Chapter 9 True/False

Question 1

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.

Answer 1

True

Question 2

Audit assurance is the complement of planned detection risk, that is, one minus planned detection risk.

Answer 2

False

Question 3

Engagement risk is effectively the audit firm’s business risk.

Answer 3

True

Question 4

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.

Answer 4

True

Question 5

Inherent risk and control risk are directly related.

Answer 5

False

Question 6

As control risk increases, the amount of substantive evidence the auditor plans to accumulate should increase.

Answer 6

True

Question 7

Acceptable audit risk and the amount of substantive evidence required are inversely related.

Answer 7

True

Question 8

To maximize audit effectiveness, the auditor should establish a high preliminary judgment about materiality and allocate most of the amount to balance sheet accounts.

Answer 8

False

Question 9

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.

Answer 9

True

Question 10

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.

Answer 10

True

Question 11

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.

Answer 11

False

Question 12

Insert risk and control risk are normally assessed for the overall audit.

Answer 12

False

Question 13

If the preliminary judgment of materiality increases, the amount of audit evidence required will also increase.

Answer 13

False

Question 14

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.

Answer 14

False

Question 15

The audit risk model that must be used for planning audit procedures and evaluating audit results is: AcAR = IR x CR x AcDR.

Answer 15

False

Question 16

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.

Answer 16

True

Question 17

Achieved detection risk can be reduced only by accumulating more audit evidence.

Answer 17

False

Question 18

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.

Answer 18

True

Question 19

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.

Answer 19

False

Question 20

. The most important element of the audit risk model is control risk.

Answer 20

False

Question 21

Acceptable audit risk and planned detection risk are inversely related; i.e., as acceptable audit risk increases, planned detection risk should decrease, ceteris paribus.

Answer 21

False

Question 22

Inherent risk and planned detection risk are inversely related; i.e., as inherent risk increases, planned detection risk should decrease, ceteris paribus.

Answer 22

True

Question 23

If acceptable audit risk is low, and inherent risk and control risk are both high, then planned detection risk should be high.

Answer 23

False

Question 24

Auditors cannot use prior year financial statement balances to establish their preliminary judgment about materiality in planning the current year’s audit.

Answer 24

False

Question 25

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.

Answer 25

True

Question 26

Most practitioners allocate the preliminary judgment about materiality to income statement accounts.

Answer 26

False

Question 27

Net income before taxes is normally the most important base for deciding materiality.

Answer 27

True

Question 28

The FASB definition of materiality focuses on potential users of financial statements.

Answer 28

False

Question 29

There is no precise definition of materiality in the professional literature.

Answer 29

True