Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement 1. Matariality relates to the significance or importance of an item. a. True b. False ANSWER. True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 2. Auditors and management should agree on what is considered material. a. True b, False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 3. Clearly trivial and not material are terms that can be used interchangeably. a. True b. False ANSWER. False POINTS. 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 4, Auditors need to choose materiality amounts carefully because once a materiality judgment has been made, it cannot be revised. a. True b. False ANSWER. False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 5. As detection risk increases, the amount of evidence an auditor needs to obtain decreases. a. True Cengage Learning Testing, Powered by Cognero Page!Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement b. False ANSWER: Tre POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS. United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 6. When business risk is low, the auditor does not have a high concern about the ability of the organization to operate efficiently. a. True b. False ANSWER: Tre POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 7. Only public companies have to be concerned with business tisk. a. True b. False ANSWER Palse POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 8. Touring a company’s plant offers much insight into potential audit issues. a. True b. False ANSWER. True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 9. When a successor auditor contacts a company’s previous auditor, the successor auditor might obtain information related to client management's integrity. a. True b. False ANSWER. True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills Cengage Learning Testing, Powered by Cognero Page?Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement United States - AK - AICPA BB-Critical thinking 10. News media and web searches can provide useful information related to client management's integrity and the risk of material misstatement in the financial statements, a. True b. False ANSWER. True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 11, LEXIS is a public database where the existence of legal proceedings against a company or key members of the company can be found. a. True b. False ANSWER. True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 12. The purpose of the auditor's consideration of the effectiveness of internal controls is to determine the nature, extent and timing of substantive testing. a. True b. False ANSWER: Tre POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.119 - Assess Factors Affecting Control Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 13. Trend analysis deals with the relationship between wo or more accounts within the curent-year a. True b. False ANSWER. False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB ritical thinking 14, One potential limitation to using industry data in preliminary analytical procedures is that the data from the client may not be directly comparable to the data of the industry. Cengage Learning Testing, Powered by Cognero PageChapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement a. True b. False ANSWER, Tre POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 15, Brainstorming sessions should be led by the engagement team, a. True b. False ANSWER, False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB.-Ctitical thinking 16, During the process of a brainstorming session, the focus is more on the quality of ideas generated rather than the quantity of ideas generated. a. True b, False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-05 - LO: 07-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Analytical Procedures and Brainstorming Activities 17. The usual length of a brainstorming session is about four hours a. True b. False ANSWER. False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 18. If detection risk is low, the auditor is more willing to take a higher risk of the substantive audit procedures not detecting a material misstatement. a. True b. False ANSWER: False Cengage Learning Testing, Powered by Cognero PagesChapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 19. Detection risk is measured on a scale of 0% to a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 20. A risk of material misstatement of 100% indicates that material misstatement is highly likely. a. True b, False ANSWER: Tre POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 21. The intemal controls of an organization have no impact on the efficiency of an audit. a. True b, False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-06 - LO: 07-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Audit Procedures to Respond to Assessed Risks of Material Misstatement 22. Ineffective internal controls result in higher risk of material misstatement in the financial statements than effective internal controls, a. True b, False ANSWER: Tre POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills Cengage Learning Testing, Powered by Cognero Page 5Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement United States - AK - AICPA BB-Critical thinking 23. A company’s history of exactly meeting analyst estimates is a factor which could lead auditors to assess inherent risk at a higher level a. True b, False ANSWER: Tre POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-03 - LO: 07-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Factors Affecting Inherent Risk 24. Internal controls that the auditor expects to rely on to reduce substantive testing must be tested. a. True b, False ANSWER: Tre POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 25. A detection risk of 90% would suggest that an auditor must perform extensive substantive audit testing, a. True b, False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-06 - LO: 07-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB.-Critical thinking TOPICS: Responding to Identified Risks of Material Misstatement 26. Heightened risk of material misstatement causes the auditor to perform audit procedures closer to year end. a. True b. False ANSWER. True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills Cengage Learning Testing, Powered by Cognero Page 6Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement United States - AK - AICPA BB-Critical thinking 27. Audit procedures have to be announced or be completed at predictable times. a. True b, False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 28. All audit procedures must be completed before year end a. True b, False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 29. When the risk of material misstatement is heightened, the auditor increases the extent of audit procedures and requires more evidence a. True b. False ANSWER: Tre POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 30. Inherent and control risks are risk controlled by the auditor. