Question 1

Materiality relates to the significance or importance of an item.

Accepted Answer

Materiality refers to the significance or importance of an item or information in regards to a financial statement's accuracy and relevance.

Question 2

A risk of material misstatement of 100% indicates that material misstatement is highly likely.

Accepted Answer

A risk of material misstatement of 100% means that there is a certainty of material misstatement in the financial statements.

Question 3

When a successor auditor contacts a company's previous auditor,the successor auditor might obtain information related to client management's integrity.

Accepted Answer

When a successor auditor contacts a company's previous auditor, they may obtain information related to client management's integrity as part of their due diligence process. This information may include any ethical or fraudulent issues that the previous auditor may have encountered while working with the company.

Question 4

Detection risk is measured on a scale of 0% to 5%.

Accepted Answer

Detection risk is not limited to a scale of 0% to 5%; it refers to the risk that auditors fail to detect material misstatements in financial statements, and it is not quantified within such a narrow range.

Question 5

If detection risk is low,the auditor is more willing to take a higher risk of the substantive audit procedures not detecting a material misstatement.

Accepted Answer

If detection risk is low, it means that the auditor believes that the substantive audit procedures are highly effective in detecting material misstatements. Therefore, the auditor would be less willing to take on the risk of substantive audit procedures not detecting a material misstatement, and would likely perform more extensive audit procedures to increase the level of assurance.

Question 6

Touring a company's plant offers much insight into potential audit issues.

Accepted Answer

Touring a company's plant allows auditors to observe the company's operations and identify potential audit issues such as inventory management, production processes, and control systems.

Question 7

Brainstorming sessions should be led by the engagement team.

Accepted Answer

Brainstorming sessions can be led by anyone in the organization, not just the engagement team, to encourage diverse perspectives and ideas.

Question 8

LEXIS is a public database where the existence of legal proceedings against a company or key members of the company can be found.

Accepted Answer

This is an accurate description of LEXIS.

Question 9

Auditors and management should agree on what is considered material.

Accepted Answer

The answer of Auditors and management should agree on what...

Question 10

The internal controls of an organization have no impact on the efficiency of an audit.

Accepted Answer

The internal controls of an organization have a significant impact on the efficiency of an audit. The stronger the internal controls, the more organized and prepared the organization will be for an audit, ultimately leading to a more efficient and effective audit process. On the other hand, weak internal controls can lead to an audit process that is more time-consuming and requires greater effort and resources on the part of the auditors.

Question 11

Trend analysis deals with the relationship between two or more accounts within the current year.

Accepted Answer

Trend analysis involves comparing financial statements and ratios over multiple periods to identify patterns or trends in financial performance, not just the relationship between accounts within a single year.

Question 12

One potential limitation to using industry data in planning analytical procedures is that the data from the client may not be directly comparable to the data of the industry.

Accepted Answer

Industry data may reflect averages or trends in the broader market, which may differ from the client's specific characteristics or circumstances. As a result, it may be necessary to adjust or customize the industry data to make it more relevant to the client's situation before using it in analytical procedures.

Question 13

As detection risk increases,the amount of evidence an auditor needs to obtain decreases.

Accepted Answer

Detection risk is inversely related to the amount of evidence needed; as detection risk increases, auditors can accept a higher risk of not detecting a material misstatement, thus requiring less evidence.

Question 14

News media and web searches can provide useful information related to client management's integrity and the risk of material misstatement in the financial statements.

Accepted Answer

News media and web searches can provide information about any negative public perception or controversies related to the client's management, which can indicate a higher risk of material misstatement in the financial statements.

Question 15

The purpose of the auditor's consideration of the effectiveness of internal controls is to determine the nature,extent,and timing of substantive testing.

Accepted Answer

The purpose of assessing the effectiveness of internal controls is to determine the nature, extent, and timing of substantive testing that the auditor will need to perform. This is because if the internal controls are effective, the auditor can rely on them to mitigate the risk of material misstatements in the financial statements, which reduces the need for substantive testing. However, if the internal controls are not effective, the auditor will need to perform more substantive testing to obtain sufficient evidence about the accuracy and completeness of the financial statements.

Question 16

During the process of a brainstorming session,the focus is more on the quality of ideas generated rather than the quantity of ideas generated.

Accepted Answer

During a brainstorming session, the focus is more on the quantity of ideas generated rather than the quality of ideas generated. The idea is to encourage everyone to share as many ideas as possible, without criticism or judgment, and then evaluate and refine those ideas later in the process.

Question 17

When business risk is low,the auditor does not have a high degree of concern about the ability of the organization to operate effectively or profitably.

Accepted Answer

When business risk is low, it means that there is less uncertainty or possibility of negative events affecting the organization's ability to operate effectively or profitably. Therefore, the auditor does not have a high degree of concern about the organization's financial stability and performance.

Question 18

Only public companies have to be concerned with business risk.

Accepted Answer

Business risk exists for all types of companies regardless of whether they are public or private. Business risk refers to the possibility of financial losses or other adverse outcomes resulting from factors such as market conditions, changes in regulations, competition, and operational issues. All companies, whether public or private, are exposed to various types of business risks and must take steps to manage them effectively.

Question 19

The usual length of a brainstorming session is about four hours.

Accepted Answer

The usual length of a brainstorming session can vary, but it typically lasts between 30 minutes to two hours. Four hours would be an exceptionally long session.

Question 20

A misstatement is an error,either intentional or unintentional,that exists in a transaction or financial statement account balance.

Accepted Answer

A misstatement is indeed an error, intentional or unintentional, that is present in a financial transaction or statement account balance.

Quiz 7: Planning the Audit: Identifying and Responding to the Risks of Material Misstatement