exerci09

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Exerci (CHAPTER 9)

Multiple-Choice Questions

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1.	If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is, by definition of FASB Statement No. 2,
	a. material.
	b. insignificant.
	c. significant.
	d. relevant.

2.	The preliminary judgment about materiality is the amount by which the auditor believes the statements could be misstated and still not affect the decisions of reasonable urs.
	a. minimum
	b. maximum
	c. mean average
	d. median average

3.	When auditors allocate the preliminary judgment about materiality to account balances, the materiality allocated to any given account balance is referred to in SAS No. 39 as
	a. the materiality range.
	b. the error range.
	c. tolerable materiality.
	d. tolerable misstatement.

4.	Why do auditors establish a preliminary judgment about materiality?
	a. To help the auditor plan the appropriate evidence to accumulate.
	b. So that the client can know what records to make available to the auditor.
	c. To determine what level of staffing (i.e., work experience) is required for the audit.
	d. None of the above.

5.	If an auditor establishes a relatively low level for materiality, then the auditor will
	a. accumulate more evidence than if a higher level had been t.
	b. accumulate less evidence than if a higher level had been t.
	c. accumulate approximately the same evidence as would be the ca were a higher level t.
	d. accumulate an undetermined amount of evidence.

6.	After the preliminary judgment about materiality has been established, auditors may
	a. not adjust it.
	b. adjust it downward only.
	c. adjust it upward only.
	d. adjust it either downward or upward.

7.	In an audit area that has a higher inherent risk, it would be prudent to
	a. increa the amount of audit evidence gathered.
	b. assign more experienced staff to that area.
	c. review the completed audit files more thoroughly.
	d. do all of the above.
8.	Which of the following is least likely to be appropriate as the basis for determining the preliminary judgment about materiality in the audit of a t of financial statements?
	a. Net income before taxes.
	b. Current asts.
	c. Owners’ equity.
	d. Inventory.
9.	Auditors generally allocate the preliminary judgment about materiality to
	a. the balance sheet only.
	b. the income statement only.
	c. the income statement and balance sheet.
	d. the statement of cash flows.

10.	Which of the following statements regarding inherent risk is correct?
	a. The inherent risk assigned in the audit risk model is unaffected by the auditor’s experience with client’s organization.
	b. Most auditors t a low inherent risk in the first year of an audit and increa it if experience shows that it was incorrect.
	c. Most auditors t a high inherent risk in the first year of an audit and reduce it in subquent years as they gain experience, even when there is inherent risk.
	d. The inherent risk assigned in the audit risk model is dependent upon the strengths in client’s internal control system.

11.	Auditors begin their asssments of inherent risk during the planning pha. Which of the following would not be a topic of the planning pha that would also help to asss inherent risk?
	a. Obtaining client’s agreement on the engagement letter.
	b. Obtaining knowledge about the client’s business and industry.
	c. Touring the client’s plant and offices.
	d. Identifying related parties.
12.	What is the primary means of dealing with risk in planning audit evidence?
	a. Selection of more effective tests of details of balances.
	b. Application of the audit risk model.
	c. Establish a lower preliminary judgment about materiality.
	d. All of the above.

13.	The opinion paragraph in auditors’ reports includes two important phras that are directly related to materiality and risk. The phras are
	a. “in our opinion” and “in all material respects.”
	b. “prents fairly” and “in all material respects.”
	c. “in our opinion” and “prents fairly.”
	d. “in all material respects” and “reasonable assurance.”

14.	The phra “in our opinion” in the auditor’s report is intended to inform urs that auditors
	初中日记 a. guarantee fair prentation of the financial statements.
	b. act as insurers of the accuracy of the statements.
	c. certify the material prented in the statements by management.
	d. ba their conclusions about the statements on professional judgment.

15.	Inherent risk is _______ related to detection risk and _______ related to the amount of audit evidence.
	a. directly, inverly.
	b. directly, directly.
	c. inverly, inverly.
	d. inverly, directly.

