Question 1

Planning materiality is typically less than overall materiality and helps the auditor to determine the extent of:
A)audit evidence needed.
B)analytical procedure performed.
C)substantive procedure performed.
D)work performed.

Accepted Answer

Planning materiality is a preliminary estimate of the maximum amount of misstatement in the financial statement that is acceptable to the auditor, and it is typically less than overall materiality. The purpose of planning materiality is to help the auditor determine the extent of audit evidence needed to support their audit opinion. Therefore, choice A is the best answer as it correctly identifies the extent of audit evidence needed. Choices B, C, and D are incorrect as they do not accurately describe the purpose of planning materiality.

Question 2

Which of the following factors in assessing severity of internal control deficiencies indicates that a deficiency that may have been considered a material weakness at an interim date would not be considered a material weakness at the year end?
A)Remediation of a control deficiency.
B)Existence of compensating controls.
C)Complexity and subjectivity of the account balance.
D)Effectiveness of oversight and governance.

Accepted Answer

If a control deficiency is remediated by year-end, it may no longer be considered a material weakness, as the issue has been addressed and corrected.

Question 3

The FASB has set a hierarchy of inputs to consider in assessing fair value.Which of the following valuations are generally viewed as highly subjective?
A)Level 1
B)Level 2
C)Level 3
D)Level 4

Accepted Answer

Level 3 valuations are generally viewed as highly subjective, as they are based on unobservable inputs and require significant judgment to determine fair value. Level 1 and 2 valuations rely on more objective and readily available market data. There is no Level 4 in the FASB hierarchy.

Question 4

Under which approach is the client expected to estimate fair value based on a model of the future cash flows associated with the instrument or the asset?
A)Mark to market model
B)Replacement model
C)Mark to model
D)Historical cost model

Accepted Answer

The approach where the client is expected to estimate fair value based on a model of the future cash flows associated with the instrument or asset is called mark to model. Therefore, the best choice is C) Mark to model. The other options, A) mark to market model, B) replacement model, and D) historical cost model, do not involve estimating fair value based on future cash flows.

Question 5

Although different audit firms take different approaches,planning materiality could be the same as overall materiality,or could be a percentage of overall materiality,generally ranging from:
A)25% to 75% of overall materiality.
B)50% to 75% of overall materiality.
C)25% to 50% of overall materiality.
D)40% to 75% of overall materiality.

Accepted Answer

The answer of Although different audit firms take different approaches,planning...

Question 6

Which of the following best describes the nature of discontinued assets?
A)Impairment testing based on most likely sale or disposal price.
B)Impairment testing only if plants are closed or equipment is not used.
C)Lower of cost or market impairments,including an allowance for obsolescence.
D)Estimates and assumptions made in preparation of the estimate of income tax expense for the year.

Accepted Answer

Discontinued assets are assets that the company has decided to sell or dispose of. Impairment testing must be done on such assets based on the most likely sale or disposal price to determine if there is a loss in value.

Question 7

Critical Criteria in Assessing Severity of Internal Control Deficiencies
What general factors should be considered by an auditor in evaluating whether or not a control deficiency is a material weakness,or a significant deficiency,or a control issue?

Accepted Answer

The answer of Critical Criteria in Assessing Severity of Internal...

Question 8

The FASB has set a hierarchy of inputs to consider in assessing fair value.Price taken from a recent trade on the NIKKEI of an index stock would fall under which level?
A)Level 0
B)Level 1
C)Level 2
D)Level 3

Accepted Answer

Level 1 inputs are quoted prices for identical assets or liabilities in active markets. If a recent trade on the NIKKEI of an index stock is available, it would be considered a Level 1 input because it is a quoted price in an active market.

Question 9

Which of the following Statements on Auditing Standards (SAS)provides the AICPA's basic guidance on materiality judgments?
A)107
B)61
C)89
D)92

Accepted Answer

SAS 107 provides the AICPA's basic guidance on materiality judgments.

Question 10

Considering Qualitative Factors
What are the considerations that may cause a quantitatively small misstatement to be considered material?

Accepted Answer

The answer of Considering Qualitative Factors
What are the considerations that...

Question 11

Which of the following is an approach to setting posting materiality?
A)Dual approach
B)Percentage approach
C)Qualitative approach
D)Planning approach

Accepted Answer

The answer of Which of the following is an approach...

Question 12

The discovery of an intentional misstatement,even if immaterial,could impact the auditor's opinion on the effectiveness of the client's:
A)external controls.
B)interim financial statements.
C)internal controls.
D)segment reports.

Accepted Answer

The discovery of an intentional misstatement can indicate weaknesses or inadequacies in the client's internal controls, which can lead to an increased risk of material misstatement in the financial statements. As such, the auditor may need to reconsider their assessment of the effectiveness of the internal controls and may need to perform additional testing to ensure the accuracy of the financial statements. The discovery of a misstatement is unlikely to impact the auditor's opinion on external controls, interim financial statements, or segment reports, unless the misstatement is material and affects these areas.

Question 13

Which method focuses on assuring that the year-end balance sheet is correct and does not consider the impact of prior-year uncorrected misstatements reversing in later years?
A)Rollover
B)Iron curtain
C)Dual
D)Percentage

Accepted Answer

The Iron curtain method focuses on assuring that the year-end balance sheet is correct and does not consider the impact of prior-year uncorrected misstatements reversing in later years. It ignores the effect of prior-year misstatements and only considers the current year's errors.

