ACC 402 (Advanced Accounting 402)
Exam 2 Review Questions and
Answers Study Guide
Management's Responsibilities - ANSWER>>1) Financial reporting (includes
financial statements and footnotes)
2) Internal control
3) Public companies (CEO and CFO must certify to SEC)
Financial Reporting - ANSWER>>Management is responsible for the financial
statements and related disclosures/footnotes.
Financial Reporting Responsibility includes: - ANSWER>>- adopting sound
accounting policies
- maintaining accounting records
- making fair representations in the financial statements
- deciding what presentations and disclosures are necessary
Management responsibilities include: - ANSWER>>financial reporting, internal
control, and public company certification requirements.
Management responsibility for financial reporting - ANSWER>>Management is
responsible for the financial statements and related disclosures or footnotes, not
the auditor.
What financial reporting responsibility includes - ANSWER>>- adopting sound
accounting policies
- maintaining accounting records
,- making fair representations in the financial statements
- deciding what presentations and disclosures are necessary
Why management is responsible for financial reporting - ANSWER>>Because
Management runs the business daily and knows more about the company's
transactions, assets, liabilities, equity, and operations than the auditor.
If management insists on unacceptable disclosures - ANSWER>>The auditor may
issue a qualified opinion, issue an adverse opinion, or withdraw from the
engagement.
Management responsibility for internal control - ANSWER>>Management is
responsible for designing, implementing, and maintaining adequate internal
control.
Auditor role in internal control - ANSWER>>The auditor evaluates internal control
as part of the audit, but internal control itself is management's responsibility.
Public company CEO and CFO certification - ANSWER>>Under Sarbanes-Oxley, the
CEO and CFO of public companies must certify the quarterly and annual financial
statements filed with the SEC.
What CEO and CFO certify by signing - ANSWER>>They certify that:
- the statements comply with the Securities Exchange Act of 1934
- the statements fairly present, in all material respects, the company's financial
condition and results of operations
Penalty for knowingly false certification - ANSWER>>Knowingly false certification
can result in significant fines and imprisonment for up to 20 years.
Chapter 6 topic 2 overall - ANSWER>>Auditor's responsibilities include obtaining
reasonable assurance, understanding errors and fraud, and recognizing that fraud
is harder to detect but the auditor's responsibility is the same.
,Auditor's overall objective - ANSWER>>Obtain reasonable assurance that the
financial statements are free from material misstatement, whether due to fraud
or error, and express an opinion on whether they are fairly presented in
accordance with the applicable financial reporting framework.
Reasonable assurance definition - ANSWER>>Reasonable assurance is a high but
not absolute level of assurance that the financial statements are free of material
misstatement.
What reasonable assurance is not - ANSWER>>- It is not absolute assurance
- not complete certainty
- and not a guarantee.
Why auditor is not a guarantor - ANSWER>>Even a properly conducted audit may
fail to detect a material misstatement.
Material misstatement definition - ANSWER>>A misstatement is material if it
would likely influence the decision of a reasonable financial statement user.
Why auditors do not find every immaterial misstatement - ANSWER>>Finding
every immaterial error or fraud would be too costly and impractical.
Why assurance is not absolute reason 1 - ANSWER>>Auditors test samples rather
than every transaction or balance.
Why assurance is not absolute reason 2 - ANSWER>>Audit procedures, timing,
extent, and evaluation involve auditor judgment.
Why assurance is not absolute reason 3 - ANSWER>>Many accounting amounts
involve estimates and uncertainty.
, Why assurance is not absolute reason 4 - ANSWER>>Fraud can be concealed
through collusion, falsified documents, management override, or deliberate
deception.
Nature of audit evidence - ANSWER>>Audit evidence is generally persuasive, not
convincing.
Two types of misstatements - ANSWER>>Errors and fraud.
Error definition - ANSWER>>An error is an unintentional misstatement in the
financial statements.
Fraud definition - ANSWER>>Fraud is an intentional misstatement in the financial
statements.
Error example 1 - ANSWER>>Wrong extension of price times quantity on an
invoice.
Error example 2 - ANSWER>>Overlooking older raw materials when valuing
inventory.
Auditor responsibility for fraud and error - ANSWER>>The auditor's responsibility
is the same for both: obtain reasonable assurance that the financial statements
are free of material misstatement.
Why fraud is harder to detect - ANSWER>>Fraud is harder to detect because
those committing it may conceal it through collusion, falsified documents,
management override, or deliberate deception.
Additional internal control responsibility for auditor - ANSWER>>For larger public
companies, the auditor may also issue a report on internal control over financial
reporting and give an opinion on whether the company maintained effective
Exam 2 Review Questions and
Answers Study Guide
Management's Responsibilities - ANSWER>>1) Financial reporting (includes
financial statements and footnotes)
2) Internal control
3) Public companies (CEO and CFO must certify to SEC)
Financial Reporting - ANSWER>>Management is responsible for the financial
statements and related disclosures/footnotes.
Financial Reporting Responsibility includes: - ANSWER>>- adopting sound
accounting policies
- maintaining accounting records
- making fair representations in the financial statements
- deciding what presentations and disclosures are necessary
Management responsibilities include: - ANSWER>>financial reporting, internal
control, and public company certification requirements.
Management responsibility for financial reporting - ANSWER>>Management is
responsible for the financial statements and related disclosures or footnotes, not
the auditor.
What financial reporting responsibility includes - ANSWER>>- adopting sound
accounting policies
- maintaining accounting records
,- making fair representations in the financial statements
- deciding what presentations and disclosures are necessary
Why management is responsible for financial reporting - ANSWER>>Because
Management runs the business daily and knows more about the company's
transactions, assets, liabilities, equity, and operations than the auditor.
If management insists on unacceptable disclosures - ANSWER>>The auditor may
issue a qualified opinion, issue an adverse opinion, or withdraw from the
engagement.
Management responsibility for internal control - ANSWER>>Management is
responsible for designing, implementing, and maintaining adequate internal
control.
Auditor role in internal control - ANSWER>>The auditor evaluates internal control
as part of the audit, but internal control itself is management's responsibility.
Public company CEO and CFO certification - ANSWER>>Under Sarbanes-Oxley, the
CEO and CFO of public companies must certify the quarterly and annual financial
statements filed with the SEC.
What CEO and CFO certify by signing - ANSWER>>They certify that:
- the statements comply with the Securities Exchange Act of 1934
- the statements fairly present, in all material respects, the company's financial
condition and results of operations
Penalty for knowingly false certification - ANSWER>>Knowingly false certification
can result in significant fines and imprisonment for up to 20 years.
Chapter 6 topic 2 overall - ANSWER>>Auditor's responsibilities include obtaining
reasonable assurance, understanding errors and fraud, and recognizing that fraud
is harder to detect but the auditor's responsibility is the same.
,Auditor's overall objective - ANSWER>>Obtain reasonable assurance that the
financial statements are free from material misstatement, whether due to fraud
or error, and express an opinion on whether they are fairly presented in
accordance with the applicable financial reporting framework.
Reasonable assurance definition - ANSWER>>Reasonable assurance is a high but
not absolute level of assurance that the financial statements are free of material
misstatement.
What reasonable assurance is not - ANSWER>>- It is not absolute assurance
- not complete certainty
- and not a guarantee.
Why auditor is not a guarantor - ANSWER>>Even a properly conducted audit may
fail to detect a material misstatement.
Material misstatement definition - ANSWER>>A misstatement is material if it
would likely influence the decision of a reasonable financial statement user.
Why auditors do not find every immaterial misstatement - ANSWER>>Finding
every immaterial error or fraud would be too costly and impractical.
Why assurance is not absolute reason 1 - ANSWER>>Auditors test samples rather
than every transaction or balance.
Why assurance is not absolute reason 2 - ANSWER>>Audit procedures, timing,
extent, and evaluation involve auditor judgment.
Why assurance is not absolute reason 3 - ANSWER>>Many accounting amounts
involve estimates and uncertainty.
, Why assurance is not absolute reason 4 - ANSWER>>Fraud can be concealed
through collusion, falsified documents, management override, or deliberate
deception.
Nature of audit evidence - ANSWER>>Audit evidence is generally persuasive, not
convincing.
Two types of misstatements - ANSWER>>Errors and fraud.
Error definition - ANSWER>>An error is an unintentional misstatement in the
financial statements.
Fraud definition - ANSWER>>Fraud is an intentional misstatement in the financial
statements.
Error example 1 - ANSWER>>Wrong extension of price times quantity on an
invoice.
Error example 2 - ANSWER>>Overlooking older raw materials when valuing
inventory.
Auditor responsibility for fraud and error - ANSWER>>The auditor's responsibility
is the same for both: obtain reasonable assurance that the financial statements
are free of material misstatement.
Why fraud is harder to detect - ANSWER>>Fraud is harder to detect because
those committing it may conceal it through collusion, falsified documents,
management override, or deliberate deception.
Additional internal control responsibility for auditor - ANSWER>>For larger public
companies, the auditor may also issue a report on internal control over financial
reporting and give an opinion on whether the company maintained effective
