by Mubashir Shahzad , Oracle Functional Consultant/ERP Business Analyst , Jaffer Business
System
8 years ago
after the assesment of internal controls enviroment, risk and controls, management stance of internal con trols, and when they perform initial assesment of controls through testting of control frome work, then they can reach to decide materiality level.
plz like the answer
by Yajna Sapkota
, Manager , Cooperatives organization
3 years ago
At the end of fiscal year if there is additional stock of materials which can increase the cost so auditor may ask to balance the materials.
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Purpose-This study aims to explore and explain the risk factors affecting Multi-location Audit Risk. Methodology-An empirical study was conducted for the assessment of multi-locations audit risk factors applied in the Egyptian audit firms. The researchers joined an audit team in one of the largest Egyptian audit firms for a period of about six months observing how multilocation audits are performed. The researchers used questionnaire and interviews with professional senior auditors. A number of hypotheses were tested using descriptive data analysis and Spearman correlations. Findings-The results showed that the study hypotheses could be accepted. It further indicated the absence of direct guidelines for professional auditors in performing multi location audits in Egypt.
AUDITING CONCEPTS AND APPLICATIONS – Reviewer 4
(Materiality and Audit Risk)
1) If it is probable that the judgment of a reasonable person will be 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.
Answer: A
Terms: FASB Statement No. 2; Probable judgment of a reasonable person
2) The scope paragraph of the standard unqualified auditor's report states that "… the standards
require that we plan and perform the audit to obtain ________ assurance about whether the
financial statements are free of material misstatement." What type of assurance is given?
A) Immediate
B) Limited
C) Reasonable
D) Absolute
Answer: C
Terms: Type of assurance provided
3) Auditors are responsible for determining whether financial statements are materially
misstated, so upon discovering a material misstatement they must bring it to the attention of:
A) regulators.
B) the audit firm's managing partner.
C) the client shareholders.
D) the client.
Answer: D
Terms: Discovery of a material misstatement must bring it to the attention
4) Determining materiality requires professional judgment.
A) True
B) False
Answer: A
Terms: Materiality
1
Copyright © 2014 Pearson Education
1) If it is probable that the judgment of a reasonableperson will be changed or influenced by the omission or misstatement ofinformation, then that information is, by definition of FASB Statement No. 2:
A) material.
B) insignificant.
C) significant.
D) relevant.
2) The scope paragraph of the standard unqualifiedauditor's report states that "… the standards require that we plan andperform the audit to obtain ________ assurance about whether the financialstatements are free of material misstatement". What type of assurance isgiven?
A) immediate
B) limited
C) reasonable
D) absolute
3) Auditors are responsible for determining whetherfinancial statements are materially misstated, so upon discovering a materialmisstatement they must bring it to the attention of:
A) regulators.
B) the audit firm's managing partner.
C) the client shareholders.
D) the client's management.
D) the client's management.
1) Audit standards require the auditor to considermateriality early in the audit. Which statement(s) regarding preliminarymateriality are true?
I. Preliminarymateriality may change during the engagement.
II. Preliminarymateriality is the maximum amount the auditor by which the auditor believes thefinancials could be misstated and still not affect the decisions of reasonableusers.
A) I only
B) II only
C) both I and II
D) neither are true
2) Why do auditors establish a preliminary judgment aboutmateriality?
A) To determine the appropriate level of staff to assign tothe audit.
B) So that the client can know what records to makeavailable to the auditor.
C) To plan the appropriate audit evidence to accumulate anddevelop an overall audit strategy.
D) To finalize the control risk assessment.
C) To plan the appropriate audit evidence to accumulate anddevelop an overall audit strategy.
3) If an auditor establishes a relatively high level formateriality, then the auditor will:
A) accumulate more evidence than if a lower level had beenset.
B) accumulate less evidence than if a lower level had beenset.
C) accumulate approximately the same evidence as would bethe case were materiality lower.
D) accumulate an undetermined amount of evidence.
B) accumulate less evidence than if a lower level had beenset.
4) The preliminary judgment about materiality and theamount of audit evidence accumulated are ________ related.
A) directly
B) indirectly
C) not
D) inversely
5) Which of the following is the primary basis used to decidemateriality for a for-profit entity?
A) net sales
B) net assets
C) net income before tax
D) all of the above
6) Auditing standards ________ that the basis used todetermine the preliminary judgment about materiality be documented in the auditfiles.
A) permit
B) do not allow
C) require
D) strongly encourage
7) Amounts involving fraud are usually considered ________important than unintentional errors of equal dollar amounts.
A) less
B) no less
C) no more
D) more
8) Qualitative factors can affect an auditor's assessmentof materiality. Which of the following qualitative factors could influence the assessmentof materiality?
I. Misstatementsthat are otherwise immaterial may be material if they affect earnings trends.
II. Minormisstatements resulting from the consequences of contractual obligations.
A) I only
B) II only
C) I and II
D) neither I nor II
9) The five steps in applying materiality are listed belowin random order.
1. Estimatethe combined misstatement.
2. Estimatethe total misstatement in the segment.
3. Setpreliminary judgment about materiality.
4. Allocatepreliminary judgment about materiality to segments.
5. Comparecombined estimate with preliminary judgment about materiality.
The first three steps in correct sequence would be:
A) 1, 2, 5
B) 3, 4, 2
C) 2, 1, 5
D) 3, 2, 4
10) Which of the following statements is not correct?
A) Materiality is a relative rather than an absoluteconcept.
B) The most important base used as the criterion fordeciding materiality is total assets.
C) Qualitative factors as well as quantitative factorsaffect materiality.
D) Given equal dollar amounts, frauds are usuallyconsidered more important than errors.
B) The most important base used as the criterion fordeciding materiality is total assets.
12) When setting a preliminary judgment about materiality:
A) more evidence is required for a low dollar amount thanfor a high dollar amount.
B) less evidence is required for a low dollar amount thanfor a high dollar amount.
C) the same amount of evidence is required for either lowor high dollar amounts.
D) there is no relationship between it and the dollaramount of evidence needed.
A) more evidence is required for a low dollar amount thanfor a high dollar amount.
13) Lewis Corporation has a few large accounts receivablethat total one million dollars whereas
Clark Corporation has many small accounts receivable thattotal one million dollars. Misstatement in any one account is more significantfor Lewis corporation because of the concept of:
A) Materiality.
B) Audit risk.
C) Reasonable assurance.
D) Comparative analysis.
1) When auditors allocate the preliminary judgment aboutmateriality to account balances, the materiality allocated to any given accountbalance is referred to as:
A) the materiality range.
B) the error range.
C) tolerable materiality.
D) tolerable misstatement.
D) tolerable misstatement.
2) Auditors generally allocate the preliminary judgmentabout materiality to the:
A) balance sheet only.
B) income statement only.
C) income statement and balance sheet.
D) statement of cash flows.
3) Which of the following is an incorrect statementregarding the allocation of the preliminary judgment about materiality tobalance sheet accounts?
A) Auditors expect certain accounts to have more misstatementsthan others.
B) The allocation has virtually no effect on audit costsbecause the auditor must collect sufficient appropriate audit evidence.
C) Auditors expect to identify overstatements as well asunderstatements in the accounts.
D) Relative audit costs affect the allocation.
B) The allocation has virtually no effect onaudit costs because the auditor must collect sufficient
4) Which of the following statements is true concerning theallocation of preliminary materiality?
A) It is necessary to allocate preliminary materiality tofinancial statements as a whole rather than by segments.
B) Preliminary materiality should be allocated to incomestatement accounts only.
C) It is required by the SEC.
D) When preliminary materiality is allocated to segments itis termed tolerable misstatement.
D) When preliminary materiality is allocated to segments itis termed tolerable misstatement.
5) Which of the following statements is false?
A) Either an overstatement of an asset account or anunderstatement of a liability account would have the same effect on the incomestatement.
B) A misclassification in the balance sheet will have noeffect on operating income.
