acct 5200 exam 1 || very Flawless.
information risk correct answers the possibility that the information upon which the business risk
decision was made was inaccurate
causes:
-remoteness of information
-biases and motives of the provider
-complexity
-voluminous data
cost of information risk is a factor in Cost of Capital; COC= risk free rate of return, economic
risk premium, information risk premium
higher information risk premium=high cost of capital
remoteness of information correct answers can't get an inside view//don't know what's actually
happening on the inside because it's being provided by others
biases and motives of the provider correct answers information could be biased if provided by
someone whose goals are inconsistent w those of the decision maker
can be because management is conservative or aggressive, has subconscious bias, etc.
voluminous data correct answers with large organizations there are large number of transactions
which increases the likelihood that information is recorded improperly
also with large amounts of data how is the relevant data chosen? is it being used the right way?
management has much more insight and information than what is actually presented. this could
lead to a discrepancy between what management knows and what users know
complexity correct answers not everyone has accounting/finance background=hard for users to
understand
exchanges are more and more complex and therefore difficult to record
4 ways information is improved correct answers signaling, monitoring, information-risk
reduction, insurance
signaling correct answers assurance provides a method of credibility signaling the quality of the
commodity to the consumer so higher price can be charged
consumers are more willing to pay higher if there is a signal of high quality
monitoring correct answers principal agent model- motivating someone to work hard all the time
shard to do, have to prepare and adjust for this by monitoring and making incentive adjustments
audits are done to reassure shareholders so they will be willing to pay management more
reduce information risk (3 ways) correct answers -user verifies information (may be too costly)
,-user shares information risk: management is responsible for providing reliable information to
others, users= potential for financial losses
ex: you and company agree to balance risk premium out between you two, this leads to issues bc
if something goes wrong there will be a lawsuit
-provide audited financial statements: most common way to reduce information risk
insurance hypothesis correct answers assumption that an audit provides "insurance" in the even
that something goes wrong
injured parties can be
-investors who relied on audited financial statements can sue auditors who are negligent and who
have deep pockets
-politicians who would be blamed for a company failure; allows SEC to point the finger at
auditors and avoid blame
when company goes bankrupt, investors will sue company and auditors. but usually blame falls
on company
assurance correct answers independent professional service that improves the quality of
information for decision makers
anything that improves quality and doesn't have to be CPA; anyone can provide these services
ex: consumer reports, better business bureau, corporate social responsibility and sustainability
reports
attestation correct answers more specific type of assurance service; a CPA is engaged to issue a
*written* communication that expresses a conclusion about the reliability of a *written*
assertion that is the responsibility of another party
services that improve quality of information and come w a WRITTEN report
ex: financial statements audits, financial statement reviews, attestation over internal control over
financial reporting, other attest services like SOC reports
audits correct answers the accumulation and evaluation of evidence about information to
determine and report on the degree of correspondence between the information and established
criteria. Should be done by a competent, independent person
a specific type of attestation service
financial statement audits, internal controls over financial reporting audits, operational audits
financial statement audit correct answers designed to provide reasonable assurance that financial
statements are free of material misstatements
, internal controls over financial reporting (ICFR) audit correct answers management assets that
internal controls have been developed and implemented and the auditor attests to the
effectiveness of internal controls
operational audit correct answers evaluates efficiency and effectiveness of any part of
organization's operating procedures and methods
compliance audit correct answers determines whether the audit is following specific procedures,
rules or regulation set by some higher authority
types of auditors and audit firms correct answers CPA firms- external and independent auditors
Government Accountability Office (GAO) auditor- reports to congress; performs a wide variety
of audits such as expenditure compliance and operational efficiency and excellence of federal
programs
IRS tax auditors
Internal Auditors- employed by all types of organizations; report to the audit committee, perform
a variety of audits such as compliance, operational efficiency and financial statement audits
auditing regulation correct answers self-regulated until the early 2000s; resulted in incentives
that didnt align w the purpose of an audit, scandals like Enron arose
led to creation of the Sarbanes Oxley Act of 2002
Sarbanes Oxley Act of 2002 (SOX) correct answers create and empowered the Public Company
Accounting Oversight Board (PCAOB)
SEC restrictions, specifically regarding independence and non-audits services
required mandatory partner rotation and integrated audits
partner rotation- partners can only work on a client for 5 years. disadvantage here is that new
partners have to learn the industry and the client
relationship partners- role companies have created where these partners don't touch the audit or
F/S, they just deal w the client, make sure they're happy
Dodd Frank Wall Street Reform and Consumer Protection Act correct answers created
restrictions for financial services companies
3 governing bodies correct answers IAASB, AICPA/ASB, PCAOB
IAASB correct answers international standards on auditing, applicable to entities outside the US
international version for international based companies
AICPA/ASB correct answers AICPA auditing standards, applicable to private company audits
standards very similar to PCAOB, slight differences
information risk correct answers the possibility that the information upon which the business risk
decision was made was inaccurate
causes:
-remoteness of information
-biases and motives of the provider
-complexity
-voluminous data
cost of information risk is a factor in Cost of Capital; COC= risk free rate of return, economic
risk premium, information risk premium
higher information risk premium=high cost of capital
remoteness of information correct answers can't get an inside view//don't know what's actually
happening on the inside because it's being provided by others
biases and motives of the provider correct answers information could be biased if provided by
someone whose goals are inconsistent w those of the decision maker
can be because management is conservative or aggressive, has subconscious bias, etc.
voluminous data correct answers with large organizations there are large number of transactions
which increases the likelihood that information is recorded improperly
also with large amounts of data how is the relevant data chosen? is it being used the right way?
management has much more insight and information than what is actually presented. this could
lead to a discrepancy between what management knows and what users know
complexity correct answers not everyone has accounting/finance background=hard for users to
understand
exchanges are more and more complex and therefore difficult to record
4 ways information is improved correct answers signaling, monitoring, information-risk
reduction, insurance
signaling correct answers assurance provides a method of credibility signaling the quality of the
commodity to the consumer so higher price can be charged
consumers are more willing to pay higher if there is a signal of high quality
monitoring correct answers principal agent model- motivating someone to work hard all the time
shard to do, have to prepare and adjust for this by monitoring and making incentive adjustments
audits are done to reassure shareholders so they will be willing to pay management more
reduce information risk (3 ways) correct answers -user verifies information (may be too costly)
,-user shares information risk: management is responsible for providing reliable information to
others, users= potential for financial losses
ex: you and company agree to balance risk premium out between you two, this leads to issues bc
if something goes wrong there will be a lawsuit
-provide audited financial statements: most common way to reduce information risk
insurance hypothesis correct answers assumption that an audit provides "insurance" in the even
that something goes wrong
injured parties can be
-investors who relied on audited financial statements can sue auditors who are negligent and who
have deep pockets
-politicians who would be blamed for a company failure; allows SEC to point the finger at
auditors and avoid blame
when company goes bankrupt, investors will sue company and auditors. but usually blame falls
on company
assurance correct answers independent professional service that improves the quality of
information for decision makers
anything that improves quality and doesn't have to be CPA; anyone can provide these services
ex: consumer reports, better business bureau, corporate social responsibility and sustainability
reports
attestation correct answers more specific type of assurance service; a CPA is engaged to issue a
*written* communication that expresses a conclusion about the reliability of a *written*
assertion that is the responsibility of another party
services that improve quality of information and come w a WRITTEN report
ex: financial statements audits, financial statement reviews, attestation over internal control over
financial reporting, other attest services like SOC reports
audits correct answers the accumulation and evaluation of evidence about information to
determine and report on the degree of correspondence between the information and established
criteria. Should be done by a competent, independent person
a specific type of attestation service
financial statement audits, internal controls over financial reporting audits, operational audits
financial statement audit correct answers designed to provide reasonable assurance that financial
statements are free of material misstatements
, internal controls over financial reporting (ICFR) audit correct answers management assets that
internal controls have been developed and implemented and the auditor attests to the
effectiveness of internal controls
operational audit correct answers evaluates efficiency and effectiveness of any part of
organization's operating procedures and methods
compliance audit correct answers determines whether the audit is following specific procedures,
rules or regulation set by some higher authority
types of auditors and audit firms correct answers CPA firms- external and independent auditors
Government Accountability Office (GAO) auditor- reports to congress; performs a wide variety
of audits such as expenditure compliance and operational efficiency and excellence of federal
programs
IRS tax auditors
Internal Auditors- employed by all types of organizations; report to the audit committee, perform
a variety of audits such as compliance, operational efficiency and financial statement audits
auditing regulation correct answers self-regulated until the early 2000s; resulted in incentives
that didnt align w the purpose of an audit, scandals like Enron arose
led to creation of the Sarbanes Oxley Act of 2002
Sarbanes Oxley Act of 2002 (SOX) correct answers create and empowered the Public Company
Accounting Oversight Board (PCAOB)
SEC restrictions, specifically regarding independence and non-audits services
required mandatory partner rotation and integrated audits
partner rotation- partners can only work on a client for 5 years. disadvantage here is that new
partners have to learn the industry and the client
relationship partners- role companies have created where these partners don't touch the audit or
F/S, they just deal w the client, make sure they're happy
Dodd Frank Wall Street Reform and Consumer Protection Act correct answers created
restrictions for financial services companies
3 governing bodies correct answers IAASB, AICPA/ASB, PCAOB
IAASB correct answers international standards on auditing, applicable to entities outside the US
international version for international based companies
AICPA/ASB correct answers AICPA auditing standards, applicable to private company audits
standards very similar to PCAOB, slight differences
