ACCT 4400 Exam 1 Flashcards

Exam 1 Brief Terms and Laws

1
Q

Informational Asymmetry

A

management has more information than creditors, owners and investors

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2
Q

Conflict of Interest

A

managers may not act in the best interest of owners

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3
Q

Principal/Agent

A

Principals: Owners/ stockholders; Agent: Managers running the business

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4
Q

Assurance Service Examples

A

audits, attestation service, and others like IT consulting, installing new accounting systems, tax consulting

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5
Q

Audit Risk

A

the risk of an auditor giving a clean opinion when in fact it was not

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6
Q

Unqualified Opinion

A

Clean Audit Report

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7
Q

Qualified Opinion

A

uncertain report; there may be gray areas

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8
Q

Adverse Opinion

A

financial stmt not in accordance w/ GAAP

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9
Q

Disclaimer Opinion

A

choose to not give an opinion

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10
Q

Sarbanes - Oxley Act

A

created PCAOB; Focus on Internal Control; CEO & CFO must certify financial stmt; Auditor Independence Provision

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11
Q

Professional Skepticism

A

make sure to have a questioning mind and critical assessment of evidence

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12
Q

Audit Committee

A

setting term of engagement; hiring external auditor; setting compensation

they are independent director to audit firms

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13
Q

SEC

A

watchdog of capital market

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14
Q

PCAOB

A

watchdog of auditors; set standards to public companies

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15
Q

AICPA

A

code of conduct for accountants; sets standards to private companies

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16
Q

Managers Resposibility

A

PIE: Prepare financial stmt; internal controls; evidence

17
Q

Auditors Responsibility

A

CES: Competence & Capabilities; ethics; skepticism

18
Q

Audit Report

A

Opinion address fair presentation of financial stmt according to GAAP standards at material level

19
Q

Principles of Professional Conduct

A

basic broad principles that govern the profession

20
Q

Rule of Conduct

A

Enforceable rules build from the principles that are more specific

21
Q

Interpretations of the Rules

A

deeper dive to the rule of conducts

22
Q

List 6 Principles of Professional Conduct

A

Responsibilities; public interest; integrity; objectivity; due care; scope & nature of service

23
Q

Immediate Family

A

spouse, spousal equivalent, dependent

24
Q

Close Family

A

w/ material investment
Parent; sibling; nondependent children

25
Q

Prohibited Relationship w/ Client

A

Direct financial interest, material indirect financial interest, and serving managerial role during audit period

26
Q

4 Stages in Disposition of Audit

A

1) event leads to losses 2) investigation 3) legal process 4) final resolution

27
Q

Engagement Risk

A

Risks of auditor suffering reputation or monetary loss

28
Q

Ordinary Negligence

A

Lack of due care

29
Q

Gross Negligence (Constructive Fraud)

A

Reckless disregard for professional standard

30
Q

Common Law

A

Case law developed overtime through judge/court decision

31
Q

Statutory Law

A

enacted law passed by legislative bodies

32
Q

Common Law: Client sues Auditor

A

client has burden of proof: lack of due care and loss of negligence

auditor best defense is GAAP accordance

33
Q

Common Law: Third Party sues Auditor

A

third party has burden of proof: breach of contract and suffered loss

auditors best defense is GAAP accordance

34
Q

Securities Act of 1933

A

(IPO ONLY) When loss or false/misleading material misstatement auditor must prove they were not negligent AKA they had the burden of proof

35
Q

Securities Exchange Act 1934

A

(ALL OTHER PUBLIC) plaintiff must prove loss, material misstatement, reliance to statement, scienter (intent)

36
Q

Private Securities Litigation Reform Act 1995

A

Provides proportionate liability based on % if responsibilities aka reduced auditors liability

37
Q

Securities Litigation Uniform Standard Act 1998

A

Closes loophole where plantiff could sue in state court instead of federal

38
Q

Class Action Fairness Act 2005

A

Attempt to reduce frivolous lawsuit by expanding federal jurisdiction to multi-state class action lawsuits