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BSA 33P > Chapter 7 TB > Flashcards

Chapter 7 TB Flashcards

1
Q

(T/F) Materiality relates to the significance or importance of an item.

A

TRUE

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2
Q

(T/F) Auditors and management should agree on what is considered material.

A

FALSE

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3
Q

(T/F) A misstatement is an error, either intentional or unintentional, that exists in a transaction or financial statement account balance.

A

TRUE

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4
Q

(T/F) As detection risk increases, the amount of evidence an auditor needs to obtain decreases.

A

TRUE

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5
Q

(T/F) When business risk is low, the auditor does not have a high degree of concern about the ability of the organization to operate effectively or profitably.

A

TRUE

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6
Q

(T/F) Only public companies have to be concerned with business risk.

A

FALSE

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7
Q

(T/F) Touring a company’s plant offers much insight into potential audit issues.

A

TRUE

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8
Q

(T/F) When a successor auditor contacts a company’s previous auditor, the successor auditor might obtain information related to client management’s integrity.

A

TRUE

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9
Q

(T/F) News media and web searches can provide useful information related to client management’s integrity and the risk of material misstatement in the financial statements.

A

TRUE

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10
Q

(T/F) LEXIS is a public database where the existence of legal proceedings against a company or key members of the company can be found.

A

TRUE

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11
Q

(T/F) The purpose of the auditor’s consideration of the effectiveness of internal controls is to determine the nature, extent, and timing of substantive testing.

A

TRUE

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12
Q

(T/F) Trend analysis deals with the relationship between two or more accounts within the current year.

A

FALSE

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13
Q

(T/F) One potential limitation to using industry data in planning analytical procedures is that the data from the client may not be directly comparable to the data of the industry.

A

TRUE

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14
Q

(T/F) Brainstorming sessions should be led by the engagement team.

A

FALSE

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15
Q

(T/F) During the process of a brainstorming session, the focus is more on the quality of ideas generated rather than the quantity of ideas generated.

A

FALSE

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16
Q

(T/F) The usual length of a brainstorming session is about four hours.

A

FALSE

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17
Q

(T/F) If detection risk is low, the auditor is more willing to take a higher risk of the substantive audit procedures not detecting a material misstatement.

A

FALSE

If detection risk is low, the auditor is more willing to take a lower risk of the substantive audit procedures not detecting a material misstatement.

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18
Q

(T/F) Detection risk is measured on a scale of 0% to 5%.

A

FALSE

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19
Q

(T/F) A risk of material misstatement of 100% indicates that material misstatement is highly likely.

A

TRUE

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20
Q

(T/F) The internal controls of an organization have no impact on the efficiency of an audit.

A

FALSE

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21
Q

(T/F) Ineffective internal controls result in higher risk of material misstatement in the financial statements than effective internal controls.

A

TRUE

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22
Q

(T/F) A company’s history of exactly meeting analyst estimates is a factor which could lead auditors to assess inherent risk at a higher level.

A

TRUE

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23
Q

(T/F) Internal controls that the auditor expects to rely on to reduce substantive testing must be tested.

A

TRUE

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24
Q

(T/F) A detection risk of 90% would suggest that an auditor must perform extensive substantive audit testing.

A

FALSE

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25
Q

(T/F) Heightened risk of material misstatement causes the auditor to perform audit procedures closer to year end.

A

TRUE

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26
Q

(T/F) Audit procedures have to be announced or be completed at predictable times.

A

FALSE

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27
Q

(T/F) All audit procedures must be completed before year end.

A

FALSE

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28
Q

(T/F) When the risk of material misstatement is heightened, the auditor increases the extent of audit procedures and requires more evidence.

A

TRUE

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29
Q

(T/F) Inherent and control risks are risks controlled by the auditor.

A

FALSE

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30
Q

(T/F) A risk factor indicating a heightened risk of fraud would be considered a significant risk.

A

TRUE

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31
Q

(T/F) The existence of one or more risk factors means that there is a material misstatement present.

A

FALSE

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32
Q

(T/F) In most audits, materiality is most commonly expressed as a percentage of net income.

A

FALSE

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33
Q

(T/F) Auditors are only concerned with materiality for the financial statements as a whole.

A

FALSE

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34
Q

(T/F) Material Misstatement and Importance of Materiality Judgments

A

TRUE

35
Q

(T/F) In planning the audit, auditors consider planning materiality in terms of the largest aggregate level of misstatement that could occur in the financial statements.

A

FALSE

In planning the audit, auditors consider planning materiality in terms of the smallest aggregate level of misstatement that could occur in the financial statements.

36
Q

(T/F) Performance materiality is used for assessing the risks of material misstatement and determining the nature, timing, and extent of audit procedures to perform during the audit opinion formulation process.

A

TRUE

37
Q

(T/F) The auditor typically sets posting materiality at 50 to 75% of overall materiality.

A

FALSE

The auditor typically sets posting materiality at 3 to 5% of overall materiality.

38
Q

(T/F) The lower the dollar amount of the performance materiality the more audit evidence is required.

A

TRUE

39
Q

(T/F) A significant risk is the same as a material risk.

