Chapter 1: An Introduction to Assurance and Financial Statement Auditing

Question 1

Demand for auditing

Answer 1

The need for accountability when business owners hire others to manage their businesses, as is typical in modern corporations

Question 2

Basic definition of FS audit

Answer 2

Provides assurance to investors, creditors, or other stakeholders that a company is being honest about its financial information and that the information is reliable

RISK-BASED

Question 3

Assertions

Answer 3

Representations, explicit or otherwise, with respect to the recognition, measurement, presentation, and disclosure of information in the financial statements, which are inherent in management, representing that the financial statements are prepared in accordance with the applicable financial reporting framework. Used by the auditor to consider the different types of potential misstatements that may occur when identifying, assessing, and responding to the risks of material misstatement

Question 4

Auditing

Answer 4

A 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 5

Audit Risk

Answer 5

The risk that that we will render a “clean” opinion on materially misstated financial statements

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated

Question 6

Causes of Information Risk

Answer 6

• Remoteness of information
• Biases and motives of the provider
• Voluminous data
• Complex transactions

Question 7

How to reduce information risk

Answer 7

• User verifies information
• User shares information risk with management. Legal liability!
• Audited financial statements are provided.

Question 8

Information Asymmetry

Answer 8

The manager, who runs the business day-to-day, generally has more information about the “true” financial position and results of operations of the entity than does the absentee owner

Question 9

Information Risk

Answer 9

The risk that information circulated by a company’s management could be false or misleading. Reducing this benefits both the owner and the manager by making the manager’s reports more credible.

Question 10

What is the main role of the auditor

Answer 10

Give REASONABLE ASSURANCE that the financial statements are presented fairly in all material respects

Question 11

Materiality

Answer 11

The amount by which a set of financial statements could be misstated without affecting the judgment of a reasonable person