Acc 623 Audit Review

In: Business and Management

Submitted By likaren101
Words 1560
Pages 7
Audit Problems
ACC 623
Test 1 Review

I) Intro to Auditing a. The Need for High quality Information: i. Financial information is relied upon by investors to make their investment decisions, creditors to make lending decisions, and by other parties that include vendors, customers, and potential merger or acquisition partners. It is extremely important that this information be reliable since significant sums of money are at stake in these investment and lending decisions. ii. A user of the financial statements of an entity who views the information they obtain as being low quality, or risky, will demand a higher return for his or her investment in that entity. 1. Risk premium: the difference between the return demanded by the investors and the return that would be demanded in the absence of any associated risk iii. Low quality information can be caused by either intentional or unintentional misstatements of that information. 2. Unintentional misstatements in the financial statements often occur due to weak internal controls, unqualified staff, human judgment errors, or lack of attention to detail in the financial reporting process. 3. Mgt, who prepare the financial statements, have significant incentives to intentionally misstate the financial statements to make the company appear more profitable than it is a. Moral hazard: situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. ex: The risk that, being sheltered from the majority of negative consequences, management may misstate the financial statements in order to profit from gains in the stock price. b. The Market For Lemons: iv. If buyers are unable to distinguish between reliable and unreliable information…...

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