Question 1

________ misstatements are those where the auditor can determine the amount of the misstatement in the account.
A) Potential
B) Likely
C) Known
D) Projected

Accepted Answer

Known misstatements are those where the auditor can determine the amount of the misstatement in the account. Potential misstatements refer to errors or fraud that may exist but have not been detected yet. Likely misstatements are those that the auditor believes have a high chance of occurrence based on their understanding of the client's operations and industry. Projected misstatements are the auditor's estimation of the misstatements remaining after extrapolating the results of their testing to the entire population of transactions/accounts.

Question 2

Auditors are ________ to document the known and likely misstatements in the financial statements under audit.
A) permitted
B) required
C) not allowed
D) strongly encouraged

Accepted Answer

Auditors are required to document the known and likely misstatements in the financial statements under audit in accordance with auditing standards. This documentation serves as evidence of the auditor's consideration of misstatements and supports the audit opinion issued by the auditor.

Question 3

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

The allocation of preliminary judgment about materiality to financial statement accounts is an important step in determining the amount and nature of evidence required for auditing. This process helps the auditor to identify areas that require closer scrutiny and to focus on the most relevant aspects of the audit. Therefore, the decision on materiality allocation can directly affect the extent of audit procedures needed to perform and the outcome of the audit.

Question 4

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

Accepted Answer

Both overstatements and understatements can have a material impact on the financial statements, and therefore must be considered when allocating materiality to balance sheet accounts.

Question 5

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 6

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. Control risk is important in determining the extent of control testing needed and the reliance that can be placed on a client's internal controls, but it is not the most important element.

Question 7

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:
A) increase materiality levels.
B) decrease detection risk.
C) decrease substantive testing.
D) increase inherent risk.

Accepted Answer

If the assessed level of control risk is increased, it means that there is a higher likelihood of material misstatements going undetected. To compensate for this, the auditor needs to decrease detection risk, which is the risk of the auditor not detecting a material misstatement. Decreasing substantive testing or increasing inherent risk would not be appropriate responses to an increase in assessed level of control risk. Increasing materiality levels could reduce the amount of work necessary, but it would not necessarily achieve an overall audit risk level that is substantially the same as the planned audit risk level.

Question 8

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

This statement is true, as allocating less tolerable misstatement to accounts that can be verified by low-cost audit procedures can help the auditor maximize efficiency by reducing the amount of time and resources required for auditing those accounts. This allows the auditor to focus more attention and resources on accounts that require more extensive audit procedures, such as high-risk accounts or those with complex transactions.

Question 9

Using your knowledge of the relationships among acceptable audit risk, inherent risk, control risk, planned detection risk, tolerable misstatement, and planned evidence, state the effect on planned evidence (increase or decrease) of changing each of the following factors, while the other factors remain unchanged.
1. An increase in acceptable audit risk.________.
2. An increase in inherent risk. ________.
3. A decrease in control risk. ________.
4. An increase in planned detection risk. ________.
5. An increase in tolerable misstatement. ________.

Accepted Answer

The answer of Using your knowledge of the relationships among...

Question 10

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

Accepted Answer

The correct audit risk model is AR = IR × CR × DR, where AR is audit risk, IR is inherent risk, CR is control risk, and DR is detection risk. AAR (acceptable audit risk) is not part of the equation.

Question 11

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 12

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

Accepted Answer

Total estimated misstatements include both known misstatements and projected misstatements, as well as a potential sampling error if the auditor uses statistical sampling to test a subset of the data.

Question 13

When expressing an unqualified opinion, the auditor who evaluates the audit findings should be satisfied that the:
A) amount of known misstatement is documented in the management representation letter.
B) estimate of the total known and likely misstatements is less than a material amount.
C) estimate of the total likely misstatement includes sample error.
D) amount of known misstatement is acknowledged and recorded by the client.

Accepted Answer

When expressing an unqualified opinion, the auditor should be satisfied that all known and likely misstatements are less than a material amount. This includes estimates of misstatements, not just known misstatements. The management representation letter may document known misstatements, but it is not sufficient to evaluate the overall materiality of misstatements. Including sample error in the estimate of likely misstatement would be inaccurate and potentially result in a higher materiality threshold. Acknowledgment and recording of known misstatements by the client is important, but not sufficient to evaluate the overall materiality of misstatements.

Question 14

Which of the following audit risk components may be assessesed in non-quantitative terms?
A) 
B) 
C) 
D)

Accepted Answer

Audit risk components related to qualitative factors such as the integrity of management and the quality of information systems may be assessed in non-quantitative terms. Choice A is the only option that refers to a non-quantitative audit risk component.

Question 15

The risk of material misstatement is a combination of two client controlled factors: inherent risk and control risk. What is inherent risk, why is it important and give examples of inherent risk factors.

Accepted Answer

The answer of The risk of material misstatement is a...

Question 16

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

Accepted Answer

This is correct. The preliminary judgment on materiality is compared to an estimated total misstatement to determine if an account balance is materially misstated. If the estimated total misstatement exceeds the preliminary judgment on materiality, then the account balance is considered to be materially misstated. If it is less than the preliminary judgment on materiality, then it is not considered materially misstated.

Question 17

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

This is true. A lower tolerable misstatement means that the auditor needs to be more precise in their testing and gathering of evidence, as even small misstatements can have a significant impact on the overall accuracy of the financial statements. A higher tolerable misstatement, on the other hand, would allow for a greater degree of variability or error without necessarily affecting the overall accuracy of the financial statements.

Question 18

Which of the following underlies the application of generally accepted auditing standards?
A) the elements of materiality and relative risk
B) the element of internal control
C) the element of corroborating evidence
D) the element of reasonable assurance

Accepted Answer

The answer of Which of the following underlies the application...

Question 19

An auditor who audits a business cycle that has low inherent risk should:
A) increase the amount of audit evidence gathered.
B) assign more experienced staff to that area.
C) increase the tolerable misstatement for the area.
D) expand planning procedures.

Accepted Answer

When auditing a business cycle with low inherent risk, the auditor can reduce the level of substantive procedures performed. As a result, they can increase the tolerable misstatement for the area. This will allow for fewer procedures to be performed, which will save time and cost. The other options may not be necessary or appropriate for a business cycle with low inherent risk.

Question 20

Likely misstatements can result from:
A) 
B) 
C) 
D)

Accepted Answer

The answer of Likely misstatements can result from:
A) 
B) 
C)...

Quiz 9: Materiality and Risk

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

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

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.

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

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.

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:

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.

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

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

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

When expressing an unqualified opinion, the auditor who evaluates the audit findings should be satisfied that the:

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

The risk of material misstatement is a combination of two client controlled factors: inherent risk and control risk. What is inherent risk, why is it important and give examples of inherent risk factors.

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

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.

Which of the following underlies the application of generally accepted auditing standards?

An auditor who audits a business cycle that has low inherent risk should:

Likely misstatements can result from: