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Auditing and Assurance Services, 14e (Arens)
Chapter 9 Materiality and Risk
Learning Objective 9-1
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
Diff: Easy
Objective: LO 9-1
AACSB: Reflective thinking skills
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
Diff: Easy
Objective: LO 9-1
AACSB: Reflective thinking skills
3)Auditors are responsible for determining whether financial stat ements 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's
management. Answer:
D
Terms: Discovery of a material misstatement must bring it to the attention
Diff: Easy
Objective: LO 9-1
AACSB: Reflective thinking skills
1
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4)The FASB definition of materiality focuses on potential users of financial
statements. A) True
B) False
Answer:
B
Terms: Materiality focuses on potential users
Diff: Easy
Objective: LO 9-1
AACSB: Reflective thinking skills
Learning Objective 9-2
1)Audit standards require the auditor to consider materiality early in the audit. Which
statement(s) regarding preliminary materiality are true?
I. Preliminary materiality may change during the engagement.
II. Preliminary materiality is the maximum amount the auditor by which the auditor
believes the financials could be misstated and still not affect the decisions of
reasonable users .
A) I
only B)
II only
C) both I and II
D) neither are
true Answer: C
Terms: Preliminary materiality assessment
Diff: Easy
Objective: LO 9-2
AACSB: Reflective thinking skills
2)Why do auditors establish a preliminary judgment about
materiality? A) To determine the appropriate level of staff to
assign to the audit.
B) So that the client can know what records to make available to the auditor.
C) To plan the appropriate audit evidence to accumulate and develop an overall
audit strategy. D) To finalize the control risk assessment.
Answer: C
Terms: Purpose to establish preliminary judgment about materiality
Diff: Easy
Objective: LO 9-2
AACSB: Reflective thinking skills
3)If an auditor establishes a relatively high level for materiality, then the auditor will:
A) accumulate more evidence than if a lower level had been set.
B) accumulate less evidence than if a lower level had been set.
C)accumulate approximately the same evidence as would be the case were materiality
lower.
D)accumulate an undetermined amount of evidence.
Answer: B
Terms: High level for materiality
Diff: Easy
Objective: LO 9-2
AACSB: Reflective thinking skills
2
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4)The preliminary judgment about materiality and the amount of audit evidence
accumulated are
________
related. A)
directly
B)
indirectly
C) not
D)
inversely
Answer: D
Terms: Preliminary judgment about materiality and amount of evidence accumulated
Diff: Easy
Objective: LO 9-2
AACSB: Reflective thinking skills
5)Which of the following is the primary basis used to decide materiality for a for -
profit entity? A) net sales
B) net assets
C) net income before
tax D) all of the
above
Answer: C
Terms: Primary basis to decide materiality for a for-profit entity
Diff: Easy
Objective: LO 9-2
AACSB: Reflective thinking skills
6)Auditing standards ________ that the basis used to determine the preliminary
judgment about materiality be documented in the audit files.
A) permit
B) do not
allow C)
require
D) strongly
encourage Answer:
C
Terms: Auditing standards; Preliminary judgment about materiality documented
Diff: Easy
Objective: LO 9-2
AACSB: Reflective thinking skills
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
Answer:
D
Terms: Amounts involving fraud
Diff: Easy
Objective: LO 9-2
AACSB: Reflective thinking skills
3
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8)Qualitative factors can affect an auditor's assessment of materiality. Which of the
following qualitative factors could influence the assessment of materiality?
I. Misstatements that are otherwise immaterial may be material if they affect earnings
trends.
II. Minor misstatements resulting from the consequences of contractual
obligations. A) I only
B) II
only C) I
and II
D) neither I
nor II Answer:
C
Terms: Qualitative factors can affect auditor's assessment of materiality
Diff: Easy
Objective: LO 9-2
AACSB: Reflective thinking skills
9) The five steps in applying materiality are listed below in random order.
1. Estimate the combined misstatement.
2. Estimate the total misstatement in the segment.
3. Set preliminary judgment about materiality.
4. Allocate preliminary judgment about materiality to segments.
5. Compare combined 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
Answer:
B
Terms: Five steps in applying materiality
Diff: Moderate
Objective: LO 9-2
AACSB: Reflective thinking skills
10) Which of the following statements is not correct?
A) Materiality is a relative rather than an absolute concept.
B) The most important base used as the criterion for deciding materiality is total
assets.
C) Qualitative factors as well as quantitative factors affect materiality.
