Exam 9: Materiality and Risk

Harker, CPA is in the audit planning phase of Dracule Industries.An understanding needs to be established regarding the responsibilities of Harker and Dracule's Management.For each of the task items listed below indicate the responsible party from the list of choices given.Each choice may be used once, more than once or not at all.

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

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

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.

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

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.

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

Which is a true statement about audit risk?

One major limitation in the application of the audit risk model is the difficulty of measuring the components of the model.

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

Auditors begin their assessment of inherent risk during the planning phase and update the assessments throughout the audit.

Both overstatements and understatements must be considered when allocating materiality to balance sheet accounts.

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

Likely misstatements can result from:

Using your knowledge of the relationships among acceptable audit risk, inherent risk, control risk, planned detection risk, performance materiality, 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 performance materiality.________.

Amounts involving fraud are not usually considered qualitative factors affecting the preliminary materiality judgment.

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

Determining materiality requires professional judgment.

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

Which of the following statements is not true?