Deck 8: Materiality Decisions and Performing Analytical Procedures

Question 1

As more materiality is allocated to an account, the amount of audit work on that account increases.

Answer 1

False

Question 2

Relationships among data may be expected to continue in the absence of known conditions to the contrary.

Answer 2

True

Question 3

Materiality judgments involve both quantitative and qualitative considerations.

Answer 3

True

Question 4

Analytical procedures often provide the auditor with clues about whether an account is more likely to be overstated or understated.

Question 5

Industry-wide data is relevant to the development of analytical procedures for a specific client.

Question 6

Analytical procedures are defined as "evaluations of financial information made by a study of plausible relationships among financial data components."

Question 7

The allocation of the preliminary estimate of materiality may not be revised once the fieldwork is begun.

Question 8

In practice, the allocation of materiality is normally done without heavy reliance on the subjective judgment of the auditor.

Question 9

Materiality should be allocated to the various accounts in proportion to their recorded balances.

Question 10

The FASB definition of materiality is stated in explicit quantitative terms.

Question 11

Many auditors make the allocation of materiality on the basis of the balance sheet account balances alone.

Question 12

Material misstatement is not possible for individual accounts with balances below the auditor's preliminary judgment about materiality.

Question 13

In developing analytical procedures, the reliability of budget data is independent of the assumptions used in their preparation or the care used in compiling the budgeted amounts.

Question 14

Inquiries of management are usually sufficient to resolve significant differences between results and expectations that are the result of analytical procedures.

Question 15

The primary reason for performing analytic procedures in audit planning is to identify accounts that may contain misstatements and to design an audit that will respond to the risk of material misstatement.

Question 16

In audit planning, the auditor should recognize that there may be several levels of materiality.

Question 17

Preliminary judgments about materiality are set for planning purposes and may be changed as the audit progresses.

Question 18

Analytical models that compare financial data with underlying nonfinancial data are usually less effective than analytical models that compare current year's financial data with last year's financial data.

Question 19

The auditor's preliminary judgment about materiality cannot be made before the financial statement date, when annual amounts become known.

Question 20

In order to remain unbiased, it is important for the auditor not to develop preliminary expectations before performing calculations on client data.

Question 21

"Tolerable misstatement" is the termed used to indicate materiality at the:

A) balance sheet level.
B) account balance level.
C) income statement level.
D) company-wide level.
E) transactions level.

Question 22

When setting the level of materiality on a particular engagement, the auditor is required to consider:

A) the unique circumstances pertaining to the entity.
B) the information needs of the users.
C) neither the unique circumstances pertaining to the entity nor the information needs of the users.
D) the information needs of the client.
E) both the unique circumstances pertaining to the entity and the information needs of the users.

Question 23

Materiality underlies the application of generally accepted auditing standards, particularly the:

A) general and field work standards.
B) general and reporting standards.
C) field work and reporting standards.
D) reporting standards.
E) general standards.

Question 24

In a normal audit, the relationship between the level of materiality used to plan the engagement and the level of materiality used to evaluate evidence is:

A) they must be identical.
B) the former may be either higher or lower than the latter.
C) the former is normally higher than the latter.
D) the former is normally lower than the latter.
E) they can never be the same.

Question 25

In making judgments about materiality at the account balance level, the auditor must consider the relationship between it and financial statement materiality. This should lead the auditor to plan the audit to detect misstatements that:

A) are individually material to the statements taken as a whole.
B) are individually immaterial to the statements taken as a whole.
C) may be immaterial individually, but may aggregate with misstatements in other accounts to a material level.
D) bring the cumulative total of known misstatements to the level of materiality established by management.
E) are individually material to the account balance.

Question 26

In making a preliminary judgments about materiality, the auditor initially determines the aggregate (overall) level of materiality for each statement. For planning purposes, the auditor should use the:

A) levels separately.
B) level he or she judges to be the more reliable.
C) average of these levels.
D) largest aggregate level.
E) smallest aggregate level.

Question 27

In planning the audit, the auditor should assess materiality at two levels:

A) the preliminary level and the final level.
B) the company level and the divisional level.
C) the account balance level and the detailed item level.
D) the financial statement level and the account balance level.
E) the account balance level and the transaction level.

Question 28

Return on Equity = Assets Turnover x Profit Margin.

