Question 1

If the market value of the reporting unit is below book value and a significant amount of goodwill exists, the presumption is that there has been an impairment of goodwill.

Accepted Answer

A) True 
 B)False

Question 2

Because of conservatism considerations, auditors should allow a client to overestimate its reserve for restructuring.

Accepted Answer

A) True 
 B)False

Question 3

The discovery of an intentional misstatement, even if immaterial, could impact the auditor's opinion on the effectiveness of the client's internal control over financial reporting.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following is false regarding the valuation of goodwill?

Accepted Answer

A)  U.S. accounting standards require that goodwill be specifically identified with an operating segment or a reporting unit. 
B)  By definition, acquired parts of the business (or goodwill) must be sufficiently identifiable so that they can be managed as a unit or may be separately identified and sold as a unit. 
C)  Goodwill is tested for impairment quarterly. 
D)  Goodwill is the excess of the purchase price over the fair market value of the acquired company's tangible assets, identifiable intangible assets, and liabilities.

Question 5

When a client has significant and nonrecurring charges to nonoperating expenses, which of the following would be the most appropriate materiality benchmark?

Accepted Answer

A)  Net profit. 
B)  Income from continuing operations. 
C)  Cash inflows. 
D)  Cash outflows.

Question 6

Which of the following statements best describe an issue related to inventory?

Accepted Answer

A)  Impairment testing based on most likely sale or disposal price. 
B)  Subject to allowance for noncollectibility. 
C)  Lower of cost or market impairments, including an allowance for obsolescence. 
D)  Subject to estimates made regarding the expected life of the assets and the appropriateness of the depreciation method.

Question 7

Which of the following statements is false regarding materiality judgments?

Accepted Answer

A)  Materiality judgments are a matter of professional judgment. 
B)  Materiality judgments depend on the needs of a reasonable person (an investor, potential investor, or other stakeholder) relying on the information. 
C)  Materiality judgments involve both quantitative and qualitative considerations. 
D)  Materiality judgments are easy for auditors to make.

Question 8

The iron curtain method for assessing materiality focuses on assuring that the year-end balance sheet is correct and considers the impact of prior-year uncorrected misstatements reversing in later years.

Accepted Answer

A) True 
 B)False

Question 9

The assessment as to whether a misstatement in a cash-flow classification is material should be primarily based on an income statement perspective.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is required by the dual approach for assessing uncorrected misstatements?

Accepted Answer

A)  The application of the rollover method. 
B)  The application of the iron curtain method. 
C)  Simultaneous application of both the rollover and iron curtain methods. 
D)  Sequential application of both the rollover and iron curtain methods.

Question 11

The auditor should have a sound basis, supported by objective evidence, regarding accounting estimates and should not fall victim to an "all estimates are subjective" argument in order to waive which of the following?

Accepted Answer

A)  Contingent liability. 
B)  Material misstatements. 
C)  Unrecorded liability. 
D)  Material adjustments.

Question 12

Performance materiality helps the auditor to determine which of the following?

Accepted Answer

A)  Extent of audit evidence needed. 
B)  The specific analytical procedures to perform. 
C)  The specific substantive procedures to perform. 
D)  Control risk assessment.

Question 13

Misstatements detected during the audit that were initially deemed to be immaterial need not be summarized to determine their aggregate effects.

Accepted Answer

A) True 
 B)False

Question 14

An audit of Level 1 assets is likely to be less challenging than an audit of Level 3 assets.

Accepted Answer

A) True 
 B)False

Question 15

In assessing the fair value of Level 1 assets, the auditor can perform an analysis of the volume of trading activity as part of obtaining audit evidence.

Accepted Answer

A) True 
 B)False

Question 16

The significant judgments related to debt depend on specific accounting rules (U.S. or international) that the company is following.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is not a factor adding to the complexity of materiality judgments made by auditors?

Accepted Answer

A)  Regulators pay particular attention to the judgmental aspects of auditor materiality decisions. 
B)  SEC regulators do not believe it is appropriate to use percentage terms to substitute for a full analysis of all relevant considerations regarding the magnitude of misstatement. 
C)  Regulators focus on how materiality decisions can affect client financial results. 
D)  SEC regulators have few requirements for auditors to comply with since the AICPA fills that role.

Question 18

Impairment is measured by the difference between market value of the operating segment and which of the following?

Accepted Answer

A)  Carrying value of net assets. 
B)  Fair market value of net assets. 
C)  Book value of total assets. 
D)  Book value of current assets.

Question 19

Auditors are not responsible for making judgments regarding the fair value of securities.

Accepted Answer

A) True 
 B)False

Question 20

Almost every asset and liability account requires significant judgments. Which of the following judgments is subject to allowance for noncollectibility?

Accepted Answer

A)  Inventories. 
B)  Marketable securities. 
C)  Other receivables. 
D)  Deferred revenue.

Exam 16: Advanced Topics Concerning Complex Auditing Judgments

If the market value of the reporting unit is below book value and a significant amount of goodwill exists, the presumption is that there has been an impairment of goodwill.

Because of conservatism considerations, auditors should allow a client to overestimate its reserve for restructuring.

The discovery of an intentional misstatement, even if immaterial, could impact the auditor's opinion on the effectiveness of the client's internal control over financial reporting.

Which of the following is false regarding the valuation of goodwill?

When a client has significant and nonrecurring charges to nonoperating expenses, which of the following would be the most appropriate materiality benchmark?

Which of the following statements best describe an issue related to inventory?

Which of the following statements is false regarding materiality judgments?

The iron curtain method for assessing materiality focuses on assuring that the year-end balance sheet is correct and considers the impact of prior-year uncorrected misstatements reversing in later years.

The assessment as to whether a misstatement in a cash-flow classification is material should be primarily based on an income statement perspective.

Which of the following is required by the dual approach for assessing uncorrected misstatements?

The auditor should have a sound basis, supported by objective evidence, regarding accounting estimates and should not fall victim to an "all estimates are subjective" argument in order to waive which of the following?

Performance materiality helps the auditor to determine which of the following?

Misstatements detected during the audit that were initially deemed to be immaterial need not be summarized to determine their aggregate effects.

An audit of Level 1 assets is likely to be less challenging than an audit of Level 3 assets.

In assessing the fair value of Level 1 assets, the auditor can perform an analysis of the volume of trading activity as part of obtaining audit evidence.

The significant judgments related to debt depend on specific accounting rules (U.S. or international) that the company is following.

Which of the following is not a factor adding to the complexity of materiality judgments made by auditors?

Impairment is measured by the difference between market value of the operating segment and which of the following?

Auditors are not responsible for making judgments regarding the fair value of securities.

Almost every asset and liability account requires significant judgments. Which of the following judgments is subject to allowance for noncollectibility?