Chapter 1, Assurance and Auditing
Questions
1. What are the potential consequences of relying on information that is misleading,
incomplete, or confusing?
2. Describe the important information risks that investors face when making decisions
based on financial reports.
3. Explain why the financial statement audit is important to stakeholders.
4. Briefly explain the natural demand for auditing.
5. Describe the history of auditing prior to the modern era, explaining the evolution of the
focus of audits over time.
6. The demand for auditing can develop naturally or can be mandated by government
regulation. Which do you think is most important in the evolution of auditing through
history?
7. Explain the importance of reliable information for a large manufacturing company, a
small business, a not-for-profit entity and a government organization
8. How does the modern business environment impact the need for relevant and reliable
data?
,9. What two competing forces influence managers’ decisions to misstate (or not misstate)
financial results for their own benefit?
10. Information asymmetry may impact managers and stakeholders. Define this term and
explain two situations where incentives and information asymmetry may create
potentially dysfunctional distrust.
11. Why should stakeholders be knowledgeable about an organization’s approach to ethics?
12. Describe different ways an individual may react when faced with decisions that are
ethically questionable?
13. Why does full and complete disclosure discourage unethical decisions?
14. Explain the importance of and the difference between financial literacy and financial
experts with regard to the audit committee.
15. Explain the role and importance of the compensation committee.
16. Why is the effectiveness of internal auditors potentially limited?
17. Explain the requirements and limitations of external auditors.
18. What powerful lesson did the auditing profession learn from the Enron/Andersen
tragedy?
19. What three conditions must be met before an auditor undertakes an assurance
engagement?
,20. What four conditions affect an auditor’s attestation engagement?
21. What are the general requirements (legal and otherwise) for becoming a licensed public
accountant?
Problems
22. Explain the role of the internal auditors and external auditors in corporate governance.
23. Compare and contrast assurance, attestation and financial statement audit.
24. Describe examples of assurance services and give an illustrative example.
25. Describe the CPA licensing process in the United States.
26. Using the examples of Enron, describe different ways individuals react when faced with
decisions that are ethically questionable.
a. Note to Professors: This question can be broadened or narrowed, depending on what
actual cases you have discussed or assigned.
27. Which of the following claims is amenable to attestation? What problems does each
assertion cause with regard to attestation?
a. “Smith Company’s total assets grew 13% compared to last year.”
b. “Diet Rite’s market share in 2005 increased 46%.”
c. “We, the Islamic Republic of Iran meet the requirements of the International Atomic
Energy Agency.”
d. “Pepsi’s products are the best soft drinks available.”
e. “My business lunch expenses today were $43.29.”
, f. “The Jones Manufacturing Company is in compliance with all OSHA standards.”
g. “Our new drug will provide the best chance for cancer patients.”
h. “Our lotion reduces the appearance of wrinkles due to aging better than competing
products.”
28. Consider the information needs of a locally owned convenience store and a national
grocery chain.
a. What information needs are similar?
b. What information needs are different?
c. How does each company collect and process information?
29. How are audits regulated in the USA?
ANSWERS
Questions
1. What are the potential consequences of relying on information that is misleading,
incomplete, or confusing?
a. Low quality information can lead to poor decisions. Decisions which rely on
inaccurate information may lead to unexpected or unacceptable outcomes, including
financial losses.
2. Describe the important information risks that investors face when making decisions
based on financial reports.
a. Objectivity: Biased information may entice an investor to purchase shares in a
company that is intentionally overvalued.
Questions
1. What are the potential consequences of relying on information that is misleading,
incomplete, or confusing?
2. Describe the important information risks that investors face when making decisions
based on financial reports.
3. Explain why the financial statement audit is important to stakeholders.
4. Briefly explain the natural demand for auditing.
5. Describe the history of auditing prior to the modern era, explaining the evolution of the
focus of audits over time.
6. The demand for auditing can develop naturally or can be mandated by government
regulation. Which do you think is most important in the evolution of auditing through
history?
7. Explain the importance of reliable information for a large manufacturing company, a
small business, a not-for-profit entity and a government organization
8. How does the modern business environment impact the need for relevant and reliable
data?
,9. What two competing forces influence managers’ decisions to misstate (or not misstate)
financial results for their own benefit?
10. Information asymmetry may impact managers and stakeholders. Define this term and
explain two situations where incentives and information asymmetry may create
potentially dysfunctional distrust.
11. Why should stakeholders be knowledgeable about an organization’s approach to ethics?
12. Describe different ways an individual may react when faced with decisions that are
ethically questionable?
13. Why does full and complete disclosure discourage unethical decisions?
14. Explain the importance of and the difference between financial literacy and financial
experts with regard to the audit committee.
15. Explain the role and importance of the compensation committee.
16. Why is the effectiveness of internal auditors potentially limited?
17. Explain the requirements and limitations of external auditors.
18. What powerful lesson did the auditing profession learn from the Enron/Andersen
tragedy?
19. What three conditions must be met before an auditor undertakes an assurance
engagement?
,20. What four conditions affect an auditor’s attestation engagement?
21. What are the general requirements (legal and otherwise) for becoming a licensed public
accountant?
Problems
22. Explain the role of the internal auditors and external auditors in corporate governance.
23. Compare and contrast assurance, attestation and financial statement audit.
24. Describe examples of assurance services and give an illustrative example.
25. Describe the CPA licensing process in the United States.
26. Using the examples of Enron, describe different ways individuals react when faced with
decisions that are ethically questionable.
a. Note to Professors: This question can be broadened or narrowed, depending on what
actual cases you have discussed or assigned.
27. Which of the following claims is amenable to attestation? What problems does each
assertion cause with regard to attestation?
a. “Smith Company’s total assets grew 13% compared to last year.”
b. “Diet Rite’s market share in 2005 increased 46%.”
c. “We, the Islamic Republic of Iran meet the requirements of the International Atomic
Energy Agency.”
d. “Pepsi’s products are the best soft drinks available.”
e. “My business lunch expenses today were $43.29.”
, f. “The Jones Manufacturing Company is in compliance with all OSHA standards.”
g. “Our new drug will provide the best chance for cancer patients.”
h. “Our lotion reduces the appearance of wrinkles due to aging better than competing
products.”
28. Consider the information needs of a locally owned convenience store and a national
grocery chain.
a. What information needs are similar?
b. What information needs are different?
c. How does each company collect and process information?
29. How are audits regulated in the USA?
ANSWERS
Questions
1. What are the potential consequences of relying on information that is misleading,
incomplete, or confusing?
a. Low quality information can lead to poor decisions. Decisions which rely on
inaccurate information may lead to unexpected or unacceptable outcomes, including
financial losses.
2. Describe the important information risks that investors face when making decisions
based on financial reports.
a. Objectivity: Biased information may entice an investor to purchase shares in a
company that is intentionally overvalued.
