Multiple-Choice Questions
1. easy a 2. easy b 3. easy d 4. easy c 5. easy d 6. easy c 7. easy b
If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is, by definition of FASB Statement No. 2: a. material. b. insignificant. c. significant. d. relevant.
The preliminary judgment about materiality is the amount by which the auditor believes the statements could be misstated and still not affect the decisions of reasonable users. a. minimum b. maximum c. mean average d. median average
Auditors are responsible for determining whether financial statements are materially misstated, so upon discovering a material misstatement they must bring it to the attention of: a. regulators.
b. the audit firm’s managing partner. c. no one in particular. d. the client’s management.
The FASB definition of materiality emphasizes what class of financial statement users? a. Regulators.
b. Informed investors. c. Reasonable persons. d. Potential investors.
When auditors allocate the preliminary judgment about materiality to account balances, the materiality allocated to any given account balance is referred to as: a. the materiality range. b. the error range.
c. tolerable materiality. d. tolerable misstatement.
Why do auditors establish a preliminary judgment about materiality?
a. To determine the appropriate level of audit experience required for the work. b. So that the client can know what records to make available to the auditor.
c. To plan the appropriate audit evidence to accumulate and develop an overall audit strategy. d. None of the above.
Auditors are _____ to decide on the combined amount of misstatements in the financial statements that they would consider material early in the audit. a. permitted b. required c. not allowed
d. strongly encouraged
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8. easy b 9. easy d 10. easy d 11. easy d 12. easy d 13. easy c 14. easy d
If an auditor establishes a relatively high level for materiality, then the auditor will: a. accumulate more evidence than if a lower level had been set. b. accumulate less evidence than if a lower level had been set.
c. accumulate approximately the same evidence as would be the case were materiality lower. d. accumulate an undetermined amount of evidence.
The preliminary judgment about materiality and the amount of audit evidence accumulated are _____ related. a. directly b. indirectly c. not
d. inversely
After the preliminary judgment about materiality has been established, auditors may: a. not adjust it.
b. adjust it downward only. c. adjust it upward only.
d. adjust it either downward or upward.
In an audit area that has a higher inherent risk, it would be prudent to: a. increase the amount of audit evidence gathered. b. assign more experienced staff to that area. c. reduce the tolerable misstatement for the area. d. do all of the above.
Which of the following is least likely to be appropriate as the basis for determining the preliminary judgment about materiality in the audit of financial statements? a. Net income before taxes. b. Current assets. c. Owners’ equity. d. Inventory.
Auditing standards _____ that the basis used to determine the preliminary judgment about materiality be documented in the audit files. a. permit
b. do not allow c. require
d. strongly encourage
Amounts involving fraud are usually considered _____ important than unintentional errors of equal dollar amounts. a. less b. no less c. no more d. more
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15. easy d 16. easy a 17. easy c 18. easy a 19. medium b 20. medium b
Which of the following qualitative factors may significantly influence whether an item is deemed to be material?
a. Misstatements that are otherwise minor may be material if there are possible consequences
arising from contractual obligations.
b. Misstatements that are otherwise immaterial may be material if they affect a trend in
earnings.
c. Amounts involving fraud are usually considered more important than unintentional errors
of equal dollar amounts.
d. All of the above may influence materiality.
Auditors generally allocate the preliminary judgment about materiality to the: a. balance sheet only. b. income statement only.
c. income statement and balance sheet. d. statement of cash flows.
Which of the following statements regarding inherent risk is correct?
a. The inherent risk assigned in the audit risk model is unaffected by the auditor’s experience
with client’s organization.
b. Most auditors set a low inherent risk in the first year of an audit and increase it if
experience shows that it was incorrect.
c. Most auditors set a high inherent risk in the first year of an audit and reduce it in
subsequent years as they gain experience, even when there is inherent risk.
d. The inherent risk assigned in the audit risk model is dependent upon the strengths in
client’s internal control system.
Auditors begin their assessments of inherent risk during audit planning. Which of the following would not help in assessing inherent risk during the planning phase? a. Obtaining client’s agreement on the engagement letter.
b. Obtaining knowledge about the client’s business and industry. c. Touring the client’s plant and offices. d. Identifying related parties.
Auditors commonly allocate materiality to balance sheet accounts rather than income statement accounts because most income statement misstatements have a(n) _____ effect on the balance sheet. a. less b. equal
c. undetermined d. more
Which of the following is not a correct statement regarding the allocation of the preliminary judgment about materiality to balance sheet accounts?
a. Auditors expect certain accounts to have more misstatements than others.
b. The allocation has virtually no effect on audit costs because the auditor must collect
sufficient appropriate audit evidence.
c. Auditors expect to identify overstatements as well as understatements in the accounts. d. Relative audit costs affect the allocation.
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21. medium b 22. medium d 23. medium c 24. medium d 25. medium b 26. medium b 27. medium a
What is the primary means of dealing with risk in planning decisions related to audit evidence? a. Selection of more effective tests of details of balances. b. Application of the audit risk model.
c. Establish a lower preliminary judgment about materiality. d. All of the above.
The phrase “in our opinion” in the auditor’s report is intended to inform users that auditors: a. guarantee fair presentation of the financial statements. b. act as insurers of the accuracy of the statements.
c. certify the material presented in the statements by management.
d. base their conclusions about the statements on professional judgment.
An overstatement of an asset account has ____ effect on the income statement than an understatement of a liability account. a. a greater b. less of an c. the same
d. none of the above
Inherent risk is _______ related to detection risk and _______ related to the amount of audit evidence.
a. directly, inversely b. directly, directly c. inversely, inversely d. inversely, directly
The five steps in applying materiality are listed below in random order. 1. Estimate the combined misstatement. 2. Estimate the total misstatement in the segment. 3. Set preliminary judgment about materiality. 4. Allocate preliminary judgment about materiality to segments.
5. Compare combined estimate with preliminary judgment about materiality. The correct sequence from start to finish would be: a. 1 2 5 4 3. b. 3 4 2 1 5. c. 4 3 1 5 2. d. 5 1 3 2 4.
Which of the following statements is not correct?
a. Materiality is a relative rather than an absolute concept.
b. The most important base used as the criterion for deciding materiality is total assets. c. Qualitative factors as well as quantitative factors affect materiality.
d. Given equal dollar amounts, frauds are usually considered more important than errors.
Since materiality is relative, it is necessary to have bases for establishing whether misstatements are material. Normally, the most common base for deciding materiality is: a. net income before taxes. b. net working capital. c. net income after taxes. d. total assets.
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28. medium d 29. medium b 30. medium b 31. medium c 32. medium d 33. medium c 34. medium c
Certain types of misstatements are likely to be more important than other types to users, even if the dollar amounts are the same. Which of the following does not demonstrate this?
a. Amounts involving frauds are considered more important than errors of equal amount.
b. Misstatements that are otherwise minor may be considered material if there are possible
consequences arising from contractual obligations.
c. Misstatements that are otherwise immaterial may be material if they affect a trend in
earnings.
d. Each of the above demonstrates this concept.
The more effective the internal controls, the lower the risk factor that ______ assigned to control risk.
a. should be b. could be c. is
d. must be
Allocating the preliminary judgment about materiality to financial statements segments is necessary because:
a. evidence is accumulated for the financial statements as a whole so materiality does not
apply to them.
b. evidence is accumulated by segments rather than for the financial statements as a whole. c. it is required by the AICPA’s Code of Professional Conduct. d. it is required by the SEC.
Which of the following statements is not correct?
a. Either an overstatement of an asset account or an understatement of a liability account
would have the same effect on the income statement.
b. A misclassification in the balance sheet will have no effect on operating income.
c. Either an overstatement of an asset account or an overstatement of a liability account
would have the same effect on the income statement.
d. Either an understatement of an asset account or an overstatement of a liability account
would have the same effect on the income statement.
