ACC 406 - FINANCIAL STATEMENT AUDITING EXAM 1 QUESTIONS WITH
CORRECT ANSWERS 2025/2026
Assurance Services - CORRECT ANSWER -independent professional services that improve the
quality of information, or its context, for decision makers.
Attest Services - CORRECT ANSWER -Independent professional services that improve quality of
information, or its context, for decision makers. Encompasses attest services and financial
statement audits.
Audit Evidence - CORRECT ANSWER -All the information used by the auditor in arriving at the
conclusions on which the audit opinion is based. Audit evidence includes the information
contained in the accounting records underlying the financial statements, as well as other
information.
Audit Risk - CORRECT ANSWER -The risk that an auditor expresses an inappropriate audit
opinion when the financial statements are materially misstated.
Auditing - CORRECT ANSWER -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.
Information Asymmetry - CORRECT ANSWER -The concept that the manager generally has more
information about the true financial position and results of operations of the entity than the
absentee owner does.
Information Risk - CORRECT ANSWER -The risk that information circulated by a company's
management could be false or misleading.
, Materiality - CORRECT ANSWER -The maximum amount by which the auditor believes the
financial statements could be misstated and still not affect the decisions of users.
Misstatement - CORRECT ANSWER -A departure from the applicable reporting framework
(GAAP) that, if material, causes the financial statements to not be presented fairly. They may be
classified as fraud (intentional), other illegal acts such as noncompliance (intentional or
unintentional), and errors (unintentional).
Reasonable Assurance - CORRECT ANSWER -The concept that an audit done in accordance with
auditing standards may fail to detect a material misstatement in a client's financial statements.
In an auditing context this term has been defined to mean a high but not absolute level of
assurance.
Risk of Material Misstatement (RMM) - CORRECT ANSWER -The risk that the financial
statements are materially misstated prior to the audit.
Unqualified (unmodified) Audit Report - CORRECT ANSWER -A "clean" audit report, indicating
the auditor's opinion that a client's financial statements are fairly presented in accordance with
agreed-upon criteria (e.g., GAAP).
Audit Committee - CORRECT ANSWER -A committee consisting of members of the board of
directors, charged with overseeing the entity's system of internal control over financial
reporting, internal and external auditors, and the financial reporting process. Members typically
must be independent of management.
Auditing Standards of the PCOAB - CORRECT ANSWER -Statements issued by the Public
Company Accounting Oversight Board.
Business Processes - CORRECT ANSWER -Processes implemented by management to achieve
entity objectives. Business processes are typically organized into the following categories:
CORRECT ANSWERS 2025/2026
Assurance Services - CORRECT ANSWER -independent professional services that improve the
quality of information, or its context, for decision makers.
Attest Services - CORRECT ANSWER -Independent professional services that improve quality of
information, or its context, for decision makers. Encompasses attest services and financial
statement audits.
Audit Evidence - CORRECT ANSWER -All the information used by the auditor in arriving at the
conclusions on which the audit opinion is based. Audit evidence includes the information
contained in the accounting records underlying the financial statements, as well as other
information.
Audit Risk - CORRECT ANSWER -The risk that an auditor expresses an inappropriate audit
opinion when the financial statements are materially misstated.
Auditing - CORRECT ANSWER -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.
Information Asymmetry - CORRECT ANSWER -The concept that the manager generally has more
information about the true financial position and results of operations of the entity than the
absentee owner does.
Information Risk - CORRECT ANSWER -The risk that information circulated by a company's
management could be false or misleading.
, Materiality - CORRECT ANSWER -The maximum amount by which the auditor believes the
financial statements could be misstated and still not affect the decisions of users.
Misstatement - CORRECT ANSWER -A departure from the applicable reporting framework
(GAAP) that, if material, causes the financial statements to not be presented fairly. They may be
classified as fraud (intentional), other illegal acts such as noncompliance (intentional or
unintentional), and errors (unintentional).
Reasonable Assurance - CORRECT ANSWER -The concept that an audit done in accordance with
auditing standards may fail to detect a material misstatement in a client's financial statements.
In an auditing context this term has been defined to mean a high but not absolute level of
assurance.
Risk of Material Misstatement (RMM) - CORRECT ANSWER -The risk that the financial
statements are materially misstated prior to the audit.
Unqualified (unmodified) Audit Report - CORRECT ANSWER -A "clean" audit report, indicating
the auditor's opinion that a client's financial statements are fairly presented in accordance with
agreed-upon criteria (e.g., GAAP).
Audit Committee - CORRECT ANSWER -A committee consisting of members of the board of
directors, charged with overseeing the entity's system of internal control over financial
reporting, internal and external auditors, and the financial reporting process. Members typically
must be independent of management.
Auditing Standards of the PCOAB - CORRECT ANSWER -Statements issued by the Public
Company Accounting Oversight Board.
Business Processes - CORRECT ANSWER -Processes implemented by management to achieve
entity objectives. Business processes are typically organized into the following categories:
