Exam 9: Considering Materiality and Audit Risk

The five steps in applying materiality are listed below in random order. 1.Estimate the combined misstatement. 2)Estimate the total misstatement in the segment. 3)Set materiality for the financial statements as a whole. 4)Determine performance materiality. 5)Compare combined estimate with preliminary judgment about materiality. The first three steps in correct sequence would be:

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.

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

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

Discuss each of the five steps in applying materiality in an audit,and identify the audit phase(s)in which each step is performed.List these steps in the order in which they occur.

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

If the total misstatement of an account is known,a sampling error still needs to be determined.

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

Describe the audit risk model and each of its components.

Auditors generally allocate the preliminary judgment about materiality to the:

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

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.

Which of the following statements is not correct?

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.________.

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

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?

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:

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

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

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.