D)Given equal dollar amounts, frauds are usually considered more important
than errors. Answer: B
Terms: Materiality
Diff: Moderate
Objective: LO 9-2
AACSB: Reflective thinking skills
4
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
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Auditing and Assurance Services, 14e (Arens)
Chapter 9 Materiality and Risk
Learning Objective 9-1
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
Diff: Easy
Objective: LO 9-1
AACSB: Reflective thinking skills
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
Diff: Easy
Objective: LO 9-1
AACSB: Reflective thinking skills
3)Auditors are responsible for determining whether financial stat ements 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's
management. Answer:
D
Terms: Discovery of a material misstatement must bring it to the attention
Diff: Easy
Objective: LO 9-1
AACSB: Reflective thinking skills
1
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
, To
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4)The FASB definition of materiality focuses on potential users of financial
statements. A) True
B) False
Answer:
B
Terms: Materiality focuses on potential users
Diff: Easy
Objective: LO 9-1
AACSB: Reflective thinking skills
Learning Objective 9-2
1)Audit standards require the auditor to consider materiality early in the audit. Which
statement(s) regarding preliminary materiality are true?
I. Preliminary materiality may change during the engagement.
II. Preliminary materiality is the maximum amount the auditor by which the auditor
believes the financials could be misstated and still not affect the decisions of
reasonable users .
A) I
only B)
II only
C) both I and II
D) neither are
true Answer: C
Terms: Preliminary materiality assessment
Diff: Easy
Objective: LO 9-2
AACSB: Reflective thinking skills
2)Why do auditors establish a preliminary judgment about
materiality? A) To determine the appropriate level of staff to
assign to the audit.
B) So that the client can know what records to make available to the auditor.
C) To plan the appropriate audit evidence to accumulate and develop an overall
audit strategy. D) To finalize the control risk assessment.
Answer: C
Terms: Purpose to establish preliminary judgment about materiality
Diff: Easy
Objective: LO 9-2
AACSB: Reflective thinking skills
3)If an auditor establishes a relatively high level for materiality, then the auditor will:
A) accumulate more evidence than if a lower level had been set.
B) accumulate less evidence than if a lower level had been set.
C)accumulate approximately the same evidence as would be the case were materiality
lower.
D)accumulate an undetermined amount of evidence.
Answer: B
Terms: High level for materiality
Diff: Easy
Objective: LO 9-2
AACSB: Reflective thinking skills
2
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
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4)The preliminary judgment about materiality and the amount of audit evidence
accumulated are
________
related. A)
directly
B)
indirectly
C) not
D)
inversely
Answer: D
Terms: Preliminary judgment about materiality and amount of evidence accumulated
Diff: Easy
Objective: LO 9-2
AACSB: Reflective thinking skills
5)Which of the following is the primary basis used to decide materiality for a for -
profit entity? A) net sales
B) net assets
C) net income before
tax D) all of the
above
Answer: C
Terms: Primary basis to decide materiality for a for-profit entity
Diff: Easy
Objective: LO 9-2
AACSB: Reflective thinking skills
6)Auditing standards ________ that the basis used to determine the preliminary
judgment about materiality be documented in the audit files.
A) permit
B) do not
allow C)
require
D) strongly
encourage Answer:
C
Terms: Auditing standards; Preliminary judgment about materiality documented
Diff: Easy
Objective: LO 9-2
AACSB: Reflective thinking skills
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
Answer:
D
Terms: Amounts involving fraud
Diff: Easy
Objective: LO 9-2
AACSB: Reflective thinking skills
3
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
, To
To downloaddownload moremore ebooks,ebooks, slides,slides, SMSM andand TBTB visit:visit: http://testbanklancerhtp:/testbanklancer..blogspotblogspot..comcom
8)Qualitative factors can affect an auditor's assessment of materiality. Which of the
following qualitative factors could influence the assessment of materiality?
I. Misstatements that are otherwise immaterial may be material if they affect earnings
trends.
II. Minor misstatements resulting from the consequences of contractual
obligations. A) I only
B) II
only C) I
and II
D) neither I
nor II Answer:
C
Terms: Qualitative factors can affect auditor's assessment of materiality
Diff: Easy
Objective: LO 9-2
AACSB: Reflective thinking skills
9) The five steps in applying materiality are listed below in random order.
1. Estimate the combined misstatement.
2. Estimate the total misstatement in the segment.
3. Set preliminary judgment about materiality.
4. Allocate preliminary judgment about materiality to segments.
5. Compare combined 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
Answer:
B
Terms: Five steps in applying materiality
Diff: Moderate
Objective: LO 9-2
AACSB: Reflective thinking skills
10) Which of the following statements is not correct?
A) Materiality is a relative rather than an absolute concept.
B) The most important base used as the criterion for deciding materiality is total
assets.
C) Qualitative factors as well as quantitative factors affect materiality.
D)Given equal dollar amounts, frauds are usually considered more important
than errors. Answer: B
Terms: Materiality
Diff: Moderate
Objective: LO 9-2
AACSB: Reflective thinking skills
4
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