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-02 - LO: 07-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Risks of Material Misstatement Cengage Learning Testing, Powered by Cognero PageChapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement 31. A risk factor indicating a heightened risk of fraud would be considered a significant risk. a. True b. False ANSWER. True POINTS: 1 LEARNING OBJECTIVES: AUDT.IOHN.16.117 - Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 32. The existence of one or more risk factors means that there is a material misstatement present. a. True b, False ANSWER, False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 33. In most audits, materiality is most commonly expressed as a percentage of net income. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-01 - LO: 07-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Materiality 34, Auditors are only concemed with materiality for the financial statements as a whole. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 35. Tolerable misstatement is always less than or equal to performance materiality. a. True b, False Cengage Learning Testing, Powered by Cognero PagesChapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement ANSWER, Tre POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN. 16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 36. An immaterial misstatement is defined as one that is clearly inconsequential, whether taken individually or in the aggregate and whether judged by any criteria of circumstance. a. Tre b. False ANSWER. False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-01 - LO: 07-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills, United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Materiality 37. Performance materiality is used for assessing the risks of material misstatement and determining the nature, timing, and extent of audit procedures to perform during the audit opinion formulation process, a. True b. False ANSWER. True POINTS. 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 38, Tolerable misstatement is the amount of misstatement in an account balance that the auditor could tolerate and still not judge the underlying account balance to be materially misstated a. True b. False ANSWER. True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 39. The lower the dollar amount of the performance materiality the more audit evidence is required a. Tme Cengage Learning Testing, Powered by Cognero PageChapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement b. False ANSWER: Tre POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 40. A significant risk is the same as a material risk. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-02 - LO: 07-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS, Identifying and Assessing Risks of Material Misstatement 41. Iftolerable misstatement for accounts payable is $1,000, the auditor would need to obtain more audit evidence for that account than if tolerable misstatement were $100,000. a. True b. False ANSWER: Tre POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 42. The purpose of tests of controls are to provide reasonable assurance that internal controls are operating effectively, a. Te b. False ANSWER Tre POINTS: 1 LEARNING OBJECTIVES: AUDT.IOHN.16.119 - Assess Factors Affecting Control Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 43. The quick ratio is useful for analyzing inventory accounts. a. True b. False Cengage Learning Testing, Powered by Cognero Page 10Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN. 16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS. United States - AK - AACSB-Analytical skills United States - AK - AICPA BB.-Ctitical thinking 44, Detection risk is controllable by the client. a. True b, False ANSWER, False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS. United States - AK - AACSB-Analytical skills United States - AK - AICPA BB.-Ctitical thinking 45. Insistence from the CEO that she must be present at all meetings between the audit committee and internal/external auditors would cause auditors to assess inherent risk at a higher level a. True b, False ANSWER: Tre POINTS: 1 LEARNING OBJECTIVES: AUDT.IOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS. United States - AK - AACSB-Analytical skills United States - AK - AICPA BB.-Ctitical thinking 46. Which 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, “amount of a misstatement or omission” b. “in light of surrounding circumstances” c. “probable that the judgement of a reasonable person” d. “significantly altered the total mix of information available” ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-01 - LO: 07-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Materiality 47. If $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. $20,000 b. $25,000 Cengage Learning Testing, Powered by Cognero Page 11Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement c. $40,000 d. $15,000 ANSWER, d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS. United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 48. Which of the following best describes the amount of misstatement an auditor is willing to accept and still judge that an account balance is not materially misstated? a. Tolerable misstatement. b. Performance materiality. ¢. A clearly trivial amount. 4. Significant risk. ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.IOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 49. If materiality judgments change during the audit opinion formulation process, what happens fo previous audit decisions that were based on the evidence obtained using the initial material setting? a, They need to be reassessed. b. They need to be noted in the footnotes. c. No action is required. d. None of the above. ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN. 16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB.Ctitical thinking 50. Which item is correct concerning the risk of material misstatement? a. Risk of material misstatement arises because audit procedures have been misapplied. b. Risk of material misstatement can be controlled and changed by the auditor. c. Risk of material misstatement must be assessed in non-quantitative terms. 