Question 1

Auditors are susceptible to judgmental biases because of the use of shortcuts or heuristics in the reasoning process.

Accepted Answer

Auditors, like all humans, are capable of using heuristics in their reasoning process. These mental shortcuts may lead to judgmental biases, where the auditor makes decisions or comes to conclusions that are not entirely objective or rational. Common heuristics used by auditors include anchoring, confirmation bias, and availability bias. Understanding and minimizing these biases is a critical part of the audit process.

Question 2

In CAS 540,quantified uncertainty is referred to as probability or risk.

Accepted Answer

Quantified uncertainty in CAS 540 is specifically referred to as probability or risk.

Question 3

Under the RBR system of risk-based reasoning for accounting estimates,in the ________ region,the probability of payoff (one minus acceptable AccR)to (acceptable AccR).

Accepted Answer

The answer of Under the RBR system of risk-based reasoning...

Question 4

When misstatements due to incorrect accounting estimates are factored in,the true probability of material misstatement is simply the product of Audit Risk and Information Risk

Accepted Answer

Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. It is a function of the risks of material misstatement (inherent and control risks) and detection risk, not simply the product of audit risk and information risk. Information risk relates to the possibility that the information upon which the business risk decision was made was inaccurate. The true probability of material misstatement considers the inherent risk, control risk, and detection risk, not just audit risk and information risk.

Question 5

Under the risk-based reasoning (RBR)system of risk-based reasoning for accounting estimates,in the ignore region,the probability of payoff is 1.00 to (one minus acceptable AccR).

Accepted Answer

In the risk-based reasoning (RBR) system for accounting estimates, the "ignore region" does not imply a probability of payoff of 1.00 to (one minus acceptable AccR). Instead, the ignore region refers to a range of outcomes where the risk of material misstatement is considered low enough that no further audit attention is warranted. The specific probabilities associated with the ignore region would not be described in this manner.

Question 6

An Accounting Estimate Problem or "Cockburn's problem" occurs when _______.

Accepted Answer

Cockburn's problem arises when the width of the reasonable range is greater than the material misstatement but not greater than two times the material misstatement, indicating that an estimate without significant risk can be found within the reasonable range.

Question 7

A lack of neutrality by management in the preparation and presentation of information is known as estimation uncertainty.

Accepted Answer

Estimation uncertainty refers to the uncertainty and potential variability of estimates themselves, and is typically related to the inherent limitations of estimation methods and data sources used. A lack of neutrality by management in presenting information is likely to be related to management bias or manipulation, rather than estimation uncertainty.

Question 8

The risk of misstatement arising from estimation uncertainty due to future events is known as accounting risk.

Accepted Answer

Accounting risk refers to the risk of misstatement arising from estimation uncertainty due to future events, such as changes in the economy, market conditions, or business environment.

Question 9

There are huge pressures on the auditor from management regarding recording of estimates because such estimates are essentially subjective in nature,and the major source of disagreement is likely the assumptions made about future-event outcomes.

Accepted Answer

Estimates are often subjective in nature and there can be disagreements between management and auditors regarding assumptions made about future-event outcomes. This can cause significant pressures on the auditor to accurately record these estimates.

Question 10

Accounting risk (AccR)is largely geared to reflect business risks of the auditee.

Accepted Answer

Accounting risk is indeed closely tied to the business risks faced by the auditee. Accounting risk refers to the risk that the financial statements may contain material misstatements or errors, which could result in incorrect conclusions being drawn by stakeholders. The level of accounting risk is influenced by a range of factors, including the complexity of the transactions and activities being undertaken by the auditee and the quality of the internal control systems in place. As such, accounting risk is closely linked to the underlying risks faced by the business, and auditors must take these factors into account when assessing the level of risk associated with an audit engagement.

Question 11

The difference between what was reported and what should have been reported,an auditor's traditional perspective of misstatement,is the basis of the concept of auditing risk.

Accepted Answer

Auditing risk refers to the risk that an auditor may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated. The concept of misstatement is related to the accuracy of financial statements, but auditing risk encompasses the broader risk of not detecting such inaccuracies.

Question 12

Which of the following statements regarding calibration is FALSE?

Accepted Answer

Calibration is not achieved through the use of heuristics, but rather through feedback and experience that adjusts an expert's intuition to match reality. Heuristics are shortcuts or rules of thumb that experts use to make judgments or estimates, but they can sometimes lead to biases or inaccurate predictions. Calibration is about improving the accuracy of expert judgments by aligning them with reality, and it requires a systematic process of feedback and learning.

Question 13

From Cockburn's perspective,which of the following statements is FALSE?

Accepted Answer

The answer of From Cockburn's perspective,which of the following statements...

Question 14

Accounting estimate nirvana is ________.

Accepted Answer

Accounting estimate nirvana is achieved when the width of the reasonable range is less than or equal to the material misstatement, which means that there is no significant risk for any estimates within the reasonable range. This indicates that the estimate is highly reliable and accurate. Option B states the same, hence it is the correct choice. Option A and D state that an estimate with no significant risk can be found within the reasonable range, but the width of the reasonable range is greater than the material misstatement, which means there is still a level of uncertainty involved. Option C states that the width of the reasonable range is greater than or equal to the material misstatement, which signifies that there may be significant risks associated with the estimate. Therefore, option B is the best choice.

Question 15

Risks associated with forecasting future outcomes or events in accounting estimates are increasingly recognized as the biggest source of error in accounting estimates.

Accepted Answer

Accounting estimates involve predicting future outcomes or events, which can be impacted by a variety of factors and are therefore subject to risks and uncertainties. These risks can lead to errors in the estimates, making them the biggest source of error in accounting estimates. As a result, accounting standards require companies to disclose information about the nature and extent of these risks in their financial statements.

Question 16

Generally accepted accounting principles are based on the going-concern concept.

Accepted Answer

Generally accepted accounting principles assume that a company will continue to operate in the foreseeable future, and its financial statements must reflect that assumption. This concept is known as the going-concern concept.

Question 17

The risk-based reasoning (RBR)matrix is an attempt to summarize all the possibilities of accounting uncertainties that an auditor may encounter and classify them by reporting types.

Accepted Answer

The statement describes the purpose and content of the risk-based reasoning (RBR) matrix accurately. The RBR matrix is a comprehensive tool that helps auditors identify and assess different types of risks that may affect the accuracy and reliability of financial statements. By categorizing these risks based on their nature and potential impact, the RBR matrix enables auditors to develop appropriate audit strategies and procedures to address them. Ultimately, the RBR matrix helps auditors to provide high-quality assurance services that enhance the credibility and trustworthiness of financial reporting.

Question 18

Uncertainty situations may cause audit reports to be modified (qualified)for departures from GAAP.

Accepted Answer

Uncertainty situations, such as incomplete or inadequate records, may cause auditors to modify their report for departures from GAAP, resulting in a qualified opinion.

Question 19

Which of the following statements regarding the risk-based reasoning (RBR)matrix is FALSE?

Accepted Answer

The RBR matrix does not focus on AudR levels; rather, it provides a framework for assessing the risk associated with accounting uncertainties and making decisions based on those assessments. The other statements are true: the RBR matrix attempts to summarize all possibilities of accounting uncertainties and classify them by reporting type, there are three regions of probabilities to consider, and the matrix is a decision aid for reporting situations involving future events.

Question 20

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

Accepted Answer

The tendency to exaggerate the inevitability of causal sequences is known as the hindsight bias, not the availability heuristic. The availability heuristic is a mental shortcut that relies on immediate examples that come to a person's mind when evaluating a specific topic, concept, method or decision.

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