Auditing and Assurance Services, 16e (Arens/Elder/Beasley)
Chapter 9 Materiality and Risk
9.1 Learning Objective 9-1
1) Which of the following would not increase the risks of material misstatement at the overall
financial statement level?
A) effective oversight by the board of directors
B) deficiencies in management’s integrity
C) inadequate accounting systems
D) all of the above
2) The auditor’s responsibility section in an audit report states that “…the standards require that
we plan and perform the audit to obtain ________ assurance about whether the financial
statements are free of material misstatement.” What type of assurance is given?
A) immediate
B) limited
C) reasonable
D) absolute
3) ________ risk represents the auditor’s assessment of the susceptibility of an assertion to
material misstatement, before considering the effectiveness of the client’s internal control.
A) Material
B) Account balance
C) Control
D) Inherent
4) Risk of material misstatement at the assertion level
A) is only relevant to account balances.
B) determines the nature, timing, and extent of further audit procedures.
C) refers to risks that are pervasive to the financial statements as a whole.
D) consists of business risk and inherent risk.
5) The risk of material misstatement exists only at the overall financial statement level.
6) Significant changes in the industry may increase the risk of material misstatement at the
assertion level.
7) Inherent risk and control risk exist independent of the audit of the financial statements.
9.2 Learning Objective 9-2
1) Risk assessment procedures include inquiries of management and others by the auditor. As
part of these procedures, the auditor should talk to
A) internal auditors.
B) board of directors.
C) individuals involved with regulatory compliance.
D) all of the above.
2) Risk assessment procedures include
A) a required discussion among the staff members of the audit and the client regarding material
misstatements in the financial statement.
B) determination of the type of audit opinion to issue.
C) observation of the entity’s operations.
D) assessing acceptable audit risk.
3) Risk assessment procedures are performed to identify and assess the risk of material
misstatement. List three risk assessment procedures.
4) The performance of risk assessment procedures is designed to help the auditor obtain an
understanding of the entity.
5) Auditing standards require the engagement partner to be included in discussions about the
susceptibility of the client’s financial statements to material misstatements.
6) Auditors are not allowed to make inquires of employees who are not considered management,
such as marketing or sales personnel.
9.3 Learning Objective 9-3
1) When considering the risk of misstatement due to fraud,
A) the risk of not detecting a material misstatement due to fraud is lower than the risk of not
detecting a misstatement due to error.
B) the risk is only made at the financial statement level.
C) auditing standards require the auditor to presume that risk of fraud exist in expense
transactions.
D) auditing standards outline procedures the auditor should perform to obtain information from
management about their consideration of fraud.
2) Individuals engaged in conducting a fraud will generally not misrepresent information to the
auditor.
3) The auditor’s risk assessment for fraud should be ongoing throughout the audit.
9.4 Learning Objective 9-4
1) A ________ risk represents an identified and assessed risk of material misstatement that, in
the auditor’s professional judgment, requires special audit consideration.
A) material
B) substantial
C) financial statement
D) significant
2) Which of the following will generally be considered a significant risk?
A) a sale to a customer
B) the determination of the amount of bad debt expense
C) the purchase of inventory
D) obtaining a loan from the bank
3) Significant risks often relate to routine transactions.
4) The auditor must perform substantive tests related to assertions deemed to have significant
risks.
9.5 Learning Objective 9-5
1) Which of the following risks are used in the audit risk model?
A)
Control Risk
Inherent Risk
Planned Detection
Risk
Yes
Yes
Yes
B)
Control Risk
Inherent Risk
Planned Detection
Risk
Yes
Yes
No
C)
Control Risk
Inherent Risk
Planned Detection
Risk
No
No
Yes
D)
Control Risk
Inherent Risk
Planned Detection
Risk
No
No
No
2) Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed
level of control risk from that originally planned. To achieve an overall audit risk level that is
substantially the same as the planned audit risk level, the auditor would
A) increase materiality levels.
B) decrease detection risk.
C) decrease substantive testing.
D) increase inherent risk.
3) When dealing with audit risk,
A) auditors cannot accept any level of risk in performing the audit function.
B) most risks that auditors encounter are relatively easy to measure.
C) the audit risk model is only used for classes of transactions.
D) the audit risk model helps the auditor to decide how much and what types of evidence to
accumulate.
4) The measurement of the auditor’s assessment of the susceptibility of an assertion to material
misstatement, before considering the effectiveness of related internal controls is defined as
A) audit risk.
B) inherent risk.
C) sampling risk.
D) detection risk.
5) The risk that audit evidence for an audit objective will fail to detect misstatements exceeding
performance materiality levels is
A) audit risk.
B) control risk.
C) inherent risk.
D) planned detection risk.
6) If the auditor decides to reduce acceptable audit risk, planned detection risk
A) increases.
B) decreases.
C) stay the same.
D) cannot be determined.
