Deck 19: Part I the Audit of Accounting Estimates: Basic Material Relating to Accountingestimates

Question 1

An auditor's analysis of specific accounts receivable and recent trends in bad debt losses as a percent of sales may cause the auditor to conclude that the allowance for doubtful accounts should be between $130,000 and $160,000. If management's recorded estimate falls within that range, the auditor ordinarily would conclude that the recorded amount is reasonable, and no difference would be aggregated. If management's recorded estimate is $110,000, how much would be aggregated as a misstatement?

A) $0.
B) $30,000.
C) $20,000.
D) $110,000.

Answer 1

C

Question 2

A(n) ________ is an existing condition, or situation, involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.

A) going concern
B) estimate
C) management bias
D) contingency

Answer 2

D

Question 3

Which of the following statements regarding the risk-based reasoning (RBR) matrix is FALSE?

A) The RBR matrix is an attempt to summarize all the possibilities of accounting uncertainties that an auditor may encounter and classify them by reporting types.
B) The RBR matrix focuses on AudR levels.
C) Under the RBR system of risk-based reasoning for accounting estimates, there are three possible ranges or regions of probabilities of payoffs to consider.
D) The main use of the RBR matrix is to provide a convenient decision aid for any reporting situation involving future events.

Answer 3

B

Question 4

Generally accepted accounting principles are based on the going-concern concept. Thus, an opinion that financial statements are in conformity with GAAP means that continued existence may be presumed for a "reasonable time", which is considered to be ________.

A) at least one year beyond the date of the financial statements
B) at least six months beyond the date of the financial statements
C) at least two years beyond the date of the financial statements
D) at least five years beyond the date of the financial statements

Question 5

Which of the following statements regarding calibration is FALSE?

A) A calibrated person is one who, when asked a large number of questions, will get about as many correct as he or she expected.
B) An uncalibrated person who is systematically overconfident may be 90% confident of his or her correctness over a large number of questions, where in the end that person will only get 60% or 70% of them correct.
C) Calibration is achieved through the use of heuristics, which improves the quality of experts' estimates.
D) If the environment is predictable and an expert has learned through calibration training to identify the situations where intuition misleads him or her, then the feedback will have corrected the expert's intuitions.

Question 6

The actual monetary amount which results from resolution of the underlying transaction(s), event(s), or condition(s) addressed by the accounting estimate is known as ________.

A) estimation uncertainty
B) outcome of an accounting estimate
C) management bias
D) management's point estimate

Question 7

The tendency to value what we have because it is ours, regardless of its intrinsic value, is known as the ________.

A) endowment effect
B) availability heuristic
C) representative heuristic
D) halo effect

Question 8

The prediction that people estimate frequency or probability by the ease with which instances or occurrences of the event can be brought to mind is known as the ________.

A) heuristic bias
B) availability heuristic
C) representative heuristic
D) halo effect

Question 9

Which of the following statements regarding the going concern concept is FALSE?

A) Generally accepted accounting principles are based on the going-concern concept.
B) Dealing with questions of going concern is difficult because auditors are forced to evaluate matters of financial analysis, business strategy, and financial forecasting.
C) Management is responsible for determining whether there is a significant doubt about a company's ability to continue as a going concern.
D) Financial difficulties, labour problems, loss of key personnel, litigation, and other such things may be important signals.

Question 10

An approximation of a monetary amount in the absence of a precise means of measurement is known as ________.

A) estimation uncertainty
B) an accounting estimate
C) management bias
D) management's point estimate

Question 11

From Cockburn's perspective, which of the following statements is FALSE?

A) Reasonable ranges were getting too narrow.
B) Reasonable ranges were getting too wide.
C) Reasonable ranges are crucial for deciding if there is a misstatement in accounting estimates.
D) Auditors must consider the riskiness of the accounting estimates.

Question 12

Which of the following statements regarding audit risk (AudR) and accounting risk (AccR) is FALSE?

A) AccR is largely geared to reflect business risks of the auditee.
B) AccR is the material difference between an estimate involving future events and its outcome.
C) AudR is something that is relevant to the auditee but not to the auditor.
D) The auditor has to consider both AudR and AccR and somehow combine them using professional judgment.

Question 13

Accounting estimate nirvana is ________.

A) the width of the reasonable range is greater than the material misstatement but not greater than two times the material misstatement, which means an estimate with no significant risk can be found within the reasonable range
B) the width of the reasonable range is less than or equal to the material misstatement, which means that there is no significant risk for any estimates within the reasonable range
C) the width of reasonable range is greater than or equal to the material misstatement, which means that there is no significant risk for any estimates within the reasonable range
D) the width of reasonable range is less than the material misstatement but not greater than two times the material misstatement, which means an estimate with no significant risk can be found within the reasonable range

Question 14

Misstatements are defined as the difference between ________ and the nearest point of the reasonable range.