16.	The five steps in applying materiality are listed below in random order.
	1. Estimate the combined misstatement.
	2. Estimate the total misstatement in the gment.
	3. Set preliminary judgment about materiality.
	4. Allocate preliminary judgment about materiality to gments.
	5. Compare combined estimate with preliminary judgment about materiality.
	The correct quence from start to finish would be
	a. 1 2 5 4 3.
	b. 3 4 2 1 5.
	c. 4 3 1 5 2.
	d. 5 1 3 2 4.
17.	Which of the following statements is not correct?
	a. Materiality is a relative rather than an absolute concept.
	b. Normally, the most important ba ud as the criterion for deciding materiality is total asts.
	c. Qualitative factors as well as quantitative factors affect materiality.
	d. Given equal dollar amounts, frauds are usually considered more important than errors.
18.	Since materiality is relative, it is necessary to have bas for establishing whether misstatements are material. Normally, the most common ba for deciding what is material is
	a. net income before taxes.
	b. net working capital.
	c. net income after taxes.
	d. total asts.
19.	The more effective the internal controls, the lower the risk factor that ______ assigned to control risk.
	a. should be.
	b. could be.
	c. is.
	d. must be.

20.	Allocating the preliminary judgment about materiality to gments of the financial statements is necessary becau
	a. evidence is accumulated for the financial statements as a whole so the materiality doesn’t apply to them.
	b. evidence is accumulated by gments rather than for the financial statements as a whole.
	c. it is required by the AICPA’s Code of Professional Conduct.
	d. it is required by the SEC.
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21.	Which of the following statements is not correct?
	a. Either an overstatement of an ast account or an understatement of a liability account would have the same effect on the income statement.
	b. A misclassification in the balance sheet will have no effect on operating income.
	c. Either an overstatement of an ast account or an overstatement of a liability account would have the same effect on the income statement.
	d. Either an understatement of an ast account or an overstatement of a liability account would have the same effect on the income statement.

22.	Regardless of how the allocation of the preliminary judgment about materiality was done, when the audit is complete the auditor must be confident that the combined errors in all accounts are
	a. less than the preliminary judgment.
	b. equal to the preliminary judgment.
	c. more than the preliminary judgment.
	d. less than or equal to the preliminary judgment.

23.	Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance to refer to ________.
	a. detection risk.
	b. audit report risk.
	c. acceptable audit risk.
	d. none of the above.
24.	If planned detection risk is reduced, the amount of evidence the auditor accumulates will
	a. increa.
	b. decrea.
	c. remain unchanged.
	d. be indeterminate.

25.	When discussing control risk (CR) and the audit risk model, which of the following statements is not true?
	a. CR is a measure of the auditor’s asssment of the likelihood that errors will not be prevented or detected by the client’s internal control.
	b. If the auditor concludes that internal control is completely ineffective to prevent or detect errors, he/she would assign a 0% to CR.
	c. The relationship between control risk and detection risk is inver.
	d. The relationship between control risk and evidence is direct.
26.	When management has an adequate level of integrity for the auditor to accept the engagement but cannot be regarded as completely honest in all dealings, auditors normally
盗墓笔记3	a. reduce acceptable audit risk and increa inherent risk.
	b. reduce inherent risk and control risk.
	c. increa inherent risk and control risk.
	d. increa acceptable audit risk and reduce inherent risk.
27.	Inherent risk is reduced where the likelihood of defalcations is low. This would be true for an account such as
	a. inventory.
	b. marketable curities.
	c. cash.
	d. accounts receivable.
28.	A major limitation in the application of the audit risk model is
	a. the difficulty in defining the terms of the model.
	b. the difficulty in measuring the components of the model.
	c. the difficulty in understanding the effect on other factors in the model when one factor is changed.
	d. the failure of the Audit Standards Board (ASB) of the AICPA to accept it and incorporate it into the SASs.
29.	In determining the type of opinion to express, an auditor asss the nature of the reporting qualifications and the materiality of their effects. Materiality will be the primary factory considered in the choice between
	a. an “except for” opinion and an adver opinion.
	b. an “except for” opinion and a disclaimer of opinion.
	c. an adver opinion and a disclaimer of opinion.
	d. a qualified opinion and a piecemeal opinion.

30.	When tting a preliminary judgment about materiality,
	a. more evidence is required for a low dollar amount than for a high dollar amount.
	b. less evidence is required for a low dollar amount than for a high dollar amount.
	c. the same amount of evidence is required for either low or high dollar amounts.
	d. there is no relationship between it and the dollar amount of evidence needed.

办公软件教学31.	The expectation of misstatements after considering the effect of internal control is most appropriately thought of as
	a. control risk and acceptable audit risk.
	b. inherent risk.
	c. the combination of inherent risk and control risk.
	d. none of the above.
32.	When discussing acceptable audit risk (AAR) and the audit risk model, which of the following statements is true?
	a. The terms audit assurance, overall assurance, or level of assurance are synonyms for AAR.
	b. AAR is objectively determined by the auditor.
	c. AAR is the risk that the auditor is willing to take that the financial statements are fairly stated after the audit is completed and an unqualified opinion has been reached.
	d. When the auditor decides on a lower acceptable audit risk, it means the auditor wants to be more certain that the financial statements are not materially misstated.

33.	Which of the following is not a consideration when the auditor is attempting to asss the inherent risk?
	a. Nature of client’s business.
	b. Existence of related parties.
	c. Frequency and intensity of top management’s review of the accounting transactions and records.
	d. Susceptibility to defalcation.

34.	Which of the following is an example of the concept of inherent risk?
	a. Humans make more errors than computers; therefore, a manual accounting system is riskier than a computerized system.
	b. Accounting systems with vouchers have many more controls built in, so the risk that there will be errors on the financial statements is reduced.
	c. Loans receivable for a finance company are less likely to be collectible than tho of a bank.
	d. Audits with larger sample sizes are less risky than tho with smaller sample sizes.

35.	The audit risk model is
	a. a planning, testing, and evaluation model.
	b. uful in evaluating results but of limited u in planning.
	c. uful in planning, but of limited value in evaluating results.
	d. uful when performing the tests of balances, but of little value in either the planning or evaluation stages.

36.	Rearch in auditing has shown that if a revid risk is ud in the audit risk model to determine a revid planned detection risk, there is a danger of
	a. not decreasing the evidence sufficiently.
	b. not increasing the evidence sufficiently.
	c. over-auditing.
	d. incread lawsuits against the auditor for failure to follow GAAS.

37.	For financial reporting purpos, a change from straight-line to an accelerated depreciation method was disclod in a note to the financial statements and has an immaterial effect on the current financial statements. It is expected, however, that the change will have a significant effect on future periods. The auditor should express a(n)
	a. qualified opinion.
	b. unqualified opinion.
	c. consistency exception.
	d. adver opinion.

