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

Question 2

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

Accepted Answer

A)  increase the amount of audit evidence gathered. 
B)  assign more experienced staff to that area. 
C)  increase the tolerable misstatement for the area. 
D)  expand planning procedures. 
A)  increase the amount of audit evidence gathered. 
B)  assign more experienced staff to that area. 
C)  increase the tolerable misstatement for the area. 
D)  expand planning procedures. C

Question 3

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

Accepted Answer

A) True 
 B)False  True

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

Net income before tax is the normal base used to determine materiality in a non-for-profit company.

Accepted Answer

A) True 
 B)False

Question 6

The preliminary judgment about materiality and the amount of audit evidence accumulated are ________ related.

Accepted Answer

A)  directly 
B)  indirectly 
C)  not 
D)  inversely 
A)  directly 
B)  indirectly 
C)  not 
D)  inversely

Question 7

Auditors may assess inherent risk and control risk:

Accepted Answer

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

Question 8

Auditors typically rely on internal controls of their private company clients:

Accepted Answer

A)  only as needed to complete the audit and satisfy Sarbanes-Oxley requirements. 
B)  only if the controls are determined to be effective. 
C)  only if the client asks an auditor to test controls. 
D)  only if the controls are sufficient to increase Control Risk to an acceptable level. 
A)  only as needed to complete the audit and satisfy Sarbanes-Oxley requirements. 
B)  only if the controls are determined to be effective. 
C)  only if the client asks an auditor to test controls. 
D)  only if the controls are sufficient to increase Control Risk to an acceptable level.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

1. decrease
2. incre

Question 11

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

Question 12

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 13

Match nine of the terms (a-i) with the definitions provided below (1-9):
a. Business risk
b. Preliminary judgment about materiality
c. Inherent risk
d. Planned detection risk
e. Audit assurance
f. Acceptable audit risk
g. Tolerable misstatement
h. Control risk
i. Materiality
________ 1. A measure of the risk that audit evidence for a segment will fail to detect misstatements exceeding a tolerable amount, should such misstatements exist.
________ 2. The risk that the auditor or audit firm will suffer harm because of a client relationship, even though the audit report rendered for the client was correct.
________ 3. A measure of the auditor's assessment of the likelihood that misstatements exceeding a tolerable amount in a segment will not be prevented or detected by the client's internal controls.
________ 4. 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.
________ 5. The materiality allocated to any given account balance.
________ 6. The maximum amount by which the auditor believes that the statements could be misstated and still not affect the decisions of reasonable users.
________ 7. This term is synonymous with acceptable audit risk.
________ 8. 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.
________ 9. 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. d
2. a

Question 14

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 15

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

Accepted Answer

A) True 
 B)False

Question 16

If acceptable audit risk is low, and inherent risk and control risk are both low, then planned detection risk should be high.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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.

Accepted Answer

A) True 
 B)False

Question 19

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 20

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 defalcation 
A)  nature of client's business 
B)  existence of related parties 
C)  degree of separation of duties 
D)  susceptibility to defalcation

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:

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

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

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

Net income before tax is the normal base used to determine materiality in a non-for-profit company.

The preliminary judgment about materiality and the amount of audit evidence accumulated are ________ related.

Auditors may assess inherent risk and control risk:

Auditors typically rely on internal controls of their private company clients:

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

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.

Which of the following statements is not correct?

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.

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

If acceptable audit risk is low, and inherent risk and control risk are both low, then planned detection risk should be high.

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

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.

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

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

The Demand for Audit and Other Assurance Services

The CPA Profession

Audit Reports

Professional Ethics

Legal Liability

The CPA Profession

Audit Evidence

Audit Planning and Analytical Procedures

Section 404 Audits of Internal Control and Control Risk

Fraud Auditing

The Impact of Information Technology on the Audit Process

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 and Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls and 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 Balances

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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