4. Risk of material misstatement is controllable by the client ANSWER. d POINTS: 1 Cengage Learning Testing, Powered by Cognero Page 12Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement LEARNING OBJECTIVES: AUDT.JOHN.16.07-02 - LO: 07-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS) Identifying and Assessing Risks of Material Misstatement 51. What is the nature of the relationship between risk of material misstatement and audit risk? a. Direct. b. None. c. Correlational. d. Inverse. ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB.-Ctitical thinking 52. Detection risk is affected by which aspects of substantive audit procedures? a, Nature. b. Timing. c, Extent. 4. All of the above, ANSWER, d POINTS. 1 LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 53. Which of the following factors would lead an auditor to assess inherent risk at a higher level? a. The account balance is easily determined without estimation. b. The account balance is composed of a high volume of nonroutine transactions ¢c. The account balance is composed of simple transactions. 4. All of the above would lead the auditor to assess a higher level of inherent risk ANSWER b POINTS. 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-03 - LO: 07-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assess Factors Affecting Inherent Risk $4. To learn more about a company and its inherent risks, auditors can use which of the following resources? Cengage Learning Testing, Powered by Cognero Page 13Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement a, Management inquiries. b. Economic statistics. c. Online searches 4. Any of the above could be used ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 55. Which of the following is a reason a predecessor auditor can decline to reply to a firm’s current auditor? a. Data is under court order. b. They must always respond. c. The client does not approve of confidential information being shared. d. Both A and C are correct. ANSWER. d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 56. Which of the following factors will result in control risk being assessed at a higher level? a. Controls are well designed b. There is a lack of supervision of accounting personnel. c. Accounting staff are well trained and educated 4. The control environment is operating effectively. ANSWER. b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.119 - Assess Factors Affecting Control Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB. tical thinking 37. Which of the following are two frequently used preliminary analytical procedures? a, Reasonableness tests and economic analyses. b. Trend analyses and reasonableness tests. c. Ratio analyses and economic analyses 4. Ratio analyses and trend analyses. ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero Page 14Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement 58. Which of the following best describes year-to-year comparisons of account balances? a. Time analyses, b. Reasonableness tests. c. Ratio analyses. 4. Trend analyses. ANSWER d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 59. Which of the following ratios provide information about liquidity? a. Net profit margin. b. Current ratio. ¢. Inventory tumover. 4. Sales to assets. ANSWER. b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 60. Which of the following would be a reason that industry and client data were not directly comparable? a. Broad industry. b. Use of different accounting principles. c. Neither of the above. 4. Both A & Bare correct. ANSWER. d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB. ritical thinking 61. Which of the following are common brainstorming session guidelines? a. Freedom of expression. b. Respectful communication. c. Suspension of criticism. d. All of the above. ANSWER, d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming Cengage Learning Testing, Powered by Cognero Page 15Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 62, What is the main reason to establish guidelines for brainstorming sessions? a. To not hurt feelings. b. It is required by the SEC. c. To encourage interactive and constructive group dialogue and idea exchange. d. To pass information up to top-level management efficiently. ANSWER. c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 63. What type of relationship exists between audit risk and detection risk? a. Direct. b. Inverse c. Indirect. 4. No relationship. ANSWER. a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 64. What is the typical range for the setting of audit risk? a. 1% - 10% b. 1% - 5% ©. 0% - 5% . 0% - 10% ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk STATE STANDARDS. United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 65. Which of the following would be the likely risk results from using a 1% level of detection risk? a. High detection risk and low audit risk. b. High detection risk and high audit risk. c. Low detection risk and high audit risk. 4. Low detection risk and low audit risk ANSWER. d Cengage Learning Testing, Powered by Cognero Page 16Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 66. What is the typical range for the assessment of the risk of material misstatement? a. 0% - 100% b. 0% - 10% ©. 0% - 5% d. 1% - 100% ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk STATE STANDARDS. United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-« ritical thinking 67. As inherent risk increases, and other risk factors remain constant, what happens to the extent of audit work? a. Increases. b. Decreases. c. Stays the same. 4. Becomes less reliable ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB.Ctitical thinking 68. Which of the following statements best describes what is meant by setting control risk atL00%? a. Controls are effective, b. Controls are relevant. c. Controls are ineffective d. Cannot be determined from the information given. ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN. 16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS. United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 69. If the auditor's assessment of audit risk is low (e.g., 1% rather than 5%), what is the effect on the amount of direct testing performed by the auditor? a. Increase in direct testing. Cengage Learning Testing, Powered by Cognero Page 17Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement b, Decrease in direct testing c. No change in direct testing. d. Direct testing is not needed. ANSWER. a POINTS: 1 LEARNING OBJECTIVES: AUDT.IOHN. 16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS. United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 70, Which of the following terms best describes the numerical depiction of the relationship between control risk, inherent risk, detection risk, and audit risk? a, Audit risk model. b. Risk of misstatement model. ¢. Significance model. 