Question 1

What is the last phase of the audit?

Accepted Answer

The last phase of an audit is the reporting phase, where the auditor prepares a report summarizing the findings of the audit and providing recommendations for improvement. This report is typically shared with the client and any other relevant stakeholders. The other choices listed are all earlier phases in the audit process.

Question 2

From a definitional perspective, information is considered material if it _______.

Accepted Answer

Materiality in accounting refers to the importance or significance of information to users of financial statements. Information is considered material if its inclusion or exclusion could impact the decision-making process of those users. Therefore, choice A is the correct answer. Choices B, C, and D are not accurate in defining materiality in accounting.

Question 3

Information is considered quantitatively material if it _______.

Accepted Answer

Quantitative materiality is determined by the auditor's planning materiality assessment, which is typically based on a percentage of the client's financial statement items. Therefore, information is considered quantitatively material if it exceeds the dollar magnitude of the planning materiality assessment.

Question 4

What is the second phase of the audit?

Accepted Answer

The second phase of the audit is the risk response phase, which follows the initial risk assessment phase. In this phase, auditors develop and implement actions to address the identified risks.

Question 5

When considering clients like Boeing, inventory will most likely be the largest current asset and prepaid expenses will be one of the smallest.As a result, the auditors should plan to _______.

Accepted Answer

Since inventory is the largest current asset, it poses a higher risk of material misstatement and fraud. Therefore, auditors should focus more on inventory during their audit procedures and devote more audit time to ensure that it is properly valued and accounted for. Prepaid expenses, on the other hand, are relatively small and less prone to material misstatements, so auditors can allocate less time for this account.

Question 6

Auditors make decisions about the extent and timing of detailed testing of account balances and transactions during the ________phase of the audit.

Accepted Answer

Auditors make decisions about the extent and timing of detailed testing of account balances and transactions during the risk response phase of the audit. This is because the risk response phase is where auditors assess the risks of material misstatement and design and perform audit procedures to respond to those risks.

Question 7

Total equity may be more reliable of a benchmark for determining planning materiality when a company is experiencing a _______.

Accepted Answer

Total equity represents the residual value available to shareholders after all liabilities are paid. In a situation where a company is experiencing a loss or very poor operating results, total equity becomes a more significant metric as it directly impacts the value available to shareholders. Therefore, total equity may be a more reliable benchmark for determining planning materiality in such situations.

Question 8

What must happen before planning the audit and implementing the phase of risk assessment?

Accepted Answer

Before planning the audit and implementing the phase of risk assessment, the auditor must first make a client acceptance or continuation decision, which involves evaluating whether to accept or continue an engagement with a particular client. This decision is based on factors such as the client's reputation, business and industry risks, and the auditor's independence and ability to perform the engagement. Only after this decision has been made can the auditor proceed with planning the audit strategy and conducting the phase of risk assessment. Therefore, choice A is the best answer. Choices B, C, and D are incorrect because they do not reflect the proper sequence of steps in the audit process. The risk response phase comes after risk assessment, the reporting phase comes after fieldwork and testing, and the audit strategy is developed as part of the planning phase, which includes risk assessment.

Question 9

Information is considered qualitatively material if it _______.

Accepted Answer

Materiality is not just about its quantitative aspect, but also about its qualitative aspect. A piece of information may not have a large dollar amount, but if it affects a user's decision-making process for a reason other than its magnitude, such as legal or reputational consequences, then the information is considered qualitatively material.

Question 10

If new information comes to light that would cause the auditor to establish a different level of planning materiality, then the auditor _______.

Accepted Answer

If new information comes to light that would cause the auditor to establish a different level of planning materiality, the auditor should examine the information and make adjustments to materiality as needed. This is in line with auditing standards and the auditor's responsibility to obtain sufficient evidence to support their opinion. The auditor cannot simply rely on a benchmark or have management select the appropriate benchmark without considering the specific circumstances of the engagement.

Question 11

Which of the following statements are true?

