ACCT. 4301 Exam 1 Practice Questions and Correct Answers

Auditing a systematic approach 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. audit risk the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. What is the principal-agent problem? The conflict in priorities between the two could be different materiality the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, 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. Why is there a demand for auditing services? The arrangement of the principal-agent gives rise to a demand for auditing of information because it plays a valuable role in monitoring the contractual relationships between the entity and its stockholders, managers, employees, and debt holders. information asymmetry manager has much more information than the shareholder does (conflict of interest) which leads to information risk for the Principal. how does the audit function mitigate the problem that exists between management and outside stakeholders Outside auditors reduce information risk between management and outside stakeholders. information risk risk that the information provided by management is incorrect how can a lender prevent management from taking the borrowed funds and using them inappropriately? One way is to place restrictive covenants in the debt agreement with which the entity and its management must comply. This arrangement gives rise to a demand for the auditing of information reported by management to the lender in terms of whether the debt covenants are being met. pre-2002 - economic boom led to more, more society; explosion of scandals - accounting firm's competition for business - emphasis on growth and increasing non-audit services - incentive compensation pressures (auditors and management)