Demand for Auditing

Question 1

What factors create a demand for auditing/attestation services?

Answer 1

1. Potential bias or error from the information provider.

2. Difficult for the information user to personally verify the information.

Question 2

How do audits benefit financial statement users?

Answer 2

Audits protect financial statement users from erroneous or fraudulent information.

Question 3

How do companies benefit from having their financial statements audited?

Answer 3

1. Audits reduce the cost of capital by making it easier for companies to obtain loans and issue securities.
2. Auditors provide a “management letter” containing advice on how to improve operations.

Question 4

What type of assurance is provided by an audit? a review? a compilation?

Answer 4

Audits provide reasonable (positive) assurance. Reviews provide limited (negative) assurance. Compilations provide no assurance.

Question 5

Why can’t auditors provide absolute assurance that the financial statements are fairly stated?

Answer 5

1. Auditors cannot test 100% of transactions.
2. Financial statements contain many estimated amounts whose “correct” amounts will not be known until the future.
3. Fraud may be cleverly concealed.

Question 6

What are the two primary procedures used while performing a review of financial statements?

Answer 6

1. Inquiry of management.

2. Analytical procedures.

Question 7

What additional procedures are performed during an audit that are not performed during a review?

Answer 7

1. Evaluation and testing of internal controls.

2. Substantive tests of transactions and balances.