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?
“significantly altered the total mix of information available”
“in light of surrounding circumstances”
“amount of a misstatement or omission”
“probable that the judgement of a reasonable person”
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?
$15,000
$40,000
$25,000
$20,000
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 materiality setting?
The auditor repeats all audit procedures performed prior to the change in materiality judgments.
The auditor modifies the audit opinion to note the change in materiality judgements.
The auditor reassesses those previous decisions.
No action is required.
Which item is correct concerning the risk of material misstatement?
Risk of material misstatement must be assessed in non-quantitative terms.
Risk of material misstatement arises because audit procedures have been misapplied.
Risk of material misstatement can be controlled and changed by the auditor.
Risk of material misstatement is controllable by the client.
What is the nature of the relationship between risk of material misstatement and audit risk?
None
Correlational
Direct
Inverse
Detection risk is affected by which aspects of substantive audit procedures?
Nature
Timing
Extent
All of the above
Which of the following factors would lead an auditor to assess inherent risk at a higher level?
The account balance is easily determined without estimation.
The account balance is composed of a high volume of nonroutine transactions.
The account balance is composed of simple transactions.
All of the above would lead the auditor to assess a higher level of inherent risk.
To learn more about a company and its inherent risks, auditors can use which of the following resources?
Management inquiries
Economic statistics
Online searches
Any of the above could be used
Which of the following factors will result in control risk being assessed at a higher level?
There is a lack of supervision of accounting personnel.
The control environment is operating effectively.
Accounting staff are well trained and educated.
Controls are well designed.
Which of the following are two frequently used planning analytical procedures?
Ratio analysis and trend analysis.
Reasonableness tests and economic analysis.
Trend analysis and reasonableness tests.
Ratio analysis and economic analysis.
Which of the following best describes year-to-year comparisons of account balances?
Time analyses
Trend analyses
Ratio analysis
Reasonableness tests
Which of the following ratios provides information about liquidity?
Inventory turnover
Net profit margin
Current ratio
Sales to assets
What is the main reason to establish guidelines for brainstorming sessions?
To clearly identify lines of authority
To pass information up to top-level management efficiently
To encourage interactive and constructive group dialogue and idea exchange
To comply with SEC requirements
What type of relationship exists between audit risk and detection risk?
Indirect
No relationship
What is the typical range for the setting of audit risk?
1%-5%
1%-10%
0%-10%
0%-5%
Which of the following would be the likely risk results from using a 1% level of detection risk?
High detection risk and high audit risk
Low detection risk and high audit risk
High detection risk and low audit risk
Low detection risk and low audit risk
Which of the following risks are controllable by the auditor?
Audit risk and detection risk
Audit risk and control risk
Risk of material misstatement
None of the above
As inherent risk increases, and other risk factors remain constant, what happens to the extent of audit work?
Increases
Stays the same
Decreases
Becomes less reliable
Which of the following statements best describes what is meant by setting control risk at 100%?
Controls are relevant
Controls are effective
Cannot be determined from the information given
Controls are ineffective
If the auditor’s assessment of audit risk is low (e.g., 1% rather than 5%), what is the effect on the amount of substantive testing performed by the auditor?
Increase in substantive testing
No change in substantive testing
Substantive testing is not needed
Decrease in substantive testing
What is the auditor trying to accomplish by varying the timing of audit procedures from the prior year?
Confuse the client
Gather information during different times of the year
Introduce unpredictability
Finish the audit sooner
What procedure has to be completed at or after the end of the period?
Evaluating of adjusting journal entries
Assessment of control risk
Engagement letter
All procedures must be completed prior to period end
An increase in the risk of material misstatement would lead to which of the following responses?
Decrease in the extent of audit procedures
Earlier performance of audit procedures
Increase in the extent of audit procedures
No change in the extent or timing of audit procedures
Which of the following risk factors suggests a heightened level of risk of material misstatement?
Few immaterial related-party transactions
The departure of key personnel of a company
Declining a merger with another company
Having a stable product
Which of the following terms best describes the risk that audit procedures will fail to detect material misstatements?
Control risk
Detection risk
Audit risk
Inherent risk
Which of the following statements regarding detection risk is true?
Detection risk incorporates both substantive analytical procedures and tests of details.
Detection risk provides guidance to the auditor on the substantive audit procedures needed to achieve the desired audit risk.
A low level of detection risk means the auditor needs to obtain more evidence from substantive procedures.
In which of the following situations will auditors typically rely on internal controls over financial reporting?
If the client asks the auditor to test controls.
If the controls are sufficient to increase control risk to an acceptable level.
If control risk is assessed at a high level.
If the controls are determined to be designed and operating effectively.
The risk of material misstatement refers to which of the following?
Control risk and acceptable audit risk
Inherent risk and audit risk
The combination of inherent risk and control risk
Which of the following statements is false?
Inherent risk is directly related to the amount of evidence required in account testing.
Inherent risk is the susceptibility of the financial statements to material misstatement, assuming no internal controls.
Inherent risk is inversely related to the level of control risk.
Inherent risk and control risk are assessed by the auditor and controlled by the client.
Which of the following is a factor that would cause an increase in the assessment of control risk?
The industry is mature and declining
Little interaction between senior management and operating staff
A new business strategy is improperly implemented
New products have uncertain likelihood of success
