Question 1

If the total misstatement of an account is known, a sampling error still needs to be determined.

Accepted Answer

If the total misstatement of an account is known, there is no need to determine a sampling error as the entire population has been evaluated.

Question 2

Auditors allocate the preliminary judgment about materiality to financial statement segments rather than by financial statements as a whole. What is the term for the auditor's allocation of preliminary misstatement to account balances?
 What are three difficulties auditors face when allocating materiality to balance sheet accounts?

Accepted Answer

The answer of Auditors allocate the preliminary judgment about materiality...

Question 3

Likely misstatements can result from

Accepted Answer

The answer of Likely misstatements can result from
...

Question 4

If the auditor approaches the audit of the accounts in a sequential manner, the findings of the audit of accounts audited earlier can be used to revise the performance materiality established for accounts audited later.

Accepted Answer

By revising the performance materiality based on the findings of accounts audited earlier, the auditor can better tailor their procedures for accounts audited later and ensure the audit is more efficient and effective. This is a common practice in audit planning and execution.

Question 5

List the five steps in applying materiality in an audit.

Accepted Answer

The answer of List the five steps in applying materiality...

Question 6

Sampling risk results if the sample accurately represents the population.

Accepted Answer

Sampling risk arises from the possibility that the sample does not accurately represent the population, leading to incorrect conclusions.

Question 7

The preliminary judgment on materiality is compared to the total estimated misstatement amount to determine if an account balance is materially misstated.

Accepted Answer

The preliminary judgment on materiality is compared to the total estimated misstatement amount to determine if an account balance is materially misstated. This comparison helps auditors decide whether or not to adjust the financial statements. Therefore, the statement is true.

Question 8

Total estimated misstatements include known misstatements and projected misstatements plus a sampling error.

Accepted Answer

Total estimated misstatements include both known misstatements (those found and specifically identified by the auditor) and projected misstatements (extrapolated from audit findings to the entire population being audited), as well as a sampling error (the risk of assuming the sample is representative of the entire population).

Question 9

To calculate the estimate of the likely misstatement of a total population, the auditor makes a direct projection of the known misstatement from the sample to the population, and subtracts an estimated allowance for sampling risk.

Accepted Answer

The auditor calculates the estimate of the likely misstatement of a total population by making a direct projection of the known misstatement from the sample to the population, but they add an allowance for sampling risk, not subtract it, to account for the uncertainty inherent in sampling.

Question 10

Auditors are ________ to document the known and likely misstatements in the financial statements under audit.

Accepted Answer

Auditors are required to document the known and likely misstatements in the financial statements under audit. This is a key step in ensuring that the financial statements are accurate and reliable, and that any errors or discrepancies are identified and addressed in a timely manner. Failure to properly document misstatements can result in significant legal and regulatory consequences for both the auditors and the company being audited.

Question 11

When evaluating the audit findings, the auditor should be satisfied that the

Accepted Answer

The auditor should ensure that the estimate of total known and likely misstatements is less than a material amount. This provides reasonable assurance that the financial statements are not materially misstated. Option A is incorrect because management representation letters do not document the amount of known misstatements but rather provide written statements regarding the completeness and accuracy of information provided by management. Option C is incorrect because the estimate of total likely misstatement should not include sample error as this will inflate the estimate. Option D is incorrect as the amount of known misstatement being acknowledged and recorded by the client does not provide sufficient assurance that the financial statements are free from material misstatements.

Question 12

________ misstatements are those where the auditor can determine the amount of the misstatement in the account.

Accepted Answer

Known misstatements are those where the auditor can determine the amount of the misstatement in the account. Identification of known misstatements provides the basis for the auditor to evaluate the effect of the misstatement on the financial statements as a whole. Potential misstatements are those that the auditor suspects might exist but has not yet been able to confirm, while likely misstatements are those that the auditor believes will occur unless corrected. Projected misstatements are estimates of misstatements based on extrapolation from audit evidence.

Quiz 8: Audit Planning and Materiality