Chapter 3 Practice Assignment
Which of the following statement is true regarding the concept of materiality?
a lower level of materiality assessed by the auditor, means a smaller likelihood that a misstatement may potentially impact or change the decision-making process
The typical range of overall materiality benchmarks for total assets and total revenues in which of the following?
0.25% to 2%
If audit risk is set at 1.6%, inherent risk is 80%, and control risk is 80%, what should auditors set for detection risk? What is the best audit strategy?
2.5% and substantive approach
What is the most common based used by auditors for planning materiality for publicly traded companies?
5% of pretax income
Which of the following statements regarding risk assessment is correct? (1)
AU-C 300 Planning an Audit and AS 2021 Audit Planning require auditors to plan the audit by assessing risk to reduce audit risk to an acceptable low level
Which of the following statements is incorrect regarding risk assessment? (1)
AU-C 300 Planning an Audit and AS 2101 Audit Planning require auditors to plan the audit by assessing risk to reduce audit risk to an acceptable high level
A client sells high-end fashion clothing and has inadequate security. Inherent risk is high for the assertion of inventory existence because expensive clothing may be stolen. Control risk is high since there is inadequate security, which increases the risk of theft. The auditor cannot rely on the client's security system to reduce the risk of material misstatement associated with the existence of inventory. What is the best alternative for the auditor to keep audit risk low?
As the risk of material misstatement is high, the best strategy is the substantive approach
An audit firm is approached by four new prospective clients. However, due to limitations regarding its size, the audit firm can only choose one client. Which of the following 4 clients is most likely to be accepted by the audit firm?
Company D 1. Management shows integrity in business and accounting decisions. 2. The firm has expertise to perform services requested by the client and has access to specialists that can meet client needs. 3. No independence problems exist, or independence problems can be resolved prior to client acceptance. 4. The entity has a strong accounting system with good internal controls.
Which of the following statements is incorrect regarding risk assessment? (2)
an auditor will perform various risk assessment procedures to ensure that appropriate attention is paid to the accounts and transactions least at risk of being materially misstated
An engagement letter for a publicly traded company audit is typically address to which individual?
audit committee chair
An auditor mistakenly concludes that a company is financially sound based on an incorrect appraisal of the company's pension obligations. This best exemplifies which of the following risks?
audit risk
Which of the following statements regarding risk assessment is correct? (3)
audit risk is the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated
Which of the following is an outcome of the risk assessment and planning phase?
audit strategy
Which of the following alternatives best synthesizes the purpose of developing an audit strategy?
audit strategy is the process by which auditors determine the most appropriate scope, direction, and timing of audit engagement - an audit strategy also helps to develop an audit plan for the success of audit engagement, as well as the right audit approach
A higher materiality level translates into
auditor doing less work
A lower materiality level translates into
auditors doing more audit work
Which of the following statements regarding risk assessment is correct? (2)
auditors make preliminary risk assessments while planning the audit
Which statements below exemplifies the relation between professional skepticism and misstatements during the fraud risk assessment process?
auditors should adopt professional skepticism when assessing the risk of material misstatement due to fraud, given that fraud is an intentional act through the use of deception that results in a misstatements in financial statements
Overall, the determination of which type of materiality is a subjective process that will vary across firms and across clients, and it may change during the performance of?
both planning and performance
An individual with experience in the investment industry is starting a community bank. The company is looking for an auditor so that audited financial statements can be provided to potential investors. The audit firm is large but has limited experience auditing banks. The audit firm's CEO has recommended that the audit firm refuse this new engagement. Which of the following factors likely contributed to the CEO's decision?
competence issues
Which of the following best exemplifies the first stage of an audit?
identifying the risks of an erroneous reporting by the business
Which of the following statements regarding setting materiality is correct?
in selecting an appropriate benchmark, auditors can choose an item from the balance sheet or the income statement
There is an ________ relationship between materiality level and sample size
inverse
Toshiba Corporation is a publicly traded Japanese company headquartered in Tokyo that makes consumer electronics, household electronics, office equipment, and more. In July 2015, the CEO of Toshiba announced he was resigning amid an accounting scandal in which profits had been overstated for the past seven years by approximately $1.9 billion. The technology industry is extremely competitive, and Toshiba's upper management set aggressive profit targets. The home electronics and appliances division was showing losses and the memory chip division was feeling pressure because of decreasing demand from Chinese electronics companies. Overall, there was a lack of internal controls in upper management and an unethical corporate culture led by upper management. Controls that did exist were overridden by upper management's pressure to show profits. Which statement below is an example of opportunities, incentives or pressures to commit fraud that Toshiba faced?
