Question 1

One major limitation in the application of the audit risk model is the difficulty of measuring the
components of the model.

Accepted Answer

A) True 
 B)False  True

Question 2

Once the auditor determines the preliminary judgement about materiality for a particular engagement, that amount cannot be changed during the engagement.

Accepted Answer

A) True 
 B)False  False

Question 3

Which statement regarding inherent risk is correct?

Accepted Answer

A)  Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain experience, even when there is inherent risk. 
B)  The inherent risk assigned in the audit risk model is unaffected by the auditor's experience with client's organisation. 
C)  The inherent risk assigned in the audit risk model is dependent upon the strengths in client's internal control system. 
D)  Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows that it was incorrect. 
A)  Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain experience, even when there is inherent risk. 
B)  The inherent risk assigned in the audit risk model is unaffected by the auditor's experience with client's organisation. 
C)  The inherent risk assigned in the audit risk model is dependent upon the strengths in client's internal control system. 
D)  Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows that it was incorrect. A

Question 4

The auditor assesses control risk and inherent risk.On a typical engagement, the auditor would be LEAST likely to assess these for:

Accepted Answer

A)  each audit objective. 
B)  each cycle. 
C)  the overall audit. 
D)  each account. 
A)  each audit objective. 
B)  each cycle. 
C)  the overall audit. 
D)  each account.

Question 5

When setting a preliminary judgement about materiality at the planning stage, auditors may have to subsequently change this preliminary assessment.The new assessment is called:

Accepted Answer

A)  allocated materiality. 
B)  segment materiality. 
C)  revised assessment of materiality. 
D)  planned materiality. 
A)  allocated materiality. 
B)  segment materiality. 
C)  revised assessment of materiality. 
D)  planned materiality.

Question 6

Likely misstatements arise from:

Accepted Answer

A)  the auditor's estimate of misstatements. 
B)  projections of misstatements based on the auditor's tests. 
C)  projections of misstatements based on the auditor's preliminary assessment of materiality. 
D)  differences between management's and the auditor's judgement about estimates of account balances. 
A)  the auditor's estimate of misstatements. 
B)  projections of misstatements based on the auditor's tests. 
C)  projections of misstatements based on the auditor's preliminary assessment of materiality. 
D)  differences between management's and the auditor's judgement about estimates of account balances.

Question 7

Materiality is best described as which type of concept?

Accepted Answer

A)  qualitative 
B)  quantitative 
C)  relative 
D)  relevant 
A)  qualitative 
B)  quantitative 
C)  relative 
D)  relevant

Question 8

Which one of the following statements is true? Misstatements found in the previous year's audit:

Accepted Answer

A)  that occur again in the current year's audit indicate management fraud. 
B)  have little likelihood of occurring again in the current year's audit. 
C)  have a high likelihood of occurring again in the current year's audit. 
D)  that occur again in the current year's audit indicate employee fraud. 
A)  that occur again in the current year's audit indicate management fraud. 
B)  have little likelihood of occurring again in the current year's audit. 
C)  have a high likelihood of occurring again in the current year's audit. 
D)  that occur again in the current year's audit indicate employee fraud.

Question 9

According to ASA 320, at what point should materiality be considered?

Accepted Answer

A)  when determining the nature, timing, and extent of audit procedures 
B)  when evaluating the effect of uncorrected misstatements, if any, on the financial report and in forming the opinion in the auditor's report 
C)  at all stages of audit planning 
D)  both A and B 
A)  when determining the nature, timing, and extent of audit procedures 
B)  when evaluating the effect of uncorrected misstatements, if any, on the financial report and in forming the opinion in the auditor's report 
C)  at all stages of audit planning 
D)  both A and B

Question 10

Control risk and the amount of substantive evidence required are directly related; i.e., as control risk increases, the amount of substantive evidence the auditor plans to accumulate should increase.

