Question 1

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

Accepted Answer

A) True 
 B)False  False

Question 2

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

Accepted Answer

Level 1 ─
Financial statement level because the auditor expresses an opinion on the
financial statements taken as a whole.
Level 2 ─
Account balance level because the auditor verifies individual account balances in reaching an overall conclusion on the fairness of the financial statements.

Question 3

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

Accepted Answer

A) True 
 B)False  False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

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

Question 6

Materiality judgments involve both quantitative and qualitative considerations.

Accepted Answer

A) True 
 B)False

Question 7

Return on Equity = Assets Turnover x Profit Margin.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

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

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

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 11

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.

Accepted Answer

A) True 
 B)False

Question 12

Quantitative guidelines for setting materiality levels are currently provided by:

Accepted Answer

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

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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:

Accepted Answer

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 16

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:

Accepted Answer

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 17

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

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

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 19

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:

Accepted Answer

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 20

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:

Accepted Answer

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.

Exam 8: Materiality Decisions and Performing Analytical Procedures

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

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

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

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

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

Materiality judgments involve both quantitative and qualitative considerations.

Return on Equity = Assets Turnover x Profit Margin.

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

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

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

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.

Quantitative guidelines for setting materiality levels are currently provided by:

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

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

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:

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:

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

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

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:

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: