Misstatements that are otherwise inor may be material if there are possible consequences arising trom contractual obligations. Yes No Misstatements that are otherwise immaterial may be material if they affect a trend in earnings 16. Auditors generally allocate the preliminary Judgment about materiality to the: a. balance sheet only. b. income statement only. c. income statement and balance sheet. d. statement of cash flows. 17. Which of the following statements regarding inherent risk is correct? a. The inherent risk assigned in the audit risk model is unaffected by the auditor’s experience with client’s organization. Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows that it was incorrect. c. Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain experience, even when there is inherent risk. d. The inherent risk assigned in the audit risk model is dependent upon the strengths in client’s internal control system. 18. Auditors begin their assessments of inherent risk during audit planning. Which of the following would not help in assessing inherent risk during the planning phase? a.
Obtaining client’s agreement on the engagement letter. b. Obtaining knowledge about the client’s business and industry. c. Touring the client’s plant and offices. d. Identifying related parties. 19. medium Auditors commonly allocate materiality to balance sheet accounts rather than income statement accounts because most income statement misstatements have a(n) effect on the balance sheet. a. reduced b. equal c. undetermined d. increased 20. Which of the following is not a correct statement regarding the allocation of the preliminary Judgment about materiality to balance sheet accounts? a.
Auditors expect certain accounts to have more misstatements than others. b. The allocation has virtually no effect on audit costs because the auditor must collect sufficient appropriate audit evidence. c. Auditors expect to identify overstatements as well as understatements in the accounts. d. Relative audit costs affect the allocation. 21. What is the primary means of dealing with risk in planning decisions related to audit evidence? a. Selection of more effective tests of details of balances. b. Application of the audit risk model. c. Establishing a lower preliminary Judgment about materiality. Allocating materiality Judgment to segments. The phrase “in our opinion” in the auditor’s report is intended to inform users that auditors: a. guarantee fair presentation of the financial statements. b. act as insurers ot the accuracy ot the statements c. certify the material presented in the statements by management. d. base their conclusions about the statements on professional Judgment. Inherent risk is audit evidence. a. directly, inversely b. directly, directly inversely, inversely inversely, directly 24. related to detection risk and related to the amount of The five steps in applying materiality are listed below in random order. . Estimate the combined misstatement. 2. Estimate the total misstatement in the segment. 3. Set preliminary Judgment about materiality. 4. Allocate preliminary Judgment about materiality to segments. 5. Compare combined estimate with preliminary Judgment about materiality. The correct sequence from start to finish would be: a. 12543. b. 34215. c. 43152. d. 51324. 25. Which of the following statements is not correct? a. Materiality is a relative rather than an absolute concept. b. The most important ase used as the criterion for deciding materiality is total assets. . Qualitative factors as well as quantitative factors affect materiality. d. Given equal dollar amounts 26. , trauds are usually considered more impo rtant than errors. Since materiality is relative, it is necessary to have bases for establishing whether misstatements are material. Normally, the most common base for deciding materiality is: a. net income before taxes. b. net working capital. c. net income after taxes. d. total assets. 27. Certain types of misstatements are likely to be more important than other types to sers, even if the dollar amounts are the same.
Which of the following demonstrates this? Amounts involving frauds are considered more important than errors of equal amount earnings. 28. Allocating the preliminary Judgment about materiality to tlnancial statements segments is necessary because: a. evidence is accumulated for the financial statements as a whole so materiality does not apply to them. b. evidence is accumulated by segments rather than for the financial statements as a whole. c. it is required by the AICPA’s Code of Professional Conduct. d. t is required by the SEC. 29. a.
Either an overstatement of an asset account or an understatement of a liability account would have the same effect on the income statement. b. A misclassification in the balance sheet will have no effect on operating income. c. Either an overstatement of an asset account or an overstatement of a liability account would have the same effect on the income statement. d. Either an understatement of an asset account or an overstatement of a liability Regardless of how the preliminary Judgment about materiality is allocated, the uditor must be confident that total combined misstatements in all accounts are: a. ess than the preliminary Judgment. b. equal to the preliminary Judgment. c. more than the preliminary Judgment. d. less than or equal to the preliminary Judgment. 31. Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance to refer to a. detection risk b. audit report risk c. acceptable audit risk d. inherent risk misstatements are those where the auditor can determine the amount of the misstatement in the account. a. Potential b. Likely c. Known d.
Projected When a different extent of evidence is needed for the various cycles, the difference is caused by: a. errors in the client’s accounting system. b. a client’s need to achieve an unqualified opinion. c. an auditor’s need to follow auditing standards. d. an auditor’s expectations of errors and assessment of internal control. If planned detection risk is reduced, the amount of evidence the auditor accumulates will: a. increase. b. decrease. c. remain unchanged. d. be indeterminate. 35. Medium Likely misstatements can result from: Computation of the sampling error for the