Question 1

Auditors make materiality assessments to help in planning the audit evidence to obtain and in evaluating the audit evidence that was obtained.

Accepted Answer

Auditors make materiality assessments in order to determine the significance of potential misstatements in the financial statements and to plan the scope of their audit procedures accordingly. This helps them ensure that they obtain sufficient and appropriate audit evidence to support their opinions on the fairness of the financial statements. Additionally, as they evaluate the audit evidence that was obtained, they may adjust their materiality thresholds based on any new information that comes to light.

Question 2

In performing substantive analytical procedures, the threshold for determining whether differences between the client's recorded balance and the auditor's expectation should be based on planning materiality.

Accepted Answer

The threshold for determining differences between the client's recorded balance and the auditor's expectation should be based on planning materiality during substantive analytical procedures. This is because these procedures are performed to obtain assurance about the fairness of the account balances, and materiality is a key factor in determining the level of assurance required.

Question 3

If a company's net income varies significantly from year to year, the auditor might consider using an average of the net income from the prior three to five years as the materiality benchmark.

Accepted Answer

This is true as using an average of net income from the prior three to five years can help provide a more stable and consistent benchmark for materiality, rather than relying solely on the current year's net income which may fluctuate significantly.

Question 4

The significant judgments of "Assets of Held-for-Sale Operations" are subject to impairment testing based on the most likely sale or disposal price.

Accepted Answer

The statement is true. Assets held for sale are recorded at the lower of their carrying amount or fair value less costs to sell. Impairment testing is performed to determine if the fair value less costs to sell is lower than the carrying amount, and if so, an impairment loss is recognized. The impairment testing is based on the most likely sale or disposal price.

Question 5

If the auditor believes that misstatements aggregating approximately $50,000 would be material to the income statement, but misstatements aggregating approximately $100,000 would be material to the balance sheet, the auditor typically assesses overall materiality at $100,000 or less.

Accepted Answer

The auditor typically assesses overall materiality based on the smallest amount that could influence the economic decisions of users, which in this case would be $50,000 for the income statement.

Question 6

Planning materiality helps the auditor determine the extent of audit evidence needed in order to provide an opinion on the financial statements.

Accepted Answer

Planning materiality is a benchmark used by auditors to determine the amount of audit evidence needed to form an opinion on the financial statements. It is determined based on the auditor's professional judgment and takes into consideration the size of the company, its industry, and the risk of material misstatement. By setting a planning materiality level, the auditor can determine the overall scope of the audit and focus on areas where the risk of material misstatement is higher.

Question 7

Materiality judgments are made in light of the surrounding circumstances, but need not necessarily involve both quantitative and qualitative considerations.

Accepted Answer

Materiality judgments typically involve both quantitative and qualitative considerations to determine the significance of information in financial reporting.

Question 8

The inventory account does not require any subjective estimates by management.

Accepted Answer

The inventory account often requires subjective estimates by management such as determining the method of inventory costing (FIFO, LIFO, etc.), estimating the useful life of inventory items, and determining any obsolete inventory that needs to be written down or off.

Question 9

Existing professional guidance notes that auditors must make materiality assessments for purposes of (1) audit planning and (2) evidence evaluation after audit procedures are completed.

Accepted Answer

This statement is correct and aligns with existing professional guidance on auditing. Auditors are required to assess materiality for both audit planning and evidence evaluation.

Question 10

The significant judgments related to "deferred income taxes" are subject to estimates of future profitable operations against which the deferred asset might be utilized.

Accepted Answer

The statement is correct. Deferred income taxes are recognized for the future tax consequences of events that have already been recognized in the financial statements or tax returns. The future realization of a deferred tax asset is dependent on estimates of future taxable income or profitable operations against which the deferred asset can be utilized.

Question 11

The auditor considers materiality only at the overall financial statement level.

Accepted Answer

The auditor considers materiality at both the overall financial statement level and the individual account balance or transaction level. Materiality is an important concept in the audit process as it helps the auditor determine the nature, timing, and extent of audit procedures to be performed.

Question 12

The significant judgments related to "net finance receivables" include assessing the allowance for noncollectibility.

Accepted Answer

The allowance for noncollectibility is a key component of evaluating net finance receivables. It helps determine the amount of receivables that are expected to be collected and what portion may need to be written off as uncollectible.

Question 13

Complex audit judgments and decisions often involve accounts that require subjective estimates by management.

Accepted Answer

Complex audit judgments and decisions often involve accounts that require subjective estimates by management, which can make the auditing process more challenging.

Question 14

The purpose of making materiality judgments is to make sure that financial statements are free of any material misstatement.

Accepted Answer

Materiality judgments are important to ensure that financial statements do not have any significant misstatements that could impact the interpretation and decision-making of users of those statements. Materiality is determined by considering the size and nature of the item, as well as its relevance to the financial statements as a whole. This helps to ensure that the financial statements provide a true and fair view of the entity's financial position, performance, and cash flows.

Question 15

Determining materiality is based solely on quantitative factors.

Accepted Answer

Materiality can also be determined based on qualitative factors, such as the nature of the item, its potential impact on stakeholders, and its relevance to the decision-making process.

Question 16

Auditor needs to assess disclosures about what lines of business the company may discontinue.

Accepted Answer

As part of their audit procedures, auditors are required to evaluate the disclosures made by management about the company's plans to discontinue or exit certain lines of business. This is important information for investors and other stakeholders, and the auditor needs to ensure that the disclosures are accurate and complete.

Question 17

An auditor's consideration of materiality is a matter of professional judgment and is influenced by the auditor's perception of the needs of users of financial statements.

Accepted Answer

The consideration of materiality by an auditor is based on professional judgment and takes into account the needs of financial statement users.

Question 18

Auditors are not responsible for making judgments regarding the fair value of securities.

Accepted Answer

Auditors are responsible for assessing whether the fair value measurements and disclosures in financial statements are reasonable and in accordance with applicable accounting standards.

Question 19

There are systematic processes that the auditor can use in making most of the complex judgments in the financial statements.

Accepted Answer

The auditor can use systematic processes such as risk assessment procedures, analytical procedures, and audit evidence gathering to make complex judgments in the financial statements. These processes help the auditor to gather sufficient and appropriate evidence to support their judgments and conclusions.

Question 20

Auditors are constantly challenged to evaluate the quality of a client's estimates, including areas such as obsolescence of inventory, allowance for doubtful accounts, and tax provisions among others.

Accepted Answer

Auditors are responsible for evaluating the quality of their client's financial statements, including the estimates made in areas such as inventory obsolescence, allowance for doubtful accounts, and tax provisions. This evaluation is necessary to ensure that the financial statements accurately reflect the financial position of the company.

Quiz 16: Advanced Topics Concerning Complex Auditing Judgments