UNIT 2 - D251 ADVANCE AUDITING |87 QUESTIONS AND ANSWERS.

The auditor bases materiality solely on quantitative factors. False Performance materiality is an amount less than overall materiality and helps the auditor determine the extent of audit evidence needed. True Which of the following statements is true regarding materiality? a. Materiality is the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. b. Materiality is the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it d. Both (a) and (c) are correct. Which of the following statements is true concerning performance materiality? a. Performance materiality is set less than overall materiality and helps the auditor determine the extent of audit evidence to obtain. b. If performance materiality is set too low, the auditor might not perform sufficient procedures to detect material misstatements in the financial statements. c. If performance materiality is set too high, the auditor might perform more substantive procedures than necessary. d. Pe a. Performance materiality is set less than overall materiality and helps the auditor determine the extent of audit evidence to obtain. Detection risk is the susceptibility of an assertion to a material misstatement before consideration of related controls. False Some level of control risk is always present in an organization because of the inherent limitations of internal control. True Which of the following statements represents the appropriate directional relationships? a. As inherent risk increases, audit risk increases. b. As inherent risk increases, audit risk decreases. c. As control risk increases, detection risk decreases. d. As control risk increases, inherent risk decreases. c. As control risk increases, detection risk decreases. Which of the following statements is false regarding planning analytical procedures? a. The precision of the auditor's expectation tends to be less precise, and based on more aggregated data, for planning analytical procedures than for substantive analytical procedures. b. The objective for planning analytical procedures is to identify accounts with heightened risk of misstatement to provide a basis for designing and implementing responses to the assessed risks. c. For planning analytical pro d. A frequently used planning analytical procedure is regression analysis. A high level of detection risk means that the audit firm is willing to accept a low risk of not detecting a material misstatement. False The nature of risk response refers to the sufficiency and appropriateness of evidence that is necessary given the risk of material misstatement and the level of acceptable audit risk. False Assume that the auditor sets audit risk at 1%. What is the appropriate interpretation of this level of audit risk? a. The auditor is willing to take only a 1% chance that audit procedures will not detect a material misstatement. b. The auditor is 99% confident that the audit procedures will detect a material misstatement. c. The auditor is willing to take only a 1% chance of expressing an audit opinion that the financial statements are fairly presented when they are materially misstated. d. c. The auditor is willing to take only a 1% chance of expressing an audit opinion that the financial statements are fairly presented when they are materially misstated. Which of the following statements is false regarding the nature, timing, and extent of risk responses? a. The nature of risk response refers to the types of audit procedures applied given the nature of the account balance and the most relevant assertions regarding that account balance. b. The timing of risk response refers to when the auditor performs the audit procedures. c. When the risk of material misstatement is low, the auditor conducts the audit procedures closer to year-end, on an una c. When the risk of material misstatement is low, the auditor conducts the audit procedures closer to year-end, on an unannounced basis, and includes more elements of unpredictability in the procedures. Which phrase or term regarding materiality is used by the Supreme Court of the United States and is not found in FASB Concepts Statements No. 2? a. magnitude of an omission or misstatement b. significantly altered the total mix of information available c. probable that the judgment of a reasonable person d. in light of surrounding circumstances b. significantly altered the total mix of information available Which materiality does an auditor use when determining whether the financial statements overall are materially correct? a. Posting materiality b. Performance materiality c. Specific materiality d. Planning materiality d. Planning materiality What describes the misstatements identified throughout the audit that will be considered at the end of the audit in determining whether the financial statements overall are materially correct? a. Tolerable error b. Performance materiality c. Overall materiality d. Posting materiality d. Posting materiality When materiality judgments change during the audit opinion formulation process, what happens to previous audit decisions that were based on evidence obtained using the initial materiality setting? a. The auditor takes no action. b. The auditor repeats all audit procedures performed prior to the change in the materiality judgments. c. The auditor reassesses those previous audit decisions. d. The auditor modifies the audit opinion to note the change in the materiality judgments. c. The auditor reassesses those previous audit decisions. Which factor would result in control risk being assessed at a higher level? a. Accounting staff are well trained and educated. b. There is a lack of supervision of accounting personnel. c. Controls are well designed. d. The control environment is operating effectively. b. There is a lack of supervision of accounting personnel. Which technique is used to analyze year-to-year comparisons of account balances? a. Ratio analysis b. Trend analysis c. Reasonableness test d. Variance analysis b. Trend analysis