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

Accepted Answer

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.

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 an understanding of the company's accounting practices and internal controls, testing transactions and account balances, and providing assurance that the financial statements are free of material misstatement. The auditor's opinion provides credibility to the financial statements and helps users of the information make informed decisions. The other choices are not the primary role and responsibility of auditors.

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 refers to minimizing the chances of incorrect or misleading information being used in decision-making. Improving the credibility of information is one way of minimizing the risk of using unreliable information. The other options (A, B, and D) do not accurately describe the concept of information risk reduction.

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

Accepted Answer

The concept of recognizing auditing as playing a bigger part of social control is known as the audit society concept. This concept suggests that auditing has become a fundamental part of modern society, as it provides assurance and trust in various institutions, organizations, and systems. It also highlights the extent to which auditing practices have expanded beyond traditional financial auditing and now encompass a wide range of social, environmental, and ethical issues.

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

Accepted Answer

Estimating the value of inventory lost in a warehouse fire involves forensic accounting techniques such as reconstructing transactions and tracing financial records to determine the actual value of inventory at the time of the fire. This is a typical example of a forensic accounting assignment. A, B, and C are not examples of forensic accounting, but rather relate to other areas of accounting such as compliance, performance auditing, and assurance services.

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

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 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

Accepted Answer

Information risk refers to the risk that financial statements may be materially false and misleading, affecting the decisions of users relying on that information.

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.

Accepted Answer

Independent auditors report on a company's financial statements to provide users with confidence in the numbers they base their decisions on. The auditor's report indicates that the financial statements are free from material misstatement and can be relied upon by users. While the auditor may detect management fraud, correct misstated account balances, or identify weaknesses in internal control, the primary reason for an audit is to enhance the credibility of the financial statements for their intended users.

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

Accepted Answer

The fairness of financial statements is not within the scope of operational auditing. The focus is on the effectiveness and efficiency of operations, compliance with policies, and achievement of business objectives. Financial statement auditing is a separate process that evaluates the fairness and accuracy of financial statements.

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

Accepted Answer

The difference between what the public expects of auditors and what auditors can actually deliver is known as an expectations gap. Forensics refers to the use of investigative techniques to analyze financial and accounting information. Business risk is the potential risk that a company will face in its operations, while information risk is the risk of inaccurate or incomplete information affecting business decisions.

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"

Accepted Answer

The answer of Really Big Co.is a publicly traded company...

Question 12

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 and objective opinion on the accuracy and truthfulness of the financial statements, which helps satisfy users' demand for reliable information. Therefore, option A is correct.

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

Accepted Answer

The answer of In an audit engagement,the three-party accountability relationship...

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

Accepted Answer

International harmonization refers to the process of bringing accounting and audit standards together across multiple countries. This is done to ensure consistency in financial reporting and to facilitate international trade and investment. Generally accepted auditing standards (B) refers to the set of guidelines that auditors must follow when conducting an audit. Independence (C) refers to the concept that auditors must remain impartial and free from conflicts of interest when conducting an audit. Public accountability (D) refers to the responsibility that organizations have to be transparent and accountable to the public. While all of these concepts are related to accounting and auditing, international harmonization specifically pertains to the convergence of standards across countries.

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.

Accepted Answer

The concept of three-party accountability means that the auditor is responsible for accountability to three parties- the company being audited, the users of the financial statements, and regulatory authorities. The auditor is expected to act in the public interest and maintain independence to provide an unbiased opinion on the financial statements. Hence, the auditor is not expected to act solely in the interest 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

Accepted Answer

Comprehensive governmental auditing often includes audits of economy, which assess whether resources have been used efficiently and effectively to achieve desired outcomes.

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

Accepted Answer

The auditee is the person or company whose information is being audited. This is because the purpose of the audit is to provide an independent evaluation of the accuracy and completeness of the auditee's financial statements or other information. The auditee may pay the audit fee and use the audited information, but these factors do not define the auditee's role in the audit process. The person or company who performs an audit is called the auditor.

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

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 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

Accepted Answer

Auditors on staff in the Office of the Auditor General of Canada (OAG) are considered to be external auditors because the OAG is organizationally independent from the government agencies it audits. This independence ensures that the auditors are able to provide objective and unbiased assessments of the financial statements and operations of the agencies they audit. Additionally, the OAG follows auditing standards that are similar to Generally Accepted Auditing Standards (GAAS) to ensure the quality and reliability of their audit work.

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.

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.

Quiz 1: Introduction to Auditing

The agency problem can be mitigated by ________.

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

Reducing information risk means the same as ________.

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

An example of a forensic accounting assignment might be ________.

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

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

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

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

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

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

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

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

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

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

The auditee is the person or company ________.

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

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 ________.

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