Question 1

Which of the following types of misstatements has the highest level of certainty?
A) identified misstatements
B) likely misstatements
C) likely aggregate misstatements
D) further possible misstatements

Accepted Answer

Identified misstatements have the highest level of certainty as they have been directly and specifically pinpointed by the auditor.

Question 2

The materiality for Holloy Company is $75 000. There are carryforward misstatements of $25 000 from the previous year. Current year anticipated misstatements are $15 000, with anticipated corrections of $10 000. What is the performance materiality?
A) $45 000
B) $50 000
C) $55 000
D) $90 000

Accepted Answer

A

Question 3

When an auditor allocates materiality to segments, then the materiality amount for different accounts under audit will
A) potentially differ from each other.
B) require the same level of unanticipated misstatements.
C) require the same amount of audit work.
D) be the same for each account audited.

Accepted Answer

Materiality is allocated to segments based on their size and significance. Therefore, the materiality amount for different accounts under audit may potentially differ from each other depending on their relative size and significance to the overall financial statements.

Question 4

Further possible misstatement considers
A) possible presence of management fraud.
B) possible lack of knowledge of the audit team.
C) imprecision in the sampling process.
D) imprecision in the audit procedures.

Accepted Answer

The answer of Further possible misstatement considers
A) possible presence of...

Question 5

Lauralye Leasing Limited (LLL) provides lease financing to companies and individuals for equipment other than automobiles. Leases on commercial signs make up 50% of total leases; computer and telecommunications equipment are 30%; and restaurant equipment makes up most of the remainder. LLL's customers arrange to buy new equipment from equipment dealers, then contact LLL to arrange lease financing.
	LLL was founded over thirty years ago by Laura and Al Ye. It is now run by Mr. and Mrs. Ye's daughter, Betsy, who is the President of LLL. LLL owns a small building downtown, where the offices of the business are located. Unused office space is rented out to other commercial tenants.
	Betsy was a classmate of yours at in university and you have kept loosely in touch over the years. This year, she moved LLL's audit to your firm (a local firm with five partners), after deciding that the firm her parents had hired many years ago did not really understand her business' needs.
	LLL has a small loan that is used to cover blips in working capital. The company has two salespeople. Most loans are received from stores throughout the city with whom LLL has standing agreements. If customers require financing, they fill in an application and fax it to LLL for approval. LLL will reply within two business days.
	The company has been profitable for many years. There are no extraordinary items in the current year's financial statements.
Selected financial information is as follows:

Required:
A) Which base would you use to calculate materiality? Why?
B) Calculate materiality. Choose a specific number and explain why you chose that amount.

Accepted Answer

The answer of Lauralye Leasing Limited (LLL) provides lease financing...

Question 6

The auditors have decided upon a materiality level of $100 000 for their audit of ABC Manufacturing. Which one of the following errors would be considered more important by the auditors?
A) an error in accounts receivable cutoff of $50 000
B) an overstatement of accounts payable by $15 000
C) an error in allocation between accounts receivable and accounts payable by $75 000
D) an illegal payment of $15 000

Accepted Answer

Illegal payments are considered more important by auditors regardless of the amount because they indicate potential legal and ethical violations, which can have significant implications beyond the financial statement's accuracy.

Question 7

Since materiality is relative, it is necessary to have benchmarks for establishing whether misstatements are material. Normally, the most important base for deciding what is material, because it is regarded as a critical item of current period information for users, is
A) total assets.
B) net income.
C) net working capital.
D) net income before taxes.

Accepted Answer

The answer of Since materiality is relative, it is necessary...

Question 8

If the auditor sets a low dollar amount as materiality,
A) more evidence is required than for a high amount.
B) less evidence is required than for a high amount.
C) the same amount of evidence is required as for a high dollar amount.
D) it has no effect on the amount of evidence required.

Accepted Answer

Setting a low dollar amount as materiality means the auditor considers even small misstatements to be significant. Therefore, the auditor will require more evidence to ensure the financial statements are free from material misstatement, compared to setting a higher materiality threshold.

Question 9

Silka is in the process of performing an audit. During the audit, Silka decided to change materiality. A valid reason for this would be
A) a new user of the financial statemens was identified.
B) a fraud was discovered in the accounts payable section.
C) materiality required the auditors to perform too many tests.
D) too many errors were found during testing.

Accepted Answer

A valid reason for changing materiality during an audit would be if a new user of the financial statements was identified. This would require the auditors to reassess materiality to ensure that it reflects the needs of the new user. Changing materiality due to fraud, excessive testing or errors found during testing would not be appropriate as these are not valid reasons for changing materiality.

Question 10

If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is considered to be
A) significant.
B) insignificant.
C) material.
D) relevant.

Accepted Answer

The term used in the question relates to the concept of materiality. Materiality refers to the significance of information in determining the decision of a reasonable person. If the omission or misstatement of information can influence the judgment of a reasonable person, then that information is considered material. Therefore, the correct option is C) material.

Question 11

If an auditor were to calculate an estimate of the errors by direct projection from the sample to the population and found $7000 of net overstatement errors in a sample of $100 000 out of a total population of $900 000, the estimate of errors in the population is
A) $6300.
B) $778.
C) $63 000.
D) $77 778.

Accepted Answer

The answer of If an auditor were to calculate an...

Question 12

Audit risk is a measure of
A) the auditor's assessment of the likelihood that a material misstatement might occur in the first place.
B) the probability that the financial statements contain errors.
C) how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed.
D) the probability that errors in the financial statements that were not detected by the internal controls of the firm are not detected by the auditor.

Accepted Answer

The answer of Audit risk is a measure of
A) the...

Question 13

The first step in applying materiality is
A) estimating the misstatement in a segment for each functional cycle.
B) setting a judgment about materiality for the financial statements as a whole.
C) estimating the combined effects of errors.
D) comparing the error estimate with the materiality levels.

Accepted Answer

The first step in applying materiality is setting a judgment about materiality for the financial statements as a whole. This judgment involves determining the amount of misstatement that would be considered material to the financial statements as a whole. This step is important as it provides a benchmark for evaluating the significance of misstatements found during the audit.

Question 14

If the auditor assessed the detection risk as high, the extent of evidence the auditor plans to accumulate is
A) low.
B) high.
C) medium.
D) uncertain: more information is needed.

Accepted Answer

If the auditor assessed the detection risk as high, it means that the auditor believes there is a high risk that material misstatements will not be detected even if they exist. Therefore, to mitigate this risk, the auditor needs to accumulate sufficient and appropriate evidence to reduce the detection risk to an acceptable level. This means that the auditor needs to increase the extent of evidence to compensate for the high detection risk, resulting in a low detection risk after considering the evidence.

Question 15

The audit risk model is
A) a planning, testing, and evaluation model.
B) useful in planning but of limited value in evaluating results.
C) useful in evaluating results but of limited use in planning.
D) useful when performing the tests of balances, but of little value in either the planning or evaluation stages.

Accepted Answer

The answer of The audit risk model is
A) a planning,...

Question 16

A) Discuss each of the six steps in applying materiality in an audit and identify the audit phase(s) in which each step is performed.
B) Discuss the three main factors that affect an auditor's preliminary judgment about materiality.

Accepted Answer

The answer of A) Discuss each of the six steps...

Question 17

Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit function. An effective auditor will
A) take any means available to reduce the risk to the lowest possible level.
B) set the risk level between 5% and 10%.
C) perform the audit procedures first and quantitatively set the risk level before forming an opinion and writing the report.
D) recognize that risks exist and deal with those risks in an appropriate manner.

Accepted Answer

Risk cannot be completely eliminated in auditing, but the auditor should acknowledge it and take appropriate steps to mitigate or manage it. This may involve additional audit procedures or modifying the audit opinion or report. Simply setting a fixed risk level or performing procedures before assessing the risk level may not be sufficient or appropriate.

Question 18

The purpose of allocating planning materiality to balance sheet accounts is to
A) assess the appropriate evidence to accumulate for each account on the balance sheet.
B) assess the appropriate evidence to accumulate for each account on both the balance sheet and income statement.
C) reduce the amount of procedures done in the course of the audit.
D) increase the possibility that fraud or illegal activities would be detected by audit procedures.

Accepted Answer

The answer of The purpose of allocating planning materiality to...

Question 19

CAS 320 (materiality in planning and performing an audit) defines materiality in terms of three key concepts. The first and second concepts are that a material misstatement should be considered in the context of knowledgeable users and the effect on decision making; and that material is relative to circumstances surrounding the decision and nature of the information. The third concept is
A) that the auditor should consider users of financial statements as a group.
B) that the auditor should consider users of financial statements individually.
C) that the users should be informed and approve of the materiality used by the auditor.
D) that the auditor should be conservative in setting the materiality level.

Accepted Answer

CAS 320 states that the auditor should consider users of financial statements as a group when determining materiality, rather than considering the impact on individual users.

Question 20

Materiality should be adjusted for the effect of net anticipated misstatements to determine performance materiality available for
A) identified misstatements.
B) likely misstatements.
C) unanticipated misstatements.
D) further possible misstatements.

Accepted Answer

Performance materiality is the amount set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. In determining performance materiality, the auditor should take into account the effect of identified and likely misstatements on the audit, but not further possible misstatements. However, the auditor should adjust performance materiality for the effect of unanticipated misstatements, which are misstatements that are not identified by the auditor's risk assessment procedures. Therefore, materiality should be adjusted for the effect of net anticipated misstatements to determine performance materiality available for unanticipated misstatements.

Quiz 7: Materiality and Risk

Which of the following types of misstatements has the highest level of certainty?

The materiality for Holloy Company is $75 000. There are carryforward misstatements of $25 000 from the previous year. Current year anticipated misstatements are $15 000, with anticipated corrections of $10 000. What is the performance materiality?

When an auditor allocates materiality to segments, then the materiality amount for different accounts under audit will

Further possible misstatement considers

The auditors have decided upon a materiality level of $100 000 for their audit of ABC Manufacturing. Which one of the following errors would be considered more important by the auditors?

Since materiality is relative, it is necessary to have benchmarks for establishing whether misstatements are material. Normally, the most important base for deciding what is material, because it is regarded as a critical item of current period information for users, is

If the auditor sets a low dollar amount as materiality,

Silka is in the process of performing an audit. During the audit, Silka decided to change materiality. A valid reason for this would be

If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is considered to be

If an auditor were to calculate an estimate of the errors by direct projection from the sample to the population and found $7000 of net overstatement errors in a sample of $100 000 out of a total population of $900 000, the estimate of errors in the population is

Audit risk is a measure of

The first step in applying materiality is

If the auditor assessed the detection risk as high, the extent of evidence the auditor plans to accumulate is

The audit risk model is

A) Discuss each of the six steps in applying materiality in an audit and identify the audit phase(s) in which each step is performed. B) Discuss the three main factors that affect an auditor's preliminary judgment about materiality.

Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit function. An effective auditor will

The purpose of allocating planning materiality to balance sheet accounts is to

Materiality should be adjusted for the effect of net anticipated misstatements to determine performance materiality available for