Question 1

Materiality is affected by quantitative and ________ factors.

Accepted Answer

A)  audit risk 
B)  absolute 
C)  relevant 
D)  qualitative 
A)  audit risk 
B)  absolute 
C)  relevant 
D)  qualitative

Question 2

Preliminary assessment of materiality is the combined amount of misstatements in the financial
statements that auditors would consider material early in the audit.

Accepted Answer

A) True 
 B)False

Question 3

Regardless of how the allocation of the preliminary judgement about materiality was done, when the audit is complete, the auditor must be confident that the combined errors in all accounts are:

Accepted Answer

A)  less than the preliminary judgement. 
B)  more than the preliminary judgement. 
C)  less than or equal to the preliminary judgement. 
D)  equal to the preliminary judgement. 
A)  less than the preliminary judgement. 
B)  more than the preliminary judgement. 
C)  less than or equal to the preliminary judgement. 
D)  equal to the preliminary judgement.

Question 4

If acceptable audit risk is low, and inherent risk and control risk are both high, then planned detection risk should be high.

Accepted Answer

A) True 
 B)False

Question 5

The audit risk model is:

Accepted Answer

A)  useful when performing the tests of balances, but of little value in either the planning or evaluation stages. 
B)  useful in evaluating results but of limited use in planning. 
C)  useful in planning but of limited use in evaluating results. 
D)  a planning, testing, and evaluation model. 
A)  useful when performing the tests of balances, but of little value in either the planning or evaluation stages. 
B)  useful in evaluating results but of limited use in planning. 
C)  useful in planning but of limited use in evaluating results. 
D)  a planning, testing, and evaluation model.

Question 6

Performance materiality as set by the auditor:

Accepted Answer

A)  does not affect inherent or control risks. 
B)  increases inherent risk only. 
C)  increases control risk only. 
D)  increases inherent risk and control risk. 
A)  does not affect inherent or control risks. 
B)  increases inherent risk only. 
C)  increases control risk only. 
D)  increases inherent risk and control risk.

Question 7

Inherent risk and control risk normally vary for different accounts in the same audit, whereas acceptable audit risk is ordinarily held constant for each account in the same audit.

Accepted Answer

A) True 
 B)False

Question 8

The auditor's preliminary judgement about materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the economic decisions of users.

Accepted Answer

A) True 
 B)False

Question 9

Explain why it is necessary to allocate the preliminary judgement about materiality to individual accounts (segments)in the financial statements.Also explain why allocating to balance sheet accounts is more common than allocating to income statement accounts.

Accepted Answer

Allocating the preliminary judgement abo

Question 10

Which factor listed is NOT a good indicator of potential financial failure?

Accepted Answer

A)  The client is constantly short of cash and working capital. 
B)  The client has had increasing net losses for several years. 
C)  The client's retained earnings were reduced by half as a result of a large dividend payout. 
D)  The client relies heavily on debt financing, especially by financing permanent assets with short-term loans. 
A)  The client is constantly short of cash and working capital. 
B)  The client has had increasing net losses for several years. 
C)  The client's retained earnings were reduced by half as a result of a large dividend payout. 
D)  The client relies heavily on debt financing, especially by financing permanent assets with short-term loans.

Question 11

What is the correct sequence of applying the five steps of materiality?
1) Estimate the combined misstatement.
2) Estimate the total misstatement in the segment.
3) Set the preliminary judgement of materiality.
4) Allocate the preliminary judgement of materiality to segments.
5) Compare the combined estimate with the preliminary judgement about materiality.
The correct sequence from start to finish would be:

Accepted Answer

A)  1 2 5 4 3. 
B)  5 1 3 2 4. 
C)  3 4 2 1 5. 
D)  4 3 1 5 2. 
A)  1 2 5 4 3. 
B)  5 1 3 2 4. 
C)  3 4 2 1 5. 
D)  4 3 1 5 2.

Question 12

Which of the following is NOT a difficulty auditors face when allocating materiality?

Accepted Answer

A)  audit costs 
B)  reliability of audit evidence 
C)  understatements and/or overstatements 
D)  expectations of misstatements in accounts 
A)  audit costs 
B)  reliability of audit evidence 
C)  understatements and/or overstatements 
D)  expectations of misstatements in accounts

Question 13

How does the amount of evidence change when the auditor reduces planned detection risk?

Accepted Answer

A)  It is indeterminate. 
B)  It increases. 
C)  It remains unchanged. 
D)  It decreases. 
A)  It is indeterminate. 
B)  It increases. 
C)  It remains unchanged. 
D)  It decreases.

Question 14

The lower the dollar amount of the preliminary judgement of materiality, the less audit evidence is
required.

Accepted Answer

A) True 
 B)False

Question 15

Which one of the following statements is NOT correct?

Accepted Answer

A)  A misclassification in the balance sheet will have no effect on operating income. 
B)  Either an overstatement of an asset account or an understatement of a liability account would have the same effect on the income statement. 
C)  Either an understatement of an asset account or an overstatement of a liability account would have the same effect on the income statement. 
D)  Either an overstatement of an asset account or an overstatement of a liability account would have the same effect on the income statement. 
A)  A misclassification in the balance sheet will have no effect on operating income. 
B)  Either an overstatement of an asset account or an understatement of a liability account would have the same effect on the income statement. 
C)  Either an understatement of an asset account or an overstatement of a liability account would have the same effect on the income statement. 
D)  Either an overstatement of an asset account or an overstatement of a liability account would have the same effect on the income statement.

Question 16

Which one of the following is an example of the concept of inherent risk?

Accepted Answer

A)  Accounting systems with vouchers have many more controls built in, so the risk that there will be errors on the financial statements is reduced. 
B)  Loans receivable for a finance company are less likely to be collectible than those of a bank. 
C)  Humans make more errors than computers; therefore, a manual accounting system is riskier than a computerised system. 
D)  Audits with larger sample sizes are less risky than those with smaller sample sizes. 
A)  Accounting systems with vouchers have many more controls built in, so the risk that there will be errors on the financial statements is reduced. 
B)  Loans receivable for a finance company are less likely to be collectible than those of a bank. 
C)  Humans make more errors than computers; therefore, a manual accounting system is riskier than a computerised system. 
D)  Audits with larger sample sizes are less risky than those with smaller sample sizes.

Question 17

Direct projection from the sample to the population:

Accepted Answer

A)  ignores sampling error. 
B)  is only necessary when the sample error is material. 
C)  takes into account errors in accounts not audited. 
D)  none of the above 
A)  ignores sampling error. 
B)  is only necessary when the sample error is material. 
C)  takes into account errors in accounts not audited. 
D)  none of the above

Question 18

Audit assurance is the complement of planned detection risk, i.e., one minus planned detection risk.

Accepted Answer

A) True 
 B)False

Question 19

There are several factors that affect an audit firm's engagement risk and therefore the acceptable audit risk.Discuss three of these factors.

Accepted Answer

Engagement risk and acceptable audit ris

Question 20

The amount of evidence required will be lower where:

Accepted Answer

A)  IR and CR are both medium and planned DR is medium. 
B)  IR and CR are both low and DR is low. 
C)  IR and CR are both low and planned DR is high. 
D)  IR and CR are both high and planned DR is low. 
A)  IR and CR are both medium and planned DR is medium. 
B)  IR and CR are both low and DR is low. 
C)  IR and CR are both low and planned DR is high. 
D)  IR and CR are both high and planned DR is low.

Materiality is affected by quantitative and ________ factors.

Preliminary assessment of materiality is the combined amount of misstatements in the financial statements that auditors would consider material early in the audit.

Regardless of how the allocation of the preliminary judgement about materiality was done, when the audit is complete, the auditor must be confident that the combined errors in all accounts are:

If acceptable audit risk is low, and inherent risk and control risk are both high, then planned detection risk should be high.

The audit risk model is:

Performance materiality as set by the auditor:

Inherent risk and control risk normally vary for different accounts in the same audit, whereas acceptable audit risk is ordinarily held constant for each account in the same audit.

The auditor's preliminary judgement about materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the economic decisions of users.

Explain why it is necessary to allocate the preliminary judgement about materiality to individual accounts (segments)in the financial statements.Also explain why allocating to balance sheet accounts is more common than allocating to income statement accounts.

Which factor listed is NOT a good indicator of potential financial failure?

Which of the following is NOT a difficulty auditors face when allocating materiality?

How does the amount of evidence change when the auditor reduces planned detection risk?

The lower the dollar amount of the preliminary judgement of materiality, the less audit evidence is required.

Which one of the following statements is NOT correct?

Which one of the following is an example of the concept of inherent risk?

Direct projection from the sample to the population:

Audit assurance is the complement of planned detection risk, i.e., one minus planned detection risk.

There are several factors that affect an audit firm's engagement risk and therefore the acceptable audit risk.Discuss three of these factors.

The amount of evidence required will be lower where:

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

Materiality is affected by quantitative and ________ factors.

Preliminary assessment of materiality is the combined amount of misstatements in the financial statements that auditors would consider material early in the audit.

Regardless of how the allocation of the preliminary judgement about materiality was done, when the audit is complete, the auditor must be confident that the combined errors in all accounts are:

If acceptable audit risk is low, and inherent risk and control risk are both high, then planned detection risk should be high.

The audit risk model is:

Performance materiality as set by the auditor:

Inherent risk and control risk normally vary for different accounts in the same audit, whereas acceptable audit risk is ordinarily held constant for each account in the same audit.

The auditor's preliminary judgement about materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the economic decisions of users.

Explain why it is necessary to allocate the preliminary judgement about materiality to individual accounts (segments)in the financial statements.Also explain why allocating to balance sheet accounts is more common than allocating to income statement accounts.

Which factor listed is NOT a good indicator of potential financial failure?

Which of the following is NOT a difficulty auditors face when allocating materiality?

How does the amount of evidence change when the auditor reduces planned detection risk?

The lower the dollar amount of the preliminary judgement of materiality, the less audit evidence is required.

Which one of the following statements is NOT correct?

Which one of the following is an example of the concept of inherent risk?

Direct projection from the sample to the population:

Audit assurance is the complement of planned detection risk, i.e., one minus planned detection risk.

There are several factors that affect an audit firm's engagement risk and therefore the acceptable audit risk.Discuss three of these factors.

The amount of evidence required will be lower where:

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