Question 1

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

Accepted Answer

A detection risk of 90% would suggest a high likelihood that the auditor will not detect material misstatements, indicating a need for more, not less, extensive substantive audit testing to lower this risk to an acceptable level.

Question 2

Inherent and control risks are risks controlled by the auditor.

Accepted Answer

Inherent and control risks are risks that exist within the client's operations and cannot be controlled by the auditor. The auditor can only assess and provide recommendations on how to mitigate or manage those risks.

Question 3

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

Accepted Answer

The presence of risk factors does not necessarily mean that a material misstatement is present. Risk factors are simply indicators that there may be a higher risk of material misstatements occurring. Further audit procedures are needed to determine if a material misstatement actually exists.

Question 4

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.

Accepted Answer

Performance materiality is used to determine the amount of misstatement in a particular account or group of accounts that would be considered material enough to affect the overall financial statements. Therefore, if performance materiality for accounts payable is $1,000, it means that any misstatement in this account that would exceed this amount would be considered material. In contrast, if performance materiality were $100,000, it would mean that a misstatement of up to $100,000 in accounts payable would not be considered material. As a result, the auditor would need to obtain more audit evidence for accounts payable if performance materiality were $1,000 than if it were $100,000.

Question 5

Material Misstatement and Importance of Materiality Judgments

Accepted Answer

Material misstatement refers to a misstatement in the financial statements that may influence the decisions of the users of the financial statements. Materiality judgments are important to determine whether a misstatement is material or not, which is needed to assess the impact of the misstatement on the financial statements and the decisions of the users.

Question 6

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

Accepted Answer

The answer of The auditor typically sets posting materiality at...

Question 7

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

Accepted Answer

A risk factor indicating a heightened risk of fraud would be considered a significant risk, as it increases the likelihood of fraudulent activities taking place. It is important for organizations to identify and assess such risks in order to implement appropriate controls and prevent fraud.

Question 8

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

Accepted Answer

Ineffective internal controls do not adequately prevent or detect errors or fraud in financial reporting, which increases the risk of material misstatement in the financial statements. In contrast, effective internal controls provide reasonable assurance that material misstatements will be prevented or detected in a timely manner. Therefore, A is the correct answer.

Question 9

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

Accepted Answer

The answer of In planning the audit,auditors consider planning materiality...

Question 10

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

Accepted Answer

When the auditor determines that there is a heightened risk of material misstatement, they may perform audit procedures closer to year end to gather additional evidence and ensure the financial statements are fairly presented. This is because the risk of material misstatements may increase as the year-end approaches due to factors such as increased transactions and adjustments or management pressure to meet financial targets.

Question 11

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.

Accepted Answer

Performance materiality is a key component in the audit planning process and is used to determine the amount of misstatement that would be considered material for each account or balance, as well as the level of assurance that is required for each account or balance. The auditor then uses this information to design and perform audit procedures that are tailored to the specific risks and materiality thresholds for each account or balance.

Question 12

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

Accepted Answer

Audit procedures cannot be announced or completed at predictable times as this may allow for manipulation or preparation of the records being audited. Surprise audits are often conducted to increase the effectiveness and reliability of the audit process.

Question 13

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

Accepted Answer

A company's consistent ability to meet analyst estimates may indicate a lack of transparency or manipulation of financial information, leading to a higher inherent risk for auditors to consider.

Question 14

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

Accepted Answer

This statement is true. The auditor cannot simply rely on internal controls without testing them to ensure they are functioning effectively. This is because if there are any weaknesses or breakdowns in the controls, the risk of material misstatement increases and this may require more substantive testing to be done. Therefore, it is essential for auditors to test internal controls that are relied upon to reduce substantive testing.

Question 15

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

Accepted Answer

Materiality can be expressed as a percentage of any financial statement line item or account balance, not just net income. The choice of materiality base is dependent on professional judgment and varies from audit to audit.

Question 16

All audit procedures must be completed before year end.

Accepted Answer

This statement is not necessarily true. Audit procedures can continue into the new year if necessary, especially if there are significant issues or complexities that require additional time to investigate and resolve. Additionally, some audit procedures may not be able to be completed until after year end, such as testing of year-end adjustments and cutoff procedures.

Question 17

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

Accepted Answer

Auditors also consider materiality for individual financial statement line items or disclosures. This is because an error in a single line item or disclosure can impact the overall financial statements.

Question 18

A significant risk is the same as a material risk.

Accepted Answer

A significant risk is not necessarily the same as a material risk. A significant risk is one that requires special audit consideration, while a material risk is one that could have a material impact on financial statements.

Question 19

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

Accepted Answer

Lower performance materiality means a lower threshold for what is considered significant, requiring auditors to gather more evidence to ensure all significant items are identified and assessed.

Question 20

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

Accepted Answer

This statement is true. When the risk of material misstatement is heightened, the auditor needs to obtain more evidence to reduce the risk of a wrong opinion, and thus they may increase the scope and extent of audit procedures.

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