Chapter 16 – Advanced Topics Concerning Complex Auditing Judgments
1. The significant judgments of “Assets of Held-for-Sale Operations” are subject to impairment testing based on
the most likely sale or disposal price.
a.
True
b.
False
True
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Complex Audit Judgments
2. Complex audit judgments and decisions often involve accounts that require subjective estimates by
management.
a.
True
b.
False
True
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Complex Audit Judgments
3. The inventory account does not require any subjective estimates by management.
a.
True
b.
False
False
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United States – AK – AICPA BB-Critical thinking
Complex Audit Judgments
4. Auditors are not responsible for making judgments regarding the fair value of securities.
a.
True
b.
False
False
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5. Auditors are constantly challenged to evaluate the quality of a client’s estimates, including areas such as
obsolescence of inventory, allowance for doubtful accounts, and tax provisions among others.
a.
True
b.
False
True
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Complex Audit Judgments
6. Auditor needs to assess disclosures about what lines of business the company may discontinue.
a.
True
b.
False
True
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Complex Audit Judgments
7. There are systematic processes that the auditor can use in making most of the complex judgments in the
financial statements.
a.
True
b.
False
True
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Complex Audit Judgments
8. The significant judgments related to “net finance receivables” include assessing the allowance for
noncollectibility.
a.
True
b.
False
True
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9. The significant judgments related to “deferred income taxes” are subject to estimates of future profitable
operations against which the deferred asset might be utilized.
a.
True
b.
False
True
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Complex Audit Judgments
10. Existing professional guidance notes that auditors must make materiality assessments for purposes of (1)
audit planning and (2) evidence evaluation after audit procedures are completed.
a.
True
b.
False
True
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Materiality judgments
11. An auditor’s consideration of materiality is a matter of professional judgment and is influenced by the
auditor’s perception of the needs of users of financial statements.
a.
True
b.
False
True
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Materiality judgments
12. Materiality judgments are made in light of the surrounding circumstances, but need not necessarily involve
both quantitative and qualitative considerations.
a.
True
b.
False
False
1
13. The purpose of making materiality judgments is to make sure that financial statements are free of any
material misstatement.
a.
True
b.
False
True
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Materiality judgments
14. The auditor considers materiality only at the overall financial statement level.
a.
True
b.
False
False
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Materiality judgments
15. Auditors make materiality assessments to help in planning the audit evidence to obtain and in evaluating the
audit evidence that was obtained.
a.
True
b.
False
True
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Materiality judgments
16. Determining materiality is based solely on quantitative factors.
a.
True
b.
False
False
United States – AK – AICPA BB-Critical thinking
Materiality judgments
17. If the auditor believes that misstatements aggregating approximately $50,000 would be material to the
income statement, but misstatements aggregating approximately $100,000 would be material to the balance
sheet, the auditor typically assesses overall materiality at $100,000 or less.
a.
True
b.
False
False
1
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Materiality judgments
18. Planning materiality helps the auditor determine the extent of audit evidence needed in order to provide an
opinion on the financial statements.
a.
True
b.
False
True
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Materiality judgments
19. In performing substantive analytical procedures, the threshold for determining whether differences between
the client’s recorded balance and the auditor’s expectation should be based on planning materiality.
a.
True
b.
False
True
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Materiality judgments
20. If a company’s net income varies significantly from year to year, the auditor might consider using an
average of the net income from the prior three to five years as the materiality benchmark.
a.
True
b.
False
True
United States – AK – AICPA BB-Critical thinking
Materiality judgments
21. The accumulation of which potential misstatements to accumulate for the purpose of assessing the
materiality of misstatements is often based on whether items are considered clearly trivial.
a.
True
b.
False
True
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Materiality judgments
22. 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 statements is often based on whether
something is considered clearly trivial.
a.
True
b.
False
True
1
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Materiality judgments
23. Auditors may consider only quantitative effects and not qualitative effects in making materiality judgments.
a.
True
b.
False
False
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Materiality judgments
24. Misstatements detected during the audit that were initially deemed to be immaterial need not be summarized
to determine their aggregate effects.
a.
True
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Materiality judgments
Chapter 16 – Advanced Topics Concerning Complex Auditing Judgments
b.
False
False
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Assessing Misstatements
25. The auditor need not inform the audit committee about adjustments arising from the audit that were
considered to be material.
a.
True
b.
False
False
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Assessing Misstatements
26. The assessment as to whether a misstatement in a cash-flow classification is material should be primarily
based on an income statement perspective.
a.
True
b.
False
False
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Assessing Misstatements
27. Auditors request the client to book all known misstatements, even if the recording cost is very high so that
there are no carryovers from year to year.
a.
True
b.
False
False
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Assessing Misstatements
28. The SEC’s position is generally that if management refuses to correct a material misstatement, then the
Chapter 16 – Advanced Topics Concerning Complex Auditing Judgments
auditor is obligated to issue a qualified or an adverse opinion on the financial statements.
a.
True
b.
