ACCT 5200 - Midterm I || A+ Guaranteed.
Operational Audits correct answers concentrates on seeking aspects of operations in which
wastes could be reduced by the introduction of controls
Endogenous demand for audit correct answers Audit is demanded by the actors of the economy
itself, not a regulatory body
Exogenous demand for audit correct answers government legislation demands audit to be
performed
Internal values of audit to issuer correct answers better information for decision making, lower
theft and fraud losses
External values of audit to issuer correct answers lower cost of capital, lower cost of debt, better
terms of trade from suppliers, workers, and customer, and better comparability with competitors
Key attributes of the econ of value for audit services correct answers 1. complexity
2. consequences
3. asymmetrical information gap
4. conflicting interests
Four conceptual reasons for endogenous demand correct answers 1. signaling
2. monitoring
3. information-risk reduction
4. insurance hypothesis
Sinaling correct answers producer wants assurance of the quality of their good/service to prove
to buyers that their commodity is worth a premium pricing
Monitoring correct answers aka "principle-agent model" -- manager/producer of a good wants
assurance of the quality of their work to prove to their capital investor(s), i.e. principals, that the
deserve a premium compensation
Information Risk correct answers the possibility that the information upon which a business
decision was made was inaccurate, cause by ( i ) *remoteness of information*, i.e. one cannot
have first-hand knowledge from inside the company, and ( ii ) *biases and motives of the
provider*, i.e. inconsistent goals of the information provider and user may bias the information
in favor of the provider, and ( iii ) *voluminous data*, i.e. large organizations have many
transactions that can be difficult to track
3 ways to reduce information risk correct answers 1. user vierifies information
2. user shares information risks with mgmt
3. provide audited F/S
, insurance hypothesis correct answers idea that audits are only used as a scapegoat--i.e. investors
can sue the audit providers if the company they invested in declares bankruptcy, and politicians
can also blame audit providers
SOX requirements for audit committees correct answers 1. members must be independent of
issuer, excluding: family & EEs of mgmt, people with significant biz relations w/ company, &
some interlocking directors
2. AC respinsible for oversight of auditors
3. must receive regular updates from auditor on: accounting treatments, alternative GAAP
treatments & auditor's preference
4. Accounting disagreements between auditor and mgmt
SOX requirements for BoD/ officers correct answers 1. CEO & CFO must personally certify F/S
2. CEO & CFO must forfeit bonuses and profts on stock sales if issuer is required to issue a
restatement due to misconduct
3. prohibited from trading during pension 'blackout'
SOX requirements for accounting firms correct answers 1. must register with PCAOB, submit
periodic reports, and pay board fees (based on client number)
2. must retain documents for 7 years (5 yr felony punishment)
3. *new laws:*
- must comply with internal controls testing standards
- must attest to mgmt representations on ICs
- must obtain AC pre-approval for audit servies
- must be responsible to the AC
4. *not new, but laws:*
- must use a second partner review
- must rotate audit partners every 5 yrs
Audit standards settings organizations correct answers Auditing Standards Board (ASB)
FASB
PCAOB
SEC
GAAS: ASB principles framework correct answers 1. Responsibilities (3)
2. Performance (5)
3. Reporting Standards (2)
I. Responsibilities (3) correct answers 1. adequate technical training and proficiency
2. independence in mental attitude
Operational Audits correct answers concentrates on seeking aspects of operations in which
wastes could be reduced by the introduction of controls
Endogenous demand for audit correct answers Audit is demanded by the actors of the economy
itself, not a regulatory body
Exogenous demand for audit correct answers government legislation demands audit to be
performed
Internal values of audit to issuer correct answers better information for decision making, lower
theft and fraud losses
External values of audit to issuer correct answers lower cost of capital, lower cost of debt, better
terms of trade from suppliers, workers, and customer, and better comparability with competitors
Key attributes of the econ of value for audit services correct answers 1. complexity
2. consequences
3. asymmetrical information gap
4. conflicting interests
Four conceptual reasons for endogenous demand correct answers 1. signaling
2. monitoring
3. information-risk reduction
4. insurance hypothesis
Sinaling correct answers producer wants assurance of the quality of their good/service to prove
to buyers that their commodity is worth a premium pricing
Monitoring correct answers aka "principle-agent model" -- manager/producer of a good wants
assurance of the quality of their work to prove to their capital investor(s), i.e. principals, that the
deserve a premium compensation
Information Risk correct answers the possibility that the information upon which a business
decision was made was inaccurate, cause by ( i ) *remoteness of information*, i.e. one cannot
have first-hand knowledge from inside the company, and ( ii ) *biases and motives of the
provider*, i.e. inconsistent goals of the information provider and user may bias the information
in favor of the provider, and ( iii ) *voluminous data*, i.e. large organizations have many
transactions that can be difficult to track
3 ways to reduce information risk correct answers 1. user vierifies information
2. user shares information risks with mgmt
3. provide audited F/S
, insurance hypothesis correct answers idea that audits are only used as a scapegoat--i.e. investors
can sue the audit providers if the company they invested in declares bankruptcy, and politicians
can also blame audit providers
SOX requirements for audit committees correct answers 1. members must be independent of
issuer, excluding: family & EEs of mgmt, people with significant biz relations w/ company, &
some interlocking directors
2. AC respinsible for oversight of auditors
3. must receive regular updates from auditor on: accounting treatments, alternative GAAP
treatments & auditor's preference
4. Accounting disagreements between auditor and mgmt
SOX requirements for BoD/ officers correct answers 1. CEO & CFO must personally certify F/S
2. CEO & CFO must forfeit bonuses and profts on stock sales if issuer is required to issue a
restatement due to misconduct
3. prohibited from trading during pension 'blackout'
SOX requirements for accounting firms correct answers 1. must register with PCAOB, submit
periodic reports, and pay board fees (based on client number)
2. must retain documents for 7 years (5 yr felony punishment)
3. *new laws:*
- must comply with internal controls testing standards
- must attest to mgmt representations on ICs
- must obtain AC pre-approval for audit servies
- must be responsible to the AC
4. *not new, but laws:*
- must use a second partner review
- must rotate audit partners every 5 yrs
Audit standards settings organizations correct answers Auditing Standards Board (ASB)
FASB
PCAOB
SEC
GAAS: ASB principles framework correct answers 1. Responsibilities (3)
2. Performance (5)
3. Reporting Standards (2)
I. Responsibilities (3) correct answers 1. adequate technical training and proficiency
2. independence in mental attitude
