I.

SHORT ESSAY QUESTIONS

1. In addition to understanding accounting, the auditor must possess expertise in the

accumulation and interpretation of audit evidence. It is this expertise that distinguishes
auditors from accountants.

2. Information risk is the risk that information obtained will be misleading or inaccurate. This
might happen when the information is manipulated to achieve desirable results. The
primary causes of information risk can be complex and large volumes of data that are hard
to comprehend in the right way. Second cause of information risk is the personal bias where
the data is adjusted to achieve desirable results and motives.

3. Management's responsibility is for the fairness of the financial statements. The auditors are
responsible for performing an independent audit of the financial statements and issuing a
report on them in accordance with generally accepted auditing standards.

4. Reasonable assurance includes the understanding that there is a remote likelihood that
material misstatements will not be prevented or detected on a timely basis. To achieve
reasonable assurance, the auditor needs to obtain sufficient appropriate audit evidence to
reduce audit risk to an acceptably low level.

5. The difference between auditing and assurance services is that assurance services relate to
the basic aims of these procedures, while the auditing services ensure that the financial
reports are presented fairly, ethically, accurately, and comply with the accounting
standards/principles.

II. TRUE OR FALSE

1. FAKSE
2. TRUE
3. FALSE
4. TRUE
5. FALSE
6. TRUE
7. FALSE
8. TRUE
9. FALSE
10. TRUE
III. MULTIPLE CHOICE QUESTIONS

1. C.
2. D.
3. A.
4. B.
5. C.
6. D,
7. B.
8. B.
9. B.
10. B.

IV. Auditing is an independent appraisal activity for an entity's financial affairs that helps users
create rational and unbiased opinions on the financial statements. This is a transparent
activity where users or shareholders of the company engage an independent audit firm to
express an opinion on the financial statements. This helps in better management of financial
affairs, and management bias and window dressing are avoided because the shareholders,
who are the ultimate owners of the company, need reasonable assurance that there are no
material misstatements in the financial statements.
Smaller firms may engage external auditors for the sake of regulatory requirements,
but large and giant businesses engage external auditors for their increased level of
confidence and integrity over the entity's affairs because the owners can't be present to
observe or comment on the operational efficiency of the organization. The auditor highlights
grey areas of the business which are addressed in the management letter. The management
forwards such issues to the relevant department to rectify and reply with corrected
measures taken. As a result, because of this independent auditing, the financial affairs of
businesses are refined.
The fraud and errors are regularly highlighted through the auditor's independent
audit opinion, because of which management is always alert to avoid such situations. There
is always an information risk that management might manipulate the records and
information to achieve desired results or satisfy the management that the company is in
safe hands, which it is actually not. Auditing is a very familiar concept, where smaller firms
even engage audit firms to help them to achieve better internal controls and avoid fraud
because of ineffective controls that can be easily overridden by fraudulent activities.
Associating audit with the regulatory environment is not right because there are many areas
that audit covers, like inventory count, cash count, and fixed asset verification.