A) management's point estimate
B) the auditor's point estimate
C) estimation uncertainty
D) the outcome of an accounting estimate

Question 15

Quantified uncertainty is referred to as ________.

A) Audit risk (AudR)
B) estimation
C) probability
D) Accounting risk (AccR)

Question 16

It is "reasonable" to assume the going-concern assumption for financial reporting when the degree of doubt is no higher than ________.

A) 50%
B) 80%
C) 20%
D) 10%

Question 17

Under the RBR system of risk-based reasoning for accounting estimates, in the ________ region, the probability of payoff is 1.00 to (one minus acceptable AccR).

A) ignore
B) record
C) heuristic
D) disclose

Question 18

According to Cockburn, which of the following statements relating to auditors' reasonable ranges is FALSE?

A) The key issue is factors to consider in determining the width of the range.
B) The auditor must accept the reality of the uncertainty that may be associated with the range.
C) Specialists such as engineers, actuaries, and economists may need to be consulted.
D) The range estimate must be made at the year-end date.

Question 19

CIFiR's (SEC established Advisory Committee on Improvements to Financial Reporting) progress report proposes a framework for accounting judgments consisting of which two components?

A) A critical and good-faith thought process and documentation.
B) Calibration and estimation.
C) Professional accounting judgment and professional auditing judgment.
D) Heuristics and accounting risk.

Question 20

The tendency to exaggerate the inevitability of causal sequences is known as the ________.

A) heuristic bias
B) availability heuristic
C) representative heuristic
D) hindsight bias

Question 21

In CAS 540, quantified uncertainty is referred to as probability or risk.

Question 22

Auditors are susceptible to judgmental biases because of the use of shortcuts or heuristics in the reasoning process.

Question 23

A lack of neutrality by management in the preparation and presentation of information is known as estimation uncertainty.

Question 24

Calibration is achieved through repetition and feedback, which improves the quality of expert's estimates.

Question 25

What are the three types of misstatements according to CAS 540?

Question 26

Risks associated with forecasting future outcomes or events in accounting estimates are increasingly recognized as the biggest source of error in accounting estimates.

Question 27

Uncertainty situations may cause audit reports to be modified (qualified) for departures from GAAP.

Question 28

List the various factors that need to be considered regarding the nature and scope of an issue prior to the exercise of professional judgment.

Question 29

Accounting risk (AccR) is largely geared to reflect business risks of the auditee.

Question 30

The risk-based reasoning (RBR) matrix is an attempt to summarize all the possibilities of accounting uncertainties that an auditor may encounter and classify them by reporting types.

Question 31

There are huge pressures on the auditor from management regarding recording of estimates because such estimates are essentially subjective in nature, and the major source of disagreement is likely the assumptions made about future-event outcomes.

Question 32

The difference between what was reported and what should have been reported, an auditor's traditional perspective of misstatement, is the basis of the concept of auditing risk.

Question 33

Accounting estimate nirvana occurs when the width of the reasonable range is less than or equal to the material misstatement, which means that there is no significant risk for any estimates within the reasonable range.

Question 34

Under the risk-based reasoning (RBR) system of risk-based reasoning for accounting estimates, in the ignore region, the probability of payoff is 1.00 to (one minus acceptable AccR).

Question 35

Generally accepted accounting principles are based on the going-concern concept.

Question 36

Under Canadian audit standard CAS 706, the auditor may decide to place a "red flag" paragraph drawing attention to the uncertainty in the report. If there is material uncertainty about the going-concern assumption, for example, then CAS 706 requires that an emphasis of matter paragraph be added even when there is proper disclosure in the financial statements. Under what circumstances would uncertainty situations cause audit reports to be qualified for departures from GAAP?

Question 37

What is a risk-based reasoning (RBR) matrix and what is it used for?

Question 38

The tendency to exaggerate the inevitability of causal sequences is known as the availability heuristic.

Question 39

Provide an example to illustrate what is meant by a reasonable estimate and what a misstatement is relative to an estimate according to AuG-41.

Question 40

What are the key concepts and related definitions relating to CAS 540.07?

Question 41

The nature of any adjustment depends on how wide the range is, as was first noted by Cockburn. Whether the reasonable range (RR) is sufficiently narrow is determined by the level of acceptable accounting risk (AccR). What are the generic rules of thumb for high-assurance engagements involving reasonable ranges that capture high probabilities of future outcomes?