Essay Questions

38.		Explain why it is necessary to allocate the preliminary judgment about materiality to individual accounts (gments) in the financial statements. Also explain why allocating to balance sheet accounts is more common than allocating to income statement accounts.
		Answer: Allocating the preliminary judgment about materiality to individual accounts is necessary becau evidence is accumulated for accounts rather than for the financial statements as a whole. Allocating to accounts establishes a tolerable misstatement amount for each account, which helps the auditor decide the appropriate audit evidence to accumulate for each account. Most practitioners allocate materiality to balance sheet accounts rather than income statement accounts becau there are fewer balance sheet than income statement accounts.
39.		Discuss how auditors u the audit risk model when planning an audit.
		Answer: The audit risk model is ud primarily for planning purpos in deciding how much evidence to accumulate in each cycle. The auditor decides an acceptable level of audit risk, asss inherent risk and control risk, and then us the relationship depicted in the following model to determine an appropriate level for planned detection risk: PDR = AAR IR x CR
40.		Describe the audit risk model and each of its components.
		Answer: The planning form of the audit risk model is stated as follows: PDR = AAR IR x CR where: PDR = planned detection risk AAR = acceptable audit risk IR = inherent risk CR = control risk Planned detection risk is a measure of the risk that audit evidence for an account will fail to detect misstatements exceeding a tolerable amount, should such misstatements exist. Planned detection risk determines the amount of substantive evidence that the auditor plans to accumulate. Acceptable audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued. It is influenced primarily by the degree to which external urs will rely on the statements, the likelihood that a client will have financial difficulties after the audit report is issued, and the auditor’s evaluation of management’s integrity. Inherent risk is a measure of the auditor’s asssment of the likelihood that there are material misstatements in an account before considering the effectiveness of internal control. Control risk is a measure of the auditor’s asssment of the likelihood that misstatements exceeding a tolerable amount in an account will not be prevented or detected by the client’s internal controls.
41.		There are veral factors that affect an audit firm’s business risk and, therefore, acceptable audit risk. Discuss three of the factors.
		Answer: Business risk and acceptable audit risk are affected by: ∙ The degree to which external urs will rely on the statements. For large, publicly held clients, business risk is greater, and acceptable audit risk will be less, than for small, privately held clients, ceteris paribus. ∙ The likelihood that a client will have financial difficulties after the audit report is issued. Business risk is greater, and acceptable audit risk will be lower, when the client is experiencing financial difficulties. ∙ The auditor’s evaluation of management’s integrity. Business risk is greater, and acceptable audit risk will be lower, when the client’s management has questionable integrity.
	42.	Discuss each of the five steps in applying materiality in an audit, and identify the audit pha(s) in which each step is performed.
		Answer: Step 1. Set preliminary judgment about materiality. This is the combined amount of misstatements in the financial statements that would be considered material. This decision is made in the planning stage of the audit. Step 2. Allocate preliminary judgment about materiality to gments. In this step, the auditor normally allocates the preliminary judgment about materiality to the balance sheet accounts. The amount of materiality allocated to an account is referred to as that account’s tolerable misstatement. This allocation is performed in the audit planning stage. Step 3. Estimate total misstatement in gment. In this step, the auditor projects the sample results to the population. An allowance for sampling risk is also calculated. This would be performed after the substantive tests for each account are completed. Step 4. Estimate the combined misstatement. In this step, the projected errors for each account are added, along with total sampling error, to calculate the combined misstatement. This would be performed after all substantive tests have been completed. Step 5. Compare combined estimated misstatement with preliminary or revid judgment about materiality. If the combined estimated misstatement is less than or equal to the judgment about materiality, then the auditor concludes the financial statements are fairly prented. This would be performed after all substantive tests have been completed, in the final review stage of the audit.

43.	Below are four situations that involve the audit risk model as it is ud for planning audit evidence requirements in the audit of inventory. For each situation, calculate planned detection risk.
	SITUATION
	1 2 3 4

	Acceptable audit risk 1% 10% 10% 5%

	Inherent risk 100% 100% 50% 20%

	Control risk 100% 100% 40% 30%

	Planned detection risk ______ ______ ______ ______

44.	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 (increa or decrea) of changing each of the following factors, while the other factors remain unchanged.
	1. An increa in acceptable audit risk. .
	2. An increa in inherent risk. .
	3. A decrea in control risk. .
	4. An increa in planned detection risk. .
	5. An increa in tolerable misstatement. .

45.	Match six of the terms (a-i) with the definitions provided below (1-6):

	a. Business risk
	b. Preliminary judgment about materiality
	c. Inherent risk
	d. Planned detection risk
	e. Audit assurance
	f. Acceptable audit risk
	g. Tolerable misstatement
	h. Control risk
	i. Materiality

	1. A measure of the risk that audit evidence for a gment will fail to detect misstatements exceeding a tolerable amount, should such misstatements exist.
	2. The risk that the auditor or audit firm will suffer harm becau of a client relationship, even though the audit report rendered for the client was correct.
	3. A measure of the auditor’s asssment of the likelihood that misstatements exceeding a tolerable amount in a gment will not be prevented or detected by the client’s internal controls.
	4. A measure of how much risk the auditor is willing to take that the financial statements may be materially misstated after the audit is completed and an unqualified audit opinion has been issued.
	5. The materiality allocated to any given account balance.
	6. The maximum amount by which the auditor believes that the statements could be misstated and still not affect the decisions of reasonable urs.
46.	In practice, auditors rarely assign numerical probabilities to inherent risk, control risk, or acceptable audit risk. It is more common to asss the risks as high, medium, or low. For each of the four situations below, fill in the blanks for planned detection risk and the amount of evidence you would plan to gather (“planned evidence”) using the terms high, medium, or low.

	SITUATION
	1 2 3 4

	Acceptable audit risk Low Low High High

	Inherent risk High Low Low Low

	Control risk High Low Medium Low

	Planned detection risk ______ ______ ______ ______

	Planned evidence ______ ______ ______ ______