Chapter 7 Planning the Audit Identifying and Responding to the Risks of Material Misstatement答案.docx

Chapter 7: Planning the Audit: Identifying and Responding to the Risks of Material Misstatement Key1.Materiality relates to the significance or importance of an item.TRUE2.Auditors and management should agree on what is considered material.FALSE3.Clearly trivial and not material are terms that can be used interchangeably.FALSE4.Auditors need to choose materiality amounts carefully because once a materiality judgment has been made, it cannot be revised.FALSE5.As detection risk increases, the amount of evidence an auditor needs to obtain decreases.TRUE6.When business risk is low, the auditor does not have a high concern that about the ability of the organization to operate efficiently.TRUE7.Only public companies have to be concerned with business risk.FALSE8.Touring a companys plant offers much insight into potential audit issues.TRUE9.When a successor auditor contacts a companys previous auditor, successor auditor might obtain information related to client managements integrity.TRUE10.News media and web searches can provide useful information related to client managements integrity and the risk of material misstatement in the financial statements.TRUE11.LEXIS is a public database where the existence of legal proceedings against a company or key members of the company can be found.TRUE12.The purpose of the auditors consideration of the effectiveness of internal controls is to determine the nature, extent and timing of substantive testing.TRUE13.Trend analysis deals with the relationship between two or more accounts.FALSE14.One potential limitation to using industry data in preliminary analytical procedures is that the data from the client may not be directly comparable to the data of the industry.TRUE15.Brainstorming sessions should be led by the engagement team.FALSE16.There are guidelines that can be followed in brainstorming sessions to promote productivity and creativity.TRUE17.The usual length of a brainstorming session is about four hours.FALSE18.If detection risk is low, the auditor is more willing to take a higher risk of the substantive audit procedures not detecting a material misstatement.FALSE19.Detection risk is measured on a scale of 0% to 5%.FALSE20.A risk of material misstatement of 100% indicates that material misstatement is highly likely.TRUE21.It is never efficient to rely on the internal controls of an organization.FALSE22.Ineffective internal controls result in higher risk of material misstatement in the financial statements than effective internal controls.TRUE23.Appropriate evidence about inventory existence can be obtain through inspection.TRUE24.Internal controls that the auditor expects to rely on to reduce substantive testing must be tested.TRUE25.An auditor may rely on a specialist when assessing the value of a companys inventory.TRUE26.Heightened risk of material misstatement causes the auditor to perform audit procedures closer to year end.TRUE27.Audit procedures have to be announced or be completed at predictable times.FALSE28.All audit procedures must be completed before year end.FALSE29.When the risk of material misstatement is heightened, the auditor increases the extent of audit procedures and demands more evidence.TRUE30.Inherent and control risks are risk controlled by the client.TRUE31.A risk factor indicating a heightened risk of fraud would be considered a significant risk.TRUE32.The existence of one or more risk factors means that there is a material misstatement present.FALSE33.As a guideline, 1% of total assets or revenue (whichever is larger) can be used to set materiality.TRUE34.Auditors are only concerned with materiality for the financial statements as a whole.FALSE35.Tolerable misstatement is always less than or equal to performance materiality.TRUE36.A companys website can contain useful information that can help an auditor understand the products and strategies of the company.TRUE37.Performance materiality is used for assessing the risks of material misstatement and determining the nature, timing, and extent of audit procedures to perform during the audit opinion formulation process.TRUE38.Tolerable misstatement is the amount of misstatement in an account balance that the auditor could tolerate and still not judge the underlying account balance to be materially misstated.TRUE39.The lower the dollar amount of the performance materiality the more audit evidence is required.TRUE40.Net income before tax is common base used to determine materiality in a non-for-profit company.FALSE41.If tolerable misstatement for accounts payable is $1,000, the auditor would need to obtain more audit evidence for that account than if tolerable misstatement were $100,000.TRUE42.The purpose of tests of control is to provide reasonable assurance that internal controls are operating effectively.TRUE43.The quick ratio is useful for analyzing inventory accounts.FALSE44.Detection risk is controllable by the client.FALSE45.Insistence from the CEO that she must be present at all meetings between the audit committee and internal/external auditors would cause auditors to assess inherent risk at a higher level.TRUE46.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, which of the following (based on the definition of FASB Statement No. 2) best describes that information?A.Insignificant.B.Relevant.C.Significant.D.Material.47.If $15,000 is considered to be material to the income statement, but $25,000 is material to the balance sheet, the auditor should set overall materiality at which of the following dollar amounts?A.