Question 1

Quantified uncertainty is referred to as ________.

Accepted Answer

A)  Audit risk (AudR) 
B)  estimation
C)  probability
D)  Accounting risk (AccR)  C

Question 2

List the various factors that need to be considered regarding the nature and scope of an issue prior to the exercise of professional judgment.

Accepted Answer

Professional judgment should be based on a critical and reasoned evaluation made in good faith,prior to the exercise of the judgment,of an identified issue,including the nature and scope of the issue based on the following:
1.An analysis of the transaction,including the substance and business purpose of the transaction.
2.The material facts reasonably available at the time that the financial statements are issued.
3.A thorough review and analysis of relevant literature,including the relevant underlying principles.
4.Alternative views or estimates,including pros and cons for reasonable alternatives.
5.The rationale for the choice selected,including reasons for the alternative or estimate selected and linkage of the rationale to investors' information needs and the judgments of competent external parties.
6.Linkage of the alternative or estimate selected to the substance and business purpose of the transaction or issue being evaluated.
7.Known diversity in practice regarding the alternatives or estimates.
8.The consistency of application of alternatives or estimates to similar transactions.
9.The appropriateness and reliability of the assumptions and data used.

Question 3

An approximation of a monetary amount in the absence of a precise means of measurement is known as ________.

Accepted Answer

A)  estimation uncertainty
B)  an accounting estimate
C)  management bias
D)  management's point estimate B

Question 4

An auditor's analysis of specific accounts receivable and recent trends in bad debt losses as a percent of sales may cause the auditor to conclude that the allowance for doubtful accounts should be between $130,000 and $160,000.If management's recorded estimate falls within that range,the auditor ordinarily would conclude that the recorded amount is reasonable,and no difference would be aggregated.If management's recorded estimate is $110,000,how much would be aggregated as a misstatement?

Accepted Answer

A)  $0.
B)  $30,000.
C)  $20,000.
D)  $110,000.

Question 5

From Cockburn's perspective,which of the following statements is FALSE?

Accepted Answer

A)  Reasonable ranges were getting too narrow.
B)  Reasonable ranges were getting too wide.
C)  Reasonable ranges are crucial for deciding if there is a misstatement in accounting estimates.
D)  Auditors must consider the riskiness of the accounting estimates.

Question 6

Greater volatility in the business environment raises the amount of measurement uncertainty associated with predicting future-event amounts.Such greater uncertainty leads to an increase in which type of risk?

Accepted Answer

A)  Accounting risk.
B)  Detection Risk.
C)  Business Risk.
D)  Control Risk.

Question 7

Auditors are susceptible to judgmental biases because of the use of shortcuts or heuristics in the reasoning process.

Accepted Answer

A) True 
 B)False

Question 8

The tendency for auditors to blindly follow the prior year's audit file when conducting the current year's audit is an example of which type of judgment bias?

Accepted Answer

A)  Representative heuristic.
B)  Availability.
C)  Confirmation.
D)  Anchoring.

Question 9

The prediction that people estimate frequency or probability by the ease with which instances or occurrences of the event can be brought to mind is known as the ________.

Accepted Answer

A)  heuristic bias
B)  availability heuristic
C)  representative heuristic
D)  halo effect

Question 10

Provide an example to illustrate what is meant by a reasonable estimate and what a misstatement is relative to an estimate according to AuG-41.

Accepted Answer

The answer of Provide an example to illustrate what is...

Question 11

What are the key concepts and related definitions relating to CAS 540.07?

Accepted Answer

The answer of What are the key concepts and related...

Question 12

According to Savage and Van Allen,what is the problem with using the average or expected value of a distribution as a point estimate for a distribution of values?

Accepted Answer

A)  It is too costly to develop such estimates.
B)  When sufficient estimation uncertainty exists,use of such estimates can lead to misleading results.
C)  It adds too much complexity to the audit process
D)  It eliminates the auditor's need to exercise professional judgement.

Question 13

Under the risk-based reasoning (RBR)system of risk-based reasoning for accounting estimates,in the ignore region,the probability of payoff is 1.00 to (one minus acceptable AccR).

