Question 1

MNE and Associates used the benchmark of 5% of income (earnings) before income tax and came up with $9.5 million as their planning materiality for Garden, Inc.MNE also determined that planning materiality using a benchmark of 1% total assets resulted in $23 million.How should MNE decide which planning materiality amount to use?

Accepted Answer

Ultimately, the auditors must use their professional judgment to decide on the planning materiality amount, along with qualitative factors in the final assessment. While the benchmarks of 5% of income and 1% of total assets are helpful, they are not the only factors that should be considered in determining planning materiality. Auditors must consider factors such as the company's risk profile, complexity, size, and history of misstatements when making their decision. Therefore, the auditor should use their professional judgment to decide which planning materiality amount is appropriate for the specific circumstances of the audit.

Question 2

In the Eilifsen and Messier (2015) study, the firms that used benchmarks of total assets and total revenues, used what percent of these figures to determine their planning materiality?

Accepted Answer

Eilifsen and Messier (2015) found that firms using benchmarks of total assets and total revenues typically applied a range of 0.25% to 2.0% of these figures to determine their planning materiality.

Question 3

The use of performance materiality should reduce the ________________ and/or undetected misstatements in the financial statements is greater than materiality for the financial statements as a whole.

Accepted Answer

Performance materiality is used to reduce the risk that the aggregate of uncorrected and undetected misstatements exceeds the materiality level for the financial statements as a whole. It does this by setting a lower threshold for the audit procedures, thereby aiming to catch smaller misstatements that, in aggregate, could be significant.

Question 4

Martin Inc.is being audited by the firm MNE and Associates.MNE's auditors decide that $100 million is the planning materiality and $50 million is the appropriate performance materiality at the account level.If all of Martin's account balances are below $50 million, the auditors will:

Accepted Answer

Even if individual account balances are below performance materiality, the auditors should still perform some level of detailed audit procedures on the accounts because the immaterial misstatements can be material in aggregate. This is known as the aggregation principle, which requires auditors to consider the risk of material misstatement in the financial statements as a whole, rather than just at the individual account level. Therefore, option A is the best choice.

Question 5

The use of performance materiality should:

Accepted Answer

The use of performance materiality sets a lower threshold for misstatements to be considered when auditing individual account balances, transactions or disclosures. This reduces the probability that the sum of immaterial and/or undetected misstatements in the financial statements is greater than materiality for the financial statements as a whole. Therefore, choice A is correct.

Question 6

What is audit risk?

Accepted Answer

Audit risk is the risk that the auditor will issue an inappropriate audit opinion when the financial statements contain a material misstatement. This inappropriate opinion could be either an unqualified opinion when the financial statements contain a material misstatement or a qualified, adverse, or disclaimer of opinion when the auditor fails to detect a material misstatement. Therefore, answer A is the most appropriate choice. Choice B is incorrect as an objectionable audit opinion is not a recognized audit opinion. Choice C is incorrect as an adverse opinion is a recognized audit opinion, but it is issued when the auditor detects a material misstatement that is both material and pervasive. Choice D is incorrect as an incompatible audit opinion is not a recognized audit opinion.

Question 7

AU-C 200.A22, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards states auditors should be skeptical if certain situations arise.Which situation is NOT included in those that AU-C 200.A22 presents?

Accepted Answer

AU-C 200.A22 presents situations where auditors should be skeptical, including contradictory audit evidence, unreliable client documents or responses, and possible fraud. However, there is no mention of a situation indicating the need for fewer audit procedures.

Question 8

After determining materiality, which of the following is NOT a step for the auditor to follow?

Accepted Answer

While assessing fraud risk is an important aspect of the audit process, it is not directly related to the determination of materiality. Therefore, it is not a necessary step following the determination of materiality.

Question 9

A majority of companies in the Eilifsen and Messier (2015) study used _____________ percent of income before taxes to determine planning materiality.

Accepted Answer

The Eilifsen and Messier (2015) study found that a majority of companies used 5 percent of income before taxes to determine planning materiality.

Question 10

The auditor can set detection risk as high if _________.

Accepted Answer

When inherent risk and control risk are low, the risk of material misstatement is also low. Therefore, the auditor can set detection risk as high without compromising the overall audit risk.

Question 11

What is performance materiality?

Accepted Answer

Performance materiality refers to the amount or amounts set by the auditors at less than the overall materiality level for specific classes of transactions, account balances, or disclosures. This is done to reduce the risk of material misstatements and to ensure that the audit is focused on the most important areas.

Question 12

The determination of performance materiality is _________________and involves the exercise of professional judgment.

Accepted Answer

Performance materiality is not a simple mechanical calculation and requires professional judgment. It involves assessing the risk of material misstatement, considering the size and nature of the account balance, and other relevant factors.

Question 13

At the assertion level, the risk of material misstatement refers to risks that affect classes of ________.

Accepted Answer

The risk of material misstatement affects not only transactions and disclosures but also account balances. Therefore, the best choice is D, which includes all three categories.

Question 14

A(an)______________ is an amount set by the auditor that is less than planning materiality and 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 an amount set by the auditor that is lower than planning materiality and is used to determine the extent of audit procedures for a particular class of transaction or account balance. This ensures that the auditor gives more attention to accounts or transactions that have a greater risk of material misstatement, while also ensuring that the overall audit risk is kept within an acceptable level. Quantitative materiality refers to the materiality level set for the financial statements as a whole, while qualitative materiality refers to the nature of a misstatement and its potential impact on the financial statements. Auditing standards describe the procedures that must be followed by the auditor during the audit.

Question 15

Holding everything else constant, as the auditor's evaluation of materiality_______, the auditor is looking to obtain a more precise conclusion about the financial statements.The _______precision of the audit will cause the auditor to perform more extensive audit procedures.

Accepted Answer

When the auditor's evaluation of materiality decreases, it means the auditor is concerned with smaller amounts potentially affecting the financial statements' accuracy. This leads to seeking a more precise conclusion, requiring increased precision in the audit, which in turn necessitates more extensive audit procedures.

Question 16

Which of the following denotes information or misstatements that exceed the magnitude of an auditor's preliminary materiality assessment?

Accepted Answer

Quantitative materiality refers to the numerical or monetary thresholds or benchmarks auditors use to assess the significance of misstatements in financial statements. When information or misstatements exceed these thresholds, they are considered to exceed the auditor's preliminary materiality assessment.

Question 17

If auditors determine a higher planning materiality level, they will plan to gather _______ extensive audit evidence.

Accepted Answer

If auditors determine a higher planning materiality level, they will plan to gather less extensive audit evidence. This is because a higher planning materiality level means that the auditor has determined that certain misstatements or errors are not material enough to affect the overall financial statements. As a result, the auditor may choose to use sampling techniques or rely on internal controls rather than conducting a more thorough examination of every transaction or account balance.

Question 18

Which term means that (or is defined as): auditors should maintain a questioning mind and thoroughly investigate all evidence presented by the client?

Accepted Answer

Professional skepticism is the term that refers to auditors being cautious and critical in their assessment of financial information provided by the client. They should not take everything at face value and should question everything until they are satisfied that the evidence is reliable and accurate. This is an important part of the audit process as it helps to ensure that any errors or irregularities are detected and addressed.

Question 19

When would auditors increase the amount of detailed audit procedures used to test the year-end account balances and transactions from throughout the year?

Accepted Answer

The answer of When would auditors increase the amount of...

Question 20

MNE and Associates is auditing Blanchard Company.MNE has decided to use 5% of income (earnings) before income tax as a benchmark.If income (earnings) before income tax was $33 million, what would be the amount of planning materiality?

Accepted Answer

Planning materiality is calculated as a percentage of a chosen benchmark, in this case, 5% of income before income tax. Therefore, 5% of $33 million equals $1.65 million.

Quiz 3: Risk Assessment Part Iaudit Risk and Audit Strategy