Chapter 1 Introduction to Auditing

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.  

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 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

The essence of a financial report audit is to:  
 

•  examine individual transactions so that the auditor may certify as to their validity.
• detect fraud
• assure the consistent application of correct accounting procedures.
• determine whether the client’s financial reports are fairly stated.

 Financial report auditing can best be described as:  
 

• a regulatory function that prevents the issuance of improper financial information. 
• a professional activity that measures and communicates financial and business data.
• a discipline that attests to the results of accounting and other functional operations and data. 
• a branch of accounting. 

Which of the following is not an attribute of an external auditor?  
 

• Client advocacy
• Integrity.
• Professional competence with regards to underlying subject matter
• Objectivity

Below are a number of potential additional benefits arising from an assurance service:  
 I. recommendations to improve the efficiency of operations.
 II. a positive influence on the behavior of people whose activities are being assured.
 III. recommendations to improve the effectiveness of operations.   Which combination of these is identified in the book as additional benefits?  
 

• I and II only
•  I and III only
• II and III only
• I, II and III.