Regardless of how the preliminary judgment about materiality is allocated, the auditor must be confident that total combined misstatements in all accounts are: a. less than the preliminary judgment. b. equal to the preliminary judgment. c. more than the preliminary judgment.
d. less than or equal to the preliminary judgment.
Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance to refer to ________. a. detection risk b. audit report risk c. acceptable audit risk d. none of the above
_____ misstatements are those where the auditor can determine the amount of the misstatement in the account. a. Potential b. Likely c. Known d. Projected
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35. medium d 36. medium a 37. medium c 38. medium b 39. medium d 40. medium a 41. medium a 42. medium b
When a different extent of evidence is needed for the various cycles, the difference is caused by: a. errors in the client’s accounting system.
b. a client’s need to achieve an unqualified opinion. c. an auditor’s need to follow auditing standards.
d. an auditor’s expectations of errors and assessment of internal control.
If planned detection risk is reduced, the amount of evidence the auditor accumulates will: a. increase. b. decrease.
c. remain unchanged. d. be indeterminate.
Likely misstatements can result from:
a. differences between management’s and an auditor’s judgment about account balances. b. projections of misstatements based on an auditor’s tests of a sample from a population. c. both a and b. d. neither a nor b.
When discussing control risk (CR) and the audit risk model, which of the following is false? a. CR is a measure of the auditor’s assessment of the likelihood that misstatements will not be
prevented or detected by internal control.
b. If the auditor concludes that internal control is completely ineffective to prevent or detect
errors, he/she would assign a low value (e.g., 0%) to CR.
c. The relationship between control risk and detection risk is inverse. d. The relationship between control risk and evidence is direct.
Which of the following is not a good indicator of the degree to which statements are relied on by external users?
a. Client’s size, as measured by total assets or total revenue. b. Distribution of ownership among the public. c. Nature and amount of liabilities.
d. Amount of net income or loss after taxes.
If an auditor believes the chance of financial failure is high and there is a corresponding increase in business risk for the auditor, acceptable audit risk would likely: a. be reduced. b. be increased. c. remain the same.
d. be calculated using a computerized statistical package.
When management has an adequate level of integrity for the auditor to accept the engagement but cannot be regarded as completely honest in all dealings, auditors normally: a. reduce acceptable audit risk and increase inherent risk. b. reduce inherent risk and control risk. c. increase inherent risk and control risk.
d. increase acceptable audit risk and reduce inherent risk.
One accounting issue that does not require management to use significant judgments is: a. the allowance for doubtful accounts.
b. the useful life of equipment for tax purposes. c. obsolete inventory.
d. the liability for warranty payments.
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43. medium d 44. medium d
45. (Public) medium a 46. medium b 47. medium a 48. medium d 49. medium b 50. medium a
Inherent risk is often low for an account such as: a. inventory.
b. marketable securities. c. cash.
d. accounts receivable.
The auditor typically does not assess control risk and inherent risk for: a. each audit objective. b. each cycle. c. each account. d. the overall audit.
To what extent do auditors typically rely on internal controls of their public company clients? a. Extensively b. Only very little c. Infrequently d. Never
To what extent do auditors typically rely on internal controls of their private company clients? a. Only as needed to complete the audit.
b. Only as the controls are expected to be effective. c. Only as the client asks an auditor to test controls. d. None of the above.
Acceptable audit risk is ordinarily set by the auditor during planning and: a. held constant for each major cycle and account.
b. held constant for each major cycle but varies by account. c. varies by each major cycle and by each account.
d. varies by each major cycle but is constant by account.
When the auditor is attempting to determine the extent to which external users rely on a client’s financial statements, they may consider several factors including: a. client size.
b. concentration of ownership. c. types and amounts of liabilities. d. all of the above.
A major difficulty in the application of the audit risk model is: a. defining the terms of the model.
b. measuring the components of the model.
c. understanding the effect on other factors in the model when one factor is changed. d. the failure of the Audit Standards Board to accept it and incorporate it into standards.
