Tax Chapter 9 Flashcards Answers

question

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.
answer

A) material.
question

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
answer

C) reasonable
question

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.
answer

D) the client’s management.
question

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

B) False
question

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
answer

C) both I and II
question

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.
answer

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

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.
answer

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

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

D) inversely
question

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
answer

C) net income before tax
question

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
answer

C) require
question

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

D)more
question

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
answer

C) I and II
question

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
answer

B) 3, 4, 2
question

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.
answer

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

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
answer

Yes, Yes
question

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.
answer

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

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.
answer

A) Materiality.
question

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
answer

True
question

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

True
question

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

False
question

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
answer

True
question

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
answer

False
question

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

True
question

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

False
question

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.
answer

D) tolerable misstatement.
question

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.
answer

A) balance sheet only.
question

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.
answer

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

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.
answer

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

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.
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

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
answer

Yes No Yes
question

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
answer

C) I and II
question

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.
answer

B) the balance sheet accounts because there are fewer.
question

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.
answer

D) does not affect any of the four risks.
question

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

True
question

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
answer

True
question

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

True
question

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
answer

True
question

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
answer

True
question

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
answer

B) required
question

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

C) Known
question

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
answer

No Yes Yes
question

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.
answer

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

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
answer

True
question

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

True
question

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.
answer

C) increase the tolerable misstatement for the area.
question

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

Yes Yes Yes
question

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.
answer

B) decrease detection risk.
question

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
answer

A) the elements of materiality and relative risk
question

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

True
question

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.
answer

B) Inherent Risk
question

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.
answer

D) Planned detection risk.
question

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

B) decrease.
question

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
answer

D) inversely, directly
question

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
answer

C) acceptable audit risk
question

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

A) increase.
question

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
answer

A) I only
question

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

A) inventory.
question

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.
answer

B) are inversely related to detection risk.
question

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
answer

A) extensively
question

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.
answer

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

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.
answer

A) held constant for each major cycle and account.
question

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.
answer

C) the combination of inherent risk and control risk.
question

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.
answer

D) is controllable by the client.
question

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
answer

Yes Yes
question

In a financial statement audit, inherent risk is evaluated to help an auditor asses which of the following? A) The internal audit department’s objectivity in reporting a material misstatement of a financial statement assertion it detects to the audit committee. B) The risk the internal control system will not detect a material misstatement of a financial statement assertion. C) The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion. D) The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls.
answer

D) The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls.
question

Which of the following statements is not true? A) Inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related to the amount of audit evidence required. B) Inherent risk is directly related to evidence whereas detection risk is inversely related to the amount of audit evidence required. C) Inherent risk is the susceptibility of the financial statements to material error, assuming no internal controls. D) Inherent risk and control risk are assessed by the auditor and function indepen dently of the financial statement audit.
answer

A) Inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related to the amount of audit evidence required.
question

If acceptable audit risk is low, and inherent risk and control risk are both low, then planned detection risk should be high. A)True B) False
answer

True
question

Tolerable misstatement does not affect audit risk, inherent risk, control risk, or planned detection ris k yet the combination of the tolerable misstatement and the four risks will determine the amount of planned audit evidence. A)True B) False
answer

True
question

A high detection risk equates to a low amount of audit evidence needed. A)True B) False
answer

False
question

For a private company client, auditors are required to test any internal controls they believe have not been operating effectively during the period under audit. A)True B) False
answer

False
question

Insert risk and control risk are normally assessed for the each segment but sets audit risk at the financial statement level. A)True B) False
answer

False
question

Acceptable audit risk and the amount of substantive evidence required are inversely related. A)True B) False
answer

True
question

As control risk increases, the amount of substantive evidence the auditor plans to accumulate should increase. A)True B) False
answer

True
question

Inherent risk and control risk are directly related. A)True B) False
answer

False
question

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. A)True B) False
answer

True
question

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

A) be reduced.
question

When management has an adequate level of integrity for the auditor to accept the engagement but cannot be regarded as completely honest in all dealings, auditors normally: A) reduce acceptable audit risk and increase inherent risk. B) reduce inherent risk and control risk. C) increase inherent risk and control risk. D) increase acceptable audit risk and reduce inherent risk.
answer

A) reduce acceptable audit risk and increase inherent risk.
question

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

D) assessment of detection risk.
question

Audit assurance is the complement of planned detection risk, that is, one minus planned detection risk. A)True B) False
answer

False
question

If an auditor believes the client will have financial difficulties after the audit report is issued, and external users will be relying heavily on the financial statements, the auditor will probably set acceptable audit risk as low. A)True B) False
answer

True
question

Engagement risk is effectively the audit firm’s business risk. A)True B) False
answer

True
question

Which of the following statements regarding inherent risk is correct? 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.
answer

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.
question

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? 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.
answer

A) Obtaining client’s agreement on the engagement letter.
question

Which of the following is not a primary consideration when assessing inherent risk? A) nature of client’s business B) existence of related parties C) degree of separation of duties D) susceptibility to defalcation
answer

C) degree of separation of duties
question

As the acceptable level of detection risk increases, an auditor may change the: A) timing of substantive tests by performing them at an interim date rather than year end. B) timing of the tests on controls by performing them throughout the year rather than at one time. C) assess the level of inherent risk to a lower amount. D) increase the sample size to achieve a more effective test.
answer

A) timing of substantive tests by performing them at an interim date rather than year end.

Get instant access to
all materials

Become a Member