Materiality and Audit Risks

If an auditor establishes a relatively low level for materiality, then the auditor will

• Accumulate approximately the same evidence as would be the case was a higher level set.

• Accumulate an undetermined amount of evidence.

• Accumulate more evidence than if a higher level had been set.

• Accumulate less evidence than if a higher level had been set.

In an audit area that has a higher inherent risk, it would be prudent to

• Review the completed audit files more thoroughly.

• Increase the amount of audit evidence gathered.

• Assign more experienced staff to that area.

• Do all of the above.

Which of the following qualitative factors may significantly influence whether an item is deemed to be material?

• Misstatements that are otherwise immaterial may be material if they affect a trend in earnings.

• Amounts involving fraud are usually considered more important than unintentional errors of equal dollar amounts.

• Misstatements that are otherwise minor may be material if there are possible consequences arising from contractual obligations.

• All of the above may influence materiality

The phrase "in our opinion" in the auditor's report is intended to inform users that auditors

• Act as insurers of the accuracy of the statements.

• Guarantee fair presentation of the financial statements.

• Base their conclusions about the statements on professional judgment.

• Certify the material presented in the statements by management.

Inherent risk is related to detection risk and related to the amount of audit evidence.

• inversely; inversely

• directly; inversely

• directly; directly

• inversely; directly

The three steps in applying materiality are listed below in random order.

i. Allocate preliminary judgment about materiality to segments. Estimate the total misstatement in the segment. Estimate the combined misstatement.

ii. Compare combined estimate with preliminary judgment about materiality.

iii.Set preliminary judgment about materiality.

The correct sequence from start to finish would be

• i, iii, ii.

• iii, ii, i.

• iii, i, ii.

• i, ii, iii.

The expectation of misstatements after considering the effect of internal control is most appropriately thought of as

• Control risk and acceptable audit risk.

• The combination of inherent risk and control risk.

• Inherent risk.

• None of the above.

When discussing acceptable audit risk (AAR) and the audit risk model, which of the following statements is true?

• AAR is objectively determined by the auditor.

• 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. .

• The terms audit assurance, overall assurance, or level of assurance are synonyms for AAR

• 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.

Which of the following is an example of the concept of inherent risk?

• Humans make more errors than computers; therefore, a manual accounting system is riskier than a computerized system.

• Loans receivable for a finance company are less likely to be collectible than those of a bank.

• Audits with larger sample sizes are less risky than those with smaller sample sizes

• Accounting systems with vouchers have many more controls built in, so the risk that there will be errors on the financial statements is reduced.

The audit risk model is

• A planning, testing, and evaluation model.

• Useful in planning, but of limited value in evaluating results.

• Useful in evaluating results but of limited use in planning.

• Useful when performing the tests of balances, but of little value in either the planning or evaluation stages.