Question 1

Net income before tax is common base used to determine materiality in a non-for-profit company.

Accepted Answer

Net income before tax is a common base used to determine materiality in for-profit companies, not non-profit companies. Non-profit companies may use alternative bases, such as total revenue or total expenses, to determine materiality.

Question 2

The lower the dollar amount of the performance materiality the more audit evidence is required.

Accepted Answer

The lower the dollar amount of performance materiality, the lower the level of material misstatement that the auditor is willing to accept. Therefore, to mitigate the risk of undetected material misstatements, the auditor will need to gather more audit evidence.

Question 3

The existence of one or more risk factors means that there is a material misstatement present.

Accepted Answer

The existence of risk factors does not necessarily mean that there is a material misstatement present. Risk factors indicate potential areas of risk, but additional information and analysis is required to determine whether a material misstatement exists.

Question 4

Inherent and control risks are risk controlled by the client.

Accepted Answer

Inherent and control risks are types of risks that exist within the client's internal controls and operations. As such, it is the client's responsibility to identify, evaluate, and manage these risks to ensure the success of their business processes.

Question 5

All audit procedures must be completed before year end.

Accepted Answer

This statement is not necessarily true as some audit procedures may continue after year end if they relate to events or transactions that occur after the balance sheet date. Additionally, the timing of completion of audit procedures may be dependent on various factors, such as the complexity of the audit, availability of information, and client cooperation, and cannot be guaranteed to be completed before year-end.

Question 6

Internal controls that the auditor expects to rely on to reduce substantive testing must be tested.

Accepted Answer

The auditor is required to test internal controls that they plan to rely on in order to reduce substantive testing. This is because relying on internal controls without testing them would be a form of audit risk, as the controls may not be effective in preventing or detecting material misstatements. Therefore, it is crucial for the auditor to perform testing procedures to ensure that the controls are reliable before relying on them.

Question 7

An auditor may rely on a specialist when assessing the value of a company's inventory.

Accepted Answer

Yes, an auditor may rely on a specialist such as a certified appraiser when evaluating the value of a company's inventory. This is allowed under Generally Accepted Auditing Standards (GAAS), as long as the auditor determines that the specialist is qualified and independent.

Question 8

Audit procedures have to be announced or be completed at predictable times.

Accepted Answer

Audit procedures should not be announced or completed at predictable times as this can increase the risk of fraud and deception. The element of surprise is important in conducting effective audits.

Question 9

If tolerable misstatement for accounts payable is $1,000,the auditor would need to obtain more audit evidence for that account than if tolerable misstatement were $100,000.

Accepted Answer

If the tolerable misstatement for accounts payable is only $1,000, it means that the auditor has set a lower materiality threshold for this account, and therefore, more audit evidence would be required to ensure the accuracy of the account balance. On the other hand, if the tolerable misstatement were $100,000, it means that the auditor has set a higher materiality threshold for this account, and therefore, less audit evidence may be required.

Question 10

Ineffective internal controls result in higher risk of material misstatement in the financial statements than effective internal controls.

Accepted Answer

Ineffective internal controls do not provide the necessary checks and balances to catch and prevent errors and fraud, leading to a higher risk of material misstatement in the financial statements. Effective internal controls are designed to mitigate and detect such risks, resulting in a lower risk of material misstatement.

Question 11

Tolerable misstatement is always less than or equal to performance materiality.

Accepted Answer

Tolerable misstatement is the maximum amount of misstatement that could exist in a financial statement element or total, yet the auditor would still conclude that the financial statements are not materially misstated. Since performance materiality is the maximum amount of materiality that can be set for any element or total of the financial statements, tolerable misstatement will always be less than or equal to performance materiality.

Question 12

A company's website can contain useful information that can help an auditor understand the products and strategies of the company.

Accepted Answer

A company's website can provide valuable information to an auditor about the company's products, services, and overall strategies. This information can help the auditor in planning the audit and developing an understanding of the business being audited. However, the auditor should also be cautious and verify the accuracy of the information obtained from the website.

Question 13

Tolerable misstatement is the amount of misstatement in an account balance that the auditor could tolerate and still not judge the underlying account balance to be materially misstated.

Accepted Answer

Tolerable misstatement is a concept used in audit planning and is the maximum amount of difference between the actual account balance and the audited account balance that the auditor can accept as being not material. Therefore, the statement is true.

Question 14

Auditors are only concerned with materiality for the financial statements as a whole.

Accepted Answer

Auditors are also concerned with materiality for individual accounts or disclosures within the financial statements. Materiality is a matter of professional judgment, and the auditor must consider both quantitative and qualitative factors in determining whether a misstatement is material.

Question 15

Heightened risk of material misstatement causes the auditor to perform audit procedures closer to year end.

Accepted Answer

When there is a heightened risk of material misstatement, the auditor may choose to perform audit procedures closer to year end to obtain more reliable and accurate information. This is because the risk of material misstatement may increase near the end of the reporting period due to factors such as increased pressure on management to meet financial targets or deadlines, complex transactions or estimates, or changes in the business environment. By performing procedures closer to year end, the auditor can gather more complete and up-to-date information to assess the risk of material misstatement and ensure the financial statements are fairly presented.

Question 16

Performance materiality is used for assessing the risks of material misstatement and determining the nature,timing,and extent of audit procedures to perform during the audit opinion formulation process.

Accepted Answer

This statement is true. Performance materiality is an important consideration in the audit process, as it helps auditors determine how much evidence they need to gather in order to form an opinion on the financial statements. By setting a level of materiality that is lower than the overall financial statement level, auditors can focus their efforts on the areas of the financial statements that are most likely to contain material misstatements, while still ensuring that they are gathering enough evidence to form an opinion on the financial statements as a whole.

Question 17

A risk factor indicating a heightened risk of fraud would be considered a significant risk.

Accepted Answer

A risk factor indicating a heightened risk of fraud would be considered significant as it increases the likelihood of fraudulent activity occurring. It is important for organizations to identify and address significant risks to prevent fraud from occurring.

Question 18

As a guideline,1% of total assets or revenue (whichever is larger)can be used to set materiality.

Accepted Answer

This is a generally accepted guideline for determining materiality in financial reporting.

Question 19

When the risk of material misstatement is heightened,the auditor increases the extent of audit procedures and demands more evidence.

Accepted Answer

When the risk of material misstatement is higher, the auditor needs to perform more extensive audit procedures and obtain more evidence to reduce audit risk to an acceptable level. Therefore, the auditor will increase the extent of audit procedures and demand more evidence to ensure that the financial statements are free from material misstatements.

Question 20

Appropriate evidence about inventory existence can be obtain through inspection.

Accepted Answer

Inspection of physical inventory is a common method of obtaining evidence about inventory existence.

Quiz 7: Planning the Audit: Identifying and Responding to the Risks of Material Misstatement