Question 1

Auditors need to consider the risk and take appropriate actions relating to material misstatements of fact contained in the client's MD&A section of the 10-K filed with the SEC.

Accepted Answer

Auditors are required to consider the risk of material misstatements of fact in all financial statements, including the MD&A section, and take appropriate actions to address them. This is in accordance with auditing standards and SEC regulations.

Question 2

If a company's net income varies significantly from year to year,the auditor might consider using an average of the net income from the prior three to five years as the materiality benchmark.

Accepted Answer

This is true as using an average of net income from the prior three to five years can help provide a more stable and consistent benchmark for materiality, rather than relying solely on the current year's net income which may fluctuate significantly.

Question 3

Auditors should consider only quantitative effects and not qualitative effects in making materiality judgments.

Accepted Answer

Auditors should consider both quantitative and qualitative factors in making materiality judgments. Quantitative factors include the amount of the financial statement item, while qualitative factors include the nature of the item, the context in which it occurs, and the potential magnitude of the misstatement. Ignoring qualitative factors could lead to a failure to recognize the impact of certain misstatements that could be material in the context of the financial statements as a whole.

Question 4

If the market value of a company is below book value and a significant amount of goodwill exists,the presumption is that there has been an impairment of goodwill.

Accepted Answer

If the market value of a company is below book value and a significant amount of goodwill exists, it indicates that the assets recorded on the balance sheet may not be worth their recorded value. This could result in an impairment of goodwill, which is recognized when the fair value of the reporting unit (which includes goodwill) is less than its carrying amount. Therefore, the presumption is that there has been an impairment of goodwill.

Question 5

Goodwill arising from many acquisitions can be netted into one test at the company level.

Accepted Answer

The answer of Goodwill arising from many acquisitions can be...

Question 6

A materiality level where the auditor believes that the errors below that level would not,even when aggregated with all other misstatements,be material to the financial statements is called as posting materiality.

Accepted Answer

Posting materiality is a level of materiality where the auditor believes that errors below that level would not be material to the financial statements, even when aggregated with all other misstatements.

Question 7

The accumulation of all potential misstatements in a place where the audit team can assess the materiality of misstatements is often based on posting materiality.

Accepted Answer

The accumulation of potential misstatements in a place where the audit team can assess their materiality is called the audit documentation. The materiality of misstatements is often based on the posting materiality, which is the amount below which misstatements may be considered immaterial. Therefore, the statement is true.

Question 8

Auditors request the client to book all known misstatements even if the recording cost is very high so that there are no carryovers from year to year.

Accepted Answer

The answer of Auditors request the client to book all...

Question 9

The discovery of an intentional misstatement,even if immaterial,could impact the auditor's opinion on the effectiveness of the client's internal controls.

Accepted Answer

Even an immaterial intentional misstatement indicates a weakness in the client's internal control, which could affect the auditor's opinion on the effectiveness of internal controls.

Question 10

The auditor should have performed sufficient work to have confidence in the most likely estimate of misstatements in an account balance and that estimate should be used for making materiality judgments.

Accepted Answer

This statement is true. The auditor needs to perform sufficient audit procedures to have reasonable assurance that the financial statements are free from material misstatement. The auditor should use the most likely estimate of misstatement in making their materiality judgments.

Question 11

Although the SEC guidance is developed for public companies,the concepts regarding materiality are sound and could be followed by private companies and other organizations.

Accepted Answer

The statement is true. While the SEC guidance is developed for public companies, the concepts of materiality are applicable to all organizations, including private companies. Therefore, private companies can also use these concepts as a guideline to determine what information is material and should be disclosed to stakeholders.

Question 12

It is a mandate for all companies listed with the NASDAQ stock exchange to maintain an internal audit function.

Accepted Answer

While it is considered good practice, NASDAQ does not mandate that all listed companies maintain an internal audit function.

Question 13

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

Accepted Answer

The threshold for determining whether differences between the client's account balance and the auditor's expectation should be based on planning materiality. Substantive analytical procedures are performed to evaluate the financial information and to assess the risk of material misstatement. To determine the significance of the differences, the auditor compares the amount of the difference to the planning materiality. If the difference is greater than planning materiality, this suggests that there may be a material misstatement in the financial statements. Therefore, planning materiality is used as a threshold for determining the significance of differences when performing substantive analytical procedures.

Question 14

Goodwill has to be evaluated for impairment once a year and not necessarily at the balance sheet date.However,the date for evaluation has to be consistently applied.

Accepted Answer

Goodwill has to be evaluated for impairment at least once a year and the date for evaluation has to be consistently applied. It does not necessarily have to be evaluated at the balance sheet date.

Question 15

Volume of transactions affected is one of the critical criteria in assessing materiality of internal control deficiencies.

Accepted Answer

The volume of transactions affected is one of the factors that can impact the materiality of internal control deficiencies. The larger the volume of transactions affected, the higher the potential impact on the organization's financial statements and the more significant the deficiency may be.

Question 16

According to the ASC 350 guidance,intangible assets that are not amortized will be tested for impairment at least annually by comparing the fair values of those assets with their recorded amounts.

Accepted Answer

According to ASC 350-30-35-3, "Intangible assets not subject to amortization shall be measured at fair value... at least annually. Until an asset with an indefinite life is ultimately disposed of, it shall be subject to an annual assessment of impairment, or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired." Therefore, intangible assets that are not amortized will be tested for impairment at least annually by comparing their fair values with their recorded amounts.

Question 17

Misstatements detected during the audit that were initially deemed to be immaterial need not be summarized to determine their aggregate effects.

Accepted Answer

Misstatements, regardless of whether they were initially deemed to be immaterial, should be summarized to determine their aggregate effects on the financial statements. This is necessary in order to evaluate whether the financial statements as a whole are materially misstated.

Question 18

Audit Standard No.5 by the PCAOB encourages the external auditor to utilize the work of internal auditors and other objective parties within the organization when performing the assessment of internal control over financial reporting.

Accepted Answer

PCAOB Audit Standard No.5 does indeed encourage external auditors to utilize the work of internal auditors and other objective parties within the organization when performing the assessment of internal control over financial reporting. This is because these parties often have valuable insights and information about the organization's internal controls that can inform the external auditor's work and help them identify potential issues or areas of concern. By leveraging the work of internal auditors and other objective parties, external auditors can conduct a more thorough and effective assessment of internal control over financial reporting, which in turn can help improve financial reporting accuracy and reliability.

Question 19

In order to achieve efficiency,a CPA firm can provide both internal and external audit services for the same client.

Accepted Answer

Providing both internal and external audit services for the same client can lead to conflicts of interest and compromise the independence required for external audits.

Question 20

The auditor need not inform the audit committee about adjustments arising from the audit that were considered to be material.

Accepted Answer

The auditor is required to inform the audit committee about all material adjustments arising from the audit. This is because the audit committee is responsible for overseeing the financial reporting process and ensuring the accuracy and completeness of the financial statements. The auditor's communication with the audit committee regarding material adjustments provides assurance that the financial statements fairly present the financial position and results of operations.

Quiz 18: Advanced Topics Concerning Complex Audit Judgments