Question 1

When dealing with audit risk:

Accepted Answer

Auditors accept some level of risk in performing the audit function as it is not possible to completely eliminate all risks. The audit risk model is used to assess overall audit risk, which includes inherent risk, control risk, and detection risk, for all aspects of the financial statements, not just classes of transactions. Audit firms may use both quantitative and qualitative assessments for risk, depending on the situation.

Question 2

Why do auditors use the audit risk model when planning an audit?

Accepted Answer

The answer of Why do auditors use the audit risk...

Question 3

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

Accepted Answer

The auditor should be satisfied that the estimate of the total known and likely misstatements is less than a material amount. This ensures that the financial statements are fairly presented and not materially misstated. While the other choices may also be important considerations when evaluating audit findings, they do not address the overall materiality of the misstatements.

Question 4

If the auditor approaches the audit of the accounts in s 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

This is true as the auditor may revise the performance materiality in light of the findings of the audit of accounts audited earlier, which can help to reduce the risk of material misstatement in accounts audited later.

Question 5

Likely misstatements can result from:

Accepted Answer

The answer of Likely misstatements can result from:
...

Question 6

Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned.To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:

Accepted Answer

If the assessed level of control risk is increased, it means that the auditor believes there is a higher risk that material misstatements could occur and not be detected by the entity's controls. As a result, the auditor would need to decrease detection risk (the risk that the auditor fails to detect a material misstatement) in order to achieve the same overall audit risk level. This can be done by performing more substantive testing to provide a higher level of assurance that the financial statements are free from material misstatements. Changing materiality levels or inherent risk would not necessarily have an impact on the need to decrease detection risk in this situation. Decreasing substantive testing would not be appropriate as it would result in a lower level of assurance about the financial statements.

Question 7

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

Accepted Answer

This statement is true. Total estimated misstatements include both known misstatements, projected misstatements, and a sampling error.

Question 8

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

Accepted Answer

Auditors are required by auditing standards to document known and likely misstatements in the financial statements under audit to ensure that the financial statements are fairly presented. This documentation is an important part of the audit file and helps ensure the accuracy and completeness of the audit work.

Question 9

Both overstatements and understatements must be considered when allocating materiality to balance sheet accounts.

Accepted Answer

Both overstatements and understatements can result in misstated account balances that could be material to the financial statements. Therefore, both must be taken into consideration when determining materiality for balance sheet accounts.

Question 10

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 sample as the exact misstatement can be determined. Sampling is only used when a population is too large to examine in its entirety.

Question 11

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.

Question 12

To maximize audit efficiency, the auditor should allocate less tolerable misstatement 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 misstatement to accounts that can be verified using low-cost audit procedures can help the auditor save time and resources, therefore maximizing audit efficiency.

Question 13

Discuss each of the five steps in applying materiality in an audit, and identify the audit phase(s)in which each step is performed.List these steps in the order in which they occur.

Accepted Answer

The answer of Discuss each of the five steps in...

Question 14

The most important element of the audit risk model is control risk.

Accepted Answer

The most important element of the audit risk model is inherent risk, followed by control risk and detection risk. All three components of the model are equally important and should be assessed by the auditor in order to determine the overall audit risk.

Question 15

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

Accepted Answer

This statement is true. The auditor's preliminary judgment about materiality helps them determine the level of testing necessary for each account in the financial statements. Accounts that are deemed to be more material will require more extensive testing to ensure that the financial statements are fairly presented.

Question 16

Sampling error represents the minimum misstatement amount that exists in all accounts subjected to sampling.

Accepted Answer

Sampling error represents the difference between the sample result and the true population value, and does not necessarily represent the minimum misstatement amount in all accounts subjected to sampling.

Question 17

________ 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. Potential misstatements are those where the auditor believes there is a possibility of a misstatement but does not yet have sufficient evidence to determine the amount. Likely misstatements are those where the auditor believes it is probable that a misstatement exists. Projected misstatements are those where the auditor estimates the potential misstatements based on a sample and projects the misstatement to the entire population.

Question 18

Which of the following audit risk components may be assessed in non-quantitative terms?

Accepted Answer

The answer of Which of the following audit risk components...

Question 19

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 lower the tolerable misstatement, the more audit evidence the auditor must obtain to ensure the accuracy of the account balance. Therefore, if a tolerable misstatement of only $1,000 is assigned, the auditor will need to perform more detailed procedures and obtain more evidence compared to if a tolerable misstatement of $100,000 was assigned.

Question 20

The audit risk model that must be used for planning audit procedures and evaluating audit results is:
  = AAR.

Accepted Answer

The answer of The audit risk model that must be...

Quiz 9: Materiality and Risk

When dealing with audit risk:

Why do auditors use the audit risk model when planning an audit?

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

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

Likely misstatements can result from:

Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned.To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:

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

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

Both overstatements and understatements must be considered when allocating materiality to balance sheet accounts.

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

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

To maximize audit efficiency, the auditor should allocate less tolerable misstatement 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.

Discuss each of the five steps in applying materiality in an audit, and identify the audit phase(s)in which each step is performed.List these steps in the order in which they occur.

The most important element of the audit risk model is control risk.

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

Sampling error represents the minimum misstatement amount that exists in all accounts subjected to sampling.

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

Which of the following audit risk components may be assessed in non-quantitative terms?

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.

The audit risk model that must be used for planning audit procedures and evaluating audit results is: = AAR.