Q.A.Materiality is a relative conceptB.Materiality judgments involve both quantitative and qualitative judgmentsC.Auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of an informed decision maker who will rely on the financial statementsD.At the planning state, the auditor considers materiality at the financial statement level onlyAnswer» d. At the planning state, the auditor considers materiality at the financial statement level only
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Which of the following may cause management to intentionally understate profits?
A. management wants to create "cookie jar" reserves for a rainy day
B. the company is under scruitiny by tax authorities
C. the company is suffering a large loss and wants to take a "big bath."
D. all of the aboveWhich of the following is true.
A. auditors are responsible for detecting all fraudulent financial reporting.
B. auditors must specifically consider fraud risk from overstating liabilities.
C. auditors must specifically consider fraud risk from management override of controls
D. all of the above are true- C. auditors must specifically consider fraud risk from management
- override of controls
Auditors would perform the following steps in which order?
A. set audit risk; assess risk of material misstatement; calculate detection risk
B. assess risk of material misstatement; determine detection risk; calculate audit risk
C. set audit risk; determine detection risk; assess risk of material misstatement
D. assess risk of material misstatement; assess audit risk; determine detection risk- A. set audit risk; assess risk of material misstatement; calculate
- detection risk
Which of the following is not required by SAS No. 99, "Consideration of Fraud in a Financial Statement Audit"?
A. conduct inquireies of the audit committee as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud
B. conduct a discussion by the audit team of the risks of material misstatement due to fraud
C. conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until verified by the auditor
D. Conduct a continuing assessment of the risk of material misstatement due to fruad throughout the audit- A. conduct inquireies of the audit committee as to their views about the
- risks of fraud and their knowledge of any fraud or suspected fraud
Inspection of tangible assets provides evidence for which assertion?
A. completeness
B. occurrence
C. rights and obligations
D. existenceThe risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated is referred to as
A. audit risk
B. information risk
C. business risk
D. detection riskIf results from the auditor's tests of controls induce the auditor to change the assessed level of control risk for inventory from .2 to .4 and audit risk and inherent risk remain constant, what is the effect on the acceptable level of detection risk?
A. detection risk would increase from .3 to .6
B. detection risk would decrease from .4 to .2
C. a change in detection risk cannot be calculated because audit risk and inherent risk values are not given.
D. detection risk would not change since audit risk and inherent risk do not change.B. detection risk would decrease from .4 to .2
The auditor has assessed the risk of material misstatement to determine the acceptable level of detection risk for financial statement assertations for inventory account balances. As the acceptable level of detection risk decreases, which of the following adjustments to the accounts receivable audit program would the audit team normally make?
A. change the nature of substantive tests to more efficient procedures, such as using negatvie rather than posititve confirmations
B. increase the sample size of the confirmations
C. change the sampling method from random to convenience sampling.
D. change the timinf of the confirmation process to an interim dateB. increase the sample size of the confirmations
Which of the following factors best define the materiality of audit risks?
A. years since last audit, significant management turnover & average value per transaction
B. volume of transactions, value of assets at risk & average value per transaction
C. volume of transactions, degree of system integration, years since last audit, significant management turnover, value of assets at risk, average value per transaction, & results of last audit
D. degree of system integration, significant management turnover, results of last audit- B. volume of transactions, value of assets at risk & average value
- per transaction
With respect to management's accounting estimates, auditors are not for
A. determining the reasonableness of estimates
B. determining that estimates are presented in conformity with GAAP
C. determining that estimates are adequately disclosed in the financial statements
D. all of the aboveAuditors are not responsible for accounting estimates with respect to:
A. determining that estimates are presented in conformity with GAAP
B. making the estimates
C. determining the reasonableness of estimates
D. determining that estimates are adequately disclosed in the financial statementsAICPA auditing standards do not require auditors of financial statements to:
A. report all finding of errors and frauds to police authorities
B. design audits to provide reasonable assurance of detecting errors and frauds
C. understand the nature of errors and frauds
D. assess the risk of occurrence of errors and fraudsA. report all finding of errors and frauds to police authorities
The risk that the auditors’ own work will lead to the decision that material misstatements do not exist in the financial statements, when in fact such misstatements do exist, is:
A. detection risk
B. audit risk
C. control risk
D. inherent riskAuditors are responsible for the quality of the work related to management and control of:
A. inherent risk
B. relative risk
C. detection risk
D. control riskThe auditors assessed a combined inherent risk and control risk at 0.50 and said they wanted to achieve a 0.05 risk of failing to detect misstatements in an account equal to the $17,000 tolerable misstatement assigned to the account. What detection risk do the auditors plan to use for planning the remainder of the audit work?