$20,000B.$25,000C.$40,000D.$15,00048.Which of the following best describes the amount of misstatement an auditor is willing to accept and still will not say the account balance is materially misstated?A.Tolerable misstatement.B.Performance materiality.C.A clearly trivial amount.D.Significant risk.49.If materiality judgments change during the audit opinion formulation process, what happens to previous evidence collection decisions that were based on the initial judgments?A.They need to be reassessed.B.They need to be noted in the footnotes.C.No action is required.D.None of the above.50.In what way does the risk of material misstatement differ from detection risk?A.Risk of material misstatement arises because audit procedures have been misapplied.B.Risk of material misstatement can be controlled and changed by the auditor.C.Risk of material misstatement can be assessed in quantitative and non-quantitative terms.D.Risk of material misstatement is controllable by the client.51.What is the nature of the relationship between risk of material misstatement and audit risk?A.Direct.B.None.C.Correlational.D.Inverse.52.Detection risk is affected by which aspects of substantive audit procedures?A.Nature.B.Timing.C.Extent.D.All of the above.53.Which of the following factors would lead an auditor to assess inherent risk at a higher level?A.The account balance is easily determined without estimation.B.The account balance represents an easily embezzled asset.C.The account balance is composed of simple transactions.D.All of the above would lead the auditor to assess a higher level of inherent risk.54.To learn more about a company and its inherent risks, auditors can use which of the following resources?A.Management inquiries.B.Economic statistics.C.Online searches.D.Any of the above could be used.55.Which of the following is a reason a predecessor auditor can decline to reply to a firms current auditor?A.Data is under court order.B.They must always respond.C.The client does not approve of confidential information being shared.D.Both A and C are correct.56.Which of the following factors will result in control risk being assessed at a higher level?A.Controls are well designed.B.There is a lack of supervision of accounting personnel.C.Accounting staff are well trained and educated.D.The control environment is operating effectively.57.Which of the following are two frequently used preliminary analytical procedures?A.Reasonableness tests and economic analyses.B.Trend analyses and reasonableness tests.C.Ratio analyses and economic analyses.D.Ratio analyses and trend analyses.58.Which of the following best describes year-to-year comparisons of account balances?A.Time analyses.B.Reasonableness tests.C.Ratio analyses.D.Trend analyses.59.Which of the following ratios provide information about liquidity?A.Net profit margin.B.Current ratio.C.Inventory turnover.D.Sales to assets.60.Which of the following would be a reason that industry and client data were not directly comparable?A.Broad industry.B.Use of different accounting principles.C.Neither of the above.D.Both A & B are correct.61.Which of the following are common brainstorming session guidelines?A.Freedom of expression.B.Respectful communication.C.Suspension of criticism.D.All of the above.62.What is the main reason to establish guidelines for brainstorming sessions?A.To not hurt feelings.B.It is required by the SEC.C.To encourage interactive and constructive group dialogue and idea exchange.D.To pass information up to top-level management efficiently.63.What type of relationship exists between audit risk and detection risk?A.Direct.B.Inverse.C.Indirect.D.No relationship.64.What is the typical scale for audit risk?A.1% - 10%B.1% - 5%C.0% - 5%D.0% - 10%65.Which of the following statements best describes what is meant by a 1% level of detection risk?A.High detection risk and low audit risk.B.High detection risk and high audit risk.C.Low detection risk and high audit risk.D.Low detection risk and low audit risk.66.What is the typical scale for the risks of material misstatement?A.0% - 100%B.0% - 10%C.0% - 5%D.1% - 100%67.As inherent risk increases, what happens to the audit work?A.Increases.B.Decreases.C.Stays the same.D.Becomes less reliable.68.Which of the following statements best describes what is meant by setting control risk at100%?A.Controls are effective.B.Controls are relevant.C.Controls are ineffective.D.Cannot be determined from the information given.69.If the auditors assessment of audit risk is low (e.g., 1% rather than 5%), what is the effect on the amount of direct testing performed by the auditor?A.Increase in direct testing.B.Decrease in direct testingC.No change in direct testing.D.Direct testing is not needed.70.Which of the following terms best describes the numerical depiction of the relationship between control risk, inherent risk, detection risk, and audit risk?A.Audit risk model.B.Risk of misstatement model.C.Significance model.D.Materiality equation.71.When an auditor chooses not to rely on a clients internal controls because the control design is ineffective, which of the following tests is eliminated?A.Substantive testing.B.Test of controls.C.Test of details of balances.D.Substantive analytical procedures.72.Which of the following terms best describes the types and appropriateness of audit procedures used?A.Nature of detection risk.B.Material misstatement risk.C.Nature of auditing procedures.D.Nature of risk response.73.Appropriateness addresses which aspect