Question 1

An auditor's analysis of specific accounts receivable and recent trends in bad debt losses as a percent of sales may cause the auditor to conclude that the allowance for doubtful accounts should be between $130,000 and $160,000. If management's recorded estimate falls within that range, the auditor ordinarily would conclude that the recorded amount is reasonable, and no difference would be aggregated. If management's recorded estimate is $110,000, how much would be aggregated as a misstatement?
A) $0.
B) $30,000.
C) $20,000.
D) $110,000.

Accepted Answer

If the auditor concludes that the allowance for doubtful accounts should be between $130,000 and $160,000, and management's recorded estimate is $110,000, there is a misstatement of at least $20,000 ($130,000 - $110,000) but no more than $50,000 ($160,000 - $110,000). Therefore, the correct answer is C.

Question 2

A(n) ________ is an existing condition, or situation, involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.
A) going concern
B) estimate
C) management bias
D) contingency

Accepted Answer

A contingency is an existing condition that involves uncertainty about the potential gain or loss for a company, which will only be resolved based on one or more future events. Examples of contingencies could include pending lawsuits, natural disasters, or the outcome of negotiations with suppliers or customers. Contingencies are typically disclosed in a company's financial statements as a footnote or in the Management Discussion and Analysis (MD&A) section.

Question 3

Which of the following statements regarding the risk-based reasoning (RBR) matrix is FALSE?
A) The RBR matrix is an attempt to summarize all the possibilities of accounting uncertainties that an auditor may encounter and classify them by reporting types.
B) The RBR matrix focuses on AudR levels.
C) Under the RBR system of risk-based reasoning for accounting estimates, there are three possible ranges or regions of probabilities of payoffs to consider.
D) The main use of the RBR matrix is to provide a convenient decision aid for any reporting situation involving future events.

Accepted Answer

The RBR matrix does not focus on AudR levels; rather, it provides a framework for assessing the risk associated with accounting uncertainties and making decisions based on those assessments. The other statements are true: the RBR matrix attempts to summarize all possibilities of accounting uncertainties and classify them by reporting type, there are three regions of probabilities to consider, and the matrix is a decision aid for reporting situations involving future events.

Question 4

Generally accepted accounting principles are based on the going-concern concept. Thus, an opinion that financial statements are in conformity with GAAP means that continued existence may be presumed for a "reasonable time", which is considered to be ________.
A) at least one year beyond the date of the financial statements
B) at least six months beyond the date of the financial statements
C) at least two years beyond the date of the financial statements
D) at least five years beyond the date of the financial statements

Accepted Answer

According to GAAP, financial statements are prepared assuming the going-concern concept, which means that the entity will continue its operations for the foreseeable future. A reasonable time frame for this assumption is at least one year beyond the date of the financial statements. Therefore, choice A is the best answer.

Question 5

Which of the following statements regarding calibration is FALSE?
A) A calibrated person is one who, when asked a large number of questions, will get about as many correct as he or she expected.
B) An uncalibrated person who is systematically overconfident may be 90% confident of his or her correctness over a large number of questions, where in the end that person will only get 60% or 70% of them correct.
C) Calibration is achieved through the use of heuristics, which improves the quality of experts' estimates.
D) If the environment is predictable and an expert has learned through calibration training to identify the situations where intuition misleads him or her, then the feedback will have corrected the expert's intuitions.

Accepted Answer

Calibration is not achieved through the use of heuristics, rather it is the process of adjusting or correcting measurements based on a known standard. Heuristics may improve the quality of an expert's estimation but that is not directly related to calibration.

Question 6

The actual monetary amount which results from resolution of the underlying transaction(s), event(s), or condition(s) addressed by the accounting estimate is known as ________.
A) estimation uncertainty
B) outcome of an accounting estimate
C) management bias
D) management's point estimate

Accepted Answer

The outcome of an accounting estimate is the actual monetary amount that results from the resolution of the underlying transaction(s), event(s), or condition(s) addressed by the accounting estimate. Estimation uncertainty refers to the range of possible outcomes or the level of confidence in the estimate. Management bias refers to intentional or unintentional deviations from objective data, and management's point estimate is their best guess of the outcome.

Question 7

The tendency to value what we have because it is ours, regardless of its intrinsic value, is known as the ________.
A) endowment effect
B) availability heuristic
C) representative heuristic
D) halo effect

Accepted Answer

The endowment effect refers to the tendency to place greater value on things we own simply because we own them, regardless of their objective worth. The other options are not applicable to this concept.

