Accounting 4632 Midterm Exam 1 Study Guide Spring 2016 Professor Beck Combo of multiple choice and free response open ended assertions or conceptual questions vast majority of points come from MC The following study guide was prepared with the intention of directing students attention toward many of the important concepts covered in the course that they should know for the first midterm exam I caution students that it is not an exhaustive list However students can expect that the vast majority of exam questions will relate to the issues referenced in this study guide The study guide was prepared in reference to the textbook as the course structure tends to follow the textbook I refer students to the PowerPoint slides and their notes for material covered during lectures All topics covered during lectures are fair game for coverage on the exam and I typically look back through the PowerPoint slides that we covered in class when I write the first several questions on any given exam All assigned readings from the MGP textbook are also fair game for coverage on the exam Note I cover the issues topics in class that I consider to be most important so students should focus their attention on the issues topics from the MGP textbook that were covered in class When writing exam questions I proceed by going through any in class practice problem sets and or any practice problem sets posted to Blackboard the MGP textbook and the Gleim questions to develop inspiration for exam questions but not necessarily in that order ALL practice problems covered in class and posted to Blackboard for students to do for practice are also fair game for coverage on the exam I also recommend that students copy and paste all of the Announcements from the course site on Blackboard into a Word document and review any and all comments about the material that were posted to the Announcements section on Blackboard Any additional information I provided there is also fair game Sometimes I add additional tips or hints prior to an exam The lectures emphasize important points and are largely organized around the textbook Many of the lectures contain additional information that I have added to the course that is not discussed in either the MGP Textbook or the Gleim material Students should be sure to review all PowerPoint slides covered in class as well as any notes taken during lectures and make sure that they have a solid grasp of these concepts as well I caution students against trying to memorize lists of items from the PowerPoint slides While some memorization regarding auditor independence issues may be necessary such a strategy will not work well for most material covered in the course The course is highly conceptual in nature and I want students to understand why the auditor is required to or should perform various activities Students need to achieve a higher order understanding of the material and be able to apply the concepts Rather than memorizing I encourage students to always seek to identify the structure underlying the concepts Students will have a more cohesive understanding of the material if they seek to understand the structure of the material and why the auditor is required to or should perform various activities To test their understanding of the material students will want to review the assigned Gleim problems Time permitting students may find it beneficial to work additional Gleim problems contained within the assigned study units Note For the assertions material we covered in class there were very few Gleim problems available for me to select as Gleim covers assertions in a later study unit in the context of the revenue and collection cycle Students will need to know the following concepts ideas discussed in the MGP textbook MGP Chapter 1 all 1 Information asymmetry and the role of auditing assurance services We talked about the Lemons Dilemma in class Be sure to understand the issues involved The relationship between owner and manager often results in information asymmetry the manager generally has more information about the true financial position results of operations of entity Goals may not coincide there is a natural conflict of interest Manager may not always act in best interest of shareholders managers may manipulate reported earnings to inflate companies stock bigger bonus for manager i Auditing accounting information holds manager accountable 2 Differences among Audit Attest and Assurance engagements decreases information risk Auditing a process of objectively obtaining and evaluating evidence regarding assertions made by company about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and then communicate results to investors Attest attest services occur when a practitioner is engaged to an issue and must report on a subject matter or an assertion about a subject matter that is the responsibility of another party i Attest services take many forms including prospective information analyses systems and processes etc Auditing is a specialized form of an attest service ii Types of attest engagements examination review agreed upon procedures Assurance services independent professional services that improve the quality of information or it s context for decision makers 2 Assurance services are a broad category of services designed to improve the quality of decision making by improving confidence in the information on which decisions are made Attestation services are a subcategory of assurance services They require independence and result in a report They include examinations reviews and agreed upon procedures Compilations are NOT included because they don t require independence Audits are subcategory of attestation services They are examinations of historical financial statements 3 Concepts of Materiality and Risk and why they are relevant to an audit audit may fail to detect material misstatements and auditor can unknowingly give a clean opinion Audit risk i The audit only provides reasonable assurance that the statements Materiality don t contain misstatements Can not absolutely guarantee amount by which financial statements could be misstated if the omitted information or misstatement could influence decisions of users of those financial statements then MATERIAL judgment of a reasonable person relying on that information would change 4 Understand what audit evidence is and relevance reliability trade off underlying