A

FALSE

40
Q

(T/F) If performance materiality for accounts payable is $1,000, the auditor would need to obtain more audit evidence for that account than if performance materiality were $100,000.

A

TRUE

41
Q

(T/F) Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

A

TRUE

42
Q

(T/F) The quick ratio is useful for analyzing inventory accounts.

A

FALSE

Quick ratio excludes inventory from its formula.

43
Q

(T/F) Detection risk is controllable by the client.

A

FALSE

Detection risk is controllable by the auditor.

44
Q

(T/F) Insistence from the CEO that she must be present at all meetings between the audit committee and internal/external auditors would cause auditors to assess inherent risk at a higher level.

A

TRUE

45
Q

Which of the following phrases or terms regarding materiality is used by the Supreme Court of the United States and is not found in FASB Concepts Statement No. 2?

“amount of a misstatement or omission”
“in light of surrounding circumstances”
“probable that the judgement of a reasonable person”
“significantly altered the total mix of information available”

A

“significantly altered the total mix of information available”

46
Q

If $15,000 is considered to be material to the income statement, but $25,000 is material to the balance sheet, the auditor should set overall materiality at which of the following dollar amounts?

a. $20,000
b. $25,000
c. $40,000
d. $15,000

A

d. $15,000

47
Q

Which of the following best describes the misstatements identified throughout the audit that will be considered at the end of the audit in determining whether the financial statements overall are materially correct?

Posting materiality.
Performance materiality.
Overall materiality.
Tolerable error.

A

Posting materiality.

48
Q

If materiality judgments change during the audit opinion formulation process, what happens to previous audit decisions that were based on the evidence obtained using the initial materiality setting?

The auditor reassesses those previous decisions.
The auditor repeats all audit procedures performed prior to the change in materiality judgments.
The auditor modifies the audit opinion to note the change in materiality judgements.
No action is required.

A

The auditor reassesses those previous decisions.

49
Q

Which item is correct concerning the risk of material misstatement?

Risk of material misstatement arises because audit procedures have been misapplied.
Risk of material misstatement can be controlled and changed by the auditor.
Risk of material misstatement must be assessed in non-quantitative terms.
Risk of material misstatement is controllable by the client.

A

Risk of material misstatement is controllable by the client.

50
Q

What is the nature of the relationship between risk of material misstatement and audit risk?

Direct.
None.
Correlational.
Inverse.

A

Inverse.

51
Q

Detection risk is affected by which aspects of substantive audit procedures?

Nature.
Timing.
Extent.
All of the above.

A

All of the above.

52
Q

Which of the following factors would lead an auditor to assess inherent risk at a higher level?

The account balance is easily determined without estimation.
The account balance is composed of a high volume of nonroutine transactions.
The account balance is composed of simple transactions.
All of the above would lead the auditor to assess a higher level of inherent risk.

A

The account balance is composed of a high volume of nonroutine transactions.

53
Q

To learn more about a company and its inherent risks, auditors can use which of the following resources?

Management inquiries.
Economic statistics.
Online searches.
Any of the above could be used.

A

Any of the above could be used.

54
Q

Which of the following is a reason a predecessor auditor can decline to reply to a firm’s current auditor?

Data is under court order.
They must always respond.
The client does not approve of confidential information being shared.
Both A and C are correct.

A

Both A and C are correct.

55
Q

Which of the following factors will result in control risk being assessed at a higher level?

Controls are well designed.
There is a lack of supervision of accounting personnel.
Accounting staff are well trained and educated.
The control environment is operating effectively.

A

There is a lack of supervision of accounting personnel.

56
Q

Which of the following are two frequently used planning analytical procedures?

Reasonableness tests and economic analyses.
Trend analyses and reasonableness tests.
Ratio analyses and economic analyses.
Ratio analyses and trend analyses.

A

Ratio analyses and trend analyses.

57
Q

Which of the following best describes year-to-year comparisons of account balances?

Time analyses.
Reasonableness tests.
Ratio analyses.
Trend analyses.

A

Trend analyses.

58
Q

Which of the following ratios provides information about liquidity?

Net profit margin.
Current ratio.
Inventory turnover.
Sales to assets.

A

Current ratio.

59
Q

Which of the following would be a reason that industry and client data were not directly comparable?

Broad industry.
Use of different accounting principles.
Neither of the above.
Both A & B are correct.

A

Both A & B are correct.

60
Q

Which of the following are common brainstorming session guidelines?

Freedom of expression.
Respectful communication.
Suspension of criticism.
All of the above.

A

All of the above.

61
Q

What is the main reason to establish guidelines for brainstorming sessions?

To clearly identify lines of authority.
To comply with SEC requirements.
To encourage interactive and constructive group dialogue and idea exchange.
To pass information up to top-level management efficiently.

A

To encourage interactive and constructive group dialogue and idea exchange.

62
Q

What type of relationship exists between audit risk and detection risk?

Direct.
Inverse.
Indirect.
No relationship.

A

Direct.

63
Q

What is the typical range for the setting of audit risk?

a. 1%–10%
b. 1%–5%
c. 0%–5%
d. 0%–10%

A

b. 1%–5%

64
Q

Which of the following would be the likely risk results from using a 1% level of detection risk?