4d. Materiality equation, ANSWER a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 71. When an auditor chooses not to rely on a client’s internal controls because the control design is ineffective, which of the following tests are eliminated? a. Substantive testing. b. Tests of controls c. Tests of details of balances. 4. Substantive analytical procedures. ANSWER, b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 72. Which of the following terms best describes the types and appropriateness of audit procedures used? a. Nature of detection risk. b, Material misstatement risk. c. Nature of auditing procedures. d. Nature of risk response. ANSWER: d Cengage Learning Testing, Powered by Cognero Page 18Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 73. Appropriateness addresses which aspect of audit procedures? a. Relevance. b. Reasoning. c. Reliability, d. Both A & C. ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN. 16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 74, Which of the following best describes what is meant by the timing of risk response? a, Where procedures are conducted. b, When procedures are conducted. c. How procedures are conducted. 4. Who conducts the procedures, ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.IOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 78, What is the auditor trying to accomplish by varying the timing of audit procedures from the prior year? a. Introduce unpredictability. b. Confuse the client. ©. Gather information curing different times of the year, 4. Finish the audit sooner, ANSWER a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 76. Which of the following approaches can be used to introduce unpredictability into the audit? Cengage Learning Testing, Powered by Cognero Page 19Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement a. Assessing high risk accounts, b. Performing procedures on an unannounced basis c. Performing the audit in the same location each year. d. Selecting items that would normally be tested ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 77. What procedure has to be completed at or after the end of the period? a, Assessment of control ri b. En; ¢. Evaluation of adjusting journal entries. d. All procedures must be completed prior to period end. gement letter ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.IOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 78. An increase in the risk of material misstatement would lead to which of the following responses? a, Increase in the extent of auditing procedures. b, Decrease in the extent of auditing procedures. c. No change in the extent of auditing procedures. 4. No change in the extent of audit procedures. ANSWER. a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 79. Which of the following risk factors suggests a heightened level of risk of material misstatement? a. Having a stable product. b. The departure of key personnel of a company. c. Few immaterial related-party transactions. 4. Declining a merger with another company. ANSWER. b POINTS: 1 Cengage Learning Testing, Powered by Cognero Page 20Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS. United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Ctitical thinking 80, Which of the following terms best describes the risk that audit procedures will fail to detect misstatements exceeding tolerable misstatement? a. Audit risk. b. Control risk. c. Detection risk. 4. Inherent risk. ANSWER, c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-02 - LO: 07-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Risks of Material Misstatement 81. As the risk of material misstatement increases, what happens with detection risk? a. Medium increase. b. Stay the same c. Decrease, d. Severely increase ANSWER: © POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 82. In which of the following situations will auditors typically rely on internal controls over financial reporting? a. If control risk is assessed at a high level. b. Ifthe controls are determined to be designed and operating effectively. c. Ifthe clients asks the auditor to test controls. d. If the controls are sufficient to increase control risk to an acceptable level. ANSWER. b POINTS: 1 LEARNING OBJECTIVES. AUDT.JOHN.16.07-04 - LO: 07-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS. United States - AK - AACSB-Analytical skills United States - AK - AICPA BB.-Ctitical thinking TOPICS: Assess Factors Affecting Control Risk Cengage Learning Testing, Powered by Cognero Page 21Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement ‘83. The risk of material misstatement refers to which of the following? a. Inherent risk. b. Control risk and acceptable audit risk. c. The combination of inherent risk and control risk. d. Inherent risk and audit risk. ANSWER; c POINTS: 1 LEARNING OBJECTIVES: AUDT.IOHN.16.117 - Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 84, Which of the following statements is false? a. Inherent risk is inversely related to the level of control risk. b. Inherent risk is directly related to the amount of evidence required in account testing. ¢. Inherent risk is the susceptibility of the financial statements to material misstatement, assuming no internal controls. d. Inherent risk and control risk are assessed by the auditor and controlled by the client. ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-03 - LO: 07-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS. United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Factors Affecting Inherent Risk 85. Which of the following is a factor that would cause an inerease in the assessment of control risk? a, New products have uncertain likelihood of success b. Little interaction between senior management and operating staff c. A new business strategy is improperly implemented 4. The industry is mature and declining. ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-04 - LO: 07-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB.Critical thinking TOPICS: Assessing Factors Affecting Control Risk 86. Qualitative reasons for materiality List the reasons why an amount that is quantitatively immaterial might be considered material due to qualitative reasons ANSWER, ‘The SEC provides guidance when a quantitatively small misstatement may still be Cengage Learning Testing, Powered by Cognero Page 2Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement considered material due to qualitative reasons. These reasons include: The misstatement hides a failure to meet analysts’ consensus expectations for the company. The misstatement changes a loss into income, or vioe versa. “The misstatement concerns a segment or other portion of the company’s business that plays a significant cole in the company’s operations or profitability The misstatement affects the company’s compliance with regulatory requirements. The misstatement affects the company's compliance with loan covenants or other contractual requirements. The misstatement has the effect of increasing management's compensation. “The misstatement involves the concealment of an unlawful transaction POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS. United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 87. Inherent risk List some factors that would lead an auditor to assess inherent risk relating to operations at a higher level ANSWER. Factors that would lead an auditor to assess inherent risk relating to operations at a higher level include: The company lacks personnel or expertise to deal with the changes in the industry. New products and service offerings have uncertain likelinood of successful introduction and acceptance by the market The use of information technology is incompatible across systems and processes. Expansion of the business for which the demand for the company’s products or services has not been accurately estimated. ‘Anew business strategy is incompletely or improperly implemented. Financing is lost due to the company's inability to meet financing requirements. Now reguiatory requirements increase legal exposure. Alternative products, services, competitors, or providers pose a threat to current business. There are significant supply chain risks. ‘The production and delivery processes are complex. The industry is mature and dectining. The organization lacks ability to control costs with the possibilty of unforeseen costs ‘The organization produces products that have multiple substitutes. POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 88. Brainstorming What are the steps of the brainstorming proces ANSWER: The stops of the brainstorming process are: 1. Review prior year client information. 2. Consider client information, particularly with respect to the fraud triangle. 3. Integrate information from steps 1 and 2 into an assessment of the likelihood of fraud in the engagement. Cengage Learning Testing, Powered by Cognero Pago23Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement 4, Identify audit responses to fraud risks. POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 89, Risk Responses When considering risk responses, what steps should the auditor take? ANSWER: ‘An auditor should do the following when considering risk responses: 1. Evaluate the reasons for the assessed risk of material misstatement. 2. Estimate the likelihood of material misstatement due to the inherent risks of the client. 3. Consider the role of internal controls, and determine whether control risk is relatively high or low, thereby determining whether the auditor should rely on controls (thereby necessitating tests of controls) or whether the auditor needs to conduct a more substantive audit. 4, Obtain more relevant and reliable audit evidence as the aucitor’s assessment of the risk of material misstatement increases. POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN. 16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 90. Importance of materiality judgments Explain the differences between performance materiality and tolerable misstatement. ANSWER. Performance materiality refers to the amount or amounts set by the auditor at less than the materiality level for the financial statements as a whole or for particular classes of transactions, account balances, or disclosures. If the auditor plans the audit only to detect individual material misstatements, the auditor would be overlooking the fact that the aggregate of individually immaterial misstatements can cause the financial statements as a whole to be materially misstated. Performance materiality is used for assessing the risks of material misstatement and determining the nature, timing, and extent of audit procedures to perform during the audit opinion formulation process. If performance materiality is set too high, the auditor might not perform sufficient procedures to detect material misstatements in the financial statements. If performance materiality is set too low, the auditor might perform more substantive procedures than necessary. Performance materiality is different from, but relates to, the concept of tolerable misstatement. Tolerable misstatement is the amount of misstatement in an account balance that the auditor could tolerate and still not judge the underlying account balance to be materially misstated. Tolerable misstatement is the application of performance ‘materiality to a particular sampling procedure, so it is always less than or equal to Cengage Learning Testing, Powered by Cognero Page 24Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement performance materiality POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN. 16.116 - Material Misstatement and Importance of Materiality Judaments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 91. Relationships between risks Identify how an increase in each of the following factors (assuming the other factors remain unchanged) will affect planned audit evidence. Audit risk, + Inherent risk, + Control risk, + Detection risk, + Tolerable misstatement ANSWER, An inerease in audit risk decreases planned evidence. ‘An increase in inherent risk increases planned evidence, An increase in control risk increases planned evidence. An increase in detection risk decreases planned evidene An increase in tolerable misstatement decreases planned evidence. POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 92. Predecessor auditor Discuss the required communications between predecessor and successor auditors. ANSWER Auditing standards require a successor auditor to communicate with the predecessor auditor whenever accepting a client that has been previously audited. The purpose of the communication is to help the successor auditor evaluate whether to accept the engagement. While the initiation of communication rests with the successor auditor, the predecessor auditor must respond to the request for information. However, because of the requirements that related to confidentiality, the predecessor must obtain the former client’s permission prior to providing information. POINTS. 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills, United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero Page 25,