Ch . 1 questions

Question 1

Owners who are not directly involved in running the business are referred to as Blank______.

Answer 1

Stockholders and principals

Question 2

CPAs have a traditional reputation of Blank______.

Answer 2

Competence
Objectivity
Independence

Question 3

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

Answer 3

Information asymmetry

Question 4

Information asymmetry and conflicts of interest exist between Blank______.

Answer 4

managers and investers
buyers and sellers

Question 5

The demand for assurance services comes from Blank______ between managers and owners or managers and potential investors.

Answer 5

Conflicts of interest
information asymmetry

Question 6

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

Answer 6

conflict of interests

Question 7

When a manager is honest, Blank______.

Answer 7

it may be in the manager’s self-interest to hire an auditor

Question 8

The auditor’s verification of financial reports reduces __________ which is the chance that data circulated by a company’s management will be false or misleading.

Answer 8

Information risk

Question 9

Purchasing the assurance provided by an audit Blank______ the cost of capital for a firm.

Answer 9

significantly reduces

Question 10

CPAs add Blank______ to information produced and reported by management to outside parties.

Answer 10

credibility

Question 11

How many large, international accounting firms dominate the audits of large publicly traded companies, auditing over 90% of the revenue produced by all such companies in the United States?

Answer 11

4

Question 12

Which of the following accounting firms failed in 2002 because the firm lost its reputation as a high-quality objective auditor?

Answer 12

Arthur Andersen

Question 13

True or false: Reporting in accordance with a set of agreed-upon procedures reduces the conflict of interest between managers and owners and thus the need for auditing.

Answer 13

False

Question 14

True or false: Some of the most important assertions entities make to investors are implicit in the audit opinion.

Answer 14

False

Question 15

True or false: Audits can save a company money by enabling them to get lower interest rates on loans.

Answer 15

True

Question 16

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

Answer 16

Assertions

Question 17

Auditing is demanded because it Blank______.

Answer 17

Plays a valuable role in monitoring contractual relationships

Question 18

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

Answer 18

Transactions
account balances

Question 19

The entity being audited typically hires and pays the auditor. This highlights the importance to the investing public of auditor Blank______.

Answer 19

Objectivity
Independence

Question 20

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

Answer 20

Assurance

Question 21

Some of the most important assertions entities make to investors are implicit in the entities’ Blank______.

Answer 21

financial statements

Question 22

The focus of the auditor’s evidence collection efforts is Blank______.

Answer 22

financial statement assertions

Question 23

Which of the following is a type of attest service?

Answer 23

auditing

Question 24

“Objectively obtaining and evaluating evidence to assess another party’s assertions” is a key component of every Blank______.

Answer 24

Audit

Question 25

The aspects of information reflected in the financial statements are Blank______ and related disclosures.

Answer 25

Transactions and account balances

Question 26

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

Answer 26

reliability and relevance

Question 27

The auditor's assessments of _________ and ___________influence the nature, timing, and extent of the audit evidence to be gathered.

Answer 27

materiality and audit risk

Question 28

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

Answer 28

attest services

Question 29

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

Answer 29

materiality

Question 30

The process of obtaining and evaluating evidence makes up most of the accounting professional's activities on any Blank______.

Answer 30

Audit

Question 31

The focus of the FASB's definition of materiality is on Blank______.

Answer 31

financial stmt users

Question 32

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

Answer 32

criteria

Question 33

Which of the following statements are correct?

Answer 33

The auditor cannot guarantee that all material misstatements will be uncovered.

Question 34

The conceptual and procedural details of a financial statement audit build on the fundamental concepts of Blank______.

Answer 34

audit risk materiality evidence

Question 35

A very small difference that is unlikely to affect an investor's decisions in a significant manner is deemed to be Blank______.

Answer 35

immaterial