Accepted Answer

A) True 
 B)False

Question 11

Benchmarks are needed for evaluating materiality.If you used operating profit before income tax, what minimum percentage would you use for planning materiality?

Accepted Answer

A)  5% 
B)  10% 
C)  1% 
D)  none of the above 
A)  5% 
B)  10% 
C)  1% 
D)  none of the above

Question 12

Discuss each of the five steps in applying materiality in an audit, and identify the audit phase(s)in which each step is performed.

Accepted Answer

.Step 1.Set preliminary judgement of mat

Question 13

If an auditor believes internal controls are completely ineffective to prevent or detect misstatements, the auditor should assess control risk as high, perhaps 100%.

Accepted Answer

A) True 
 B)False

Question 14

Benchmarks are needed for evaluating materiality.If you used current liabilities or current assets, what minimum percentage would you use for planning materiality?

Accepted Answer

A)  5% 
B)  10% 
C)  1% 
D)  none of the above 
A)  5% 
B)  10% 
C)  1% 
D)  none of the above

Question 15

Auditors have difficulty applying the concept of materiality in practice because they often do not know who the users of the financial statements are or what economic decisions will be made.

Accepted Answer

A) True 
 B)False

Question 16

Inherent risk is reduced where the likelihood of misstatement is low.This would be true for accounts receivable if most balances in accounts receivable were:

Accepted Answer

A)  from related parties. 
B)  overdue. 
C)  from overseas customers. 
D)  current. 
A)  from related parties. 
B)  overdue. 
C)  from overseas customers. 
D)  current.

Question 17

Risk and materiality are related; risk is a measure of uncertainty where materiality measures magnitude.

Accepted Answer

A) True 
 B)False

Question 18

Which type of guidelines are suggested by AASB 1031?

Accepted Answer

A)  relative 
B)  relevant 
C)  qualitative 
D)  quantitative 
A)  relative 
B)  relevant 
C)  qualitative 
D)  quantitative

Question 19

The preliminary judgement about materiality is the ________ amount by which the auditor believes the statements could be misstated and still NOT affect the economic decisions of users.

Accepted Answer

A)  median average 
B)  minimum 
C)  maximum 
D)  mean average 
A)  median average 
B)  minimum 
C)  maximum 
D)  mean average

Question 20

Auditors begin their assessments of inherent risk during the planning phase.Which of the following would NOT be a topic of the planning phase that would also help to assess inherent risk?

Accepted Answer

A)  identifying related parties 
B)  touring the client's plant and offices 
C)  obtaining knowledge about the client's business and industry 
D)  obtaining client's agreement on the engagement letter 
A)  identifying related parties 
B)  touring the client's plant and offices 
C)  obtaining knowledge about the client's business and industry 
D)  obtaining client's agreement on the engagement letter

One major limitation in the application of the audit risk model is the difficulty of measuring the components of the model.

Once the auditor determines the preliminary judgement about materiality for a particular engagement, that amount cannot be changed during the engagement.

Which statement regarding inherent risk is correct?

The auditor assesses control risk and inherent risk.On a typical engagement, the auditor would be LEAST likely to assess these for:

When setting a preliminary judgement about materiality at the planning stage, auditors may have to subsequently change this preliminary assessment.The new assessment is called:

Likely misstatements arise from:

Materiality is best described as which type of concept?

Which one of the following statements is true? Misstatements found in the previous year's audit:

According to ASA 320, at what point should materiality be considered?

Control risk and the amount of substantive evidence required are directly related; i.e., as control risk increases, the amount of substantive evidence the auditor plans to accumulate should increase.

Benchmarks are needed for evaluating materiality.If you used operating profit before income tax, what minimum percentage would you use for planning materiality?

Discuss each of the five steps in applying materiality in an audit, and identify the audit phase(s)in which each step is performed.

If an auditor believes internal controls are completely ineffective to prevent or detect misstatements, the auditor should assess control risk as high, perhaps 100%.

