Exam 1: An Introduction to Assurance and Financial Statement Auditing

Sally Thompson's company, Sally's Shoes, is a successful shoe retail business with one store. Sally would like to expand to two locations, but the bank has asked for an independent audit before it will provide financing. Sally hires her brother-in-law, George Thompson, to perform the audit. George has experience in auditing non-profit organizations and he decides to perform the audit the same way as his other audits. After completing all the steps of the audit process, George issues an unqualified opinion indicating that he is certain that the company's financial statements contain no misstatements. Comment on any potential problems with George's audit of Sally's Shoes.

Preliminary engagement activities include

Which of the following is not a concept that is included in the scope paragraph of the auditor's report?

An auditor would issue an adverse opinion if

In the context of agency theory, information asymmetry refers to the idea that

Define "information asymmetry" and discuss it in the context of the financial markets. Include in your discussion how information asymmetry is reduced.

Auditing services and attestation services are the same.

Which one of the following statements best describes the concept of materiality?

Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?

Which of the following best describes the fundamental, underlying reason for why there is demand for an independent auditor to report on financial statements?

A standard, unqualified auditor's report contains three paragraphs, plus a fourth explanatory paragraph in some circumstances. Provide a brief (one sentence) description for each paragraph.

Decision makers demand reliable information that is provided by accountants.

Which of the following best describes the concept of audit risk?

Auditing is a type of attest service.

You are a new employee at the accounting firm Murray & Murray, CPAs. Before you are assigned to your first audit, your supervisor tests your knowledge and asks you to explain the term "scope" in the context of a financial statement audit. Required: A. Provide a definition of scope. A. The scope of an audit is the type and amount of audit work to be performed. B. Describe what influences an auditor's determination of scope. B. The auditor's assessments of risk and materiality influence the scope of the audit. For instance, if an auditor sets a lower materiality amount or would like to substantially reduce audit risk, the scope of the audit would be increased. In establishing the scope of an audit, the auditor must make decisions about the nature, extent, and timing of evidence to be gathered in order to evaluate management's assertions.

When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to

Why do auditors generally use a sampling approach to evidence gathering?

Which of the following statements is not true with respect to assurance, attest, and audit services?

Why must an auditor assess materiality?

Discuss an overview of the financial statement audit process using the terms "assertion," "evidence," and "report."