Question 1

Which of the following underlies the application of generally accepted auditing standards?

Accepted Answer

A)  the elements of materiality and relative risk 
B)  the element of internal control 
C)  the element of corroborating evidence 
D)  the element of reasonable assurance 
A)  the elements of materiality and relative risk 
B)  the element of internal control 
C)  the element of corroborating evidence 
D)  the element of reasonable assurance

Question 2

Acceptable audit risk is ordinarily set by the auditor during planning and:

Accepted Answer

A)  held constant for each major cycle and account. 
B)  held constant for each major cycle but varies by account. 
C)  varies by each major cycle and by each account. 
D)  varies by each major cycle but is constant by account. 
A)  held constant for each major cycle and account. 
B)  held constant for each major cycle but varies by account. 
C)  varies by each major cycle and by each account. 
D)  varies by each major cycle but is constant by account.

Question 3

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 preliminary judgment about materiality.
4) Allocate preliminary judgment about materiality to segments.
5) Compare combined estimate with preliminary judgment about materiality.
The first three steps in correct sequence would be:

Accepted Answer

A)  1, 2, 5 
B)  3, 4, 2 
C)  2, 1, 5 
D)  3, 2, 4 
A)  1, 2, 5 
B)  3, 4, 2 
C)  2, 1, 5 
D)  3, 2, 4

Question 4

When setting a preliminary judgment about materiality:

Accepted Answer

A)  more evidence is required for a low dollar amount than for a high dollar amount. 
B)  less evidence is required for a low dollar amount than for a high dollar amount. 
C)  the same amount of evidence is required for either low or high dollar amounts. 
D)  there is no relationship between it and the dollar amount of evidence needed. 
A)  more evidence is required for a low dollar amount than for a high dollar amount. 
B)  less evidence is required for a low dollar amount than for a high dollar amount. 
C)  the same amount of evidence is required for either low or high dollar amounts. 
D)  there is no relationship between it and the dollar amount of evidence needed.

Question 5

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 the auditor by which the auditor believes the financials could be misstated and still not affect the decisions of reasonable users.

Accepted Answer

A)  I only 
B)  II only 
C)  both I and II 
D)  neither are true 
A)  I only 
B)  II only 
C)  both I and II 
D)  neither are true

Question 6

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 7

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:

Accepted Answer

A)  client size. 
B)  concentration of ownership. 
C)  types and amounts of liabilities. 
D)  assessment of detection risk. 
A)  client size. 
B)  concentration of ownership. 
C)  types and amounts of liabilities. 
D)  assessment of detection risk.

Question 8

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 9

When expressing an unqualified opinion, the auditor who evaluates the audit findings 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 10

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 11

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 12

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 13

Which of the following statements regarding inherent risk is correct?

Accepted Answer

A)  Inherent risk is unaffected by the auditor's experience with client's organization. 
B)  Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows that it was incorrect. 
C)  Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain experience, even when there is inherent risk. 
D)  Inherent risk is dependent upon the strengths in client's internal control system. 
A)  Inherent risk is unaffected by the auditor's experience with client's organization. 
B)  Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows that it was incorrect. 
C)  Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain experience, even when there is inherent risk. 
D)  Inherent risk is dependent upon the strengths in client's internal control system.

Question 14

To maximize audit efficiency, the auditor should allocate less tolerable misstatement to accounts that can be verified by using low-cost audit procedures, such as analytical procedures, than to accounts that are more costly to audit.

Accepted Answer

A) True 
 B)False

Question 15

Planned detection risk
I. determines the amount of substantive evidence the auditor plans to accumulate.
II. is dependent on inherent risk and control risk.

Accepted Answer

A)  I only 
B)  II only 
C)  I and II 
D)  None of the above 
A)  I only 
B)  II only 
C)  I and II 
D)  None of the above

Question 16

Lewis Corporation has a few large accounts receivable that total one million dollars whereas
Clark Corporation has many small accounts receivable that total one million dollars. Misstatement in any one account is more significant for Lewis corporation because of the concept of:

Accepted Answer

A)  Materiality. 
B)  Audit risk. 
C)  Reasonable assurance. 
D)  Comparative analysis. 
A)  Materiality. 
B)  Audit risk. 
C)  Reasonable assurance. 
D)  Comparative analysis.

Question 17

A high detection risk equates to a low amount of audit evidence needed.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

The audit risk model is used primarily f

Question 19

The audit risk model that must be used for planning audit procedures and evaluating audit results is:
DR
IR × CR = AAR.

Accepted Answer

A) True 
 B)False

Question 20

Auditors generally allocate the preliminary judgment about materiality to the:

Accepted Answer

A)  balance sheet only. 
B)  income statement only. 
C)  income statement and balance sheet. 
D)  statement of cash flows. 
A)  balance sheet only. 
B)  income statement only. 
C)  income statement and balance sheet. 
D)  statement of cash flows.

Exam 9: Materiality and Risk

Which of the following underlies the application of generally accepted auditing standards?

Acceptable audit risk is ordinarily set by the auditor during planning and:

When setting a preliminary judgment about materiality:

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

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:

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

When expressing an unqualified opinion, the auditor who evaluates the audit findings should be satisfied that the:

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:

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?

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

Which of the following statements regarding inherent risk is correct?

To maximize audit efficiency, the auditor should allocate less tolerable misstatement to accounts that can be verified by using low-cost audit procedures, such as analytical procedures, than to accounts that are more costly to audit.

Planned detection risk I. determines the amount of substantive evidence the auditor plans to accumulate. II. is dependent on inherent risk and control risk.

Lewis Corporation has a few large accounts receivable that total one million dollars whereas Clark Corporation has many small accounts receivable that total one million dollars. Misstatement in any one account is more significant for Lewis corporation because of the concept of:

A high detection risk equates to a low amount of audit evidence needed.

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

The audit risk model that must be used for planning audit procedures and evaluating audit results is: DR IR × CR = AAR.

Auditors generally allocate the preliminary judgment about materiality to the:

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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