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

Question 1

Materiality relates to the significance or importance of an item.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

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.

Question 6

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

Question 7

Brainstorming sessions should be led by the engagement team.

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.

Question 9

Auditors and management should agree on what is considered material.

Question 10

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

Question 11

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

Question 13

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

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.

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.

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.

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.

Question 18

Only public companies have to be concerned with business risk.

Question 19

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

Question 20

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

Question 21

A detection risk of 90% would suggest that an auditor must perform extensive substantive audit testing.

Question 22

Inherent and control risks are risks controlled by the auditor.

Question 23

The existence of one or more risk factors means that there is a material misstatement present.

Question 24

If performance materiality for accounts payable is $1,000,the auditor would need to obtain more audit evidence for that account than if performance materiality were $100,000.

Question 25

Material Misstatement and Importance of Materiality Judgments

Question 26

The auditor typically sets posting materiality at 50 to 75% of overall materiality.

Question 27

A risk factor indicating a heightened risk of fraud would be considered a significant risk.

Question 28

Ineffective internal controls result in higher risk of material misstatement in the financial statements than effective internal controls.

Question 29

In planning the audit,auditors consider planning materiality in terms of the largest aggregate level of misstatement that could occur in the financial statements.

Question 30

Heightened risk of material misstatement causes the auditor to perform audit procedures closer to year end.

Question 31

Performance materiality is used for assessing the risks of material misstatement and determining the nature,timing,and extent of audit procedures to perform during the audit opinion formulation process.

Question 32

Audit procedures have to be announced or be completed at predictable times.

Question 33

A company's history of exactly meeting analyst estimates is a factor which could lead auditors to assess inherent risk at a higher level.

Question 34

Internal controls that the auditor expects to rely on to reduce substantive testing must be tested.

Question 35

In most audits,materiality is most commonly expressed as a percentage of net income.

Question 36

All audit procedures must be completed before year end.

Question 37

Auditors are only concerned with materiality for the financial statements as a whole.

Question 38

A significant risk is the same as a material risk.

Question 39

The lower the dollar amount of the performance materiality the more audit evidence is required.

Question 40

When the risk of material misstatement is heightened,the auditor increases the extent of audit procedures and requires more evidence.

Question 41

To learn more about a company and its inherent risks,auditors can use which of the following resources?

A)Management inquiries.
B)Economic statistics.
C)Online searches.
D)Any of the above could be used.

Question 42

Which of the following would be a reason that industry and client data were not directly comparable?

A)Broad industry.
B)Use of different accounting principles.
C)Neither of the above.
D)Both A & B are correct.

Question 43

The quick ratio is useful for analyzing inventory accounts.

Question 44

If materiality judgments change during the audit opinion formulation process,what happens to previous audit decisions that were based on the evidence obtained using the initial materiality setting?

A)The auditor reassesses those previous decisions.
B)The auditor repeats all audit procedures performed prior to the change in materiality judgments.
C)The auditor modifies the audit opinion to note the change in materiality judgements.
D)No action is required.

Question 45

Which of the following factors will result in control risk being assessed at a higher level?

A)Controls are well designed.
B)There is a lack of supervision of accounting personnel.
C)Accounting staff are well trained and educated.
D)The control environment is operating effectively.

Question 46

Detection risk is controllable by the client.

Question 47

Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Question 48

Which of the following ratios provides information about liquidity?

A)Net profit margin.
B)Current ratio.
C)Inventory turnover.
D)Sales to assets.

Question 49

Which item is correct concerning the risk of material misstatement?

A)Risk of material misstatement arises because audit procedures have been misapplied.
B)Risk of material misstatement can be controlled and changed by the auditor.
C)Risk of material misstatement must be assessed in non-quantitative terms.
D)Risk of material misstatement is controllable by the client.

Question 50

If $15,000 is considered to be material to the income statement,but $25,000 is material to the balance sheet,the auditor should set overall materiality at which of the following dollar amounts?

A)$20,000
B)$25,000
C)$40,000
D)$15,000

Question 51

Which of the following factors would lead an auditor to assess inherent risk at a higher level?

A)The account balance is easily determined without estimation.
B)The account balance is composed of a high volume of nonroutine transactions.
C)The account balance is composed of simple transactions.
D)All of the above would lead the auditor to assess a higher level of inherent risk.

Question 52

Which of the following are common brainstorming session guidelines?

A)Freedom of expression.
B)Respectful communication.
C)Suspension of criticism.
D)All of the above.

Question 53

What is the nature of the relationship between risk of material misstatement and audit risk?

A)Direct.
B)None.
C)Correlational.
D)Inverse.

Question 54

Which of the following best describes year-to-year comparisons of account balances?

A)Time analyses.
B)Reasonableness tests.
C)Ratio analyses.
D)Trend analyses.

Question 55

Detection risk is affected by which aspects of substantive audit procedures?

A)Nature.
B)Timing.
C)Extent.
D)All of the above.

Question 56

Which of the following is a reason a predecessor auditor can decline to reply to a firm's current auditor?

A)Data is under court order.
B)They must always respond.
C)The client does not approve of confidential information being shared.
D)Both A and C are correct.

Question 57

Which of the following are two frequently used planning analytical procedures?