False
True
AUDT.JOHN.16.16-03 – LO: 16-03
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Assessing Misstatements
29. 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.
a.
True
b.
False
True
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Assessing Misstatements
30. 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.
a.
True
b.
False
False
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Assessing Misstatements
31. The SEC issued SAB 108 in 2006, which mandates what is termed a dual approach to assessing uncorrected
misstatements.
a.
True
b.
False
True
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32. A misstatement that is intentional is not assessed any differently by the auditor than a misstatement that is
unintentional.
a.
True
b.
False
False
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Assessing Misstatements
33. When evaluating identified misstatements, the auditor only needs to consider misstatements in the current
year, and not misstatements from the prior year.
a.
True
b.
False
False
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Assessing Misstatements
34. Auditors can choose to test the client’s warranty reserves using primarily tests of controls and substantive
analytical procedures.
a.
True
b.
False
True
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Audit Considerations for Long-Term Liabilities
35. When auditing pension obligations, the auditor will likely use a specialist to assist the audit team.
a.
True
b.
False
True
1
36. 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.
a.
True
b.
False
True
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Audit Considerations for Merger and Acquisition Activities
37. Because of conservatism considerations, auditors should allow a client to overestimate its reserve for
restructuring.
a.
True
b.
False
False
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Audit Considerations for Merger and Acquisition Activities
38. Goodwill has to be evaluated for impairment once a year, as well as on an interim basis as the time events
and circumstances warrant.
a.
True
b.
False
True
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Audit Considerations for Merger and Acquisition Activities
39. 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.
a.
True
b.
False
True
Audit Considerations for Long-Term Liabilities
40. Goodwill arising from many acquisitions can be netted into one test at the company level.
a.
True
b.
False
False
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Audit Considerations for Merger and Acquisition Activities
41. If restructuring charges are not calculated correctly, the charges can be used to fraudulently manipulate
income.
a.
True
b.
False
True
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Audit Considerations for Merger and Acquisition Activities
42. 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.
a.
True
b.
False
43. When assessing fair value of Level 2 assets, auditors will use information on the sale of identical items in
active or inactive markets as a source of audit evidence.
a.
True
b.
False
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Audit Considerations for Merger and Acquisition Activities
44. Level 1 assets is a broad category of assets and applies to financial instruments, property, or lower of cost or
market considerations for inventory, loans, or receivables.
a.
True
b.
False
45. Audits of Level 3 assets are the most straightforward as they involve an observable, active market.
a.
True
b.
False
46. Assuming that other assets have been properly valued, if the market value of the reporting unit is equal to
the carrying value of the assets of the reporting unit, the presumption is that goodwill has been impaired.
a.
True
b.
False
47. Current FMV of assets and liabilities of non-goodwill assets is one of the factors affecting goodwill
impairment valuations.
a.
True
b.
False
AUDT.JOHN.16.16-06 – LO: 16-06
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Audit Considerations for Fair Value and Impairment
48. A sensitivity analysis of changes in value based on industry and cash-flow assumptions is one of the aspects
of the audit program for goodwill impairment testing.
a.
True
b.
False
49. While performing goodwill impairment testing, if the original reporting unit no longer exists because
operations have been fully integrated into operations of the parent company, the approach would be to
determine whether all other assets have been adjusted to fair value, where applicable.
a.
True
b.
False
50. U.S. accounting standards require organizations to use a two-step process to determine the impairment of
goodwill.
a.
True
b.
False
51. An audit of Level 1 assets is likely to be less challenging than an audit of Level 3 assets.
a.
True
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Audit Considerations for Fair Value and Impairment
Chapter 16 – Advanced Topics Concerning Complex Auditing Judgments
b.
False
52. When there is a ready market for financial instruments, the audit procedures related to valuation and
disclosures are more straightforward than when the instrument is not readily marketable.
a.
True
b.
False
True
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Audit considerations for financial instruments
53. When auditing financial hedges, the auditor should understand the product, identify relevant risks and
controls, and understand the appropriate accounting.
a.
True
b.
False
True
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Audit considerations for financial instruments
54. The significant judgments related to debt depend on specific accounting rules (U.S. or international) that the
company is following.
a.
True
b.
False
True
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Audit considerations for financial instruments
55. The volume of transactions affected is one of the critical criteria in assessing identified internal control
Chapter 16 – Advanced Topics Concerning Complex Auditing Judgments
deficiencies.
a.
True
b.
False
True
AUDT.JOHN.16.16-08 – LO: 16-08
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Assessing Deficiencies in Internal Control
56. Evidence of fraud, whether or not material, on the part of senior management, would likely cause the auditor
to conclude that the client had a material weakness in internal control over financial reporting.
a.
True
b.
False
True
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Assessing Deficiencies in Internal Control
57. A compensating control would not be considered as a factor that could mitigate a potential material
weakness.
a.
True
b.
False
False
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Assessing Deficiencies in Internal Control
58. In the U.S. a CPA firm can provide both internal and external audit services for the same public company
client.
a.
