Exam 9: Considering Materiality and Audit 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.

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

When the auditor is attempting to determine the extent to which external users rely on a client's financial statements,they may consider several factors except for:

Audit standards require the auditor to consider the combined amount of misstatement early in the audit.This is known as preliminary materiality judgment.List and discuss the three main factors that affect an auditor's preliminary judgment about materiality.

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.

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

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

Auditors respond to risk primarily by: I.changing the extent of testing. II.changing the types of audit procedures.

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.

Audit standards require the auditor to consider materiality early in the audit.Which statement(s)regarding preliminary materiality are true? I.Preliminary materiality may change during the engagement. II.Preliminary materiality is the maximum amount by which the auditor believes the financials could be misstated and still not affect the decisions of reasonable users.

Which is a true statement about audit risk?

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

Total estimated misstatements include known misstatements and projected misstatements plus a sampling error.

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.

If it is probable that the judgment of a reasonable person will be changed or influenced by the omission or misstatement of information,then that information is,by definition of FASB Statement No.2:

When setting a preliminary judgment about materiality:

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.

When management has an adequate level of integrity for the auditor to accept the engagement but cannot be regarded as completely honest in all dealings,auditors normally:

Auditors are responsible for determining whether financial statements are materially misstated,so upon discovering a material misstatement they must bring it to the attention of: