Chapter 7 – Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
1. Materiality relates to the significance or importance of an item.
a.
True
b.
False
True
Judgments
United States – AK – AICPA BB-Critical thinking
2. Auditors and management should agree on what is considered material.
a.
True
b.
False
False
1
Judgments
United States – AK – AICPA BB-Critical thinking
3. Clearly trivial and not material are terms that can be used interchangeably.
a.
True
b.
False
False
1
Judgments
United States – AK – AICPA BB-Critical thinking
4. Auditors need to choose materiality amounts carefully because once a materiality judgment has been made, it
cannot be revised.
a.
True
b.
False
False
1
Judgments
United States – AK – AICPA BB-Critical thinking
5. As detection risk increases, the amount of evidence an auditor needs to obtain decreases.
a.
True
Chapter 7 – Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
b.
False
True
1
AUDT.JOHN.16.117 – Risks of Material Misstatement
6. When business risk is low, the auditor does not have a high concern about the ability of the organization to
operate efficiently.
a.
True
b.
False
7. Only public companies have to be concerned with business risk.
a.
True
b.
False
8. Touring a company’s plant offers much insight into potential audit issues.
a.
True
b.
False
9. When a successor auditor contacts a company’s previous auditor, the successor auditor might obtain
information related to client management’s integrity.
a.
True
b.
False
10. News media and web searches can provide useful information related to client management’s integrity and
the risk of material misstatement in the financial statements.
a.
True
b.
False
11. LEXIS is a public database where the existence of legal proceedings against a company or key members of
the company can be found.
a.
True
b.
False
12. The purpose of the auditor‘s consideration of the effectiveness of internal controls is to determine the
nature, extent and timing of substantive testing.
a.
True
b.
False
True
1
AUDT.JOHN.16.119 – Assess Factors Affecting Control Risk
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13. Trend analysis deals with the relationship between two or more accounts within the current-year.
a.
True
b.
False
False
1
AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
United States – AK – AICPA BB-Critical thinking
14. One potential limitation to using industry data in preliminary analytical procedures is that the data from the
client may not be directly comparable to the data of the industry.
United States – AK – AICPA BB-Critical thinking
Chapter 7 – Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
a.
True
b.
False
True
1
AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
United States – AK – AICPA BB-Critical thinking
15. Brainstorming sessions should be led by the engagement team.
a.
True
b.
False
False
1
AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
United States – AK – AICPA BB-Critical thinking
16. During the process of a brainstorming session, the focus is more on the quality of ideas generated rather
than the quantity of ideas generated.
a.
True
b.
False
False
1
AUDT.JOHN.16.07-05 – LO: 07-05
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United States – AK – AICPA BB-Critical thinking
Analytical Procedures and Brainstorming Activities
17. The usual length of a brainstorming session is about four hours.
a.
True
b.
False
False
1
AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
United States – AK – AICPA BB-Critical thinking
18. If detection risk is low, the auditor is more willing to take a higher risk of the substantive audit procedures
not detecting a material misstatement.
a.
True
b.
False
False
19. Detection risk is measured on a scale of 0% to 5%.
a.
True
b.
False
False
1
AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
United States – AK – AICPA BB-Critical thinking
20. A risk of material misstatement of 100% indicates that material misstatement is highly likely.
a.
True
b.
False
True
1
AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
United States – AK – AICPA BB-Critical thinking
21. The internal controls of an organization have no impact on the efficiency of an audit.
a.
True
b.
False
False
1
AUDT.JOHN.16.07-06 – LO: 07-06
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Planning Audit Procedures to Respond to Assessed Risks of Material Misstatement
22. Ineffective internal controls result in higher risk of material misstatement in the financial statements than
effective internal controls.
a.
True
b.
False
True
1
1
AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
United States – AK – AICPA BB-Critical thinking
23. A company’s history of exactly meeting analyst estimates is a factor which could lead auditors to assess
inherent risk at a higher level.
a.
True
b.
False
True
1
AUDT.JOHN.16.07-03 – LO: 07-03
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Assessing Factors Affecting Inherent Risk
24. Internal controls that the auditor expects to rely on to reduce substantive testing must be tested.
a.
True
b.
False
True
1
and Plan Audit Procedures
25. A detection risk of 90% would suggest that an auditor must perform extensive substantive audit testing.
a.
True
b.
False
False
1
AUDT.JOHN.16.07-06 – LO: 07-06
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Responding to Identified Risks of Material Misstatement
26. Heightened risk of material misstatement causes the auditor to perform audit procedures closer to year end.
a.
True
b.
False
True
1
United States – AK – AICPA BB-Critical thinking
27. Audit procedures have to be announced or be completed at predictable times.
a.
True
b.
False
False
1
and Plan Audit Procedures
United States – AK – AICPA BB-Critical thinking
28. All audit procedures must be completed before year end.
a.
True
b.
False
False
1
and Plan Audit Procedures
United States – AK – AICPA BB-Critical thinking
29. When the risk of material misstatement is heightened, the auditor increases the extent of audit procedures
and requires more evidence.
a.
True
b.
False
True
1
Judgments
United States – AK – AICPA BB-Critical thinking
30. Inherent and control risks are risk controlled by the auditor.
a.
True
b.
False
True
1
AUDT.JOHN.16.07-02 – LO: 07-02
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31. A risk factor indicating a heightened risk of fraud would be considered a significant risk.
a.
True
b.
False
True
1
AUDT.JOHN.16.117 – Risks of Material Misstatement
United States – AK – AICPA BB-Critical thinking
32. The existence of one or more risk factors means that there is a material misstatement present.
a.
