ACCT 4301 EXAM 1 REVIEW UPDATED ACTUAL
QUESTIONS AND CORRECT ANSWERS
Question:
1. Questions and CORRECT
Answer:
Answers
,Question:
2. What is auditing?
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.
Question:
3. What is audit risk?
Answer:
Audit risk is the risk that the auditor mistakenly
expresses a clean audit opinion when the financial
statements are materially misstated
Question:
4. What is materiality?
Answer:
the magnitude of an omission or misstatement of
accounting information that, in light of surrounding
circumstances, make it probable that the judgement
of a reasonable person relying on the information
Ould have been changed or influenced by the
omission or misstatement
Question:
5. What is the principal-agent problem?
Answer:
Information asymmetry and conflicts of interest lead
to information risk for the principal
,Question:
6. Why is there a demand for audit
services?
Answer:
Auditing is demanded because it plays a valuable role
in monitoring the contractual relationships between
the entity and its stockholders, managers, employees,
and debt holders. Certified public accountants have
been charged with providing audit services because
of their traditional reputation of competence,
independence, objectivity, and concern for the public
interest. As a result, they are able to add credibility to
information produced and reported by management
to outside parties.
, Question:
7. How does information asymmetry and
conflicts of interest between managers
and investors rest in the demand for
auditing?
Answer:
In this setting, the managers serve as agents for the
owners (who are sometimes referred to as principals)
and fulfill a stewardship function by managing the
corporation's assets. Accounting and auditing play
important roles in this principal-agent relationship. We
first explain the roles of accounting and auditing from
a conceptual perspective. Then we'll use an analogy
involving a house inspector to illustrate the concepts.
First, it is important to understand that the relationship
between an owner and manager often results in
information asymmetry between the two parties.
Information asymmetry means that the manager
generally has more information about the "true"
financial position and results of operations of the
entity than does the absentee owner.
The owner likely will be willing to invest more in the
business and to pay the manager more if the manager
can be held accountable for how he or she uses the
owner's invested resources. As the amount of capital
involved and the number of potential owners increase,
the potential impact of accountability also increases.
The auditor's role is to determine whether the reports
prepared by the manager conform to the contract's
provisions. Thus, the auditor's verification of the
financial information adds credibility to the report and
reduces information risk, or the risk that information
circulated by a company's management will be false
or misleading. Reducing information risk potentially
benefits both the owner and the manager.
QUESTIONS AND CORRECT ANSWERS
Question:
1. Questions and CORRECT
Answer:
Answers
,Question:
2. What is auditing?
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.
Question:
3. What is audit risk?
Answer:
Audit risk is the risk that the auditor mistakenly
expresses a clean audit opinion when the financial
statements are materially misstated
Question:
4. What is materiality?
Answer:
the magnitude of an omission or misstatement of
accounting information that, in light of surrounding
circumstances, make it probable that the judgement
of a reasonable person relying on the information
Ould have been changed or influenced by the
omission or misstatement
Question:
5. What is the principal-agent problem?
Answer:
Information asymmetry and conflicts of interest lead
to information risk for the principal
,Question:
6. Why is there a demand for audit
services?
Answer:
Auditing is demanded because it plays a valuable role
in monitoring the contractual relationships between
the entity and its stockholders, managers, employees,
and debt holders. Certified public accountants have
been charged with providing audit services because
of their traditional reputation of competence,
independence, objectivity, and concern for the public
interest. As a result, they are able to add credibility to
information produced and reported by management
to outside parties.
, Question:
7. How does information asymmetry and
conflicts of interest between managers
and investors rest in the demand for
auditing?
Answer:
In this setting, the managers serve as agents for the
owners (who are sometimes referred to as principals)
and fulfill a stewardship function by managing the
corporation's assets. Accounting and auditing play
important roles in this principal-agent relationship. We
first explain the roles of accounting and auditing from
a conceptual perspective. Then we'll use an analogy
involving a house inspector to illustrate the concepts.
First, it is important to understand that the relationship
between an owner and manager often results in
information asymmetry between the two parties.
Information asymmetry means that the manager
generally has more information about the "true"
financial position and results of operations of the
entity than does the absentee owner.
The owner likely will be willing to invest more in the
business and to pay the manager more if the manager
can be held accountable for how he or she uses the
owner's invested resources. As the amount of capital
involved and the number of potential owners increase,
the potential impact of accountability also increases.
The auditor's role is to determine whether the reports
prepared by the manager conform to the contract's
provisions. Thus, the auditor's verification of the
financial information adds credibility to the report and
reduces information risk, or the risk that information
circulated by a company's management will be false
or misleading. Reducing information risk potentially
benefits both the owner and the manager.
