ACC402 Exam #2 (Ch. 6, 7, & 8) ACTUAL UPDATED QUESTIONS AND CORRECT
ANSWERS
Explain the objective of conducting an audit of financial To provide financial statement users with an opinion by the auditor about whether
statements. the financial statements are presented fairly, in all material respects, in
accordance with the applicable financial accounting framework
Explain the objective of conducting an audit of internal To provide users with an opinion by the auditor about whether the company
controls. maintained, in all material respects, effective internal control over financial
reporting, based on established criteria
Discuss management's responsibilities for the financial - Responsible for the financial statements and internal control
statements. - Management knows more about a company's transactions and related assets,
liabilities, and equity than the auditor
Discuss the significance of the Sarbanes-Oxley Act in - The Sarbanes-Oxley Act of 2002 requires the CEO and CFO of public companies
regard to management's responsibilities. to certify (sign) the quarterly (10Q) and annual reports (10K) submitted to the SEC
- The Sarbanes-Oxley Act provides for both civil and criminal penalties for anyone
who knowingly falsely certifies those statements
What are the four main responsibilities of the auditor? - Reasonable Assurance
- Material vs. Immaterial Misstatements
- Errors vs. Fraud
- Fraudulent Financial Reporting vs. Misappropriation of Assets
What are the auditor's responsibilities for detecting Fraudulent Financial Reporting
material fraud? In other words, explain the difference - Sometimes called management fraud
between fraudulent financial reporting and the - Harms users by providing incorrect financial information
misappropriation of assets. Misappropriation of Assets
- Sometimes referred to as employee fraud
- Harms creditors and stockholders because assets are no longer available
, Describe the auditor's responsibility to consider laws and Responsibilities depend on whether the laws or regulations are expected to have
regulations. a direct effect on the amounts and disclosures in the financial statements
Explain the auditor's responsibility for the Direct Effect. Auditor should obtain sufficient appropriate evidence
Explain the auditor's responsibility for the Indirect Effect. Auditor performs specified procedures on all audits; if auditor suspects or detects
illegal acts, the auditor has additional responsibilities
Describe the procedures performed to identify - Understand the entity's legal and regulatory framework
noncompliance with laws and regulations. - Inquire of management and those charged w/ governance about whether the
entity is in compliance with laws and regulations
- Inspect correspondence, if any, with the relevant licensing or regulatory
authorities
- Stay alert for noncompliance identified by other audit procedures
- Obtain written management representations
Describe the procedures when noncompliance is - Obtain an understanding of the nature of the act and the circumstances in which
identified or suspected. it has occurred
- Obtain further evidence to evaluate the effects on the financial statements
- Discuss the matter with:
- Management at a level above those involved
- Those charged with governance, when appropriate
- Consider the need to obtain legal advice
- Evaluate the effects of the noncompliance on other aspects of the audit
including:
- The auditor's risk assessment
- The reliability of other representations from management
Describe the reporting of identified or suspected - Report to those charged with governance
noncompliance. - Report to regulatory and enforcement authorities
- Determine whether the auditor has a responsibility to report noncompliance to
outside parties
- Report in the auditor's report
- GAAP departure; qualified or adverse
- Scope limitation; qualified or adverse
What assurance does the auditor provide that errors and Errors: Reasonable assurance
fraud that are material to the financial statements will be Fraud: Reasonable assurance
detected?
Describe the need to maintain professional skepticism An attitude of the auditor that includes a:
when conducting an audit. - questioning mind that is alert to conditions that may indicate possible
misstatement due to fraud or error
- critical assessment of audit evidence
Describe the key elements of an effective professional The application of relevant knowledge, training, and experience, within the
judgment process. context provided by auditing, accounting, and ethical standards, in making
informed decisions about the courses of action that are appropriate in the
circumstances of the audit engagement
- Knowledge/education, training, and experience
ANSWERS
Explain the objective of conducting an audit of financial To provide financial statement users with an opinion by the auditor about whether
statements. the financial statements are presented fairly, in all material respects, in
accordance with the applicable financial accounting framework
Explain the objective of conducting an audit of internal To provide users with an opinion by the auditor about whether the company
controls. maintained, in all material respects, effective internal control over financial
reporting, based on established criteria
Discuss management's responsibilities for the financial - Responsible for the financial statements and internal control
statements. - Management knows more about a company's transactions and related assets,
liabilities, and equity than the auditor
Discuss the significance of the Sarbanes-Oxley Act in - The Sarbanes-Oxley Act of 2002 requires the CEO and CFO of public companies
regard to management's responsibilities. to certify (sign) the quarterly (10Q) and annual reports (10K) submitted to the SEC
- The Sarbanes-Oxley Act provides for both civil and criminal penalties for anyone
who knowingly falsely certifies those statements
What are the four main responsibilities of the auditor? - Reasonable Assurance
- Material vs. Immaterial Misstatements
- Errors vs. Fraud
- Fraudulent Financial Reporting vs. Misappropriation of Assets
What are the auditor's responsibilities for detecting Fraudulent Financial Reporting
material fraud? In other words, explain the difference - Sometimes called management fraud
between fraudulent financial reporting and the - Harms users by providing incorrect financial information
misappropriation of assets. Misappropriation of Assets
- Sometimes referred to as employee fraud
- Harms creditors and stockholders because assets are no longer available
, Describe the auditor's responsibility to consider laws and Responsibilities depend on whether the laws or regulations are expected to have
regulations. a direct effect on the amounts and disclosures in the financial statements
Explain the auditor's responsibility for the Direct Effect. Auditor should obtain sufficient appropriate evidence
Explain the auditor's responsibility for the Indirect Effect. Auditor performs specified procedures on all audits; if auditor suspects or detects
illegal acts, the auditor has additional responsibilities
Describe the procedures performed to identify - Understand the entity's legal and regulatory framework
noncompliance with laws and regulations. - Inquire of management and those charged w/ governance about whether the
entity is in compliance with laws and regulations
- Inspect correspondence, if any, with the relevant licensing or regulatory
authorities
- Stay alert for noncompliance identified by other audit procedures
- Obtain written management representations
Describe the procedures when noncompliance is - Obtain an understanding of the nature of the act and the circumstances in which
identified or suspected. it has occurred
- Obtain further evidence to evaluate the effects on the financial statements
- Discuss the matter with:
- Management at a level above those involved
- Those charged with governance, when appropriate
- Consider the need to obtain legal advice
- Evaluate the effects of the noncompliance on other aspects of the audit
including:
- The auditor's risk assessment
- The reliability of other representations from management
Describe the reporting of identified or suspected - Report to those charged with governance
noncompliance. - Report to regulatory and enforcement authorities
- Determine whether the auditor has a responsibility to report noncompliance to
outside parties
- Report in the auditor's report
- GAAP departure; qualified or adverse
- Scope limitation; qualified or adverse
What assurance does the auditor provide that errors and Errors: Reasonable assurance
fraud that are material to the financial statements will be Fraud: Reasonable assurance
detected?
Describe the need to maintain professional skepticism An attitude of the auditor that includes a:
when conducting an audit. - questioning mind that is alert to conditions that may indicate possible
misstatement due to fraud or error
- critical assessment of audit evidence
Describe the key elements of an effective professional The application of relevant knowledge, training, and experience, within the
judgment process. context provided by auditing, accounting, and ethical standards, in making
informed decisions about the courses of action that are appropriate in the
circumstances of the audit engagement
- Knowledge/education, training, and experience
