Question 1

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:  A) material.  B) insignificant.  C) significant.  D) relevant.

Accepted Answer

A) material.

Question 2

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?  A) immediate  B) limited  C) reasonable  D) absolute

Accepted Answer

C) reasonable

Question 3

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

Accepted Answer

D) the client\'s management.

Question 4

The FASB definition of materiality focuses on potential users of financial statements.  A) True  B) False

Accepted Answer

B) False

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

Accepted Answer

C) both I and II

Question 6

Why do auditors establish a preliminary judgment about materiality?  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.

Accepted Answer

C) To plan the appropriate audit evidence to accumulate and develop an overall audit strategy.

Question 7

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

Accepted Answer

B) accumulate less evidence than if a lower level had been set.

Question 8

The preliminary judgment about materiality and the amount of audit evidence accumulated are ________ related.  A) directly  B) indirectly  C)not  D) inversely

Accepted Answer

D) inversely

Question 9

Which of the following is the primary basis used to decide materiality for a for-profit entity? A) net sales  B) net assets  C) net income before tax  D) all of the above

Accepted Answer

C) net income before tax

Question 10

Auditing standards ________ that the basis used to determine the preliminary judgment about materiality be documented in the audit files.  A)permit  B) do not allow  C) require  D) strongly encourage

Accepted Answer

C) require

Question 11

Amounts involving fraud are usually considered ________ important than unintentional errors of equal dollar amounts.  A) less  B)noless  C) no more  D)more

Accepted Answer

D)more

Question 12

Qualitative factors can affect an auditor\'s assessment of materiality. Which of the following qualitative factors could influence the assessment of materiality?  I. Misstatements that are otherwise immaterial may be material if they affect earnings trends.  II. Minor misstatements resulting from the consequences of contractual obligations.  A) I only  B) II only  C) I and II  D) neither I nor II

Accepted Answer

C) I and II

Question 13

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

Accepted Answer

B) 3, 4, 2

Question 14

Which of the following statements is not correct?  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.

Accepted Answer

B) The most important base used as the criterion for deciding materiality is total assets.

Question 15

Certain types of misstatements are likely to be more important than other types to users, even if the dollar amounts are the same. Which of the following demonstrates this?    Amounts involving frauds are considered more important than errors of equal amount    Misstatements that are otherwise immaterial may be material if they affect a trend in earnings

Accepted Answer

Yes, Yes

Question 16

When setting a preliminary judgment about materiality:  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.

Accepted Answer

A) more evidence is required for a low dollar amount than for a high dollar amount.

Question 17

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

Accepted Answer

A) Materiality.

Question 18

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.  A) True  B) False

Accepted Answer

True

Question 19

Preliminary judgments about materiality are often changed during the course of the engagement.  A) True  B) False

Accepted Answer

True

Question 20

Net assets are the most often used base for deciding materiality.  A) True  B) False

Accepted Answer

False

Question 21

Auditors have difficulty applying the concept of materiality in practice because they often do not know who the users of the financial statements are or what decisions will be made.  A)True  B) False

Accepted Answer

True

Question 22

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.  A)True  B) False

Accepted Answer

False

Question 23

If the preliminary judgment of materiality increases, the amount of audit evidence required will decrease.  A)True  B) False

Accepted Answer

True

Question 24

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

Accepted Answer

False

Question 25

When auditors allocate the preliminary judgment about materiality to account balances, the materiality allocated to any given account balance is referred to as:  A) the materiality range.  B) the error range.  C) tolerable materiality.  D) tolerable misstatement.

Accepted Answer

D) tolerable misstatement.

Question 26

Auditors generally allocate the preliminary judgment about materiality to the:  A) balance sheet only.  B) income statement only.  C) income statement and balance sheet.  D) statement of cash flows.

Accepted Answer

A) balance sheet only.

Question 27

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

Accepted Answer

B) The allocation has virtually no effect on audit costs because the auditor must collect sufficient appropriate audit evidence.

Question 28

Which of the following statements is true concerning the allocation of preliminary materiality?  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) It is required by the SEC.  D) When preliminary materiality is allocated to segments it is termed tolerable misstatement.

Accepted Answer

D) When preliminary materiality is allocated to segments it is termed tolerable misstatement.

Question 29

Which of the following statements is false?  A) Either an overstatement of an asset account or an understatement of a liability account would have the same effect on the income statement.  B) A misclassification in the balance sheet will have no effect on operating income.  C) Either an overstatement of an asset account or an overstatement of a liability account would have the same effect on the income statement.  D) Either an understatement of an asset account or an overstatement of a liability account would have the same effect on the income statement.

Accepted Answer

C) Either an overstatement of an asset account or an overstatement of a liability account would have the same effect on the income statement.

Question 30

Which of the following are major difficulties auditors face when allocating materiality to balance sheet accounts?  1. Certain accounts contain more misstatements  than others  2. Only overstatements need be considered  3. Audit costs can affect allocation

Accepted Answer

Yes  No  Yes

Question 31

When tolerable misstatement is exceeded by ________ the auditor should request the client to adjust their account balance.  I. Known misstatements  II. Projected misstatement  A) I only  B) II only  C) I and II  D) None of the above

Accepted Answer

C) I and II

Question 32

When allocating materiality, most practitioners choose to allocate to:  A) the income statement accounts because they are more important.  B) the balance sheet accounts because there are fewer.  C) both balance sheet and income statement accounts because there could be errors on either.  D) all of the financial statements because it is required by GAAS.

Accepted Answer

B) the balance sheet accounts because there are fewer.

Question 33

Tolerable misstatement as set by the auditor: 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.

Accepted Answer

D) does not affect any of the four risks.

Question 34

Most practitioners allocate the preliminary judgment about materiality to balance sheet accounts.  A) True  B) False

Accepted Answer

True

Question 35

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.  A)True  B) False

Accepted Answer

True

Question 36

Both overstatements and understatements must be considered when allocating materiality to balance sheet accounts.  A) True  B) False

Accepted Answer

True

Question 37

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.  A)True  B) False

Accepted Answer

True

Question 38

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.  A)True  B) False

Accepted Answer

True

Question 39

Auditors are ________ to document the known and likely misstatements in the financial statements under audit.  A) permitted  B) required  C) not allowed  D) strongly encouraged

Accepted Answer

B) required

Question 40

________ misstatements are those where the auditor can determine the amount of the misstatement in the account.  A) Potential  B) Likely  C) Known  D) Projected

Accepted Answer

C) Known

Question 41

Likely misstatements can result from:  Computation of the sampling error for the cash account  Differences between management\'s and an auditor\'s judgment about account balances  Projections of misstatements based on an auditor\'s tests of a sample from a population

Accepted Answer

No  Yes  Yes

Question 42

When expressing an unqualified opinion, the auditor who evaluates the audit findings should be satisfied that the:  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.B) estimate of the total known and likely misstatements is less than a material amount.

Accepted Answer

B) estimate of the total known and likely misstatements is less than a material amount.

Question 43

The preliminary judgment on materiality is compared to an estimated total misstatements to determine if an account balance is materially misstated.  A) True  B) False

Accepted Answer

True

Question 44

Total estimated misstatements include known misstatements and projected misstatements plus a sampling error.  A) True  B) False

Accepted Answer

True

Question 45

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

Accepted Answer

C) increase the tolerable misstatement for the area.

Question 46

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

Accepted Answer

Yes  Yes  Yes

Question 47

Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:  A) increase materiality levels.  B) decrease detection risk.  C) decrease substantive testing.  D) increase inherent risk.

Accepted Answer

B) decrease detection risk.

Question 48

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

Accepted Answer

A) the elements of materiality and relative risk

Question 49

The most important element of the audit risk model is control risk.  A)True  B) False

Accepted Answer

True

Question 50

The measurement of the auditor\'s assessment of the likelihood that ther e are material misstatements due to error or fraud in a segment before considering the effectiveness of internal controls is defined as:  A) Audit risk.  B) Inherent risk.  C) Sampling risk.  D) Detection risk.

Accepted Answer

B) Inherent Risk

Question 51

The risk that audit evidence for a segment will fail to detect misstatements exceeding tolerable misstatement is:  A) Audit risk.  B) Control risk.  C) Inherent risk.  D) Planned detection risk.

Accepted Answer

D) Planned detection risk.

Question 52

As the risk of material misstatement increases, detection risk should:  A) medium increase.  B) decrease.  C) stay the same.  D) Is indeterminate.

Accepted Answer

B) decrease.

Question 53

Inherent risk is ________ related to detection risk and ________ related to the amount of audit evidence.  A) directly, inversely  B) directly, directly  C) inversely, inversely  D) inversely, directly

Accepted Answer

D) inversely, directly

Question 54

Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance to refer to ________.  A) detection risk  B) audit report risk  C) acceptable audit risk  D) inherent risk

Accepted Answer

C) acceptable audit risk

Question 55

If planned detection risk is reduced, the amount of evidence the auditor accumulates will:  A) increase.  B) decrease.  C) remain unchanged.  D) be indeterminate.

Accepted Answer

A) increase.

Question 56

Planned detection risk  I. determines the amount of substantive evidence the auditor plans to accumulate.  II. is dependent on inherent risk and control risk.  A) I only  B) II only  C) I and II  D) None of the above

Accepted Answer

A) I only

Question 57

Inherent risk is often high for an account such as: A) inventory.  B) land.  C) cash.  D) notes payable.

Accepted Answer

A) inventory.

Question 58

Inherent risk and control 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.

Accepted Answer

B) are inversely related to detection risk.

Question 59

To what extent do auditors typically rely on internal controls of their public company clients?  A) extensively  B) only very little  C) infrequently  D) never

Accepted Answer

A) extensively

Question 60

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

Accepted Answer

B) only if the controls are determined to be effective.

Question 61

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

Accepted Answer

A) held constant for each major cycle and account.

Question 62

The risk of material misstatement refers to:  A) control risk and acceptable audit risk.  B) inherent risk.  C) the combination of inherent risk and control risk.  D) inherent risk and audit risk.

Accepted Answer

C) the combination of inherent risk and control risk.

Question 63

The risk of material misstatement differs from detection risk in that it:  A) arises because audit procedures have been misapplied.  B) can be controlled and changed by the auditor.  C) can be assessed in quantitative and non-quantitative terms.  D) is controllable by the client.

Accepted Answer

D) is controllable by the client.

Question 64

Auditors may assess inherent risk and control risk:  Jointly to determine the risk of material misstatement  Separately and combine their effects in the audit risk model

Accepted Answer

Yes  Yes

Tax Chapter 9 Flashcards Answers

Unlock all answers in this set

Haven't found what you were looking for?

Search for samples, answers to your questions and flashcards