Question 1

If planned detection risk is reduced,the amount of evidence the auditor accumulates will:

Accepted Answer

A)  increase. 
B)  decrease. 
C)  remain unchanged. 
D)  be indeterminate. 
A)  increase. 
B)  decrease. 
C)  remain unchanged. 
D)  be indeterminate.

Question 2

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 3

As the risk of material misstatement increases,detection risk should:

Accepted Answer

A)  medium increase. 
B)  decrease. 
C)  stay the same. 
D)  Is indeterminate. 
A)  medium increase. 
B)  decrease. 
C)  stay the same. 
D)  Is indeterminate.

Question 4

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 5

Match the terms below (a-h)with the definitions provided below (1-8):
a.Preliminary judgment about materiality
b.Inherent risk
c.Planned detection risk
d.Audit assurance
e.Acceptable audit risk
f.Performance materiality level
g.Control risk
h.Materiality
________ 1.A measure of the risk that audit evidence for a segment will fail to detect misstatements exceeding the performance materiality amount,should such misstatements exist.
________ 2.A measure of the auditor's assessment of the likelihood that misstatements exceeding a performance materiality in a segment will not be prevented or detected by the client's internal controls.
________ 3.A measure of how much risk the auditor is willing to take that the financial statements may be materially misstated after the audit is completed and an unqualified audit opinion has been issued.
________ 4.The materiality allocated to any given account balance.
________ 5.The maximum amount by which the auditor believes that the statements could be misstated and still not affect the decisions of reasonable users.
________ 6.This term is synonymous with acceptable audit risk.
________ 7.The magnitude of an omission or misstatement of accounting information that makes it probable that the judgment of a reasonable person would have been changed.
________ 8.A measure of the auditor's assessment of the likelihood that there are material misstatements before considering the effectiveness of internal control.

Accepted Answer

1.c
2.g
3.

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

CPA firms can establish policy guidelines to help their auditors determine materiality.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A)  measure the uncertainty of amounts of a given magnitude. 
B)  measure uncertainty only. 
C)  measure magnitude only. 
D)  measure inherent risk. 
A)  measure the uncertainty of amounts of a given magnitude. 
B)  measure uncertainty only. 
C)  measure magnitude only. 
D)  measure inherent risk.

Question 9

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 10

Inherent risk and control risk:

Accepted Answer

A)  are inversely related to each other. 
B)  are inversely related to detection risk. 
C)  are directly related to detection risk. 
D)  are directly related to audit risk. 
A)  are inversely related to each other. 
B)  are inversely related to detection risk. 
C)  are directly related to detection risk. 
D)  are directly related to audit risk.

Question 11

Which of the following is a correct statement?

Accepted Answer

A)  The audit risk model helps in evaluating results. 
B)  Special care must be exercised when the auditor decides on the basis of accumulated evidence that the original assessment of control risk was understated. 
C)  The auditor violates due care if he knows that the original assessment of audit risk is inappropriate and he fails to change it. 
D)  Performance materiality is part of the audit risk model. 
A)  The audit risk model helps in evaluating results. 
B)  Special care must be exercised when the auditor decides on the basis of accumulated evidence that the original assessment of control risk was understated. 
C)  The auditor violates due care if he knows that the original assessment of audit risk is inappropriate and he fails to change it. 
D)  Performance materiality is part of the audit risk model.

Question 12

Why do auditors establish a preliminary judgment about materiality?

Accepted Answer

A)  To determine the appropriate level of staff to assign to the audit 
B)  So that the client can know what records to make available to the auditor 
C)  To help plan the appropriate evidence to accumulate 
D)  To finalize the control risk assessment 
A)  To determine the appropriate level of staff to assign to the audit 
B)  So that the client can know what records to make available to the auditor 
C)  To help plan the appropriate evidence to accumulate 
D)  To finalize the control risk assessment

Question 13

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:

Accepted Answer

A)  be reduced. 
B)  be increased. 
C)  remain the same. 
D)  be calculated using a computerized statistical package. 
A)  be reduced. 
B)  be increased. 
C)  remain the same. 
D)  be calculated using a computerized statistical package.

Question 14

Inherent risk and control risk are directly related.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A)  It is necessary to allocate preliminary materiality to financial statements as a whole rather than by segments. 
B)  Preliminary materiality should be allocated to income statement accounts only. 
C)  Preliminary materiality is required by the SEC. 
D)  The PCAOB term used when preliminary materiality is allocated to segments is tolerable misstatement. 
A)  It is necessary to allocate preliminary materiality to financial statements as a whole rather than by segments. 
B)  Preliminary materiality should be allocated to income statement accounts only. 
C)  Preliminary materiality is required by the SEC. 
D)  The PCAOB term used when preliminary materiality is allocated to segments is tolerable misstatement.

Question 17

Auditors begin their assessments of inherent risk during audit planning.Which of the following would not help in assessing inherent risk during the planning phase?

Accepted Answer

A)  Obtaining client's agreement on the engagement letter 
B)  Obtaining knowledge about the client's business and industry 
C)  Touring the client's plant and offices 
D)  Identifying related parties 
A)  Obtaining client's agreement on the engagement letter 
B)  Obtaining knowledge about the client's business and industry 
C)  Touring the client's plant and offices 
D)  Identifying related parties

Question 18

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?

Accepted Answer

Performance materiality is the term for

Question 19

Qualitative factors can affect an auditor's assessment of materiality.Which of the following statements is true?
I.Misstatements that are otherwise immaterial may be material if they affect earnings trends.
II.Misstatements that are otherwise minor may be material if there are possible consequences arising from contractual obligations.

Accepted Answer

A)  I only 
B)  II only 
C)  I and II 
D)  neither I nor II 
A)  I only 
B)  II only 
C)  I and II 
D)  neither I nor II

Question 20

Which of the following audit risk components may be assessed in non-quantitative terms?

Accepted Answer

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

Exam 9: Considering Materiality and Audit Risk

If planned detection risk is reduced,the amount of evidence the auditor accumulates will:

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

As the risk of material misstatement increases,detection risk should:

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

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.

CPA firms can establish policy guidelines to help their auditors determine materiality.

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

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.

Inherent risk and control risk:

Which of the following is a correct statement?

Why do auditors establish a preliminary judgment about materiality?

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:

Inherent risk and control risk are directly related.

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

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

Auditors begin their assessments of inherent risk during audit planning.Which of the following would not help in assessing inherent risk during the planning phase?

Which of the following audit risk components may be assessed in non-quantitative terms?

The Assurance Services Market

The Audit Standards Setting Process

Audit Reports

Legal Liability Considerations for Auditors

Ethics and the Audit Profession

Audit Responsibilities and Objectives

Nature and Type of Audit Evidence

Audit Planning

Considering Internal Control

Considering the Risk of Fraud

Implications of Information Technology for the Audit Process

Developing the Overall Audit Plan 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 Inventory and Warehousing Cycle

Audit of the Payroll and Personnel Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash and Financial Instruments

Audit Completion

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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