ACCY 405 Midterm 1 Questions with
Correct Answers
What are the five assertions in financial statements - ANSWERSExistence
Completeness
Valuation
Rights & Obligations
Presentation & Disclosure
Existence - ANSWERSAre there items included in the financial statements included in
the financial statements that should not be there
-occurrence is a form of existence
Completeness - ANSWERSIs there anything missing from the F/S that should be there?
-cut-off is a form of completeness
What are the three communications in an auditor's report? - ANSWERSResponsibilities,
reasonable assurance, present fairly in all material respects
What is endogenous demand? - ANSWERSDemand arises within the economy itself,
with no outside intervention
What is exogenous demand? - ANSWERSDemand for assurance is imposed as a result
of outside regulation
Four conceptual reasons for endogenous demand: - ANSWERSSignaling, monitoring,
information risk reduction, insurance
What is signaling? - ANSWERSConceptual reason for endogenous demand; producers
who believe their product is high quality want information asymmetry reduced
What is monitoring? - ANSWERSConceptual reason for endogenous demand; principle
provides capital, agent manages resources; managers hire attestation to reduce
information asymmetry and gain trust of principle
What is information risk reduction? - ANSWERSConceptual reason for endogenous
demand; provides knowledge or information
Insurance - ANSWERSConceptual reason for endogenous demand; Provides risk
protection and pays hurt parties damages
Hypothesis in Minnis Aricle? - ANSWERSHypothesis 1: firms that get an audit realize a
lower cost of debt (due to signaling)
Correct Answers
What are the five assertions in financial statements - ANSWERSExistence
Completeness
Valuation
Rights & Obligations
Presentation & Disclosure
Existence - ANSWERSAre there items included in the financial statements included in
the financial statements that should not be there
-occurrence is a form of existence
Completeness - ANSWERSIs there anything missing from the F/S that should be there?
-cut-off is a form of completeness
What are the three communications in an auditor's report? - ANSWERSResponsibilities,
reasonable assurance, present fairly in all material respects
What is endogenous demand? - ANSWERSDemand arises within the economy itself,
with no outside intervention
What is exogenous demand? - ANSWERSDemand for assurance is imposed as a result
of outside regulation
Four conceptual reasons for endogenous demand: - ANSWERSSignaling, monitoring,
information risk reduction, insurance
What is signaling? - ANSWERSConceptual reason for endogenous demand; producers
who believe their product is high quality want information asymmetry reduced
What is monitoring? - ANSWERSConceptual reason for endogenous demand; principle
provides capital, agent manages resources; managers hire attestation to reduce
information asymmetry and gain trust of principle
What is information risk reduction? - ANSWERSConceptual reason for endogenous
demand; provides knowledge or information
Insurance - ANSWERSConceptual reason for endogenous demand; Provides risk
protection and pays hurt parties damages
Hypothesis in Minnis Aricle? - ANSWERSHypothesis 1: firms that get an audit realize a
lower cost of debt (due to signaling)
