Question 1

The SEC issued SAB 108 in 2006, which mandates what is termed a dual approach to assessing uncorrected misstatements.

Accepted Answer

SAB 108 does indeed mandate a dual approach to assessing uncorrected misstatements. This approach involves determining the materiality of each individual misstatement and then aggregating all individually immaterial misstatements to determine if they are considered material in the aggregate.

Question 2

If the market value of the reporting unit is below book value and a significant amount of goodwill exists, the presumption is that there has been an impairment of goodwill.

Accepted Answer

When the market value of a reporting unit falls below its book value and there is significant goodwill, it suggests that the goodwill may not be recoverable, indicating potential impairment.

Question 3

Goodwill arising from many acquisitions can be netted into one test at the company level.

Accepted Answer

Goodwill must be tested for impairment at the reporting unit level, not netted at the company level, according to accounting standards.

Question 4

Because of conservatism considerations, auditors should allow a client to overestimate its reserve for restructuring.

Accepted Answer

Auditors should not allow a client to overestimate its reserve for restructuring as it would lead to an overstatement of assets and an understatement of expenses, which is a violation of the principle of conservatism. Auditors should ensure that the reserve is reasonable and supported by appropriate evidence.

Question 5

Auditors can choose to test the client's warranty reserves using primarily tests of controls and substantive analytical procedures.

Accepted Answer

Auditors can choose to test the client's warranty reserves using primarily tests of controls and substantive analytical procedures to assess the adequacy of the reserve and the effectiveness of the controls over its estimation and recording. This approach allows auditors to evaluate both the processes and the financial estimations related to warranty reserves.

Question 6

Auditors request the client to book all known misstatements, even if the recording cost is very high so that there are no carryovers from year to year.

Accepted Answer

Auditors typically request clients to correct material misstatements, but may allow immaterial misstatements to remain uncorrected if the cost of correction outweighs the benefits, as long as they do not affect the financial statements' overall accuracy.

Question 7

The assessment as to whether a misstatement in a cash-flow classification is material should be primarily based on an income statement perspective.

Accepted Answer

The assessment of materiality for a misstatement in cash-flow classification should be based on the impact it has on cash flows and not just income statement perspectives. Cash flow misstatements can impact the liquidity and solvency of an entity, which are critical considerations for stakeholders. Therefore, the evaluation of the materiality of cash flow through the cash-flow classification should be given considerable importance.

Question 8

The SEC's position is generally that if management refuses to correct a material misstatement, then the auditor is obligated to issue a qualified or an adverse opinion on the financial statements.

Accepted Answer

The SEC's position on this matter is indeed that if management refuses to correct a material misstatement, then the auditor is obligated to issue a qualified or an adverse opinion on the financial statements. This is in keeping with the auditor's responsibility to ensure that the financial statements are accurate and reliable, and to provide assurance to users of the financial statements that they can rely on the information presented. In cases where management is unwilling or unable to correct a material misstatement, the auditor must take action to ensure that the misstatement is appropriately disclosed in the financial statements in order to provide transparency to users of the financial statements.

Question 9

Goodwill has to be evaluated for impairment once a year, as well as on an interim basis as the time events and circumstances warrant.

Accepted Answer

According to the accounting standards, goodwill has to be evaluated for impairment at least once a year, and also on an interim basis if there are any events or changes in circumstances that could indicate impairment. This is in accordance with International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP).

Question 10

Misstatements detected during the audit that were initially deemed to be immaterial need not be summarized to determine their aggregate effects.

Accepted Answer

All misstatements detected during the audit, regardless of whether they were initially deemed to be immaterial, need to be summarized to determine their aggregate effects. This is required by auditing standards, which state that the auditor should accumulate all misstatements identified during the audit, even those that are individually immaterial, to evaluate the effect of uncorrected misstatements on the financial statements as a whole.

Question 11

The accumulation of which potential misstatements to accumulate for the purpose of assessing the materiality of misstatements is often based on whether items are considered clearly trivial.

Accepted Answer

This statement is true. The accumulation of potential misstatements for materiality assessment often excludes clearly trivial items, meaning items that are not likely to have a significant impact on the overall financial statements.

Question 12

Auditors may consider only quantitative effects and not qualitative effects in making materiality judgments.

Accepted Answer

Auditors should consider both quantitative and qualitative effects in making materiality judgments. Quantitative factors include the amount of the item, while qualitative factors include the nature and circumstances of the item. Both of these factors may impact the decision of whether an item is material or not.

Question 13

A misstatement that is intentional is not assessed any differently by the auditor than a misstatement that is unintentional.

Accepted Answer

A misstatement that is intentional is considered fraud and requires the auditor to perform additional procedures, including informing those charged with governance, considering the effect on the financial statements and audit report, and in some cases, withdrawing from the engagement.

Question 14

When auditing pension obligations, the auditor will likely use a specialist to assist the audit team.

Accepted Answer

Pension obligations can be complex and require specialized knowledge. Therefore, the auditor may engage a specialist to assist in the audit process to ensure that the audit is completed accurately and effectively.

Question 15

The iron curtain method for assessing materiality focuses on assuring that the year-end balance sheet is correct and considers the impact of prior-year uncorrected misstatements reversing in later years.

Accepted Answer

The iron curtain method focuses on the cumulative effect of uncorrected misstatements and how they affect the current year-end balance sheet, without specifically considering the reversal of prior-year misstatements in later years.

Question 16

The discovery of an intentional misstatement, even if immaterial, could impact the auditor's opinion on the effectiveness of the client's internal control over financial reporting.

Accepted Answer

The discovery of an intentional misstatement, even if immaterial, could indicate a weakness in the client's internal control over financial reporting and affect the auditor's opinion on its effectiveness.

Question 17

When evaluating identified misstatements, the auditor only needs to consider misstatements in the current year, and not misstatements from the prior year.

Accepted Answer

The auditor needs to consider misstatements from both the current year and the prior year when evaluating identified misstatements. This is because misstatements from the prior year may have carried forward and impacted the current year's financial statements.

Question 18

A materiality level where the auditor believes that the errors below that level would not, even when aggregated with all other misstatements, be material to the financial statements is often based on whether something is considered clearly trivial.

Accepted Answer

This statement is true. Auditors often use the threshold of materiality to determine if a misstatement, individually or in aggregate, would have a significant impact on the financial statements. If the auditor determines that a misstatement is clearly trivial, it would not be considered material, even when aggregated with other misstatements.

Question 19

Goodwill is the excess of the purchase price over the fair market value of the acquired company's tangible assets, identifiable intangible assets, and liabilities.

Accepted Answer

This statement is true. Goodwill represents the value of a business's reputation, customer relationships, and other intangible assets that cannot be separately identified and valued. It is calculated as the purchase price minus the fair market value of the company's identifiable tangible and intangible assets and liabilities.

Question 20

The auditor need not inform the audit committee about adjustments arising from the audit that were considered to be material.

Accepted Answer

The auditor is required to inform the audit committee of all material adjustments that arise from the audit. This is because material adjustments can have a significant impact on the financial statements and, therefore, need to be brought to the attention of the audit committee. Failing to inform the audit committee of material adjustments would be a breach of the auditor's responsibility to communicate with the audit committee.

Quiz 16: Advanced Topics Concerning Complex Auditing Judgments