Question 1

The significant judgments related to "deferred income taxes" are subject to estimates of future profitable operations against which the deferred asset might be utilized.

Accepted Answer

This is true because the amount of deferred income taxes is based on estimates of future taxable income, and if the company does not generate enough profits in the future, the deferred tax asset may not be utilized. Therefore, significant judgments must be made regarding the company's future profitability.

Question 2

The purpose of making materiality judgments is to make sure that financial statements are free of any material misstatement.

Accepted Answer

Materiality judgments help in determining whether any information needs to be disclosed in financial statements as it could potentially impact the decision-making of users of the financial statements. This ensures that the financial statements are free of any material misstatement, which is important for the credibility and reliability of the information presented in the statements.

Question 3

If the auditor believes that misstatements aggregating approximately $50,000 would be material to the income statement,but misstatements aggregating approximately $100,000 would be material to the balance sheet,the auditor typically assesses overall materiality at $100,000 or less.

Accepted Answer

False

Question 4

The significant judgments related to "net finance receivables" include assessing the allowance for noncollectibility.

Accepted Answer

The assessment of allowance for noncollectibility is an important aspect related to the reporting of net finance receivables.

Question 5

An auditor's consideration of materiality is a matter of professional judgment and is influenced by the auditor's perception of the needs of users of financial statements.

Accepted Answer

An auditor's consideration of materiality is indeed a matter of professional judgment and is influenced by the auditor's perception of the needs of users of financial statements. Materiality refers to the significance or importance of an amount, transaction, or discrepancy in the financial statements that could potentially impact a user's decision-making. The auditor considers materiality when planning and performing an audit to ensure that they focus on the areas that are most important to the users of the financial statements.

Question 6

Auditors make materiality assessments to help in planning the audit evidence to obtain and in evaluating the audit evidence that was obtained.

Accepted Answer

Auditors use materiality assessments to determine the appropriate level of risk, the nature and extent of audit procedures, and the evaluation of the audit evidence obtained. This helps the auditor focus on the most important areas of the financial statements and allocate appropriate resources while conducting the audit.

Question 7

The inventory account does not require any subjective estimates by management.

Accepted Answer

The inventory account may require management's subjective estimates for things like determining the cost of inventory or determining the amount of inventory that is obsolete or damaged.

Question 8

Auditors are constantly challenged to evaluate the quality of a client's estimates,including areas such as obsolescence of inventory,allowance for doubtful accounts,and tax provisions among others.

Accepted Answer

Auditors are indeed required to evaluate the quality of a client's estimates in various areas, including those mentioned such as inventory obsolescence, allowance for doubtful accounts, and tax provisions. This is because estimates involve a degree of judgment and uncertainty, and therefore require careful scrutiny to ensure they are reasonable and accurate.

Question 9

Existing professional guidance notes that auditors must make materiality assessments for purposes of (1)audit planning and (2)evidence evaluation after audit procedures are completed.

Accepted Answer

Existing professional guidance requires auditors to make materiality assessments both for audit planning and for evaluating audit evidence after procedures are completed. Materiality helps auditors determine the significance of potential misstatements in the financial statements, and is a key consideration in the audit process.

Question 10

The auditor considers materiality only at the overall financial statement level.

Accepted Answer

The auditor considers materiality both at the overall financial statement level and at the individual account or transaction level. Materiality is an important concept in audit planning and evaluation of audit evidence.

Question 11

There are systematic processes that the auditor can use in making most of the complex judgments in the financial statements.

Accepted Answer

The auditor can use systematic processes such as risk assessment, materiality, and testing controls to make complex judgments in the financial statements. These processes help ensure that the auditor's judgments are objective and based on reliable evidence.

Question 12

Planning materiality helps the auditor determine the extent of audit evidence needed in order to provide an opinion on the financial statements.

Accepted Answer

Planning materiality is a crucial concept in auditing as it helps the auditor determine the significance of misstatements in the financial statements and the amount of audit evidence needed to provide an opinion on the fairness of the financial statements. Therefore, the statement is true.

Question 13

Auditor needs to assess disclosures about what lines of business the company may discontinue.

Accepted Answer

As part of the audit process, the auditor needs to assess the disclosures made by the company regarding the lines of business it may discontinue or exit. This assessment helps the auditor to evaluate the company's financial statements and determine if they provide a true and fair view of the company's financial position, performance, and cash flows.

Question 14

Complex audit judgments and decisions often involve accounts that require subjective estimates by management.

Accepted Answer

Complex audit judgments and decisions may involve accounts such as allowance for doubtful accounts, inventory reserves, and contingent liabilities, which require subjective estimates by management. The auditor needs to assess the reasonableness of these estimates by evaluating the underlying assumptions, methods, and data used by management, as well as considering other sources of information and the auditor's own professional judgment.

Question 15

Auditors are not responsible for making judgments regarding the fair value of securities.

Accepted Answer

The answer of Auditors are not responsible for making judgments...

Question 16

Evaluating the Quality of Client's Internal Audit Function An external auditor assesses the quality of the internal audit function to determine whether the internal auditors' work is relevant to the external audit and of sufficient quantity and quality.Describe the three factors of the internal audit function that would be considered by the external auditor in this quality assessment.

Accepted Answer

The answer of Evaluating the Quality of Client's Internal Audit...

Question 17

In performing substantive analytical procedures,the threshold for determining whether differences between the client's recorded balance and the auditor's expectation should be based on planning materiality.

Accepted Answer

The threshold for determining whether differences between the client's recorded balance and the auditor's expectation should be based on planning materiality in performing substantive analytical procedures. This means that if the differences are below the planning materiality, they are considered not significant and do not require further investigation. If they exceed the planning materiality, they are considered significant and require further investigation.

Question 18

The significant judgments of "Assets of Held-for-Sale Operations" are subject to impairment testing based on the most likely sale or disposal price.

Accepted Answer

The significant judgments of "Assets of Held-for-Sale Operations" are subject to impairment testing based on the most likely sale or disposal price. This means that the assets need to be valued based on their estimated sale or disposal price, and any impairment (decrease in value) needs to be recognized in the financial statements. This requires significant management judgment, as the estimated sale or disposal price may be affected by various factors such as market conditions and competition.

Question 19

Determining materiality is based solely on quantitative factors.

Accepted Answer

Determining materiality involves both quantitative and qualitative factors such as the nature of the item, the user's needs, and the circumstances surrounding the item.

Question 20

Materiality judgments are made in light of the surrounding circumstances,but need not necessarily involve both quantitative and qualitative considerations.

Accepted Answer

The answer of Materiality judgments are made in light of...

Quiz 16: Advanced Topics Concerning Complex Auditing Judgments