A)Reasonableness tests and economic analyses.
B)Trend analyses and reasonableness tests.
C)Ratio analyses and economic analyses.
D)Ratio analyses and trend analyses.

Question 58

Insistence from the CEO that she must be present at all meetings between the audit committee and internal/external auditors would cause auditors to assess inherent risk at a higher level.

Question 59

Which of the following phrases or terms regarding materiality is used by the Supreme Court of the United States and is not found in FASB Concepts Statement No.2?

A)"amount of a misstatement or omission"
B)"in light of surrounding circumstances"
C)"probable that the judgement of a reasonable person"
D)"significantly altered the total mix of information available"

Question 60

Which of the following best describes the misstatements identified throughout the audit that will be considered at the end of the audit in determining whether the financial statements overall are materially correct?

A)Posting materiality.
B)Performance materiality.
C)Overall materiality.
D)Tolerable error.

Question 61

An increase in the risk of material misstatement would lead to which of the following responses?

A)Increase in the extent of audit procedures.
B)Decrease in the extent of audit procedures.
C)Earlier performance of audit procedures.
D)No change in the extent or timing of audit procedures.

Question 62

Which of the following risk factors suggests a heightened level of risk of material misstatement?

A)Having a stable product.
B)The departure of key personnel of a company.
C)Few immaterial related-party transactions.
D)Declining a merger with another company.

Question 63

Which of the following approaches can be used to introduce unpredictability into the audit?

A)Assessing high risk accounts.
B)Performing procedures on an unannounced basis.
C)Performing the audit in the same location each year.
D)Selecting items that would normally be tested.

Question 64

Which of the following statements best describes what is meant by setting control risk at 100%?

A)Controls are effective.
B)Controls are relevant.
C)Controls are ineffective.
D)Cannot be determined from the information given.

Question 65

Which of the following risks are controllable by the auditor?

A)Audit risk and detection risk.
B)Audit risk and control risk.
C)Risk of material misstatement.
D)None of the above.

Question 66

Which of the following statements regarding detection risk is true?

A)Detection risk incorporates both substantive analytical procedures and tests of details.
B)Detection risk provides guidance to the auditor on the substantive audit procedures needed to achieve the desired audit risk.
C)A low level of detection risk means the auditor needs to obtain more evidence from substantive procedures.
D)All of the above.

Question 67

Which of the following terms best describes the numerical depiction of the relationship between control risk,inherent risk,detection risk,and audit risk?

A)Audit risk model.
B)Risk of misstatement model.
C)Significance model.
D)Materiality equation.

Question 68

As inherent risk increases,and other risk factors remain constant,what happens to the extent of audit work?

A)Increases.
B)Decreases.
C)Stays the same.
D)Becomes less reliable.

Question 69

What type of relationship exists between audit risk and detection risk?

A)Direct.
B)Inverse.
C)Indirect.
D)No relationship.

Question 70

What is the main reason to establish guidelines for brainstorming sessions?

A)To clearly identify lines of authority.
B)To comply with SEC requirements.
C)To encourage interactive and constructive group dialogue and idea exchange.
D)To pass information up to top-level management efficiently.

Question 71

Which of the following terms best describes the types and appropriateness of audit procedures used?

A)Nature of detection risk.
B)Material misstatement risk.
C)Nature of auditing procedures.
D)Nature of risk response.

Question 72

If the auditor's assessment of audit risk is low (e.g. ,1% rather than 5%),what is the effect on the amount of substantive testing performed by the auditor?

A)Increase in substantive testing.
B)Decrease in substantive testing
C)No change in substantive testing.
D)Substantive testing is not needed.

Question 73

Which of the following best describes what is meant by the timing of risk response?

A)Where procedures are conducted.
B)When procedures are conducted.
C)How procedures are conducted.
D)Who conducts the procedures.

Question 74

When an auditor chooses not to rely on a client's internal controls because the control design is ineffective,which of the following tests are eliminated?

A)Substantive testing.
B)Tests of controls.
C)Tests of details of balances.
D)Substantive analytical procedures.

Question 75

What procedure has to be completed at or after the end of the period?

A)Assessment of control risk.
B)Engagement letter.
C)Evaluation of adjusting journal entries.
D)All procedures must be completed prior to period end.

Question 76

Which of the following terms best describes the risk that audit procedures will fail to detect material misstatements?

A)Audit risk.
B)Control risk.
C)Detection risk.
D)Inherent risk.

Question 77

Which of the following would be the likely risk results from using a 1% level of detection risk?

A)High detection risk and low audit risk.
B)High detection risk and high audit risk.
C)Low detection risk and high audit risk.
D)Low detection risk and low audit risk.

Question 78

What is the typical range for the setting of audit risk?

A)1%-10%
B)1%-5%
C)0%-5%
D)0%-10%

Question 79

Appropriateness addresses which aspect of audit procedures?

A)Relevance.
B)Reasoning.
C)Reliability.
D)Both A & C.

Question 80

What is the auditor trying to accomplish by varying the timing of audit procedures from the prior year?

A)Introduce unpredictability.
B)Confuse the client.
C)Gather information during different times of the year.
D)Finish the audit sooner.