Question 29

The auditor must be prepared to rigidly maintain his or her preliminary decisions about materiality as the audit progresses.

Question 30

Professional standards recognize that a misstatement that is quantitatively immaterial may be qualitatively material. In regard to these items, professional standards require the auditor to:

A) plan the audit to search for them.
B) design explicit procedures to detect them.
C) be on the alert for them.
D) report them to the audit committee.
E) report them directly to client management.

Question 31

The auditor will allocate more materiality to accounts with a(n):

A) high chance of misstatements and that are difficult to audit.
B) high chance of misstatements but that are easy to audit.
C) low chance of misstatements but that are difficult to audit.
D) low chance of misstatements and that are easy to audit.
E) average chance of misstatements and that are easy to audit.

Question 32

Inventory Turnover (in days) = Inventory / Cost of Goods Sold x 365

Question 33

Materiality at the account balance level is stated in planning an audit because:

A) some users make decisions based upon individual account balances.
B) the auditor verifies account balances in reaching an overall conclusion on the fairness of the financial statements.
C) the opinion on the fairness of the financial statements extends to the individual account balances.
D) official pronouncements have specified different levels of materiality for various financial statement items.
E) the opinion on the fairness of the financial statements extends to the individual transactions.

Question 34

Which of the following is not a weakness of analytical procedures?

A) Fraudulent financial reporting often reports numbers that appear to be reasonable.
B) The auditor may have no basis for presuming that the data used is accurate.
C) Analytical procedures are usually very cost effective.
D) Improper specification of relationships between the variables used may undermine their effectiveness.
E) Any audit procedure runs some risk of failing to detect material misstatements.

Question 35

Free Cash Flow = Cash Flow from Operations - Capital Expenditures.

Question 36

The auditor makes preliminary judgments about materiality levels in planning the audit. This materiality assessment is referred to as:

A) planning materiality.
B) preliminary materiality.
C) initial materiality.
D) beginning materiality.
E) benchmark materiality.

Question 37

The six steps involved in performing analytical procedures does not include:

A) developing an expectation range.
B) analyzing data and identify significant differences.
C) performing the calculations using industry data.
D) Investigating significant unexpected differences.
E) identifying calculations and comparisons to be made.

Question 38

Gross Operating Cycle = AR Turnover x Inventory Turnover.

Question 39

Quantitative guidelines for setting materiality levels are currently provided by:

A) neither GAAP nor GAAS.
B) GAAP.
C) GAAS.
D) both GAAP and GAAS.
E) the AICPA.

Question 40

In allocating financial statement materiality to the various accounts, the auditor should consider:

A) the likelihood of misstatements in the account.
B) the probable cost of verifying the account.
C) neither the likelihood of misstatements in the account nor the probable cost of verifying the account.
D) both the likelihood of misstatements in the account and the probable cost of verifying the account.
E) the likelihood of misstatements in a transaction.

Question 41

Identify the two levels of materiality that are important in audit planning and indicate the reason for each level.

Question 42

Which key financial ratio is defined as the estimate of the number of days from the time a company purchases inventory, sells it, and collects the receivable?

A) Inventory turnover.
B) Accounts receivable turnover.
C) Gross operating cycle.
D) Net operating cycle.
E) Accounts payable turnover.

Question 43

All else being equal, as the level of materiality decreases, the amount of evidence required will:

A) remain the same.
B) increase.
C) decrease.
D) change in an unpredictable fashion.
E) fluctuate randomly.

Question 44

Which of the key financial ratios below measures the impact of financing decisions on earnings?

A) Common earnings leverage.
B) Profit margin.
C) Capital structure leverage.
D) Return on common equity.
E) Free cash flow.

Question 45

Numerous factors influence the effectiveness of analytical procedures. Which of the following factors would tend to make analytical procedures less effective?

A) Relationships that are dynamic.
B) Precise models.
C) Reliable systems of internal controls.
D) A variety of sources.
E) Assertion specific procedures.

Question 46

In general, as an account balance decreases, the amount of evidence required will:

A) remain the same.
B) increase.
C) decrease.
D) change in an unpredictable fashion.
E) fluctuate randomly.

Question 47

Which of the following rations is not considered to be a key measure of profitability?.

A) Asset turnover.
B) Inventory turnover.
C) Return on assets.
D) Capital structure leverage.
E) Return on equity.