Question 1

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

Accepted Answer

The potential conflict of interest arises from the fact that companies wanting loans or selling stock have an incentive to present their financial information in the best possible light, which may not always be an accurate reflection of their financial position. This creates a potential conflict of interest between the financial decision makers and the companies providing the financial information.

Question 2

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

Accepted Answer

While operational auditing may touch on financial statements as part of evaluating business operations, the primary focus is on ensuring efficient use of resources, effective achievement of objectives, and compliance with company policies. Checking for the fairness of financial statements is typically the responsibility of a financial auditor.

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

Accepted Answer

Reducing information risk involves improving the accuracy and credibility of information, which is achieved by ensuring that information is reliable, relevant, and accurate. This can include implementing controls to reduce the risk of errors or fraud, verifying the accuracy of information, and ensuring that information is presented in a clear and understandable manner. It does not necessarily involve serving the public interest, monitoring economic activities, or ensuring adherence to accounting principles.

Question 4

In addition to the audit of financial statements, comprehensive governmental auditing may also include audits of efficiency, effectiveness, and ________.
A) fraud
B) accuracy
C) economy
D) adequacy

Accepted Answer

Comprehensive governmental auditing may include audits of efficiency, effectiveness, and economy in addition to the audit of financial statements. Efficiency audits assess whether the government is using its resources in the most productive way possible. Effectiveness audits assess whether the government's programs and policies are achieving their intended goals. Economy audits assess whether the government is acquiring and using resources in the most efficient and cost-effective manner possible. Fraud and accuracy are also important areas to audit, but they are not the only aspects of comprehensive governmental auditing.

Question 5

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.

Accepted Answer

Professional judgment in the context of auditing is defined as the application of relevant training, knowledge, and experience in making informed decisions about the appropriate courses of action during the audit process. It involves considering auditing standards, accounting standards, and professional ethics to reach a decision.

Question 6

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

Accepted Answer

The three underlying conditions affecting users' demand for accounting information are complexity, uncertainty, and time sensitivity.

Question 7

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

Accepted Answer

Estimating the value of inventory lost in a warehouse fire requires forensic accounting skills such as analyzing financial records, documenting evidence, and providing expert testimony.

Question 8

The assurance function involves the lending of credibility to financial information.

Accepted Answer

The assurance function involves providing independent and objective opinions on financial information to enhance its credibility and reliability. Thus, it lends credibility to financial information. Therefore, the statement is true.

Question 9

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.

Accepted Answer

The primary role and responsibility of independent external auditors is to perform an audit and provide an opinion on the financial statements of a company. This involves obtaining reasonable assurance that the financial statements are free from material misstatement, and expressing an opinion as to whether the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows in accordance with the applicable financial reporting framework. The other options - preparing financial statements, providing business consulting advice, and reporting on control weaknesses - may be services auditors are engaged to perform, but they are not the primary role and responsibility.

Question 10

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.

Accepted Answer

Independent auditors report on a company's financial statements to provide assurance to users of the financial statements that they can rely on the numbers when making decisions. It is important for users to have confidence in the financial statements provided by the company, and independent auditors provide that confidence by ensuring that the financial statements are free from material misstatements. While management fraud and misstated account balances are potential issues that could be identified during an audit, the primary purpose of an audit is to provide assurance to users of the financial statements. The effectiveness of the company's internal controls may also be a factor considered during the audit, but it is not the main reason for the independent audit.

Question 11

The agency problem can be mitigated by ________.
A) greater transparency
B) a higher degree of independence
C) design of contracts
D) internal auditing

Accepted Answer

The answer of The agency problem can be mitigated by...

Question 12

The risk that financial statements may be materially false and misleading is called ________.
A) business risk
B) information risk
C) client risk
D) risk assessment

Accepted Answer

Information risk refers to the risk that the financial statements may be materially false and misleading. Business risk refers to the risk that a company will not achieve its financial goals. Client risk refers to the risk associated with a specific client's ability to pay for services rendered. Risk assessment is the process of identifying, analyzing and evaluating risks.

Question 13

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

Accepted Answer

The role of the auditor is to provide an independent opinion on the financial statements of an entity, which helps to increase the reliability of information for users such as investors, creditors, and other stakeholders. Therefore, the auditor's role is to satisfy users' demand for reliable information.

Question 14

The concept of three-party accountability means that the auditor is expected to act in the interests of the party paying the audit fee.

Accepted Answer

The concept of three-party accountability means that the auditor is expected to act in the interests of the third-party users of the financial statements, such as investors and creditors, rather than the party paying the audit fee (the client).

Question 15

Three-party accountability is a special case of which economic theory problem?
A) independence
B) agency
C) business risk
D) forensics

Accepted Answer

Three-party accountability involves three parties: the principal, the agent, and a third party who is affected by the actions of the agent. This is a special case of the agency problem, which arises when there is a conflict of interest between the principal and the agent. In this case, the third party is affected by the actions of the agent, and the principal may not have the ability to fully control the actions of the agent, leading to potential issues of accountability.

Question 16

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 the federal government
D) guided by standards similar to GAAS

Accepted Answer

Auditors on staff in the OAG are organizationally independent from the government agencies they audit, which is a key characteristic of an external auditor. This means they are not part of the organizations they audit and their objective and unbiased assessments can be relied upon.

Question 17

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

Accepted Answer

The expectations gap refers to the difference between what the public (including clients and investors) believes an auditor should do and what auditors can reasonably do given their professional responsibilities and limitations. Forensics refers to the use of accounting, auditing, and investigative skills to detect and prevent fraud, while business risk is the risk that a company will fail to meet its objectives or not properly manage its resources. Information risk is the risk that information reported by a company is inaccurate or misleading.

Question 18

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

Accepted Answer

The auditee is the person or company whose information is being audited.

Question 19

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

Accepted Answer

Users are often separated from the accounting records by both distance and time, which creates a demand for reliable financial information to bridge this gap and ensure that they have accurate and timely data for decision-making.

Question 20

International harmonization is also known as ________.
A) convergence
B) harmony
C) independence
D) critical thinking

Accepted Answer

International harmonization refers to the process of aligning accounting standards and procedures across different countries in order to simplify and standardize financial reporting. This is often referred to as "convergence" because the goal is to bring different systems into agreement or harmony with each other. Choice B) harmony is similar, but not as commonly used in this context. Choice C) independence is not relevant to the concept of international harmonization in accounting. Choice D) critical thinking is also not applicable to this topic.

Quiz 1: Introduction to Auditing

Since financial decision makers usually obtain accounting information from companies wanting loans or selling stock, this creates a potential ________.

In operational auditing, the auditor studies business operations and makes recommendations about all of the following EXCEPT ________.

Reducing information risk means the same as ________.

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

Professional judgment is a widely used concept in accounting and auditing. How is it defined in the audit standards?

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

An example of a forensic accounting assignment might be ________.

The assurance function involves the lending of credibility to financial information.

What is the primary role and responsibility of independent external auditors?

Which of the following best describes the main reason that independent auditors report on a company's financial statements?

The agency problem can be mitigated by ________.

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

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

The concept of three-party accountability means that the auditor is expected to act in the interests of the party paying the audit fee.

Three-party accountability is a special case of which economic theory problem?

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 ________.

The difference between what the public expects of auditors and what auditors can actually deliver is known as ________.

The auditee is the person or company ________.

The underlying conditions that create demand by users for reliable financial information include the fact that ________.

International harmonization is also known as ________.