Question 1

Silka is in the process of performing an audit. During the audit, Silka decided to change materiality. A valid reason for this would be

Accepted Answer

Changing materiality during an audit may be necessary if new information emerges, such as the discovery of a new user of the financial statements who requires greater accuracy or if there are changes in business conditions that affect the significance of certain items. Changing materiality due to the discovery of fraud, too many testing requirements or too many errors found during testing are not valid reasons as they do not relate to a change in business conditions or the need to meet the relevant stakeholder's requirements.

Question 2

The audit risk model is

Accepted Answer

The audit risk model is primarily used in the planning stage to help auditors determine the nature, timing, and extent of audit procedures. It is less useful in evaluating results because it does not directly address the outcomes of audit procedures.

Question 3

If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is considered to be

Accepted Answer

The term "material" refers to information that is considered important enough that it could potentially change the outcome of a decision or judgment. If a reasonable person's judgment would have been affected by the omission or misstatement of certain information, then that information is considered to be material. Therefore, option C is the correct answer.

Question 4

The auditors have decided upon a materiality level of $100 000 for their audit of ABC Manufacturing. Which one of the following errors would be considered more important by the auditors?

Accepted Answer

Illegal payments are considered more important by auditors regardless of the amount because they indicate potential legal and ethical violations, which can have significant implications beyond the financial statement's accuracy.

Question 5

If the auditor assessed the detection risk as high, the extent of evidence the auditor plans to accumulate is

Accepted Answer

If the auditor assesses the detection risk as high, it means that there is a higher risk that the auditor may not detect any material misstatements in the financial statements. In this scenario, the auditor needs to increase the level of substantive testing to lower this risk. Therefore, the auditor would plan to accumulate a low extent of evidence to ensure that the inherent and control risks are reduced to the level that the auditors can obtain reasonable assurance that the financial statements are free from material misstatements.

Question 6

CAS 320 (materiality in planning and performing an audit) defines materiality in terms of three key concepts. The first and second concepts are that a material misstatement should be considered in the context of knowledgeable users and the effect on decision making; and that material is relative to circumstances surrounding the decision and nature of the information. The third concept is

Accepted Answer

The third concept of materiality in CAS 320 is that the auditor should consider users of financial statements as a group. This means that the auditor should consider the impact of material misstatements on the financial statements as a whole, rather than on individual users. The decision-making of the entire group of users should be taken into account when determining materiality.

Question 7

Further possible misstatement considers

Accepted Answer

The answer of Further possible misstatement considers
...

Question 8

When an auditor allocates materiality to segments, then the materiality amount for different accounts under audit will

Accepted Answer

Materiality is allocated to segments based on the segment's financial information, and therefore, the materiality amount for different accounts under audit may differ from each other. This is because the materiality amount is based on the level of significance of the account in the context of the overall financial statements of the segment.

Question 9

If the auditor sets a low dollar amount as materiality,

Accepted Answer

Setting a low dollar amount as materiality means the auditor considers even small misstatements to be significant. Therefore, the auditor will require more evidence to ensure the financial statements are free from material misstatement, compared to setting a higher materiality threshold.

Question 10

The purpose of allocating planning materiality to balance sheet accounts is to

Accepted Answer

The answer of The purpose of allocating planning materiality to...

Question 11

Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit function. An effective auditor will

Accepted Answer

Recognizing that risks exist and dealing with them in an appropriate manner is the best approach. It is impossible to completely eliminate risk in auditing, but an effective auditor will take steps to mitigate risk and ensure the highest possible level of accuracy in their work. Setting a specific risk level or quantitatively determining risk before forming an opinion may not take into account all relevant factors and could lead to inaccurate conclusions. The auditor must use their professional judgment to manage risk appropriately.

Question 12

Audit risk is a measure of

Accepted Answer

Audit risk is the risk that the auditor is willing to accept that the financial statements may be materially misstated after the audit is completed.

Question 13

The materiality for Holloy Company is $75 000. There are carryforward misstatements of $25 000 from the previous year. Current year anticipated misstatements are $15 000, with anticipated corrections of $10 000. What is the performance materiality?

Accepted Answer

Performance materiality is calculated as the greater of materiality or the sum of carryforward misstatements and anticipated misstatements net of anticipated corrections. In this case, performance materiality is $75,000 (materiality) or $25,000 (carryforward misstatements) + $15,000 (anticipated misstatements) - $10,000 (anticipated corrections) = $30,000, whichever is greater. Therefore, performance materiality is $75,000.

Question 14

Lauralye Leasing Limited (LLL) provides lease financing to companies and individuals for equipment other than automobiles. Leases on commercial signs make up 50% of total leases; computer and telecommunications equipment are 30%; and restaurant equipment makes up most of the remainder. LLL's customers arrange to buy new equipment from equipment dealers, then contact LLL to arrange lease financing.
LLL was founded over thirty years ago by Laura and Al Ye. It is now run by Mr. and Mrs. Ye's daughter, Betsy, who is the President of LLL. LLL owns a small building downtown, where the offices of the business are located. Unused office space is rented out to other commercial tenants.
Betsy was a classmate of yours at in university and you have kept loosely in touch over the years. This year, she moved LLL's audit to your firm (a local firm with five partners), after deciding that the firm her parents had hired many years ago did not really understand her business' needs.
LLL has a small loan that is used to cover blips in working capital. The company has two salespeople. Most loans are received from stores throughout the city with whom LLL has standing agreements. If customers require financing, they fill in an application and fax it to LLL for approval. LLL will reply within two business days.
The company has been profitable for many years. There are no extraordinary items in the current year's financial statements.
Selected financial information is as follows:
 $$\begin{array} { l r } 
\text { Current assets } & \$ 9910000 \
\text { Long term assets } & \$ 46500000 \
\text { Short term liabilities } & \$ 30700000 \
\text { Shareholders' equity } & \$ 25710000 \
\text { Revenue } & \$ 10200000 \
\text { Expenses } & \$ 5600000 \
\text { Income before tax } & \$ 4600000 \
\text { (and before bonus) } &
\end{array}$$ 
Required: 
A) Which base would you use to calculate materiality? Why?
B) Calculate materiality. Choose a specific number and explain why you chose that amount.

Accepted Answer

The answer of Lauralye Leasing Limited (LLL) provides lease financing...

Question 15

The first step in applying materiality is

Accepted Answer

The first step in applying materiality is setting a judgment about materiality for the financial statements as a whole. This involves determining the amount or amounts that could influence or affect the judgments of financial statement users. Once this is determined, the auditor can then use this materiality threshold to guide their testing and evaluation of potential misstatements in the financial statements.

Question 16

A) Discuss each of the six steps in applying materiality in an audit and identify the audit phase(s) in which each step is performed.
B) Discuss the three main factors that affect an auditor's preliminary judgment about materiality.

Accepted Answer

The answer of A) Discuss each of the six steps...

Question 17

If an auditor were to calculate an estimate of the errors by direct projection from the sample to the population and found $7000 of net overstatement errors in a sample of $100 000 out of a total population of $900 000, the estimate of errors in the population is

Accepted Answer

The answer of If an auditor were to calculate an...

Question 18

Which of the following types of misstatements has the highest level of certainty?

Accepted Answer

Identified misstatements are the misstatements that have been found and confirmed by the auditor with a high level of certainty, therefore they have the highest level of certainty among the given options. Likely misstatements, likely aggregate misstatements, and further possible misstatements are all potential misstatements that have not been confirmed with the same level of certainty as identified misstatements.

Question 19

Materiality should be adjusted for the effect of net anticipated misstatements to determine performance materiality available for

Accepted Answer

Performance materiality is the amount set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. In determining performance materiality, the auditor should take into account the effect of identified and likely misstatements on the audit, but not further possible misstatements. However, the auditor should adjust performance materiality for the effect of unanticipated misstatements, which are misstatements that are not identified by the auditor's risk assessment procedures. Therefore, materiality should be adjusted for the effect of net anticipated misstatements to determine performance materiality available for unanticipated misstatements.

Question 20

Since materiality is relative, it is necessary to have benchmarks for establishing whether misstatements are material. Normally, the most important base for deciding what is material, because it is regarded as a critical item of current period information for users, is

Accepted Answer

The answer of Since materiality is relative, it is necessary...

Quiz 7: Materiality and Risk