Question 1

Auditors will vary the acceptable audit risk for each segment of the audit.

Accepted Answer

The answer of Auditors will vary the acceptable audit risk...

Question 2

If an auditor assigns a tolerable misstatement of $1 000 to accounts payable, he or she would need to obtain more audit evidence for that account than if $100 000 had been assigned.

Accepted Answer

The higher the tolerable misstatement, the lower the amount of audit evidence needed, as there is more room for error without causing a material misstatement. Therefore, if the tolerable misstatement is low (e.g. $1 000), the auditor would need to obtain more audit evidence to ensure that the account is fairly presented in the financial statements.

Question 3

The definition of materiality indicates that both the users and the auditors of financial statements are
assumed to have knowledge of the likely preparers of the statements.

Accepted Answer

The definition of materiality does not assume that users or auditors have knowledge of the likely preparers of financial statements. Materiality refers to the magnitude of an error or omission in the financial statements that would influence the decision of a reasonable user.

Question 4

Auditors have difficulty applying the concept of materiality in practice because they often do not know who the users of the financial statements are or what economic decisions will be made.

Accepted Answer

Materiality is a subjective concept that depends on the size and nature of an item's impact on financial statements, and its significance to users' economic decisions. Since auditors may not know all potential users or their specific decision-making needs, applying materiality can be challenging in practice.

Question 5

The primary purpose of allocating the preliminary judgement about materiality to financial statement accounts is to help the auditor decide the appropriate evidence to accumulate for each account.

Accepted Answer

Allocating preliminarily judgement about materiality helps the auditor in determining the amount and type of evidence to gather for every account.

Question 6

Once the auditor determines the preliminary judgement about materiality for a particular engagement, that amount cannot be changed during the engagement.

Accepted Answer

The preliminary judgement about materiality can be revised and updated during the course of the engagement if the circumstances warrant such revision. However, such revisions should be based on reasonable grounds and should be appropriately documented.

Question 7

The definition of materiality in the auditing standards is consistent with that contained in accounting
standards.

Accepted Answer

The definition of materiality in the auditing standards is consistent with that contained in accounting standards.

Question 8

Preliminary assessment of materiality is the combined amount of misstatements in the financial
statements that auditors would consider material early in the audit.

Accepted Answer

Preliminary assessment of materiality is the initial determination of the amount of misstatements in the financial statements that would be considered material by the auditors. This assessment is conducted before the audit begins and helps the auditors to plan and perform their audit procedures in order to detect significant misstatements.

Question 9

Performance materiality as set by the auditor:
A) does not affect inherent or control risks.
B) increases inherent risk only.
C) increases control risk only.
D) increases inherent risk and control risk.

Accepted Answer

Performance materiality is a concept used by auditors to determine the amount by which financial statements can be misstated without affecting the decisions of reasonable users. It is related to the planning and execution of an audit, and does not directly affect the assessment of inherent or control risks, which are characteristics of the audited entity's environment and systems.

Question 10

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

Accepted Answer

The audit risk model is primarily used in planning the audit by helping the auditor determine the level of evidence needed to reduce audit risk to an acceptable level. While it can also be useful in evaluating results, its main purpose is in the planning stage. Therefore, choice C is the best answer.

Question 11

The lower the dollar amount of the preliminary judgement of materiality, the less audit evidence is
required.

Accepted Answer

The lower the dollar amount of the preliminary judgement of materiality, the more audit evidence is required because smaller amounts have a relatively greater impact on the financial statements as a whole.

Question 12

To maximise audit efficiency, the auditor should allocate less tolerable error to accounts that can be verified by using low-cost audit procedures, such as analytical procedures, than to accounts that are more costly to audit.

Accepted Answer

Allocating less tolerable error to accounts that can be verified using low-cost audit procedures will help the auditor to efficiently manage resources and reduce the overall audit cost. This approach is consistent with the risk-based audit approach, where audit resources are directed towards high-risk areas. Accounts that are more costly to audit may require more extensive audit procedures and should be allocated a higher tolerable error threshold.

Question 13

If an auditor believes the client will have financial difficulties after the audit report is issued, and external users will be relying heavily on the financial statements, the auditor will probably set acceptable audit risk as high.

Accepted Answer

If the auditor believes that the client will have financial difficulties after the audit report is issued, and external users will be relying heavily on the financial statements, the auditor would increase the level of audit scrutiny and would lower the acceptable audit risk, rather than setting it high. This is because the higher the acceptable audit risk, the more likely that the auditor will give an unqualified opinion on financial statements that contain material misstatements. This would undermine the credibility and reliability of the financial statements and could harm the interests of external users who rely on them.

Question 14

The primary purpose of the audit risk model is to aid auditors in planning the extent of tests of controls and determining which particular controls should be tested.

Accepted Answer

The primary purpose of the audit risk model is to help auditors assess the risk of material misstatement in a financial statement audit, thereby determining the nature, timing, and extent of audit procedures.

Question 15

Most practitioners allocate the preliminary judgement about materiality to balance sheet accounts rather than income statement accounts.

Accepted Answer

This is because the balance sheet accounts represent assets, liabilities and equity which are usually more significant and inherently more material than income statement accounts which represent revenues and expenses.

Question 16

Australian auditing standards provide detailed, objective guidance on how auditors are to establish a preliminary materiality level, thus eliminating the need for subjective auditor judgement in this task.

Accepted Answer

Australian auditing standards acknowledge that establishing a preliminary materiality level requires professional judgement, and provide guidance on factors to consider in exercising that judgement, but do not provide a one-size-fits-all formula or quantitative threshold. Therefore, some level of subjectivity is inherent in the process.

Question 17

A materiality level of $1 000 would require more audit evidence than would a materiality level of $100 000.

Accepted Answer

A lower materiality level means that smaller misstatements can have a material impact on the financial statements, and as a result, the auditor would need to gather more audit evidence to ensure that the financial statements are materially correct. On the other hand, a higher materiality level means that larger misstatements would be required before the financial statements are considered materially misstated, and therefore the auditor would require less audit evidence.

Question 18

The auditor's preliminary judgement about materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the economic decisions of users.

Accepted Answer

The statement is true. Materiality is a concept used by auditors to determine the significance of a misstatement in the financial statements. The auditor's preliminary judgement about materiality is based on the auditor's professional judgment and is used to determine the scope of the audit procedures. It is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the economic decisions of users.

Question 19

Inherent risk and planned detection risk are inversely related; i.e., as inherent risk increases, planned detection risk should decrease, ceteris paribus.

Accepted Answer

This statement is true according to the risk assessment formula, where Risk of Material Misstatement = Inherent Risk x Control Risk. Therefore, if the inherent risk is high, the risk of material misstatement is also high, and the planned detection risk (which is the inverse of the risk of material misstatement) must be low to achieve an acceptable level of overall audit risk.

Question 20

If an auditor believes internal controls are completely ineffective to prevent or detect misstatements, the auditor should assess control risk as high, perhaps 100%.

Accepted Answer

If the auditor believes that internal controls are completely ineffective, then control risk should be assessed as high, which means that there is a high risk that material misstatements may exist in the financial statements. In this case, the auditor may decide to perform more substantive procedures to detect and correct any misstatements.

Quiz7: Materiality and risk