Chapter 16 – Advanced Topics Concerning Complex Auditing Judgments
76. Which of the following statements is not true about materiality judgments?
a.
The auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of
users of financial statements.
b.
The auditor considers materiality only in relation to classes of transactions, account balances, and
disclosures.
c.
Materiality judgments are used to help the auditor gather sufficient appropriate evidence about
whether the financial statements are free of material misstatement.
d.
Materiality decisions differ from one audit client to another.
AUDT.JOHN.16.16-02 – LO: 16-02
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Materiality Judgments
77. Which of the following statements is false regarding materiality judgments?
a.
Materiality judgments are a matter of professional judgment.
b.
Materiality judgments depend on the needs of a reasonable person (an investor, potential investor, or
other stakeholder) relying on the information.
c.
Materiality judgments involve both quantitative and qualitative considerations.
d.
Materiality judgments are easy for auditors to make.
AUDT.JOHN.16.16-02 – LO: 16-02
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Materiality Judgments
78. Which of the following is not a factor adding to the complexity of materiality judgments made by auditors?
a.
Regulators pay particular attention to the judgmental aspects of auditor materiality decisions.
b.
SEC regulators do not believe it is appropriate to use percentage terms to substitute for a full analysis
of all relevant considerations regarding the magnitude of misstatement.
c.
Regulators focus on how materiality decisions can affect client financial results.
d.
SEC regulators have few requirements for auditors to comply with since the AICPA fills that role.
AUDT.JOHN.16.16-02 – LO: 16-02
United States – BUSPORG: Analytic
79. Which of the following is an approach used to determine posting material?
a.
Dual approach.
b.
Percentage approach.
c.
Qualitative approach.
d.
Planning approach.
b
1
AUDT.JOHN.16.16-03 – LO: 16-03
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Assessing Misstatements
80. According to SAB 108, what approach is used when assessing uncorrected misstatements?
a.
b.
c.
d.
b
1
AUDT.JOHN.16.16-03 – LO: 16-03
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Assessing Misstatements
81. Misstatements detected during the audit that were initially deemed to be immaterial must be summarized to
determine which of the following?
a.
Materiality.
b.
Quantitative effect.
c.
Aggregate effects.
d.
Nature of misstatement.
1
AUDT.JOHN.16.16-03 – LO: 16-03
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Assessing Misstatements
82. The adjustments arising from the audit that were considered to be material should be communicated by the
auditor to which of the following?
a.
Audit staff.
b.
Management.
c.
Audit committee.
Chapter 16 – Advanced Topics Concerning Complex Auditing Judgments
d.
Internal auditors.
1
AUDT.JOHN.16.16-03 – LO: 16-03
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Assessing Misstatements
83. The auditor should have a sound basis, supported by objective evidence, regarding accounting estimates and
should not fall victim to an “all estimates are subjective” argument in order to waive which of the following?
a.
Contingent liability.
b.
Material misstatements.
c.
Unrecorded liability.
d.
Material adjustments.
d
1
AUDT.JOHN.16.16-03 – LO: 16-03
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Assessing Misstatements
84. Which method focuses on the materiality of current year misstatements and the reversing effect of prior-
year misstatements on the income statement?
a.
Rollover method.
b.
Iron curtain method.
c.
Percentage approach.
d.
Judgmental method.
1
AUDT.JOHN.16.16-03 – LO: 16-03
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Assessing Misstatements
85. Which method focuses on assuring that the year-end balance sheet is correct and does not consider the
impact of prior-year uncorrected misstatements reversing in later years?
a.
Rollover.
b.
Iron curtain.
c.
Dual.
d.
Percentage.
b
1
86. The discovery of an intentional misstatement, even if immaterial, could impact the auditor’s opinion on the
effectiveness of which of the following?
a.
The client’s external controls.
b.
The client’s interim financial statements.
c.
The client’s internal controls over financial reporting.
d.
The client’s segment reports.
AUDT.JOHN.16.16-03 – LO: 16-03
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Assessing Misstatements
87. Which of the following is required by the dual approach for assessing uncorrected misstatements?
a.
The application of the rollover method.
b.
The application of the iron curtain method.
c.
Simultaneous application of both the rollover and iron curtain methods.
d.
Sequential application of both the rollover and iron curtain methods.
AUDT.JOHN.16.16-03 – LO: 16-03
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Assessing Misstatements
88. Which of the following is not a long-term liability account with a high risk of material misstatement?
a.
