ACC 550 EXAM 1 QUESTIONS AND VERIFIED
ANSWERS
System of Investor Protection - Answers - Audit Committee (part of Board of Directors)
Internal Auditor
External Auditor
Regulators (SEC & PCAOB)
Company (Management)
Assurance Services - Answers - independent professional services
improve the quality of information
for decision makers
U.S. Audit Professional Standards - Answers - AU-C - statements on auditing standards
(nonpublic)
AS - auditing standards (public)
International Audit Professional Standards - Answers - ISA - Internal standards on
auditing
U.S. Attestation Professional Standards - Answers - AT - Standards for Attestation
engagements
International Attestation Professional Standards - Answers - ISAE - international
standards on assurance engagements
ISRS - International standards of related services
U.S. Accounting & Review Professional Standards - Answers - AR - Standards for
Accounting & Review Services
International accounting & review professional standards - Answers - ISRE -
international standards on review engagements
ISRS - international standards of related services
Sources of Audit Demand - Answers - Information Hypothesis
Insurance Hypothesis
Monitoring Hypothesis (agency theory)
Information Hypothesis - Answers - financial statements = information for decision
makers
(investors, creditors, company, suppliers, customers, etc.)
audit report = information itself
confirms audit report (rely on F/S info/reduces information risk)
, disconfirms audit report (do not rely)
Insurance Hypothesis - Answers - auditor absorbs risk
materially misstated F/S (restatement/fraud), no going concern, bankruptcy)
auditor specialization (assurance) vs. insurance companies
hurricanes/fires = verifiable
F/S quality isn't black & white
different because of nature of risk & info used to determine risk
Monitoring Hypothesis - Answers - "overseeing management"
Agency theory - principals (owners) and agents (managers)
conflict of interest/information asymmetry
Monitor F/S under management control (principal benefits)
auditee (agent) benefits through higher compensation, lower rate loans, contract with
suppliers, ability to raise capital
Future demand for audits - Answers - future markets in information age
continuous auditing
fair value auditing
Fraud Triangle - Answers - pressure (personal & work)
opportunity
rationalization
Ways to deter fraud - Answers - strong, ethical tone at the top
professional skepticism
consider both evidence to confirm & disconfirm
internal & external auditors must use skepticism
fraud risk management
effective communication
Auditor must report to audit committee about: - Answers - significant accounting policies
management judgments & accounting estimates
quality of accounting
effectiveness of internal controls
unusual transactions
Economic crisis audit considerations - Answers - increased risk of fraud
internal controls must be evaluated more thoroughly
heightened professional skepticism
understand & discuss risks with engagement team, audit committee, and management
What is audit quality? How is it measured? - Answers - solid planning & evidence
collection
confidence level of conclusions from procedures
ANSWERS
System of Investor Protection - Answers - Audit Committee (part of Board of Directors)
Internal Auditor
External Auditor
Regulators (SEC & PCAOB)
Company (Management)
Assurance Services - Answers - independent professional services
improve the quality of information
for decision makers
U.S. Audit Professional Standards - Answers - AU-C - statements on auditing standards
(nonpublic)
AS - auditing standards (public)
International Audit Professional Standards - Answers - ISA - Internal standards on
auditing
U.S. Attestation Professional Standards - Answers - AT - Standards for Attestation
engagements
International Attestation Professional Standards - Answers - ISAE - international
standards on assurance engagements
ISRS - International standards of related services
U.S. Accounting & Review Professional Standards - Answers - AR - Standards for
Accounting & Review Services
International accounting & review professional standards - Answers - ISRE -
international standards on review engagements
ISRS - international standards of related services
Sources of Audit Demand - Answers - Information Hypothesis
Insurance Hypothesis
Monitoring Hypothesis (agency theory)
Information Hypothesis - Answers - financial statements = information for decision
makers
(investors, creditors, company, suppliers, customers, etc.)
audit report = information itself
confirms audit report (rely on F/S info/reduces information risk)
, disconfirms audit report (do not rely)
Insurance Hypothesis - Answers - auditor absorbs risk
materially misstated F/S (restatement/fraud), no going concern, bankruptcy)
auditor specialization (assurance) vs. insurance companies
hurricanes/fires = verifiable
F/S quality isn't black & white
different because of nature of risk & info used to determine risk
Monitoring Hypothesis - Answers - "overseeing management"
Agency theory - principals (owners) and agents (managers)
conflict of interest/information asymmetry
Monitor F/S under management control (principal benefits)
auditee (agent) benefits through higher compensation, lower rate loans, contract with
suppliers, ability to raise capital
Future demand for audits - Answers - future markets in information age
continuous auditing
fair value auditing
Fraud Triangle - Answers - pressure (personal & work)
opportunity
rationalization
Ways to deter fraud - Answers - strong, ethical tone at the top
professional skepticism
consider both evidence to confirm & disconfirm
internal & external auditors must use skepticism
fraud risk management
effective communication
Auditor must report to audit committee about: - Answers - significant accounting policies
management judgments & accounting estimates
quality of accounting
effectiveness of internal controls
unusual transactions
Economic crisis audit considerations - Answers - increased risk of fraud
internal controls must be evaluated more thoroughly
heightened professional skepticism
understand & discuss risks with engagement team, audit committee, and management
What is audit quality? How is it measured? - Answers - solid planning & evidence
collection
confidence level of conclusions from procedures