True
b.
False
False
1
AUDT.JOHN.16.117 – Risks of Material Misstatement
United States – AK – AICPA BB-Critical thinking
33. In most audits, materiality is most commonly expressed as a percentage of net income.
a.
True
b.
False
1
AUDT.JOHN.16.07-01 – LO: 07-01
United States – BUSPORG: Analytic
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Assessing Materiality
34. Auditors are only concerned with materiality for the financial statements as a whole.
a.
True
b.
False
False
1
Judgments
United States – AK – AICPA BB-Critical thinking
35. Tolerable misstatement is always less than or equal to performance materiality.
a.
True
b.
False
Chapter 7 – Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
True
1
Judgments
36. An immaterial misstatement is defined as one that is clearly inconsequential, whether taken individually or
in the aggregate and whether judged by any criteria of circumstance.
a.
True
b.
False
False
1
AUDT.JOHN.16.07-01 – LO: 07-01
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Assessing Materiality
37. Performance materiality is used for assessing the risks of material misstatement and determining the nature,
timing, and extent of audit procedures to perform during the audit opinion formulation process.
a.
True
b.
False
True
1
Judgments
United States – AK – AICPA BB-Critical thinking
38. Tolerable misstatement is the amount of misstatement in an account balance that the auditor could tolerate
and still not judge the underlying account balance to be materially misstated.
a.
True
b.
False
True
1
Judgments
United States – AK – AICPA BB-Critical thinking
39. The lower the dollar amount of the performance materiality the more audit evidence is required.
a.
True
Chapter 7 – Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
b.
False
True
1
Judgments
United States – AK – AICPA BB-Critical thinking
40. A significant risk is the same as a material risk.
a.
True
b.
False
False
1
AUDT.JOHN.16.07-02 – LO: 07-02
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identifying and Assessing Risks of Material Misstatement
41. If tolerable misstatement for accounts payable is $1,000, the auditor would need to obtain more audit
evidence for that account than if tolerable misstatement were $100,000.
a.
True
b.
False
True
1
Judgments
United States – AK – AICPA BB-Critical thinking
42. The purpose of tests of controls are to provide reasonable assurance that internal controls are operating
effectively.
a.
True
b.
False
True
1
AUDT.JOHN.16.119 – Assess Factors Affecting Control Risk
United States – AK – AICPA BB-Critical thinking
43. The quick ratio is useful for analyzing inventory accounts.
a.
True
b.
False
Chapter 7 – Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
False
1
AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
44. Detection risk is controllable by the client.
a.
True
b.
False
False
1
AUDT.JOHN.16.117 – Risks of Material Misstatement
United States – AK – AICPA BB-Critical thinking
45. Insistence from the CEO that she must be present at all meetings between the audit committee and
internal/external auditors would cause auditors to assess inherent risk at a higher level.
a.
True
b.
False
46. Which of the following phrases or terms regarding materiality is used by the Supreme Court of the United
States and is not found in FASB Concepts Statement No. 2?
a.
“amount of a misstatement or omission”
b.
“in light of surrounding circumstances”
c.
“probable that the judgement of a reasonable person”
d.
“significantly altered the total mix of information available”
d
1
AUDT.JOHN.16.07-01 – LO: 07-01
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Assessing Materiality
47. If $15,000 is considered to be material to the income statement, but $25,000 is material to the balance sheet,
the auditor should set overall materiality at which of the following dollar amounts?
a.
$20,000
b.
$25,000
Chapter 7 – Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
c.
$40,000
d.
$15,000
d
1
48. Which of the following best describes the amount of misstatement an auditor is willing to accept and still
judge that an account balance is not materially misstated?
a.
Tolerable misstatement.
b.
Performance materiality.
c.
A clearly trivial amount.
d.
Significant risk.
1
Judgments
United States – AK – AICPA BB-Critical thinking
49. If materiality judgments change during the audit opinion formulation process, what happens to previous
audit decisions that were based on the evidence obtained using the initial material setting?
a.
They need to be reassessed.
b.
They need to be noted in the footnotes.
c.
No action is required.
d.
None of the above.
1
Judgments
50. Which item is correct concerning the risk of material misstatement?
a.
Risk of material misstatement arises because audit procedures have been misapplied.
b.
Risk of material misstatement can be controlled and changed by the auditor.
c.
Risk of material misstatement must be assessed in non-quantitative terms.
d.
Risk of material misstatement is controllable by the client.
51. What is the nature of the relationship between risk of material misstatement and audit risk?
a.
Direct.
b.
None.
c.
Correlational.
d.
Inverse.
d
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AUDT.JOHN.16.117 – Risks of Material Misstatement
United States – AK – AICPA BB-Critical thinking
52. Detection risk is affected by which aspects of substantive audit procedures?
a.
Nature.
b.
Timing.
c.
Extent.
d.
All of the above.
d
1
AUDT.JOHN.16.117 – Risks of Material Misstatement
United States – AK – AICPA BB-Critical thinking
53. Which of the following factors would lead an auditor to assess inherent risk at a higher level?
a.
The account balance is easily determined without estimation.
b.
The account balance is composed of a high volume of nonroutine transactions.
c.
The account balance is composed of simple transactions.
d.
All of the above would lead the auditor to assess a higher level of inherent risk.
b
1
AUDT.JOHN.16.07-03 – LO: 07-03
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United States – AK – AICPA BB-Critical thinking
54. To learn more about a company and its inherent risks, auditors can use which of the following resources?
AUDT.JOHN.16.07-02 – LO: 07-02
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United States – AK – AICPA BB-Critical thinking