lack of internal controls is an example of opportunity to perpetrate a fraud
If audit risk is set at low, inherent risk is high, and control risk is high, what should auditors set for detection risk?
low
When assessing management integrity, the auditor will typically consider all of the following factors EXCEPT
management's personal relationships with the audit team
Which term refers to the ability of information to influence decisions that users make on the basis of the financial information of a specific reporting entity?
materiality
If audit risk is set at low, inherent risk is high, and control risk is low, what should auditors set for detection risk?
medium
Which of the following is correct regarding the different phases of an audit and deciding on an audit strategy?
once the elements of risk assessment have been considered, auditors can develop their audit strategy
Performance materiality at the individual account level should be less than the ________ materiality
planning
The determination of both ____________ materiality is a subjective process that will vary across firms and across clients?
planning and performance
Which of the following marks the final stage in the client acceptance or continuance decision process?
preparation of an engagement letter
Maple Wine Corporation has a balance of its allowance for doubtful account of $100,000, which is 2.5% of its accounts receivable ending balance. The auditors decided to audit the allowance for doubtful accounts together with the accounts receivable. Which of the following would this most likely be?
qualitative
When pretax income is either negative or fluctuating drastically from year to year, auditors should use total revenues or total assets as a base for calculating.....
quantitative planning materiality
If auditors obtain information in the risk response phase that indicates an assessment during the risk assessment phase was incorrect, the auditor should
reevaluate and revise their audit plan
If the risk of material misstatement is low, auditors should use the
reliance on controls approach
In which of the following phases does the auditor start identifying factors that may impact the risk of a material misstatement occurring in the financial statements?
risk assessment phase
A high-tech company is looking for a new auditor. The company has grown through an acquisition and needs an auditor that can handle its needs. The company has paid attention to good internal controls, and the new auditor sees no independence issues. Discussions with the previous auditor, the audit committee, and management provide a consistent story about the company and its reasons for changing auditors. However, in the process of acquisition the company became embroiled in a dispute with a regulatory agency. Hence, the new audit company decided to refuse the new client. What is the most important factor contributing to the refusal?
risk of association
In which phase of the audit do auditors perform tests of controls and detailed substantive testing of transactions and accounts, concentrating effort where the risk of material misstatement is greatest?
risk response phase
Which of the following is correct regarding the respective phases of an audit?
technological developments should be considered the Risk Assessment phase because such technological developments might make particular products obsolete and cause inventory to be more susceptible to overstatement
All of the following occur during the risk assessment phase EXCEPT
test of internal controls
Which of the following statements about auditing standards is correct?
the auditing standards do not provide any guidelines for the determination of performance materiality
Which of the following demonstrates professional skepticism being practiced?
the auditor gathers more evidence as he suspects fraud may be present
Inherent risk and control risk are under
the client's control
The auditor gather information about a client's management integrity through communication with
the client's future auditor
A utilities company is looking for a new auditor. The company has grown through an acquisition and needs an auditor that can handle its needs. The company has paid attention to good internal control, and the new auditor sees no independence issues. Discussions with the predecessor auditor, the audit committee, and management provide a consistent story about the company and its reasons for changing auditors. Which of the following is a negative factor suggesting the auditor may want to refuse this company as a new audit client?
the company is in a heavily regulated industry
All of the following are positive factors suggesting that an auditor should accept a new client EXCEPT
there are significant regulatory reporting requirements with close monitoring by regulators
Which of the following statements regarding risk is correct?
there is an inverse relationship between the risk of material misstatement and detection risk
Which of the following materiality benchmarks is most appropriate for a company that has a net loss for the current year?
total assets
While auditing Anastasia General Merchandise Corporation, which of the following can Alex Young, CPA, use as a benchmark for prepaid expense, and property, plant, and equipment accounts?
total assets
Key components of an engagement letter include all of the following EXCEPT the
type of audit opinion that will be issued
The planning materiality threshold for company A is $300 million and auditors decided that one-third of that amount, $100 million, is an appropriate performance materiality threshold at the account level to determine if individual accounts or transactions are materially misstated. Generally, auditors would spend minimal time performing detailed audit testing on all accounts EXCEPT
valuation allowance - $50 million
