Question 1

Which of the following qualitative factors may significantly influence whether an item is deemed to be material?

Accepted Answer

The answer of Which of the following qualitative factors may...

Question 2

Auditors commonly allocate materiality to balance sheet accounts rather than income statement accounts because most income statement misstatements have a(n) ________ effect on the balance sheet.
A) increased
B) equal
C) reduced
D) undetermined

Accepted Answer

Most income statement misstatements have an equal effect on the balance sheet because they affect both the income statement and the retained earnings on the balance sheet.

Question 3

What is the primary means of dealing with risk in planning decisions related to audit evidence?
A) Selection of more effective tests of details of balances.
B) Application of the audit risk model.
C) Establishing a lower preliminary judgment about materiality.
D) Allocating materiality judgment to segments.

Accepted Answer

The audit risk model is the primary means of dealing with risk in planning decisions related to audit evidence. It helps auditors assess the levels of inherent risk, control risk, and detection risk, and to plan the audit procedures accordingly to achieve an acceptably low level of audit risk.

Question 4

The phrase 'reasonable assurance' in the auditor's report is intended to inform users that auditors:
A) act as insurers of the accuracy of the statements.
B) base their conclusions about the statements on professional judgment.
C) certify the material presented in the statements by management.
D) guarantee fair presentation of the financial statements.

Accepted Answer

The phrase 'reasonable assurance' indicates that auditors base their conclusions on the financial statements using professional judgment. It implies a high level of assurance but does not guarantee absolute accuracy, certify the material, or act as insurers of the financial statements.

Question 5

Since materiality is relative, it is necessary to have bases for establishing whether misstatements are material. Normally, the most common base for deciding materiality is:
A) total assets.
B) net income after taxes.
C) net working capital.
D) net income before taxes.

Accepted Answer

Net income before taxes is often used as a base for determining materiality because it reflects the company's profitability and is a key indicator of financial performance.

Question 6

Certain types of misstatements are likely to be more important than other types to users, even if the dollar amounts are the same. Which of the following demonstrates this?

Accepted Answer

The answer of Certain types of misstatements are likely to...

Question 7

Likely misstatements can result from:

Accepted Answer

The answer of Likely misstatements can result from: ...

Question 8

One accounting issue that does not require management to use significant judgments is:
A) the allowance for doubtful accounts.
B) the liability for warranty payments.
C) obsolete inventory.
D) the useful life of equipment for tax purposes.

Accepted Answer

The useful life of equipment for tax purposes is often determined by tax laws and regulations, not by management's judgment.

Question 9

The auditor typically does not assess control risk and inherent risk for:
A) the overall audit.
B) each cycle.
C) each account.
D) each audit objective.

Accepted Answer

The auditor assesses control risk and inherent risk at the level of each account and each audit objective, rather than for the overall audit. This allows for a more detailed and specific risk assessment, which can then inform the nature, timing, and extent of audit procedures.

Question 10

Auditors may assess inherent risk and control risk:

Accepted Answer

The answer of Auditors may assess inherent risk and control...

Question 11

Which one of the following statements about the cycle approach to auditing is not correct?
A) There are differences among cycles in the effectiveness of internal controls.
B) There are differences among cycles on the auditor's willingness to accept risk that material errors exist after the auditing is complete.
C) There are differences among cycles in the frequency and size of expected errors.
D) It is common for auditors to want an equally low likelihood of errors for each cycle after the auditor is finished.

Accepted Answer

The answer of Which one of the following statements about...

Question 12

Which of the following is not a primary consideration when assessing inherent risk?
A) Susceptibility to misappropriation of funds.
B) Existence of related parties.
C) Frequency and intensity of management's review of accounting transactions and records.
D) Nature of client's business.

Accepted Answer

Inherent risk assessment focuses on the susceptibility of an account balance or class of transactions to misstatements that could be material, either individually or when aggregated with misstatements in other balances or classes, without considering internal controls. The frequency and intensity of management's review of accounting transactions and records is more related to control risk than inherent risk.

Question 13

Using your knowledge of the relationships among acceptable audit risk, inherent risk, control risk, planned detection risk, tolerable misstatement, and planned evidence, state the effect on planned evidence (increase or decrease) of changing each of the following factors, while the other factors remain unchanged.
-An increase in acceptable audit risk.

Accepted Answer

The answer of Using your knowledge of the relationships among...

Question 14

Using your knowledge of the relationships among acceptable audit risk, inherent risk, control risk, planned detection risk, tolerable misstatement, and planned evidence, state the effect on planned evidence (increase or decrease) of changing each of the following factors, while the other factors remain unchanged.
-A decrease in control risk.

Accepted Answer

The answer of Using your knowledge of the relationships among...

Question 15

Using your knowledge of the relationships among acceptable audit risk, inherent risk, control risk, planned detection risk, tolerable misstatement, and planned evidence, state the effect on planned evidence (increase or decrease) of changing each of the following factors, while the other factors remain unchanged.
-An increase in planned detection risk.

Accepted Answer

The answer of Using your knowledge of the relationships among...

Question 16

Using your knowledge of the relationships among acceptable audit risk, inherent risk, control risk, planned detection risk, tolerable misstatement, and planned evidence, state the effect on planned evidence (increase or decrease) of changing each of the following factors, while the other factors remain unchanged.
-An increase in tolerable misstatement.

Accepted Answer

The answer of Using your knowledge of the relationships among...

Question 17

There is no precise definition of materiality in the professional literature.

Accepted Answer

Materiality is a concept that is subjective and varies depending on the context of its application, such as in accounting, auditing, or legal matters. Professional literature often provides guidelines or frameworks rather than a precise, universally applicable definition, allowing professionals to exercise judgment based on the specific circumstances.

Question 18

Net income before taxes is normally the most important base for deciding materiality.

Accepted Answer

Net income before taxes is often used as a base for determining materiality because it reflects the company's profitability and is a key indicator of financial performance.

Question 19

Auditors cannot use prior year financial statement balances to establish their preliminary judgment about materiality in planning the current year's audit.

Accepted Answer

Auditors often use prior year financial statement balances as a starting point to establish their preliminary judgment about materiality in planning the current year's audit, adjusting for any known changes in the business or its environment.

Question 20

Tolerable misstatement is the maximum combined total of all misstatements in the financial statements that the auditor is willing to allow, or tolerate, when issuing a standard unmodified opinion.

Accepted Answer

Tolerable misstatement refers to the maximum error in a specific account balance or class of transactions that the auditor is willing to accept, not the combined total for the entire financial statements.

Quiz 3: Audit Evidence, Audit Planning, Analytical Procedures, Materiality and Risk

Which of the following qualitative factors may significantly influence whether an item is deemed to be material?

Auditors commonly allocate materiality to balance sheet accounts rather than income statement accounts because most income statement misstatements have a(n) ________ effect on the balance sheet.

What is the primary means of dealing with risk in planning decisions related to audit evidence?

The phrase 'reasonable assurance' in the auditor's report is intended to inform users that auditors:

Since materiality is relative, it is necessary to have bases for establishing whether misstatements are material. Normally, the most common base for deciding materiality is:

Certain types of misstatements are likely to be more important than other types to users, even if the dollar amounts are the same. Which of the following demonstrates this?

Likely misstatements can result from:

One accounting issue that does not require management to use significant judgments is:

The auditor typically does not assess control risk and inherent risk for:

Auditors may assess inherent risk and control risk:

Which one of the following statements about the cycle approach to auditing is not correct?

Which of the following is not a primary consideration when assessing inherent risk?

There is no precise definition of materiality in the professional literature.

Net income before taxes is normally the most important base for deciding materiality.

Auditors cannot use prior year financial statement balances to establish their preliminary judgment about materiality in planning the current year's audit.

Tolerable misstatement is the maximum combined total of all misstatements in the financial statements that the auditor is willing to allow, or tolerate, when issuing a standard unmodified opinion.