ACCT 4400 Exam 1

Question 1

Informational Asymmetry

Answer 1

management has more information than creditors, owners and investors

Question 2

Conflict of Interest

Answer 2

managers may not act in the best interest of owners

Question 3

Principal/Agent

Answer 3

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

Question 4

Assurance Service Examples

Answer 4

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

Question 5

Audit Risk

Answer 5

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

Question 6

Unqualified Opinion

Answer 6

Clean Audit Report

Question 7

Qualified Opinion

Answer 7

uncertain report; there may be gray areas

Question 8

Adverse Opinion

Answer 8

financial stmt not in accordance w/ GAAP

Question 9

Disclaimer Opinion

Answer 9

choose to not give an opinion

Question 10

Sarbanes - Oxley Act

Answer 10

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

Question 11

Professional Skepticism

Answer 11

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

Question 12

Audit Committee

Answer 12

setting term of engagement; hiring external auditor; setting compensation

they are independent director to audit firms

Question 13

SEC

Answer 13

watchdog of capital market

Question 14

PCAOB

Answer 14

watchdog of auditors; set standards to public companies

Question 15

AICPA

Answer 15

code of conduct for accountants; sets standards to private companies

Question 16

Managers Resposibility

Answer 16

PIE: Prepare financial stmt; internal controls; evidence

Question 17

Auditors Responsibility

Answer 17

CES: Competence & Capabilities; ethics; skepticism

Question 18

Audit Report

Answer 18

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

Question 19

Principles of Professional Conduct

Answer 19

basic broad principles that govern the profession

Question 20

Rule of Conduct

Answer 20

Enforceable rules build from the principles that are more specific

Question 21

Interpretations of the Rules

Answer 21

deeper dive to the rule of conducts

Question 22

List 6 Principles of Professional Conduct

Answer 22

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

Question 23

Immediate Family

Answer 23

spouse, spousal equivalent, dependent

Question 24

Close Family

Answer 24

w/ material investment
Parent; sibling; nondependent children

Question 25

Prohibited Relationship w/ Client

Answer 25

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

Question 26

4 Stages in Disposition of Audit

Answer 26

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

Question 27

Engagement Risk

Answer 27

Risks of auditor suffering reputation or monetary loss

Question 28

Ordinary Negligence

Answer 28

Lack of due care

Question 29

Gross Negligence (Constructive Fraud)

Answer 29

Reckless disregard for professional standard

Question 30

Common Law

Answer 30

Case law developed overtime through judge/court decision

Question 31

Statutory Law

Answer 31

enacted law passed by legislative bodies

Question 32

Common Law: Client sues Auditor

Answer 32

client has burden of proof: lack of due care and loss of negligence auditor best defense is GAAP accordance

Question 33

Common Law: Third Party sues Auditor

Answer 33

third party has burden of proof: breach of contract and suffered loss auditors best defense is GAAP accordance

Question 34

Securities Act of 1933

Answer 34

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

Question 35

Securities Exchange Act 1934

Answer 35

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

Question 36

Private Securities Litigation Reform Act 1995

Answer 36

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

Question 37

Securities Litigation Uniform Standard Act 1998

Answer 37

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

Question 38

Class Action Fairness Act 2005

Answer 38

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