A. 0.10.
B. 0.75.
C. 0.00.
D. 0.20.An audit program contains:
A. specifications of procedures the auditors believe appropriate for the financial statements under audit
B. reconciliation of the account balances in the financial statements with the account balances in the client’s general ledger
C. documentation of the assertions under audit, the evidence obtained, and the conclusions reached
D. specifications of audit standards relevant to the financial statements being audited- A. specifications of procedures the auditors believe appropriate for the
- financial statements under audit
The revenue cycle of a company generally includes these accounts:
A. inventory, accounts payable, and general expenses
B. cash, accounts receivable, and sales
C. inventory, general expenses, and payroll
D. cash notes payable, and capital stockB. cash, accounts receivable, and sales
When auditing the existence assertion for an asset, auditors proceed from the:
A. potentially unrecorded items forward to the financial statement numbers
B. supporting original transaction documents to the general ledger
C. general ledger back to the supporting original transaction documents
D. financial statement numbers back to the potentially unrecorded itemsC. general ledger back to the supporting original transaction documents
If tests of controls induce the auditor to change the assessed level of control risk for fixed assets from 0.4 to 1.0, and audit risk (.05) and inherent risk remain constant, the acceptable level of detection risk is most likely to:
A. change from .2 to .3
B. change from .1 to .04
C. change from .25 to .1
D. be unchangedWhen financial statement auditors decide to carry out a response to a particular fraud risk in an account balance of class of transactions, they are most likely to:
A. carefully avoid conducting interviews with people in the fraud-rich areas
B. exercise more professional skepticism
C. study more carefully management’s selection and application of accounting principles
D. perform procedures such as inventory observation and cash counts on a surprise or unannounced basis- D. perform procedures such as inventory observation and cash counts on a
- surprise or unannounced basis
It is appropriate and acceptable under generally accepted auditing standards for an auditor to:
A. assess both inherent and control risk at 100 percent and achieve an acceptably low audit risk by performing extensive detection work
B. assess control risk at zero and perform a minimum of detection work
C. assess inherent risk at zero and perform a minimum of detection work
D. decide that audit risk can be 40 percent- A. assess both inherent and control risk at 100 percent and achieve an
- acceptably low audit risk by performing extensive detection work
Confirmations of accounts receivable provide evidence primarily about these two assertions:
A. rights and obligations and existence
B. completeness and valuation
C. existence and completeness
D. valuation and rights and obligationsA. rights and obligations and existence
If sales and income were overstated by recording a false credit sale at the end of the year, you could find the false “dangling debit” in the:
A. accounts receivable
B. bad debt expense
C. cost of goods sold
D. inventoryOne of the typical characteristics of management fraud is:
A. conversion of stolen inventory to cash deposited in a falsified bank account
B. illegal acts committed by management to evade laws and regulations
C. falsification of documents in order to steal money from an employer
D. victimization of investors through the use of materially misleading financial statements- D. victimization of investors through the use of materially misleading
- financial statements
Under the Private Securities Litigation Reform Act, independent auditors are required to:
A. report to the SEC all instances of illegal acts they believe have a material effect on financial statements if the board of directors does not first report to the SEC
B. report in writing all instances of illegal acts to the client’s board of directors
C. report clearly inconsequential illegal acts to the audit committee of the client’s board of directors
D. resign from the audit engagement and report the instances of illegal acts to the SEC- A. report to the SEC all instances of illegal acts they believe have a
- material effect on financial statements if the board of directors does
- not first report to the SEC
With respect to the concept of materiality, which one of the following statements is correct?
A. Materiality is determined by reference to ACIPA guidelines.
B. Materiality depends on the nature of a transaction rather than the dollar amount of the transaction.
C. Materiality is a matter of professional judgment.
D. Materiality depends only on the dollar amount of an item relative to other items in the financial statements.C. Materiality is a matter of professional judgment.
Edison Corporation has a few large accounts receivable that a total $1,400,000. Victor Corporation has a great number of small accounts receivable that also total $1,400,000. The importance of a misstatement in any one account is therefore greater for Edison than for Victor. This is an example of the auditor’s concept of:
A. comparative analysis
B. materiality
C. relative risk
D. reasonable assuranceWhich of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to afford a reasonable basis for an opinion?
A. Reasonable assurance
B. Inherent risk.
C. Materiality.
D. Auditor judgment.In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity’s income statement but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate:
A. $15,000
B. $10,000
C. $20,000
D. $30,000What assurance does the auditor provide that errors, fraud, and direct-effect illegal acts that are material to the financial statements will be detected?
Errors Fraud Direct-Effect Illegal Acts
A. Limited Limited Reasonable
B. Reasonable Reasonable Reasonable
C. Reasonable Limited Limited
D. Limited Negative LimitedB. Reasonable Reasonable Reasonable