chap 5 distinguishing buisness failure, audit failure, and audit risk

Question 1

what is a business failure?

Answer 1

when a business is unable to repay its lenders or meet the expectations of investors

Question 2

Many accounting and legal profesionals believe that a major cause of lawsuits aginst CPAs is FSs users lack of understanding of what 2 concepts?

Answer 2

1. The difference between a business failure and an audit failure 2. The difference between an audit failure and audit risk

Question 3

what is the expectation gap?

Answer 3

refers to the difference between what an auditor’s responsibilities are and what the user expects from the auditor.

Question 4

what are 3 reasons that may cause business failure?

Answer 4

1. recession 2. poor managment decisions 3. unexpected competition in the industry

Question 5

audit failure is when he auditor issues an incorrect audit opinion because ?

Answer 5

the auditor did not comply with auditing standards

Question 6

refers to the difference between what an auditor’s responsibilities are and what the user expects from the auditor.

Answer 6

the expectation gap

Question 7

when a business is unable to repay its lenders or meet the expectations of investors …this is what kind of failrue

Answer 7

a business failure

Question 8

T/F The “expectation gap” contributes to the amount of litigation against auditors

Answer 8

T

Question 9

in cases of audiot failure laws often allow parties who suffered losses to recover some or all of the losses caused by the audit failure. why is this difficult to do in practice?

Answer 9

because the complexitiy of auditing makes if hard to figure out when the auditor has failed to use due care and legal precedent makes it hard to figure out who has the right to expect the benefit of an audit and recover losses in event of an audit failure

Question 10

when discussing the expectation gap, what is the User expectation?

Answer 10

often that the auditor guarantees the accuracy of the financial statements, and even guarantees the viability of the business

Question 11

what is an example of an audit failure?

Answer 11

assigning unqualified assistants to perform certain audit tasks where they failed to notice material misstatements in the client’s records that a qualified auditor would have found

Question 12

T/F Audit risk is avoidable

Answer 12

F

Question 13

what is an audit failure?

Answer 13

when the auditor issues an incorrect audit opinion because the auditor did not comply with auditing standards

Question 14

the possibility that the auditor concludes, after conducting an adequate audit, that the financial statements were fairly stated when, in fact, they were materially misstated…this is known as ?

Answer 14

audit risk

Question 15

when the auditor issues an incorrect audit opinion because the auditor did not comply with auditing standards …this is what kind of failure

Answer 15

audit failure

Question 16

when discussing the expectation gap, what is an auditors responsibility?

Answer 16

to perform the audit in accordance with auditing standards

Question 17

what is an audit risk?

Answer 17

the possibility that the auditor concludes, after conducting an adequate audit, that the financial statements were fairly stated when, in fact, they were materially misstated

Question 18

why is audit risk unavoidable?

Answer 18

because auditors gather evidence only on a test basis and well concealed fruads are extremely diffiduclt to detect

Question 19

T/F If the auditor did not exercise due care, the auditor can be held liable for the incorrect opinion

Answer 19

T

Question 20

In cases when an audit failed to uncover material misstatements and the wrong type of opinion was issued, it is appropriate to question what?

Answer 20

whether the auditor exercised due care in performing the audit.