Accepted Answer

A) True 
 B)False

Question 14

The nature of any adjustment depends on how wide the range is,as was first noted by Cockburn.Whether the reasonable range (RR)is sufficiently narrow is determined by the level of acceptable accounting risk (AccR).What are the generic rules of thumb for high-assurance engagements involving reasonable ranges that capture high probabilities of future outcomes?

Accepted Answer

The answer of The nature of any adjustment depends on...

Question 15

There are huge pressures on the auditor from management regarding recording of estimates because such estimates are essentially subjective in nature,and the major source of disagreement is likely the assumptions made about future-event outcomes.

Accepted Answer

A) True 
 B)False

Question 16

Generally accepted accounting principles are based on the going-concern concept.Thus,an opinion that financial statements are in conformity with GAAP means that continued existence may be presumed for a "reasonable time",which is considered to be ________.

Accepted Answer

A)  at least one year beyond the date of the financial statements
B)  at least six months beyond the date of the financial statements
C)  at least two years beyond the date of the financial statements
D)  at least five years beyond the date of the financial statements

Question 17

When misstatements due to incorrect accounting estimates are factored in,the true probability of material misstatement is simply the product of Audit Risk and Information Risk

Accepted Answer

A) True 
 B)False

Question 18

CAS 540 refers to management's judgments that the auditor considers unreasonable as _________ misstatements.

Accepted Answer

A)  likely aggregate
B)  factual
C)  projected
D)  judgmental

Question 19

Accounting risk (AccR)is largely geared to reflect business risks of the auditee.

Accepted Answer

A) True 
 B)False

Question 20

According to Cockburn,which of the following statements relating to auditors' reasonable ranges is FALSE?

Accepted Answer

A)  The key issue is factors to consider in determining the width of the range.
B)  The auditor must accept the reality of the uncertainty that may be associated with the range.
C)  Specialists such as engineers,actuaries,and economists may need to be consulted.
D)  The range estimate must be made at the year-end date.

Exam 19: The Audit of Accounting Estimates: Basic Material Relating to Accounting Estimates

Quantified uncertainty is referred to as ________.

List the various factors that need to be considered regarding the nature and scope of an issue prior to the exercise of professional judgment.

An approximation of a monetary amount in the absence of a precise means of measurement is known as ________.

From Cockburn's perspective,which of the following statements is FALSE?

Greater volatility in the business environment raises the amount of measurement uncertainty associated with predicting future-event amounts.Such greater uncertainty leads to an increase in which type of risk?

Auditors are susceptible to judgmental biases because of the use of shortcuts or heuristics in the reasoning process.

The tendency for auditors to blindly follow the prior year's audit file when conducting the current year's audit is an example of which type of judgment bias?

The prediction that people estimate frequency or probability by the ease with which instances or occurrences of the event can be brought to mind is known as the ________.

Provide an example to illustrate what is meant by a reasonable estimate and what a misstatement is relative to an estimate according to AuG-41.

What are the key concepts and related definitions relating to CAS 540.07?

According to Savage and Van Allen,what is the problem with using the average or expected value of a distribution as a point estimate for a distribution of values?

Under the risk-based reasoning (RBR)system of risk-based reasoning for accounting estimates,in the ignore region,the probability of payoff is 1.00 to (one minus acceptable AccR).

There are huge pressures on the auditor from management regarding recording of estimates because such estimates are essentially subjective in nature,and the major source of disagreement is likely the assumptions made about future-event outcomes.

Generally accepted accounting principles are based on the going-concern concept.Thus,an opinion that financial statements are in conformity with GAAP means that continued existence may be presumed for a "reasonable time",which is considered to be ________.

When misstatements due to incorrect accounting estimates are factored in,the true probability of material misstatement is simply the product of Audit Risk and Information Risk

CAS 540 refers to management's judgments that the auditor considers unreasonable as _________ misstatements.

Accounting risk (AccR)is largely geared to reflect business risks of the auditee.

According to Cockburn,which of the following statements relating to auditors' reasonable ranges is FALSE?