Auditing: A Practical Approach 4th Canadian Edition by Robyn Moroney Test bank
CPA Competency: Audit and Assurance
AACSB: Analytic
23. According to the agency theory, demand for audit is due to conflicts between
a) managers and owners.
b) managers and agents.
c) owners and principals.
d) auditors and owners.
Answer: a
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
24. While awaiting a meeting in his firm’s boardroom, the senior partner, Bill Goldsworthy,
read the following statement in an article in The Globe & Mail: “The greater the perceived
quality of the information contained in the financial statements, the more likely it will be relied
upon by the users of that information.” This statement best describes
a) the expectations gap.
b) agency theory.
c) information hypothesis.
d) insurance hypothesis.
Answer: c
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
25. As users of the financial statements, suppliers would least consider which of the
following aspects of the financial statements?
a) solvency of the entity
b) profitability of the entity
c) return on investment of the entity
d) corporate social responsibility of the entity
Answer: c
Bloomcode: Application
Difficulty: Medium
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
26. Which of the following is incorrect? A government can be considered to be a user of the general purpose financial statements because
a) it is the sole basis for the calculation of taxes owed to the government.
b) it can determine whether certain regulations have been complied with.
c) it can gain a better understanding of the entity’s activities.
d) governments need to assess the entity so that they can provide the entity with grants that will benefit society.
Answer: a
Bloomcode: Application
Difficulty: Medium
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
27. Agency theory can be described as the theory of
a) hiring an agency to review the work of the management, in this case it is the auditor.
b) when the finance function is outsourced to an outside party, and the auditor is required to audit the outside party’s work.
c) the relationship between the owner and the management of the business when the owner is not the manager of the business.
d) the relationship between the auditor and the management of the business.
Answer: c
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
28. Insurance hypothesis tells us that
a) investors will demand that financial statements be audited as a way of insuring against some of their loss should their investment fail.
b) investors can insure themselves against loss by investing in a diverse investment portfolio should an individual investment fail.
c) investors cannot insure themselves against loss when investing in an entity.
d) the entity can take out insurance to protect itself from such risks as employee or management fraud which can lead to material misstatements in the financial statements.
Answer: a
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
29. Vera Sobczyk spent a week at a client’s wholesale operation determining whether the
client’s remittances to the tax authorities were in accordance with tax regulations. This is an
example of a(n)
a) taxes payable mandate.