C) Either an overstatement of an asset account or anoverstatement of a liability account would have the same effect on the incomestatement.
C) Either an overstatement of an asset account or anoverstatement of a liability account would have the same effect on the incomestatement.
7) When tolerable misstatement is exceeded by ________ theauditor should request the client to adjust their account balance.
I. Knownmisstatements
II. Projectedmisstatement
A) I only
B) II only
C) I and II
D) None of the above
8) When allocating materiality, most practitioners chooseto allocate to:
A) the income statement accounts because they are moreimportant.
B) the balance sheet accounts because there are fewer.
C) both balance sheet and income statement accounts becausethere could be errors on either.
D) all of the financial statements because it is requiredby GAAS.
B) the balance sheet accounts because there are fewer.
9) Tolerable misstatement as set by the auditor:
A) decreases acceptable audit risk.
B) increases inherent risk and control risk.
C) affects planned detection risk.
D) does not affect any of the four risks.
D) does not affect any of the four risks.
1) Auditors are ________ to document the known and likelymisstatements in the financial statements under audit.
A) permitted
B) required
C) not allowed
D) strongly encouraged
2) ________ misstatements are those where the auditor candetermine the amount of the misstatement in the account.
A) Potential
B) Likely
C) Known
D) Projected
4) When expressing an unqualified opinion, the auditor whoevaluates the audit findings should be satisfied that the:
A) amount of known misstatement is documented in themanagement representation letter.
B) estimate of the total known and likely misstatements isless than a material amount.
C) estimate of the total likely misstatement includessample error.
D) amount of known misstatement is acknowledged andrecorded by the client.
B) estimate of the total known and likely misstatements isless than a material amount.
1) An auditor who audits a business cycle that has lowinherent 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.
C) increase the tolerable misstatement for the area.
3) Based on audit evidence gathered and evaluated, anauditor decides to increase the assessed level of control risk from thatoriginally planned. To achieve an overall audit risk level that issubstantially 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.
B) decrease detection risk.
4) Which of the following underlies the application ofgenerally 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
A) the elements of materiality and relative risk
1) The measurement of the auditor's assessment of thelikelihood that there are material misstatements due to error or fraud in asegment before considering the effectiveness of internal controls is definedas:
A) Audit risk.
B) Inherent risk.
C) Sampling risk.
D) Detection risk.
2) The risk that audit evidence for a segment will fail todetect misstatements exceeding tolerable misstatement is:
A) Audit risk.
B) Control risk.
C) Inherent risk.
D) Planned detection risk.
D) Planned detection risk.
3) As the risk of material misstatement increases,detection risk should:
A) medium increase.
B) decrease.
C) stay the same.
D) Is indeterminate.
4) Inherent risk is ________ related to detection risk and________ related to the amount of audit evidence.
A) directly, inversely
B) directly, directly
C) inversely, inversely
D) inversely, directly
5) 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) inherent risk
6) If planned detection risk is reduced, the amount ofevidence the auditor accumulates will:
A) increase.
B) decrease.
C) remain unchanged.
D) be indeterminate.
7) Planned detection risk
I. determinesthe amount of substantive evidence the auditor plans to accumulate.
II. isdependent on inherent risk and control risk.
A) I only
B) II only
C) I and II
D) None of the above
8) Inherent risk is often high for an account such as:
A) inventory.
B) land.
C) cash.
D) notes payable.
9) Inherent risk and control risk:
A) are inversely related to each other.
B) are inversely related to detection risk.
C) are directly related to detection risk.
D) are directly related to audit risk.
B) are inversely related to detection risk.
10) To what extent do auditors typically rely on internalcontrols of their public company clients?
A) extensively
B) only very little
C) infrequently
D) never
11) Auditors typically rely on internal controls of theirprivate company clients:
A) only as needed to complete the audit and satisfySarbanes-Oxleyrequirements.
B) only if the controls are determined to be effective.
C) only if the client asks an auditor to test controls.
D) only if the controls are sufficient to increase ControlRisk to an acceptable level.
B) only if the controls are determined to be effective.