Question 8

The prediction that people estimate frequency or probability by the ease with which instances or occurrences of the event can be brought to mind is known as the ________.
A) heuristic bias
B) availability heuristic
C) representative heuristic
D) halo effect

Accepted Answer

The description matches the definition of the availability heuristic, which is a cognitive shortcut wherein people estimate the frequency or probability of an event based on how easily examples come to mind.

Question 9

Which of the following statements regarding the going concern concept is FALSE?
A) Generally accepted accounting principles are based on the going-concern concept.
B) Dealing with questions of going concern is difficult because auditors are forced to evaluate matters of financial analysis, business strategy, and financial forecasting.
C) Management is responsible for determining whether there is a significant doubt about a company's ability to continue as a going concern.
D) Financial difficulties, labour problems, loss of key personnel, litigation, and other such things may be important signals.

Accepted Answer

Management is responsible for assessing the company's ability to continue as a going concern, but auditors also evaluate this assessment. The statement implies that only management is responsible, which is misleading.

Question 10

An approximation of a monetary amount in the absence of a precise means of measurement is known as ________.
A) estimation uncertainty
B) an accounting estimate
C) management bias
D) management's point estimate

Accepted Answer

An accounting estimate is an approximation of a monetary amount when a precise means of measurement is unavailable. Estimation uncertainty and management bias refer to factors that can affect the accuracy of an accounting estimate, while management's point estimate is a specific value assigned by management based on their judgment and analysis.

Question 11

From Cockburn's perspective, which of the following statements is FALSE?
A) Reasonable ranges were getting too narrow.
B) Reasonable ranges were getting too wide.
C) Reasonable ranges are crucial for deciding if there is a misstatement in accounting estimates.
D) Auditors must consider the riskiness of the accounting estimates.

Accepted Answer

The answer of From Cockburn's perspective, which of the following...

Question 12

Which of the following statements regarding audit risk (AudR) and accounting risk (AccR) is FALSE?
A) AccR is largely geared to reflect business risks of the auditee.
B) AccR is the material difference between an estimate involving future events and its outcome.
C) AudR is something that is relevant to the auditee but not to the auditor.
D) The auditor has to consider both AudR and AccR and somehow combine them using professional judgment.

Accepted Answer

AudR is a concept that is central to the auditor's work as it measures the risk that the auditor will not detect a material misstatement in the financial statements. The auditor has to consider both AccR and AudR and combine them using professional judgment. AccR, on the other hand, is largely geared to reflect business risks of the auditee and is the material difference between an estimate involving future events and its outcome. Therefore, option C that states AudR is something that is relevant to the auditee but not to the auditor is false.

Question 13

Accounting estimate nirvana is ________.
A) the width of the reasonable range is greater than the material misstatement but not greater than two times the material misstatement, which means an estimate with no significant risk can be found within the reasonable range
B) the width of the reasonable range is less than or equal to the material misstatement, which means that there is no significant risk for any estimates within the reasonable range
C) the width of reasonable range is greater than or equal to the material misstatement, which means that there is no significant risk for any estimates within the reasonable range
D) the width of reasonable range is less than the material misstatement but not greater than two times the material misstatement, which means an estimate with no significant risk can be found within the reasonable range

Accepted Answer

Accounting estimate nirvana is achieved when the width of the reasonable range is less than or equal to the material misstatement, meaning that there is no significant risk for any estimates within the reasonable range. This indicates that the estimate is highly accurate and reliable.

Question 14

Misstatements are defined as the difference between ________ and the nearest point of the reasonable range.
A) management's point estimate
B) the auditor's point estimate
C) estimation uncertainty
D) the outcome of an accounting estimate

Accepted Answer

Misstatements are defined as the difference between management's point estimate and the nearest point of the reasonable range. This is because management is responsible for making the initial estimate and the auditor's job is to determine whether that estimate falls within a reasonable range or not.

Question 15

Quantified uncertainty is referred to as ________.
A) Audit risk (AudR)
B) estimation
C) probability
D) Accounting risk (AccR)

Accepted Answer

Quantified uncertainty is often expressed as probabilities, which represent the likelihood or chance of a particular outcome occurring. Choice A (Audit risk) and choice D (Accounting risk) are specific types of risks in auditing and accounting, respectively, and do not directly relate to quantified uncertainty. Estimation (choice B) is a process for making educated guesses or predictions based on available information, but it does not capture the concept of uncertainty itself. Therefore, choice C (probability) is the best answer.

Question 16

It is "reasonable" to assume the going-concern assumption for financial reporting when the degree of doubt is no higher than ________.
A) 50%
B) 80%
C) 20%
D) 10%

Accepted Answer

According to generally accepted accounting principles (GAAP), the going-concern assumption should be used in financial reporting unless there is "substantial doubt" about the entity's ability to continue operating for at least one year after the date the financial statements are issued. The degree of doubt must be no higher than 20% for the going-concern assumption to be considered reasonable. Answer choices A, B, and D are all percentage levels above the 20% threshold.

Question 17

Under the RBR system of risk-based reasoning for accounting estimates, in the ________ region, the probability of payoff is 1.00 to (one minus acceptable AccR).
A) ignore
B) record
C) heuristic
D) disclose

Accepted Answer

Under RBR system, the risk of not recording an estimate is based on the Acceptable Accounting Range (AccR). In the region where the probability of payoff is 1.00 to (one minus acceptable AccR), recording the estimate is the best choice. This ensures that the estimate is recognized in the financial statements, and the risk associated with not recording the estimate is low. Therefore, the correct choice is to record the estimate (Option B).

Question 18

According to Cockburn, which of the following statements relating to auditors' reasonable ranges is FALSE?
A) The key issue is factors to consider in determining the width of the range.
B) The auditor must accept the reality of the uncertainty that may be associated with the range.
C) Specialists such as engineers, actuaries, and economists may need to be consulted.
D) The range estimate must be made at the year-end date.

Accepted Answer

Cockburn does not mention that the range estimate must be made at the year-end date. The timing of the estimate will depend on the circumstances of each case.

Question 19

CIFiR's (SEC established Advisory Committee on Improvements to Financial Reporting) progress report proposes a framework for accounting judgments consisting of which two components?
A) A critical and good-faith thought process and documentation.
B) Calibration and estimation.
C) Professional accounting judgment and professional auditing judgment.
D) Heuristics and accounting risk.

Accepted Answer

The progress report proposes a framework for accounting judgments consisting of a critical and good-faith thought process and documentation. This framework emphasizes the importance of documenting the reasoning behind accounting judgments and ensuring that they are made in a thoughtful and deliberate manner. The other options listed are not specifically mentioned as components of the proposed framework.

Question 20

The tendency to exaggerate the inevitability of causal sequences is known as the ________.
A) heuristic bias
B) availability heuristic
C) representative heuristic
D) hindsight bias

Accepted Answer

The tendency to exaggerate the inevitability of causal sequences is known as the hindsight bias, which involves the belief, after an event has occurred, that the outcome was predictable or inevitable, even though it may not have been. The other options are different types of heuristics, which refer to mental shortcuts or rules of thumb that people use to make judgments and decisions.

Quiz 19: Part I the Audit of Accounting Estimates: Basic Material Relating to Accountingestimates

A(n) ________ is an existing condition, or situation, involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.

Which of the following statements regarding the risk-based reasoning (RBR) matrix is FALSE?

Generally accepted accounting principles are based on the going-concern concept. Thus, an opinion that financial statements are in conformity with GAAP means that continued existence may be presumed for a "reasonable time", which is considered to be ________.

Which of the following statements regarding calibration is FALSE?

The actual monetary amount which results from resolution of the underlying transaction(s) , event(s) , or condition(s) addressed by the accounting estimate is known as ________.

The tendency to value what we have because it is ours, regardless of its intrinsic value, is known as the ________.

The prediction that people estimate frequency or probability by the ease with which instances or occurrences of the event can be brought to mind is known as the ________.

Which of the following statements regarding the going concern concept is FALSE?

An approximation of a monetary amount in the absence of a precise means of measurement is known as ________.

From Cockburn's perspective, which of the following statements is FALSE?

Which of the following statements regarding audit risk (AudR) and accounting risk (AccR) is FALSE?

Accounting estimate nirvana is ________.

Misstatements are defined as the difference between ________ and the nearest point of the reasonable range.

Quantified uncertainty is referred to as ________.

It is "reasonable" to assume the going-concern assumption for financial reporting when the degree of doubt is no higher than ________.

Under the RBR system of risk-based reasoning for accounting estimates, in the ________ region, the probability of payoff is 1.00 to (one minus acceptable AccR) .

According to Cockburn, which of the following statements relating to auditors' reasonable ranges is FALSE?

CIFiR's (SEC established Advisory Committee on Improvements to Financial Reporting) progress report proposes a framework for accounting judgments consisting of which two components?

The tendency to exaggerate the inevitability of causal sequences is known as the ________.