Accepted Answer

The auditing standards do not require specific percentages be applied as benchmarks in setting planning materiality. For publicly traded companies, the primary users of financial statements are shareholders, but for private companies, it may be owners, lenders, or other stakeholders. Auditors rely heavily on their professional judgment in setting planning materiality based on factors such as the company's size, complexity, and risks. Different audit firms may vary in the method they use to set planning materiality in the risk assessment phase.

Question 12

Misstatements that impact a user's decision-making process for a reason other than its magnitude constitute ________ materiality.

Accepted Answer

Qualitative materiality refers to misstatements that may not have a significant financial impact but can still affect a user's decision-making process due to their nature, such as misstatements related to fraud or illegal activity. It is important for auditors to consider both quantitative and qualitative materiality when assessing the impact of misstatements.

Question 13

In addition to income before income taxes, another acceptable benchmark(s) for private company audits is(are) _______.

Accepted Answer

Total assets and total revenues are acceptable benchmarks for private company audits as they provide a comprehensive overview of the company's financial performance and position. Net income, income tax rate, and net liabilities are all important measures, but they do not represent the full picture of the company's financial health.

Question 14

AU-C 300 Planning an Audit and AS 2101 Audit Planning primarily requires auditors to _______.

Accepted Answer

Planning an audit primarily requires auditors to assess risk and plan the audit to reduce audit risk to an acceptably low level, as per AU-C 300 Planning an Audit and AS 2101 Audit Planning. While performing tests of the system of internal control, or tests of account balances, transactions, or disclosures, and making decisions about the extent and timing of detailed testing of account balances and transactions are also important aspects of audit planning, they are not the primary requirements. The auditors cannot rely solely on the client's system of internal controls and must evaluate it to identify risks of material misstatement.

Question 15

In an analysis by Eilifsen and Messier (2015), of the eight largest U.S.public accounting firms in the study, _______ firms revealed that they use "income before income taxes" as the primary benchmark for determining planning materiality.

Accepted Answer

According to the analysis by Eilifsen and Messier (2015), seven out of the eight largest U.S. public accounting firms revealed that they use "income before income taxes" as the primary benchmark for determining planning materiality.

Question 16

Information is considered quantitatively material if it exceeds the magnitude of an auditor's _______ materiality assessment.

Accepted Answer

Quantitative materiality is determined during the planning phase of the audit while qualitative materiality is assessed during the performance phase of the audit. Therefore, if information exceeds the auditor's quantitative materiality assessment, it is considered quantitatively material.

Question 17

What is the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated?

Accepted Answer

This is an example of audit risk, which is the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated. This risk arises from factors such as the possibility of errors in the financial statements, limitations in the scope of the audit, and the possibility of fraud or other intentional wrongdoing. The auditor must assess and manage this risk in order to provide a high-quality audit opinion.

Question 18

Which of the following is an amount set by the auditor that is used to make decisions about the extent of audit procedures for a particular class of transaction, account balance, or disclosure?

Accepted Answer

Performance materiality is defined as the amount or amounts set by the auditor for each materiality level that reduces to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. It is used to make decisions about the extent of audit procedures for a particular class of transaction, account balance, or disclosure. Planning materiality is the materiality level set in planning stage while overall materiality is the materiality level set for the financial statements as a whole. Qualitative materiality is the consideration of the nature and circumstances of a misstatement in addition to its amount.

Question 19

When the financial statements are materially misstated for a particular client, which of the following will constitute an audit risk?

Accepted Answer

When the financial statements are materially misstated, there is a risk that the auditor may express an incorrect audit opinion, which can lead to legal and financial consequences for the auditor and the client. The other choices do not directly relate to the audit risk in this situation.

Question 20

In general, what does detailed testing of account balances provide?

Accepted Answer

Detailed testing of account balances provides the evidence needed by auditors to determine if the financial statements are fairly presented. This includes testing the accuracy, completeness, validity, and existence of the account balances. It also allows auditors to identify any potential errors, misstatements, or fraud, and adjust their audit opinion accordingly.

Quiz 3: Risk Assessment Part Iaudit Risk and Audit Strategy