Question 1

The FASB definition of materiality focuses on potential users of financial statements.

Accepted Answer

A) True 
 B)False

Question 2

The lower the dollar amount of the preliminary judgment the more audit evidence is required.

Accepted Answer

A) True 
 B)False

Question 3

Describe the audit risk model and each of its components.

Accepted Answer

The planning form of the audit risk mode

Question 4

Likely misstatements can result from:

Accepted Answer

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

Question 5

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 6

Inherent risk is ________ related to detection risk and ________ related to the amount of audit evidence.

Accepted Answer

A)  directly, inversely 
B)  directly, directly 
C)  inversely, inversely 
D)  inversely, directly 
A)  directly, inversely 
B)  directly, directly 
C)  inversely, inversely 
D)  inversely, directly

Question 7

Audit assurance is the complement of planned detection risk, that is, one minus planned detection risk.

Accepted Answer

A) True 
 B)False

Question 8

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 9

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

Accepted Answer

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

Question 10

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

Accepted Answer

A)  accumulate more evidence than if a lower level had been set. 
B)  accumulate less evidence than if a lower level had been set. 
C)  accumulate approximately the same evidence as would be the case were materiality lower. 
D)  accumulate an undetermined amount of evidence. 
A)  accumulate more evidence than if a lower level had been set. 
B)  accumulate less evidence than if a lower level had been set. 
C)  accumulate approximately the same evidence as would be the case were materiality lower. 
D)  accumulate an undetermined amount of evidence.

Question 11

Tolerable misstatement as set by the auditor:

Accepted Answer

A)  decreases acceptable audit risk. 
B)  increases inherent risk and control risk. 
C)  affects planned detection risk. 
D)  does not affect any of the four risks. 
A)  decreases acceptable audit risk. 
B)  increases inherent risk and control risk. 
C)  affects planned detection risk. 
D)  does not affect any of the four risks.

Question 12

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.

Accepted Answer

Step 1. Set preliminary judgment about m

Question 13

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 plan the appropriate audit evidence to accumulate and develop an overall audit strategy. 
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 plan the appropriate audit evidence to accumulate and develop an overall audit strategy. 
D)  To finalize the control risk assessment.

Question 14

Most practitioners allocate the preliminary judgment about materiality to balance sheet accounts.

Accepted Answer

A) True 
 B)False

Question 15

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:

Accepted Answer

A)  regulators. 
B)  the audit firm's managing partner. 
C)  the client shareholders. 
D)  the client's management. 
A)  regulators. 
B)  the audit firm's managing partner. 
C)  the client shareholders. 
D)  the client's management.

Question 16

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.

Accepted Answer

Allocating the preliminary judgment abou

Question 17

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

Tolerable misstatement is the term for t

Question 18

Which of the following is the primary basis used to decide materiality for a for-profit entity?

Accepted Answer

A)  net sales 
B)  net assets 
C)  net income before tax 
D)  all of the above 
A)  net sales 
B)  net assets 
C)  net income before tax 
D)  all of the above

Question 19

When tolerable misstatement is exceeded by ________ the auditor should request the client to adjust their account balance.
I. Known misstatements
II. Projected misstatement

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 20

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)

Exam 9: Materiality and Risk

The FASB definition of materiality focuses on potential users of financial statements.

The lower the dollar amount of the preliminary judgment the more audit evidence is required.

Describe the audit risk model and each of its components.

Likely misstatements can result from:

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?

Inherent risk is ________ related to detection risk and ________ related to the amount of audit evidence.

Audit assurance is the complement of planned detection risk, that is, one minus planned detection risk.

Inherent risk and control risk:

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

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

Tolerable misstatement as set by the auditor:

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.

Why do auditors establish a preliminary judgment about materiality?

Most practitioners allocate the preliminary judgment about materiality to balance sheet accounts.

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:

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.

Which of the following is the primary basis used to decide materiality for a for-profit entity?

When tolerable misstatement is exceeded by ________ the auditor should request the client to adjust their account balance. I. Known misstatements II. Projected misstatement

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

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

Filters

Inherent risk is related to detection risk and related to the amount of audit evidence.