Chapter 1 (UG)

What does an auditor do?

• Provide a guarantee on the ongoing viability of a company
• Provide an opinion on the financial report
• Work with management to porduce a set of financial statements
• Ensure that the financial report contains no fraud

1.1  What best describes the ‘agency problem’ that results in a demand for audits?

• Shareholders act in their own interests and not in the interests of the company
• Banks have different information expectations to shareholders
• Managers’ act first in the interests of shareholders to the detriment of creditors
• A.  Managers act in their own interests rather than the interests of shareholders.  

1.1  Regulators use of the audit function to insulate themselves from blame in a corporate failure most relates to which reason for a demand in auditing?

• Insurance hypothesis
• Agency theory
• Information hypothesis
• A.  None of the above; it’s a separate issue.

What must an auditor consider when undertaking an audit

• Ethical standards issued by the professional bodies
• Accounting standards
•    The Corporations Act.
• All of the above

1.1  The key reason for the radical audit reforms over the past decade is:

• The disparity of revenues and practices between the big firms and the smaller accounting practices
• The inability of auditors to meet their liability claims
• The alleged accounting fraud and audit failures related to major corporate collapses
• A.  The perceived pursuit of self –interest by auditors to the detriment of the public interest.

1.1  The purpose of the surveillance program undertaken by ASIC is to:

• Obtain evidence on the negligence of auditors and accountants
• A.  Develop a complete framework of creative accounting mechanisms.
• Evaluate the adequacy of compliance with respect to financial reporting
• A.  Ensure dividends are not paid from financial statements that have been misstated.

1.1  the main objective of CLERP 9 was to:

• Ensure Australia’s legal provisions are as close as possible to the US legislation
• Strengthen the financial reporting process so as to ensure the integrity of the capital market
• A.  Review the liability issues of the audit and legal profession.
• Evaluate possible conflicts of interest in the auditing profession

1.1  A financial statement audit provides which level of assurance?

• A high level of assurance
• An acceptable level of assurance
• A moderate level of assurance
• A.  A low level of assurance.  

1.1  Who are the primary financial report users that auditors need to be concerned about?

• Managers of the audited firm
• Banks who provide capital to the firm
• The general public
• Shareholders of the firm

1.1  What best describes the ‘expectation gap’ as defined by Porter (1993)?

• A.  Misperceptions of users about what an audit is designed to do.
• Poor performance by auditors
• Inadequate audit standards
• A.  All of the above.