Benchmarks are needed for evaluating materiality.If you used current liabilities or current assets, what minimum percentage would you use for planning materiality?

Auditors have difficulty applying the concept of materiality in practice because they often do not know who the users of the financial statements are or what economic decisions will be made.

Inherent risk is reduced where the likelihood of misstatement is low.This would be true for accounts receivable if most balances in accounts receivable were:

Risk and materiality are related; risk is a measure of uncertainty where materiality measures magnitude.

Which type of guidelines are suggested by AASB 1031?

The preliminary judgement about materiality is the ________ amount by which the auditor believes the statements could be misstated and still NOT affect the economic decisions of users.

Auditors begin their assessments of inherent risk during the planning phase.Which of the following would NOT be a topic of the planning phase that would also help to assess inherent risk?

Demand for audit and assurance services

Auditors’ legal environment

Audit quality and ethics

Audit responsibilities and objectives

Audit evidence

Audit planning and documentation

Internal control and control risk

Fraud auditing

The impact of information technology on the audit process

Overall audit plan and audit program

Audit of the sales and collection cycle: Tests of controls and substantive tests of transactions

Completing tests in the sales and collection cycle: Accounts receivable

Audit sampling

Audit of transaction cycles and financial statement balances I

Audit of transaction cycles and financial statement balances II

Completing the audit

Audit reporting

Other auditing and assurance engagements

Filters

Exam7: Materiality and risk

One major limitation in the application of the audit risk model is the difficulty of measuring the components of the model.

Once the auditor determines the preliminary judgement about materiality for a particular engagement, that amount cannot be changed during the engagement.

Which statement regarding inherent risk is correct?

The auditor assesses control risk and inherent risk.On a typical engagement, the auditor would be LEAST likely to assess these for:

When setting a preliminary judgement about materiality at the planning stage, auditors may have to subsequently change this preliminary assessment.The new assessment is called:

Likely misstatements arise from:

Materiality is best described as which type of concept?

Which one of the following statements is true? Misstatements found in the previous year's audit:

According to ASA 320, at what point should materiality be considered?

Control risk and the amount of substantive evidence required are directly related; i.e., as control risk increases, the amount of substantive evidence the auditor plans to accumulate should increase.

Benchmarks are needed for evaluating materiality.If you used operating profit before income tax, what minimum percentage would you use for planning materiality?

Discuss each of the five steps in applying materiality in an audit, and identify the audit phase(s)in which each step is performed.

If an auditor believes internal controls are completely ineffective to prevent or detect misstatements, the auditor should assess control risk as high, perhaps 100%.

Benchmarks are needed for evaluating materiality.If you used current liabilities or current assets, what minimum percentage would you use for planning materiality?

Auditors have difficulty applying the concept of materiality in practice because they often do not know who the users of the financial statements are or what economic decisions will be made.

Inherent risk is reduced where the likelihood of misstatement is low.This would be true for accounts receivable if most balances in accounts receivable were:

Risk and materiality are related; risk is a measure of uncertainty where materiality measures magnitude.

Which type of guidelines are suggested by AASB 1031?

The preliminary judgement about materiality is the ________ amount by which the auditor believes the statements could be misstated and still NOT affect the economic decisions of users.

Auditors begin their assessments of inherent risk during the planning phase.Which of the following would NOT be a topic of the planning phase that would also help to assess inherent risk?

Demand for audit and assurance services

Auditors’ legal environment

Audit quality and ethics

Audit responsibilities and objectives

Audit evidence

Audit planning and documentation

Internal control and control risk

Fraud auditing

The impact of information technology on the audit process

Overall audit plan and audit program

Audit of the sales and collection cycle: Tests of controls and substantive tests of transactions

Completing tests in the sales and collection cycle: Accounts receivable

Audit sampling

Audit of transaction cycles and financial statement balances I

Audit of transaction cycles and financial statement balances II

Completing the audit

Audit reporting

Other auditing and assurance engagements

Filters