Chapter 1

Question 1

The basic purpose of a financial statement audit is to

Answer 1

Provide assurance regarding whether the client’s financial statements are fairly stated

Question 2

What is audit risk?

Answer 2

The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated

Question 3

Decision makers demand reliable information that is provided by accountants. (T/F)

Answer 3

True

Question 4

Testing all transactions that occurred during the period is cost effective (T/F)

Answer 4

False

Question 5

The auditor can lack independence when?

Answer 5

Never, the auditor cannot lack independence

Question 6

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with who?

Answer 6

Management of the company

Question 7

What organization is responsible for setting auditing standards for audits of publicly-traded companies in the U.S.?

Answer 7

PCAOB

Question 8

Services that improve the quality of information for decision makers

Answer 8

Assurance services

Question 9

A service where one party issues a report or assertion about subject matter that is someone else’s responsibility

Answer 9

Attestation services

Question 10

A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events, and communicating the results to interested parties

Answer 10

Auditing

Question 11

The magnitude of an omission or misstatement of information that makes it probable that the judgement of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement

Answer 11

Materiality

Question 12

What are the two elements of Evidence

Answer 12

Relevance & Reliability

Question 13

Refers to whether the evidence relates to the specific assertion being tested

Answer 13

Relevance

Question 14

Refers to the diagnosticity of the evidence, signals true state of assertion

Answer 14

Reliability

Question 15

A discipline that provides assurance regarding the results of accounting and other functional operations and data.

Answer 15

Independent Auditing

Question 16

The imbalance of information between stockholders and the management of the company

Answer 16

Information Asymmetry

Question 17

What is the primary reason an independent auditor reports on the financial statements?

Answer 17

To add credibility, where appropriate, since management may not be perceived as objective with respect to its own financial statements

Question 18

Assurance services differ from auditing services in that…

Answer 18

Assurance services may include a report about the relevance and timeliness, not just the reliability, of the information

Question 19

What is the relationship between attestation services and audit services?

Answer 19

Auditing is a subset of attestation that involves the issuance of an opinion regarding the fairness of financial statements

Question 20

How what a decrease in the desired level of assurance affect the sample size of the audit

Answer 20

Would create a smaller sample size

Question 21

An auditor’s evaluation of the reasonableness of a company’s loan loss reserve would normally be made during which phase of the audit?

Answer 21

Auditing business processes and related accounts

Question 22

The study and practice of auditing in unlike other areas in accounting because it…

Answer 22

requires common sense and some creativity