Exam 9: Materiality and Risk

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.

The auditing profession has established guidelines for setting inherent risk.

Which of the following statements is false?

Auditor's allocate the preliminary judgment about materiality to financial statement segments rather than by financial statements as a whole.What is the term for the auditor's allocation of preliminary misstatement to account balances? What are three difficulties auditor's face when allocating materiality to balance sheet accounts?

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

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.

When setting a preliminary judgment about materiality:

A high detection risk equates to a low amount of audit evidence needed.

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:

When assessing risk, it is important to remember that:

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

If the auditor approaches the audit of the accounts in s sequential manner, the findings of the audit of accounts audited earlier can be used to revise the performance materiality established for accounts audited later.

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.

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

Net assets are the most often used base for deciding materiality.

Sampling error represents the minimum misstatement amount that exists in all accounts subjected to sampling.

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.

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

Inherent risk and control risk are directly related.

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