Question 1

Which of the following statements is not true about materiality judgments?

Accepted Answer

The statement "The auditor considers materiality only in relation to classes of transactions, account balances, and disclosures" is not true. While materiality is a concept that is primarily related to classes of transactions, account balances, and disclosures, it can also be applied to other aspects of the audit, such as the evaluation of internal controls or the selection of auditing procedures.

Question 2

Although different audit firms take different approaches, performance materiality could be the same as overall materiality, or could be a percentage of overall materiality. Generally this range is which of the following?

Accepted Answer

The answer of Although different audit firms take different approaches,...

Question 3

Which of the following best describes the nature of assets of held-for-sale operations?

Accepted Answer

Assets held-for-sale operations are assets that are expected to be sold or disposed of within a short period, usually up to one year. These assets are measured at the lower of carrying amount and fair value less costs to sell. Impairment is tested based on the most likely sale or disposal price, which is determined through market data and other relevant information. Therefore, option A is the best choice as it correctly describes the nature of assets held-for-sale operations.

Question 4

In which of the following cases is it not necessary for an auditor to revise the original materiality level and document the new materiality amount, as well as the rationale for changing the amount?

Accepted Answer

When the client plans to change depreciation methods for new plant assets procured in the future, it is not necessary for the auditor to revise the original materiality level as it does not impact the current financial statements. The other options may lead to changes in the materiality level and should be documented by the auditor.

Question 5

Which of the following statements is not true regarding the use of a judgmental approach by auditors in determining whether a misstatement is clearly trivial?

Accepted Answer

The determination of whether a misstatement is clearly trivial using a judgmental approach does not use percentages for the likelihood of misstatement. The other statements are true regarding the use of a judgmental approach.

Question 6

Which of the following statements best describe an issue related to inventory?

Accepted Answer

The statement "Lower of cost or market impairments, including an allowance for obsolescence" best describes an issue related to inventory. This is because inventory is subject to a valuation method called lower of cost or market, which basically means that if the market value of inventory falls below its cost, the inventory is written down to the lower market value. This can result in an impairment expense and an allowance for obsolescence may also be necessary if the inventory is at risk of becoming outdated or unsaleable.

Question 7

Which of the following would not be a reason to lower the threshold for materiality?

Accepted Answer

The audit team wanting to limit the amount of time spent at the client's facilities is not a valid reason to lower the threshold for materiality. Materiality should be determined based on the potential impact of misstatements on users of the financial statements, not on the convenience of the audit team.

Question 8

Almost every asset and liability account requires significant judgments. Which of the following judgments is subject to allowance for noncollectibility?

Accepted Answer

Other receivables are subject to allowance for noncollectibility. This is because they represent a claim on a customer or third party for payment, and there is always a risk that the customer or third party will not pay the full amount owed. Therefore, a company must make a judgment as to how much of the account is likely to be uncollectible and record an allowance for that amount.

The other options are not subject to allowance for noncollectibility. Inventories are valued at the lower of cost or net realizable value, which takes into account any expected losses due to obsolescence, damage, or other factors. Marketable securities are valued at fair value, and any declines in value are typically recognized as unrealized losses in the income statement. Deferred revenue represents payments received in advance for goods or services that have not yet been delivered, and it is not subject to allowance for noncollectibility since the payment has already been received.

Question 9

For nonprofit entities, appropriate benchmarks for materiality judgments would include which of the following?

Accepted Answer

For nonprofit entities, materiality is often judged based on total expenses, total revenues, or total assets, as these figures are more relevant to their financial activities and objectives.

Question 10

What document is prepared so that auditors can aggregate potential misstatements in order to assess the materiality of misstatements?

Accepted Answer

The summary of unadjusted audit differences is a document prepared by the auditors that aggregates potential misstatements, allowing them to assess the materiality of those misstatements. This information is then used by the auditors to determine whether the financial statements are fairly presented and whether any adjustments need to be made. The audit opinion is a separate document that expresses the auditors' opinion on the fairness of the financial statements as a whole. The summary of earnings trends and the post-closing trial balance may be useful documents in the audit process, but they do not specifically serve the purpose of aggregating potential misstatements.

Question 11

Which of the following is subject to fair value assessment?

Accepted Answer

All three options could require fair value adjustments. Marketable securities are typically reported at fair value on the balance sheet, inventory may need to be adjusted to market value, and property that will be sold may need to be revalued to fair value if there has been a significant change in market conditions.

Question 12

According to SAB 108, what approach is used when assessing uncorrected misstatements?

Accepted Answer

SAB 108 requires the use of the dual approach, which considers both the iron curtain and rollover methods to assess the impact of uncorrected misstatements on financial statements.

Question 13

Which of the following statements is false regarding materiality judgments?

Accepted Answer

Materiality judgments may be challenging for auditors, as they require professional judgment and consideration of various factors.

Question 14

All internal auditors are required to have the CIA designation in order to practice internal auditing.

Accepted Answer

While having the CIA designation may be preferred and valued by organizations, it is not a legal requirement for practicing internal auditing. Other qualifications and experiences may be considered by organizations when hiring internal auditors.

Question 15

When a client has significant and nonrecurring charges to nonoperating expenses, which of the following would be the most appropriate materiality benchmark?

Accepted Answer

Income from continuing operations measures the company's ongoing profitability and excludes one-time or nonrecurring charges, making it a more appropriate benchmark when a client has significant and nonrecurring charges to nonoperating expenses. Net profit and cash inflows/outflows may be affected by a variety of factors, which could obscure the impact of nonrecurring charges.

Question 16

Which of the following will the auditor will not consider when making a materiality determination?

Accepted Answer

Auditors consider all these factors when determining materiality, as they can impact financial statement users' decisions.

Question 17

Performance materiality helps the auditor to determine which of the following?

Accepted Answer

Performance materiality is a term used in auditing that refers to the amount or level of misstatement in the financial statements that is considered significant enough to affect the users' decision-making. By setting the performance materiality level, the auditor can determine the appropriate extent of audit evidence needed to achieve a reasonable assurance level. Therefore, the correct choice is A, extent of audit evidence needed. B and C are incorrect because they refer to specific procedures that are determined based on the audit objectives, not performance materiality. D is incorrect because control risk assessment is determined based on the auditor's understanding of the client's internal control system, not materiality.

Question 18

Which of the following is an approach used to determine posting material?

Accepted Answer

The answer of Which of the following is an approach...

Question 19

Which of the following is least likely to require significant auditor judgment about the dollar amount to be disclosed in the financial statement?

Accepted Answer

Cash on hand at the end of the year is typically easy to determine and does not require significant auditor judgment. Contingent liabilities, estimate of income tax expense, and inventory valuation all involve more complex judgment and estimation.

Question 20

Which of the following is not a factor adding to the complexity of materiality judgments made by auditors?

Accepted Answer

This statement is incorrect. The SEC has numerous requirements that auditors must comply with, and these requirements are separate and distinct from AICPA standards. The other options are factors that do add to the complexity of materiality judgments made by auditors.

Quiz 16: Advanced Topics Concerning Complex Auditing Judgments