12) Acceptable audit risk is ordinarily set by the auditorduring planning and:
A) held constant for each major cycle and account.
B) held constant for each major cycle but varies byaccount.
C) varies by each major cycle and by each account.
D) varies by each major cycle but is constant by account.
A) held constant for each major cycle and account.
13) The risk of material misstatement refers to:
A) control risk and acceptable audit risk.
B) inherent risk.
C) the combination of inherent risk and control risk.
D) inherent risk and audit risk.
C) the combination of inherent risk and control risk.
14) The risk of material misstatement differs fromdetection risk in that it:
A) arises because audit procedures have been misapplied.
B) can be controlled and changed by the auditor.
C) can be assessed in quantitative and non-quantitativeterms.
D) is controllable by the client.
D) is controllable by the client.
16) In a financial statement audit, inherent risk isevaluated to help an auditor asses which of the following?
B) The risk the internal control system will not detect amaterial misstatement of a financial statement assertion.
C) The risk that the audit procedures implemented will notdetect a material misstatement of a financial statement assertion.
D) The susceptibility of a financial statement assertion toa material misstatement assuming there are no related controls.
D) The susceptibility of a financial statement assertion toa material misstatement assuming there are no related controls.
17) Which of the following statements is not true?
A) Inherent risk is inversely related to the amount ofaudit evidence whereas detection risk is directly related to the amount ofaudit evidence required.
B) Inherent risk is directly related to evidence whereasdetection risk is inversely related to the amount of audit evidence required.
C) Inherent risk is the susceptibility of the financialstatements to material error, assuming no internal controls.
A) Inherent risk is inversely related to the amount ofaudit evidence whereas detection risk is directly related to the amount ofaudit evidence required.
1) If an auditor believes the chance of financial failureis high and there is a corresponding increase in business risk for the auditor,acceptable audit risk would likely:
A) be reduced.
B) be increased.
C) remain the same.
D) be calculated using a computerized statistical package.
2) When management has an adequate level of integrity forthe auditor to accept the engagement but cannot be regarded as completelyhonest in all dealings, auditors normally:
A) reduce acceptable audit risk and increase inherent risk.
B) reduce inherent risk and control risk.
C) increase inherent risk and control risk.
D) increase acceptable audit risk and reduce inherent risk.
A) reduce acceptable audit risk and increase inherent risk.
3) When the auditor is attempting to determine the extentto which external users rely on a client's financial statements, they mayconsider several factors except for:
A) client size.
B) concentration of ownership.
C) types and amounts of liabilities.
D) assessment of detection risk.
D) assessment of detection risk.
1) Which of the following statements regarding inherentrisk is correct?
A) Inherent risk is unaffected by the auditor's experiencewith client's organization.
B) Most auditors set a low inherent risk in the first yearof an audit and increase it if experience shows that it was incorrect.
C) Most auditors set a high inherent risk in the first yearof an audit and reduce it in subsequent years as they gain experience, evenwhen there is inherent risk.
C) Most auditors set a high inherent risk in the first yearof an audit and reduce it in subsequent years as they gain experience, evenwhen there is inherent risk.
2) Auditors begin their assessments of inherent risk duringaudit planning. Which of the following would not help in assessinginherent risk during the planning phase?
A) Obtaining client's agreement on the engagement letter.
B) Obtaining knowledge about the client's business andindustry.
C) Touring the client's plant and offices.
D) Identifying related parties.
A) Obtaining client's agreement on the engagement letter.
3) Which of the following is not a primaryconsideration when assessing inherent risk?
A) nature of client's business
B) existence of related parties
C) degree of separation of duties
D) susceptibility to defalcation
C) degree of separation of duties
1) As the acceptable level of detection risk increases, anauditor may change the:
A) timing of substantive tests by performing them at aninterim date rather than year end.
B) timing of the tests on controls by performing themthroughout the year rather than at one time.
C) assess the level of inherent risk to a lower amount.
D) increase the sample size to achieve a more effectivetest.
A) timing of substantive tests by performing them at aninterim date rather than year end.