Accounting 101

Question 1

What is the accounting equation?

Answer 1

Assets = liabilities +equity

Question 2

What is a trial balance?

Answer 2

A report of all a companies debits and credits at any given time

Question 3

What are debits and credits and what is their relationship to accrual accounting?

Answer 3

Debuts are where money flows to whilst credits are where money flows from. In accrual accounting, debits and credits but always equate to zero.

Question 4

What is actuarial accounting?

Answer 4

A system in where costs and benefits must be equal. Debits+credits must equal 0.

Question 5

What is a reasonable audit?

Answer 5

A thoroughly conducted audit that allows reasonable conclusions to be drawn up and placed into a report.

Question 6

What is a limited audit?

Answer 6

An audit in which only limited conclusions can be deduced and placed into a report. Is it less thorough than a reasonable audit.

Question 7

What are the 5 elements of an assurance engagement?

Answer 7

1. Three party involvement: practitioner, intended users and the responsible party.
2. Appropriate subject matter.
3. Suitable criteria.
4. Sufficient appropriate evidence.
5. Written assurance report.

Question 8

What are the HIRED benefits to audit?

Answer 8

1. Higher quality of information which is more reliable, improving the markets reputation.
2. Independent scrutiny and verification are valuable to management.
3. Reduces the risk of management bias, fraud and error by acting as a deterrent.
4. Enhances the credibility of financial statements for tax authorities, lenders and investors.
5. Deficiencies in the internal control system can be highlighted by the auditor.

Question 9

What is the expectation gap ?

Answer 9

Misconceptions about the role of an auditor and the holism of their analysis.

Question 10

What are 3 examples of expectation bias?

Answer 10

1. A belief that all transactions are balanced are tested. Tests are instead performed on a sample basis.
2. A belief that the auditor will detect all fraud. Auditors provide reasonable assurance that financial statements are free from material misstatement, that could be caused by fraud.
3. Believing that the auditor is responsible for preparing financial statements.

Question 11

What are the limitations of an audit according to FIRED?

Answer 11

1. Financial statements include subjective estimates and other judgemental matters.
2. Internal controls may be relied on which have their own inherent limitations.
3. Representations from management may have to be relied upon as the only source of evidence in some areas.
4. Evidence is often persuasive; not conclusive.
5. Do not test all transactions and balances due to a sample being used. The sampling technique may therefore hinder the accuracy.

Question 12

What are three limitations of an Audit ?

Answer 12

1. The nature of the financial reporting: financial statements are affected by management judgement and are therefore subject to bias.
2. Nature of audit procedures - incomplete or falsified documents may be provided by the client.
3. Timeliness of financial reporting - the relevance of information diminishes over timer and the auditor cannot investigate every matter exhaustively.

Question 13

What is accounting and why is it important?

Answer 13

The collection, analysis and communication of financial data. It improved the decision making process of users it communicates date to.

Question 14

What are the two main types of accounting?

Answer 14

Financial and management.

Question 15

What are 3 characteristics of financial accounting?

Answer 15

1. Generalised data.
2. Produced for external use.
3. Highly regulated.

Question 16

What are 3 characteristics of management accounting?

Answer 16

1. Specialised reports made for management.
2. Made for internal use to improve the decision making of management.
3. Less regulated and created according to company policy, not regulatory bodies.