ch01 - Chapter 1 Multiple Choice 1-1. C 1-2. A 1-3. A 1-4....

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Chapter 1 Multiple Choice 1-1. C 1-2. A 1-3. A 1-4. C 1-5. B 1-6. A 1-7. C 1-8. D 1-9. C 1-10. D 1-11. A 1-12. B 1-13. D 1-14. C 1-15. A 1-16. D 1-17. B 1-18. C 1-19. B 1-20. A Discussion Questions 1-21 [LO 2] Why do you have to be a good accountant in order to be a good auditor? In order to be a good auditor, you must also be a good accountant. To be an effective auditor, one must thoroughly understand the accounts and processes to be audited. Auditors need a deep understanding of financial accounting to determine what information must be captured about an economic event and how it should be presented in the financial statements. 1-22 [LO 3] Auditors cannot change the financial statements. Explain the influence the auditor has on management’s decisions regarding financial statement presentation. Also, explain your perception of the possible tension created by any power struggle inherent in the management- auditor relationship. How do you think auditors should respond when management wants the company’s financial statements to be presented in a certain way but the auditor disagrees? The auditor expresses an opinion on the financial statement presentation in the auditor’s report. If there is a serious disagreement between management and the auditor with respect to whether the financial statements are a fair representation of the company’s economic situation and activities, the auditor is required to render a qualified or adverse opinion in his report. Management usually needs a clean and unqualified opinion and failing to obtain one is disastrous. Because the auditor is hired and paid by management, the auditor – management
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relationship is fraught with potential conflicts of interest. There is also enormous legal liability for the auditor. There are many risks involved in auditing. Because financial reporting requires the exercise of much judgment, reasonable persons often disagree on issues of presentation. Successful auditors must persuade their clients to present the financial statements in the proper manner. The auditor’s professional knowledge, experience, and demeanor are necessary to manage expectations, avoid problems, and defuse tensions before they become conflicts. 1-23 [LO 2] How do the capital markets and economy benefit as a result of all public-traded companies having an independent audit? If the investing public perceives audited financial statements to be more reliable than nonaudited financial statements, then audits make a significant contribution by increasing investor confidence. Investors who have confidence in the information are more likely to participate in the world’s capital markets. This participation allows our capital markets and our economy to grow. Independent audits are a necessary component of information transparency and reliability. After all, the integrity of financial reporting is the foundation upon which our public markets are
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This note was uploaded on 02/02/2012 for the course BUSINESS 101 taught by Professor - during the Spring '11 term at Mississippi Valley State University.

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ch01 - Chapter 1 Multiple Choice 1-1. C 1-2. A 1-3. A 1-4....

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