Ch. 1 SmartBook

True or false: Information asymmetry means that owners generally have more information about the financial position and results of entity operations than managers.

False Reason: Managers generally have more information about the financial position and operations than absentee owners.

True or false: The auditor's report, also known as the audit opinion, is the main product or output of the audit.

True Reason: This is the final phase and the way the auditor communicates his or her findings.

Professional managers hired by owners to run the corporation on a day-to-day basis are referred to as ______. stockholders agents veterans hosts

agents

The broadest category of independent professional accounting services intended to help decision makers by improving the quality or context of information they use are ______ services. attest auditing assurance

assurance

These occur when a practitioner is engaged to issue a report on subject matter that is the responsibility of another party. assurance services attest services accounting services

attest services

"Objectively obtaining and evaluating evidence to assess another party's assertions" is a key component of every ______. audit assurance service attest service

audit

The process of obtaining and evaluating evidence makes up most of the accounting professional's activities on any ______. audit assurance service attest service

audit

Oral or visual information as well as paper or electronic documents that originate either within or outside the organization are all types of ______ ______.

audit evidence

The end product of an auditor's work is the ______. materiality assessment engagement letter audit opinion financial statements

audit opinion

Which of the following is a type of attest service? financial planning assurance services auditing consulting

auditing

Because goals may not coincide, there is a natural ______ of ______ between managers and absentee owners.

conflict interest

CPAs add ______ to information produced and reported by management to outside parties. credibility insight accountability accuracy

credibility

In the context of a financial statement audit, generally accepted accounting principles usually serve as the established ______ for assessing management assertions.

criteria

Select all that apply Capital markets allow public companies to raise the investment capital necessary in order to ______. finance research and development fund equipment needed expand to new markets fund technology increase managerial compensation improve credit ratings

finance research and development fund equipment needed expand to new markets fund technology

The focus of the auditor's evidence collection efforts is ______. financial statement assertions manager's discussion and analysis board of director reports company investors

financial statement assertions

The focus of the FASB's definition of materiality is on ______. company management the board of directors auditors financial statement users

financial statement users

These are implemented to ensure that the client's information system appropriately captures and records individual transactions, which are then collected into ending account balances. internal controls rules and regulations external controls financial statements

internal controls

The amount by which a set of financial statements could be misstated without affecting the judgment of a reasonable person is referred to as ______.

materiality

If both the manager and absentee owner seek to maximize their self-interest, the manager ______ act in the best interest of the owner. may not always will always will never

may not always

If the client is a public, rather than a private company, the assessment of internal controls will be ______ thorough. less equally more

more

Most of the auditor's work in arriving at an opinion on the financial statements consists of ______ audit evidence relating to management's assertions. discussing preparing and summarizing obtaining and evaluating reporting on

obtaining and evaluating

Increasing use of audit data analytics ______ auditors' ability to ask the right questions and evaluate the answers yielded by the data. places a greater premium on has no effect on the reduces the need for the

places a greater premium on

Accounting professionals perform various services that provide assurance about the ______ and ______ of information given by one party to another.

relevance reliability

Select all that apply The increased used of data analytics in auditing ______. requires the auditor to be an expert in technology and computer programming makes it less important for audit professionals to reason through challenging concepts requires the ability to query, manipulate, and interpret information streamlines some tedious audit tasks

requires the ability to query, manipulate, and interpret information streamlines some tedious audit tasks

The quantity of evidence the auditor obtains is the basis of ______. sufficiency reliability appropriateness relevance

sufficiency

The two key descriptors of audit evidence are ______ and ______.

sufficient or sufficiency appropriate or appropriateness

Select all that apply The aspects of information reflected in the financial statements are ______ and related disclosures. transactions profitability account balances materiality

transactions account balances

Understanding management assertions in terms of ______ and ______ ______ helps the auditor focus on the different types of audit procedures needed to test the assertions.

transactions account balances

Which of the following accounting firms failed in 2002 because the firm lost its reputation as a high-quality objective auditor? Ernst & Young KPMG Deloitte Arthur Andersen

Arthur Andersen

Select all that apply Identify common preliminary engagement activities. Establish an understanding with the client about the services to be performed. Determine the audit engagement team requirements. Ensure the independence of the audit firm and audit team. Audit business processes and related accounts. Consider and audit internal controls.