7) Inherent risk is ________ related to planned detection risk and ________ related to the
amount of audit evidence.
A) directly; inversely
B) directly; directly
C) inversely; inversely
D) inversely; directly
8) Auditors frequently refer to the terms audit assurance, overall assurance, and level of
assurance instead of
A) detection risk.
B) audit report risk.
C) acceptable audit risk.
D) inherent risk.
9) If planned detection risk is reduced, the amount of evidence the auditor accumulates will
A) increase.
B) decrease.
C) remain unchanged.
D) be indeterminate.
10) Planned detection risk
I. determines the amount of substantive evidence the auditor plans to accumulate.
II. is dependent on inherent risk and business risk.
A) I only
B) II only
C) I and II
D) neither I nor II
11) Inherent risk is often high for an account such as
A) inventory.
B) land.
C) capital stock.
D) notes payable.
12) Inherent risk and control risk
A) are inversely related to each other.
B) are inversely related to detection risk.
C) are directly related to detection risk.
D) are directly related to audit risk.
13) To what extent do auditors typically rely on internal controls of their public company
clients?
A) extensively
B) only very little
C) infrequently
D) never
14) Auditors typically rely on internal controls of their private company clients
A) only as needed to complete the audit and satisfy Sarbanes-Oxley requirements.
B) only if the controls are determined to be effective.
C) only if the client asks an auditor to test controls.
D) only if the controls are sufficient to increase control risk to an acceptable level.
15) Which is a true statement about audit risk?
A) Audit risk measures the risk that a material misstatement could occur and not be detected by
internal control.
B) When auditors decide on a higher acceptable audit risk, they want to be more certain that the
financial statements are not materially misstated.
C) Audit assurance is the complement of acceptable audit risk.
D) There is an inverse relationship between acceptable audit risk and planned detection risk.
16) The risk of material misstatement refers to
A) control risk and acceptable audit risk.
B) inherent risk.
C) the combination of inherent risk and control risk.
D) inherent risk and audit risk.
17) When assessing risk, it is important to remember that
A) for acceptable audit risk, the SEC decides the risk the CPA firm should take for public clients.
B) inherent risk can be changed by the auditor.
C) detection risk can only be determined after audit risk, inherent risk, and control risk are
determined.
D) control risk is determined by company management since they are responsible for internal
control.
18) Which of the following is a correct relationship?
A) Acceptable audit risk and planned detection risk have an inverse relationship.
B) Control risk and planned detection risk have a direct relationship.
C) Planned detection risk and inherent risk have an inverse relationship.
D) All of the above are correct relationships.
19) In a financial statement audit, inherent risk is evaluated to help an auditor asses which of the
following?
A) the internal audit department’s objectivity in reporting a material misstatement of a financial
statement assertion it detects to the audit committee
B) the risk the internal control system will not detect a material misstatement of a financial
statement assertion
C) the risk that the audit procedures implemented will not detect a material misstatement of a
financial statement assertion
D) the susceptibility of a financial statement assertion to a material misstatement assuming there
are no related controls
20) Which of the following statements is not true?
A) Inherent risk is inversely related to the amount of audit evidence whereas detection risk is
directly related to the amount of audit evidence required.
B) Inherent risk is directly related to evidence whereas detection risk is inversely related to the
amount of audit evidence required.
C) Inherent risk is the susceptibility of the financial statements to material error, assuming no
internal controls.
D) Inherent risk and control risk are assessed by the auditor and function independently of the
financial statement audit.
21) An auditor who audits a business cycle that has low inherent risk should
A) increase the amount of audit evidence gathered.
B) assign more experienced staff to that area.
C) expand planning procedures.
D) do none of the above.
22) Why do auditors use the audit risk model when planning an audit?
23) Match the terms below (a-h) with the definitions provided below (1-8):
a. preliminary judgment about materiality
b. inherent risk
c. planned detection risk
d. audit assurance
e. acceptable audit risk
f. performance materiality level
g. control risk
h. materiality
________ 1. a measure of the risk that audit evidence for a segment will fail to detect
misstatements exceeding the performance materiality amount, should such misstatements exist
________ 2. a measure of the auditor’s assessment of the likelihood that misstatements
exceeding a performance materiality in a segment will not be prevented or detected by the
client’s internal controls
________ 3. a measure of how much risk the auditor is willing to take that the financial
statements may be materially misstated after the audit is completed and an unqualified audit
opinion has been issued
________ 4. the materiality allocated to any given account balance
________ 5. the maximum amount by which the auditor believes that the statements could be
misstated and still not affect the decisions of reasonable users
________ 6. This term is synonymous with acceptable audit risk.
________ 7. the magnitude of an omission or misstatement of accounting information that makes
it probable that the judgment of a reasonable person would have been changed
________ 8. a measure of the auditor’s assessment of the likelihood that there are material
misstatements before considering the effectiveness of internal control