Warranty reserves.
b.
Pension obligations.
c.
Other postemployment benefits.
d.
Marketable securities.
AUDT.JOHN.16.16-04 – LO: 16-04
United States – BUSPORG: Analytic
AUDT.JOHN.16.16-03 – LO: 16-03
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Assessing Misstatements
89. Which of the following is not a key type of evidence that the auditor needs to examine with respect to
pensions and postemployment benefits?
a.
Whether the actuarial firm hired by management is independent, capable, and objective.
b.
The appropriateness of the actuarial firm’s work.
c.
The reasonableness of significant interest rate assumptions.
d.
The length of illnesses that pension recipients contract.
AUDT.JOHN.16.16-04 – LO: 16-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Long-Term Liabilities
90. Which of the following is not an element of pensions and other postemployment benefits that is difficult to
estimate?
a.
Projected lifetime of former employees that will receive a pension.
b.
The future earnings of employees prior to retiring for defined benefit plans.
c.
Long-term interest rates to discount future costs back to present value.
d.
Current amounts earned on pension plan assets.
AUDT.JOHN.16.16-04 – LO: 16-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Long-Term Liabilities
91. Which of the following factors would be least likely to affect the estimate of the warranty liability?
a.
Changes in the product.
b.
Changes in the nature of the warranty.
c.
Changes in the sales staff.
d.
Changes in sales volume.
AUDT.JOHN.16.16-04 – LO: 16-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Long-Term Liabilities
92. An audit of the other postemployment benefits does not require estimates with respect to which of the
following?
a.
Changes in medical expenses.
b.
Changes in coverage.
Chapter 16 – Advanced Topics Concerning Complex Auditing Judgments
c.
Changes in average life expectancies.
d.
Changes in Human Resource personnel in charge of postemployment benefits.
AUDT.JOHN.16.16-04 – LO: 16-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Long-Term Liabilities
93. If an acquired company remains intact after it has been acquired, it is defined as which of the following
types of segments?
a.
Financing segment.
b.
Investing segment.
c.
Operating segment.
d.
Non-operating segment.
AUDT.JOHN.16.16-05 – LO: 16-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Merger and Acquisition Activities
94. Which of the following is not a significant challenge related to valuation issues for audits of merger and
acquisition transactions?
a.
Valuing the assets upon acquisition.
b.
Valuing the liabilities upon acquisition.
c.
Measuring restructuring charges.
d.
Measuring the qualifications of personnel from the acquired company.
AUDT.JOHN.16.16-05 – LO: 16-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Merger and Acquisition Activities
95. Which one of the following is not an audit procedure used when testing restructuring charges?
a.
Review current and proposed financial accounting standards to determine if changes have occurred
in accounting for restructuring.
b.
Evaluate the qualifications of management.
c.
Mathematically test the estimates.
d.
Review and independently test the estimates by reviewing (a) contracts, (b) appraisals for property or
estimates from investment bankers, and (c) severance contracts.
Chapter 16 – Advanced Topics Concerning Complex Auditing Judgments
AUDT.JOHN.16.16-05 – LO: 16-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Merger and Acquisition Activities
96. Which of the following is false regarding the valuation of goodwill?
a.
U.S. accounting standards require that goodwill be specifically identified with an operating segment
or a reporting unit.
b.
By definition, acquired parts of the business (or goodwill) must be sufficiently identifiable so that
they can be managed as a unit or may be separately identified and sold as a unit.
c.
Goodwill is tested for impairment quarterly.
d.
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.
AUDT.JOHN.16.16-05 – LO: 16-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Merger and Acquisition Activities
97. Which of the following approaches for determining fair value of Level 3 assets is used by the auditor?
a.
Determining appropriate model and sensitivity of model.
b.
Reviewing contracts to determine if loss is other than temporary.
c.
Performing an analysis of volume of trading activity.
d.
Performing an analysis of trades on similar assets.
AUDT.JOHN.16.16-06 – LO: 16-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Fair Value and Impairment
98. Which of the following is not an audit challenge relevant to fair value estimation of Level 1, 2, and 3 assets?
a.
Determining identical assets and active markets.
b.
Assessing client methodology and cash flows to originally estimate value.
c.
Determining appropriate model and inputs expected cash flows.
d.
Determining similar assets and relevant markets.
99. Which of the following should the client have as part of its process for estimating fair value?
a.
A systematic process to identify each asset that is subject to realizable value estimation.
b.
A process to identify relevant historical values.
c.
An analysis of transactions that have taken place within the client’s organization.
d.
A realistic process to estimate future cash flows to discount back to a present value.
AUDT.JOHN.16.16-06 – LO: 16-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Fair Value and Impairment
100. In the FASB hierarchy of inputs to consider for assessing fair value, which is associated with Level 1?
a.
Observable information on similar items.
b.
Nonexistence of active markets.
c.
Quoted prices on identical items.
d.
Relevant economic and industry factors.
AUDT.JOHN.16.16-06 – LO: 16-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Fair Value and Impairment
101. In the audit approach for assessing fair value, which should the auditor determine for Level 2 assets?
a.
The correspondence of the client’s assets to similar assets in an active market.
b.
Contingent liabilities.
c.
Sensitivity of model used for marking to model.
d.
The performance of tests of controls.
AUDT.JOHN.16.16-06 – LO: 16-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
102. Which one of the following statements is not accurate about goodwill impairment valuations?
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Fair Value and Impairment
Chapter 16 – Advanced Topics Concerning Complex Auditing Judgments
a.
Goodwill arising from acquisitions can be netted into one test at the operating segment level, but not
netted at the company level.
b.
Market valuation may be volatile. A temporary decline in market value may not be a good indicator
of FMV.
c.
FMV might not exist, might require independent appraisals by investment bankers or estimates using
cash flow and discounted present value factors.
d.
No assumptions are required about competition, economic development, product placement, and so
forth.
AUDT.JOHN.16.16-06 – LO: 16-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Fair Value and Impairment
103. Impairment is measured by the difference between market value of the operating segment and which of the
following?
a.
Carrying value of net assets.
b.
Fair market value of net assets.
c.
Book value of total assets.
d.
Book value of current assets.
AUDT.JOHN.16.16-06 – LO: 16-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Fair Value and Impairment
104. In a standard audit program for goodwill impairment testing, if the original reporting unit no longer exists
because operations have been fully integrated into operations of the parent company, which approach should the
auditor take?
a.
Compare market value with carrying value. A market value less than carrying value is presumptive
evidence that goodwill has been impaired.
b.
Compare fair value with realizable value. A fair value less than realizable value is presumptive
evidence that goodwill has been impaired.
c.
Compare book value with realizable value. A book value less than realizable value is presumptive
evidence that goodwill has been impaired.
d.
Compare book value with market value. A market value less than book value is presumptive
evidence that goodwill has been impaired.
1
105. The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following relates
to Level 3?
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 do not exist.
AUDT.JOHN.16.16-06 – LO: 16-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Fair Value and Impairment
106. The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following
valuations are generally viewed as the most subjective?
a.
Level 0.
b.
Level 1.
c.
Level 2.
d.
Level 3.
AUDT.JOHN.16.16-06 – LO: 16-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Fair Value and Impairment
107. The FASB has set a hierarchy of inputs to consider in assessing fair value. Price taken from a recent trade
on the NIKKEI of an index stock would fall under which level?
a.
Level 0.
b.
Level 1.
c.
Level 2.
d.
Level 3.
AUDT.JOHN.16.16-06 – LO: 16-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Fair Value and Impairment
108. Which of the following models is associated with Level 3 in the FASB hierarchy for ascertaining fair
value?
a.
Mark to market model.
b.
Replacement model.
c.
Mark to model.
d.
Historical cost model.
AUDT.JOHN.16.16-06 – LO: 16-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Fair Value and Impairment
109. Under which of the following approaches is the client expected to estimate fair value based on a model of
the future cash flows associated with the instrument or the asset?
a.
Mark to market model.
b.
Replacement model.
c.
Mark to model.
d.
Historical cost model.
AUDT.JOHN.16.16-06 – LO: 16-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Considerations for Fair Value and Impairment
110. Which one of the following general factors would not be considered when assessing identified internal
control deficiencies?
a.
Control environment.
b.
Audit evidence from a poorly controlled system.
c.
Repeatability of a process.
d.
Complexity and subjectivity of the account balance affected by the deficiency.
AUDT.JOHN.16.16-08 – LO: 16-08
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Assessing Deficiencies in Internal Control
111. Material misstatements in the financial statements, including those requiring restatements strongly imply a
material weakness in which of the following?
a.
Income statement.