Deck 17: Advanced Topics Concerning Complex Auditing Judgements

Question 1

One difficulty that commonly arises in making materiality judgements is that the auditor's materiality judgements at the planning stage may differ from those at the evidence evaluation stage because the auditor may learn certain facts during the audit that cause a change in judgement.

Answer 1

True

Question 2

A third common problem is determining how to allocate materiality where there are many client locations.

Answer 2

True

Question 3

Different materiality levels may be established for different locations and the aggregate of the location materiality levels could equal or exceed overall planning materiality.

Answer 3

True

Question 4

An important consideration for auditors in judging the potential materiality of contingencies is the needs of investors and other users of the financial report and audit report.

Question 5

The auditor is not required to make a judgement as to what the fair value of a security might be at year end and about contingencies - including their probability and potential dollar amount.

Question 6

ASA 320 Materiality In Planning and Performing An Audit provides the professional accounting bodies with basic guidance on materiality judgements.

Question 7

The accumulation of all potential misstatements in a place where the audit team can assess the materiality of misstatements is often based on performance materiality.

Question 8

Performance materiality is a materiality level where the auditor believes that the errors below that level would not, even when aggregated with all other misstatements, be material to the financial report.

Question 9

The auditor should have gathered systematic evidence that incorporates relevant information about the correctness of the account balance and should be able to defend the veracity of that estimate.

Question 10

Auditors need to consider the risk and take appropriate action relating to material misstatements of fact contained in the client's annual report, including in the Directors' Report.

Question 11

It is a mandate for all companies listed with the Australian Securities Exchange to maintain an internal audit function.

Question 12

ASA 610 encourages the external auditor to utilise the work of internal auditors and other objective parties within the organisation when performing the assessment of internal control over financial reporting.

Question 13

According to the AASB 138 Intangible Assets, intangible assets that are not amortised will be tested for impairment at least annually by comparing the fair values of those assets with their recorded amounts.

Question 14

Considering AASB 139 Financial Instruments: Recognition and Measurement, the cash position of the investee is one of the factors that indicate that an other-than-temporary impairment of a security's value has occurred.

Question 15

Areas where subjective judgements are made are almost always:

A) low risk and require minimal auditor attention
B) high risk and require significant auditor attention
C) high risk and require minimal auditor attention.
D) high risk and require significant auditor .attention

Question 16

Recent history shows that many auditors lack skills in making:

A) estimates
B) professional judgements
C) determining materiality
D) audits profitable

Question 17

The auditor may also be required to make a judgement as to what the fair value of a
Security might be at year end and about contingencies This includes their:

A) profitability
B) probability and potential dollar amount
C) historical cost
D) expected useful life

Question 18

The Global Reporting Initiative, which issued the G3 Guidelines in 2006, is examining the issue of materiality as it applies to:

A) global reporting
B) future asset reporting
C) sustainability reporting
D) fair market reporting

Question 19

If management resists making the adjustment, then, by definition, it can be argued that it is:

A) immaterial
B) material
C) sceptical
D) irrelevant

Question 20

Which of the following accounts would be subject to allowance for non-collectibility?

A) finance receivables - net
B) derivative financial instruments
C) future income tax benefit
D) discontinued assets

Question 21

The AASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following relates to Level 1?

A) quoted prices for identical items in active, liquid and visible markets.
B) unobservable inputs to be used in illiquid situations
C) observable information for similar items in active or inactive markets
D) unobservable inputs to be used in situations where markets don't exist

Question 22

For the same client, APES 110 prohibits a public accounting firm from providing which of the following services?

A) tax and external audit services
B) internal and external audit services
C) management letter and audit services
D) internal control and financial statement audits

Question 23

ASA 640 encourages the external auditor to utilise the work of which of the following?

A) experts
B) internal auditors
C) independent valuation professionals
D) internal officers of the company

Question 24

When the auditor detects an intentional misstatement they should all of the following except:

A) reconsider the level of audit risk for the client
B) directly advise ASIC first
C) consider revising the nature, timing, and extent of audit procedures
D) alert management and the audit committee or board

Question 25

Which of the following standards provides the auditor with basic guidance on materiality judgements?

A) AASB 1031
B) AASB 138
C) AASB 139
D) AASB 116

Question 26

Which of the following is not a common benchmark for materiality?

A) assets
B) expenses
C) net income
D) total assets

Question 27

The IASB has set a hierarchy of inputs to consider in assessing fair value. Prices taken from a recent trade on the NIKKEI of an index stock would fall under which level?

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

Question 28

Which of the following is associated with Level 3 in the IASB hierarchy for ascertaining fair value?

A) quoted prices for identical items in a active, liquid, visible market
B) average prices for identical items in an active, liquid, visible market
C) observable information for similar items in an active or inactive market
D) unobservable inputs to be used in situations where markets do not exist