. The success of an investment depends on multiple factors such as market conditions, management decisions, and economic environment.

Question 2

A compliance audit involves gathering evidence to ascertain whether the person or entity under review has followed the rules, policies, procedures, laws and regulations with which they must conform

Accepted Answer

A compliance audit is specifically designed to assess whether the auditee is complying with applicable rules, policies, procedures, laws and regulations.

Question 3

The nature of audit procedures refers to the reliance on evidence provided by the client and its management.

Accepted Answer

Audit procedures are designed to obtain sufficient and appropriate audit evidence to support the auditor's opinion on the financial statements. This evidence is obtained through a combination of tests of controls, substantive procedures, and other procedures as deemed necessary by the auditor. The evidence may come from the client and its management, as well as from third-party sources such as banks, customers, and suppliers. Therefore, the nature of audit procedures does include reliance on evidence provided by the client and its management.

Question 4

The sources of demand for audit and assurance services does not include
A) independence.
B) complexity.
C) reliability.
D) competing incentives.

Accepted Answer

Independence is not a source of demand for audit and assurance services, but rather a fundamental requirement for their effective execution. The sources of demand include complexity, reliability, and competing incentives, as these all contribute to the need for audit and assurance services to ensure accurate and transparent financial reporting.

Question 5

Only current investors (not potential investors) are considered to be users of the financial statements.

Accepted Answer

Both current and potential investors are considered users of financial statements, as they use the information to make decisions about buying, holding, or selling equity or debt instruments.

Question 6

A reasonable level of assurance is the highest level of assurance that an auditor can provide.

Accepted Answer

The answer of A reasonable level of assurance is the...

Question 7

All modified audit reports are qualified audit opinions.

Accepted Answer

Modified audit reports can also be adverse or disclaimer of opinion, depending on the severity of the issues identified during the audit.

Question 8

The most common types of assurance engagements are financial statement audits, confirmation audits, performance audits, comprehensive audits and assurance on corporate social responsibility (CSR) disclosures.

Accepted Answer

The most common types of assurance engagements are financial statement audits, reviews, and other assurance services, but not all the types listed such as confirmation audits and comprehensive audits are standard categories.

Question 9

An operational audit is an example of a compliance audit.

Accepted Answer

An operational audit is not focused on ensuring compliance with laws or regulations, but rather on evaluating the efficiency and effectiveness of an organization's operations and processes.

Question 10

It is the auditor's responsibility to prepare the financial statements.

Accepted Answer

It is the responsibility of management to prepare the financial statements. The auditor's responsibility is to provide an opinion on the fairness and accuracy of the financial statements.

Question 11

The expectation gap is caused by unrealistic user expectations such as the auditor providing a moderate level of assurance.

Accepted Answer

The answer of The expectation gap is caused by unrealistic...

Question 12

A limitation of an audit is caused by
A) the nature of financial reporting.
B) the nature of audit procedures.
C) the need for the audit to be conducted within a reasonable period of time and at a reasonable cost.
D) all of the above

Accepted Answer

All of the above factors contribute to limitations of an audit. The nature of financial reporting can be complex and subject to manipulation, which limits the accuracy of the audit. The nature of audit procedures may also be limited in their ability to detect certain types of fraud or errors. Additionally, the need for audits to be conducted within a reasonable timeframe and cost can limit the extent and depth of the audit procedures performed.

Question 13

An auditor can provide a reasonable level of assurance on information other than historical financial information.

Accepted Answer

Auditors can provide a reasonable level of assurance on information other than historical financial information, such as sustainability reports, internal controls, and compliance with laws and regulations. However, the level of assurance and the type of audit procedures may vary depending on the nature of the information being audited.

Question 14

Martha Minnati was reviewing the previous year's audited financial statements of a clothing manufacturer. Her manager explained to her that for a financial statement audit, the clothing company was the accountable party, its shareholders were the users, and the subject matter was the financial statements. What kind of audit engagement was her manager describing?
A) consulting engagement
B) assurance engagement
C) review engagement
D) compliance engagement

Accepted Answer

The manager was describing an assurance engagement, where the auditor provides an independent opinion or assurance on the subject matter, in this case, the financial statements, to the users, in this case, the shareholders.

Question 15

An audit is one way for investors to insure against at least part of their loss should the company they invest in fail - this is an example of
A) agency theory.
B) information hypothesis.
C) insurance hypothesis.
D) competing incentives.

Accepted Answer

The statement describes how an audit can provide a form of insurance against potential losses for investors. This aligns with the insurance hypothesis, which suggests that auditing serves as a means for stakeholders to insure against losses resulting from misstatements or fraudulent activity.

Question 16

An engagement performed by an auditor or consultant to enhance the reliability of the subject matter can best be described as a(n)
A) compilation engagement.
B) review engagement.
C) consultancy engagement.
D) assurance engagement.

Accepted Answer

An assurance engagement involves an independent auditor or consultant providing an opinion or conclusion on the reliability or fairness of subject matter. This is in contrast to compilation or review engagements, which involve the auditor or consultant providing limited or no assurance on the subject matter. Consultancy engagements may involve providing advice or guidance, but do not necessarily involve enhancing the reliability of subject matter.

Question 17

A no assurance engagement is of little use as no assurance is given to the client.

Accepted Answer

While a no assurance engagement does not provide assurance to the client, it can still provide value in the form of limited procedures or other agreed-upon procedures that can assist the client in making decisions or providing information for a specific purpose.

Question 18

Which of the following groups would be considered users of the financial statements?
A) governments
B) current shareholders
C) general public
D) all of the above

Accepted Answer

Governments use financial statements to monitor and regulate companies, current shareholders use financial statements to make investment decisions, and the general public uses financial statements to assess a company's financial health and overall performance. Therefore, all three groups would be considered users of financial statements.

Question 19

A negative expression of opinion is only given when there is a disagreement with management and the auditor.

Accepted Answer

A negative expression of opinion can also be given when there are material misstatements in the financial statements, lack of disclosure, or inability to obtain sufficient audit evidence. It does not necessarily require a disagreement between management and the auditor.

Question 20

An example of the three parties in an assurance engagement would be:
A) audit client, employee, customer.
B) audit client, supplier, auditor.
C) auditor, shareholder, general public.
D) auditor, general public, employees.

Accepted Answer

The three parties in an assurance engagement are the assurance provider, the intended users of the assurance report or services, and the responsible party. In this case, the audit client is the responsible party, the auditor is the assurance provider, and the supplier is an example of an intended user of the assurance report or services. Therefore, choice B is the best answer.

Quiz 1: Introduction and Review of Audit and Assurance

Insurance hypothesis is a means whereby the investor can guarantee the success of their investment.

A compliance audit involves gathering evidence to ascertain whether the person or entity under review has followed the rules, policies, procedures, laws and regulations with which they must conform

The nature of audit procedures refers to the reliance on evidence provided by the client and its management.

The sources of demand for audit and assurance services does not include

Only current investors (not potential investors) are considered to be users of the financial statements.

A reasonable level of assurance is the highest level of assurance that an auditor can provide.

All modified audit reports are qualified audit opinions.

The most common types of assurance engagements are financial statement audits, confirmation audits, performance audits, comprehensive audits and assurance on corporate social responsibility (CSR) disclosures.

An operational audit is an example of a compliance audit.

It is the auditor's responsibility to prepare the financial statements.

The expectation gap is caused by unrealistic user expectations such as the auditor providing a moderate level of assurance.

A limitation of an audit is caused by

An auditor can provide a reasonable level of assurance on information other than historical financial information.

An audit is one way for investors to insure against at least part of their loss should the company they invest in fail - this is an example of

An engagement performed by an auditor or consultant to enhance the reliability of the subject matter can best be described as a(n)

A no assurance engagement is of little use as no assurance is given to the client.

Which of the following groups would be considered users of the financial statements?

A negative expression of opinion is only given when there is a disagreement with management and the auditor.

An example of the three parties in an assurance engagement would be: