Question 1

Which of the following statements regarding the going concern concept is FALSE?

Accepted Answer

Management may not always be honest or objective in their assessment of the company's ability to continue as a going concern. Therefore, auditors must also rely on other sources of information and analysis to make their evaluation.

Question 2

Which of the following statements concerning accounting risk (AccR)is FALSE?

Accepted Answer

D

Question 3

The tendency to value what we have because it is ours,regardless of its intrinsic value,is known as the ________.

Accepted Answer

The endowment effect refers to the tendency for individuals to place a higher value on objects or items that they already possess, simply because they own them. This can occur even if the item has no real intrinsic value or if a person would not have been willing to pay that same amount for the item if they did not already own it. The availability heuristic refers to the tendency to overestimate the likelihood of events that are more easily remembered or that come to mind more easily. The representative heuristic refers to the tendency to make judgments or decisions based on stereotypes or prototypes, without fully considering other information. The halo effect refers to the tendency to form an overall positive impression of a person based on one positive trait or characteristic.

Question 4

The prediction that people estimate frequency or probability by the ease with which instances or occurrences of the event can be brought to mind is known as the ________.

Accepted Answer

The description given matches the definition of the availability heuristic, where people estimate the likelihood of an event based on how easily similar examples come to mind.

Question 5

CAS 540 refers to management's judgments that the auditor considers unreasonable as _________ misstatements.

Accepted Answer

CAS 540 refers to management's judgments that the auditor considers unreasonable as judgmental misstatements.

Question 6

Generally accepted accounting principles are based on the going-concern concept.Thus,an opinion that financial statements are in conformity with GAAP means that continued existence may be presumed for a "reasonable time",which is considered to be ________.

Accepted Answer

The going-concern concept in GAAP assumes that the company will continue to operate for a reasonable period of time, which is usually defined as at least one year beyond the date of the financial statements. Therefore, an opinion that financial statements are in conformity with GAAP means that the company is expected to continue its operations for at least one year.

Question 7

The tendency for auditors to blindly follow the prior year's audit file when conducting the current year's audit is an example of which type of judgment bias?

Accepted Answer

This is an example of anchoring bias, where auditors rely too heavily on the first piece of information they see (in this case, the prior year's audit file) when making decisions about the current year's audit.

Question 8

The tendency to exaggerate the inevitability of causal sequences is known as the ________.

Accepted Answer

The tendency to exaggerate the inevitability of causal sequences is known as hindsight bias. Hindsight bias is the tendency to believe, after learning an outcome, that one would have foreseen it. This bias can lead individuals to overemphasize certain events in a causal sequence and neglect others that may have contributed to the outcome.

Question 9

According to Savage and Van Allen,what is the problem with using the average or expected value of a distribution as a point estimate for a distribution of values?

Accepted Answer

When there is sufficient estimation uncertainty, using the average or expected value of a distribution as a point estimate can lead to misleading results. It is because the estimate is based on assumptions and may not reflect the true value of the parameter being estimated. Therefore, alternative methods, such as using conservative point estimates or considering a range of possible outcomes, may be more appropriate in situations with high estimation uncertainty.

Question 10

An approximation of a monetary amount in the absence of a precise means of measurement is known as ________.

Accepted Answer

An accounting estimate is an approximation of a monetary amount when a precise means of measurement is unavailable. Estimation uncertainty and management bias refer to factors that can affect the accuracy of an accounting estimate, while management's point estimate is a specific value assigned by management based on their judgment and analysis.

Question 11

It is "reasonable" to assume the going-concern assumption for financial reporting when the degree of doubt is no higher than ________.

Accepted Answer

The going-concern assumption assumes that a company will continue to operate in the foreseeable future. It is reasonable to make this assumption when there is no higher than a 20% degree of doubt that the company will not be able to continue operating. This means that the probability of the company shutting down or going bankrupt is not high enough to cast doubt on its ability to continue operating. Therefore, choice C (20%) is the best answer.

Question 12

The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement is referred to as ________.

Accepted Answer

Estimation uncertainty refers to the inherent lack of precision in measuring accounting estimates, such as the useful life of a long-lived asset or the expected liability from a legal claim. This uncertainty can result from a lack of reliable data or changes in business conditions. Management bias, a "nightmare" estimate situation, and auditor's range are not the most appropriate answers for the given question.

Question 13

Misstatements are defined as the difference between ________ and the nearest point of the reasonable range.

Accepted Answer

Misstatements are defined as the difference between management's point estimate and the nearest point of the reasonable range. The auditor's point estimate is not used to define misstatements. Estimation uncertainty refers to the lack of precision and reliability in estimating amounts and involves a range of possible outcomes. The outcome of an accounting estimate reflects the final amount determined through the use of the accounting estimate.

Question 14

CIFiR's (SEC established Advisory Committee on Improvements to Financial Reporting)progress report proposes a framework for accounting judgments consisting of which two components?

Accepted Answer

CIFiR's progress report proposes a framework for accounting judgments consisting of a critical and good-faith thought process and documentation, which emphasizes the importance of reasoning and documenting judgment decisions. The other options may be relevant to accounting judgments, but they were not specifically mentioned in the report.

Question 15

An auditor's analysis of specific accounts receivable and recent trends in bad debt losses as a percent of sales may cause the auditor to conclude that the allowance for doubtful accounts should be between $130,000 and $160,000.If management's recorded estimate falls within that range,the auditor ordinarily would conclude that the recorded amount is reasonable,and no difference would be aggregated.If management's recorded estimate is $110,000,how much would be aggregated as a misstatement?

Accepted Answer

If management's recorded estimate falls within the range given by the auditor ($130,000 - $160,000), then the recorded amount is considered reasonable and no difference would be aggregated. However, if the recorded estimate is outside of that range, a misstatement would need to be aggregated. In this case, management's recorded estimate is $110,000, which falls below the range given by the auditor. Therefore, the misstatement would be the difference between the range given by the auditor and management's recorded estimate, which is $20,000 ($130,000 - $110,000 = $20,000). Therefore, the answer is choice C.

Question 16

Greater volatility in the business environment raises the amount of measurement uncertainty associated with predicting future-event amounts.Such greater uncertainty leads to an increase in which type of risk?

Accepted Answer

Greater volatility in the business environment increases the uncertainty in financial measurements and predictions, which raises accounting risk, as it involves the risk of errors in financial reporting due to uncertain estimates.

Question 17

Which of the following statements regarding audit risk (AudR)and accounting risk (AccR)is FALSE?

Accepted Answer

AudR is relevant to both the auditee and the auditor. The auditor has to consider AudR to assess the risk that a material misstatement might exist in the financial statements, while the auditee needs to understand AudR to evaluate the level of assurance provided by the auditor. AccR, on the other hand, is largely geared towards reflecting the inherent risks associated with the financial information and has nothing to do with the business risks of the auditee. Choices A, B, and D are true statements regarding AudR and AccR.

Question 18

Quantified uncertainty is referred to as ________.

Accepted Answer

Quantified uncertainty is typically expressed in terms of probability, which represents the degree of belief or confidence about a particular outcome or event. Audit risk and accounting risk refer to specific types of risk in the audit and accounting contexts, while estimation refers to the process of making an educated guess or prediction based on available information. Therefore, option C (probability) is the best choice.

Question 19

The actual monetary amount which results from resolution of the underlying transaction(s),event(s),or condition(s)addressed by the accounting estimate is known as ________.

Accepted Answer

The outcome of an accounting estimate is the actual monetary amount that results from the resolution of the underlying transaction(s), event(s), or condition(s) addressed by the accounting estimate. Estimation uncertainty refers to the range of possible outcomes and the degree of confidence surrounding an accounting estimate. Management bias is the intentional manipulation of an accounting estimate for personal gain or to meet certain goals, and management's point estimate is their best guess at the outcome of an accounting estimate.

Question 20

According to Cockburn,which of the following statements relating to auditors' reasonable ranges is FALSE?

Accepted Answer

Cockburn does not explicitly state that the range estimate must be made at the year-end date. It is important for the range to be relevant to the financial statement period being audited, but the timing of the estimate may vary depending on the circumstances. The other statements are true according to Cockburn's discussion of auditors' reasonable ranges.

Quiz 19: The Audit of Accounting Estimates: Basic Material Relating to Accounting Estimates