When setting a preliminary judgment about materiality:
a. more evidence is required for a low dollar amount than for a high dollar amount. b. less evidence is required for a low dollar amount than for a high dollar amount. c. the same amount of evidence is required for either low or high dollar amounts. d. there is no relationship between it and the dollar amount of evidence needed.
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51.
challenging b
52.
challenging c 53.
challenging c 54.
challenging c
55.
challenging a
56.
challenging b
57.
challenging c
When allocating materiality, most practitioners choose to allocate to: a. the income statement accounts because they are more important. b. the balance sheet accounts because there are fewer.
c. both balance sheet and income statement accounts because there could be errors on either. d. all of the financial statements because there could be errors on other statements besides the
income statement and balance sheet.
The risk of material misstatement refers to: a. control risk and acceptable audit risk. b. inherent risk.
c. the combination of inherent risk and control risk. d. none of the above.
Auditors may assess inherent risk and control risk:
a. jointly to determine the risk of material misstatement.
b. separately and combine their effects in the audit risk model. c. using the approach in choices a or b.
d. using an approach other than in choices a or b.
Which one of the following statements about the cycle approach to auditing is not correct? a. There are differences among cycles in the frequency and size of expected errors. b. There are differences among cycles in the effectiveness of internal controls.
c. There are differences among cycles on the auditor’s willingness that material errors exist
after the auditing is complete.
d. It is common for auditors to want an equally low likelihood of errors for each cycle after
the auditor is finished.
When the auditor has the same level of willingness to risk that material misstatements will exist after the audit is finished for all financial statement cycles:
a. a different extent of evidence will likely be needed for various cycles. b. the same amount of evidence will be gathered for each cycle. c. he/she has not followed generally accepted auditing standards.
d. the level for each cycle must be no more than 2% so that the entire audit does not exceed
10%.
Which of the following statements is not true?
a. Inherent risk is inversely related to detection risk. b. Inherent risk is inversely related to evidence.
c. Inherent risk is the susceptibility of the financial statements to material error, assuming no
internal controls.
d. Inherent risk is the auditor’s assessment of the likelihood that errors exceeding a tolerable
amount exist in a segment before considering the effectiveness of internal controls.
Which of the following is not a primary consideration when assessing inherent risk? a. Nature of client’s business. b. Existence of related parties.
c. Frequency and intensity of management’s review of accounting transactions and records. d. Susceptibility to defalcation.
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58.
challenging c
59.
challenging d 60.
challenging c
61.
challenging a
Which of the following is an example of the concept of inherent risk?
a. Humans make more errors than computers; therefore, a manual accounting system is riskier
than a computerized system.
b. Accounting systems with vouchers have many more controls built in, so the risk that there
will be errors on the financial statements is reduced.
c. Loans receivable for a finance company are less likely to be collectible than those of a
bank.
d. Audits with larger sample sizes are less risky than those with smaller sample sizes.
Tolerable misstatement as set by the auditor: a. decreases acceptable audit risk.
b. increases inherent risk and control risk. c. affects planned detection risk.
d. does not affect any of the four risks.
The audit risk model is:
a. a planning, testing, and evaluation model.
b. useful in evaluating results but of limited use in planning. c. useful in planning, but of limited value in evaluating results.
d. useful when performing the tests of balances, but of little value in either the planning or
evaluation stages.
Which of the following underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? a. The elements of materiality and relative risk. b. The element of internal control.
c. The element of corroborating evidence. d. The element of reasonable assurance.
Essay Questions
62. medium
Discuss the three main factors that affect an auditor’s preliminary judgment about materiality.
Answer: The three main factors that affect an auditor’s judgment about materiality are:
• Materiality is a relative rather than an absolute concept. A misstatement of a given
size might be material for a small company, whereas the same dollar misstatement could be immaterial for a larger one.
• Bases are needed for evaluating materiality. Since materiality is relative, it is
necessary to have bases for establishing whether misstatements are material. Net income before taxes is normally the most commonly used base, but other possible bases include current assets, total assets, current liabilities, and owners’ equity.
• Qualitative factors also affect materiality. Certain types of misstatements are likely to
be more important to users than others, even if the dollar amounts are the same, such as misstatements involving frauds.
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63. medium
Due to qualitative factors, certain types of misstatements are likely to be more important to users than others, even if the dollar amounts are the same. Identify two qualitative factors that might significantly affect an auditor’s materiality judgment, and give an example of each.
Answer: Qualitative factors that affect an auditor’s materiality judgment include:
• Amounts involving fraud. Amounts involving fraud are usually considered more
important than unintentional errors of equal dollar amounts because fraud reflects on the honesty and reliability of the management or other personnel involved. For example, an intentional misstatement of inventory would be more important to users than a clerical error in inventory of the same amount.
• Misstatements affecting contractual obligations. Misstatements that are otherwise
minor may be material if there are possible consequences arising from contractual obligations. For example, if a misstatement causes a required minimum account balance to exceed the minimum, when the correct balance is less than the minimum, this misstatement likely would be important to users.
• Profit vs. loss. Misstatements that cause a loss to be reported as a profit or
misstatements that affect trends in earnings are likely to be important to users.
Explain why it is necessary to allocate the preliminary judgment about materiality to individual accounts (segments) in the financial statements. Also explain why allocating to balance sheet accounts is more common than allocating to income statement accounts.
Answer: Allocating the preliminary judgment about materiality to individual accounts is necessary
because evidence is accumulated for accounts rather than for the financial statements as a whole. Allocating to accounts establishes a tolerable misstatement amount for each account, which helps the auditor decide the appropriate audit evidence to accumulate for each account. Most practitioners allocate materiality to balance sheet accounts rather than income statement accounts because there are fewer balance sheet than income statement accounts.
Why do most practitioners allocate the preliminary judgment about materiality to balance sheet accounts? Answer:
Most income statement misstatements have an equal effect on the balance sheet because of the double-entry bookkeeping system. Because there are fewer balance sheet accounts than income statement accounts in most audits and most audit procedures focus on balance sheet accounts, allocating materiality to balance sheet accounts is the most appropriate alternative.
Discuss how auditors use the audit risk model when planning an audit.
Answer: The audit risk model is used primarily for planning purposes in deciding how much
evidence to accumulate in each cycle. The auditor decides an acceptable level of audit risk, assesses inherent risk and control risk, and then uses the relationship depicted in the following model to determine an appropriate level for planned detection risk:
PDR = AAR IR x CR
64. medium
65. medium
66. medium
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67. medium
Describe the audit risk model and each of its components.
Answer: The planning form of the audit risk model is stated as follows: PDR = AAR IR x CR where: PDR = planned detection risk AAR = acceptable audit risk IR = inherent risk CR = control risk
Planned detection risk is a measure of the risk that audit evidence for an account will fail to
detect misstatements exceeding a tolerable amount, should such misstatements exist. Planned detection risk determines the amount of substantive evidence that the auditor plans to accumulate.
Acceptable audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued. It is influenced primarily by the degree to which external users will rely on the statements, the likelihood that a client will have financial difficulties after the audit report is issued, and the auditor’s evaluation of management’s integrity.
Inherent risk is a measure of the auditor’s assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of internal control.
Control risk is a measure of the auditor’s assessment of the likelihood that misstatements exceeding a tolerable amount in an account will not be prevented or detected by the client’s internal controls.
68. medium
There are several factors that affect an audit firm’s business risk and, therefore, acceptable audit risk. Discuss three of these factors.
Answer: Business risk and acceptable audit risk are affected by:
• The degree to which external users will rely on the statements. For large, publicly held
clients, business risk is greater, and acceptable audit risk will be less, than for small, privately held clients, all things being equal.
• The likelihood that a client will have financial difficulties after the audit report is
issued. Business risk is greater, and acceptable audit risk will be lower, when the client is experiencing financial difficulties.
• The auditor’s evaluation of management’s integrity. Business risk is greater and
acceptable audit risk will be lower when the client’s management has questionable integrity.
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69.
challenging
Discuss each of the five steps in applying materiality in an audit, and identify the audit phase(s) in which each step is performed. List these steps in the order in which they occur.
Answer: Step 1. Set preliminary judgment about materiality. This is the combined amount of
misstatements in the financial statements that would be considered material. This decision is made in the planning stage of the audit.
Step 2. Allocate preliminary judgment about materiality to segments. In this step, the auditor normally allocates the preliminary judgment about materiality to the balance sheet accounts. The amount of materiality allocated to an account is referred to as that account’s tolerable misstatement. This allocation is performed in the audit planning stage.
Step 3. Estimate total misstatement in segment. In this step, the auditor projects the sample results to the population. An allowance for sampling risk is also calculated. This would be performed after the substantive tests for each account are completed.
Step 4. Estimate the combined misstatement. In this step, the projected errors for each account are added, along with total sampling error, to calculate the combined misstatement. This would be performed after all substantive tests have been completed. Step 5. Compare combined estimated misstatement with preliminary or revised judgment about materiality. If the combined estimated misstatement is less than or equal to the judgment about materiality, then the auditor concludes the financial statements are fairly presented. This would be performed after all substantive tests have been completed, in the final review stage of the audit.
Other Objective Answer Format Questions
70. easy
Below are four situations that involve the audit risk model as it is used for planning audit evidence requirements in the audit of inventory. For each situation, calculate planned detection risk. SITUATION 1 2 3 4
Acceptable audit risk 1% 10% 10% 5%
Inherent risk 100% 100% 50% 20%
Control risk 100% 100% 40% 30%
Planned detection risk ______ ______ ______ ______
Answer: 1. 1%; 2. 10%; 3. 50%; 4. 83.3%
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71. easy
decrease increase decrease decrease decrease 72. medium d a h
f
g b e i
c
Using your knowledge of the relationships among acceptable audit risk, inherent risk, control risk, planned detection risk, tolerable misstatement, and planned evidence, state the effect on planned evidence (increase or decrease) of changing each of the following factors, while the other factors remain unchanged.
1. An increase in acceptable audit risk. . 2. An increase in inherent risk. . 3. A decrease in control risk. . 4. An increase in planned detection risk. . 5.
An increase in tolerable misstatement. .
Match nine of the terms (a-i) with the definitions provided below (1-9):
a. Business risk
b. Preliminary judgment about materiality c. Inherent risk
d. Planned detection risk e. Audit assurance
f. Acceptable audit risk g. Tolerable misstatement h. Control risk i. Materiality 1. A measure of the risk that audit evidence for a segment will fail to detect
misstatements exceeding a tolerable amount, should such misstatements exist.
2. The risk that the auditor or audit firm will suffer harm because of a client
relationship, even though the audit report rendered for the client was correct.
3. A measure of the auditor’s assessment of the likelihood that misstatements
exceeding a tolerable amount in a segment will not be prevented or detected by the client’s internal controls.
4. A measure of how much risk the auditor is willing to take that the financial
statements may be materially misstated after the audit is completed and an unqualified audit opinion has been issued.
5. The materiality allocated to any given account balance. 6. The maximum amount by which the auditor believes that the statements could be
misstated and still not affect the decisions of reasonable users.
7. This term is synonymous with acceptable audit risk. 8. The magnitude of an omission or misstatement of accounting information that
makes it probable that the judgment of a reasonable person would have been changed.
9. A measure of the auditor’s assessment of the likelihood that there are material
misstatements before considering the effectiveness of internal control.
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73. medium
In practice, auditors rarely assign numerical probabilities to inherent risk, control risk, or acceptable audit risk. It is more common to assess these risks as high, medium, or low. For each of the four situations below, fill in the blanks for planned detection risk and the amount of evidence you would plan to gather (“planned evidence”) using the terms high, medium, or low. SITUATION 1 2 3 4
Acceptable audit risk Low Low High High
Inherent risk High Low Low Low
Control risk High Low Medium Low
Planned detection risk ______ ______ ______ ______
Planned evidence ______ ______ ______ ______
Answer: 1. low, high 2. medium, medium 3. medium, medium 4. high, low
The auditor’s preliminary judgment about materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of reasonable users. a. True b. False
There is no precise definition of materiality in the professional literature. a. True b. False
The FASB definition of materiality focuses on potential users of financial statements. a. True b. False
Net income before taxes is normally the most important base for deciding materiality. a. True b. False
Most practitioners allocate the preliminary judgment about materiality to income statement accounts. a. True b. False
The primary purpose of allocating the preliminary judgment about materiality to financial statement accounts is to help the auditor decide the appropriate evidence to accumulate. a. True b. False
74. easy a
75. easy a 76. easy b 77. easy a 78. easy b 79. easy a
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80. easy b 81. easy b 82. easy a
Auditors cannot use prior year financial statement balances to establish their preliminary judgment about materiality in planning the current year’s audit. a. True b. False
If acceptable audit risk is low, and inherent risk and control risk are both high, then planned detection risk should be high. a. True b. False
Inherent risk and planned detection risk are inversely related; i.e., as inherent risk increases, planned detection risk should decrease, ceteris paribus. a. True b. False
Acceptable audit risk and planned detection risk are inversely related; i.e., as acceptable audit risk increases, planned detection risk should decrease, ceteris paribus. a. True b. False
The most important element of the audit risk model is control risk. a. True b. False
For a private company client, auditors are required to test any internal controls they believe have not been operating effectively during the period under audit. a. True b. False
If an auditor believes the client will have financial difficulties after the audit report is issued, and external users will be relying heavily on the financial statements, the auditor will probably set acceptable audit risk as low. a. True b. False
Achieved detection risk can be reduced only by accumulating more audit evidence. a. True b. False
Auditors have difficulty applying the concept of materiality in practice because they often do not know who the users of the financial statements are or what decisions will be made. a. True b. False
The audit risk model that must be used for planning audit procedures and evaluating audit results is: AcAR = IR x CR x AcDR. a. True b. False
83. easy b 84. easy b 85. easy b 86. easy a
87. medium b 88. medium a 89. medium b
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90. medium b
Statements on Auditing Standards provide detailed, objective guidance on how auditors are to establish a preliminary materiality level, thus eliminating the need for subjective auditor judgment in this task. a. True b. False
If the preliminary judgment of materiality increases, the amount of audit evidence required will also increase. a. True b. False
Insert risk and control risk are normally assessed for the overall audit. a. True b. False
Tolerable misstatement is the maximum combined total of all misstatements in the financial statements that the auditor is willing to allow, or tolerate, when issuing a standard unqualified opinion. a. True b. False
If an auditor assigns a tolerable misstatement of $1,000 to accounts payable, he or she would need to obtain more audit evidence for that account than if $100,000 had been assigned. a. True b. False
To maximize audit efficiency, the auditor should allocate less tolerable misstatement to accounts that can be verified by using low-cost audit procedures, such as analytical procedures, than to accounts that are more costly to audit. a. True b. False
To maximize audit effectiveness, the auditor should establish a high preliminary judgment about materiality and allocate most of the amount to balance sheet accounts. a. True b. False
Acceptable audit risk and the amount of substantive evidence required are inversely related. a. True b. False
As control risk increases, the amount of substantive evidence the auditor plans to accumulate should increase. a. True b. False
Inherent risk and control risk are directly related. a. True b. False
91. medium b 92. medium b 93. medium b
94. medium a 95. medium a
96. medium b 97. medium a 98. medium a 99. medium b
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100. medium a
An acceptable audit risk assessment of low indicates a risky client requiring more extensive evidence, assignment of more experienced personnel, and/or a more extensive review of audit files.
a. True b. False
Engagement risk is effectively the audit firm’s business risk. a. True b. False
Audit assurance is the complement of planned detection risk, that is, one minus planned detection risk. a. True b. False
101. medium a 102. medium b
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