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Auditing Chapter 7 Homework
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Questions in this quiz (30)
1Which of the following phrases or terms regarding materiality is used by the Supreme Court of the United States and is not found in FASB Concepts Statement No. 2?
- A“significantly altered the total mix of information available”
- B“in light of surrounding circumstances”
- C“amount of a misstatement or omission”
- D“probable that the judgement of a reasonable person”
2If $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$15,000
- B$40,000
- C$25,000
- D$20,000
3If materiality judgments change during the audit opinion formulation process, what happens to previous audit decisions that were based on the evidence obtained using the initial materiality setting?
- AThe auditor repeats all audit procedures performed prior to the change in materiality judgments.
- BThe auditor modifies the audit opinion to note the change in materiality judgements.
- CThe auditor reassesses those previous decisions.
- DNo action is required.
4Which item is correct concerning the risk of material misstatement?
- ARisk of material misstatement must be assessed in non-quantitative terms.
- BRisk of material misstatement arises because audit procedures have been misapplied.
- CRisk of material misstatement can be controlled and changed by the auditor.
- DRisk of material misstatement is controllable by the client.
5What is the nature of the relationship between risk of material misstatement and audit risk?
- ANone
- BCorrelational
- CDirect
- DInverse
6Detection risk is affected by which aspects of substantive audit procedures?
- ANature
- BTiming
- CExtent
- DAll of the above
7Which of the following factors would lead an auditor to assess inherent risk at a higher level?
- AThe account balance is easily determined without estimation.
- BThe account balance is composed of a high volume of nonroutine transactions.
- CThe account balance is composed of simple transactions.
- DAll of the above would lead the auditor to assess a higher level of inherent risk.
8To learn more about a company and its inherent risks, auditors can use which of the following resources?
- AManagement inquiries
- BEconomic statistics
- COnline searches
- DAny of the above could be used
9Which of the following factors will result in control risk being assessed at a higher level?
- AThere is a lack of supervision of accounting personnel.
- BThe control environment is operating effectively.
- CAccounting staff are well trained and educated.
- DControls are well designed.
10Which of the following are two frequently used planning analytical procedures?
- ARatio analysis and trend analysis.
- BReasonableness tests and economic analysis.
- CTrend analysis and reasonableness tests.
- DRatio analysis and economic analysis.
11Which of the following best describes year-to-year comparisons of account balances?
- ATime analyses
- BTrend analyses
- CRatio analysis
- DReasonableness tests
12Which of the following ratios provides information about liquidity?
- AInventory turnover
- BNet profit margin
- CCurrent ratio
- DSales to assets
13What is the main reason to establish guidelines for brainstorming sessions?
- ATo clearly identify lines of authority
- BTo pass information up to top-level management efficiently
- CTo encourage interactive and constructive group dialogue and idea exchange
- DTo comply with SEC requirements
14What type of relationship exists between audit risk and detection risk?
- ADirect
- BIndirect
- CNo relationship
- DInverse
15What is the typical range for the setting of audit risk?
- A1%-5%
- B1%-10%
- C0%-10%
- D0%-5%
16Which of the following would be the likely risk results from using a 1% level of detection risk?
- AHigh detection risk and high audit risk
- BLow detection risk and high audit risk
- CHigh detection risk and low audit risk
- DLow detection risk and low audit risk
17Which of the following risks are controllable by the auditor?
- AAudit risk and detection risk
- BAudit risk and control risk
- CRisk of material misstatement
- DNone of the above
18As inherent risk increases, and other risk factors remain constant, what happens to the extent of audit work?
- AIncreases
- BStays the same
- CDecreases
- DBecomes less reliable
19Which of the following statements best describes what is meant by setting control risk at 100%?
- AControls are relevant
- BControls are effective
- CCannot be determined from the information given
- DControls are ineffective
20If the auditor’s assessment of audit risk is low (e.g., 1% rather than 5%), what is the effect on the amount of substantive testing performed by the auditor?
- AIncrease in substantive testing
- BNo change in substantive testing
- CSubstantive testing is not needed
- DDecrease in substantive testing
21What is the auditor trying to accomplish by varying the timing of audit procedures from the prior year?
- AConfuse the client
- BGather information during different times of the year
- CIntroduce unpredictability
- DFinish the audit sooner
22What procedure has to be completed at or after the end of the period?
- AEvaluating of adjusting journal entries
- BAssessment of control risk
- CEngagement letter
- DAll procedures must be completed prior to period end
23An increase in the risk of material misstatement would lead to which of the following responses?
- ADecrease in the extent of audit procedures
- BEarlier performance of audit procedures
- CIncrease in the extent of audit procedures
- DNo change in the extent or timing of audit procedures
24Which of the following risk factors suggests a heightened level of risk of material misstatement?
- AFew immaterial related-party transactions
- BThe departure of key personnel of a company
- CDeclining a merger with another company
- DHaving a stable product
25Which of the following terms best describes the risk that audit procedures will fail to detect material misstatements?
- AControl risk
- BDetection risk
- CAudit risk
- DInherent risk
26Which of the following statements regarding detection risk is true?
- ADetection risk incorporates both substantive analytical procedures and tests of details.
- BDetection risk provides guidance to the auditor on the substantive audit procedures needed to achieve the desired audit risk.
- CA low level of detection risk means the auditor needs to obtain more evidence from substantive procedures.
- DAll of the above
27In which of the following situations will auditors typically rely on internal controls over financial reporting?
- AIf the client asks the auditor to test controls.
- BIf the controls are sufficient to increase control risk to an acceptable level.
- CIf control risk is assessed at a high level.
- DIf the controls are determined to be designed and operating effectively.
28The risk of material misstatement refers to which of the following?
- AControl risk and acceptable audit risk
- BInherent risk
- CInherent risk and audit risk
- DThe combination of inherent risk and control risk
29Which of the following statements is false?
- AInherent risk is directly related to the amount of
evidence required in account testing. - BInherent risk is the susceptibility of the financial
statements to material misstatement, assuming no
internal controls. - CInherent risk is inversely related to the level of
control risk. - DInherent risk and control risk are assessed by the
auditor and controlled by the client.
- AInherent risk is directly related to the amount of
30Which of the following is a factor that would cause an increase in the assessment of control risk?
- AThe industry is mature and declining
- BLittle interaction between senior management and operating staff
- CA new business strategy is improperly implemented
- DNew products have uncertain likelihood of success
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- Auditing Chapter 7 Homework
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- Kayla Harbaugh
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- English
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