Establish an understanding with the client about the services to be performed. Determine the audit engagement team requirements. Ensure the independence of the audit firm and audit team.

Which of the following usually serves as the basis for evaluating management's assertions in the context of a financial statement audit? International Auditing Standards (IAS) Generally Accepted Accounting Principles (GAAP) Generally Accepted Auditing Standards (GAAS) International Financial Reporting Standards (IFRS)

Generally Accepted Accounting Principles (GAAP)

Select all that apply Which of the following statements are correct? Specialists other than auditors may be required on some audit teams. The auditor must update his or her understanding of the entity to put together the appropriate audit team. Setting the scope of the audit requires an understanding of the quality of the entity's internal controls. To ensure the audit runs smoothly, it is preferable to have members of the audit team that have personal relationships with the client.

Specialists other than auditors may be required on some audit teams. The auditor must update his or her understanding of the entity to put together the appropriate audit team. Setting the scope of the audit requires an understanding of the quality of the entity's internal controls.

When business owners hire others to manage their business, the demand for auditing can be understood as the need for ______

accountability

Much of what auditors do revolves around collecting and evaluating evidence about management's financial statement ______.

assertions

When planning an audit, the audit team must determine materiality and make a preliminary analysis of the entity's ______ to determine the risk of material misstatement (RMM). business risks internal controls management team

business risks

Select all that apply Information asymmetry and conflicts of interest exist between ______. buyers and sellers managers and company employees managers and potential investors

buyers and sellers managers and potential investors

Select all that apply CPAs have a traditional reputation of ______. competence objectivity financial illiteracy risk taking independence

competence objectivity independence

The final phase in the audit process is to ______. complete the audit audit business processes and related accounts evaluate the results and issue an audit report discuss findings with the audit committee

evaluate the results and issue an audit report

A very small difference that is unlikely to affect an investor's decisions in a significant manner is deemed to be ______. immaterial an audit risk material

immaterial

A very small difference that is unlikely to affect an investor's decisions in a significant manner is deemed to be ______. material immaterial an audit risk

immaterial

An important preliminary engagement activity is to ensure the ______ of the audit firm and audit team. independence reliability integrity objectivity

independence

Select all that apply The entity being audited typically hires and pays the auditor. This highlights the importance to the investing public of auditor ______. independence billing rates cost efficiency objectivity

independence objectivity

The fact that the manager generally has more information about the "true" financial position and results of operations of the entity than does the absentee owner is called ______ ______.

information asymmetry

Select all that apply The demand for assurance services comes from ______ between managers and owners or managers and potential investors. information asymmetry tax information requirements cooperation conflicts of interest

information asymmetry conflicts of interest

Select all that apply In order to develop and support an audit opinion, the auditor must obtain an understanding of the client's ______. board of directors internal auditors information systems business and industry risks

information systems business and industry risks

Select all that apply A company's system of internal controls is put in place by a company's ______. management internal auditors external auditors board of directors

management board of directors

Select all that apply Forming the audit team and deciding if specialists will be needed may be done by the audit ______. manager associate partner senior

manager partner

Because it isn't practical or cost beneficial for auditors to ensure financial statements are completely free of any small misstatements, the concept of ______ is important to an audit.

materiality

To ensure the audit is conducted effectively and efficiently, it is important to ______. discuss the audit with the board of directors ensure all audit team members have worked on the audit before properly plan the audit

properly plan the audit

Select all that apply Owners who are not directly involved in running the business are referred to as ______. . stockholders agents principals stewards

stockholders principals