Question 1

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

Accepted Answer

A) the materiality range. 
B) the error range. 
C) tolerable materiality. 
D) performance materiality. 
A) the materiality range. 
B) the error range. 
C) tolerable materiality. 
D) performance materiality.

Question 2

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

Accepted Answer

A) Extensively 
B) Only very little 
C) Infrequently 
D) Never 
A) Extensively 
B) Only very little 
C) Infrequently 
D) Never

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) Auditors expect certain accounts to have more misstatements than others. 
B) The allocation has virtually no effect on audit costs because the auditor must collect sufficient appropriate audit evidence. 
C) Auditors expect to identify overstatements as well as understatements in the accounts. 
D) Relative audit costs affect the allocation. 
A) Auditors expect certain accounts to have more misstatements than others. 
B) The allocation has virtually no effect on audit costs because the auditor must collect sufficient appropriate audit evidence. 
C) Auditors expect to identify overstatements as well as understatements in the accounts. 
D) Relative audit costs affect the allocation.

Question 5

There are several factors that affect an audit firm's business risk and, therefore, acceptable audit risk.Discuss three of these factors.

Accepted Answer

Business risk and acceptable audit risk

Question 6

The preliminary judgment on materiality is compared to the total estimated misstatement amount to determine if an account balance is materially misstated.

Accepted Answer

A) True 
 B)False

Question 7

When allocating performance materiality:

Accepted Answer

A) it is easy to predict in advance which accounts are mot likely to be misstated. 
B) only overstatements need to be considered. 
C) professional judgment is critical. 
D) the sum of all the performance materiality levels cannot exceed the preliminary judgment about materiality. 
A) it is easy to predict in advance which accounts are mot likely to be misstated. 
B) only overstatements need to be considered. 
C) professional judgment is critical. 
D) the sum of all the performance materiality levels cannot exceed the preliminary judgment about materiality.

Question 8

Which of the following are major difficulties auditors face when allocating materiality to balance sheet accounts?

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 9

When dealing with audit risk:

Accepted Answer

A) auditors accept some level of risk in performing the audit function. 
B) most risks that auditors encounter are relatively easy to measure. 
C) the audit risk model is only used for classes of transactions. 
D) most audit firms prefer to use a quantitative assessment for risk. 
A) auditors accept some level of risk in performing the audit function. 
B) most risks that auditors encounter are relatively easy to measure. 
C) the audit risk model is only used for classes of transactions. 
D) most audit firms prefer to use a quantitative assessment for risk.

Question 10

If the audit assurance rate is 95%, then the level of acceptable audit risk is 5%.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is not correct?

Accepted Answer

A) Materiality is a relative rather than an absolute concept. 
B) The most important base used as the criterion for deciding materiality is total assets. 
C) Qualitative factors as well as quantitative factors affect materiality. 
D) Given equal dollar amounts, frauds are usually considered more important than errors. 
A) Materiality is a relative rather than an absolute concept. 
B) The most important base used as the criterion for deciding materiality is total assets. 
C) Qualitative factors as well as quantitative factors affect materiality. 
D) Given equal dollar amounts, frauds are usually considered more important than errors.

Question 12

Dracule Industries is a privately owned business that sells medical product and devices to hospitals, clinics and the public.Certain changes have occurred in Dracule Industries during the year undergoing the audit.Harker needs to evaluate the effect these changes have on audit risk.Audit risk at the financial statement level is influenced by the risk of material misstatement; which include factors related to management, the industry and the entity or a combination thereof.For each of the following changes that have occurred during the year under audit identify the appropriate audit response for the list of responses.Each response can be used once, more than once or not at all.

Accepted Answer

1.a
2.a
3.

Question 13

The risk of material misstatement is a combination of two client controlled factors: inherent risk and control risk.What is inherent risk, why is it important and give examples of inherent risk factors.

Accepted Answer

Inherent risk is the auditor's assessmen

Question 14

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

Accepted Answer

A) Nature of client's business 
B) Existence of related parties 
C) Degree of separation of duties 
D) Susceptibility to misappropriation of assets 
A) Nature of client's business 
B) Existence of related parties 
C) Degree of separation of duties 
D) Susceptibility to misappropriation of assets

Question 15

Why do auditors use the audit risk model when planning an audit?

Accepted Answer

The audit risk model is used primarily f

Question 16

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

Accepted Answer

A) amount of known misstatement is documented in the management representation letter. 
B) estimate of the total known and likely misstatements is less than a material amount. 
C) estimate of the total likely misstatement includes sample error. 
D) amount of known misstatement is acknowledged and recorded by the client. 
A) amount of known misstatement is documented in the management representation letter. 
B) estimate of the total known and likely misstatements is less than a material amount. 
C) estimate of the total likely misstatement includes sample error. 
D) amount of known misstatement is acknowledged and recorded by the client.

Question 17

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

Accepted Answer

A) permit 
B) do not allow 
C) require 
D) strongly encourage 
A) permit 
B) do not allow 
C) require 
D) strongly encourage

Question 18

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?

Accepted Answer

A) Immediate 
B) Limited 
C) Reasonable 
D) Absolute 
A) Immediate 
B) Limited 
C) Reasonable 
D) Absolute

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

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.

Accepted Answer

A) True 
 B)False

Exam 9: Materiality and Risk

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

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

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.

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

There are several factors that affect an audit firm's business risk and, therefore, acceptable audit risk.Discuss three of these factors.

The preliminary judgment on materiality is compared to the total estimated misstatement amount to determine if an account balance is materially misstated.

When allocating performance materiality:

Which of the following are major difficulties auditors face when allocating materiality to balance sheet accounts?

When dealing with audit risk:

If the audit assurance rate is 95%, then the level of acceptable audit risk is 5%.

Which of the following statements is not correct?

The risk of material misstatement is a combination of two client controlled factors: inherent risk and control risk.What is inherent risk, why is it important and give examples of inherent risk factors.

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

Why do auditors use the audit risk model when planning an audit?

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

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

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?

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.

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.

The Demand for Audit and Other Assurance Services

The Cpa Profession

Audit Reports

Professional Ethics

Legal Liability

Audit Responsibilities and Objectives

Audit Evidence

Audit Planning and Analytical Procedures

Internal Control, Control Risk, and Section 404 Audits

Fraud Auditing

The Impact of Information Technology on the Audit Process

Overall Audit Strategy and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling for Tests of Details of Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Audit of the Payroll and Personnel Cycle

Audit of the Inventory and Warehousing Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash and Financial Instruments

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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