Deck 1: Introduction to Auditing

Question 1

The agency problem can be mitigated by ________.

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

Answer 1

C

Question 2

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.

Answer 2

B

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

The idea of recognizing auditing as playing a bigger part of social control is known as _____.

A)Professional responsibility
B)An accountability relationship
C)The effective auditor concept
D)The audit society concept

Question 5

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 6

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 7

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

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

Question 8

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 9

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

Question 10

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 11

Really Big Co.is a publicly traded company that has consistently reported increasing profits each year.However,during this year's audit,it was discovered that the CEO and CFO conspired to falsify the financial statements.This discovery resulted in a large correction to both the current and prior year's net income.It is believed that management was motivated to falsify the statements to maximize bonus and stock option compensation.Such a situation reflects which problem of economic theory?

A)Conflict of interest
B)Agency Problem
C)Three-party accountability
D)The "Dozy Watchdog"

Question 12

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

Question 13

In an audit engagement,the three-party accountability relationship involves all but which of entities?

A)society
B)the users
C)the auditor
D)the accountable party

Question 14

the convergence of accounting and audit standards across multiple countries is known as ________.

A)international harmonization
B)Generally accepted auditing standards
C)independence
D)Public accountability

Question 15

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 16

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

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

Question 17

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 18

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

Question 19

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 private investors
D)guided by standards similar to GAAS

Question 20

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 21

What is a direct reporting engagement? Provide an example of such an engagement.

Question 22

What is International Harmonization and what is motivating the accounting profession towards it?

Question 23

A PA firm cannot provide business advisory services to a non-audit client.

Question 24

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

Question 25

What is an attest engagement?

Question 26

An engagement to advise management on how to better align its compensation plans with strategic objectives,would be considered an assurance engagement.

Question 27

All audits are both an assurance and attestation engagement.

Question 28

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

Question 29

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

Question 30

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 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

Forensic accounting does not include fraud auditing.

Question 36

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

Question 37

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

Question 38

What is operational auditing and who performs it?

Question 39

What is information risk?

Question 40

When does an agency problem occur?

Question 41

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

Question 42

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.