chapter 9

Question 1

1) If it is probable that the judgment of a reasonable person will be changed or influenced by the omission or misstatement of information, then that information is, by definition of FASB Statement No. 2:

Answer 1

A) material.

Question 2

2) The scope paragraph of the standard unqualified auditor’s report states that “? the standards require that we plan and perform the audit to obtain ________ assurance about whether the financial statements are free of material misstatement.” What type of assurance is given?

Answer 2

C) Reasonable

Question 3

3) 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:

Answer 3

D) the client.

Question 4

1) Audit standards require the auditor to consider materiality early in the audit. Which statement(s) regarding preliminary materiality are true? I. Preliminary materiality may change during the engagement. II. Preliminary materiality is the maximum amount by which the auditor believes the financials could be misstated and still not affect the decisions of reasonable users.

Answer 4

C) both I and II

Question 5

2) Why do auditors establish a preliminary judgment about materiality?

Answer 5

C) To help plan the appropriate evidence to accumulate

Question 6

3) If an auditor establishes a relatively high level for materiality, then the auditor will:

Answer 6

B) accumulate less evidence than if a lower level had been set.

Question 7

4) The preliminary judgment about materiality and the amount of audit evidence accumulated are ________ related.

Answer 7

D) inversely

Question 8

5) Which of the following is the primary basis used to decide materiality for a for-profit entity?

Answer 8

C) Net income before tax

Question 9

6) Auditing standards ________ that the basis used to determine the preliminary judgment about materiality be documented in the audit files.

Answer 9

C) require

Question 10

7) Amounts involving fraud are usually considered ________ important than unintentional errors of equal dollar amounts.

Answer 10

D) more

Question 11

8) Qualitative factors can affect an auditor’s assessment of materiality. Which of the following statements is true? I. Misstatements that are otherwise immaterial may be material if they affect earnings trends. II.Misstatements that are otherwise minor may be material if there are possible consequences arising from contractual obligations.

Answer 11

C) I and II

Question 12

10) Which of the following statements is not correct?

Answer 12

B) The most important base used as the criterion for deciding materiality is total assets.

Question 13

12) When setting a preliminary judgment about materiality:

Answer 13

A) more evidence is required for a low dollar amount than for a high dollar amount.

Question 14

13) Lewis Corporation has a few large accounts receivable that total one million dollars whereas Clark Corporation has many small accounts receivable that total one million dollars. Misstatement in any one account is more significant for Lewis corporation because of the concept of:

Answer 14

A) materiality.

Question 15

1) When auditors allocate the preliminary judgment about materiality to account balances, the materiality allocated to any given account balance is referred to as:

Answer 15

D) performance materiality.

Question 16

2) Auditors generally allocate the preliminary judgment about materiality to the:

Answer 16

A) balance sheet only.

Question 17

3) Which of the following is an incorrect statement regarding the allocation of the preliminary judgment about materiality to balance sheet accounts?

Answer 17

B) The allocation has virtually no effect on audit costs because the auditor must collect sufficient appropriate audit evidence.

Question 18

4) Which of the following statements is true concerning the allocation of preliminary materiality?

Answer 18

D) The PCAOB term used when preliminary materiality is allocated to segments is tolerable misstatement.

Question 19

5) Which of the following statements is false?

Answer 19

C) Either an overstatement of an asset account or an overstatement of a liability account would have the same effect on the income statement.

Question 20

7) When allocating performance materiality:

Answer 20

C) professional judgment is critical.

Question 21

8) When allocating materiality, most practitioners choose to allocate to:

Answer 21

B) the balance sheet accounts because most audits focus on the balance sheet.

Question 22

9) Which of the following is a correct statement regarding performance materiality?

Answer 22

A) Determining performance materiality is necessary because auditors accumulate evidence by segments.

Question 23

1) Auditors are ________ to document the known and likely misstatements in the financial statements under audit.

Answer 23

B) required

Question 24

2) ________ misstatements are those where the auditor can determine the amount of the misstatement in the account.

Answer 24

C) Known

Question 25

4) When evaluating the audit findings, the auditor should be satisfied that the:

Answer 25

B) estimate of the total known and likely misstatements is less than a material amount.

Question 26

2) Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:

Answer 26

B) decrease detection risk.

Question 27

3) When dealing with audit risk:

Answer 27

A) auditors accept some level of risk in performing the audit function.

Question 28

1) The measurement of the auditor’s assessment of the likelihood that there are material misstatements due to error or fraud in a segment before considering the effectiveness of internal controls is defined as:

Answer 28

B) inherent risk.

Question 29

2) The risk that audit evidence for a segment will fail to detect misstatements exceeding performance materiality levels is:

Answer 29

C) inherent risk.

Question 30

3) As the risk of material misstatement increases, detection risk should:

Answer 30

B) decrease.

Question 31

4) Inherent risk is ________ related to detection risk and ________ related to the amount of audit evidence.

Answer 31

D) inversely, directly

Question 32

5) Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance to refer to ________.

Answer 32

C) acceptable audit risk

Question 33

6) If planned detection risk is reduced, the amount of evidence the auditor accumulates will:

Answer 33

A) increase.

Question 34

7) Planned detection risk: determines the amount of substantive evidence the auditor plans to accumulate.

Answer 34

determines the amount of substantive evidence the auditor plans to accumulate.

Question 35

8) Inherent risk is often high for an account such as:

Answer 35

A) inventory.

Question 36

9) Inherent risk and control risk:

Answer 36

B) are inversely related to detection risk.

Question 37

10) To what extent do auditors typically rely on internal controls of their public company clients?

Answer 37

A) Extensively

Question 38

11) Auditors typically rely on internal controls of their private company clients:

Answer 38

B) only if the controls are determined to be effective.

Question 39

A) only as needed to complete the audit and satisfy Sarbanes-Oxley requirements.

Answer 39

C) Audit assurance is the complement of acceptable audit risk.

Question 40

13) The risk of material misstatement refers to:

Answer 40

C) the combination of inherent risk and control risk.

Question 41

14) When assessing risk, it is important to remember that:

Answer 41

C) detection risk can only be determined after audit risk, inherent risk, and control risk are determined.

Question 42

16) In a financial statement audit, inherent risk is evaluated to help an auditor asses which of the following?

Answer 42

D) The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls

Question 43

17) Which of the following statements is not true?

Answer 43

A) Inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related to the amount of audit evidence required.

Question 44

18) An auditor who audits a business cycle that has low inherent risk should:

Answer 44

C) increase the performance materiality level for the area.

Question 45

1) 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:

Answer 45

A) be reduced.

Question 46

2) 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:

Answer 46

A) reduce acceptable audit risk and increase inherent risk.

Question 47

3) 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 except for:

Answer 47

D) assessment of detection risk.

Question 48

1) Which of the following statements regarding inherent risk is correct?

Answer 48

C) Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain more knowledge about the company.

Question 49

2) 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?

Answer 49

A) Obtaining client’s agreement on the engagement letter

Question 50

3) Which of the following is not a primary consideration when assessing inherent risk?

Answer 50

C) Degree of separation of duties

Question 51

1) As the acceptable level of detection risk increases, an auditor may change the:

Answer 51

A) timing of substantive tests by performing them at an interim date rather than year end.

Question 52

2) Auditors respond to risk primarily by:

Answer 52

I. changing the extent of testing. II. changing the types of audit procedures.

Question 53

1) When taken together, the concepts of risk and materiality in auditing:

Answer 53

A) measure the uncertainty of amounts of a given magnitude.

Question 54

2) Which of the following is a correct statement?

Answer 54

C) The auditor violates due care if he knows that the original assessment of audit risk is inappropriate and he fails to change it.