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

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

answer

D) the client

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

Determining materiality requires professional judgment. A) True B) False

answer

A) True

question

Audit standard 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 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 help plan the appropriate evidence to accumulate D) To finalize the control risk assessment

answer

C) To help plan the appropriate evidence to accumulate

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) no less C) no more D) more

answer

D) more

question

Qualitative factors can affect an auditor's assessment of materiality. Which of the following statements is true? I. Misstatements that are otherwise immaterial may be material if they affect earnings trends II. Misstatements that are otherwise minor may be material if they are possible consequences arising from 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 materiality for the financial statements as a whole 4. Determine performance materiality 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

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 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

A) True

question

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

answer

A) True

question

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

answer

B) False

question

The lower the dollar amount of the preliminary judgment the more audit evidence is required. A) True B) False

answer

A) True

question

Amounts involving fraud are not usually considered qualitative factors affecting the preliminary materiality judgment. A) True B) False

answer

B) False

question

CPA firms can establish policy guidelines to help their auditors determine materiality. A) True B) False

answer

A) 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 judgement in this task. A) True B) False

answer

B) False

question

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

answer

A) True

question

Net income before tax is the normal base used to determine materiality in a not-for-profit company. A) True B) False

answer

B) 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) performance materiality

answer

D) performance materiality

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) Preliminary materiality is required by the SEC D) The PCAOB term used when preliminary materiality is allocated to segments is tolerable misstatement

answer

D) The PCAOB term used when preliminary materiality is allocated to segments is 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

When allocating performance materiality: A) it is easy to predict in advance which accounts are most likely to be misstated B) only overstatements need to be considered C) professional judgment is critical D) the sum of all the performance materiality levels cannot exceed the preliminary judgment about materiality

answer

C) professional judgment is critical

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 most audits focus on the balance sheet 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 most audits focus on the balance sheet

question

Which of the following is a correct statement regarding performance materiality? A) Determining performance materiality is necessary because auditors accumulate evidence by segments B) The level of performance materiality does not affect the amount of evidence needed C) Performance materiality cannot vary for different classes of transactions D) Performance materiality is required for public companies, but not for private companies

answer

A) Determining performance materiality is necessary because auditors accumulate evidence by segments

question

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

answer

B) False

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

A) True

question

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

answer

A) 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

A) True

question

To maximize audit efficience, 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

A) 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 misstatement in the account. A) potential B) likely C) known D) projected

answer

C) known

question

When evaluating the audit findings, the auditor 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 included sample error D) amount of known misstatement is acknowledged and recorded by the client

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 the total estimated misstatement amount to determine if an account balance is materiality misstated. A) True B) False

answer

A) True

question

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

answer

A) True

question

If the total misstatement of an account is known, a sampling error still needs to be determined. A) True B) False

answer

B) False

question

Sampling error represents the minimum misstatement amount that exists in all accounts subjected to sampling. A) True B) False

answer

B) False

question

If the auditor approached the audit of the accounts in a sequential manner, the findings of the audit of accounts audited earlier can be used to revise the performance materiality established for accounts audited later. A) True B) False

answer

A) True

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

When dealing with audit risk: A) auditors accept some level of risk in performing the audit function B) most risks that auditors encounter are relatively easy to measure C) the audit risk model is only used for classes of transactions D) most audit firms prefer to use a quantitative assessment for risk

answer

A) auditors accept some level of risk in performing the audit function

question

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

answer

B) False

question

The measurement of the auditor's assessment of the likelihood that there 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 performance materiality levels 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 accumulated 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 business risk A) I only B) II only C) I and II D) None of the above

answer

A) I only

question

Inherent risk if often high for an account such as: A) inventory B) land C) capital stock 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

Which is a true statement about audit risk? A) audit risk measures the risk that a material misstatement could occur and not be detected by internal control B) when auditors decide on a higher acceptable audit risk, they want to be more certain that the financial statements are not materially misstated C) audit assurance is the complement of acceptable audit risk D) there is an inverse relationship between acceptable audit risk and planned detection risk

answer

C) audit assurance is the complement of acceptable audit risk

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

When assessing risk, it is important to remember that: A) for acceptable audit risk, the SEC decides the risk the CPA firm should take for public clients B) inherent risk can be changed by the auditor C) detection risk can only be determined after audit risk, inherent risk, and control risk are determined D) control risk is determined by company management since they are responsible for internal control

answer

C) detection risk can only be determined after audit risk, inherent risk, and control risk are determined

question

In a financial statement audit, inherent risk is evaluated to help an auditor assess 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 independently of financial statement audit

answer

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

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 performance materiality level for the area D) expand planning procedures

answer

C) increase the performance materiality level for the area

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

A) True

question

If the audit assurance rate is 95%, then the level of acceptable audit risk is 5% A) True B) False

answer

A) True

question

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

answer

B) 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

B) False

question

There is a direct relationship between acceptable audit risk and planned detection risk. A) True B) False

answer

A) True

question

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

answer

A) True

question

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

answer

A) True

question

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

answer

B) 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

A) True

question

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

answer

B) False

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) nature and amounts of liabilities D) assessment of detection risk

answer

D) assessment of detection risk

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

A) True

question

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

answer

A) True

question

Which of the following statements regarding inherent 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 more knowledge about the company. 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 more knowledge about the company.

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 misappropriation of assets

answer

C) degree of separation of duties

question

The risk of fraud should be assessed for the entire audit as well as by cycle, account, and objective. A) True B) False

answer

A) True

question

The auditing profession has established guidelines for setting inherent risk. A) True B) False

answer

B) False

question

Auditors begin their assessment of inherent risk during the planning phase and update the assessments throughout the audit. A) True B) False

answer

A) True

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

question

Auditors respond to risk primarily by: I. changing the extent of testing II. changing the types of audit procedures A) I only B) II only C) I and II D) neither I nor II

answer

C) I and II

question

In applying the audit risk model, auditors are concerned about overstatements, not understatements. A) True B) False

answer

B) False

question

One major limitation in the application of the audit risk model is the difficulty of measuring the components of the model. A) True B) False

answer

A) True

question

When taken together, the concepts of risk and materiality in auditing: A) measure the uncertainty of amounts of a given magnitude B) measure uncertainty only C) measure magnitude only D) measure inherent risk

answer

A) measure the uncertainty of amounts of a given magnitude

question

Which of the following is a correct statement? A) the audit risk model helps in evaluating results B) special care must be exercised when the auditor decides on the basis of accumulated evidence that the original assessment of control risk was understated C) the auditor violates due care if he knows that the original assessment of audit risk is inappropriate and he fails to change it D) performance materiality is part of the audit risk model

answer

C) the auditor violates due care if he knows that the original assessment of audit risk is inappropriate and he fails to change it

Chapter 9 Audit – Flashcards

Unlock all answers in this set

Haven't found what you were looking for?

Search for samples, answers to your questions and flashcards