Question 1

When using financial ratios,the most important comparisons are to those of previous years for the company and to industry averages or similar companies for the same year.

Accepted Answer

Comparing financial ratios to previous years for the same company allows for analysis of trends and changes in performance over time. Comparing to industry averages or similar companies for the same year allows for benchmarking and understanding how the company is performing relative to its peers.

Question 2

Audit standards require the auditor to consider materiality early in the audit.Which statement(s)regarding preliminary materiality are True?
I. Preliminary materiality may change during the engagement.
II. Preliminary materiality is the maximum amount by which the auditor believes the financials could be misstated and still not affect the decisions of reasonable users.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

I is true as the auditor may revise preliminary materiality during the course of the audit based on the audit findings. II is also true as preliminary materiality is the threshold above which misstatements could influence users' decisions. Therefore, both statements are true.

Question 3

Which of the following is part of planning?
A)Set materiality for the financial statements as a whole.
B)Estimate total misstatement in the segment.
C)Estimate the combined misstatement.
D)Compare the combined estimated with preliminary judgment.

Accepted Answer

Setting materiality for the financial statements as a whole is part of the planning process in an audit. This involves determining the threshold above which misstatements in the financial statements are considered material and therefore significant to the users of these statements.

Question 4

________ materiality is materiality for segments of the audit.
A)Segment
B)Individual
C)Financial statement
D)Performance

Accepted Answer

The answer of ________ materiality is materiality for segments of...

Question 5

Why do auditors establish a preliminary judgment about materiality?
A)to determine the appropriate level of staff to assign to the audit
B)so the client can know what records to make available to the auditor
C)to help plan the appropriate evidence to accumulate
D)to finalize the control risk assessment

Accepted Answer

Auditors establish a preliminary judgment about materiality to help plan the appropriate evidence to accumulate. This helps the auditor ensure that they are gathering enough evidence to make an informed opinion about the financial statements.

Question 6

Which of the following is a correct statement regarding analytical procedures?
A)A major strength in using industry ratios for auditing is the difference between the nature of the client's financial information and that of the firms making up the industry totals.
B)Common-size financial statements display all items as a percentage change from a base year.
C)In identifying areas of specific risk,the auditor is likely to focus on the liquidity activity ratios.
D)In order to look for a misstatement in the allowance for bad debts,the auditor should divide gross sales by sales returns and allowances.

Accepted Answer

Analytical procedures involve comparing financial information with expectations developed from the auditor's understanding of the client and its environment. In identifying areas of specific risk, auditors focus on ratios that can indicate potential problems, such as liquidity ratios (e.g., current ratio, quick ratio) which assess the company's ability to meet its short-term obligations. This focus helps auditors to identify areas where the financial statements may be at risk of material misstatement.

Question 7

The first step in applying materiality is to determine performance materiality.

Accepted Answer

The first step in applying materiality is to determine the overall materiality for the financial statements as a whole, not performance materiality. Performance materiality is determined after setting the overall materiality.

Question 8

Preliminary analytical procedures can help the auditor assess client business risk.

Accepted Answer

Preliminary analytical procedures are used by auditors to understand the client's business and industry, identify potential risk areas, and plan the audit accordingly. By analyzing trends and ratios in financial information, auditors can identify unusual fluctuations or patterns that may indicate increased business risk. Therefore, preliminary analytical procedures can help the auditor assess client business risk.

Question 9

If an auditor establishes a relatively high level for materiality,then the auditor will
A)accumulate more evidence than if a lower level had been set.
B)accumulate less evidence than if a lower level had been set.
C)accumulate approximately the same evidence as would be the case were materiality lower.
D)accumulate an undetermined amount of evidence.

Accepted Answer

If an auditor establishes a relatively high level for materiality, it means that the auditor believes that misstatements smaller than that level will not affect the decision-making process of financial statement users. Therefore, the auditor will accumulate less evidence than if a lower level had been set to detect misstatements smaller than the higher materiality level.

Question 10

Operations are approaches followed by the entity to achieve organizational objectives.

Accepted Answer

The answer of Operations are approaches followed by the entity...

Question 11

When performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year currently under audit.The auditor should
A)investigate the possibility the client may have made an error in their cost of goods sold computation.
B)assist management in developing greater cost efficiencies in their product line.
C)prepare a going concern opinion for the client.
D)advise the client to have extensive disclosure to alleviate investor concerns.

Accepted Answer

A decline in gross profit percentage is a potential red flag for misstatement in cost of goods sold computation. Therefore, the auditor should investigate the possibility of any errors in COGS computation. Assistance with cost efficiencies, going concern opinions, or extensive disclosure may not be appropriate or necessary at this point in the audit process.

Question 12

Which of the following is a reason that the auditors may change the preliminary judgment about materiality?
A)The auditors decide that the preliminary judgment was too large.
B)The auditors decide that the preliminary judgment was too small.
C)Client circumstance may have changed due to qualitative events.
D)all of the above

Accepted Answer

All of the above statements are potential reasons for the auditors to change their preliminary judgment about materiality. The auditors may determine that their initial judgment was either too large or too small based on new information they uncover during their audit. Additionally, qualitative events or changes in client circumstances may impact the auditors' assessment of materiality.

Question 13

When dealing with materiality,
A)if the client refuses to correct a material misstatement,the auditor is required to adjust the financial statements.
B)management is responsible for determining whether financial statements are materially misstated.
C)materiality must be determined as as percentage of sales.
D)the auditor must bring any material misstatements to the client's attention.

Accepted Answer

The auditor is responsible for identifying and bringing any material misstatements to the client's attention, so they can be addressed appropriately.

Question 14

Auditing standards define ________ as the magnitude of misstatements that individually,or when aggregated with other misstatements,could reasonably be expected to influence the economic decisions of users made on the basis of the financial statements.
A)fraud
B)inherent risk
C)materiality
D)significant

Accepted Answer

Materiality is defined as the magnitude of misstatements that could reasonably affect the economic decisions of financial statement users. It is a key concept in auditing and is used to determine the nature, timing, and extent of audit procedures.

Question 15

Materiality does not depend on the decisions of users who rely on the statements to make the decisions.

Accepted Answer

Materiality depends on the significance of an item or error in the context of the financial statements, which is judged based on the needs of users who rely on these statements to make decisions.

Question 16

In order to be meaningful,a company's ratios should be compared to their prior year's ratios,not industry benchmarks.

Accepted Answer

While it is important to compare a company's ratios to their prior year's ratios to track their progress and identify trends, industry benchmarks provide a useful point of comparison to assess the company's performance relative to its competitors and the overall market. It is useful to analyze both types of comparisons to gain a comprehensive understanding of the company's financial health.

Question 17

Auditors perform preliminary analytical procedures to better understand the client's business and to assess client business risk.

Accepted Answer

Auditors commonly perform preliminary analytical procedures to gain a better understanding of the client's business and assess the risk associated with it. These procedures help the auditors to identify any unusual fluctuations or trends in the financial information, which may indicate a potential material misstatement in the financial statements.

Question 18

Which of the following is the primary basis used to decide materiality for a profit-oriented entity?
A)net sales
B)net assets
C)net income before tax
D)all of the above

Accepted Answer

The answer of Which of the following is the primary...

Question 19

Which of the following would not be classified as an analytical procedure?
A)benchmarking the company's profitability ratios against others in the industry
B)preparing common size financial statements
C)calculating income statement account balances as a percent of sales when the level of sales has changed from the prior year
D)reconciling fixed asset dispositions with the fixed asset ledger

Accepted Answer

Reconciling fixed asset dispositions with the fixed asset ledger is a substantive procedure rather than an analytical procedure because it involves directly verifying the accuracy of account balances rather than analyzing relationships or trends in financial data. The other options involve comparing or calculating ratios and percentages, which are typical of analytical procedures.

Question 20

Which is a liquidity activity ratio?
A)profit margin
B)inventory turnover
C)return on assets
D)times interest earned

Accepted Answer

Inventory turnover is a liquidity activity ratio as it measures the number of times a company sells and replaces its inventory within a given period.

Quiz 8: Audit Planning and Analytical Procedures

When using financial ratios,the most important comparisons are to those of previous years for the company and to industry averages or similar companies for the same year.

Which of the following is part of planning?

________ materiality is materiality for segments of the audit.

Why do auditors establish a preliminary judgment about materiality?

Which of the following is a correct statement regarding analytical procedures?

The first step in applying materiality is to determine performance materiality.

Preliminary analytical procedures can help the auditor assess client business risk.

If an auditor establishes a relatively high level for materiality,then the auditor will

Operations are approaches followed by the entity to achieve organizational objectives.

When performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year currently under audit.The auditor should

Which of the following is a reason that the auditors may change the preliminary judgment about materiality?

When dealing with materiality,

Auditing standards define ________ as the magnitude of misstatements that individually,or when aggregated with other misstatements,could reasonably be expected to influence the economic decisions of users made on the basis of the financial statements.

Materiality does not depend on the decisions of users who rely on the statements to make the decisions.

In order to be meaningful,a company's ratios should be compared to their prior year's ratios,not industry benchmarks.

Auditors perform preliminary analytical procedures to better understand the client's business and to assess client business risk.

Which of the following is the primary basis used to decide materiality for a profit-oriented entity?

Which of the following would not be classified as an analytical procedure?

Which is a liquidity activity ratio?