Audit Chapter 1 and 2

Question 1

Auditing

Answer 1

systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users

Question 2

Why do we demand assurance / auditing?

Answer 2

User demand for reliable, relevant information is a consequence of complexity, remoteness, and time sensitivity.

Question 3

Information risk

Answer 3

the risk (probability) that the information (mainly financial) disseminated by a company will be materially false or misleading

Question 4

Unqualified / Unmodified Opinion

Answer 4

“clean” opinion, financial statements are free of material misstatements

Question 5

Qualified / Modified Opinion

Everything except…

Answer 5

A clients financial statements contain a misstatement that the auditor considers material, the client refuses to correct the misstatement, auditor explains that the financial statements are fairly stated except for the misstatement identified by the auditor

Question 6

Adverse Opinion

Don’t trust the info (rare)

Answer 6

Misstatements that the auditor considers so material that it pervasively affects the interpretation of the financial statements. Opinion states that the financial statements are not fairly stated and should not be relied upon.

Question 7

Audit risk

Answer 7

the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated. Some risk that a material misstatement could be present in the financial statements and the auditor could fail to detect it

Question 8

Reasonable assurance

Answer 8

the audit report only provides REASONABLE ASSURANCE that the audit report is free from misstatement, it is not possible to assert with certainty that financial statements are completely free from misstatement

Question 9

Materiality

Answer 9

the magnitude ( extent, amount) of a misstatement that would change the judgement of a reasonable investor

Question 10

Who is responsible for the financial statements?

Answer 10

Management

Question 11

Professional skepticism

Answer 11

an auditors tendency not to believe managements assertions without sufficient corroboration