True or False questions:

1, In the market for lemons example relating to automobiles, the only vehicles left in the market are low quality. This because without additional information about the quality of a vehicle, buyers use price as an indicator of quality and so the high quality vehicles get sold first.

2. Ross Stevens is partner at Arhyr & Ross audit firm. Stevens is performing an audit of a TimeAway, a online timeshare broker (buys and sells timeshares). Sbevens has a friend, Sally wiggins who has just shared with him that she is looking to purchase a timeshare in Hawaii. Stevens refers Wiggins to his audit client, indicating that TimeAway is a reputable timeshare broker. Wiggins and Time Away enter into a timeshare contract, in which Wiggins purchases a large timeshare in Hawaii from TimeAway and then also refers to TimeAway several of her friends, who also purchase timeshares from TimeAway. The President of TimeAway is so grateful for the business referrals that he gives to Ross Stevens a one-week per year Hawaii timeshare of his own as a referral fee for the business that came to him from Wiggins. Stevens has violated the code of professional conduct in this scenario.

3. Independence both in fact and independence in appearance are absolutely essential to the audit. An auditor who is in fact independent,but appears to not be independent is in violation of the Code.

4. In order to properly exercise professional skepticism, the auditor should assume that management is telling the truth, but the auditor should also validate what management says with supporting documentation

5. Audit Risk is defined as the risk that the auditor issues an unqualified opinion on a set of financial statements that are, in fact, materially misstated. Audit Risk is very similar to Type II errors, which refers to an auditor providing a clean opinion when the financial are materially misstated.