Question 1

Which of the following statements is not true about materiality judgments?

Accepted Answer

A)  The auditor's consideration of materiality is influenced by the auditor's perception of the needs of users of financial statements. 
B)  The auditor considers materiality only in relation to classes of transactions, account balances, and disclosures. 
C)  Materiality judgments are used to help the auditor gather sufficient appropriate evidence about whether the financial statements are free of material misstatement. 
D)  Materiality decisions differ from one audit client to another.

Question 2

The discovery of an intentional misstatement, even if immaterial, could impact the auditor's opinion on the effectiveness of which of the following?

Accepted Answer

A)  The client's external controls. 
B)  The client's interim financial statements. 
C)  The client's internal controls over financial reporting. 
D)  The client's segment reports.

Question 3

Which of the following is subject to fair value assessment?

Accepted Answer

A)  Marketable securities. 
B)  Inventory. 
C)  Property that will be sold. 
D)  All of the above could require fair value adjustments.

Question 4

Evaluating the Quality of Client's Internal Audit Function.
An external auditor assesses the quality of the internal audit function to determine whether the internal auditors' work is relevant to the external audit and of sufficient quantity and quality. Describe the three factors of the internal audit function that would be considered by the external auditor in this quality assessment.

Accepted Answer

The answer of Evaluating the Quality of Client's Internal Audit...

Question 5

The significant judgments of "Assets of Held-for-Sale Operations" are subject to impairment testing based on the most likely sale or disposal price.

Accepted Answer

A) True 
 B)False

Question 6

When evaluating identified misstatements, the auditor only needs to consider misstatements in the current year, and not misstatements from the prior year.

Accepted Answer

A) True 
 B)False

Question 7

In the FASB hierarchy of inputs to consider for assessing fair value, which is associated with Level 1?

Accepted Answer

A)  Observable information on similar items. 
B)  Nonexistence of active markets. 
C)  Quoted prices on identical items. 
D)  Relevant economic and industry factors.

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

A) True 
 B)False

Question 9

An audit of the other postemployment benefits does not require estimates with respect to which of the following?

Accepted Answer

A)  Changes in medical expenses. 
B)  Changes in coverage. 
C)  Changes in average life expectancies. 
D)  Changes in Human Resource personnel in charge of postemployment benefits.

Question 10

The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following valuations are generally viewed as the most subjective?

Accepted Answer

A)  Level 0. 
B)  Level 1. 
C)  Level 2. 
D)  Level 3.

Question 11

Purpose of Materiality Judgments and Common Benchmarks.
What are the key perspectives and concerns that auditors should be aware of when making materiality judgments? Explain the purpose of materiality judgments and common benchmarks.

Accepted Answer

The answer of Purpose of Materiality Judgments and Common Benchmarks.
What...

Question 12

While performing goodwill impairment testing, if the original reporting unit no longer exists because operations have been fully integrated into operations of the parent company, the approach would be to determine whether all other assets have been adjusted to fair value, where applicable.

Accepted Answer

A) True 
 B)False

Question 13

In the audit approach for assessing fair value, which should the auditor determine for Level 2 assets?

Accepted Answer

A)  The correspondence of the client's assets to similar assets in an active market. 
B)  Contingent liabilities. 
C)  Sensitivity of model used for marking to model. 
D)  The performance of tests of controls.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

In which of the following cases is it not necessary for an auditor to revise the original materiality level and document the new materiality amount, as well as the rationale for changing the amount?

Accepted Answer

A)  If there is a change in circumstances that involve laws, regulations, or the accounting framework. 
B)  If there is new information resulting from the risk assessment of the client. 
C)  If there are changes in the understanding of the client about a new contractual agreement. 
D)  If the client plans to change depreciation methods for new plant assets procured in the future.

Question 16

Level 1 assets is a broad category of assets and applies to financial instruments, property, or lower of cost or market considerations for inventory, loans, or receivables.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is an approach used to determine posting material?

Accepted Answer

A)  Dual approach. 
B)  Percentage approach. 
C)  Qualitative approach. 
D)  Planning approach.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Critical Criteria in Assessing Identified Internal Control Deficiencies.
What general factors should be considered by an auditor in evaluating whether or not a control deficiency is a material weakness, or a significant deficiency, or a control issue of lesser severity?

Accepted Answer

The answer of Critical Criteria in Assessing Identified Internal Control...

Question 20

The significant judgments related to "deferred income taxes" are subject to estimates of future profitable operations against which the deferred asset might be utilized.

Accepted Answer

A) True 
 B)False

Exam 16: Advanced Topics Concerning Complex Auditing Judgments

Which of the following statements is not true about materiality judgments?

The discovery of an intentional misstatement, even if immaterial, could impact the auditor's opinion on the effectiveness of which of the following?

Which of the following is subject to fair value assessment?

The significant judgments of "Assets of Held-for-Sale Operations" are subject to impairment testing based on the most likely sale or disposal price.

When evaluating identified misstatements, the auditor only needs to consider misstatements in the current year, and not misstatements from the prior year.

In the FASB hierarchy of inputs to consider for assessing fair value, which is associated with Level 1?

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.

An audit of the other postemployment benefits does not require estimates with respect to which of the following?

The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following valuations are generally viewed as the most subjective?

Purpose of Materiality Judgments and Common Benchmarks. What are the key perspectives and concerns that auditors should be aware of when making materiality judgments? Explain the purpose of materiality judgments and common benchmarks.

While performing goodwill impairment testing, if the original reporting unit no longer exists because operations have been fully integrated into operations of the parent company, the approach would be to determine whether all other assets have been adjusted to fair value, where applicable.

In the audit approach for assessing fair value, which should the auditor determine for Level 2 assets?

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

In which of the following cases is it not necessary for an auditor to revise the original materiality level and document the new materiality amount, as well as the rationale for changing the amount?

Level 1 assets is a broad category of assets and applies to financial instruments, property, or lower of cost or market considerations for inventory, loans, or receivables.

Which of the following is an approach used to determine posting material?

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

Critical Criteria in Assessing Identified Internal Control Deficiencies. What general factors should be considered by an auditor in evaluating whether or not a control deficiency is a material weakness, or a significant deficiency, or a control issue of lesser severity?

The significant judgments related to "deferred income taxes" are subject to estimates of future profitable operations against which the deferred asset might be utilized.