High detection risk and low audit risk.
High detection risk and high audit risk.
Low detection risk and high audit risk.
Low detection risk and low audit risk.

A

Low detection risk and low audit risk.

65
Q

Which of the following risks are controllable by the auditor?

Audit risk and detection risk.
Audit risk and control risk.
Risk of material misstatement.
None of the above.

A

Audit risk and detection risk.

66
Q

As inherent risk increases, and other risk factors remain constant, what happens to the extent of audit work?

Increases.
Decreases.
Stays the same.
Becomes less reliable.

A

Increases.

67
Q

Which of the following statements best describes what is meant by setting control risk at 100%?

Controls are effective.
Controls are relevant.
Controls are ineffective.
Cannot be determined from the information given.

A

Controls are ineffective.

68
Q

If the auditor’s assessment of audit risk is low (e.g., 1% rather than 5%), what is the effect on the amount of substantive testing performed by the auditor?

Increase in substantive testing.
Decrease in substantive testing
No change in substantive testing.
Substantive testing is not needed.

A

Increase in substantive testing.

69
Q

Which of the following terms best describes the numerical depiction of the relationship between control risk, inherent risk, detection risk, and audit risk?

Audit risk model.
Risk of misstatement model.
Significance model.
Materiality equation.

A

Audit risk model.

70
Q

When an auditor chooses not to rely on a client’s internal controls because the control design is ineffective, which of the following tests are eliminated?

Substantive testing.
Tests of controls.
Tests of details of balances.
Substantive analytical procedures.

A

Tests of controls.

71
Q

Which of the following terms best describes the types and appropriateness of audit procedures used?

Nature of detection risk.
Material misstatement risk.
Nature of auditing procedures.
Nature of risk response.

A

Nature of risk response.

72
Q

Appropriateness addresses which aspect of audit procedures?

Relevance.
Reasoning.
Reliability.
Both A & C.

A

Both A & C.

73
Q

Which of the following best describes what is meant by the timing of risk response?

Where procedures are conducted.
When procedures are conducted.
How procedures are conducted.
Who conducts the procedures.

A

When procedures are conducted.

74
Q

What is the auditor trying to accomplish by varying the timing of audit procedures from the prior year?

Introduce unpredictability.
Confuse the client.
Gather information during different times of the year.
Finish the audit sooner.

A

Introduce unpredictability.

75
Q

Which of the following approaches can be used to introduce unpredictability into the audit?

Assessing high risk accounts.
Performing procedures on an unannounced basis.
Performing the audit in the same location each year.
Selecting items that would normally be tested.

A

Performing procedures on an unannounced basis.

76
Q

What procedure has to be completed at or after the end of the period?

Assessment of control risk.
Engagement letter.
Evaluation of adjusting journal entries.
All procedures must be completed prior to period end.

A

Evaluation of adjusting journal entries.

77
Q

An increase in the risk of material misstatement would lead to which of the following responses?

Increase in the extent of audit procedures.
Decrease in the extent of audit procedures.
Earlier performance of audit procedures.
No change in the extent or timing of audit procedures.

A

Increase in the extent of audit procedures.

78
Q

Which of the following risk factors suggests a heightened level of risk of material misstatement?

Having a stable product.
The departure of key personnel of a company.
Few immaterial related-party transactions.
Declining a merger with another company.

A

The departure of key personnel of a company.

79
Q

Which of the following terms best describes the risk that audit procedures will fail to detect material misstatements?

Audit risk.
Control risk.
Detection risk.
Inherent risk.

A

Detection risk.

80
Q

Which of the following statements regarding detection risk is true?

Detection risk incorporates both substantive analytical procedures and tests of details.
Detection risk provides guidance to the auditor on the substantive audit procedures needed to achieve the desired audit risk.
A low level of detection risk means the auditor needs to obtain more evidence from substantive procedures.
All of the above.

A

All of the above.

81
Q

In which of the following situations will auditors typically rely on internal controls over financial reporting?

If control risk is assessed at a high level.
If the controls are determined to be designed and operating effectively.
If the client asks the auditor to test controls.
If the controls are sufficient to increase control risk to an acceptable level.

A

If the controls are determined to be designed and operating effectively.

82
Q

The risk of material misstatement refers to which of the following?

Inherent risk.
Control risk and acceptable audit risk.
The combination of inherent risk and control risk.
Inherent risk and audit risk.

A

The combination of inherent risk and control risk.

83
Q

Which of the following statements is false?

Inherent risk is inversely related to the level of control risk.
Inherent risk is directly related to the amount of evidence required in account testing.
Inherent risk is the susceptibility of the financial statements to material misstatement, assuming no internal controls.
Inherent risk and control risk are assessed by the auditor and controlled by the client.

A

Inherent risk is inversely related to the level of control risk.

84
Q

Which of the following is a factor that would cause an increase in the assessment of control risk?

New products have uncertain likelihood of success.
Little interaction between senior management and operating staff.
A new business strategy is improperly implemented.
The industry is mature and declining.

A

Little interaction between senior management and operating staff.

BSA 33P (21 decks)

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