Acct 402 -
Auditing
Midterm #1 fully
solved &
updated
Chapter 1: Auditing and Assurance Services - answer
What is auditing? - answer The systematic process of obtaining and
evaluating evidence regarding assertions about economic actions
and events to ascertain the degree of correspondence between the
assertions and established criteria and communicating the results
to interested users.
What is information risk? - answer - Risk that the information given
by a company is false or misleading
- Users will demand an independent third party assessment of the
given information. **Demand for reliable information**
What are the sources of information risk? - answer - Remoteness of
information
- Biases and motives of the provider
,- ***Big/Voluminous data*** (very common one)
- Complex exchange transactions
How can you reduce information risk? - answer 1. User verifies
information
- When the user goes to the business themselves to verify the info.
- Very costly, impractical
2. User shares information risk with management
- Ultimately, management is the one responsible for providing
reliable information. They can be held responsible in a lawsuit if
there is incorrect information.
3. Audited financial statements are provided
- External auditors provide assurance that the financial statements
are reliable
What is business risk? - answer The failure to meet objectives
What is the difference between auditing, attestation, and assurance
services? - answer **Auditing***: Focused on determining whether
recorded information properly reflects the economic events that
occurred during the accounting period.
[Professor said auditing will most likely be the answer]
Attestation: When a practitioner assess and reports on an assertion
about a subject matter that is the responsibility of another party.
EX: Financial forecasts/projections
Assurance Services: Independent professional service that improves
the quality of information for decision makers
,What are the five management assertions (PCAOB)? - answer 1.
Existence or Occurence
2. Rights and Obligations
3. Completeness
4. Valuation or Allocation
5. Presentation and Disclosure
(1st management assertion) What do we mean when we say,
"Existence or Occurrence"? - answer - Assets and liabilities included
in the accounts exist
- Recorded transactions are valid and have actually occurred
(2nd management assertion) What do we mean when we say,
"Rights and Obligations"? - answer - Entity has a legal claim on all
assets and revenues reported
- Has a legal responsibility for all liabilities and expenses
(3rd management assertion) What do we mean when we say,
"Completeness"? - answer - All balances and transactions have been
recorded in the financial statements
(4th management assertion) What do we mean when we say,
"Valuation or Allocation"? - answer - Assets, liabilities, and recorded
transactions have been valued in accordance with GAAP
(5th management assertion) What do we mean when we say,
"Presentation and Disclosure"? - answer - All accounts are presented
in the appropriate place
- All information required has been disclosed in the statements and
footnotes
, What is professional skepticism? - answer - Refers to an auditor's
questioning mindset towards representations made by management
and evidential matter gathered
- Must be skeptical because a potential conflict of interest always
exists between the auditor and the client
What is an internal auditor? - answer - Employed by many
organizations
- Must report to an audit committee of the board of directors
Chapter 2: Professional Standards - answer
Who did the Sarbanes-Oxley Act of 2002 apply to? - answer - Applies
to all public companies and their audit firms
What are the major changes that happed due to the Sarbanes-Oxley
Act of 2002? - answer 1. ***Created the public company accounting
oversight board (PCAOB) "peek-a-boo"*** IMPORTANT
2. Created a stronger relationship between external audit and audit
committee
- Now, external audit reports to audit committee (not the
management). This includes the requirement of having 1 financial
expert on the audit committee.
3. Increased penalties for destroying records, committing securities
fraud, and not reporting fraud (stronger protections for whistle-
blowers)
4. Management must assess and make representations about the
effectiveness of internal controls
Auditing
Midterm #1 fully
solved &
updated
Chapter 1: Auditing and Assurance Services - answer
What is auditing? - answer The systematic process of obtaining and
evaluating evidence regarding assertions about economic actions
and events to ascertain the degree of correspondence between the
assertions and established criteria and communicating the results
to interested users.
What is information risk? - answer - Risk that the information given
by a company is false or misleading
- Users will demand an independent third party assessment of the
given information. **Demand for reliable information**
What are the sources of information risk? - answer - Remoteness of
information
- Biases and motives of the provider
,- ***Big/Voluminous data*** (very common one)
- Complex exchange transactions
How can you reduce information risk? - answer 1. User verifies
information
- When the user goes to the business themselves to verify the info.
- Very costly, impractical
2. User shares information risk with management
- Ultimately, management is the one responsible for providing
reliable information. They can be held responsible in a lawsuit if
there is incorrect information.
3. Audited financial statements are provided
- External auditors provide assurance that the financial statements
are reliable
What is business risk? - answer The failure to meet objectives
What is the difference between auditing, attestation, and assurance
services? - answer **Auditing***: Focused on determining whether
recorded information properly reflects the economic events that
occurred during the accounting period.
[Professor said auditing will most likely be the answer]
Attestation: When a practitioner assess and reports on an assertion
about a subject matter that is the responsibility of another party.
EX: Financial forecasts/projections
Assurance Services: Independent professional service that improves
the quality of information for decision makers
,What are the five management assertions (PCAOB)? - answer 1.
Existence or Occurence
2. Rights and Obligations
3. Completeness
4. Valuation or Allocation
5. Presentation and Disclosure
(1st management assertion) What do we mean when we say,
"Existence or Occurrence"? - answer - Assets and liabilities included
in the accounts exist
- Recorded transactions are valid and have actually occurred
(2nd management assertion) What do we mean when we say,
"Rights and Obligations"? - answer - Entity has a legal claim on all
assets and revenues reported
- Has a legal responsibility for all liabilities and expenses
(3rd management assertion) What do we mean when we say,
"Completeness"? - answer - All balances and transactions have been
recorded in the financial statements
(4th management assertion) What do we mean when we say,
"Valuation or Allocation"? - answer - Assets, liabilities, and recorded
transactions have been valued in accordance with GAAP
(5th management assertion) What do we mean when we say,
"Presentation and Disclosure"? - answer - All accounts are presented
in the appropriate place
- All information required has been disclosed in the statements and
footnotes
, What is professional skepticism? - answer - Refers to an auditor's
questioning mindset towards representations made by management
and evidential matter gathered
- Must be skeptical because a potential conflict of interest always
exists between the auditor and the client
What is an internal auditor? - answer - Employed by many
organizations
- Must report to an audit committee of the board of directors
Chapter 2: Professional Standards - answer
Who did the Sarbanes-Oxley Act of 2002 apply to? - answer - Applies
to all public companies and their audit firms
What are the major changes that happed due to the Sarbanes-Oxley
Act of 2002? - answer 1. ***Created the public company accounting
oversight board (PCAOB) "peek-a-boo"*** IMPORTANT
2. Created a stronger relationship between external audit and audit
committee
- Now, external audit reports to audit committee (not the
management). This includes the requirement of having 1 financial
expert on the audit committee.
3. Increased penalties for destroying records, committing securities
fraud, and not reporting fraud (stronger protections for whistle-
blowers)
4. Management must assess and make representations about the
effectiveness of internal controls
