WGU D251 COST AND MANAGERIAL
ACCOUNTING STUDY GUIDE FINAL EXAM 100
QUESTIONS WITH ANSWER AND
EXPLANATION
Part 1 — Audit Risk, Planning & Materiality
1.
An auditor assesses inherent risk as high because the client has complex revenue
contracts. Control risk is also assessed as high because several controls failed
testing. What should the auditor generally do regarding planned detection risk?
A. Increase detection risk
B. Decrease detection risk
C. Leave detection risk unchanged
D. Eliminate substantive procedures
Answer: B — Decrease detection risk.
Explanation: Audit risk = IR × CR × DR. When inherent and control risk are high,
the auditor generally needs a lower detection risk. This is achieved through
stronger or more extensive substantive procedures.
2.
A company has experienced rapid growth and entered several complex financing
arrangements near year-end. Which factor most directly increases inherent risk?
A. The auditor uses statistical sampling
B. The auditor's confirmation response rate is high
C. The complexity of the financing arrangements
D. The accounting department performs reconciliations
Answer: C — The complexity of the financing arrangements.
,Explanation: Inherent risk is the susceptibility of an assertion to material
misstatement before considering internal controls. Complex transactions generally
increase this risk.
3.
An auditor lowers overall financial statement materiality. What is the most likely
consequence?
A. Less evidence is required
B. More audit work may be necessary
C. Control risk automatically decreases
D. Inherent risk automatically decreases
Answer: B — More audit work may be necessary.
Explanation: When materiality is lower, smaller misstatements become significant.
The auditor may therefore need more precise and extensive audit procedures.
4.
An auditor determines that a $25,000 misstatement is material to a small
company but immaterial to a large company. What principle does this illustrate?
A. Materiality is always a fixed percentage
B. Materiality depends on circumstances and users
C. Materiality only applies to liabilities
D. Materiality is determined solely by management
Answer: B — Materiality depends on circumstances and users.
Explanation: Materiality is based on the circumstances and the needs of financial
statement users. The same dollar amount can be material for one company and
immaterial for another.
,5.
During planning, the auditor identifies a significant risk related to management
estimates. Which response is most appropriate?
A. Reduce substantive testing
B. Increase professional skepticism and audit procedures
C. Rely entirely on management representations
D. Eliminate analytical procedures
Answer: B — Increase professional skepticism and audit procedures.
Explanation: Significant risks require an appropriately designed audit response.
This may include additional evidence, more experienced personnel, and increased
professional skepticism.
6.
Which statement about detection risk is correct?
A. The auditor directly controls inherent risk
B. The auditor directly controls control risk
C. The auditor can adjust detection risk through audit procedures
D. Detection risk is determined entirely by management
Answer: C — The auditor can adjust detection risk through audit procedures.
Explanation: The auditor manages planned detection risk by changing the nature,
timing, and extent of audit procedures.
7.
An auditor decides to perform substantive testing closer to year-end rather than
several months before year-end. What audit planning consideration is primarily
being addressed?
, A. Nature
B. Timing
C. Materiality
D. Sampling unit
Answer: B — Timing.
Explanation: Timing refers to when an audit procedure is performed.
8.
An auditor replaces a less reliable inquiry with an external confirmation. Which
characteristic of evidence is primarily improved?
A. Sufficiency
B. Reliability
C. Materiality
D. Sampling risk
Answer: B — Reliability.
Explanation: Evidence obtained directly from an independent external source is
generally more reliable than information obtained solely through inquiry of the
client.
9.
The auditor determines that the risk of material misstatement is unusually high
for inventory. Which response is most appropriate?
A. Reduce inventory testing
B. Obtain more persuasive inventory evidence
C. Rely exclusively on management's count sheets
D. Skip physical observation
Answer: B — Obtain more persuasive inventory evidence.
ACCOUNTING STUDY GUIDE FINAL EXAM 100
QUESTIONS WITH ANSWER AND
EXPLANATION
Part 1 — Audit Risk, Planning & Materiality
1.
An auditor assesses inherent risk as high because the client has complex revenue
contracts. Control risk is also assessed as high because several controls failed
testing. What should the auditor generally do regarding planned detection risk?
A. Increase detection risk
B. Decrease detection risk
C. Leave detection risk unchanged
D. Eliminate substantive procedures
Answer: B — Decrease detection risk.
Explanation: Audit risk = IR × CR × DR. When inherent and control risk are high,
the auditor generally needs a lower detection risk. This is achieved through
stronger or more extensive substantive procedures.
2.
A company has experienced rapid growth and entered several complex financing
arrangements near year-end. Which factor most directly increases inherent risk?
A. The auditor uses statistical sampling
B. The auditor's confirmation response rate is high
C. The complexity of the financing arrangements
D. The accounting department performs reconciliations
Answer: C — The complexity of the financing arrangements.
,Explanation: Inherent risk is the susceptibility of an assertion to material
misstatement before considering internal controls. Complex transactions generally
increase this risk.
3.
An auditor lowers overall financial statement materiality. What is the most likely
consequence?
A. Less evidence is required
B. More audit work may be necessary
C. Control risk automatically decreases
D. Inherent risk automatically decreases
Answer: B — More audit work may be necessary.
Explanation: When materiality is lower, smaller misstatements become significant.
The auditor may therefore need more precise and extensive audit procedures.
4.
An auditor determines that a $25,000 misstatement is material to a small
company but immaterial to a large company. What principle does this illustrate?
A. Materiality is always a fixed percentage
B. Materiality depends on circumstances and users
C. Materiality only applies to liabilities
D. Materiality is determined solely by management
Answer: B — Materiality depends on circumstances and users.
Explanation: Materiality is based on the circumstances and the needs of financial
statement users. The same dollar amount can be material for one company and
immaterial for another.
,5.
During planning, the auditor identifies a significant risk related to management
estimates. Which response is most appropriate?
A. Reduce substantive testing
B. Increase professional skepticism and audit procedures
C. Rely entirely on management representations
D. Eliminate analytical procedures
Answer: B — Increase professional skepticism and audit procedures.
Explanation: Significant risks require an appropriately designed audit response.
This may include additional evidence, more experienced personnel, and increased
professional skepticism.
6.
Which statement about detection risk is correct?
A. The auditor directly controls inherent risk
B. The auditor directly controls control risk
C. The auditor can adjust detection risk through audit procedures
D. Detection risk is determined entirely by management
Answer: C — The auditor can adjust detection risk through audit procedures.
Explanation: The auditor manages planned detection risk by changing the nature,
timing, and extent of audit procedures.
7.
An auditor decides to perform substantive testing closer to year-end rather than
several months before year-end. What audit planning consideration is primarily
being addressed?
, A. Nature
B. Timing
C. Materiality
D. Sampling unit
Answer: B — Timing.
Explanation: Timing refers to when an audit procedure is performed.
8.
An auditor replaces a less reliable inquiry with an external confirmation. Which
characteristic of evidence is primarily improved?
A. Sufficiency
B. Reliability
C. Materiality
D. Sampling risk
Answer: B — Reliability.
Explanation: Evidence obtained directly from an independent external source is
generally more reliable than information obtained solely through inquiry of the
client.
9.
The auditor determines that the risk of material misstatement is unusually high
for inventory. Which response is most appropriate?
A. Reduce inventory testing
B. Obtain more persuasive inventory evidence
C. Rely exclusively on management's count sheets
D. Skip physical observation
Answer: B — Obtain more persuasive inventory evidence.
