ACCT 406 Chp 3 Audit Planning, Types of Audit Tests, Materiality ||
with Certified Answers.
Which of the following is not a concern as to whether a misstatement is qualitatively material?
A. The misstatement hides a failure to meet analysts' expectations
B. The misstatement is less than 5% of pretax income
C. The misstatement increases management's compensation correct answers B. The misstatement
is less than 5% of pretax income
Tolerable misstatement is:
A. Materiality for the income statement as a whole
B. Materiality used to establish a scope for the audit procedures for the individual account
balance or disclosures
C. The amount of misstatement that management is willing to tolerate in the financial statements
D. Materiality for the balance sheet as a whole correct answers B. Materiality used to establish a
scope for the audit procedures for the individual account balance or disclosures
The preliminary engagement activities include all of the following except:
A. Determine the audit engagement team requirements
B. Ensure that the audit team is independent
C. Ensure that there is an independent audit committee
D. Ensure that the audit firm is independent correct answers C. Ensure that there is an
independent audit committee
An auditor is required to establish an understanding with a client regarding the responsibilities
for each engagement. This understanding generally includes:
A. Management's responsibility to guarantee that there are no material misstatements due to
fraud
, B. The auditor's responsibility to plan and perform the audit to provide reasonable, but not
absolute, assurance of detecting material errors or fraud
C. Management's responsibility for providing the auditor with an assessment of the risk of
material misstatement due to fraud
D. The auditor's responsibility for the fairness of the financial statements correct answers B. The
auditor's responsibility to plan and perform the audit to provide reasonable, but not absolute,
assurance of detecting material errors of fraud
List three examples of tests used to detect material misstatements (to obtain evidence to support
the audit opinion). correct answers -Substantive test of transactions
- Test of Details of account balances and disclosures
- Substantive analytical procedures
List three examples of tests used to gain an understanding of the entity and its environment.
correct answers - Inquiries of management and others
- Preliminary analytical procedures
- Observation and inspection
Assume you are auditing a publicly traded company. You have set materiality to be $1,000,000
and tolerable misstatement to $750,000. You identify that the only misstatement is an
understatement of Long-Term Debt by $150,000. The debt covenants require the company to
keep the debt-to-equity ratio to be below 0.60. If the client books the adjustment to the Long-
term debt account, the debt-to-equity ratio will be 0.61. Is the $150,000 misstatement material?
Explain why or why not. correct answers Yes, it is misstatement is material even though below
tolerable misstatement because it would cause the debt covenant to be violated
Assume you are auditing a non-issuer (private company). You have set materiality to be
$300,000 and tolerable misstatement to $200,000. You identify that the only misstatement is an
overstatement of sales by $150,000. Key management receive a significant performance bonus if
net income exceeds $6,000,000, and the current year's net income $6,100,000. Is the $150,000
misstatement material. Explain why or why not? correct answers Yes, it is material even though
below tolerable misstatement because it would cause management not to receive their bonus
(impact on MGMT's compensation)
with Certified Answers.
Which of the following is not a concern as to whether a misstatement is qualitatively material?
A. The misstatement hides a failure to meet analysts' expectations
B. The misstatement is less than 5% of pretax income
C. The misstatement increases management's compensation correct answers B. The misstatement
is less than 5% of pretax income
Tolerable misstatement is:
A. Materiality for the income statement as a whole
B. Materiality used to establish a scope for the audit procedures for the individual account
balance or disclosures
C. The amount of misstatement that management is willing to tolerate in the financial statements
D. Materiality for the balance sheet as a whole correct answers B. Materiality used to establish a
scope for the audit procedures for the individual account balance or disclosures
The preliminary engagement activities include all of the following except:
A. Determine the audit engagement team requirements
B. Ensure that the audit team is independent
C. Ensure that there is an independent audit committee
D. Ensure that the audit firm is independent correct answers C. Ensure that there is an
independent audit committee
An auditor is required to establish an understanding with a client regarding the responsibilities
for each engagement. This understanding generally includes:
A. Management's responsibility to guarantee that there are no material misstatements due to
fraud
, B. The auditor's responsibility to plan and perform the audit to provide reasonable, but not
absolute, assurance of detecting material errors or fraud
C. Management's responsibility for providing the auditor with an assessment of the risk of
material misstatement due to fraud
D. The auditor's responsibility for the fairness of the financial statements correct answers B. The
auditor's responsibility to plan and perform the audit to provide reasonable, but not absolute,
assurance of detecting material errors of fraud
List three examples of tests used to detect material misstatements (to obtain evidence to support
the audit opinion). correct answers -Substantive test of transactions
- Test of Details of account balances and disclosures
- Substantive analytical procedures
List three examples of tests used to gain an understanding of the entity and its environment.
correct answers - Inquiries of management and others
- Preliminary analytical procedures
- Observation and inspection
Assume you are auditing a publicly traded company. You have set materiality to be $1,000,000
and tolerable misstatement to $750,000. You identify that the only misstatement is an
understatement of Long-Term Debt by $150,000. The debt covenants require the company to
keep the debt-to-equity ratio to be below 0.60. If the client books the adjustment to the Long-
term debt account, the debt-to-equity ratio will be 0.61. Is the $150,000 misstatement material?
Explain why or why not. correct answers Yes, it is misstatement is material even though below
tolerable misstatement because it would cause the debt covenant to be violated
Assume you are auditing a non-issuer (private company). You have set materiality to be
$300,000 and tolerable misstatement to $200,000. You identify that the only misstatement is an
overstatement of sales by $150,000. Key management receive a significant performance bonus if
net income exceeds $6,000,000, and the current year's net income $6,100,000. Is the $150,000
misstatement material. Explain why or why not? correct answers Yes, it is material even though
below tolerable misstatement because it would cause management not to receive their bonus
(impact on MGMT's compensation)