True
b.
False
False
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59. Independence of the internal audit function is obtained by giving the Chief Audit Executive (CAE)
unrestricted access to the board and senior management.
a.
True
b.
False
True
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Internal Audit Function
60. Internal auditors can perform both consulting services and assurance services.
a.
True
b.
False
True
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Internal Audit Function
61. All internal auditors are required to have the CIA designation in order to practice internal auditing.
a.
True
b.
False
False
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Internal Audit Function
62. Which of the following is subject to fair value assessment?
a.
Marketable securities.
b.
Inventory.
c.
Property that will be sold.
d.
All of the above could require fair value adjustments.
d
1
63. Which of the following is least likely to require significant auditor judgment about the dollar amount to be
disclosed in the financial statement?
a.
Contingent liability related to pending litigation.
b.
Assumptions made in preparation of the estimate of income tax expense for the year.
c.
The value of inventory.
d.
Cash on hand at the end of the year.
AUDT.JOHN.16.16-01 – LO: 16-01
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Complex Audit Judgments
64. Which of the following statements best describe an issue related to inventory?
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.
AUDT.JOHN.16.16-01 – LO: 16-01
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Complex Audit Judgments
65. Which of the following best describes the nature of assets of held-for-sale operations?
a.
Impairment testing based on most likely sale or disposal price.
b.
Impairment testing if plants are closed or equipment is not used.
c.
Lower of cost or market impairments, including an allowance for obsolescence.
d.
Estimates and assumptions made in preparation of the estimate of income tax expense for the year.
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Complex Audit Judgments
66. Almost every asset and liability account requires significant judgments. Which of the following judgments
is subject to allowance for noncollectibility?
Complex Audit Judgments
Chapter 16 – Advanced Topics Concerning Complex Auditing Judgments
a.
Inventories.
b.
Marketable securities.
c.
Other receivables.
d.
Deferred revenue.
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Complex Audit Judgments
67. In which of the following cases is it not necessary for an auditor to revise the original materiality level and
document the new materiality amount, as well as the rationale for changing the amount?
a.
If there is a change in circumstances that involve laws, regulations, or the accounting framework.
b.
If there is new information resulting from the risk assessment of the client.
c.
If there are changes in the understanding of the client about a new contractual agreement.
d.
If the client plans to change depreciation methods for new plant assets procured in the future.
d
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Materiality Judgments
68. What document is prepared so that auditors can aggregate potential misstatements in order to assess the
materiality of misstatements?
a.
The audit opinion.
b.
The summary of unadjusted audit differences.
c.
The summary of earnings trends.
d.
The post-closing trial balance.
b
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Materiality Judgments
69. Which of the following statements is not true regarding the use of a judgmental approach by auditors in
determining whether a misstatement is clearly trivial?
a.
The determination is based on past auditor experience.
b.
The determination is usually not very defensible to third-party users.
c.
The determination is usually not very defensible to regulators.
Chapter 16 – Advanced Topics Concerning Complex Auditing Judgments
d.
The determination uses percentages for the likelihood of misstatement.
AUDT.JOHN.16.16-02 – LO: 16-02
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Materiality Judgments
70. Which of the following will the auditor will not consider when making a materiality determination?
a.
Potential default on loan covenants.
b.
Changes in segment earnings or trends in earnings.
c.
Factors that would affect the market’s perception of future growth and cash flow for the company.
d.
All of these insights would be considered.
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Materiality Judgments
71. Which of the following would not be a reason to lower the threshold for materiality?
a.
The auditor is concerned with potential violations of debt covenants.
b.
There were proposed adjusting entries to a particular account in prior years.
c.
The consequences of a potential misstatement in an account balance are very high.
d.
The audit team wants to limit the amount of time spent at the client’s facilities.
AUDT.JOHN.16.16-02 – LO: 16-02
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Materiality Judgments
72. Performance materiality helps the auditor to determine which of the following?
a.
Extent of audit evidence needed.
b.
The specific analytical procedures to perform.
c.
The specific substantive procedures to perform.
d.
Control risk assessment.
73. Although different audit firms take different approaches, performance materiality could be the same as
overall materiality, or could be a percentage of overall materiality. Generally this range is which of the
following?
a.
25% to 75% of overall materiality.
b.
50% to 75% of overall materiality.
c.
25% to 50% of overall materiality.
d.
40% to 75% of overall materiality.
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Materiality Judgments
74. When a client has significant and nonrecurring charges to nonoperating expenses, which of the following
would be the most appropriate materiality benchmark?
a.
Net profit.
b.
Income from continuing operations.
c.
Cash inflows.
d.
Cash outflows.
AUDT.JOHN.16.16-02 – LO: 16-02
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Materiality Judgments
75. For nonprofit entities, appropriate benchmarks for materiality judgments would include which of the
following?
a.
Total assets and total liabilities.
b.
Total revenues and total assets.
c.
Total liabilities, total income, or total assets.
d.
Total expenses, total revenues, or total assets.
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Materiality Judgments