Deck 19: The Audit of Accounting Estimates: Basic Material Relating to Accounting Estimates

Question 1

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 best able to provide an honest and objective assessment of 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.

Answer 1

C

Question 2

Which of the following statements concerning accounting risk (AccR)is FALSE?

A)Estimation of AccR requires knowledge of the auditee's business and industry.
B)AccR is largely dependent on factors outside the control of both the auditor and auditee.
C)AccR can best be estimated using the uniform distribution assumption to calculate the reasonable range.
D)AccR and Audit Risk (AuR)are largely dependent on one another.

Answer 2

D

Question 3

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

Answer 3

A

Question 4

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 5

CAS 540 refers to management's judgments that the auditor considers unreasonable as _________ misstatements.

A)likely aggregate
B)factual
C)projected
D)judgmental

Question 6

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 7

The tendency for auditors to blindly follow the prior year's audit file when conducting the current year's audit is an example of which type of judgment bias?

A)Representative heuristic.
B)Availability.
C)Confirmation.
D)Anchoring.

Question 8

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 9

According to Savage and Van Allen,what is the problem with using the average or expected value of a distribution as a point estimate for a distribution of values?

A)It is too costly to develop such estimates.
B)When sufficient estimation uncertainty exists,use of such estimates can lead to misleading results.
C)It adds too much complexity to the audit process
D)It eliminates the auditor's need to exercise professional judgement.

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

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 12

The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement is referred to as ________.

A)management bias
B)estimation uncertainty
C)a "nightmare" estimate situation
D)auditor's range

Question 13

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 14

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 15

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.

Question 16

Greater volatility in the business environment raises the amount of measurement uncertainty associated with predicting future-event amounts.Such greater uncertainty leads to an increase in which type of risk?

A)Accounting risk.
B)Detection Risk.
C)Business Risk.
D)Control Risk.

Question 17

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 18

Quantified uncertainty is referred to as ________.

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

Question 19

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 20

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 21

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

Question 22

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

Question 23

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

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

Question 24

When misstatements due to incorrect accounting estimates are factored in,the true probability of material misstatement is simply the product of Audit Risk and Information Risk

Question 25

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 26

An Accounting Estimate Problem or "Cockburn's problem" occurs when _______.

A)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.
B)The width of reasonable range is greater than two times MM,which means that all values in RR may have significant risk of CAS 540,paragraph 11.
C)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.
D)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.

Question 27

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

Question 28

The risk of misstatement arising from estimation uncertainty due to future events is known as accounting risk.

Question 29

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 30

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

Question 31

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 32

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 33

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 34

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 35

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

Question 36

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

Question 37

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 38

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

Question 39

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.

Question 40

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

Question 41

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 42

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?

Question 43

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 44

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 45

Under the risk-based reasoning system for accounting estimates,there are three possible ranges or regions of probabilities of payoffs to consider.What are they and what do they each mean?

Question 46

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

Question 47

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

Question 48

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

Question 49

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 50

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