Question 14

The dual approach requires which of the following?
A)the application of the rollover method.
B)the application of the iron curtain method.
C)simultaneous application of both the rollover and iron curtain methods.
D)sequential application of both the rollover and iron curtain methods.

Accepted Answer

The dual approach requires the simultaneous application of both the rollover and iron curtain methods to evaluate the impact of misstatements on financial statements.

Question 15

Which of the following is not true about materiality judgment?
A)The auditor's consideration of materiality is influenced by the auditor's perception of the needs of users of financial statements.
B)The auditor considers materiality only in relation to classes of transactions,account balances,and disclosures.
C)Materiality judgments make sure that the auditor gathers sufficient evidential matter to obtain reasonable assurance about whether the financial statements are free of material misstatement.
D)Materiality decisions differ from one audit client to another.

Accepted Answer

This statement is not true because the auditor also considers materiality in relation to the overall financial statements. Materiality judgments are made to ensure that the auditor gathers sufficient evidential matter to obtain reasonable assurance about whether the financial statements are free of material misstatement. Materiality decisions differ from one audit client to another and are influenced by the needs of the users of financial statements.

Question 16

Which of the following is associated with Level 3 in the FASB hierarchy for ascertaining fair value?
A)Mark to market model
B)Replacement model
C)Mark to model
D)Historical cost model

Accepted Answer

Level 3 is associated with the mark to model approach, which uses models and other estimation techniques to determine fair value when observable market data is not available.

Question 17

A material misstatement in the financial statements,including those requiring restatements strongly implies a material weakness in which of the following?
A)income statement.
B)balance sheet.
C)internal control.
D)cash flow statements.

Accepted Answer

A material misstatement in the financial statements implies that there is a material weakness in the internal control of the company, as adequate control procedures were not in place to prevent or detect the misstatement. Therefore, the best choice is C, internal control.

Question 18

Which one of the following general factors should not be considered critical in assessing severity of internal control deficiencies?
A)Control environment
B)Evidence from a poorly controlled system
C)Repeatability of a process
D)Complexity and subjectivity of the account balance

Accepted Answer

Evidence from a poorly controlled system may suggest that there are internal control deficiencies, but it is not a factor that should be considered critical in assessing the severity of those deficiencies. The other three factors (control environment, repeatability of a process, and complexity and subjectivity of the account balance) are typically important in evaluating internal controls and determining their potential impact on financial reporting.

Question 19

For nonprofit entities,appropriate benchmarks for materiality judgments would include which of the following?
A)total assets and total liabilities.
B)total revenues and total assets.
C)total liabilities,total income,or total assets.
D)total expenses,total revenues,or total assets.

Accepted Answer

For nonprofit entities, materiality is often judged based on total expenses, total revenues, or total assets, as these reflect the financial activities and resources of the organization.

Question 20

Which method focuses on the materiality of current year misstatements and the reversing effect of prior-year misstatements on the income statement?
A)Rollover method
B)Iron curtain method
C)Percentage approach
D)Judgmental method

Accepted Answer

The rollover method is the only one that focuses on the materiality of current year misstatements and the effect of prior-year misstatements on the income statement. It assumes that prior-year misstatements have been corrected in the current year, and therefore only current year misstatements are considered in assessing materiality. The other methods listed do not specifically account for the reversing effect of prior-year misstatements.

Quiz 18: Advanced Topics Concerning Complex Audit Judgments

Planning materiality is typically less than overall materiality and helps the auditor to determine the extent of:

Which of the following factors in assessing severity of internal control deficiencies indicates that a deficiency that may have been considered a material weakness at an interim date would not be considered a material weakness at the year end?

The FASB has set a hierarchy of inputs to consider in assessing fair value.Which of the following valuations are generally viewed as highly subjective?

Under which approach is the client expected to estimate fair value based on a model of the future cash flows associated with the instrument or the asset?

Although different audit firms take different approaches,planning materiality could be the same as overall materiality,or could be a percentage of overall materiality,generally ranging from:

Which of the following best describes the nature of discontinued assets?

Critical Criteria in Assessing Severity of Internal Control Deficiencies What general factors should be considered by an auditor in evaluating whether or not a control deficiency is a material weakness,or a significant deficiency,or a control issue?

The FASB has set a hierarchy of inputs to consider in assessing fair value.Price taken from a recent trade on the NIKKEI of an index stock would fall under which level?

Which of the following Statements on Auditing Standards (SAS) provides the AICPA's basic guidance on materiality judgments?

Considering Qualitative Factors What are the considerations that may cause a quantitatively small misstatement to be considered material?

Which of the following is an approach to setting posting materiality?

The discovery of an intentional misstatement,even if immaterial,could impact the auditor's opinion on the effectiveness of the client's:

Which method focuses on assuring that the year-end balance sheet is correct and does not consider the impact of prior-year uncorrected misstatements reversing in later years?

The dual approach requires which of the following?

Which of the following is not true about materiality judgment?

Which of the following is associated with Level 3 in the FASB hierarchy for ascertaining fair value?

A material misstatement in the financial statements,including those requiring restatements strongly implies a material weakness in which of the following?

Which one of the following general factors should not be considered critical in assessing severity of internal control deficiencies?

For nonprofit entities,appropriate benchmarks for materiality judgments would include which of the following?

Which method focuses on the materiality of current year misstatements and the reversing effect of prior-year misstatements on the income statement?