of audit procedures?A.Relevance.B.Reasoning.C.Reliability.D.Both A & C.74.Which of the following best describes what is meant by the timing of risk response?A.Where procedures are conducted.B.When procedures are conducted.C.How procedures are conducted.D.Who conducts the procedures.75.What is the auditor trying to accomplish by varying the timing of audit procedures from the prior year?A.Introduce unpredictability.B.Confuse the client.C.Gather information during different times of the year.D.Finish the audit sooner.76.Which of the following approaches can be used to introduce unpredictability into the audit?A.Assessing high risk accounts.B.Performing procedures on an unannounced basis.C.Performing the audit in the same location each year.D.Selecting items that would normally be tested.77.What procedure has to be completed at or after the end of the period?A.Assessment of control risk.B.Engagement letter.C.Evaluation of adjusting journal entries.D.All procedures must be completed prior to period end.78.An increase in the risk of material misstatement would lead to which of the following responses?A.Increase in the extent of auditing procedures.B.Decrease in the extent of auditing procedures.C.No change in the extent of auditing procedures.D.No change in the extent of audit procedures.79.Which of the following risk factors suggests a heightened level of risk of material misstatement?A.Having a stable product.B.The departure of key personnel of a company.C.Few immaterial related-party transactions.D.Declining a merger with another company.80.Which of the following terms best describes the risk that audit evidence will fail to detect misstatements exceeding tolerable misstatement?A.Audit risk.B.Control risk.C.Detection risk.D.Inherent risk.81.As the risk of material misstatement increases, what happens with detection risk?A.Medium increase.B.Stay the same.C.Decrease.D.Severely increase.82.In which of the following situations will auditors typically rely on internal controls over financial reporting?A.Only as needed to satisfy SOX.B.Only if the controls are determined to be designed and operating effectively.C.Only if the clients asks the auditor to test controls.D.Only if the controls are sufficient to increase control risk to an acceptable level.83.The risk of material misstatement refers to which of the following?A.Inherent risk.B.Control risk and acceptable audit risk.C.The combination of inherent risk and control risk.D.Inherent risk and audit risk.84.Which of the following statements is false?A.Inherent risk is inversely related to the amount of audit evidence, whereas detection risk is directly related to the amount of audit evidence required.B.Inherent risk is directly related to evidence, whereas detection risk is inversely related to the amount of audit evidence required.C.Inherent risk is the susceptibility of the financial statements to material misstatement, assuming no internal controls.D.Inherent risk and control risk are assessed by the auditor and controlled by the client.85.The auditors consideration of internal control over financial reporting affects which of the following?A.The nature, timing, and extent of substantive testing to perform.B.Inherent risk in the account balance.C.An acceptable level of control risk for an account balance.D.Both B and C.86.Qualitative reasons for materialityList the reasons why an amount that is quantitatively immaterial might be considered material due to qualitative reasons.The SEC provides guidance when a quantitatively small misstatement may still be considered material due to qualitative reasons. These reasons include: The misstatement hides a failure to meet analysts consensus expectations for the company. The misstatement changes a loss into income, or vice versa. The misstatement concerns a segment or other portion of the companys business that plays a significant role in the companys operations or profitability. The misstatement affects the companys compliance with regulatory requirements. The misstatement affects the companys compliance with loan covenants or other contractual requirements. The misstatement has the effect of increasing managements compensation. The misstatement involves the concealment of an unlawful transaction.87.Inherent riskList some factors that would lead an auditor to assess inherent risk relating to operations at a higher level.Factors that would lead an auditor to assess inherent risk relating to operations at a higher level include: The company lacks personnel or expertise to deal with the changes in the industry. New products and service offerings have uncertain likelihood of successful introduction and acceptance by the market. The use of information technology is incompatible across systems and processes. Expansion of the business for which the demand for the companys products or services has not been accurately estimated. A new business strategy is incompletely or improperly implemented. Financing is lost due to the companys inability to meet financing requirements. New regulatory requirements increase legal exposure. Alternative products, services, competitors, or providers pose a threat to current business. There are significant supply chain risks. The production and delivery processes are complex. The industry is mature and declining. The organization lacks ability to control costs with the possibility of unforeseen costs. The organization produces products that have multiple substitutes.88.BrainstormingWhat are the steps of the brainstorming process?The steps of the brainstorming